Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto.
Forward Looking Statements
Certain statements included in this report, including without limitation statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "project" or "continue" or the negative thereof or other similar words. All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of this Annual Report. Actual results may differ materially from those discussed in, or implied by, the forward-looking statements. The forward-looking statements speak only as of the date of this report and we assume no duty to update them.
Overview
During 2016, we continued to focus our efforts on sales execution and growing the revenue of our newer, value-added products and technologies. This resulted in higher sales in both our restaurant solutions terminals and EPICENTRAL
TM
casino software solution. During 2016 we also continued to develop these products by investing in engineering through the hiring of additional software engineers to enhance our EPICENTRAL™ software and expand of our line of restaurant solutions terminals. During 2017 we plan to strategically invest in our sales and marketing for the restaurant solutions market. We currently sell our restaurant solutions terminals primarily through distributors but in 2017 we will expand our internal sales force in order to further develop sales directly to the end customer. We believe these investments will strengthen our position in the restaurant solutions market and result in increased sales and margins in 2017.
During 2016, our sales decreased primarily due to lower TSG sales as our largest customer, IGT, placed a large order of replacement parts mainly for a legacy lottery printer in 2015 that did not repeat to the same extent in 2016. During 2016 we also experienced lower sales in our casino and gaming market, primarily in the international casino and gaming market due to the continued sluggishness in the international markets that started in 2015. Our Printex market has seen a significant, consisent negative impact from the world-wide decline in oil and gas prices. These decreases were partially offset by increased sales in our POS automation and banking market due to sales to McDonald's to support new initiatives that started in late 2015 and continued into 2016. Additionally, we saw continued market penetration of our restaurant solutions terminals as sales increased in 23% in 2016 compared to 2015.
During 2016, our total net sales decreased 4% to approximately $57,235,000. See the table below for a breakdown of our sales by market:
|
|
Year ended
|
|
|
Year ended
|
|
|
Change
|
|
(In thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
$
|
|
|
|
%
|
|
Restaurant solutions
|
|
$
|
5,162
|
|
|
|
9.0
|
%
|
|
$
|
4,191
|
|
|
|
7.0
|
%
|
|
$
|
971
|
|
|
|
23.2
|
%
|
POS automation and banking
|
|
|
10,518
|
|
|
|
18.4
|
%
|
|
|
8,838
|
|
|
|
14.8
|
%
|
|
|
1,680
|
|
|
|
19.0
|
%
|
Casino and gaming
|
|
|
21,006
|
|
|
|
36.7
|
%
|
|
|
21,755
|
|
|
|
36.5
|
%
|
|
|
(749
|
)
|
|
|
(3.4
|
%)
|
Lottery
|
|
|
9,913
|
|
|
|
17.3
|
%
|
|
|
9,468
|
|
|
|
15.9
|
%
|
|
|
445
|
|
|
|
4.7
|
%
|
Printrex
|
|
|
540
|
|
|
|
1.0
|
%
|
|
|
1,381
|
|
|
|
2.3
|
%
|
|
|
(841
|
)
|
|
|
(60.9
|
%)
|
TSG
|
|
|
10,096
|
|
|
|
17.6
|
%
|
|
|
14,043
|
|
|
|
23.5
|
%
|
|
|
(3,947
|
)
|
|
|
(28.1
|
%)
|
|
|
$
|
57,235
|
|
|
|
100.0
|
%
|
|
$
|
59,676
|
|
|
|
100.0
|
%
|
|
$
|
(2,441
|
)
|
|
|
(4.1
|
%)
|
Sales of our restaurant solutions products increased 23% in 2016 compared to 2015. In the restaurant solutions market, our focus lies with providing terminals that print food rotational date and nutritional labels to help restaurants and other food service establishments effectively manage food rotation and spoilage. The increase in restaurant solutions sales resulted largely from the continued success of our AccuDate™ 9700 terminal and the AccuDate™ Pro that was introduced in 2015. Our focus for 2017 will be to utilize an expanded internal sales force to continue increasing market penetration with our line of restaurant solutions terminals and make strategic investments in our sales and marketing force mentioned above.
Sales of our POS automation and banking products increased 19% in 2016 compared to 2015. In the POS market, we focus primarily on supplying printers that print receipts or linerless labels for customers in the restaurant and quick serve markets. During 2016, the increased sales of our POS automation and banking printers was driven by a 38% increase of our Ithaca® 9000 printers compared to 2015 to support new initiatives at McDonald's. We expect this level of sales to decrease in 2017 as McDonald's nears completion of the implementation of the initiatives started in 2015. The increased POS sales from our Ithaca®9000 printer was partially offset by a 51% decrease in sales of our other legacy POS printers that we have recently deemphasized. In the banking market, we focus mainly on supplying printers for use in bank teller stations at banks and financial institutions primarily in the U.S. Although we continue to provide printers to our existing banking and POS (non-McDonald's) customers, we have significantly reduced our focus on this market in order to increase our focus on the restaurant solutions market. As a result, sales of our banking printer sales decreased 27% in 2016 and we expect sales of our POS automation and banking printers to continue to decline in 2017.
Sales of our casino and gaming products decreased 3% in 2016 compared to 2015. In our casino and gaming market, our focus lies primarily in supplying printers worldwidefor use in slot machines at casinos and racetracks, as well as in other electronic gaming devices that print tickets or receipts. Additionally, we supplement these printer sales with revenue from EPICENTRAL™, our promotional printing system that enables casino operators to create promotional coupons and marketing messages and print them real time at the slot machine. The decrease of casino and gaming printers is due to the 28% decrease in international sales of the EPIC 950, our thermal casino printer, due to continued sluggishness in Australia and Asia. Domestic casino and gaming printer sales have remained relatively consistent, decreasing less than 1%. Sales of our EPICENTRAL
TM
software have increased 46% in 2016 compared to 2015 as we completed three installations worldwide compared to one installation completed in 2015. During 2016 we made strategic investments to improve and enhance EPICENTRAL
TM
which has led to increased revenue growth during 2016 that we believe will continue into 2017.
In the lottery market, we continue to hold a leading position based on our long-term relationship with IGT, our largest customer and the world's largest provider of lottery terminals. IGT has been our customer since 1995, and we continue to maintain a good relationship with them. During 2016, total lottery printer sales to IGT increased approximately 5%, compared to 2015. Domestic lottery sales to IGT increased 20% but was offset by an 86% decrease in international lottery sales to IGT due a sale in 2015 for the Spanish lottery that did not repeat in 2016. Our sales to IGT each year are directly dependent on the timing and number of new and upgraded lottery terminal installations IGT performs and are not indicative of IGT's overall business or revenue. Starting in 2015, we no longer have an exclusive arrangement with IGT, however, we do not believe this will significantly impact our business as we continue to have a good relationship with IGT and we now have the ability to sell our market leading products to other lottery system customers.
Sales of our Printrex branded printers include wide format, rack mounted and vehicle mounted thermal printers used by customers to log and plot oil field and down hole well drilling data in the oil and gas exploration industry. Sales in this market also includes wide format vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles and other mobile printing applications. During 2016, we experienced 61% lower Printrex product sales due primarily to the negative impact on drilling activity from our customers resulting from the continued decline of worldwide oil prices. Although we are uncertain when the oil and gas market will recover, we have taken prudent steps to align our cost structure with the current revenue level while we wait for the rebound to occur.
