TransAct Technologies Incorporated — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. TransAct designs and sells printers, terminals, software, supplies and related services for food safety, banking/POS, casino and gaming, lottery, oil and gas, medical and other markets. The unaudited filing reports one operating segment.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $15.358 million | $14.111 million | $48.770 million | $52.324 million |
| Gross profit / margin | $5.679 million / 37.0% | $5.350 million / 37.9% | $18.299 million / 37.5% | $18.945 million / 36.2% |
| Operating income / margin | $43,000 / 0.3% | $1.125 million / 8.0% | $2.732 million / 5.6% | $6.123 million / 11.7% |
| Net income | $23,000 | $839,000 | $1.739 million | $4.106 million |
| Diluted EPS | $0.00 | $0.09 | $0.19 | $0.43 |
- Cash flow: Nine-month operating cash flow was $7.784 million, versus $2.493 million in 2011. Investing activities used $684,000, including $675,000 of capital expenditures and $23,000 of capitalized software costs. Cash increased $1.714 million to $8.577 million.
- Liquidity and debt: Working capital was $24.454 million and the current ratio was 4.3, compared with $27.222 million and 5.7 at year-end 2011. No debt was outstanding; the $20 million revolving facility was undrawn. TransAct reported compliance with its financial covenants.
- Capital returns: The company repurchased 670,648 shares for $5.563 million during the first nine months, at an average $8.30 per share. The board initiated a quarterly $0.06 dividend; the first payment was declared after quarter-end.
Material changes versus prior periods
- Q3 sales increased 8.8%, driven mainly by lottery, Printrex, TSG and casino/gaming sales; banking and POS sales fell 35.1%. Printer unit volume rose 3% and average selling price increased 4%.
- Nine-month sales declined 6.8%, primarily because lottery sales fell 62.9% and banking/POS sales fell 15.6%. Casino/gaming sales grew 20.6%; Printrex sales rose to $3.622 million, reflecting a full nine months of ownership versus approximately six weeks in 2011.
- Q3 gross margin fell 0.9 percentage points, reflecting a less favorable mix, including more lower-margin lottery printers. Nine-month gross margin rose 1.3 points on a more favorable mix, including higher casino/gaming and Printrex sales.
- Operating income and net income declined materially in both comparisons. The principal Q3 factor was $1.036 million in lawsuit-related legal fees; nine-month legal fees were $1.507 million. Higher Printrex-related costs, product-development spending and, year to date, lower gross profit also weighed on results.
Outlook, management commentary and risks
- Management expected 2012 Printrex sales of approximately $5.0–$5.5 million and fourth-quarter GTECH sales to be significantly higher than Q3, based on backlog. GTECH orders depend on the timing of lottery terminal installations and can fluctuate substantially.
- Management expected full-year 2012 gross margin to be relatively consistent with 2011, and the 2012 effective tax rate to be about 36% if the expired federal research and development credit was not reinstated. Four new products were planned for launch in Q4.
- Closing the Printrex San Jose facility was substantially complete at September 30. Management estimated annualized savings of $800,000 beginning in Q4; restructuring cash payments were completed by October.
- Management stated cash and operating cash flows should cover working capital, capital expenditures, dividends, repurchases and liquidity needs for at least the next 12 months. Planned 2012 capital expenditures, including capitalized software, were approximately $1 million.
- Avery Dennison alleged misappropriation of trade secrets and sought to enjoin sales of TransAct’s Ithaca 9700 and 9800 food safety terminals. TransAct filed defenses and counterclaims; a ruling on the preliminary injunction was pending. The company could not estimate potential loss and accrued no damages liability; approximately $491,000 of related legal fees was accrued.
- The $680,000 Printrex contingent-consideration liability was unchanged; its undiscounted potential amount ranged from $100,000 to $1.8 million. The filing reported no material off-balance-sheet arrangements and no material change in market-risk exposure.
Important facts for investors to verify
- Outcome and potential sales impact of the Avery Dennison injunction request, along with continuing legal costs and any eventual loss exposure.
- Whether anticipated GTECH orders, Printrex sales and new product launches materialize, given order timing and the company’s dependence on customer projects.
- Whether the expected San Jose cost savings are achieved and whether the dividend and any future repurchases remain supported by cash generation and credit-facility covenants.
- How the pronounced year-to-date lottery decline, POS customer concentration and product-market mix affect revenue and margins in subsequent periods.