TransAct Technologies Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. TransAct designs and sells printers, terminals, software, supplies and related services across food safety/banking/POS, casino and gaming, lottery, Printrex and TransAct Services Group (TSG). It reports one operating segment.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $16.164 million | $13.619 million | Up 18.7% |
| Gross profit / margin | $6.492 million / 40.2% | $5.726 million / 42.0% | Profit up 13.4%; margin down 1.8 percentage points |
| Operating income / margin | $217,000 / 1.3% | $631,000 / 4.6% | Down 65.6% |
| Net income | $144,000 | $394,000 | Down 63.5% |
| Diluted EPS | $0.02 | $0.05 | Down $0.03 |
| Cash from operations | $2.752 million | $1.144 million | Up $1.608 million |
Sales growth reflected printer unit volume rising 36% to approximately 48,000 units, led by lottery. Average printer selling prices fell about 9%, partly because lottery printers have lower prices. Lottery revenue rose 391% to $4.031 million; food safety, banking and POS rose 25.6% to $2.222 million. Casino and gaming fell 14.7% to $5.581 million, and Printrex declined 27.4% to $707,000. TSG increased 3.1% to $3.623 million. International sales rose 21.7% to $4.154 million.
Gross margin declined primarily because of the higher share of lower-margin lottery sales. Operating income was also reduced by $1.744 million of Q1 legal fees related to the Avery Dennison litigation. Management stated that, excluding these fees, operating income would have increased $1.318 million, or 205%, year over year.
Financial position, cash flow and capital allocation
- At March 31, 2015, cash was $4.049 million, current assets $29.405 million, current liabilities $12.132 million and working capital $17.273 million. The current ratio was 2.4, versus 2.9 at year-end 2014.
- No debt was outstanding at March 31. The $20 million revolving facility was undrawn at quarter-end; it matures November 28, 2017 and is secured by company assets. The company reported compliance with its financial covenants.
- Operating cash flow benefited notably from a $3.633 million increase in accounts payable and inventory reductions; accounts receivable increased $1.711 million. Capital expenditures were $188,000. Cash rose $918,000 during the quarter.
- After quarter-end, the company borrowed $2.5 million under its revolver to help fund the $3.6 million Avery Dennison settlement payment made April 8. Management expected to repay the borrowing early in Q3 2015.
- The company paid $623,000 in dividends ($0.08 per share) and repurchased 166,553 shares for approximately $1.020 million at an average $6.12 per share. Approximately $3.846 million remained authorized for repurchases at quarter-end.
Outlook, commentary and notable items
- Management expected 2015 gross margin to exceed 2014 levels, citing anticipated growth in value-added products and cost-reduction benefits. It also expected engineering and product-development expenses to be lower in 2015.
- Based on backlog and customer forecasts, management expected 2015 lottery printer sales to GTECH to exceed 2014, especially in the first half. Sales depend on the timing of GTECH terminal installations and can fluctuate significantly.
- On May 8, 2015, TransAct extended its GTECH supply agreement through May 29, 2015 and received a $7.3 million non-cancelable order for delivery during 2016. Further agreement-extension discussions were ongoing.
- Management expected continued negative effects on Printrex sales from the oil-price decline. Off-premise gaming sales are project-oriented and difficult to predict. Management also expected Ithaca 9000 sales to McDonald’s to increase beginning in Q2 2015.
- The Avery Dennison dispute was settled March 25, 2015. TransAct agreed to pay $3.6 million and incur an estimated $25,000 label-qualification cost. The total $3.625 million expense was recorded in Q4 2014; the payment occurred after quarter-end. The company did not expect material further lawsuit expenses.
- Management expected approximately $800,000 of 2015 capital expenditures and approximately $2.5 million of 2015 dividends. It believed cash, operating cash flow and available credit would cover anticipated needs for at least the next 12 months.
- If the federal R&D tax credit was not renewed for 2015, management expected an effective tax rate of 35%–36% for the remainder of the year. The filing states that the credit had expired at the end of 2014.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material change in market-risk exposure or previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether GTECH’s $7.3 million 2016 order translates into deliveries and revenue as scheduled, and whether the supply agreement is extended beyond May 29, 2015.
- Whether lottery-driven sales growth persists and how product mix affects gross margin; the filing cautions that GTECH sales fluctuate with installation timing.
- Post-settlement liquidity and revolver repayment: quarter-end cash and debt figures predate the April settlement payment and $2.5 million borrowing.
- Whether the expected recovery in Ithaca 9000 sales and the projected benefits from value-added products and cost reductions materialize.
- Exposure to continued oil-and-gas weakness in Printrex, and the sustainability of dividends and share repurchases alongside capital spending and settlement-related borrowing.