Business context and reporting period
TransAct Technologies Incorporated designs and sells printers, terminals, software, supplies and related services for food safety, banking/POS, casino and gaming, lottery, oil and gas, medical and other markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $15.788 million | $15.853 million | $30.845 million | $33.412 million |
| Gross profit / margin | $6.452 million / 40.9% | $5.842 million / 36.9% | $12.885 million / 41.8% | $12.620 million / 37.8% |
| Operating income | $1.807 million | $0.779 million | $3.209 million | $2.689 million |
| Net income | $1.215 million | $0.508 million | $2.375 million | $1.716 million |
| Diluted EPS | $0.14 | $0.06 | $0.27 | $0.18 |
| Operating cash flow | Not separately presented for quarter | $3.307 million | $5.671 million |
At June 30, 2013, cash and cash equivalents were $8.828 million, total assets $44.395 million, total liabilities $9.899 million, and shareholders’ equity $34.496 million. The company had no debt outstanding and $20 million of undrawn revolving credit capacity. Working capital was $26.822 million and the current ratio was 4.1. First-half capital expenditures were $426,000, with $42,000 of capitalized software development costs. Dividends paid in the first half totaled $1.127 million; treasury stock purchases totaled $887,000.
Material changes versus comparable periods
- Q2 sales were nearly flat year over year, while first-half sales declined 7.7%. First-half printer unit volume fell 21%, partly offset by a 9% increase in average selling price.
- Q2 gross margin expanded 400 basis points to 40.9%; first-half gross margin also improved 400 basis points to 41.8%, reflecting product mix including the Ithaca 9700 food-safety terminal and EPICENTRAL software.
- Operating income rose 132% in Q2 and 19.3% in the first half. Higher gross margin and lower legal fees contributed; first-half results also benefited from no repeat of 2012 restructuring charges.
- First-half sales declines in casino and gaming (14.9%) and lottery (32.4%) were partly offset by growth in food safety/banking/POS (8.5%) and TSG (6.0%). International sales fell 30.1% in the first half, primarily due to casino and gaming.
- First-half operating cash flow decreased to $3.307 million from $5.671 million, despite higher net income. Inventory growth, lower accounts payable and payment of annual bonuses were cash uses; collections of receivables provided a substantial offset.
Outlook, commentary, risks and unusual items
- Management expected 2013 gross margin to exceed 2012 levels, supported by value-added products. It expected selling and marketing costs to be higher, G&A relatively consistent, and the annual effective tax rate to be 33%–34% for the remainder of 2013.
- Based on backlog and customer forecasts, management expected 2013 sales to GTECH of approximately $4–$5 million. TSG sales were expected to exceed 2012, partly from consumables for new Printrex color printers. Off-premise gaming printer sales are project-oriented and difficult to predict.
- Management expected approximately $1 million of 2013 capital expenditures, including capitalized software costs, and approximately $2.4 million in cash dividends. It believed cash and operating cash flows would meet needs for at least the next 12 months.
- The Avery Dennison lawsuit alleges misappropriation of trade secrets relating to food-safety terminals and seeks to enjoin sales of the Ithaca 9700 and 9800. The trial court denied a preliminary injunction; an appeal and a subsequent request to bar sales pending appeal were unresolved at the filing date. Further legal costs and possible business effects remain uncertain.
- Printrex acquisition contingent consideration had a fair value of $760,000 at June 30, 2013, versus $960,000 at year-end. The $200,000 Q2 fair-value decrease was credited to G&A; no payments were made in the first half.
- The first-half effective tax rate of 26.7% was unusually low, reflecting federal R&D credit benefits, including an approximately $220,000 benefit for the 2012 credit. The company was in compliance with credit-facility covenants. Its stock repurchase program expired May 27, 2013 and was not renewed.
Important facts for investors to verify
- Whether food-safety terminal sales and improved gross margins can offset lower lottery and casino printer volumes.
- The outcome and timing of the Avery Dennison appeal and injunction request, and any resulting sales restrictions or legal expenses.
- Whether GTECH orders, project-driven gaming sales and international demand meet management’s stated expectations.
- Inventory build, operating cash conversion, and the company’s ability to fund planned dividends and capital spending while maintaining liquidity.
- Whether the contingent consideration estimate, tax-rate outlook and other forward-looking expectations change in subsequent filings.