Our TSG group, which sells service, replacement parts and consumable products, including receipt paper, ribbons and inkjet cartridges, continues to offer a recurring revenue stream for the Company. TSG sales decreased 28% in 2016 from 2015 primarily due to usually high sales of replacement parts mainly to IGT for a legacy lottery printer in 2015 that did not repeat to the same extent in 2016. Additionally, we experienced a decrease in sales of Printrex consumables due to lower usage by our oil and gas customers due to depressed oil prices, as well as lower sales of HP inkjet cartridges used in our banking printers as we deemphasize our focus on this commoditized product. Despite lower TSG sales in 2016 we expect TSG sales to increase in 2017, largely in the second half of the year, due to contractual commitments for replacement part sales to IGT.
Operationally, our gross margin was 41.6% in 2016, which fell just 30 basis points shy of the record high gross margin of 41.9% we reported in 2015. We believe gross margin will increase in 2017 as our newer, higher margin products continue to grow and become a larger portion of our overall sales. In 2016 we achieved operating margin of 9.1% compared to 7.5% in 2015 primarily due to legal and settlement expenses incurred in 2015 related to the now-settled AD Lawsuit. During 2017, we expect to more significantly increase our focus on the restaurant solutions market, as we believe it represents TransAct's most significant, long term growth opportunity. To that end, we plan to build out a world-class, direct sales organization by recruiting and bringing new sales staff on board, as well as launch targeted marketing campaigns to support our restaurant solutions business. As a result of this investment, we expect our operating expenses, largely selling and marketing, to increase by approximately $2 million in 2017 compared to 2016.
We reported net income of $3,617,000 and net income per diluted share of $0.47 for 2016, compared to $3,092,000 and net income per diluted share of $0.39 for 2015. In terms of cash flow for 2016, we experienced a very strong year, generating $4,623,000 of cash from operating activities. We also returned $5,963,000 to our shareholders in the form of $3,571,000 for treasury shares and $2,416,000 for cash dividends and finishing the year with cash and cash equivalents of $2,503,000 and no debt on our Consolidated Balance Sheet at December 31, 2016.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect both Balance Sheet items and Statement of Income categories. Such estimates and judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the particular circumstances. We evaluate our assumptions on an ongoing basis by comparing actual results with our estimates. Actual results may differ from the original estimates.
The following accounting policies are those that we believe to be most critical in the preparation of our financial statements. These items utilize assumptions and estimates about the effect of future events that are inherently uncertain and are therefore based on our judgment. Please refer to Note 2 – Summary of significant accounting policies in the accompanying Consolidated Financial Statements for a complete listing of our accounting policies.
Revenue Recognition
– Our typical contracts include the sale of printers and terminals, which are sometimes accompanied by separately-priced extended warranty contracts. We also sell replacement parts, consumables, and other repair services (sometimes pursuant to multi-year product maintenance contracts), which are not included in the original printer or terminal sale and are ordered by the customer as needed. We recognize revenue pursuant to the guidance within Accounting Standards Codification ("ASC") 605, "Revenue Recognition" (ASC 605). Specifically, revenue is recognized when evidence of an arrangement exists, delivery (based on shipping terms which are generally FOB shipping point) has occurred, the selling price is fixed and determinable, and collectability is reasonably assured. We recognize revenue from the sale of printers and terminals to our distributors and resellers on a sell-in basis and on substantially the same terms as we recognize revenue from all our other customers. We provide for an estimate of product returns and price protection based on historical experience at the time of revenue recognition.
Our software solution, EPICENTRAL
TM
, enables casino operators to create promotional coupons and marketing messages and to print them in real-time at the slot machine. Revenue arrangements for EPICENTRAL
TM
include multiple deliverables and as a result such arrangements are accounted for in accordance with both ASC 605-25, "Multiple-Element Arrangements" and ASC 985-605, "Software." EPICENTRAL
TM
is primarily comprised of both a software component, which is licensed to the customer, and a hardware component. EPICENTRAL™ contains both software and hardware that are integrated to deliver the system's full functionality. These arrangements are accounted for in accordance with ASC 605-25, "Multiple-Element Arrangements". EPICENTRAL™ can also include an additional software offering, Mobile Host, that allows the customer to access certain applications on mobile devices. Mobile Host is accounted for in accordance with ASC 985-605, "Software" as Mobile Host software does not function together with the hardware device to deliver its essential functionality.
Revenue, inclusive of software license fees, is generally recognized upon installation and formal acceptance by the customer with the exception of any amount allocated to free maintenance which is deferred and recognized over the initial maintenance period, generally one year.
For EPICENTRAL
TM
and other multiple deliverable arrangements, we consider whether the deliverables in an arrangement are within the scope of existing higher-level GAAP and apply such literature to the extent that it provides guidance regarding whether to separate multiple-deliverable arrangements and how to allocate value among those separate units of accounting. When we enter into a multiple deliverable arrangement, we also determine whether revenue arrangements consist of more than one unit of accounting. At that time, we allocate arrangement consideration to the separate units of accounting based on a relative selling price hierarchy, except where amounts allocable to the delivered units is limited to that which is contingent upon the delivery of additional deliverables or meeting other specified performance conditions. The relative selling price for each element is based upon the following selling price hierarchy: vendor specific objective evidence ("VSOE") if available, third party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") to the extent that VSOE or TPE are not available.
Revenue related to extended warranty and product maintenance contracts is recognized pursuant to ASC 605-20-25, "Separately Priced Extended Warranty and Product Maintenance Contracts." Pursuant to this guidance, revenue related to separately priced product maintenance contracts is deferred and recognized over the term of the maintenance period. We record deferred revenue for advance payments received from customers for maintenance contracts.
Our customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience. Returns have historically been within expectations and the provisions established, but we cannot guarantee that we will continue to experience return rates consistent with historical patterns.
We offer some of our customers price protection as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. Our customers typically carry limited amounts of inventory, and we infrequently lower prices on current products. As a result, the amounts paid under these plans have not been material. However, we cannot guarantee that this minimal level will continue.
We charge our customers for shipping and handling services. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales.
Accounts Receivable
– We have standardized credit granting and review policies and procedures for all customer accounts, including: credit reviews of all new customer accounts; ongoing credit evaluations of current customers; credit limits and payment terms based on available credit information; and adjustments to credit limits based upon payment history and the customer's current creditworthiness. We also provide an estimate of doubtful accounts based on historical experience and specific customer collection issues. Our allowance for doubtful accounts as of December 31, 2016 was approximately $50,000, or less than 1% of outstanding accounts receivable, which we feel is appropriate considering the overall quality of our accounts receivable. While credit losses have historically been within expectations and the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience.
Inventories
– Our inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) or market. We review market value based on historical usage and estimates of future demand. Assumptions are reviewed at least quarterly and adjustments are made, as necessary, to reflect changing market conditions. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and market value. Should circumstances change and we determine that additional inventory is subject to obsolescence, additional write-downs of inventory could result in a charge to income.
Goodwill and Intangible Assets
– We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with Accounting Standards Codification ("ASC") 350-20 "Goodwill", acquired goodwill is not amortized but is subject to impairment testing at least annually and when an event occurs or circumstances change, that indicate it is more likely than not an impairment exists. Factors considered that may trigger an impairment review are: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of acquired assets or the strategy for the overall business; significant negative industry or economic trends; and significant decline in market capitalization relative to net book value. Definite lived intangible assets are amortized and are tested for impairment when appropriate. We reported $2,621,000 of goodwill and $545,000 of unamortized definite-lived intangible assets at December 31, 2016. We have determined that no goodwill or intangible asset impairment has occurred and the fair value of goodwill was substantially higher than our carrying value based on our assessment as of December 31, 2016 when the impairment review is performed.
