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PAR TECHNOLOGY CORP - 10-K - : Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
Forward-Looking Statements
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. Any statements in this document that do not
describe historical facts are forward-looking statements. Forward-looking
statements in this document (including forward-looking statements regarding the
continued health of segments of the hospitality industry, future information
technology outsourcing opportunities, an expected increase or decrease in
contract funding by the U.S. Government, the impact of current world events on
our results of operations, the effects of inflation on our margins, and the
effects of interest rate and foreign currency fluctuations on our results of
operations) are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When we use words such as "intend,"
"anticipate," "believe," "estimate," "plan," "will," or "expect", we are making
forward-looking statements. We believe the assumptions and expectations
reflected in such forward-looking statements are reasonable based on information
available to us on the date hereof, but we cannot assure you these assumptions
and expectations will prove to have been correct or we will take any action that
we presently may be planning. We have disclosed certain important factors that
could cause our actual future results to differ materially from our current
expectations, including: a decline in the volume of purchases made by one or a
group of our major customers; risks in technology development and
commercialization; risks of downturns in economic conditions generally, and in
the quick-service sector of the hospitality market specifically; risks
associated with government contracts; risks associated with competition and
competitive pricing pressures; and risks related to foreign operations.
Forward-looking statements made in connection with this report are necessarily
qualified by these factors. We are not undertaking to update or revise publicly
any forward-looking statements if we obtain new information or upon the
occurrence of future events or otherwise.
Overview
PAR's technology solutions for the Hospitality segment feature software,
hardware and support services tailored for the needs of restaurants, luxury
hotels, resorts and spas, casinos, cruise lines, movie theatres, theme parks and
retailers. The Company's Government segment provides technical expertise in the
contract development of advanced systems and software solutions for the U.S.
Department of Defense and other federal agencies, as well as information
technology and communications support services to the U.S. Department of
Defense.
The Company's products sold in the Hospitality segment are utilized in a range
of applications by thousands of customers. The Company faces competition across
all of its markets within the Hospitality segment, competing on the basis of
product design, features and functionality, quality and reliability, price,
customer service, and delivery capability. PAR's continuing strategy is to
provide complete integrated technology solutions and services with industry
leading customer service in the markets in which it participates. The Company
conducts its research and development efforts to create innovative technology
offerings that meet and exceed customer requirements and also have a high
probability for broader market appeal and success.
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The Company is focused on expanding four distinct parts of its Hospitality
businesses. First, it is investing in the market introduction and deployment of
ATRIO, its next generation, cloud-based property management software for the
Hotel/Resort/Spa market. Second, we are investing in the enhancement of
existing software and the development of the Company's SureCheck™ product for
food safety and task management applications. Third, the Company continues to
work on building more robust and extensive third-party distribution channels.
Fourth, as the Company's customers continue to expand in international markets,
PAR has created an international infrastructure focused on that expansion.
The QSR market, PAR's primary market, continues to perform well for the majority
of large, international companies, despite worldwide macroeconomic uncertainty.
However, the Company has seen an impact of current economic conditions on
smaller, regional QSR organizations, whose business is slowing because of higher
unemployment and lack of consumer confidence in certain regions. The Company is
continuing to reassess the alignment of its product and service offerings to
support improved operational efficiency and profitability going forward. These
conditions could have a material adverse impact on the Company's significant
estimates, specifically the fair value of its assets related to its legacy
products.
Approximately 36% of the Company's revenues are generated by its Government
business. The Company's focus is to expand two separate aspects of its
Government business: services and solutions. Through outstanding performance of
existing service contracts and investing in enhancing its business development
staff and processes, the Company is able to consistently win the renewal of
expiring contracts, extend existing contracts, and be awarded new efforts. With
its intellectual property and investment in new technologies, the Company
provides solutions to the U.S. Department of Defense and other federal/state
agencies with systems integration, products and highly-specialized services.
The general uncertainty in U.S. defense total workforce policies (military,
civilian and contract), procurement cycles and spending levels for the next
several years may impact the performance of this business segment.
