TransAct Technologies Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 9, 2017. TransAct develops and sells software-driven printing and technology solutions, supplies, and related services across restaurant, POS and banking, casino and gaming, lottery, and other markets. It reports one operating segment.
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $13.596 million | $14.801 million | $27.593 million | $29.158 million |
| Gross profit | $6.430 million | $5.983 million | $12.523 million | $11.868 million |
| Gross margin | 47.3% | 40.4% | 45.4% | 40.7% |
| Operating income | $1.306 million | $1.100 million | $2.722 million | $2.039 million |
| Operating margin | 9.6% | 7.4% | 9.9% | 7.0% |
| Net income | $867,000 | $753,000 | $1.810 million | $1.378 million |
| Diluted EPS | $0.12 | $0.10 | $0.24 | $0.18 |
Q2 sales fell 8.1%, while gross profit rose 7.5% and operating income rose 18.7%. For the first half, sales declined 5.4%, but gross profit increased 5.5% and operating income increased 33.5%. Management attributed margin improvement mainly to a higher share of higher-margin IGT lottery-printer replacement-parts sales.
Q2 sales by market were: restaurant solutions $1.021 million, down 40.5%; POS automation and banking $2.048 million, down 36.1%; casino and gaming $3.985 million, down 22.7%; lottery $2.787 million, up 29.6%; Printrex $282,000, up 60.2%; and TransAct Services Group (TSG) $3.473 million, up 44.5%. First-half sales were down in restaurant solutions, POS and banking, and casino and gaming, partly offset by growth in lottery, Printrex, and TSG.
Cash, liquidity, and capital
- Cash and cash equivalents were $4.877 million at June 30, 2017, up from $2.503 million at December 31, 2016. First-half operating cash flow was $3.971 million, compared with $1.898 million in the prior-year period.
- First-half investing cash outflow was $409,000, primarily capital expenditures; financing cash outflow was $1.183 million, mainly dividends. Capital expenditures for full-year 2017 were expected to be about $1.0 million.
- The company had no debt outstanding and reported $20 million available under its $20 million revolving credit facility. The facility was due to expire November 27, 2017; management expected to renew it or obtain a similar replacement before expiration. The company was in compliance with its financial covenants.
- Total assets were $31.474 million, total liabilities $6.534 million, and shareholders’ equity $24.940 million at June 30. The quarterly dividend was $0.09 per share; management expected approximately $2.6 million of dividend payments in 2017. No shares were repurchased in the first half; $1.429 million remained authorized under the repurchase program through December 31, 2017.
Management outlook, risks, and notable items
- Management expected restaurant-solutions terminal sales to increase in the second half of 2017 versus 2016, citing a large initial AccuDate XL order and planned sales and marketing investments. It expected higher 2017 selling, marketing, and general and administrative expenses as it builds sales capacity and markets these products.
- Management expected TSG sales to be higher for full-year 2017, driven by IGT replacement-parts orders. It expected the effective tax rate to be 32%–33% for 2017 and full-year dividends of approximately $2.6 million. These are management expectations, not quantified revenue or earnings guidance.
- Management said McDonald’s initiatives were nearing completion and expected 2017 sales to McDonald’s to decline versus 2016; legacy POS products were also expected to continue declining. IGT lottery orders, EPICENTRAL installations, and off-premise gaming sales can fluctuate with project timing. Lower international casino and POS sales weighed on results; oil and gas demand remained exposed to low worldwide oil prices.
- Q2 printer and terminal unit volume fell 21% to about 36,000, partly offset by a 3% increase in average selling price. A one-time mobile-printer order contributed to Printrex growth. Higher-margin IGT parts sales materially supported margins.
- The company expected to adopt the new revenue standard on January 1, 2018, using the modified retrospective approach; its impact was still under evaluation. Lease accounting changes and other new accounting standards were also under evaluation.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The filing cited no material changes to previously disclosed legal proceedings or risk factors.
Key facts for investors to verify
- Whether second-half restaurant-solutions growth materializes and offsets continuing declines in legacy POS and McDonald’s-related sales.
- How sustainable the gross-margin improvement is, given its stated reliance on higher-margin IGT replacement-parts mix.
- Timing and concentration of IGT, lottery, casino, and other project-based orders, including the repeatability of the one-time Printrex order.
- Renewal or replacement of the revolving credit facility before its November 2017 expiration, and continued covenant compliance.
- The eventual financial and reporting impact of adopting the revenue-recognition standard in 2018.