Income Taxes
– In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This involves estimating the actual current tax exposure together with assessing temporary differences between the tax basis of certain assets and liabilities and their reported amounts in the financial statements, as well as net operating losses, tax credits and other carryforwards. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheets. We then assess the likelihood that the deferred tax assets will be realized from future taxable income, and to the extent that we believe that realization is not likely, we establish a valuation allowance.
Significant judgment is required in determining the provision for income taxes and, in particular, any valuation allowance or tax reserves with respect to our deferred tax assets and uncertain tax positions. On a quarterly basis, we evaluate the recoverability of our deferred tax assets based upon historical results and forecasted taxable income over future years, and match this forecast against the basis differences, deductions available in future years and the limitations allowed for net operating loss and tax credit carryforwards to ensure that there is adequate support for the realization of the deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance or tax reserves would be charged as a reduction to income in the period such determination was made. Likewise, should we determine that we would be able to realize future deferred tax assets in excess of its net recorded amount, an adjustment to the valuation allowance would increase net income in the period such determination was made.
We account for income taxes in accordance with ASC 740, "Income Taxes." Among other things this provision prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity's financial statements. It also requires that the effects of such income tax positions be recognized only if, as of the balance sheet reporting date, it is "more likely than not" (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between the amount claimed, or expected to be claimed, on a company's income tax returns and the benefits recognized in the financial statements.
Warranty
– We generally warrant our products for up to 36 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs. If actual future product repair rates or the actual costs of material and labor differ from the estimates, adjustments to the accrued warranty liability and related warranty expense would be made.
Contingencies
– We record an estimated liability related to contingencies based on our estimates of the probable outcomes pursuant to ASC 450, "Contingencies." On a quarterly basis, we assess the potential liability related to pending litigation, audits and other contingencies and confirm or revise estimates and reserves as appropriate. If the actual liabilities are settled in an amount greater than those recorded on the balance sheet, a charge to income would be recorded. As of December 31, 2014 we had reduced the contingent liability to $0 in connection with a contingent consideration arrangement entered into as part of the Printrex acquisition. The reduction made in 2014 resulted from a decrease of $60,000 that was the result of our revised estimate of the expected payout in connection with this arrangement, primarily due to changes in probabilities and decreases in revenue and gross margin estimates, and was credited to general and administrative expense during 2014. No contingent liability reserve was recorded in 2016 or 2015 and we will not make any further reserves in the future in regards to the Printrex acquisition as the contingent consideration measurement period expired on December 31, 2014. See Note 3 to the Consolidated Financial Statements for further discussion.
Share-Based Compensation
– We calculate share-based compensation expense in accordance with ASC 718, "Compensation – Stock Compensation" using the Black-Scholes option-pricing model to calculate the fair value of share-based awards. The key assumptions for this valuation method include the expected term of an option grant, stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. The determination of these assumptions is based on past history and future expectations, and is subject to judgment. To the extent any of the assumptions were to change from year to year, the fair value of new option grants may vary significantly.
Results of Operations: Year ended December 31, 2016 compared to year ended December 31, 2015
Net Sales.
Net sales, which include printer, terminal and software sales as well as sales of replacement parts, consumables and maintenance and repair services, by market for the years ended December 31, 2016 and 2015 were as follows:
|
|
Year ended
|
|
|
Year ended
|
|
|
Change
|
|
(In thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
$
|
|
|
|
%
|
|
Restaurant solutions
|
|
$
|
5,162
|
|
|
|
9.0
|
%
|
|
$
|
4,191
|
|
|
|
7.0
|
%
|
|
$
|
971
|
|
|
|
23.2
|
%
|
POS automation and banking
|
|
|
10,518
|
|
|
|
18.4
|
%
|
|
|
8,838
|
|
|
|
14.8
|
%
|
|
|
1,680
|
|
|
|
19.0
|
%
|
Casino and gaming
|
|
|
21,006
|
|
|
|
36.7
|
%
|
|
|
21,755
|
|
|
|
36.5
|
%
|
|
|
(749
|
)
|
|
|
(3.4
|
%)
|
Lottery
|
|
|
9,913
|
|
|
|
17.3
|
%
|
|
|
9,468
|
|
|
|
15.9
|
%
|
|
|
445
|
|
|
|
4.7
|
%
|
Printrex
|
|
|
540
|
|
|
|
1.0
|
%
|
|
|
1,381
|
|
|
|
2.3
|
%
|
|
|
(841
|
)
|
|
|
(60.9
|
%)
|
TSG
|
|
|
10,096
|
|
|
|
17.6
|
%
|
|
|
14,043
|
|
|
|
23.5
|
%
|
|
|
(3,947
|
)
|
|
|
(28.1
|
%)
|
|
|
$
|
57,235
|
|
|
|
100.0
|
%
|
|
$
|
59,676
|
|
|
|
100.0
|
%
|
|
$
|
(2,441
|
)
|
|
|
(4.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International*
|
|
$
|
11,693
|
|
|
|
20.4
|
%
|
|
$
|
13,946
|
|
|
|
23.4
|
%
|
|
$
|
(2,253
|
)
|
|
|
(16.2
|
%)
|
*
|
International sales do not include sales of products made to domestic distributors or other customers who in turn ship those products to international destinations.
|
Net sales for 2016 decreased $2,441,000, or 4%, from 2015. Although net sales decreased, printer and terminal sales volume increased 3% in 2016 compared to 2015. Our printer and terminal volume increased to approximately 173,000 units, primarily due to 22% increases in both the POS automation and banking and restaurant solutions markets. The average selling price of our printers decreased less than 1% from 2016 to 2015. Overall, international sales decreased $2,253,000, or 16%, primarily driven by lower sales in the international lottery and casino and gaming markets.
Restaurant solutions:
Revenue from the restaurant solutions market includes sales of terminals which combine hardware and software in a device that includes an operating system, touchscreen and one or two thermal print mechanisms that print easy-to-read food rotation labels, grab and go labels for prepared foods, and "enjoy by" date labels to help food service establishments and restaurants (including fine dining, casual dining, quick-serve and hospitality establishments) effectively manage food spoilage and automate and manage back-of-the-restaurant operations. A summary of sales of our worldwide restaurant solutions products for the years ended December 31, 2016 and 2015 is as follows (in thousands, except percentages):
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
4,747
|
|
|
|
92.0
|
%
|
|
$
|
3,857
|
|
|
|
92.0
|
%
|
|
$
|
890
|
|
|
|
23.1
|
%
|
International
|
|
|
415
|
|
|
|
8.0
|
%
|
|
|
334
|
|
|
|
8.0
|
%
|
|
|
81
|
|
|
|
24.3
|
%
|
|
|
$
|
5,162
|
|
|
|
100.0
|
%
|
|
$
|
4,191
|
|
|
|
100.0
|
%
|
|
$
|
971
|
|
|
|
23.2
|
%
|
The increase in domestic restaurant solutions terminal sales in 2016 compared to 2015 was primarily driven by an increase in sales of our restaurant solutions terminals to McDonald's and increased sales penetration to a growing number of existing and new end user customers through our U.S. distributor.
International restaurant solutions terminal sales increased in 2016 compared to 2015, due primarily to increased sales to our Latin American distributor.
