TransAct Technologies Incorporated — Q2 2012 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2012. TransAct designs and sells transaction printers, software, supplies and related services across banking/POS, casino and gaming, lottery, Printrex, and TransAct Services Group (TSG). Printrex was acquired in August 2011; prior-period comparisons therefore exclude Printrex sales.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $15.853m | $17.519m | $33.412m | $38.213m |
| Gross profit / margin | $5.842m / 36.9% | $6.663m / 38.0% | $12.620m / 37.8% | $13.595m / 35.6% |
| Operating income / margin | $0.779m / 4.9% | $2.210m / 12.6% | $2.689m / 8.0% | $4.998m / 13.1% |
| Net income | $0.508m | $1.442m | $1.716m | $3.267m |
| Diluted EPS | $0.06 | $0.15 | $0.18 | $0.34 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $5.671m | $1.363m |
Q2 revenue declined 9.5% year over year and first-half revenue declined 12.6%. Lottery sales were the largest drag, down 65.3% in Q2 and 78.0% for the first half. Casino and gaming grew 19.6% in Q2 and 28.1% in the first half; Printrex contributed $1.174m and $2.413m, respectively. TSG sales fell 16.2% in Q2 and 10.7% in the first half. First-half international sales rose 8.2%.
Q2 gross margin fell 110 basis points as reduced volume outweighed favorable product mix. First-half gross margin improved 220 basis points on a richer mix, including more casino/gaming and Printrex products and fewer lower-margin lottery printers. Operating income and net income fell substantially amid lower gross profit, Printrex-related operating costs, product development spending, and $471,000 in lawsuit-related legal fees. The 2012 effective tax rate was 36%, versus 35% in 2011, in part because the federal R&D tax credit had expired.
Financial position and liquidity
At June 30, 2012, cash and cash equivalents were $7.212m, total assets $42.189m, and total liabilities $9.703m. The company had no debt outstanding and had $20m available under its revolving credit facility. Working capital was $24.634m, down from $27.222m at year-end; the current ratio was 4.0 versus 5.7. The company reported compliance with its credit-facility covenants.
First-half operating cash flow of $5.671m included cash benefits from a $2.500m inventory reduction and a $1.853m increase in accounts payable, partly offset by a $2.072m increase in receivables. Investing cash use was $0.349m. Financing cash use was $4.964m, principally from $5.151m of share repurchases. Cash increased $0.349m from year-end.
Outlook, commentary, and notable items
- Management expected second-half 2012 sales to GTECH to be significantly higher than first-half levels, based on order backlog; lottery orders are timing-dependent and can fluctuate significantly.
- Management expected 2012 gross margin to be relatively consistent with 2011, and the annual effective tax rate to be about 36% if the R&D credit was not reinstated.
- Printrex sales were forecast at approximately $5.0m–$5.5m for 2012. Five new products were expected to launch in the second half.
- Closing the Printrex San Jose facility was expected to cost about $140,000 in 2012 and generate annualized savings of $800,000 beginning in Q4 2012. Management expected 2012 capital expenditures, including capitalized software development, of approximately $1.0m.
- Management stated that cash and operating cash flows should meet working-capital, capital-expenditure, repurchase, and other liquidity needs for at least 12 months. Further repurchases were expected to use significant cash; $6.993m remained authorized at June 30 under the repurchase program.
- Avery Dennison sued the company and a former employee, alleging trade-secret misappropriation and seeking to bar sales of the Ithaca 9700 and 9800 food-safety terminals. TransAct filed counterclaims. A preliminary-injunction hearing occurred in August and a ruling was pending. The company could not estimate potential loss; approximately $453,000 of related legal fees were accrued, and management expected another $500,000–$1.0m of legal fees in Q3.
- Printrex acquisition contingent consideration was recorded at $680,000; the disclosed undiscounted range was $100,000–$1.8m. The company also extended its Ithaca facility lease through May 2016, with annual payments of approximately $430,000.
Investor verification priorities
- Track GTECH order timing and whether second-half lottery sales meet management’s backlog-based expectation.
- Monitor the Avery Dennison injunction ruling, potential business restrictions, litigation costs, and any change in the currently unquantified loss exposure.
- Assess whether casino/gaming growth, Printrex revenue, and planned product launches can offset lottery and TSG weakness while supporting margins.
- Review cash conversion: first-half operating cash flow benefited materially from inventory and payable movements, while receivables increased.
- Verify the effect of ongoing buybacks on cash and share count, and progress toward the expected restructuring savings.