Results of Operations - 2012 Compared to 2011
The Company reported revenues of $245.2 million for the year ended December 31,
2012, an increase of 7% from the $229.4 million reported for the year ended
December 31, 2011. The Company's net loss from continuing operations for the
year ended December 31, 2012 was $1.8 million, or $0.12 loss per share, compared
to net loss of $13.4 million, or $0.89 loss per share for the same period in
2011. During 2012, the Company reported income from discontinued operations of
$1.4 million, or $0.10 per diluted share associated with the sale of its
Logistics Management business. This compares to a loss of $2.2 million or $0.15
loss per share for the same period in 2011. The Company's net loss for the year
ended December 31, 2012 was $315,000, or $0.02 loss per share, compared to a net
loss of $15.5 million, or $1.04 per share for fiscal year 2011.
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Product revenues for the year ended December 31, 2012 were $90.5 million,
slightly below the $91.0 million recorded for the same period 2011. This
decrease was primarily the result of a decline in domestic sales to McDonald's
as their significant North American upgrade program was completed in 2011.
Partially offsetting this decrease was an increase in sales of the Company's
SureCheck product to a significant launch customer during the year, as well as
increases in product sales to YUM! Brands and SUBWAY, commensurate with new
store rollouts and upgrades. Lastly, the Company experienced an increase in
international product sales compared to 2011, primarily related to an increase
in international McDonald's sales, as well as increases in sales made through
the Company's dealer channels, which have increased 15% over 2011.
Service revenue primarily includes installation, software maintenance, training,
24 hour help desk support and various depot and on-site service options.
Customer service revenues were $66.1 million for the year ended December 31,
2012, a 5% decrease from $69.5 million reported for the same period in 2011.
This decrease was associated with a decline in installation revenue
commensurate with the related decline in full system installations in the
Company's Hospitality businesses as well as a decline in call center revenue
resulting from a modification to existing service contracts. These decreases
were partially offset by an increase in software maintenance and professional
services revenue associated with the deployment of the Company's SureCheck
product.
Government contract revenues were $88.5 million for the year ended December 31,
2012, an increase of 28% when compared to the $68.9 million recorded in 2011.
This increase is mostly attributable to the Company's new Intelligence,
Surveillance, and Reconnaissance (ISR) systems integration contract with the
U.S. Army.
Product margins for the year ended December 31, 2012 were 27.9%, a decrease from
36.4% in the same period in 2011. The decrease was primarily the result of
accelerated amortization of $5.3 million to reduce the net carrying value of
capitalized software asset in conjunction with the Company's strategic
initiative to streamline its Hospitality product portfolio. Also contributing
to this decrease was an unfavorable mix in product sales resulting from a
reduction in the amount of terminals sold relative to lower margin peripheral
devices, partially offset by an increase in software revenue driven by sales of
the Company's SureCheck software product.
Customer service margins were 30.3% for the year ended December 31, 2012,
compared to 18.3% for the same period in 2011. During 2011, the Company
recorded a charge of $7.7 million associated with the write down of service
parts inventory related to discontinued products which did not recur in 2012.
Other factors contributing to the increase were improved margins in multiple
areas including international sales and depot revenue. Offsetting the
aforementioned increase was a decrease in the Company's call center margin due
to the modification of existing contracts.
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Government contract margins were 6.4% for the year ended December 31, 2012,
relatively unchanged when compared to the 6.7% for the same period in 2011.
Contract margins for each year were benefited by the sale of Gv2F enterprise
licenses. The most significant components of contract costs in 2012 and 2011
were labor and fringe benefits. For 2012, labor and fringe benefits were $40.7
million, or 49% of contract costs, compared to $45.7 million or 71% of contract
costs for the same period in 2011. This decrease is mostly attributable to the
amount of contract work performed by subcontractors under the Company's new ISR
systems integration contract with the U.S. Army.
Selling, general and administrative expenses for the year ended December 31,
2012 were $40.5 million, an increase of 13% from the $35.8 million recorded for
the same period in 2011. This increase was partially the result of an increase
in legal expenses associated with the defense and resolution of a non-practicing
entity patent claim, as well as increases in severance and other costs related
to the cancellation of certain office lease matters. In addition, the increase
was due to higher commission expense associated with the increase in software
sales during the year, as well as an increase in sales and marketing effort
associated with the Company's Hospitality products.
Research and development expenses were $13.7 million for the year ended December
31, 2012, a slight decrease from the $13.8 million recorded in 2011.
