TransAct Technologies Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts below are in millions unless stated otherwise. TransAct develops and sells software-driven technology and printing solutions across restaurant solutions, POS automation and banking, casino and gaming, lottery, Printrex, and services and supplies (TSG). It reports one operating segment.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $11.35 | $14.75 | $22.90 | $26.99 |
| Gross profit / margin | $5.70 / 50.3% | $6.99 / 47.4% | $11.79 / 51.5% | $12.85 / 47.6% |
| Operating income / margin | $0.31 / 2.7% | $1.62 / 11.0% | $1.09 / 4.7% | $2.47 / 9.2% |
| Net income | $0.19 | $1.21 | $0.93 | $1.89 |
| Diluted EPS | $0.02 | $0.16 | $0.12 | $0.24 |
- Q2 sales fell 23.1%; first-half sales fell 15.2%. Hardware unit volume declined 26% in Q2 and 19% for the first half. The company attributed weakness to lower sales across markets, including lower casino and gaming, POS and lottery volumes, and nonrecurring prior-year customer and OEM sales.
- Gross margin improved 290 basis points in Q2 and 390 basis points for the first half, reflecting a more favorable mix toward higher-value technology solutions, fewer lower-margin POS and lottery printer sales, and, in Q2, lower manufacturing overhead.
- Operating income fell 80.9% in Q2 and 56.1% in the first half as lower revenue and higher operating expenses outweighed improved gross margins. First-half selling and marketing expense rose 8%, and general and administrative expense rose 4%.
- Operating cash flow was $1.59 for the first half, versus $2.51 a year earlier. Investing cash outflow was $0.43; financing cash outflow was $1.55, mainly dividends of $1.34. Cash declined $0.39 to $4.30.
Balance sheet, debt and liquidity
- At June 30, 2019, cash was $4.30, current assets $26.61, and current liabilities $7.55. Inventory was $14.24, up from $12.84 at year-end, largely due to planned BOHA! hardware inventory buildup.
- The company reported no borrowings outstanding and $20 million available under its revolving credit facility, which matures November 28, 2022. It was in compliance with its financial covenants. Management said cash, expected operating cash flow and available facility capacity should meet needs for at least 12 months.
- Operating lease liabilities totaled $3.50, including $0.92 current and $2.57 noncurrent; these are lease obligations, not revolving-credit borrowings. Adoption of ASC 842 in January 2019 recorded a $3.7 right-of-use asset and $3.9 lease liability, with no income-statement or cash-flow impact.
- Total shareholders’ equity was $27.43. The company paid $0.09 per share in Q2 dividends and expected approximately $2.7 in total 2019 dividends. No shares were repurchased in the first half; $3 million remained under the repurchase authorization as of June 30.
Material changes, outlook and commentary
- Revenue declined in every Q2 market. Casino and gaming remained the largest market at $5.63, down 20.3%; TSG was $2.83, down 15.8%; POS automation and banking was $1.64, down 27.0%; restaurant solutions was $0.83, down 34.1%; and lottery was $0.13, down 72.1%.
- TransAct launched its BOHA! cloud-software and hardware ecosystem in March 2019. Management reported Q2 BOHA! SaaS subscription sales increased 24% from Q1. It cited customer commitments for approximately 240 terminal rollouts over the rest of 2019 and an agreement covering an initial 1,000 locations for a large international foodservice brand, planned to roll out by year-end. After quarter-end, the company announced additional agreements: more than 400 locations with a U.S. foodservice provider, and 100 terminals at a Macau casino resort, both expected to begin deployment by year-end 2019. These are plans and commitments, not completed deployments.
- Management expected 2019 engineering and product-development expense to be consistent with 2018, selling and marketing expense to increase significantly, and G&A expense to be higher. It forecast a 7%–9% effective tax rate and approximately $1.3 in 2019 capital expenditures and capitalized software costs.
- Management expected lottery printer sales to be significantly lower in 2019 than in 2018, as IGT orders were expected to be as needed. It also expected lower 2019 sales to McDonald’s for the Ithaca 9000 printer and a decrease in total TSG sales versus 2018, despite growth in restaurant-related labels and services. It expected Printrex sales to be relatively consistent with 2018.
- Remaining performance obligations were $4.3 at June 30; the company expected to recognize $3.8 within 12 months, $0.4 within 24 months, and the balance within 36 months.
Risks, contingencies and unusual items
- Foreign-exchange losses at the U.K. subsidiary contributed to Q2 other expense of $0.14; management said future exchange gains or losses could vary with sales and currency movements. The filing identifies Brexit uncertainty, but management did not expect a material consolidated impact; U.K. operations represented 15% of Q2 revenue and 10% of first-half revenue.
- The company noted variability in project-driven casino and gaming and lottery sales, dependence of lottery orders on IGT installation timing, and lower expected orders from certain large customers. It also noted that sales to McDonald’s were lower and expected to remain lower in 2019.
- No pending or threatened legal proceedings were identified as likely to have a material adverse effect. The filing reported $0.10 of gross unrecognized tax benefits and $0.02 of accrued interest and penalties related to uncertain tax positions; certain tax years remain open to examination.
- Management stated disclosure controls were effective as of June 30, 2019, and reported no material change in internal control over financial reporting during the quarter. The filing says no material changes to previously disclosed risk factors other than the added Brexit risk.
Important facts for investors to verify
- Whether BOHA! customer commitments convert into deployments, recurring SaaS revenue and cash collections on the announced schedules.
- Whether the pronounced revenue and operating-income declines stabilize, and whether higher gross margins persist as product and customer mix changes.
- Exposure to customer and project timing, particularly IGT lottery orders, McDonald’s printer demand, casino OEM orders, and international distributor sales.
- Ability to fund planned growth investments, capital spending and dividends from operating cash flow while maintaining liquidity and covenant compliance.
- The filing’s MD&A states first-half 2018 income tax provision was $0.486 million, while the financial statements report $0.483 million; verify the intended comparable-period amount.