TransAct Technologies Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; amounts below are in U.S. dollars, with financial statement figures generally in thousands unless noted.
Business context and results
TransAct designs and sells printers, terminals, software, supplies and related services for food safety/POS, casino and gaming, lottery, and Printrex markets. It reports one operating segment.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $14.172m | $13.389m | $47.560m | $40.812m |
| Gross profit / margin | $6.291m / 44.4% | $5.286m / 39.5% | $19.944m / 41.9% | $16.800m / 41.2% |
| Operating income / margin | $1.565m / 11.0% | $0.057m / 0.4% | $3.987m / 8.4% | $1.033m / 2.5% |
| Net income | $1.028m | $0.050m | $2.560m | $0.619m |
| Diluted EPS | $0.13 | $0.01 | $0.33 | $0.07 |
Financial position, cash flow and liquidity
- Cash was $2.450m at September 30, 2015, down from $3.131m at December 31, 2014. Working capital was $18.906m, versus $18.361m; the current ratio was 3.3, versus 2.9.
- No debt was outstanding at quarter-end. The revolving credit facility provides up to $20m through November 28, 2017; all $20m was available. The facility is secured by company assets, and TransAct reported compliance with its financial covenants.
- The cash flow statement reports nine-month operating cash flow of $2.655m (2014: $3.456m), investing cash outflow of $0.487m, and financing cash outflow of $2.839m. Cash decreased $0.681m.
- Cash generation reflected net income and a $2.957m increase in accounts payable, offset in part by lower accrued liabilities, including payment of the Avery Dennison settlement and 2014 bonuses. Capital expenditures were $0.491m.
- Dividends paid were $0.08 per share in Q3 and $0.24 per share for the nine-month period. Treasury-stock purchases totaled $1.020m for the period; the repurchase program expired July 31, 2015 and was not renewed.
Material changes and operating drivers
- Q3 sales increased 5.8%; nine-month sales increased 16.5%. Nine-month printer unit volume rose 28% to about 135,000, while average selling price declined about 8%, primarily because lottery printers had lower average prices.
- Q3 growth was led by TSG (+37%), food safety/banking/POS (+29%), and lottery (+22%). Casino and gaming fell 13%, and Printrex fell 78%. International sales declined 33% in Q3, mainly due to international casino and gaming.
- For the first nine months, lottery revenue rose 179%, food safety/banking/POS 26%, and TSG 16%; casino and gaming declined 3% and Printrex 62%. Lottery growth was substantially tied to IGT installations and shipments, which management says can fluctuate significantly.
- Q3 gross margin improved 490 basis points year over year, reflecting favorable mix, including higher-margin TSG and food safety terminal sales. Nine-month gross margin rose 70 basis points despite increased sales of lower-margin lottery printers.
- Operating income benefited from higher sales, improved gross margin and lower engineering costs following 2014 cost reductions. Nine-month legal fees associated with the Avery Dennison case were $1.738m, compared with $0.475m in the prior-year period.
Outlook, risks and unusual items
- Management expected full-year 2015 gross margin to exceed 2014, citing new value-added products and cost-reduction benefits. It expected engineering and product-development expenses below 2014 levels, a full-year effective tax rate of 35%–36%, and approximately $0.8m of 2015 capital expenditures.
- Management expected approximately $2.5m of cash dividends during 2015 and stated cash, operating cash flows and available credit should meet needs for at least the next 12 months. The dividend remains subject to quarterly board approval. No specific revenue or earnings guidance is provided in the filing.
- Management expected continued 2015 pressure on Printrex sales from low oil prices and the loss of a medical-industry customer. Lower drilling activity also reduced demand for Printrex consumables.
- The Avery Dennison trade-secret dispute was settled in March 2015: TransAct paid $3.6m in April and agreed to qualify certain labels at an estimated $25,000 cost. The settlement expense of $3.625m had been recorded in Q4 2014; TransAct reversed $25,000 in Q2 2015 because required testing information was not provided on time. The company said it expected no further related expense in 2015.
- TransAct signed a non-exclusive agreement to supply thermal lottery printers to IGT through December 31, 2019. The filing cautions that IGT-related orders depend on installation timing and can vary materially.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting. It identifies no material change in previously disclosed risk factors.
Important facts for investors to verify
- Reconcile operating cash flow: the cash flow statement reports $2.655m for the first nine months of 2015, but the MD&A narrative states $2.792m. The filing text does not explain this discrepancy.
- Assess whether growth in lottery, TSG and food safety can persist, given lottery order timing, project-oriented sales and changing product mix.
- Monitor Printrex exposure to oil and gas activity and the effects of the lost medical customer.
- Confirm the sustainability of gross-margin improvement, cost reductions, dividends and liquidity while considering working-capital movements and the facility’s covenant and collateral terms.
- Review the timing and concentration of sales to IGT and international casino distributors, and the potential effects of foreign exchange and customer demand.