POS automation and banking:
Revenue from the POS automation and banking market includes sales of thermal and impact printers used primarily by restaurants (including fine dining, casual dining, quick serve and hospitality establishments) located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels. In addition, revenue includes sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations. A summary of sales of our worldwide POS automation and banking products for the years ended December 31, 2016 and 2015 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
9,754
|
|
|
|
92.7
|
%
|
|
$
|
8,180
|
|
|
|
92.6
|
%
|
|
$
|
1,574
|
|
|
|
19.2
|
%
|
International
|
|
|
764
|
|
|
|
7.3
|
%
|
|
|
658
|
|
|
|
7.4
|
%
|
|
|
106
|
|
|
|
16.1
|
%
|
|
|
$
|
10,518
|
|
|
|
100.0
|
%
|
|
$
|
8,838
|
|
|
|
100.0
|
%
|
|
$
|
1,680
|
|
|
|
19.0
|
%
|
The increase in both domestic and international POS automation and banking printer revenue in 2016 compared to 2015 was primarily driven by a 38% increase in sales of our Ithaca® 9000 printer as we continued to supply printers to support new initiatives by McDonald's that started in 2015 and accelerated in 2016. We expect sales to McDonald's to decrease in 2017 as McDonald's nears completion of the implementation of the initiatives started in 2015. This increase was partially offset by 43% lower sales of our legacy banking and other POS printers in 2016 compared to 2015 as we continue to deemphasize these products. We expect sales of these legacy products to continue to decline during 201 as we shift sales focus to our newer products.
Casino and gaming:
Revenue from the casino and gaming market includes sales of thermal ticket printers used in slot machines, video lottery terminals ("VLTs"), and other gaming machines that print tickets or receipts instead of issuing coins ("ticket-in, ticket-out" or "TITO") at casinos and racetracks ("racinos") and other gaming venues worldwide. Revenue from this market also includes sales of thermal roll-fed printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes ("AWP"), Skills with Prizes ("SWP") and Fixed Odds Betting Terminals ("FOBT") at non-casino gaming establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology. In addition, casino and gaming market revenue includes sales of our software solution (including annual software maintenance for), the EPICENTRAL
TM
print system, that enables casino operators to create promotional coupons and marketing messages and to print them real-time at the slot machine. A summary of sales of our worldwide casino and gaming products for the years ended December 31, 2016 and 2015 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
11,553
|
|
|
|
55.0
|
%
|
|
$
|
11,354
|
|
|
|
52.2
|
%
|
|
$
|
199
|
|
|
|
1.8
|
%
|
International
|
|
|
9,453
|
|
|
|
45.0
|
%
|
|
|
10,401
|
|
|
|
47.8
|
%
|
|
|
(948
|
)
|
|
|
(9.1
|
%)
|
|
|
$
|
21,006
|
|
|
|
100.0
|
%
|
|
$
|
21,755
|
|
|
|
100.0
|
%
|
|
$
|
(749
|
)
|
|
|
(3.4
|
%)
|
During 2016, domestic casino and gaming sales increased 2%, primarily due to a 37% increase in EPICENTRAL
TM
software sales as we completed two domestic installations in 2016 compared to one domestic installation in 2015. Domestic sales of our thermal casino printers during 2016 were consistent with sales in 2015.
International sales declined in 2016 due to 28% lower sales of our thermal casino printer in Europe and Asia compared to 2015. The decrease from our thermal casino printers was partially offset by increased off-premises thermal gaming printers and EPICENTRAL
TM
software sales of 38% and 121%, respectively. Sales of our off-premise gaming printers increased due to an expanding market for sports betting in Europe and Australia. However, sales of our off-premise gaming printers are largely project-oriented and therefore may fluctuate significantly from quarter to quarter and year to year. The increase in EPICENTRAL
TM
software sales was due to one new international installation completed in 2016 compared to no international installations completed in 2015.
Lottery:
Revenue from the lottery market includes sales of thermal on-line and other lottery printers to IGT and its subsidiaries for various lottery applications. A summary of sales of our worldwide lottery printers for the years ended December 31, 2016 and 2015 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
9,710
|
|
|
|
98.0
|
%
|
|
$
|
8,064
|
|
|
|
85.2
|
%
|
|
$
|
1,646
|
|
|
|
20.4
|
%
|
International
|
|
|
203
|
|
|
|
2.0
|
%
|
|
|
1,404
|
|
|
|
14.8
|
%
|
|
|
(1,201
|
)
|
|
|
(85.5
|
%)
|
|
|
$
|
9,913
|
|
|
|
100.0
|
%
|
|
$
|
9,468
|
|
|
|
100.0
|
%
|
|
$
|
445
|
|
|
|
4.7
|
%
|
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT's overall business or revenue. Based on our backlog of orders and customer's forecasts, we expect total lottery printer sales to IGT for 2017 to be consistent with those reported for 2016.
International lottery sales decreased due to sales of lottery printers to IGT for the Spanish lottery in 2015 and no comparable international
sales occurring in 2016.
Printrex:
Printrex branded printers are sold into markets that include wide format, rack mounted and vehicle mounted black/white and color thermal printers used by customers to log and plot oil field and down hole well drilling data in the oil and gas exploration industry. It also includes high-speed color inkjet desktop printers used to print logs at data centers of the oil and gas field service companies. Revenue in this market also includes sales of wide format printers used to print test results in ophthalmology devices in the medical industry, as well as vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles and other mobile printing applications. A summary of sales of our worldwide Printrex printers for the years ended December 31, 2016 and 2015 is as follows (in thousands, except percentages):
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
463
|
|
|
|
85.7
|
%
|
|
$
|
1,088
|
|
|
|
78.8
|
%
|
|
$
|
(625
|
)
|
|
|
(57.4
|
%)
|
International
|
|
|
77
|
|
|
|
14.3
|
%
|
|
|
293
|
|
|
|
21.2
|
%
|
|
|
(216
|
)
|
|
|
(73.7
|
%)
|
|
|
$
|
540
|
|
|
|
100.0
|
%
|
|
$
|
1,381
|
|
|
|
100.0
|
%
|
|
$
|
(841
|
)
|
|
|
(60.9
|
%)
|
The decrease in Printrex printers was primarily due to a 52% decline in domestic and international sales in the oil and gas market due to the continued impact from the decline in worldwide oil prices. In addition, we experienced a 79% decline in medical and mobile printer sales due largely to the loss of a customer in the medical industry and as we shift our sales focus towards the restaurant solutions market. Due to the low margin on this product, we believe the loss of this customer will not have a material adverse impact on our operating results in future years.
TSG:
Revenue from TSG includes sales of consumable products (inkjet cartridges, ribbons, receipt paper, and other printing supplies), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges. A summary of sales in our worldwide TSG market for the years ended December 31, 2016 and 2015 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2016
|
|
December 31, 2015
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
9,315
|
|
|
|
92.3
|
%
|
|
$
|
13,187
|
|
|
|
93.9
|
%
|
|
$
|
(3,872
|
)
|
|
|
(29.4
|
%)
|
International
|
|
|
781
|
|
|
|
7.7
|
%
|
|
|
856
|
|
|
|
6.1
|
%
|
|
|
(75
|
)
|
|
|
(8.8
|
%)
|
|
|
$
|
10,096
|
|
|
|
100.0
|
%
|
|
$
|
14,043
|
|
|
|
100.0
|
%
|
|
$
|
(3,947
|
)
|
|
|
(28.1
|
%)
|
The decrease in domestic revenue from TSG was due to a (1) 38% decrease in sales of replacement parts due mainly to IGT's purchase of an unusually high volume of spare parts for the lottery market in 2015 that did not repeat in 2016, (2) 19% decrease in non-Printrex consumables, largely from the decline of HP inkjet cartridges, as we continue to deemphasize the commoditized POS and banking consumable products, (3) 18% decline in service revenue, primarily due to project-oriented testing services that occurred in 2015 that did not recur to the same extent in 2016, and (4) 62% decrease of consumables sales for our Printrex color printer due to lower printing usage resulting from reduced drilling activity caused by the decline in worldwide oil prices. Based on our backlog of orders and contractual commitments from IGT for spare parts for our installed base of lottery printers, we expect TSG sales to be higher in 2017, particularly in the second half of 2017, than in 2016.
