TransAct Technologies Incorporated — Q3 2014 Form 10-Q
Business context and period: The company designs and sells transaction printers, terminals, software, supplies, and related services across food safety/banking/POS, casino and gaming, lottery, Printrex, and TransAct Services Group (TSG). This unaudited quarterly report covers the three and nine months ended September 30, 2014; financial amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $13.389 | $16.768 | $40.812 | $47.613 |
| Gross profit / margin | $5.286 / 39.5% | $7.206 / 43.0% | $16.800 / 41.2% | $20.091 / 42.2% |
| Operating income / margin | $0.057 / 0.4% | $1.915 / 11.4% | $1.033 / 2.5% | $5.124 / 10.8% |
| Net income | $0.050 | $1.451 | $0.619 | $3.826 |
| Diluted EPS | $0.01 | $0.17 | $0.07 | $0.44 |
- Nine-month operating cash flow was $3.456 million, versus $2.038 million a year earlier. Investing cash outflow was $0.568 million; financing cash outflow was $2.738 million, including $1.912 million in dividends and $0.826 million in share repurchases.
- Cash was $3.071 million at September 30, 2014, up from $2.936 million at year-end 2013. The company reported no debt and $20 million of undrawn capacity under its revolving credit facility.
- Working capital was $23.722 million, versus $24.871 million at December 31, 2013; the current ratio was 4.3, compared with 4.4. Total assets were $38.522 million and total liabilities were $7.625 million.
Material changes versus prior periods
- Q3 sales fell 20.2%; nine-month sales fell 14.3%. Printer unit volume declined 16% in Q3 and 10% over nine months; average printer selling prices were down approximately 7% and 5%, respectively.
- Casino and gaming revenue fell 32.6% in Q3 and 17.8% year to date, chiefly reflecting weaker domestic casino printer demand and fewer EPICENTRAL installations. Food safety, banking and POS revenue declined 28.4% in Q3 and 21.6% year to date, partly because prior-year distributor stocking orders did not recur.
- Lottery revenue increased 43.7% in Q3 and 8.8% year to date. Printrex and TSG revenue declined year to date by 13.6% and 7.3%, respectively; management cited oil-and-gas weakness and lower sales of certain consumables and services.
- Gross margin declined 350 basis points in Q3 and 100 basis points year to date, reflecting lower volume and a less favorable mix of higher-value products. Operating income fell 97.0% in Q3 and 79.8% year to date.
Outlook, risks, contingencies, and unusual items
- Management expected Q4 2014 food safety terminal sales to remain relatively consistent with Q3, with potential growth in 2015 as customers complete trials and make purchase decisions. It forecast 2014 GTECH sales of approximately $4.5–$5 million and capital expenditures of approximately $0.8 million.
- Management expected 2014 engineering and selling and marketing expenses to exceed 2013 levels, reflecting product launches and planned commercial investment. It expected a full-year 2014 effective tax rate of approximately 37% if the federal R&D credit was not renewed.
- The $20 million TD Bank revolving facility was due to expire November 28, 2014; management expected to renew it or obtain a similar replacement facility. The company was in compliance with covenants at September 30, 2014.
- The board raised the quarterly dividend to $0.08 per share; management expected approximately $2.6 million of 2014 dividend payments. A new repurchase authorization permits up to $7.5 million of buybacks through July 31, 2015; $0.826 million had been spent by September 30.
- Avery Dennison alleges misappropriation of trade secrets relating to food safety terminals. Its request for injunctive relief was dropped, but its damages claim remains; trial was scheduled for April 21, 2015. Legal expenses were $0.428 million in Q3 and $0.475 million year to date, and further costs were expected.
- Other disclosed risks include demand sensitivity to economic conditions, project-driven and potentially volatile casino/software and lottery sales, and oil-and-gas market exposure. The Printrex contingent consideration liability was reduced to zero; no payment was expected.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced before its November 28, 2014 expiration, and whether liquidity and covenant compliance continued.
- Whether sales and margins stabilized after the declines, particularly in domestic casino/gaming and food safety markets, and whether anticipated 2015 food safety demand materialized.
- The outcome and eventual legal costs of the Avery Dennison damages litigation.
- Actual dividend and repurchase activity, and the effect of capital returns on cash balances.
- Whether the federal R&D credit was renewed and how the resulting tax rate compared with management’s estimate.