TransAct Technologies Inc. — Q3 2018 Form 10-Q
Business context and period: TransAct designs and sells software-driven printing and technology solutions for restaurant, POS and banking, casino and gaming, lottery, and oil and gas markets, as well as related supplies and services. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $15.84m | $15.52m | $42.83m | $43.12m |
| Gross profit / margin | $8.00m / 50.5% | $7.52m / 48.4% | $20.86m / 48.7% | $20.04m / 46.5% |
| Operating income / margin | $3.21m / 20.3% | $2.59m / 16.7% | $5.69m / 13.3% | $5.31m / 12.3% |
| Net income | $2.57m | $1.81m | $4.46m | $3.62m |
| Diluted EPS | $0.33 | $0.24 | $0.57 | $0.48 |
| Operating cash flow | Not separately provided for the quarter | $3.50m | $3.62m |
Cash and liquidity: Cash was $3.80m at September 30, 2018, down from $5.51m at December 31, 2017. Current assets were $29.07m and current liabilities $9.37m. The company reported no funded debt and had $20m available under its revolving credit facility; it was in compliance with facility covenants. Management said cash, operating cash flows and available borrowing capacity should cover working capital, capital spending, dividends and liquidity needs for at least 12 months.
Cash uses and capital: Nine-month investing cash outflow was $1.19m, including $722,000 of capital expenditures and $466,000 of capitalized software. Financing cash outflow was $4.04m, including $2.00m of dividends and $2.00m of share repurchases. The quarterly dividend was $0.09 per share; management expected approximately $2.7m of dividends for full-year 2018. The $5m repurchase authorization had $3m remaining at quarter-end.
Material changes and operating drivers
- Q3 sales rose 2%, while nine-month sales declined 0.7%. Higher casino and gaming sales were the principal growth driver: up 61.7% in Q3 and 49.7% for the nine-month period.
- Lottery sales fell 69.7% in Q3 and 77.7% year to date, reflecting installation timing at IGT and the company’s reduced focus on this market. TSG sales declined 24.6% in Q3 and 12.1% year to date, partly due to lower lottery replacement-parts sales and reduced sales of legacy banking consumables.
- Restaurant solutions sales fell 26.9% in Q3 but rose 8.1% year to date. Q3 softness reflected lower AccuDate 9700 sales to McDonald’s, partly offset by multi-quarter AccuDate XL2e rollouts at three large corporate customers.
- Gross margin improved by 2.1 percentage points in Q3 and 2.2 points year to date, primarily from product mix and lower sales of lower-margin lottery and POS printers. Q3 operating income increased 24%; nine-month operating income increased 7% despite higher operating expenses.
- Effective tax rates declined to 18.4% in Q3 and 19.2% year to date, compared with 29.8% and 31.4%, respectively, mainly following U.S. tax reform. Net income also benefited from the lower tax rate.
Outlook, risks and notable items
- Management expected full-year 2018 restaurant terminal sales to be relatively consistent with 2017, full-year gross margin to be higher, and the effective tax rate to be 19%–20%. It expected capital expenditures and capitalized software costs of approximately $1.5m for 2018.
- Management expected lottery and TSG sales to be lower for full-year 2018 than in 2017. It expected Printrex sales to be higher, citing a modest oil and gas recovery.
- Q3 casino and gaming results included large replacement-printer and OEM orders that management did not expect to recur during the remainder of 2018. EPICENTRAL installations are project-based and can vary significantly by period.
- The company expected to exit the banking market at year-end 2018 and was shifting resources toward restaurant solutions and casino and gaming. It also transitioned European casino and gaming sales from an exclusive distributor to a direct-sales model; the transition contributed to higher international sales but brings execution and foreign-exchange exposure.
- Inventory increased $4.2m, or 47%, from year-end to support anticipated casino and restaurant demand; accounts payable rose $2.5m. Management attributed the working-capital changes partly to planned inventory purchases and expected Q4 collection of late-quarter receivables.
- The company reported higher foreign-exchange losses, particularly at its U.K. entity. It noted no material changes to previously disclosed risk factors or market-risk exposure and no material off-balance-sheet arrangements. Ordinary-course legal matters were not expected to have a material adverse effect.
- Management assessed disclosure controls as effective. The U.K. operation transitioned to the U.S. ERP system during Q3, requiring changes to certain processes. Adoption of the new lease standard was expected to create material right-of-use assets and lease liabilities, but not materially affect results or cash flows. Adoption of ASC 606 had no reported financial-statement impact through September 30, 2018.
Key facts for investors to verify
- Whether casino and gaming growth and the European direct-sales transition can be sustained after the Q3 large, non-recurring orders.
- Whether restaurant XL2e rollouts offset weaker AccuDate 9700 demand, and how the planned banking-market exit affects revenue and consumables.
- Whether elevated inventory converts into sales and cash collections as expected, given the $4.2m inventory build and $3.80m cash balance.
- Progress against full-year margin, tax-rate, capital-spending and dividend expectations; the filing provides no specific full-year revenue or earnings guidance.
- Potential volatility from IGT-dependent lottery demand, project-based EPICENTRAL installations, foreign exchange, and the upcoming lease-accounting adoption.