TransAct Technologies Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. TransAct develops and sells software-driven technology and printing solutions across restaurant, POS and banking, casino and gaming, lottery, and other markets. It reports one operating segment. Financial figures below are in U.S. dollars; financial-statement amounts are in thousands unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior balance-sheet date |
|---|---|---|
| Net sales | $11.550 million | $12.243 million |
| Gross profit / margin | $6.086 million / 52.7% | $5.862 million / 47.9% |
| Operating income / margin | $777,000 / 6.7% | $856,000 / 7.0% |
| Net income | $746,000; $0.10 diluted EPS | $680,000; $0.09 diluted EPS |
| Operating cash flow | $(1.554) million | $1.863 million |
| Cash and cash equivalents | $1.944 million | $4.691 million at Dec. 31, 2018 |
| Total assets / shareholders’ equity | $36.474 million / $27.628 million | $34.956 million / $27.567 million at Dec. 31, 2018 |
Sales fell 5.7%, while gross profit rose 3.8% as the gross margin increased 480 basis points, reflecting a more favorable mix and lower sales of lower-margin POS printers. Operating expenses increased 6.0%, principally from higher selling and marketing costs, so operating income declined 9.2%. Net income benefited from $90,000 of other income, primarily foreign-exchange gains, and a lower effective tax rate of 13.4% versus 20.7%.
Cash decreased $2.747 million during the quarter. Operating cash use reflected inventory growth of $1.484 million to support anticipated BOHA! hardware sales, lower accounts payable, bonus payments, and other working-capital movements, partly offset by collections of receivables. Investing cash use was $302,000, primarily capital expenditures. Financing cash use was $867,000, including $668,000 of dividends and $199,000 of withholding taxes on stock awards.
The company had no debt outstanding and $20 million available under its revolving credit facility at March 31, 2019. It reported compliance with the facility’s covenants. The $20 million facility runs through November 2022. Management said cash on hand, expected operating cash flows, and available borrowing capacity should meet liquidity needs for at least the next 12 months.
Material changes and business developments
- Restaurant Solutions sales declined 11.2% to $928,000, largely because of lower AccuDate 9700 sales to a former U.S. distributor. TransAct launched BOHA! and recorded its first BOHA! software SaaS subscription sales in the quarter.
- POS automation and banking sales fell 25.6% to $1.277 million, including lower Ithaca 9000 sales to McDonald’s. TransAct exited the banking market at year-end 2018 and expects McDonald’s Ithaca 9000 sales to decline in 2019.
- Casino and gaming sales decreased 7.7% to $5.483 million. Domestic weakness included lower off-premise gaming printer sales, industry softness in thermal casino printers, and no new domestic EPICENTRAL installation in the quarter. International casino and gaming sales increased.
- Lottery sales rose 9.8% to $697,000, but management expects 2019 lottery printer sales to be lower than 2018 as it shifts focus to restaurant and casino solutions.
- TSG sales increased 7.3% to $2.823 million, with stronger label, service, and international casino-related parts sales. Management expects TSG sales to decrease in 2019, partly due to lower lottery parts sales and the wind-down of legacy banking supplies.
- International sales increased 23.2% to $2.543 million, primarily on higher international casino and gaming sales. Hardware unit volume declined 11% to approximately 28,000 units; average selling prices increased 4%.
Outlook, risks, and unusual items
- Management expects Restaurant Solutions sales to increase in 2019 following the BOHA! launch; casino and gaming sales to be relatively consistent with 2018; lottery sales to decline; and Printrex sales to increase slightly. The company had exited the vehicle-mounted Printrex market and does not expect future sales from it.
- Management expects selling and marketing expenses to increase significantly in 2019 to support added sales staff and BOHA!, and G&A expenses to be higher. Engineering expenses are expected to be consistent with 2018. Capital expenditures and capitalized software costs are forecast at approximately $1.3 million for 2019.
- The company expects a 2019 effective tax rate of 13%–14%. Its Q1 rate benefited from the foreign-derived intangible income deduction.
- TransAct adopted ASC 842 on January 1, 2019, recording a $3.7 million right-of-use asset and a $3.9 million lease liability, with no impact on retained earnings, income, or cash flows from adoption. Q1 operating lease expense was $237,000; March 31 lease liabilities totaled $3.717 million.
- Quarterly dividends were $0.09 per share; management expected approximately $2.7 million of cash dividends for 2019. No shares were repurchased in Q1; $3 million remained authorized under the repurchase program.
- Management reported no material changes in risk factors or market-risk exposure, no material off-balance-sheet arrangements, and no pending or threatened legal proceedings believed likely to have a material adverse effect. Forward-looking results remain subject to the risks described in the company’s 2018 Form 10-K.
Key facts for investors to verify
- Whether BOHA! customer adoption and recurring SaaS revenue accelerate enough to offset declines in POS/banking, lottery, and TSG-related sales.
- Whether the higher gross margin persists and can absorb expected increases in selling, marketing, and G&A spending.
- Cash conversion and working-capital needs, particularly inventory levels, given the quarter’s operating cash outflow and reduced cash balance.
- The sustainability of the dividend and planned investment spending relative to operating cash flow and use of the credit facility.
- Quarter-to-quarter volatility in project-based EPICENTRAL, lottery, and off-premise gaming sales, and foreign-exchange gains or losses.