TransAct Technologies Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 13, 2018. TransAct develops and sells software-driven printing and technology solutions, printers, supplies, and related services across restaurant solutions, POS and banking, casino and gaming, lottery, Printrex, and TransAct Services Group (TSG). It reports one operating segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $14.751 million | $13.596 million | $26.994 million | $27.593 million |
| Gross profit / margin | $6.991 million / 47.4% | $6.430 million / 47.3% | $12.853 million / 47.6% | $12.523 million / 45.4% |
| Operating income / margin | $1.618 million / 11.0% | $1.306 million / 9.6% | $2.474 million / 9.2% | $2.722 million / 9.9% |
| Net income | $1.210 million | $0.867 million | $1.890 million | $1.810 million |
| Diluted EPS | $0.16 | $0.12 | $0.24 | $0.24 |
First-half operating cash flow was $2.512 million, versus $3.971 million a year earlier. Investing cash outflow was $0.751 million, including $0.735 million of capital expenditures. Financing cash outflow was $3.493 million, including $2.0 million of treasury-stock purchases and $1.336 million of dividends. Cash fell by $1.751 million to $3.756 million; $1.2 million was held by the U.K. subsidiary.
At June 30, 2018, total assets were $33.847 million, current assets $26.048 million, and current liabilities $8.485 million. The company had no debt outstanding and reported $20 million available under its revolving credit facility, amended through November 2022. It was in compliance with facility covenants. Inventory was $11.382 million, up $2.507 million from year-end, principally to support anticipated casino/gaming and restaurant sales.
Material changes and drivers
- Q2 sales rose 8.5% year over year, led by casino and gaming, up 77.3% to $7.067 million, including a sharp increase in international sales. Restaurant solutions rose 23.3% to $1.259 million; POS automation and banking rose 10.0% to $2.252 million.
- Lottery revenue fell 82.7% in Q2 to $0.481 million and 80.7% for the first half to $1.116 million. First-half sales were also lower in POS and banking and TSG; these declines more than offset growth in casino/gaming, restaurant solutions, and Printrex.
- First-half revenue declined 2.2%, while printer unit volume fell 12%; a shift toward higher-priced products increased average printer selling price 11%. Gross margin improved 220 basis points for the first half, but operating income declined 9% as sales fell and operating expenses rose 6%.
- Q2 other expense increased to $97,000 from $2,000, and first-half other expense was $87,000 versus $8,000, primarily because of foreign-exchange losses at the U.K. entity. Q2 operating income and net income nevertheless increased year over year.
- The effective tax rate declined to 20.1% in Q2 and 20.4% for the first half, from 33.1% and 32.9%, respectively, mainly reflecting the 2017 Tax Cuts and Jobs Act.
Outlook, risks, and other matters
- Management expected restaurant-solutions sales to increase in 2018, citing AccuDate XL rollouts; expected casino/gaming international sales to grow in the second half following the transition from an exclusive distributor to direct selling; and expected gross margins to improve as product mix shifted toward higher-value solutions.
- Management expected full-year 2018 lottery sales to be below 2017, TSG sales to decline from 2017’s unusually high level, and Printrex sales to be higher. It expected to exit the banking market by year-end 2018 and legacy banking/POS sales to continue declining. These are management expectations, not formal revenue or earnings guidance.
- Management expected a 20%–21% effective tax rate and approximately $2 million of 2018 capital expenditures and capitalized software costs. It expected approximately $2.7 million in full-year cash dividends and stated that cash, operating cash flow, and available borrowing capacity should meet needs for at least twelve months.
- Risks include volatility in lottery demand tied to the timing of customer installations, project-based EPICENTRAL sales, execution of the European direct-sales transition, foreign-exchange volatility, and the planned banking-market exit. The filing reported no material change in previously disclosed risk factors, no material off-balance-sheet arrangements, and no legal proceedings expected by management to have a material adverse effect.
- The company adopted ASC 606 in 2018 using the modified retrospective method; adoption had no reported impact on earnings, cash flows, or the June 30 balance sheet. It was evaluating the future lease-accounting standard. The filing also reported $104,000 of gross unrecognized tax benefits and $23,000 of accrued interest and penalties related to uncertain tax positions.
Important facts for investors to verify
- Whether casino/gaming growth and AccuDate XL customer rollouts continue, and whether anticipated sales convert into revenue on schedule.
- How lottery weakness, IGT installation timing, the banking-market exit, and lower expected TSG sales affect revenue and cash generation.
- Inventory levels and working-capital trends, given the first-half inventory build and lower operating cash flow year over year.
- Foreign-exchange exposure and execution costs associated with the European direct-sales model.
- The filing gives inconsistent first-half repurchase share counts: 156,510 in the MD&A and 156,410 elsewhere. It reports approximately $2.0 million repurchased at an average $12.78 per share, with $3.0 million remaining under the $5 million authorization; verify the share count.