TransAct Technologies Incorporated — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. TransAct designs and sells transaction printers, related supplies, parts and services across banking and point-of-sale, casino and gaming, and lottery markets.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $17.519 million | $16.443 million | $38.213 million | $30.651 million |
| Gross profit / margin | $6.663 million / 38.0% | $6.155 million / 37.4% | $13.595 million / 35.6% | $11.344 million / 37.0% |
| Operating income / margin | $2.210 million / 12.6% | $1.798 million / 10.9% | $4.998 million / 13.1% | $2.780 million / 9.1% |
| Net income | $1.442 million | $1.145 million | $3.267 million | $1.774 million |
| Diluted EPS | $0.15 | $0.12 | $0.34 | $0.19 |
Q2 sales rose 6.5% year over year; first-half sales rose 24.7%. First-half growth drove higher operating income and earnings, while gross margin declined because of a less favorable mix, including more lower-margin lottery printers and consumables. Q2 gross margin improved year over year, supported by sales growth and lower manufacturing overhead.
First-half operating cash flow was $1.363 million, versus cash used of $1.066 million in 2010. Investing cash use was $830,000, including $262,000 of fixed-asset purchases and $569,000 of capitalized EPICENTRAL software development. Financing cash use was $866,000, including $1.843 million of share repurchases. Cash declined $337,000 to $10.948 million.
At June 30, cash was $10.948 million, working capital was $28.342 million, and the current ratio was 4.6. Total liabilities were $8.906 million; the company had no borrowings and $20 million available under its revolving facility. Shareholders’ equity was $33.989 million.
Drivers and changes versus prior periods
- Lottery: Revenue increased 103% in Q2 to $4.973 million and 205% in the first half to $12.515 million, primarily from printer shipments to GTECH. Lottery represented 32.8% of first-half sales.
- Banking and POS: Revenue declined 28.7% in Q2 and 16.3% in the first half, largely because a large 2010 retail printer order did not recur; first-half U.S. McDonald’s-related sales also declined.
- Casino and gaming: Revenue declined 5.6% in Q2 and 2.7% in the first half. Lower shipments tied to slower Italian VLT installations and weaker Canada/Europe sales were partly offset by domestic performance and growth in some other markets.
- TransAct Services Group: Revenue increased 1.2% in Q2 and 7.8% in the first half, led by domestic consumables and replacement parts.
- Printer unit volume increased 11% in Q2 and 39% in the first half; average selling prices declined 3% and 7%, respectively, reflecting the higher proportion of lower-priced lottery printers.
- First-half accounts payable fell $3.158 million, contributing to the cash decrease despite positive operating cash flow. The company repurchased 157,900 shares for $1.843 million during the first half.
Outlook, risks and unusual items
- Management expects second-half 2011 GTECH sales to be significantly below first-half levels because of order timing. These shipments can fluctuate substantially and are not indicative of GTECH’s overall business.
- Management expects McDonald’s U.S. rollout-related sales to decline gradually in the second half as deployments near completion. It expects domestic casino sales to exceed 2010 levels through market-share gains, but cautions that uncertain economic conditions and casino capital spending make future sales unpredictable. Italian VLT-related printer sales are expected to remain below comparable 2010 periods.
- Management expects approximately $400,000 in annualized savings from closing its New Britain, Connecticut service facility, beginning in Q3 2011. The facility’s activities were transferred by June 30; a $184,000 restructuring charge was recorded, and no further closure costs were expected.
- Management expects a 2011 effective tax rate of approximately 35% and full-year capital expenditures, including capitalized software, of approximately $1.5 million. No specific full-year revenue or EPS guidance is provided. Management believes cash and operating cash flow will meet needs for at least the next 12 months.
- The $20 million TD Bank revolving facility expires November 28, 2011. The company reported covenant compliance at June 30, with no borrowings outstanding. Renewal or replacement terms are not provided in the filing text.
- On August 2, 2011, the company agreed to acquire substantially all assets of Printrex, Inc. for $4 million plus contingent consideration tied to products under development. Closing was expected in Q3, subject to customary conditions.
- No material changes to previously disclosed risk factors or market-risk exposure were reported; no legal proceedings were reported. Disclosure controls were deemed effective.
Investor verification priorities
- Track GTECH orders and the related revenue step-down anticipated in the second half, including customer and timing concentration.
- Assess whether cash generation remains strong after the first-half decline in accounts payable and continued investment in EPICENTRAL.
- Confirm renewal or replacement of the revolving credit facility before its November 2011 expiration.
- Verify Printrex closing, total consideration including contingencies, and subsequent operating contribution.
- Monitor execution of the New Britain cost savings, gross-margin recovery, and the expected slowdown in McDonald’s-related deployments.