During the second quarter of 2011, the Company determined that as a result of
the decline in the stock price that occurred during the second quarter, a
goodwill impairment triggering event had occurred. The fair value of the
Company's common shares declined from $4.60 per share at April 1, 2011 to $3.83
per share at June 30, 2011, resulting in the Company no longer being able to
reconcile the aggregate fair value of its reporting units to its market
capitalization after consideration of a reasonable control premium. Although
there was no significant adverse change to the long term financial outlook of
any of its businesses, the Company concluded that a triggering event had
occurred and as a result, performed additional analyses over the valuation of
its reporting units in accordance with the relevant accounting rules, recording
a non-cash impairment charge of $20.2 million to its goodwill in the second
quarter of 2011. In addition to the aforementioned goodwill impairment charge,
as part of this analysis, the Company recorded an impairment charge of $580,000
associated with its indefinite lived intangible assets.
Amortization of identifiable intangible assets was $455,000 for the year ended
December 31, 2012 compared to $840,000 for the same period in 2011. This
decrease was due to certain intangible assets becoming fully amortized during
2011 and 2012.
Other income, net, was $876,000 for the year ended December 31, 2012 compared to
$203,000 for the same period in 2011. Other income primarily includes
unrealized gains on the Company's investments, strategic product development
partnerships, rental income, finance charges and foreign currency gains and
losses. The increase in 2012 was due to foreign currency gains as well as
income related to strategic product development partnerships within the
Company's Hospitality businesses.
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Interest expense represents interest charged on the Company's short-term
borrowings from banks and from long-term debt. Interest expense was $69,000 for
the year ended December 31, 2012, compared to $211,000 for the same period in
2011. This reduction is associated with a lower outstanding borrowing in 2012
versus 2011.
For the year ended December 31, 2012, the Company's effective income tax rate
was a benefit of 44.5%, compared to a benefit of 35.8% in 2011. The variance
from the federal statutory rate in 2012 was due to state and foreign income
taxes, as well as the tax impact of liquidating a foreign subsidiary. The
variance from the federal statutory rate in 2011 was primarily due to research
credits and state tax benefits, partially offset by an additional valuation
allowance necessary related to certain deferred tax assets.
In connection with the American Taxpayer Relief Act of 2012 that was signed into
law in January 2013, the Company expects to record a one-time benefit of
approximately $390,000 related to retroactive tax relief for certain tax law
provisions that expired in 2012. Because the legislation was signed into law
after the end of PAR's 2012 fiscal year, the retroactive effects of the bill
will be reflected in the first quarter of 2013.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash flow from operations
and lines of credit with various commercial banks. Cash provided by operating
activities of continuing operations was $15.1 million for the year ended
December 31, 2012 compared to $13.7 million for the same period in 2011. In
2012, cash was generated by the Company's operating results plus the add back of
non-cash expenses including the accelerated amortization of internally developed
software assets that were previously capitalized. The most significant changes
to the Company's operating assets and liabilities that impacted cash flow were
an increase in accounts payable primarily due to the timing of payments
associated with the Company's ISR contract with the U.S. Government, as well as
an increase in deferred service revenue due to the timing of billing of customer
service contracts. Offsetting these changes was an increase in inventory in
support of shipments planned for early 2013.
In 2011, cash was generated by the Company's operating results before the
non-cash goodwill and intangible asset impairment and inventory charges, offset
by reductions to changes in operating assets and liabilities. The most
significant changes to the Company's operating assets and liabilities were the
decrease in accounts receivable due to the timing of collections of advanced
service and maintenance contract billings. This was partially offset by cash
used towards payments of accounts payable and accrued salaries and benefits
based on the timing of payments. Cash was also used to support the execution of
existing service support contracts with customers.
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Cash used in investing activities from continuing operations was $247,000 for
the year ended December 31, 2012 versus $8.3 million for the same period in
2011. In 2012, the Company received cash proceeds of $4 million related to the
sale of its Logistics Management business, and generated $1.9 million from the
maturity of its investments. In addition, $828,000 of the proceeds from the
Company's sale of its Logistics Management business remains in escrow as of
yearend. Capital expenditures were $1.9 million and were primarily related to
capital investments to support the Company's new hardware products, as well as
for purchases of office and computer equipment. Capitalized software was $3.4
million and was associated with the Company's Hospitality software platforms.
