TransAct Technologies Incorporated (NASDAQ: TACT) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts are in millions of dollars unless otherwise stated. TransAct develops software-driven technology and printing products for food service, POS automation, casino and gaming, lottery, and other markets; it reports one operating segment.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $5.285 | $11.350 | $15.532 | $22.900 |
| Gross profit / margin | $2.290 / 43.3% | $5.704 / 50.3% | $7.208 / 46.4% | $11.790 / 51.5% |
| Operating income (loss) | $(2.738) | $0.309 | $(4.033) | $1.086 |
| Net income (loss) | $(1.853) | $0.186 | $(2.845) | $0.932 |
| Diluted EPS | $(0.25) | $0.02 | $(0.38) | $0.12 |
- Cash flow: First-half operating cash use was $2.309, versus $1.591 provided in 2019. Investing cash use was $1.089, including a $0.600 loan to a third party; financing provided $2.278. Cash declined $1.121 to $3.082.
- Balance sheet at June 30: Current assets were $19.473 and current liabilities $5.357. Shareholders’ equity was $23.888. Debt included the $2.2 PPP loan and $0.006 outstanding under the Siena revolver. The company reported $4.4 of additional Siena borrowing capacity, subject to its borrowing base.
- Other metrics: Accounts receivable were $3.290 and inventory $11.905. Operating lease liabilities totaled $4.119. No dividend was paid in 2020; the company stopped its quarterly dividend in January.
Material changes versus prior periods
- Q2 sales fell 53.4% year over year; first-half sales fell 32.2%. Management attributed the deterioration principally to COVID-19 closures and restrictions affecting restaurants and casinos, together with weaker oil-and-gas demand.
- Casino and gaming sales declined 75.8% in Q2 and 43.4% for the first half. POS automation and banking sales declined 70.7% and 30.2%, respectively. Printrex sales fell 97.2% in Q2 and 80.1% for the first half.
- Food service technology revenue increased 7.2% in Q2 and 10.2% for the first half, supported by BOHA! software, labels, and other recurring revenue; hardware sales declined. TSG revenue declined 44.1% in Q2 and 27.3% for the first half.
- Gross margin contracted by 7.0 percentage points in Q2 and 5.1 points for the first half, primarily because lower volume left fixed manufacturing overhead spread across fewer sales.
- First-half operating expenses rose 5.0% despite cost reductions: engineering and product development increased 20.7%, and general and administrative expenses increased 8.5%; selling and marketing expenses declined 8.0%.
Outlook, management commentary, and risks
- Management reported some demand improvement in July and August compared with Q2, but demand remained below 2019 levels. It expected negative effects to continue at least through Q3 and likely through year-end 2020, with only a modest, uncertain second-half recovery. No numerical revenue or earnings guidance was provided.
- The company reduced expenses, including a workforce reduction of approximately 20% beginning in July, salary reductions, lower commissions, and curtailed discretionary spending and capital expenditures. It continued investing in food service technology products.
- Management believed cash, expected operating cash flows, cost reductions, and available revolver capacity would fund obligations and operations for at least 12 months. It also said it was evaluating additional liquidity strategies, potentially including equity or debt financing and other CARES Act programs.
- The $2.2 PPP loan bears 1% interest and is classified as long-term debt pending an SBA forgiveness decision. The company intended to apply for forgiveness; approval and the amount forgiven were not assured.
- The Siena facility provides up to $10.0 of revolving credit through March 2023, secured by substantially all company assets and subject to a borrowing base and minimum-EBITDA covenant. The company was covenant-compliant at June 30. Reduced receivables or eligible inventory, or weaker results, could reduce capacity or threaten covenant compliance.
- Supply-chain delays affected contract manufacturers in China and Thailand, responsible for approximately 80% and 19% of printer and terminal manufacturing, respectively. High inventory and lower demand had limited delivery impact to date, but prolonged disruption could impair fulfillment.
- The company recorded a $1.386 first-half income tax benefit, partly reflecting an expected carryback of 2020 net operating losses under the CARES Act. Goodwill and intangible-asset testing following a Q1 trigger found no impairment; management said further disruption could create future impairment risk.
- Disclosure controls were reported ineffective at June 30 because material weaknesses remained in ERP user-access segregation and spreadsheet controls. Management said the interim financial statements were fairly stated and reliable and described ongoing remediation.
Key facts for investors to verify
- Whether restaurant and casino demand recovered as management expected, and how that affected sales, margins, and cash generation.
- The SBA’s decision on PPP loan forgiveness and any remaining repayment obligation.
- Actual revolver availability under the borrowing base and ongoing compliance with the minimum-EBITDA covenant.
- Progress in remediating the disclosed internal-control material weaknesses and any subsequent changes in control effectiveness.
- Customer payment performance, inventory recoverability, contract-manufacturer delivery conditions, and any resulting impairment or liquidity effects.
- Whether the forecast tax-loss carryback benefit is realized and whether future tax or goodwill valuations change.