TransAct Technologies Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. TransAct designs and sells software-driven printing and technology products, supplies and services across restaurant, POS and banking, casino and gaming, lottery, and other markets. It reports one operating segment.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $12.243 million | $13.997 million | Down 12.5% |
| Gross profit / margin | $5.862 million / 47.9% | $6.093 million / 43.5% | Gross profit down 3.8%; margin up 440 basis points |
| Operating income / margin | $856,000 / 7.0% | $1.416 million / 10.1% | Operating income down 39.5% |
| Net income | $680,000 | $943,000 | Down 27.9% |
| Diluted EPS | $0.09 | $0.13 | Down $0.04 |
| Operating cash flow | $1.863 million | $771,000 | Up $1.092 million |
Cash and cash equivalents were $4.669 million at March 31, 2018, down from $5.507 million at year-end. The company had no debt outstanding and $20 million available under its revolving credit facility. Current assets were $23.130 million and current liabilities were $5.823 million. Cash used in investing was $308,000; cash used in financing was $2.387 million, including $673,000 of dividends and $1.562 million of share repurchases. The quarterly dividend was $0.09 per share.
Material changes versus Q1 2017
- Sales fell primarily because lottery revenue declined $2.346 million (78.7%) and POS automation and banking sales declined $742,000 (30.2%). Casino and gaming sales rose $823,000 (16.1%) and restaurant solutions sales rose $518,000 (98.3%).
- Printer and terminal unit volume decreased 28% to approximately 31,000 units, partly offset by a 15% increase in average selling price. International sales declined 40.8% to $2.064 million.
- Gross margin improved on favorable product mix and lower sales of lower-margin lottery and POS printers. Operating expenses rose 7%, led by higher engineering and general and administrative costs; operating income and margin consequently declined.
- Operating cash flow increased, supported by a $2.297 million reduction in receivables, principally collections from the former international casino and gaming distributor. Cash nevertheless declined due to dividends and repurchases.
Outlook, commentary and risks
- Management expects restaurant solutions sales to rise in 2018, supported by strategic investments and a large multi-quarter AccuDate XL rollout. It expects higher engineering, selling and marketing, and general and administrative expenses as it expands product development and sales teams.
- Management expects 2018 POS sales to McDonald’s to decline as implementation initiatives using the Ithaca 9000 conclude; legacy banking and POS printer sales are also expected to continue declining.
- Management expects lottery printer sales to be lower in 2018 than in 2017, and TSG sales to decline from the unusually high prior-year level of lottery-printer spare-parts sales. It expects Printrex sales to increase and international casino and gaming sales to benefit from the transition to direct selling in Europe.
- Management expects a full-year 2018 effective tax rate of 20%–21%, approximately $2 million of capital expenditures and capitalized software costs, and approximately $2.7 million in cash dividends. It believes cash, operating cash flow and credit availability will meet needs for at least the next 12 months.
- Sales in lottery and project-based gaming installations can vary significantly by quarter. The former exclusive international casino and gaming distributor relationship ended in 2017; the company is building direct-sales infrastructure. Management reported no material change in disclosed risk factors, market-risk exposure, or contractual obligations outside the ordinary course.
- The 2018 repurchase program authorizes up to $5 million through December 31, 2019; $1.6 million was used in Q1, leaving approximately $3.4 million authorized. The company was in compliance with credit-facility covenants.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no effect on retained earnings or Q1 financial statements. Tax Reform lowered the statutory U.S. corporate rate; the company disclosed provisional tax accounting and had not recorded Q1 impacts from GILTI or BEAT.
Key investor verification points
- Assess whether the sharp lottery decline and anticipated lower 2018 lottery and TSG sales are offset by restaurant and casino growth.
- Track execution and costs of the AccuDate XL rollout and the European direct-sales transition, including whether expected gaming growth materializes.
- Evaluate the sustainability of higher gross margin amid lower revenue and rising development and selling costs.
- Review cash generation after dividends and repurchases, remaining credit availability, and compliance with facility covenants.
- Monitor tax-accounting updates, including final effects of Tax Reform and any GILTI or BEAT exposure; the filing does not quantify potential future impacts.