In 2011, capital expenditures were $896,000 and were primarily related to the
purchase of office and computer equipment. Capitalized software costs relating
to software development of Hospitality segment products were $7.4 million, an
increase from the prior year as a result of investment in the Company's
Restaurant and Hotel /Resort / Spa software.
Cash used in financing activities from continuing operations was $1.5 million
for the year ended December 31, 2012 versus $1.6 million for the same period in
2011. In 2012, the Company decreased its long-term borrowings by $1.5 million
and benefited $24,000 from the exercise of employee stock options. In 2011, the
Company decreased its long term debt by $1.7 million and benefited $133,000 from
the exercise of employee stock options.
The Company maintains a credit facility which provides borrowing availability up
to $20 million (with the option to increase to $30 million) in the form of a
line of credit. This agreement allows the Company, at its option, to borrow
funds at the LIBOR rate plus the applicable interest rate spread or at the
bank's prime lending rate (3.25% at December 31, 2012). This agreement expires
in June 2014. At December 31, 2012, the Company did not have any outstanding
balance on this line of credit. The weighted average interest rate paid by the
Company was 1.31% during fiscal year 2012. This agreement contains certain loan
covenants including leverage and fixed charge coverage ratios. In February
2013, the agreement was amended to allow the Company to exclude certain
extraordinary or non-recurring non-cash expenses, charges or losses, and certain
litigation expenses incurred during the fourth quarter of 2012. The exclusion
of these charges will be applied to the Company's debt covenant calculation
through December 31, 2013. Additionally, as part of this amendment, the Company
modified its definition of Earnings before Interest, Taxes, Depreciation and
Amortization (EBITDA), to exclude certain non-cash charges for the remainder of
the agreement. The Company is in compliance with these amended covenants at
December 31, 2012. This credit facility is secured by certain assets of the
Company.
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The Company has a $1.2 million mortgage loan, collateralized by certain real
estate. This mortgage matures on November 1, 2019. In May 2012, the Company
amended its mortgage to reduce the fixed interest rate to 4.05% through October
1, 2014. Beginning on October 1, 2014 and through the maturity date of the
loan, the fixed rate will be converted to a new rate equal to the then-current
five year fixed advanced rate charged by the New York Federal Home Loan bank,
plus 225 basis points. The annual mortgage payment including interest through
October 1, 2014 totals $207,000.
During fiscal year 2013, the Company anticipates that its capital requirements
will not exceed approximately $5-6 million. The Company does not usually enter
into long term contracts with its major Hospitality segment customers. The
Company commits to purchasing inventory from its suppliers based on a
combination of internal forecasts and actual orders from customers. This
process, along with good relations with suppliers, minimizes the working capital
investment required by the Company. Although the Company lists two major
customers, McDonald's and Yum! Brands, it sells to hundreds of individual
franchisees of these corporations, each of which is individually responsible for
its own debts. These broadly made sales substantially reduce the impact on the
Company's liquidity if one individual franchisee reduces the volume of its
purchases from the Company in a given year. The Company, based on internal
forecasts, believes its existing cash, line of credit facilities and its
anticipated operating cash flow will be sufficient to meet its cash requirements
through the next twelve months. However, the Company may be required, or could
elect, to seek additional funding prior to that time. The Company's future
capital requirements will depend on many factors including its rate of revenue
growth, the timing and extent of spending to support product development
efforts, potential growth through strategic acquisition, expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of its products. The Company cannot
assure additional equity or debt financing will be available on acceptable terms
or at all. The Company's sources of liquidity beyond twelve months, in
management's opinion, will be its cash balances on hand at that time, funds
provided by operations, funds available through its lines of credit and the
long-term credit facilities that it can arrange.
