TransAct Technologies Incorporated — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. TransAct develops and sells software-driven printing and technology solutions, services, supplies, and parts across food safety/POS, casino and gaming, lottery, and other markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $14.357 million | $16.164 million |
| Gross profit / margin | $5.885 million / 41.0% | $6.492 million / 40.2% |
| Operating income | $939,000 | $217,000 |
| Net income | $625,000 | $144,000 |
| Diluted EPS | $0.08 | $0.02 |
| Operating cash flow | $(221,000) | $2.752 million |
| Capital expenditures | $221,000 | $188,000 |
Operating income was higher year over year largely because Q1 2015 included $1.744 million of legal fees related to the Avery Dennison litigation. Excluding those fees, management said operating income would have declined $1.022 million, or 52%, primarily from lower sales and increased product-development spending.
At March 31, cash and cash equivalents were $2.892 million, down from $4.473 million at year-end 2015. Total assets were $31.893 million, total liabilities $6.435 million, and shareholders’ equity $25.458 million. The company had no debt outstanding and $20 million of undrawn availability on its revolving credit facility. Working capital was $18.791 million; the current ratio was 4.2. The $20 million facility expires November 28, 2017, is secured by company assets, and carries quarterly financial covenants; the company reported compliance.
Changes and operating drivers
- Sales fell 11.2%. Food safety, banking and POS sales increased 41.2% to $3.137 million, led by Ithaca 9000 printer demand associated with McDonald’s initiatives. Casino and gaming sales decreased 2.6% to $5.438 million: domestic sales rose, but international sales fell. Lottery sales declined 27.2% to $2.935 million; Printrex fell 78.1% to $155,000; and TransAct Services Group (TSG) fell 25.7% to $2.692 million.
- Printer unit volume declined 12% to approximately 42,000; the average selling price remained consistent. International sales decreased 39.1%, primarily due to lower international casino and gaming printer sales.
- Gross margin improved 0.8 percentage points to 41.0%, which management attributed to sales mix, including two higher-margin EPICENTRAL installations.
- Engineering, design and product-development expense rose 42% to $1.236 million as the company added software engineers and invested in EPICENTRAL and food safety terminals. General and administrative expense increased 4% to $1.917 million, partly due to severance costs; selling and marketing expense was down slightly.
Outlook, risks and other notable items
- Management expected full-year 2016 gross margin to exceed 2015 levels and McDonald’s-related sales to be higher than in 2015. It expected 2016 lottery printer sales to IGT to be lower than in 2015, oil and gas weakness to continue weighing on Printrex sales, and engineering and development expense to be higher than in 2015.
- Management estimated 2016 capital expenditures of approximately $1 million and cash dividends of approximately $2.5 million. It said cash, operating cash flow, and available credit should cover liquidity needs for at least 12 months. No consolidated revenue or earnings guidance is provided in the filing.
- Lottery sales depend on the timing and number of IGT installations and may vary significantly. Off-premise gaming orders are project-oriented and can fluctuate. Oil and gas sales remain exposed to low worldwide oil prices; TSG also faced lower parts, consumables and service sales.
- The Avery Dennison dispute was settled in March 2015; the company paid $3.6 million and agreed to estimated label qualification costs of $25,000. It reported no Q1 2016 legal fees for the suit and expected no further related expense. The filing reports no material changes to previously disclosed legal proceedings or risk factors.
- The board authorized a new $5 million share-repurchase program through December 31, 2017. In Q1, the company repurchased 63,070 shares for approximately $510,000 at an average $8.09 per share, and paid a quarterly dividend of $0.08 per share. Management reported effective disclosure controls as of March 31, 2016.
Investor verification priorities
- Assess whether the sales decline and negative operating cash flow are temporary, including the impact of receivables, bonus payments and customer payment timing.
- Track the sustainability of McDonald’s-related demand and food safety growth, and the expected decline in IGT lottery sales.
- Monitor international gaming demand, oil-and-gas exposure, and TSG sales trends.
- Compare full-year gross-margin and product-development expense expectations with reported results; the filing gives no consolidated earnings or revenue forecast.
- Review cash use for dividends and repurchases against cash generation, facility terms and covenant headroom.