TransAct Technologies - 10-Q quarterly report FY

(Mark One)

Commission file number: 0-21121

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(Exact name of registrant as specified in its charter)

(Former name, former address and former fiscal year, if changed since last report.)

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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

(unaudited)

The accompanying unaudited financial statements of TransAct Technologies Incorporated have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America to be included in full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair statement of the results for the periods presented have been included.  The December 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of Ame rica.  These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2009 included in our Annual Report on Form 10-K.

The financial position and results of operations of our U.K. foreign subsidiary are measured using local currency as the functional currency.  Assets and liabilities of such subsidiary have been translated at the end of period exchange rates, and related revenues and expenses have been translated at the weighted average exchange rates with the resulting translation gain or loss recorded in accumulated other comprehensive income in the condensed consolidated balance sheets.  Transaction gains and losses are included in other income in the condensed consolidated statement of income.

The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the full year.  Certain prior period amounts in the Condensed Consolidated Financial Statements have been reclassified to conform with the current period presentation.

Transfers of Financial Assets:  The FASB improved the relevance and comparability of information that a reporting entity provides in its financial statements about transfers of financial assets.  The provisions became applicable on January 1, 2010 and are applied to transfers of financial assets completed after December 31, 2009.  Currently these provisions do not have an impact on our consolidated financial statements since we do not have transfers of financial assets and we do not anticipate these provisions will have a material impact on our consolidated financial statements.

Multiple-Deliverable Revenue Arrangements: In October 2009, the FASB established the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This guidance provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information ab out the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We are currently evaluating this new guidance.

Fair Value Measurements:  In January 2010, the FASB issued new guidance that both expanded and clarified the disclosure requirements related to fair value measurements.  Entities are required to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 of the fair value valuation hierarchy and describe the reasons for the transfers.  Additionally, entities are required to disclose and roll forward Level 3 activity on a gross basis rather than as one net number.  The new guidance also clarified that entities are required to provide fair value measurement disclosures for each class of assets and liabilities.  In addition, entities are required to provide disclosures about the valua tion techniques and inputs used to measure fair value of assets and liabilities that fall within Level 2 or Level 3 of the fair value valuation hierarchy.  The new disclosures were adopted by the Company on January 1, 2010 and do not have an impact on our consolidated financial statements.

The components of inventories are:

(unaudited)

We generally warrant our products for up to 24 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs.

The following table summarizes the activity recorded in the accrued product warranty liability during the six months ended June 30, 2010:

The current portion of the accrued product warranty liability is included in accrued liabilities and the long-term portion of the accrued product warranty liability is included in other liabilities in the condensed consolidated balance sheets.

The following table summarizes the activity recorded in accrued restructuring expenses during the three and six months ended June 30, 2010 and 2009 and is included in accrued liabilities in the accompanying consolidated balance sheets.

(unaudited)

The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding:

Unvested restricted stock is excluded from the calculation of weighted average common shares for basic EPS.  For diluted EPS, weighted average common shares include the impact of unvested restricted stock under the treasury stock method.

For the three months ended June 30, 2010 and 2009, there were 379,750 and 531,100, respectively, potentially dilutive shares consisting of stock options and nonvested restricted stock, that were excluded from the calculation of earnings per diluted share.  For the six months ended June 30, 2010 and 2009, there were 252,250 and 773,950, respectively, potentially dilutive shares consisting of stock options and nonvested restricted stock, that were excluded from the calculation of earnings per diluted share.

The following table summarizes our comprehensive income:

We paid a portion of the 2009 incentive bonus for the chief executive officer and chief financial officer in the form of deferred stock units.  Such deferred stock units were granted in March 2010 and were fully vested at the time of grant.

(unaudited)

We recorded an income tax provision for the second quarter of 2010 of $661,000 at an effective tax rate of 36.6%, compared to an income tax provision during the second quarter of 2009 of $325,000 at an effective tax rate of 33.4%. For the six months ended June 30, 2010, we recorded an income tax provision of $1,022,000 at an effective tax rate of 36.6%, compared to an income tax provision during the six months ended June 30, 2009 of $388,000 at an effective tax rate of 33.5%. Our effective tax rate for the second quarter of 2010 is higher than the second quarter of 2009 because it did not include any benefit from the federal research and development tax credit as this credit expired at the end of 2009.

We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions.  We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2003.  During 2008, a limited scope examination of our 2005 and 2006 federal tax returns was completed.  However, our federal tax returns for the years 2004 through 2008 remain open to examination.  Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the consolidated financial statements.  No federal, state or foreign tax jurisdictions are currently under examination.