The Company's future principal payments under its term loan, mortgage and
operating leases are as follows (in thousands):
Less Than More than 5
Total 1 Year 1-3 Years 3 - 5 Years Years
Long-term debt obligations $ 1,243 $ 159 $ 326 $ 367 $ 391
Operating lease 4,709 1,967 2,011 731 0
Total $ 5,952 $ 2,126 $ 2,337 $ 1,098 $ 391
Critical Accounting Policies
The Company's consolidated financial statements are based on the application of
U.S. generally accepted accounting principles (GAAP). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense
amounts reported. The Company believes its use of estimates and underlying
accounting assumptions adhere to GAAP and are consistently applied. Valuations
based on estimates are reviewed for reasonableness and adequacy on a consistent
basis throughout the Company. Primary areas where financial information of the
Company is subject to the use of estimates, assumptions and the application of
judgment include revenue recognition, accounts receivable, inventories, goodwill
and intangible assets, and taxes.
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Revenue Recognition Policy
Product revenues consist of sales of the Company's standard point-of-sale and
property management systems of the Hospitality segment. Product revenues include
both hardware and software sales. The Company also records service revenues
relating to its standard point-of-sale and property management systems of the
Hospitality segment.
Hardware
Revenue recognition on hardware sales occurs upon delivery to the customer site
(or when shipped for systems that are not installed by the Company) when
persuasive evidence of an arrangement exists, delivery has occurred, the price
is fixed or determinable, and collectability is reasonably assured.
Software
Revenue recognition on software sales generally occurs upon delivery to the
customer site (or when shipped for systems that are not installed by the
Company), when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable, and collectability is probable.
For software sales where the Company is the sole party that has the proprietary
knowledge to install the software, revenue is recognized upon installation and
when the system is ready to go live.
Service
Service revenue consists of installation and training services, support
maintenance, and field and depot repair. Installation and training service
revenue are based upon standard hourly/daily rates, and revenue is recognized as
the services are performed. Support maintenance and field and depot repair are
provided to customers either on a time and materials basis or under a
maintenance contract. Services provided on a time and materials basis are
recognized as the services are performed. Service revenues from maintenance
contracts are recorded as deferred revenue when billed to the customer and are
recognized ratably over the underlying contract period.
The individual hardware, service, and software offerings that are included in
arrangements with our customers are identified and priced separately to the
customer based upon the stand alone price for each individual hardware, service,
or software sold in the arrangement irrespective of the combination of products
and services which are included in a particular arrangement. As such, the units
of accounting are based on each individual hardware, service, and software sold,
and revenue is allocated to each element based on vendor specific objective
evidence (VSOE) of fair value. VSOE of fair value for each individual hardware,
service, and software is based on separate individual prices of these products
and services. The sales price used to establish fair value is the sales price of
the element when it is sold individually in a separate arrangement and not as a
separate element in a multiple element arrangement. Revenue recognition for
complex contractual arrangements, especially those with multiple elements,
requires a significant level of judgment and is based upon review of specific
contracts, past experiences, the selling price of undelivered elements when sold
separately, creditworthiness of customers, international laws and other factors.
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In situations where PAR's solutions contain software that is more than
incidental, revenue related to software and software related elements is
recognized in accordance with authoritative guidance on software revenue
recognition. For the software and software-related elements of such
transactions, revenue is allocated based on the relative fair value of each
element, and fair value is determined by vender specific objective evidence
(VSOE). If the Company cannot objectively determine the fair value of any
undelivered element included in such multiple-element arrangements, the Company
defers the revenue until all elements are delivered and services have been
performed, or until fair value can objectively be determined for any remaining
undelivered elements.
Government Contracts
The Company's contract revenues generated by the Government segment result
primarily from contract services performed for the U.S. Government under a
variety of cost-plus fixed fee, time-and-material, and fixed-price contracts.
Revenue on cost-plus fixed fee contracts is recognized based on allowable costs
for labor hours delivered, as well as other allowable costs plus the applicable
fee. Revenue on time and material contracts is recognized by multiplying the
number of direct labor hours delivered in the performance of the contract by the
contract billing rates and adding other direct costs as incurred. Revenue from
fixed-price contracts is recognized as labor hours are delivered, which
approximates the straight-line basis of the life of the contract. The Company's
obligation under these contracts is to provide labor hours to conduct research
or to staff facilities with no other deliverables or performance obligations.
Anticipated losses on all contracts are recorded in full when identified.
Unbilled accounts receivable are stated in the Company's consolidated financial
statements at their estimated realizable value. Contract costs, including
indirect expenses, are subject to audit and adjustment through negotiations
between the Company and U.S. Government representatives.
