TransAct Technologies Inc. — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016. TransAct develops and sells printing and software solutions across food safety, POS and banking, casino and gaming, lottery, oil and gas, and related supplies and services. It reports one operating segment. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $14.474 | $14.172 | $43.632 | $47.560 |
| Gross profit / margin | $5.915 / 40.9% | $6.291 / 44.4% | $17.783 / 40.8% | $19.944 / 41.9% |
| Operating income / margin | $1.237 / 8.5% | $1.565 / 11.0% | $3.276 / 7.5% | $3.987 / 8.4% |
| Net income | $0.883 | $1.028 | $2.261 | $2.560 |
| Diluted EPS | $0.12 | $0.13 | $0.29 | $0.33 |
| Operating cash flow | Not stated separately | Not stated separately | $3.234 | $2.655 |
In Q3, sales rose 2%, but gross profit fell 6%, operating income fell 21%, and net income fell 14% year over year. For the first nine months, sales declined 8%, operating income declined 18%, and net income declined 12%. The nine-month comparison includes $1.738 million of lawsuit-related expense in 2015 and none in 2016.
Sales and margins
- Q3 growth in casino and gaming (+27%), POS and banking (+27%), and lottery (+24%) was partly offset by lower TSG (-38%), Printrex (-70%), and food safety (-13%) sales.
- Nine-month sales increased in POS and banking (+39%) and food safety (+18%), but declined in TSG (-31%), Printrex (-66%), lottery (-17%), and casino and gaming (-6%).
- Management attributed weaker margins to sales mix: more lower-margin Ithaca 9000 printers and fewer higher-margin aftermarket parts. Q3 printer and terminal unit volume increased 28%, while average selling price fell about 8%.
- Engineering and product-development expense increased 48% in Q3 and 39% for the nine-month period, reflecting added software engineers and investment in EPICENTRAL software and food-safety terminals.
Financial position and liquidity
- At September 30, cash and equivalents were $2.199 million, down from $4.473 million at year-end 2015; total assets were $31.942 million and total shareholders’ equity was $23.558 million.
- No debt was outstanding. The company had $20 million available under its revolving credit facility, which expires November 28, 2017, and reported compliance with its covenants.
- Cash from operations of $3.234 million exceeded capital expenditures of $0.454 million. Investing cash outflow was $0.446 million; financing cash outflow was $5.045 million, mainly $3.242 million of repurchases and $1.827 million of dividends.
- Accounts receivable rose $3.313 million, or 46%, from year-end, partly reflecting the timing and increase of Q3 sales. Accounts payable rose $2.899 million, or 110%, mainly due to inventory purchases and payment timing.
- The company repurchased 413,378 shares for $3.242 million at an average $7.84 per share; $1.758 million remained authorized. Shares outstanding were 7,383,364 at October 31, 2016.
Outlook, risks and unusual items
- No overall revenue or earnings guidance is provided. Management expected full-year lottery printer sales to IGT to be consistent with 2015, engineering expense to be higher than 2015, capital expenditures of about $0.8 million, and an effective tax rate of 31%–32%. It expected approximately $2.4 million of 2016 dividends.
- Management said cash, expected operating cash flow, and available credit should fund working capital, capital expenditures, dividends, and liquidity needs for at least the next 12 months.
- Management expected oil-price weakness to continue weighing on Printrex sales during the remainder of 2016. Lottery sales depend on IGT installation timing and can vary substantially; off-premise gaming sales are also project-oriented. The filing notes declining legacy consumables and a prior-year unusually large spare-parts order that did not recur.
- The Avery Dennison lawsuit was settled in 2015; the company reported no related 2016 expense and no material change in previously disclosed legal proceedings. The settlement required a $3.6 million payment, funded in part by a revolver borrowing that was repaid in 2015.
- The filing reports no material change in risk factors or market-risk exposure. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification priorities
- Check whether McDonald’s-related Ithaca 9000 sales persist and whether the resulting product mix continues to pressure gross margin.
- Monitor collection of the higher accounts receivable balance and the timing of vendor payments reflected in accounts payable.
- Assess whether TSG, lottery, and Printrex declines continue, including exposure to IGT order timing and oil-and-gas activity.
- Verify progress against the stated full-year tax, capital-spending, dividend, and lottery-sales expectations; the filing gives no comprehensive sales or EPS forecast.
- Review cash use and remaining repurchase authorization alongside the quarterly dividend and the company’s operating cash generation.