TransAct Technologies Incorporated — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017. TransAct develops and sells printers, terminals, software, supplies and related services across restaurant solutions, POS automation and banking, casino and gaming, lottery, Printrex and TransAct Services Group (TSG). It reports one operating segment.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $15.524 million | $14.474 million | $43.117 million | $43.632 million |
| Gross profit | $7.519 million | $5.915 million | $20.042 million | $17.783 million |
| Gross margin | 48.4% | 40.9% | 46.5% | 40.8% |
| Operating income | $2.591 million | $1.237 million | $5.313 million | $3.276 million |
| Net income | $1.813 million | $0.883 million | $3.623 million | $2.261 million |
| Diluted EPS | $0.24 | $0.12 | $0.48 | $0.29 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $3.616 million | $3.235 million |
Margins and drivers. Q3 operating margin was 16.7%, versus 8.5% a year earlier; nine-month operating margin was 12.3%, versus 7.5%. Management attributed margin improvement mainly to favorable product mix, including higher contributions from spare parts, restaurant terminals and EPICENTRAL software. Q3 operating expenses increased 5%; nine-month expenses increased 2%.
Cash, debt and liquidity. Cash was $3.525 million at September 30, up from $2.503 million at December 31, 2016. The company reported no debt outstanding and $20 million available under its revolving credit facility. Current assets were $23.861 million and current liabilities $5.970 million. Nine-month investing cash use was $0.590 million, primarily capital expenditures; financing cash use was $1.998 million, including $1.911 million of dividends and $0.358 million of share repurchases. Management said cash, expected operating cash flow and facility availability should cover working capital, capital expenditures, dividends and liquidity needs for at least 12 months.
Material changes versus prior periods
- Q3 sales rose 7.3%, while nine-month sales declined 1.2%. Printer and terminal unit volume fell 15% in Q3 and 12% for the nine-month period; higher average selling prices and stronger service/supply revenue supported results.
- Q3 restaurant solutions revenue increased 86.1% to $1.803 million, supported by AccuDate terminal sales, including McDonald’s-related demand. Nine-month revenue in the category was down 4.4%.
- TSG revenue grew 57.2% in Q3 and 34.2% for the nine months, driven chiefly by replacement parts and accessories. Casino and gaming revenue fell 8.9% in Q3 and 12.3% year to date, with international weakness; POS automation and banking revenue fell 36.7% in Q3 and 24.6% year to date.
- Nine-month lottery revenue increased 8.4%, and Printrex revenue increased 105.5%, although these markets may be affected by customer orders and individual projects.
- Cash from operations increased to $3.616 million from $3.235 million for the comparable nine-month period. Cash rose despite dividend payments and repurchases; the company bought back 36,465 shares for $0.358 million in the first nine months of 2017, compared with $3.242 million of repurchases in the 2016 period.
Outlook, commentary and risks
- Management expected restaurant solutions sales to remain strong through the rest of 2017 and forecast higher Q4 TSG sales year over year, particularly from lottery replacement parts. It expected Q4 Printrex sales to be roughly consistent with Q3.
- Management expected 2017 selling and marketing and general and administrative expenses to exceed 2016 levels, reflecting restaurant-market sales investments. It forecast a 32%–33% full-year 2017 effective tax rate, approximately $0.8 million of full-year capital expenditures and approximately $2.6 million of 2017 dividends.
- The company planned to end its worldwide casino and gaming distributor relationship effective December 31, 2017 and move to direct sales to slot manufacturers and casino customers. Management warned the transition could temporarily affect sales in late 2017 and early 2018 and entail incremental selling and marketing expense.
- Sales of the Ithaca 9000 to McDonald’s were expected to decline for full-year 2017 as customer initiatives neared completion; legacy POS and banking products were also expected to continue declining. Project-based EPICENTRAL, gaming and lottery sales may fluctuate materially between periods.
- The $20 million TD Bank revolver was due to expire November 27, 2017; management expected renewal before expiration. The company was in covenant compliance at quarter-end. The facility’s stated covenant measures were met, with funded debt/EBITDA reported as zero.
- The company was evaluating the effects of the new revenue recognition standard, planned for adoption January 1, 2018 using the modified retrospective method; the impact had not been finalized. It was also evaluating the new lease standard. Management reported effective disclosure controls and no material change in internal control over financial reporting; it disclosed no material change in previously reported legal proceedings or risk factors.
Key facts for investors to verify
- Whether Q3’s improved gross margin and restaurant/TSG growth can persist, given the lower nine-month sales and declining legacy product volumes.
- The degree of customer and program concentration in restaurant solutions, including McDonald’s-related demand, and the timing of its initiatives.
- Execution and financial effects of the casino distributor-to-direct-sales transition, including any temporary sales disruption and added costs.
- Renewal terms and continued availability of the $20 million credit facility, as well as cash requirements for dividends, repurchases and capital spending.
- Final revenue-recognition standard adoption effects and any material changes to reported revenue timing or retained earnings.