Internationally, TSG revenue decreased, primarily due to 8% and 37% lower sales of replacement parts and accessories and non-Printrex consumables, respectively, in 2016 compared to 2015.
Gross Profit.
Gross profit information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2016
|
|
2015
|
|
Change
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
|
Year ended
|
|
$
|
23,799
|
|
|
$
|
24,978
|
|
|
|
(4.7
|
%)
|
|
|
41.6
|
%
|
|
|
41.9
|
%
|
Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers and expenses associated with installations and maintenance of our EPICENTRAL® print system. Gross profit decreased $1,179,000, or 5%, due primarily to a 4% decrease in sales. Our gross margin remained relatively consistent, decreasing slightly by 30 basis points compared 2015, to 41.6%.
Engineering, Design and Product Development.
Engineering, design and product development information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2016
|
|
2015
|
|
Change
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
|
Year ended
|
|
$
|
4,425
|
|
|
$
|
3,599
|
|
|
|
23.0
|
%
|
|
|
7.7
|
%
|
|
|
6.0
|
%
|
Engineering, design and product development expenses primarily include salary and payroll related expenses for our hardware and software engineering staff, depreciation and design expenses (including prototype printer expenses, outside design and testing services, and supplies). Such expenses increased $826,000 or 23%, due primarily to higher product development costs and the hiring of additional software engineers beginning in early 2016, as we continue to focus and strategically invest in enhancements to our EPICENTRAL™ software and expansion of our line of restaurant solutions terminals.
Selling and Marketing
.
Selling and marketing information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2016
|
|
2015
|
|
Change
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
|
Year ended
|
|
$
|
6,907
|
|
|
$
|
7,806
|
|
|
|
(11.5
|
%)
|
|
|
12.1
|
%
|
|
|
13.1
|
%
|
Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, e-commerce and other promotional marketing expenses. Such expenses decreased $899,000, or 12%, primarily due to lower compensation costs related to headcount reductions made during 2016, lower sales commission due to lower sales experienced in 2016 compared to 2015, and a decrease in travel expenses we consciously decided to reduce these expenses. We expect selling and marketing expenses to be higher in 2017 compared to 2016 due to investments that will be made in 2017 as we commit more resources and invest in our internal infrastructure dedicated to the restaurant solutions market to build a world-class sales force and implement direct market campaigns to address the significant market opportunities.
General and Administrative.
General and administrative information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2016
|
|
2015
|
|
Change
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
|
Year ended
|
|
$
|
7,267
|
|
|
$
|
7,367
|
|
|
|
(1.4
|
%)
|
|
|
12.7
|
%
|
|
|
12.3
|
%
|
General and administrative expenses primarily include salaries and payroll related expenses for our executive, accounting, human resource, and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company. General and administrative expenses decreased $100,000, or 1%, due primarily to lower incentive compensation costs incurred in 2016 compared to 2015, which was largely offset by higher severance cost related to headcount reductions made during 2016. We expect general and administrative expenses in 2017 to be higher than 2016 due to recruiting costs related to the planned expansion of sales staff for our restaurant solutions market.
Legal Fees and Settlement Expenses Associated with Lawsuit
.
Legal fees and settlement expenses information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2016
|
|
2015
|
|
Change
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
|
Year ended
|
|
$
|
-
|
|
|
$
|
1,738
|
|
|
|
(100.0
|
%)
|
|
|
0.0
|
%
|
|
|
2.9
|
%
|
As disclosed in Note 10 to the Condensed Consolidated Financial Statements, in June 2012, AD filed a civil complaint against the Company. In connection with this lawsuit, we incurred legal fees and settlement expenses of $0 and $1,738,000 in 2016 and 2015, respectively. Due to the settlement of the AD lawsuit in March 2015, we do not expect to incur any further expenses related to this lawsuit in the future.
Operating Income.
Operating income information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2016
|
|
2015
|
|
Change
|
|
Total Sales – 2016
|
|
|
Total Sales – 2015
|
|
Year ended
|
|
$
|
5,200
|
|
|
$
|
4,468
|
|
|
|
16.4
|
%
|
|
|
9.1
|
%
|
|
|
7.5
|
%
|
Our operating income increased by $732,000, or 16%, primarily due to lower legal fees and settlement expenses incurred in 2016, partially offset by 4% lower sales, compared to 2015. Excluding the AD legal fees, our operating income would have decreased $1,006,000, or 16% in 2016 compared to 2015, due primarily to a 4% decline in sales.
Interest.
We recorded net interest expense of $26,000 in 2016 compared to $28,000 in 2015. Interest expense was higher in 2015 due to interest expense incurred from borrowing $2,500,000 to pay the AD lawsuit settlement in 2015. We did not borrow any funds during 2016.
Other, net
.
We recorded other expense of $4,000 in 2016 compared to other income of $2,000 in 2015. The change was primarily due to higher foreign currency exchange losses recorded by our U.K. subsidiary in 2016 compared to 2015.
Income Taxes
.
We recorded an income tax provision of $1,553,000 in 2016 compared to $1,350,000 in 2015. Our effective tax rate for 2016 of 30.0% remained relatively consistent with the effective tax rate in 2015 of 30.4%. We expect our annual effective tax rate for 2017 to be approximately 32%.
Net Income.
We reported net income during 2016 of $3,617,000, or $0.47 per diluted share, compared to $3,092,000, or $0.39 per diluted share, for 2015.
Results of Operations: Year ended December 31, 2015 compared to year ended December 31, 2014
Net Sales.
Net sales, which include printer, terminal and software sales as well as sales of replacement parts, consumables and maintenance and repair services, by market for the years ended December 31, 2015 and 2014 were as follows:
|
|
Year ended
|
|
|
Year ended
|
|
|
Change
|
|
(In thousands)
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
$
|
|
|
|
%
|
|
Restaurant solutions
|
|
$
|
4,191
|
|
|
|
7.0
|
%
|
|
$
|
2,183
|
|
|
|
4.1
|
%
|
|
$
|
2,008
|
|
|
|
92.0
|
%
|
POS automation and banking
|
|
|
8,838
|
|
|
|
14.8
|
%
|
|
|
7,125
|
|
|
|
13.4
|
%
|
|
|
1,713
|
|
|
|
24.0
|
%
|
Casino and gaming
|
|
|
21,755
|
|
|
|
36.5
|
%
|
|
|
22,731
|
|
|
|
42.8
|
%
|
|
|
(976
|
)
|
|
|
(4.3
|
%)
|
Lottery
|
|
|
9,468
|
|
|
|
15.9
|
%
|
|
|
4,761
|
|
|
|
9.0
|
%
|
|
|
4,707
|
|
|
|
98.9
|
%
|
Printrex
|
|
|
1,381
|
|
|
|
2.3
|
%
|
|
|
3,910
|
|
|
|
7.4
|
%
|
|
|
(2,529
|
)
|
|
|
(64.7
|
%)
|
TSG
|
|
|
14,043
|
|
|
|
23.5
|
%
|
|
|
12,398
|
|
|
|
23.3
|
%
|
|
|
1,645
|
|
|
|
13.3
|
%
|
|
|
$
|
59,676
|
|
|
|
100.0
|
%
|
|
$
|
53,108
|
|
|
|
100.0
|
%
|
|
$
|
6,568
|
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International*
|
|
$
|
13,946
|
|
|
|
23.4
|
%
|
|
$
|
14,541
|
|
|
|
27.4
|
%
|
|
$
|
(595
|
)
|
|
|
(4.1
|
%)
|
|
*
|
International sales do not include sales of products made to domestic distributors or other customers who in turn ship those products to international destinations.
|
Net sales for 2015 increased $6,568,000, or 12%, from 2014. Printer and terminal sales volume increased 22% to approximately 167,000 units primarily due to increases in the lottery, restaurant solutions and POS automation and banking markets, of 97%, 86% and 27%, respectively. The average selling price of our printers and terminals decreased approximately 7% from 2014 to 2015, due primarily to a large portion of our sales being generated from lower priced lottery printers. Overall, international sales decreased $595,000, or 4%, primarily driven by lower sales in the international casino and gaming, TSG and Printrex markets. The declines in the international market were partially offset by increases in the restaurant solutions market, POS automation and banking market and lottery market.
