Business context and reporting period
TransAct Technologies Incorporated filed this unaudited Form 10-Q for the three months ended March 31, 2017, compared with the first quarter of 2016. The company develops and sells software-driven printing and technology products, supplies, and services for restaurant, POS and banking, casino and gaming, lottery, and other markets. It reports one operating segment.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $14.00 | $14.36 |
| Gross profit / margin | $6.09 / 43.5% | $5.89 / 41.0% |
| Operating income / margin | $1.42 / 10.1% | $0.94 / 6.5% |
| Net income | $0.94 | $0.63 |
| Diluted EPS | $0.13 | $0.08 |
| Operating cash flow | $0.77 | $(0.22) |
| Capital expenditures | $0.23 | $0.22 |
| Cash dividends paid | $0.59 | $0.62 |
At March 31, 2017, cash was $2.43 million, total assets were $31.00 million, current assets were $22.24 million, and current liabilities were $5.99 million. Total liabilities were $6.50 million. The company had no debt outstanding and reported $20 million available under its revolving credit facility. The facility expires November 28, 2017; the company was in compliance with its financial covenants. The filing reports an operating-cash-flow-to-total-debt-service covenant calculation of 88.3 against a 1.25 minimum.
Material changes versus prior year
- Sales decreased $0.36 million, or 2.5%, while printer and terminal unit volume increased 2% to approximately 43,000; average selling prices were stable.
- Gross margin rose 2.5 percentage points, which management attributed primarily to favorable factory overhead absorption versus unfavorable absorption a year earlier.
- Operating income increased 51%, reflecting higher gross profit and lower operating expenses. Net income rose from $0.63 million to $0.94 million.
- Sales by market: restaurant solutions fell 35.9% to $0.53 million; POS automation and banking rose 6.2% to $2.46 million; casino and gaming fell 5.9% to $5.12 million; lottery rose 1.6% to $2.98 million; Printrex rose 14.8% to $0.18 million; and TransAct Services Group rose 1.6% to $2.74 million. International sales increased 37.7% to $3.49 million, largely due to international lottery sales.
- Operating cash flow improved from use of $0.22 million to provision of $0.77 million. Receivables collections supported the 2017 result, partly offset by lower accounts payable and increased inventory.
Outlook, risks and notable items
- Management expects restaurant-solutions sales to increase in 2017, particularly in the second half, following increased sales and marketing investment. It also expects higher 2017 selling and marketing and G&A expenses related to building the restaurant-solutions sales organization.
- Management expects TSG sales to rise in 2017, supported by increased IGT lottery replacement-parts orders. It expects McDonald’s sales to decline for full-year 2017 as prior initiatives near completion, and legacy banking/POS printer sales to continue declining.
- Management cautioned that oil and gas demand remains affected by low worldwide oil prices. EPICENTRAL, off-premise gaming, and IGT lottery sales can fluctuate significantly with project and installation timing.
- Management expects a 32%–33% effective tax rate for 2017 and approximately $1.0 million of capital expenditures. It expects about $2.6 million in cash dividends during 2017 and stated that available cash, operating cash flow, and credit availability should cover needs for at least the next 12 months.
- The quarterly dividend was increased after quarter-end from $0.08 to $0.09 per share, declared April 28, 2017. No shares were repurchased in Q1; $1.429 million remained authorized under the repurchase program at March 31, 2017.
- The Hamden, Connecticut facility lease was extended through April 30, 2027. The company reported no material change in previously disclosed legal proceedings, risk factors, or market-risk exposure; no material off-balance-sheet arrangements; and effective disclosure controls.
- Revenue-recognition guidance was scheduled for adoption January 1, 2018, using the modified retrospective approach; the company was evaluating its impact. Lease-accounting guidance was also under evaluation. Q1 adoption of inventory and share-based-payment standards had no material income-statement impact; the latter included a $31,000 cumulative retained-earnings adjustment.
Important facts for investors to verify
- Whether restaurant-solutions growth materializes in the second half and whether associated sales-force investments produce returns.
- Customer and project timing exposure, especially IGT lottery installations, McDonald’s programs, and EPICENTRAL or off-premise gaming deployments.
- Cash generation, working-capital needs, planned capital spending, dividend commitments, and the November 2017 credit-facility renewal or replacement.
- The expected effect of the new revenue-recognition and lease-accounting standards, and developments in the company’s disclosed tax examinations and uncertain tax positions.