Business context and reporting period
TransAct Technologies Incorporated filed this unaudited Form 10-Q for the quarter ended September 30, 2013. The company designs and sells printers, terminals, software, supplies and related services for food safety/POS, casino and gaming, lottery, oil and gas, and other markets. It reports one operating segment. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $16.768 | $15.358 | $47.613 | $48.770 |
| Gross profit / margin | $7.206 / 43.0% | $5.679 / 37.0% | $20.091 / 42.2% | $18.299 / 37.5% |
| Operating income / margin | $1.915 / 11.4% | $0.043 / 0.3% | $5.124 / 10.8% | $2.732 / 5.6% |
| Net income | $1.451 | $0.023 | $3.826 | $1.739 |
| Diluted EPS | $0.17 | $0.00 | $0.44 | $0.19 |
| Operating cash flow | Not separately presented | Not separately presented | $2.038 | $7.784 |
At September 30, 2013, cash was $2.755 million, working capital was $23.811 million, and the current ratio was 3.5. Total assets were $41.911 million and shareholders’ equity was $31.409 million. The company had no debt outstanding and $20 million undrawn under its revolving credit facility.
Material changes versus the prior comparable period
- Q3 sales rose 9.2%, while nine-month sales declined 2.4%. Q3 printer unit volume increased 2%; average selling price rose about 9%. For the first nine months, printer volume fell 14%, while average selling price rose about 8%.
- Q3 food safety, banking and POS sales increased 100.7%, led by the Ithaca 9700 food safety terminal and Ithaca 9000 printer. Casino and gaming sales rose 23.1%, while lottery sales fell 58.2%. Nine-month food safety/POS sales rose 33.1%; lottery fell 44.6% and casino/gaming fell 4.6%.
- Gross margin improved 600 basis points in Q3 and 470 basis points year to date, reflecting a more favorable mix of value-added products and software. Lower lawsuit-related legal expense also aided operating income: $142,000 versus $1.036 million in Q3, and $398,000 versus $1.507 million year to date.
- Nine-month operating cash flow decreased to $2.038 million from $7.784 million, principally reflecting a $2.576 million inventory build, compared with an inventory reduction in 2012, and changes in payables and accrued liabilities.
- Cash declined $4.782 million from year-end 2012, primarily due to $5.194 million of treasury-share purchases and $1.738 million of dividends. The company repurchased 490,000 additional shares in an open-market transaction in Q3 for approximately $4.307 million; its public repurchase program had expired in May and was not renewed.
Outlook, management commentary and risks
- Management expected gross margin for the remainder of 2013 to exceed 2012 levels, supported by value-added products. It expected Q4 selling and marketing expense to be below Q3 due to the timing of the Global Gaming Expo.
- Management expected 2013 sales to GTECH of approximately $4–5 million, based on backlog and customer forecasts. GTECH orders depend on the timing of lottery-terminal installations and may fluctuate materially.
- Management expected a Q4 2013 effective tax rate of 33%–34%. The Q3 rate of 23.0% was unusually low, including a $224,000 benefit from completing the 2010 federal tax audit. The nine-month 25.4% rate also included an approximately $220,000 research and development credit benefit.
- Management expected approximately $1.0 million of 2013 capital expenditures, approximately $2.3 million of cash dividends for the year, and stated cash and operating cash flows should cover needs for at least 12 months. The quarterly dividend was subject to Board approval.
- Risks discussed include possible holiday-season softness in food safety terminal sales; project-driven, less predictable international gaming sales; and the timing of lottery-terminal deployments. International sales declined 21% in Q3 and 27.5% year to date.
- Avery Dennison’s trade-secret lawsuit remained a contingency. After quarter-end, on October 15, 2013, the appeals court affirmed the lower court’s ruling for TransAct and denied an injunction; Avery Dennison sought reconsideration on October 24. The company could incur additional legal fees.
- The Printrex contingent consideration liability was valued at $760,000 at quarter-end, down $200,000 during the first nine months; no payment was made because the underlying conditions were not satisfied.
Important facts for investors to verify
- Whether the Q3 margin improvement and stronger new-product mix persisted, and whether management’s full-year margin expectations were achieved.
- Actual GTECH sales versus the $4–5 million estimate, and the volatility of lottery and international gaming orders.
- Cash generation and inventory conversion following the $2.576 million inventory increase, alongside ongoing dividends and any further share repurchases.
- Subsequent developments in the Avery Dennison appeal and any resulting legal costs or operating restrictions.
- Actual tax rate and dividend payments versus management’s stated expectations; the filing reports no material changes to previously disclosed risk factors and says the company complied with its credit-facility covenants.