TransAct Technologies Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. TransAct designs and sells printers, food-safety terminals, software, supplies and related services across food safety, POS and banking, casino and gaming, lottery, Printrex and TSG markets. Amounts below are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $14.801 | $17.224 | $29.158 | $33.388 |
| Gross profit / margin | $5.983 / 40.4% | $7.161 / 41.6% | $11.868 / 40.7% | $13.653 / 40.9% |
| Operating income / margin | $1.100 / 7.4% | $2.205 / 12.8% | $2.039 / 7.0% | $2.422 / 7.3% |
| Net income | $0.753 | $1.388 | $1.378 | $1.532 |
| Diluted EPS | $0.10 | $0.18 | $0.18 | $0.20 |
Q2 sales fell 14% year over year and first-half sales fell 13%. Q2 printer unit volume declined 11%; first-half volume declined 12%. Q2 gross margin fell 120 basis points, mainly from product mix, including no EPICENTRAL installation (versus one a year earlier) and increased sales of lower-margin Ithaca 9000 printers. First-half margin was nearly flat, down 20 basis points.
Q2 operating income declined 50%. First-half operating income declined 16% despite the absence of $1.738 million in AD lawsuit-related legal expense recorded in first-half 2015; excluding that prior-period expense, first-half 2016 operating income was down 51% on management’s comparison. First-half effective tax rate was 32.6%, versus 36.0%, reflecting the 2016 federal R&D credit benefit.
Revenue trends and material changes
- Growth: Food safety revenue rose 69.6% in Q2 and 36.8% in the first half, driven chiefly by McDonald’s and broader distributor customer penetration. POS automation and banking rose 32.6% in Q2 and 45.4% for the half, principally from Ithaca 9000 sales tied to McDonald’s initiatives.
- Declines: Casino and gaming revenue fell 29.0% in Q2 and 17.5% for the half; lottery fell 26.8% and 27.0%, respectively. TSG declined 28.9% in Q2 and 27.3% for the half. Printrex declined 20.0% in Q2 and 64.3% for the half.
- International revenue decreased 22.7% in Q2 and 30.5% for the first half, largely due to weakness in international casino and gaming sales.
- Management attributed lower lottery sales to customer installation timing; casino results reflected a weak slot replacement cycle and lower international printer demand. TSG declines included unusually high prior-year IGT parts orders, lower commoditized consumables and fewer nonrecurring service projects. Printrex was pressured by low oil prices and loss of a medical-industry customer.
Cash, liquidity and capital allocation
- At June 30, cash and cash equivalents were $2.555 million, down from $4.473 million at year-end. First-half operating cash flow was $1.897 million; investing cash use was $0.322 million and financing cash use was $3.481 million. Cash ended the period $1.918 million lower.
- Working capital was $17.534 million, versus $18.983 million at December 31, 2015; the current ratio was 3.6, down from 4.0. Receivables increased $3.203 million during the half, attributed to sales timing; inventory fell $2.273 million.
- No debt was outstanding. The company had $20 million available under its revolving credit facility, due to expire November 28, 2017, and reported compliance with its financial covenants. Management stated available cash, operating cash flow and facility capacity should meet needs for at least twelve months.
- First-half capital expenditures were $0.330 million; approximately $1.0 million was expected for full-year 2016. The company paid $1.232 million in first-half dividends ($0.16 per share) and expected approximately $2.4 million in dividends for 2016, subject to board approval.
- Under a new $5 million repurchase authorization, TransAct bought 287,791 shares for $2.273 million at an average $7.90 per share; $2.727 million remained authorized at June 30.
Outlook, risks and unusual items
- Management expected 2016 POS automation printer sales to exceed 2015, supported by continuing McDonald’s Ithaca 9000 initiatives, and expected full-year lottery printer sales to IGT to be consistent with 2015 based on backlog and customer forecasts.
- Management expected full-year 2016 gross margin to exceed 2015, citing anticipated mix benefits from newer value-added products. Engineering and product-development expense was expected to be higher than 2015 as the company invested in EPICENTRAL software and food-safety terminals.
- Management expected the decline in worldwide oil prices to continue weighing on Printrex sales during the remainder of 2016. IGT order timing, project-oriented off-premise gaming sales, international casino demand and customer concentration around McDonald’s initiatives are notable sources of variability.
- The Avery Dennison dispute was settled in March 2015; the company paid $3.6 million and recorded the related expense in 2014. The filing reported no further expected expenses from the case and no material change in previously disclosed legal proceedings or risk factors.
- The company extended its Ithaca, New York facility lease through May 31, 2021. Management reported no material off-balance-sheet arrangements and no material change in market-risk exposure.
Investor verification priorities
- Track whether McDonald’s-related food-safety and POS growth continues, and assess customer concentration and associated margins.
- Monitor the casino, lottery, TSG and Printrex recovery assumptions, including international demand, IGT installation timing and oil-market conditions.
- Reconcile operating cash flow with rising receivables and accounts payable, and monitor cash after dividends and share repurchases.
- Verify execution against the stated 2016 gross-margin, lottery-sales, capital-expenditure and dividend expectations; these are management expectations, not guarantees.
- Review the full 10-K risk factors and credit-facility terms; this filing says there were no material updates to previously disclosed risk factors.