Business context and reporting period
TransAct Technologies designs, develops and sells printers, terminals, software, supplies and related services for food safety, banking and point-of-sale (POS), casino and gaming, lottery, and Printrex markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods unless otherwise stated. Amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $17.224 | $13.804 | $33.388 | $27.423 |
| Gross profit / margin | $7.161 / 41.6% | $5.788 / 41.9% | $13.653 / 40.9% | $11.514 / 42.0% |
| Operating income / margin | $2.205 / 12.8% | $0.345 / 2.5% | $2.422 / 7.3% | $0.976 / 3.6% |
| Net income | $1.388 | $0.175 | $1.532 | $0.569 |
| Diluted earnings per share | $0.18 | $0.02 | $0.20 | $0.07 |
| Operating cash flow | Not separately presented | Not separately presented | $1.837 | $3.848 |
Q2 sales grew 24.8%; first-half sales grew 21.8%. Printer unit volume rose 52% in Q2 and 44% in the first half, while average selling prices fell approximately 13% and 11%, respectively, mainly because of greater sales of lower-priced lottery printers. Lottery revenue rose 246% in Q2 and 317% in the first half; Printrex revenue fell 78% and 53%, respectively. First-half casino and gaming revenue was nearly flat, while food safety, banking and POS and TSG revenue increased.
Gross margin declined year over year in both reporting periods, primarily due to the larger share of lower-margin lottery printers. Q2 operating income also benefited from lower operating expenses, including cost-reduction savings; first-half results included $1.738 million of legal fees related to the Avery Dennison dispute.
At June 30, cash and cash equivalents were $2.293 million, working capital was $18.348 million, and the current ratio was 3.1. There was no debt outstanding; $20 million remained available under the revolving facility. The company drew and repaid $2.5 million during the quarter to help fund its settlement payment. First-half operating cash flow decreased year over year, with cash uses including settlement and bonus payments and higher accounts receivable; increased accounts payable partly offset those outflows. Capital expenditures were $0.407 million. The company paid $1.243 million in dividends and repurchased $1.020 million of shares during the first half.
Material changes, outlook and risks
- Outlook: Management expected full-year 2015 gross margin to exceed 2014, citing value-added products and cost-reduction initiatives, and expected engineering and product-development expenses to be lower than in 2014. It expected 2015 lottery-printer sales to GTECH to exceed 2014 based on backlog and GTECH’s forecast, and anticipated further Ithaca 9000 sales growth in the second half. Planned 2015 capital expenditures were approximately $0.8 million; expected cash dividends were approximately $2.5 million. Management believed available cash, operating cash flow and facility capacity would cover requirements for at least twelve months.
- Market risks: Management expected the worldwide oil-price decline to continue weighing on Printrex oil-and-gas sales. Medical and mobile printer sales were also affected by the loss of a medical customer. Lottery sales depend on GTECH’s installation timing and can fluctuate significantly; off-premise gaming sales are project-oriented, and domestic casino printer demand faced a weaker slot-machine replacement cycle.
- Legal settlement: The Avery Dennison dispute was settled in March 2015. TransAct paid $3.6 million in April; the previously accrued $3.625 million expense was recorded in 2014. TransAct reversed $25,000 in Q2 2015 because the required label-testing information was not provided by the settlement deadline. The company said it expected no further lawsuit-related expense in 2015.
- Other developments: TransAct signed a non-exclusive agreement to supply thermal lottery printers to GTECH through December 31, 2019; some agreement terms were confidential. A lease amendment expanded its facility from approximately 14,000 to 20,000 square feet, with an 84-month term beginning after renovation is completed or September 1, 2015, whichever is later. The revolving credit facility runs through November 28, 2017; the company reported covenant compliance and no material change in disclosed market risks or risk factors.
Important facts for investors to verify
- Whether lottery-printer demand and GTECH order timing support the projected full-year sales increase, and how the lower selling price and product mix affect margins.
- Whether Printrex weakness persists and whether the lost medical customer or oil-and-gas exposure has further effects.
- Cash conversion and working-capital trends, particularly receivables and reliance on higher accounts payable, alongside dividends, repurchases and planned capital spending.
- Terms and practical impact of the GTECH supply agreement, facility expansion and remaining share-repurchase authorization.
- Potential tax examinations: federal returns for 2011–2013 and certain state and foreign years remained open; management considered any additional state or foreign assessment immaterial.