Restaurant solutions:
A summary of sales of our worldwide restaurant solutions products for the years ended December 31, 2015 and 2014 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2015
|
|
December 31, 2014
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
3,857
|
|
|
|
92.0
|
%
|
|
$
|
1,980
|
|
|
|
90.7
|
%
|
|
$
|
1,877
|
|
|
|
94.8
|
%
|
International
|
|
|
334
|
|
|
|
8.0
|
%
|
|
|
203
|
|
|
|
9.3
|
%
|
|
|
131
|
|
|
|
64.5
|
%
|
|
|
$
|
4,191
|
|
|
|
100.0
|
%
|
|
$
|
2,183
|
|
|
|
100.0
|
%
|
|
$
|
2,008
|
|
|
|
92.0
|
%
|
The increase in both domestic and international restaurant solutions product revenue from 2014 was primarily driven by the resumption of shipments to our distributor who made a large initial stocking order in 2013 and did not make any purchases during the first nine months of 2014. Also, 2015 restaurant solutions sales benefited from shipments to a large national quick service chain store as well as first revenue contributions from our newly launched AccuDate™ Pro restaurant solutions terminal.
POS automation:
A summary of sales of our worldwide POS automation and banking products for the years ended December 31, 2015 and 2014 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2015
|
|
December 31, 2014
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
8,180
|
|
|
|
92.6
|
%
|
|
$
|
7,004
|
|
|
|
98.3
|
%
|
|
$
|
1,176
|
|
|
|
16.8
|
%
|
International
|
|
|
658
|
|
|
|
7.4
|
%
|
|
|
121
|
|
|
|
1.7
|
%
|
|
|
537
|
|
|
|
443.8
|
%
|
|
|
$
|
8,838
|
|
|
|
100.0
|
%
|
|
$
|
7,125
|
|
|
|
100.0
|
%
|
|
$
|
1,713
|
|
|
|
24.0
|
%
|
The increase in both domestic and international POS automation and banking product revenue from 2014 was primarily driven by a 31% increase in sales of our Ithaca®9000 printers due to new initiatives by McDonald's Corporation that started and accelerated in 2015. These increases were partially offset by lower sales of our legacy banking printers and other POS printers.
Casino and gaming:
A summary of sales of our worldwide casino and gaming products for the years ended December 31, 2015 and 2014 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2015
|
|
December 31, 2014
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
11,354
|
|
|
|
52.2
|
%
|
|
$
|
10,437
|
|
|
|
45.9
|
%
|
|
$
|
917
|
|
|
|
8.8
|
%
|
International
|
|
|
10,401
|
|
|
|
47.8
|
%
|
|
|
12,294
|
|
|
|
54.1
|
%
|
|
|
(1,893
|
)
|
|
|
(15.4
|
%)
|
|
|
$
|
21,755
|
|
|
|
100.0
|
%
|
|
$
|
22,731
|
|
|
|
100.0
|
%
|
|
$
|
(976
|
)
|
|
|
(4.3
|
%)
|
During 2015, domestic printer sales increased 6% compared to 2014 which we believe was due to market share gains, as the replacement cycle for slot machines remained weak. Domestic EPICENTRAL™ software sales also increased 79% as we completed one installation during 2015 compared to no domestic installations completed in 2014.
International sales declined in 2015 due to decreased sales of our thermal casino printer and EPICENTRAL
TM
software of 19% and 87%, respectively. EPICENTRAL™ software sales decreased as we had no new international installations in 2015 compared to one large multi-property installation for a customer in South America in 2014. The decreases in sales of thermal casino printer and EPICENTRAL™ were partially offset by a 22% increase in sales of our off-premises thermal gaming printers in 2015 compared to 2014 largely due to installations in sports wagering machines in Spain.
Lottery:
A summary of sales of our worldwide lottery printers for the years ended December 31, 2015 and 2014 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2015
|
|
December 31, 2014
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
8,064
|
|
|
|
85.2
|
%
|
|
$
|
4,682
|
|
|
|
98.3
|
%
|
|
$
|
3,382
|
|
|
|
72.2
|
%
|
International
|
|
|
1,404
|
|
|
|
14.8
|
%
|
|
|
79
|
|
|
|
1.7
|
%
|
|
|
1,325
|
|
|
|
1,677.2
|
%
|
|
|
$
|
9,468
|
|
|
|
100.0
|
%
|
|
$
|
4,761
|
|
|
|
100.0
|
%
|
|
$
|
4,707
|
|
|
|
98.9
|
%
|
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT's overall business or revenue. International sales increased significantly due to a one-time sale to IGT of a custom lottery printer for the Spanish lottery.
Printrex:
A summary of sales of our worldwide Printrex printers for the years ended December 31, 2015 and 2014 is as follows (in thousands, except percentages):
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2015
|
|
December 31, 2014
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
1,088
|
|
|
|
78.8
|
%
|
|
$
|
3,352
|
|
|
|
85.7
|
%
|
|
$
|
(2,264
|
)
|
|
|
(67.5
|
%)
|
International
|
|
|
293
|
|
|
|
21.2
|
%
|
|
|
558
|
|
|
|
14.3
|
%
|
|
|
(265
|
)
|
|
|
(47.5
|
%)
|
|
|
$
|
1,381
|
|
|
|
100.0
|
%
|
|
$
|
3,910
|
|
|
|
100.0
|
%
|
|
$
|
(2,529
|
)
|
|
|
(64.7
|
%)
|
The decrease in sales of Printrex printers was primarily due to 67% lower worldwide sales of printers in the oil and gas market due to the continued negative impact from the decline in worldwide oil prices. In addition, worldwide sales of our medical and mobile printers declined 59% due largely to the loss of a customer in the medical industry. This decrease was partially offset by the first contribution from our RESPONDER mobile printer in 2015.
TSG:
A summary of sales in our worldwide TSG market for the years ended December 31, 2015 and 2014 is as follows:
|
Year ended
|
|
Year ended
|
|
Change
|
|
(In thousands)
|
December 31, 2015
|
|
December 31, 2014
|
|
$
|
|
|
|
%
|
|
Domestic
|
|
$
|
13,187
|
|
|
|
93.9
|
%
|
|
$
|
11,112
|
|
|
|
89.6
|
%
|
|
$
|
2,075
|
|
|
|
18.7
|
%
|
International
|
|
|
856
|
|
|
|
6.1
|
%
|
|
|
1,286
|
|
|
|
10.4
|
%
|
|
|
(430
|
)
|
|
|
(33.4
|
%)
|
|
|
$
|
14,043
|
|
|
|
100.0
|
%
|
|
$
|
12,398
|
|
|
|
100.0
|
%
|
|
$
|
1,645
|
|
|
|
13.3
|
%
|
The increase in domestic revenue from TSG was primarily due to a 58% increase in sales of replacement parts mainly to IGT who purchased an unusually high volume of spare parts for the lottery market in 2015 and to a lesser extent a 22% increase in services revenue largely from project oriented paper testing services. These increases were partially offset by a 9% decline in non-Printrex consumables, largely from the decline of HP inkjet cartridges, as we continued to deemphasize this commoditized consumable product. In addition, consumables revenue for our Printrex color printers declined by 32%, due to lower printing usage resulting from reduced drilling activity caused by the decline in worldwide oil prices.
