TransAct Technologies Incorporated (10-K) — FY 2017
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017, with quarterly results through Q4. TransAct designs and sells printers, terminals, casino software, supplies and related services across restaurant solutions, POS and banking, casino and gaming, lottery, Printrex and TransAct Services Group (TSG). It reports one operating segment.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $56.311 million | $57.235 million | Down 1.6% |
| Gross profit / margin | $26.662 million / 47.3% | $23.799 million / 41.6% | Profit up 12.0%; margin up 570 bps |
| Operating expenses | $19.848 million | $18.599 million | Up 6.7% |
| Operating income / margin | $6.814 million / 12.1% | $5.200 million / 9.1% | Income up 31.0% |
| Net income / diluted EPS | $3.211 million / $0.42 | $3.617 million / $0.47 | Income down 11.2% |
| Cash from operations | $5.918 million | $4.624 million | Up $1.294 million |
FY 2017 sales by market: casino and gaming $18.615 million; TSG $14.176 million; lottery $9.805 million; POS and banking $7.905 million; restaurant solutions $4.758 million; and Printrex $1.052 million. International sales were $7.591 million, or 13.5% of total sales, versus $11.693 million, or 20.4%, in 2016.
Q4 results: Net sales were $13.194 million versus $13.603 million in Q4 2016; gross profit was $6.620 million versus $6.016 million. The company reported a $412,000 net loss, compared with $1.356 million net income a year earlier. The filing gives the full-year tax-reform charge but does not clearly allocate its effect on the Q4 result.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $5.507 million at year-end, up from $2.503 million; the company had no debt outstanding.
- Current assets were $26.361 million and current liabilities were $7.349 million. Shareholders’ equity was $26.014 million.
- The renewed TD Bank revolving facility provides $20 million of availability through November 2022; all $20 million was undrawn at year-end. The company reported compliance with its covenants.
- Operating cash flow of $5.918 million funded $835,000 of capital expenditures and $150,000 of capitalized software additions. Dividends paid were $2.581 million; share repurchases were $358,000.
- Management expected approximately $2 million of 2018 capital expenditures and software additions and said existing cash and operating cash flow should cover expected needs for at least 12 months.
Material changes, outlook and management commentary
- Revenue declined modestly overall, but mix improved: higher-margin spare-parts sales and a smaller share of lower-margin POS and banking printers helped lift gross margin to a reported full-year record. Printer and terminal unit volume fell 13%, while average selling price rose 4%.
- TSG sales rose 40.4%, primarily on unusually high IGT lottery-printer spare-parts demand; management expected TSG sales to fall in 2018 against that elevated comparison. POS and banking sales fell 24.8%, largely as McDonald’s Ithaca 9000 orders slowed after strong 2016 sales; further decline was expected in 2018.
- Casino and gaming sales fell 11.4%, with international sales down 47.0%, partly reflecting weak markets and lower sales through former distributor Suzo-Happ. The distributor agreement ended December 31, 2017; TransAct began using new distributors in Asia and Australia and a direct-sales approach in Europe from January 2018. Management expected international casino and gaming sales to increase, while planning higher sales and marketing spending.
- Restaurant solutions sales declined 7.8% in 2017. Following 2017 investments in a direct sales force and marketing, management expected sales to increase in 2018 as AccuDate Pro and XL contributed more. Engineering, selling and marketing, and general and administrative expenses were also expected to increase.
- Lottery sales were nearly flat in 2017; management expected lower lottery printer sales in 2018. Printrex sales rose 94.8% as oil-and-gas demand recovered; modest further growth was expected, but management did not anticipate a significant contribution to total sales.
- The Tax Cuts and Jobs Act caused a provisional $1.315 million charge to tax expense from revaluing deferred tax assets. The 2017 effective tax rate was 52.6%, versus 30.0% in 2016; management forecast a 2018 annual effective rate of 20%–21%, subject to continued evaluation of tax-law effects.
- Backlog was approximately $10.349 million at February 28, 2018, down from $16.241 million a year earlier; $7.474 million was expected to be recognized in 2018 and $2.875 million in 2019.
Risks, contingencies and unusual items
- Customer concentration is significant: IGT represented 35% of 2017 sales and 48% of year-end receivables. IGT sales depend on the timing of lottery terminal installations. The company also disclosed that Suzo-Happ accounted for 13% of year-end receivables despite representing 8% of 2017 sales.
- Manufacturing is substantially outsourced in Asia: approximately 99% of printer and terminal production was through three contract manufacturers, with one manufacturer accounting for approximately 80% according to the risk disclosure. The company also relies on sole-source suppliers for certain inkjet consumables and key components.
- Contractual obligations totaled $17.601 million, including $12.296 million of purchase obligations and $5.305 million of operating lease obligations; $13.285 million was due within one year.
- Other identified risks include demand and project timing, competition and product adoption, overseas trade and currency exposure, oil-and-gas market volatility, cybersecurity, and possible increases in steel and aluminum costs if proposed tariffs were implemented.
- The company reported no material off-balance-sheet arrangements. The Avery Dennison trade-secret litigation was settled in 2015; management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether restaurant-solutions growth and the new European direct-sales model can offset expected declines in POS, lottery and TSG sales, alongside higher planned operating costs.
- How much of 2017 TSG growth was nonrecurring IGT spare-parts demand, and how customer concentration and receivables exposure evolve.
- Whether the provisional tax-reform accounting changes and the forecast 2018 effective tax rate are confirmed as additional guidance becomes available.
- Whether backlog converts to revenue on the disclosed schedule and whether margins remain near 2017 levels as product mix changes.
- Whether contract-manufacturer and sole-source supplier exposure, purchase commitments, dividends and the new authorization to repurchase up to $5 million remain manageable.