Business context and reporting period
TransAct Technologies Incorporated designs and sells software-driven printers, terminals, restaurant solutions, casino and gaming products, lottery printers, and related supplies and services. This Form 10-K covers the fiscal year ended December 31, 2018; quarterly figures below include the unaudited fourth quarter. The company is shifting its focus toward restaurant solutions and casino and gaming, while exiting banking and reducing emphasis on lottery and legacy POS products.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $54.6 million | $56.3 million |
| Gross profit / margin | $26.7 million / 49.0% | $26.7 million / 47.3% |
| Operating income / margin | $6.8 million / 12.4% | $6.8 million / 12.1% |
| Net income | $5.4 million | $3.2 million |
| Diluted earnings per share | $0.70 | $0.42 |
| Cash from operating activities | $5.1 million | $5.9 million |
Fourth-quarter 2018 net sales were $11.8 million, gross profit $5.9 million, and net income $962,000, compared with $13.2 million, $6.6 million, and a $412,000 net loss, respectively, in fourth-quarter 2017.
- Cash and cash equivalents were $4.7 million at year-end, including $2.9 million held by the UK subsidiary. The company had no borrowings and $20 million available under its revolving credit facility, which runs through November 2022.
- Current assets were $27.0 million and current liabilities $6.6 million. Inventory rose 46% to $12.8 million, principally to support anticipated restaurant and casino/gaming demand.
- Operating cash flow was $5.1 million; capital expenditures and capitalized software additions totaled $1.5 million. Cash dividends of $2.7 million and share repurchases of $2.0 million were paid during 2018.
- Year-end shareholders’ equity was $27.6 million. Operating lease obligations totaled $4.4 million and purchase obligations $7.5 million.
Material changes versus prior period
- Total sales declined 3.1%. Casino and gaming sales rose 42.9% to $26.6 million, supported by higher domestic sales and the transition to direct European selling. International casino and gaming sales increased 81%.
- Lottery sales fell 68.5% to $3.1 million, primarily on lower IGT orders; TSG sales fell 17.1% to $11.8 million, partly reflecting unusually high prior-year lottery spare-parts sales to IGT.
- Restaurant solutions sales decreased 3.8% to $4.6 million; POS automation and banking declined 8.0% to $7.3 million. Printrex sales increased 23.3% to $1.3 million.
- Gross margin reached a company record for a full year, increasing 170 basis points, largely from product mix. Operating income was down slightly, while operating margin improved 30 basis points.
- Net income rose despite lower sales, principally because the effective tax rate fell to 16.1% from 52.6%. The 2017 rate included a provisional $1.3 million tax charge from U.S. tax reform.
Outlook, commentary, risks and unusual items
- TransAct launched its BOHA! suite of cloud-based restaurant applications and companion hardware on March 4, 2019, and expects restaurant solutions sales to increase in 2019. Management expects higher 2019 operating expenses from sales and marketing investment and the full-year impact of 2018 hiring.
- Management expects 2019 casino and gaming sales to be relatively consistent with 2018, lottery and TSG sales to decrease, and Printrex sales to increase slightly. It expects gross margin to remain near 2018 levels and a 2019 effective tax rate of 12%–14%.
- Backlog was $6.9 million at February 28, 2019, versus $10.3 million a year earlier; management expected $5.4 million to be recognized in 2019 and $1.5 million in 2020. Separately, year-end remaining performance obligations were $5.6 million.
- IGT represented 18% of 2018 sales and 21% of year-end accounts receivable. Orders and collections from this customer remain significant exposure.
- Key risks include dependence on a small group of Asian contract manufacturers (one accounted for about 80% of production), sole-source components and consumables, international trade/tariff and currency exposure, competitive pressure, and uncertain customer adoption of new products. Foreign-currency losses were $266,000 in 2018; the company does not use derivatives to manage currency risk.
- The company reported no legal proceedings it believed likely to have a material adverse effect and no material off-balance-sheet arrangements. PwC gave unqualified opinions on the financial statements and internal control; management also reported effective controls.
Important facts for investors to verify
- Whether BOHA! gains customer adoption and generates enough recurring software and hardware revenue to offset weakness in legacy markets.
- Whether casino and gaming growth can persist after large replacement and project orders, and whether European direct sales continue to perform.
- How declining IGT lottery orders and related TSG spare-parts sales affect revenue, cash generation, and customer concentration.
- Inventory conversion and working-capital needs, given the 46% inventory increase, alongside planned dividends, repurchases, and investment spending.
- Execution of supply-chain diversification plans and exposure to foreign-exchange movements, tariffs, and other international disruptions.