TransAct Technologies Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Financial amounts below are in millions unless otherwise noted. TransAct designs, sells and services transaction printers and related supplies across banking/POS, casino and gaming, lottery, oil and gas, medical and other markets.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $14.111 | $16.369 | $52.324 | $47.020 |
| Gross profit / margin | $5.350 / 37.9% | $5.557 / 33.9% | $18.945 / 36.2% | $16.901 / 35.9% |
| Operating income / margin | $1.125 / 8.0% | $1.631 / 10.0% | $6.123 / 11.7% | $4.411 / 9.4% |
| Net income | $0.839 | $1.052 | $4.106 | $2.826 |
| Diluted EPS | $0.09 | $0.11 | $0.43 | $0.30 |
| Operating cash flow | Not presented quarterly | $2.493 | $0.346 |
- Cash and cash equivalents were $7.934 at September 30, down from $11.285 at December 31, 2010. The company had no borrowings outstanding and reported $20.0 of undrawn revolving-credit availability.
- Working capital was $26.965, versus $25.525 at year-end; the current ratio was 4.2, versus 3.2. Total liabilities were $10.037 and shareholders’ equity was $35.053.
- Nine-month cash use included $4.0 for the Printrex asset acquisition, $0.568 of capitalized EPICENTRAL software development and $2.075 of share repurchases. Cash used in investing activities was $5.039; financing activities used $0.791.
Changes versus prior periods
- Q3 sales fell 13.8% year over year, while nine-month sales rose 11.3%. The quarterly decline reflected lower banking/POS, lottery and TransAct Services Group sales; higher casino/gaming sales and Printrex revenue partly offset it.
- Q3 gross margin improved 4.0 percentage points, mainly from sales mix, including a higher proportion of casino/gaming and Printrex products. However, operating income fell 31.0% and net income fell 20.2%, as lower quarterly sales and higher operating costs outweighed the margin improvement.
- Nine-month operating income increased 38.8% and net income increased 45.3%. Lottery sales rose 119.0%, largely due to order timing at GTECH; banking/POS sales declined 28.7%.
- Nine-month operating cash flow increased from $0.346 to $2.493. Working-capital movements included a $1.292 decrease in receivables, a $1.108 increase in inventories and a $3.055 decrease in accounts payable.
Outlook, management commentary and notable items
- Management expected full-year 2011 effective tax rate of 33%–34% and approximately $1.3 of 2011 capital expenditures, including EPICENTRAL development.
- Management forecast Q4 Printrex printer sales of approximately $1.2–$1.4. It expected GTECH sales to be lower in Q4 than Q3 due to order timing, and U.S. McDonald’s-related sales to decline as store rollouts near completion.
- Management expected domestic casino sales for 2011 to exceed 2010, citing market-share gains, but cautioned that uncertain economic conditions could constrain casino capital spending. Lottery, casino and project-based banking sales may fluctuate with customer installations and order timing.
- On August 19, 2011, TransAct acquired substantially all Printrex assets for $4.0 cash plus contingent consideration. Printrex contributed $0.464 of printer sales in the quarter and a reported $0.044 loss to earnings, including acquired-intangible amortization. The preliminary allocation included $0.975 goodwill and $2.280 of intangible assets; working-capital adjustments and goodwill allocation were not final. Contingent consideration was valued at $0.680, with an estimated undiscounted range of $0.1–$1.8.
- The company recorded $0.184 of restructuring costs for closing its New Britain, Connecticut service facility and estimated annualized savings of $0.4; it expected no further facility-closing costs. Warranty estimates included $0.326 of changes in estimates during the first nine months.
- The $0.276 Q3 tax provision reflected a 24.8% effective rate, favorably affected by $0.053 of discrete tax benefits. Management stated cash on hand and operating cash flows should meet needs for at least the next 12 months. The $20.0 credit facility was due to expire November 28, 2011; management expected to renew it. The company reported covenant compliance at quarter-end.
- No material changes to previously disclosed risk factors or market-risk exposure were reported. No legal proceedings or material off-balance-sheet arrangements were disclosed. Management concluded disclosure controls were effective; Printrex was excluded from the planned 2011 internal-control assessment scope.
Important facts for investors to verify
- Whether the revolving credit facility was renewed on acceptable terms after its November 2011 expiration.
- Whether Printrex delivered the expected Q4 sales and whether its contingent consideration, purchase-price allocation and integration assumptions changed.
- How much GTECH order timing, McDonald’s rollout completion and casino spending affect subsequent sales and margins.
- Whether inventory levels, accounts payable and operating cash conversion remain consistent with demand, given the reported working-capital movements.
- Progress and spending on EPICENTRAL, and realization of the stated New Britain facility savings.