Accounts Receivable-Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of probable losses
related to accounts receivable balances. The establishment of allowances
requires the use of judgment and assumptions regarding probable losses on
receivable balances. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based on our
historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and appropriate reserves have been established, we cannot guarantee
that we will continue to experience the same credit loss rates that we have
experienced in the past. Thus, if the financial condition of our customers were
to deteriorate, our actual losses may exceed our estimates, and additional
allowances would be required.
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Inventories
The Company's inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out (FIFO) method. The Company uses
certain estimates and judgments and considers several factors including product
demand, changes in customer requirements and changes in technology to provide
for excess and obsolescence reserves to properly value inventory.
Capitalized Software Development Costs
The Company capitalizes certain costs related to the development of computer
software used in its Hospitality segment. Software development costs incurred
prior to establishing technological feasibility are charged to operations and
included in research and development costs. The technological feasibility of a
computer software product is established when the Company has completed all
planning, designing, coding, and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features, and technical performance requirements. Software
development costs incurred after establishing feasibility (as defined within ASC
985-20) are capitalized and amortized on a product-by-product basis when the
product is available for general release to customers. Annual amortization,
charged to cost of sales when the product is available for general release to
customers, is computed using the greater of (a) the straight-line method over
the remaining estimated economic life of the product, generally three to seven
years or (b) the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product.
Goodwill
The Company tests goodwill for impairment on an annual basis, or more often if
events or circumstances indicate there may be impairment. The Company operates
in two business segments, Hospitality and Government. Goodwill impairment
testing is performed at the sub-segment level (referred to as a reporting unit).
The three reporting units utilized by the Company for its impairment testing
are: Restaurant, Hotel/Resort/Spa, and Government. Goodwill is assigned to a
specific reporting unit at the date the goodwill is initially recorded. Once
goodwill has been assigned to a specific reporting unit, it no longer retains
its association with a particular acquisition, and all of the activities within
a reporting unit, whether acquired or organically grown, are available to
support the value of the goodwill.
Goodwill impairment analysis is a two-step test. The first step, used to
identify potential impairment, involves comparing each reporting unit's fair
value to its carrying value including goodwill. If the fair value of a reporting
unit exceeds its carrying value, applicable goodwill is considered not to be
impaired. If the carrying value exceeds fair value, there is an indication of
impairment, at which time a second step would be performed to measure the amount
of impairment. The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step indicated impairment.
With respect to the Government and Hotel/Resort/Spa reporting units, the Company
utilizes three different methodologies in performing its goodwill impairment
test. These methodologies include both an income approach, namely a discounted
cash flow method, and two market approaches, namely the guideline public company
method and quoted price method. As a result of the write-off of goodwill
recorded in 2011, the Company did not utilize the discounted cash flow method
for its Restaurant reporting unit as this reporting unit no longer carries a
goodwill balance. As such, the Company has applied a 50% weight to each of the
aforementioned market approaches for this reporting unit. Other than the
aforementioned change, the valuation methodologies and weightings used in the
current year are generally consistent with those used in the Company's past
annual impairment tests.
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The discounted cash flow method derives a value by determining the present value
of a projected level of income stream, including a terminal value. This method
involves the present value of a series of estimated future cash flows at the
valuation date by the application of a discount rate, one which a prudent
investor would require before making an investment in the equity of the Company.
The Company considers this method to be most reflective of a market
participant's view of fair value given the current market conditions, as it is
based on the Company's forecasted results and, therefore, established its
weighting at 80% of the fair value calculation.
Key assumptions within the Company's discounted cash flow model utilized for its
annual impairment test included projected financial operating results, a long
term growth rate of 3% (beyond five years) and discount rates ranging from 17%
to 27%, depending on the reporting unit. As stated above, as the discounted
cash flow method derives value from the present value of a projected level of
income stream, a modification to the Company's projected operating results
including changes to the long term growth rate could impact the fair value. The
present value of the cash flows is determined using a discount rate based on the
capital structure and capital costs of comparable public companies, as well as
company-specific risk premium, as identified by the Company. A change to the
discount rate could impact the fair value determination.