As of June 30, 2010, we had $196,000 of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.  Within the next twelve months, we expect the total amount of unrecognized tax benefits to decrease due to the expiration of the statute of limitations on certain credits.

TransAct Technologies Incorporated designs, develops, assembles, markets and services world-class transaction printers under the Epic and Ithaca® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers generate top-quality transaction records such as receipts, tickets, coupons, register journals and other documents. We focus on the following core markets: banking and point-of-sale, casino and gaming, and lottery. We sell our products to original equipment manufacturers (“OEMs”), value-added resellers, selected distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Austr alia, the Caribbean Islands and the South Pacific. Beyond printers, TransAct is a leader in providing printing supplies to the full transaction printer market.  Through our TransAct Services Group we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the hospitality, banking, retail, gaming, and government markets.  Through our webstore, www.transactsupplies.com, and our direct selling team, we address the on-line demand for these products.  We operate in one reportable segment, the design, development, assembly and marketing of transaction printers and printer-related service, supplies and replacement parts.

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America.  The presentation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities.  Our estimates include those related to revenue recognition, inventory obsolescence, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, and contingent liabilities.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

For a complete description of our accounting policies, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates,” included in our Form 10-K for the year ended December 31, 2009.  We have reviewed those policies and determined that they remain our critical accounting policies for the six months ended June 30, 2010.

Net Sales. Net sales, which include printer sales and sales of replacement parts, consumables and repair services, by market for the three months ended June 30, 2010 and 2009 were as follows:

Net sales for the second quarter of 2010 increased $2,207,000, or 16%, from the same period last year due primarily to higher printer sales into our casino and gaming (an increase of $2,840,000, or 82%) and lottery markets (an increase of $490,000, or 25%) as well as our TransAct Services Group (“TSG”) (an increase of $430,000, or 13%), partially offset by a $1,553,000, or 28%, decrease from our banking and point-of-sale market.  Overall, international sales increased $2,853,000, or 131%, largely due to higher international shipments of our casino and gaming printers.  During the second quarter of 2010, our printer sales volume increased 30% to 51,000 units compared to the second quarter of 2009.  

 

This increase in unit volume was led by the casino and gaming market where our unit volume increased 99% from the prior year’s second quarter.  The average selling price of our printers decreased 10% for two reasons: (1) we sold more banking printers, which have higher average selling prices than our other printers, in the second quarter of 2009 compared to the second quarter of 2010 and (2) we experienced a lower average selling price of our casino printers in the second quarter of 2010 compared to the second quarter of 2009.

Revenue from the banking and point-of-sale (“POS”) market includes sales of printers used by banks, credit unions, and other financial institutions to print and/or validate receipts at bank teller stations.  Revenue from this market also includes sales of inkjet, thermal and impact printers used primarily by retailers in the restaurant (including fine dining, casual dining and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on linerless labels or other inserted media.  Sales of our banking and POS printers worldwide decreased $1,553,000, or 28%.

Domestic banking and POS printer revenue decreased to $3,645,000, representing a $1,730,000, or 32%, decrease from the second quarter of 2009 primarily driven by an 89% decrease in sales of banking printers in the second quarter of 2010 compared to the second quarter of 2009 due to the completion of a project by one of our large banking customers utilizing our BANKjet® 1500 bank teller printers in the fourth quarter of 2009. This decrease was partially offset by our second consecutive quarter of increased year-over-year sales of our BANKjet® 2500 printer.  Although we are currently pursuing several banking opportunities, due to the project-oriented nature of these sales, we cannot predict the level of future sales.  Domestic sales of our POS printers increased 38% primarily due to the shipment of a large o rder for our Ithaca® 280 thermal receipt printer to an existing retail customer as part of an upgrade to its POS system in all its U.S. stores.  Since we completed all shipments of printers related to this customer’s upgrade project, we do not expect any future shipments to this customer beyond those made in the second quarter of 2010.  Our domestic POS printer sales also rose in the second quarter of 2010 due in part to an 11% increase in sales of our two printer products for McDonalds for its combined beverage initiative and its POS system upgrade and grill initiatives.  We expect sales for McDonalds to continue to increase in the second half of 2010 as McDonalds accelerates the pace of the roll-out of its new POS system, which includes the grill initiative printer upgrades, to all of its U.S. stores.

International banking and POS printer revenue increased $177,000, or 125%, to $319,000, due primarily to higher POS printer sales to our international distributor in Mexico in the second quarter of 2010.