Internationally, TSG revenue decreased due primarily to lower sales of replacement parts and accessories in 2015 compared to 2014 due to unusually high sales to IGT in 2014 to support international legacy lottery printers that did not reoccur in 2015.
Gross Profit.
Gross profit information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2015
|
|
2014
|
|
Change
|
|
Total Sales - 2015
|
|
|
Total Sales - 2014
|
|
Year ended
|
|
$
|
24,978
|
|
|
$
|
21,711
|
|
|
|
15.0
|
%
|
|
|
41.9
|
%
|
|
|
40.9
|
%
|
Gross profit increased $3,267,000, or 15%, on a 12% increase in sales. Additionally, our gross margin increased by 100 basis points as we experienced a more favorable sales mix during 2015 compared to 2014. This increase in gross margin was achieved despite a large portion of our sales being generated from our lottery printers during 2015 which carry lower gross margin than our other products. The improved gross margin was attained primarily due to higher margin contributions from TSG products and restaurant solutions terminal sales.
Engineering, Design and Product Development.
Engineering, design and product development information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2015
|
|
2014
|
|
Change
|
|
Total Sales - 2015
|
|
|
Total Sales - 2014
|
|
Year ended
|
|
$
|
3,599
|
|
|
$
|
4,302
|
|
|
|
(16.3
|
%)
|
|
|
6.0
|
%
|
|
|
8.1
|
%
|
Engineering, design and product development expenses decreased $703,000 or 16%, due primarily to a 17% reduction of engineering compensation expenses as a result of our 2014 cost reduction initiatives as well as lower pre-production expenses during 2015 compared to 2014 when we were in the process of launching three new products.
Selling and Marketing
.
Selling and marketing information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2015
|
|
2014
|
|
Change
|
|
Total Sales - 2015
|
|
|
Total Sales - 2014
|
|
Year ended
|
|
$
|
7,806
|
|
|
$
|
7,920
|
|
|
|
(1.4
|
%)
|
|
|
13.1
|
%
|
|
|
14.9
|
%
|
Selling and marketing expenses decreased $114,000, or 1%, primarily due to lower marketing expenses from cost savings initiatives as well as lower travel expenses in our Printrex markets as we consciously decided to reduce these expenses in response to the worldwide decline in the oil and gas markets. These decreases were partially offset by the planned investments we made during the second half of 2014 and early 2015 in new sales and marketing staff to focus on sales execution of our new products.
General and Administrative.
General and administrative information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2015
|
|
2014
|
|
Change
|
|
Total Sales - 2015
|
|
|
Total Sales - 2014
|
|
Year ended
|
|
$
|
7,367
|
|
|
$
|
7,756
|
|
|
|
(5.0
|
%)
|
|
|
12.3
|
%
|
|
|
14.6
|
%
|
General and administrative expenses decreased $389,000, or 5%, due primarily to lower salary expenses related to the departure of our VP, Business Development during the fourth quarter of 2014, who was not replaced and severance costs related to the cost reduction initiatives that were incurred during the fourth quarter of 2014. These decreases were partially offset by higher incentive compensation expenses during 2015 compared to 2014.
Legal Fees and Settlement Expenses Associated with Lawsuit
.
Legal fees and settlement expenses information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2015
|
|
2014
|
|
Change
|
|
Total Sales - 2015
|
|
|
Total Sales - 2014
|
|
Year ended
|
|
$
|
1,738
|
|
|
$
|
5,505
|
|
|
|
(68.4
|
%)
|
|
|
2.9
|
%
|
|
|
10.4
|
%
|
As disclosed in Note 10 to the Consolidated Financial Statements, in June 2012, AD filed a civil complaint against the Company, which we settled in March 2015. In connection with this lawsuit, we incurred legal fees and settlement expenses of $1,738,000 and $5,505,000 in 2015 and 2014, respectively.
Operating Income (Loss).
Operating income information is summarized below (in thousands, except percentages):
|
December 31,
|
|
Percent
|
|
Percent of
|
|
|
Percent of
|
|
|
2015
|
|
2014
|
|
Change
|
|
Total Sales – 2015
|
|
|
Total Sales – 2014
|
|
Year ended
|
|
$
|
4,468
|
|
|
$
|
(3,772
|
)
|
|
|
(218.5
|
%)
|
|
|
7.5
|
%
|
|
|
(7.1
|
%)
|
The increase in our operating income and operating margin was primarily due to lower legal fees and settlement expenses incurred in 2015 compared to 2014 as well as a 12% increase in sales during 2015.
Interest.
We recorded net interest expense of $28,000 in 2015 compared to $49,000 in 2014. The decrease in net interest expense is due to the lower unused revolving credit line fee we are charged when we renewed the TD Bank Credit Facility on November 26, 2014. As of the renewal we are charged a fee of 0.15% on unused borrowings compared to 0.25% under the prior credit facility. "Liquidity and Capital Resources" below for more information.
Other, net
.
We recorded other income of $2,000 in 2015 compared to other expense of $33,000 in 2014. The change was primarily due to a $27,000 loss from the disposal of equipment during 2014 in addition to lower foreign currency exchange losses recorded by our U.K. subsidiary in 2015 compared to 2014.
Income Taxes
.
We recorded an income tax provision for 2015 of $1,350,000 at an effective tax rate of 30.4% compared to an income tax benefit of $1,433,000 at an effective tax rate of 37.2% for 2014. The effective tax rate for 2014 is higher than our 2015 effective tax rate due to the impact from the net loss reported for the year ending 2014.
Net Income.
We reported net income during 2015 of $3,092,000, or $0.39, per diluted share, compared to net loss of $2,421,000, or $(0.29), per diluted share, for 2014.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, treasury share repurchases, dividend payments, access to bank lines of credit and our ability to attract long-term capital with satisfactory terms.
Internal cash generation together with currently available cash and cash equivalents, available borrowing facilities and an ability to access credit lines, if needed, are expected to be sufficient to fund operations, capital expenditures, treasury share repurchases, dividend payments and any increase in working capital that would be required to accommodate a higher level of business activity. We actively seek to expand by acquisition as well as through the growth of our current business. While a significant acquisition may require additional debt and/or equity financing, although no assurances can be given, we believe that we would be able to obtain additional financing based on our historical earnings performance.
Cash Flow
During 2016 our cash balance decreased $1,970,000, or 44%, from December 31, 2015 and we returned a substantial portion of our cash flow to shareholders in the form of $3,571,000 of repurchases of our common stock and $2,416,000 of cash dividends paid to common shareholders. Even after funding these items and our capital expenditures, we still ended 2016 with $2,503,000 in cash and cash equivalents, of which $93,000 was held by our U.K. subsidiary, and no debt outstanding.