The market approach is a generally-accepted way of determining a value
indication of a business, business ownership interest, security or intangible
asset by using one or more methods that compare the subject to similar
businesses, business ownership interests, securities or intangible assets that
have been sold. There are two methodologies considered under the market
approach: the public company method and the quoted price method.
The public company method and quoted price method of appraisal are based on the
premise that pricing multiples of publicly traded companies can be used as a
tool to be applied in valuing closely held companies. The mechanics of the
method require the use of the stock price in conjunction with other factors to
create a pricing multiple that can be used, with certain adjustments, to apply
against the subject's similar factor to determine an estimate of value for the
subject company. The Company considered these methods appropriate as they
provide an indication of fair value as supported by current market conditions.
The Company established its weighting at 10% of the fair value calculation for
each method.
The most critical assumption underlying the market approaches utilized by the
Company are the comparable companies utilized. Each market approach described
above estimates revenue and earnings multiples for the Company based on its
comparable companies. As such, a change to the comparable companies could have
an impact on the fair value determination.
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The amount of goodwill carried by the Hotel/Resort/Spa and Government reporting
units is $6.1 million and $0.7 million, respectively. The estimated fair value
of the Hotel/Resort/Spa reporting unit exceeds its carrying value by
approximately 14%. The estimated fair value of the Government reporting unit is
substantially in excess of its carrying value.
Hotel /Resort/Spa:
In deriving its fair value estimates, the Company has utilized key assumptions
built on the current core business adjusted to reflect anticipated revenue
increases from continued investment in its next generation software. These
assumptions, specifically those included within the discounted cash flow
estimate, are comprised of the revenue growth rate, gross margin, operating
expenses, working capital requirements, and depreciation and amortization
expense.
The Company has utilized annual revenue growth rates ranging between 5% and 27%.
The high end growth rate reflects the Company's projected revenues resulting
from the release of ATRIO. This software platform will expand the Company's
capabilities into new markets. The Company believes these estimates are
reasonable given the size of the overall market which it will enter, combined
with the projected market share the Company expects to achieve. The projected
revenue growth rates ultimately trend to an estimated long term growth rate of
3%.
The Company has utilized gross margin estimates materially consistent with
historical gross margins achieved. Estimates of operating expenses, working
capital requirements and depreciation and amortization expense utilized for this
reporting unit are generally consistent with actual historical amounts, adjusted
to reflect its continued investment and projected revenue growth from ATRIO.
The Company believes utilization of actual historical results adjusted to
reflect its continued investment in ATRIO is an appropriate basis supporting the
fair value of the Hotel/Resort/Spa reporting unit.
Lastly, the Company utilized a discount rate of approximately 27% for this
reporting unit. This estimate was derived through a combination of current
risk-free interest rate data, financial data from companies that PAR has deemed
as its competitors, and was based on volatility between the Company's historical
financial projections and actual results achieved.
The current economic conditions and the continued volatility in the U.S. and in
many other countries in which the Company operates could contribute to decreased
consumer confidence and continued economic uncertainty which may adversely
impact the Company's operating performance. Although the Company has seen an
improvement in the markets which it serves, the continued volatility in these
markets could have an impact on purchases of the Company's products, which could
result in a reduction of sales, operating income and cash flows. Reductions in
these results could have a material adverse impact on the underlying estimates
used in deriving the fair value of the Company's reporting units used in support
of its annual goodwill impairment test or could result in a triggering event
requiring a fair value remeasurement, particularly if the Company is unable to
achieve the estimates of revenue growth indicated in the preceding paragraphs.
These conditions may result in an impairment charge in future periods.
32
--------------------------------------------------------------------------------
The Company has reconciled the aggregate estimated fair value of the reporting
units to the market capitalization of the consolidated Company, including a
reasonable control premium.
Taxes
The Company has significant amounts of deferred tax assets that are reviewed for
recoverability and valued accordingly. These assets are evaluated by using
estimates of future taxable income and the impact of tax planning strategies.
Valuations related to tax accruals and assets can be impacted by changes to tax
codes, changes in statutory tax rates and the Company's estimates of its future
taxable income levels.
New Accounting Pronouncements Not Yet Adopted
See Note 1 to the Consolidated Financial Statements included in Part IV, Item 15
of this Report for details of New Accounting Pronouncements Not Yet Adopted.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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