TransAct Technologies Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparison with the three months ended March 31, 2013. TransAct designs and sells printers, terminals, software, supplies, and related services across food safety/banking/POS, casino and gaming, lottery, Printrex, and service and supplies markets.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $13.619 million | $15.057 million |
| Gross profit / gross margin | $5.726 million / 42.0% | $6.433 million / 42.7% |
| Operating income / margin | $631,000 / 4.6% | $1.402 million / 9.3% |
| Net income | $394,000 | $1.160 million |
| Diluted EPS | $0.05 | $0.13 |
| Cash from operations | $1.144 million | $2.319 million |
- Sales fell 9.6%; printer unit volume declined 4% to approximately 35,000, while average selling price fell about 1%.
- Operating income declined 55%. Lower sales and a 70-basis-point reduction in gross margin contributed; higher engineering and selling expenses also weighed on results.
- Net interest expense was $14,000 versus $1,000; other expense was $8,000 versus other income of $37,000, primarily reflecting foreign-currency transaction results.
- The effective tax rate was 35.3%, compared with 19.3%. The prior-year rate benefited from the retroactive 2012 federal R&D credit; management said Q1 2014 received no benefit from that credit.
Financial position and liquidity
- At March 31, 2014, cash was $3.205 million, total assets $40.330 million, current assets $32.209 million, and total liabilities $7.795 million. Working capital was $24.935 million; the current ratio was 4.4.
- No borrowings were outstanding under the $20 million revolving credit facility; all $20 million remained available. The facility was scheduled to expire November 28, 2014. The company was in compliance with its financial covenants.
- Operating cash flow was lower year over year, partly because Q1 2013 benefited from a much larger reduction in accounts receivable. Investing cash outflow was $288,000, mainly capital expenditures; financing cash outflow was $582,000, representing dividends.
- The company paid a quarterly dividend of $0.07 per share, totaling approximately $582,000. Cash increased $269,000 during the quarter.
Material changes by market
- Food safety, banking and POS sales declined 10.8% to $1.769 million, primarily on lower domestic sales of the Ithaca 9700 terminal and 280 printer. Management cited McDonald’s rollout of Ithaca 9000 printers as a partial offset.
- Casino and gaming sales declined 2.9% to $6.542 million. Fewer EPICENTRAL software installations reduced domestic sales; increased thermal casino printer sales partly offset that decline. Management noted that software and off-premise gaming sales can vary significantly by project and quarter.
- Lottery sales declined 39.9% to $821,000, reflecting lower installation-related demand from GTECH. Printrex sales fell 26.5% to $974,000, primarily due to lower oil and gas market sales.
- TransAct Services Group sales declined 3.6% to $3.513 million, mainly due to reduced sales of non-Printrex consumables and lower project-oriented paper testing revenue. International sales overall rose 4.2% to $3.413 million.
Outlook, risks and unusual items
- Management expected 2014 sales to GTECH of approximately $4–5 million, based on backlog and customer forecasts. It expected food safety terminal sales to increase later in 2014 as customers completed trials and made purchasing decisions.
- Management expected gross margin for the remainder of 2014 to exceed 2013 levels, citing anticipated sales of value-added products. It also expected higher 2014 engineering and selling and marketing expenses, including to support three planned product launches.
- If the federal R&D credit was not renewed, management expected an effective tax rate of 35%–36% for the remainder of 2014. Capital expenditures, including capitalized software development, were projected at approximately $1 million for 2014; dividends were expected to total approximately $2.4 million.
- Management said cash on hand and operating cash flows should fund working capital, capital expenditures, dividends, and liquidity needs for at least the next 12 months. It expected to renew or replace the revolving credit facility during 2014.
- Avery Dennison’s lawsuit alleges misappropriation of trade secrets and seeks to restrict sales of the Ithaca 9700 and 9800 terminals. The appellate court had affirmed the denial of a preliminary injunction, and on April 16, 2014 denied Avery Dennison’s motion for reconsideration. The company may incur additional legal costs; the filing provides no quantified estimate of potential exposure.
- The Printrex acquisition contingent-consideration liability remained $60,000; no payment was made in Q1 because the arrangement’s conditions were not met. The filing reported no material changes to previously disclosed risk factors or market-risk exposure.
Key facts for investors to verify
- Whether food safety product trials convert to orders and whether the anticipated value-added product mix improves gross margin.
- GTECH order timing and whether 2014 lottery revenue reaches management’s $4–5 million estimate; project-driven gaming and EPICENTRAL sales may fluctuate.
- Renewal or replacement of the credit facility before its November 2014 expiration, and continued covenant compliance.
- Whether the federal R&D credit is renewed, affecting the projected tax rate, and whether cash generation supports planned dividends and capital spending.
- Further developments and potential costs in the Avery Dennison litigation, notwithstanding the favorable injunction rulings to date.