Operating activities
: The following significant factors primarily affected our cash provided by operating activities of $4,623,000 in 2016 as compared to $5,547,000 in 2015. During 2016:
|
●
|
We reported a net income of $3,617,000.
|
|
●
|
We recorded depreciation, amortization and share-based compensation expense of $1,942,000.
|
|
●
|
Accounts receivable increased $3,434,000 due primarily to the large amount of sales occurring late in the fourth quarter of 2016 compared to the fourth quarter of 2015.
|
|
●
|
Inventories decreased $1,580,000 due to the sell through of inventory on hand during 2016.
|
|
●
|
Accounts payable increased $2,255,000 due primarily to the purchase of inventory late in the fourth quarter to support the increased fourth quarter sales in 2016.
|
|
●
|
Accrued liabilities and other liabilities decreased $1,088,000 due primarily to lower accrued bonus compensation cost and deferred revenue in 2016 compared to 2015.
|
During 2015:
|
●
|
We reported a net income of $3,092,000.
|
|
●
|
We recorded depreciation, amortization and share-based compensation expense of $1,914,000.
|
|
●
|
Accounts receivable decreased $1,916,000 due primarily to improved collections during the fourth quarter of 2015 compared to the fourth quarter of 2014.
|
|
●
|
Inventories decreased $509,000 due to the sell through of inventory on hand during 2015.
|
|
●
|
Accounts payable increased $277,000 due primarily to the timing of payments.
|
|
●
|
Accrued liabilities and other liabilities decreased $3,487,000 due primarily to the payment of the AD lawsuit settlement in April 2015. See Note 10 – Commitments and Contingencies in the Notes to the Consolidated Financial Statements for further information on the lawsuit.
|
Investing activities
: Our capital expenditures were $608,000 and $959,000 in 2016 and 2015, respectively. Expenditures in 2016 were primarily for various computer and networking equipment and $84,000 in leasehold improvements for our new UK facility and to a lesser extent new product tooling equipment and purchases of furniture and fixtures.
Capital expenditures for 2017 are expected to be approximately $1,000,000, primarily for new product tooling, and tooling enhancements for our existing products, as well as for new computer software and equipment purchases.
Financing activities
: We used $5,963,000 of cash from financing activities during 2016 to purchase $3,571,000 of common stock for treasury and pay cash dividends of $2,416,000 to common shareholders, partially offset by proceeds and tax benefits from stock option exercises of $24,000. During 2015, we used $3,238,000 of cash from financing activities to pay cash dividends of $2,485,000 to common shareholders and purchase $1,020,000 of common stock for treasury, partially offset by proceeds and tax benefits from stock option exercises of $267,000. Additionally, during 2015, we borrowed $2,500,000 under the TD Bank Credit Facility to partially fund the $3,600,000 settlement payment related to the AD lawsuit which we fully repaid in 2015.
Resource Sufficiency
We believe that our cash and cash equivalents on hand and cash flows generated from operating activities will provide sufficient resources to meet our working capital needs, finance our capital expenditures, dividend payments and meet our liquidity requirements through at least the next twelve months.
Credit Facility and Borrowings
We maintain a credit facility (the "TD Bank Credit Facility") with TD Bank N.A. ("TD Bank") which provides for a $20,000,000 revolving credit line. On November 26, 2014, we signed an amendment to renew the TD Bank Credit Facility through November 28, 2017. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one percent and are secured by a lien on all of our assets. We also pay a fee of 0.15% on unused borrowings under the revolving credit line. The total deferred financing costs relating to expenses incurred to complete the TD Bank Credit Facility was $8,000. The amendment increases the amount of revolving credit loans we may use to fund future cash dividend payments or treasury share buybacks to $10,000,000 from $5,000,000. The amendment also modified the definition of EBITDA to exclude certain non-recurring expenses, including without limitation, non-recurring litigation and acquisition expenses (including the $3,625,000 expense we incurred in 2014 related to the settlement of the AD lawsuit); and modified the definition of Operating Cash Flow to exclude unfinanced capital expenditures for the quarters ending December 31, 2014, March 31, 2015 and June 30, 2015.
The TD Bank Credit Facility imposes certain quarterly financial covenants on us and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. We were in compliance with all financial covenants of the TD Bank Credit Facility at December 31, 2016. The following table lists the financial covenants and the performance measurements at December 31, 2016:
Financial Covenant
|
Requirement/Restriction
|
|
Calculation at December 31, 2016
|
|
Operating cash flow / Total debt service
|
Minimum of 1.25 times
|
|
|
60.47
|
|
Funded debt / EBITDA
|
Maximum of 3.0 times
|
|
0 times
|
|
As of December 31, 2016, undrawn commitments under the TD Bank Credit facility were $20,000,000.
Shareholder Dividend Payments
In September 2012, we announced that our Board of Directors approved the initiation of a quarterly cash dividend program which is subject to the Board's approval each quarter. On May 6, 2014, our Board of Directors declared an increase to the quarterly cash dividend from $0.07 per share to $0.08 per share. Dividends declared and paid on our common stock totaled $2,416,000 or $0.32 per share and $2,485,000 or $0.32 per share, in 2016 and 2015, respectively. On February 3, 2017, our Board of Directors approved the first quarter 2017 dividend in the amount of $0.08 per share payable on or about March 15, 2017 to common shareholders of record at the close of business on February 20, 2017. We expect to pay approximately $2,400,000 in cash dividends to our common shareholders during 2017.
Stock Repurchase Program
On February 25, 2016, our Board of Directors approved a new stock repurchase program (the "Stock Repurchase Program"). Under the Stock Repurchase Program, we are authorized to repurchase up to $5,000,000 of our outstanding shares of common stock from time to time in the open market through December 31, 2017 at prevailing market prices based on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. From the start of the Stock Repurchase Program on February 25, 2016 through December 31, 2016, we purchased 463,378 shares of our common stock for approximately $3,571,000 at an average price of $7.71. In 2015, under a prior repurchase program, we purchased 166,553 shares of our common stock for $1,020,000 at an average price of $6.12 per share. From January 1, 2005 through December 31, 2016, we repurchased a total of 3,851,967 shares of common stock for $ 29,752,000, at an average price of $7.72 per share.
Shareholders' Equity
Shareholders' equity decreased $1,619,000 to $24,109,000 at December 31, 2016 from $25,728,000 at December 31, 2015. The decrease was primarily due to the purchase of 463,378 shares of treasury stock for $3,571,000 and our payment of $2,416,000 in dividends. These decreases were partially offset by net income of $3,617,000, share-based compensation expense related to stock options of $611,000 and $151,000 from the issuance 10,700 shares of deferred stock units, net of relinquishments.
Off Balance Sheet Arrangements
As of December 31, 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
Our contractual obligations as of December 31, 2016 were as follows:
|
Payments due by period
|
|
(In thousands)
|
Total
|
|
< 1 year
|
|
1-3 years
|
|
3-5 years
|
|
> 5 years
|
|
Operating lease obligations
|
|
$
|
4,033
|
|
|
$
|
825
|
|
|
$
|
1,565
|
|
|
$
|
1,276
|
|
|
$
|
367
|
|
Purchase obligations
|
|
|
8,411
|
|
|
$
|
8,389
|
|
|
$
|
22
|
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
12,444
|
|
|
$
|
9,214
|
|
|
$
|
1,587
|
|
|
$
|
1,276
|
|
|
$
|
367
|
|
Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily of fully assembled printers and component part inventory.
Impact of Inflation
We believe that our business has not been affected to a significant degree by inflationary trends during the past three years. However, inflation is still a factor in the worldwide economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost of certain raw materials, component parts and labor used in the production of our products. It also may increase our operating expenses, manufacturing overhead expenses and the cost to acquire or replace fixed assets. We have generally been able to maintain or improve our profit margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent, price increases, and we expect to be able to do the same during 2017. As such, we do not believe that inflation will have a significant impact on our business during 2017.