Revenue from the casino and gaming market includes sales of printers used in slot machines, video lottery terminals (“VLTs”), and other gaming machines that print tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos and racetracks (“racinos”) and other gaming venues worldwide.  Revenue from this market also includes sales of printers used in the international off-premise gaming market in gaming machines at non-casino gaming establishments such as Amusement with Prizes (“AWP”), Skills with Prizes (“SWP”), and Fixed Odds Betting Terminals (“FOBT”).  Sales of our casino and gaming printers increased $2,840,000, or 82%, from the second quar ter of 2009.

Domestic sales of our casino and gaming printers increased $330,000, or 19%, due largely to an increase in sales of our thermal casino printers.  We believe that our increased casino printer sales during the second quarter of 2010 resulted from market share gains, as we believe the overall replacement cycle of slot machines was relatively consistent in the second quarter of 2010 as compared to the second quarter of 2009.  We anticipate little to no improvement in the domestic slot machine replacement cycle during the remainder of 2010. As a result, we believe the current uncertain economic environment could continue to negatively impact the casino industry’s level of capital expenditure in 2010, and as a result, our future sales to the domestic casino and gaming market could be unpredictable and adversely affe cted.

International casino and gaming printer sales increased $2,510,000, or 149%, to $4,191,000 in the second quarter of 2010.  This increase was due primarily to a 996% increase in our thermal casino printer sales to our OEM and distributor customers in Canada and Europe, somewhat offset by a 100% decrease in sales to our distributor in Australia.  The increase in sales to our customers in Canada and Europe was primarily due to the sales of gaming machines into Italy, where the Italian government has approved gambling operators to install approximately 50,000 VLT games.  We expect the majority of these games to be installed over the next couple of years, with significant installations planned for the

 

second half of 2010.  We anticipate our international casino and gaming sales to continue to increase during the remainder of 2010 as we expect to gain a substantial portion of the total Italian VLT opportunity.

Revenue from the lottery market includes sales of lottery printers to Lottomatica’s GTECH Corporation (“GTECH”), the world’s largest provider of lottery terminals, for various lottery applications.  

Domestic and international printer sales to GTECH, which include thermal on-line and other lottery printers, increased $490,000, or 25%, in the second quarter of 2010 compared to 2009, with domestic sales increasing $513,000 and international sales decreasing $23,000.  Our sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs, and as a result, may fluctuate significantly quarter-to-quarter.   Our sales to GTECH are not indicative of GTECH’s overall business or revenue.  We expect total sales to GTECH to increase in the second half of 2010 compared to the first half of 2010.  

Revenue from TSG includes sales of consumable products (inkjet cartridges, ribbons, receipt paper and other printing supplies), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges.  Sales from TSG increased $430,000, or 13%.

Domestic revenue from TSG increased $241,000, or 8%, largely due to an increase of 15% in sales of consumable products compared to the same period in 2009.  The increase in consumable products sales was primarily due to higher sales of inkjet cartridges to newly-acquired customers and to a large recurring customer whose sales fluctuate quarter-to-quarter.  Despite these increases, we expect sales of inkjet cartridges to be lower for the full year 2010 as compared to 2009 due to lower sales of inkjet cartridges for a large banking customer resulting from purchases made during 2009 representing approximately two years’ worth of consumption based on their average annual consumption rate.

Internationally, TSG revenue increased $189,000, or 154%, to $312,000, due primarily to increased sales of replacement parts.

Gross Profit.  Gross profit information is summarized below (in thousands, except percentages):

Gross profit is measured as revenue less cost of goods sold.  Cost of goods sold includes primarily the cost of all raw materials and component parts, direct labor and the associated manufacturing overhead expenses, and the cost of finished products purchased directly from contract manufacturers.  Gross profit increased $1,299,000, or 27%, to $6,155,000 and gross margin increased to 37.4% from 34.1%.  Both our gross profit and gross margin increased due to (1) a 16% increase in sales, (2) an increase in sales of contract manufactured products with lower overall product costs, including lower labor costs, resulting from the move of production for the majority of our products to a low cost contract manufacturer in China and (3) a more favorable sales mix as we sold more higher margin casino printer products and fewer lower margin banking printers in the second quarter of 2010 compared to the second quarter of 2009.

Engineering, Design and Product Development.  Engineering, design and product development information is summarized below (in thousands, except percentages):

Engineering, design and product development expenses primarily include salary and payroll related expenses for our engineering staff, depreciation and product design expenses (including prototype printer expenses, outside design and testing services, and supplies).  Such expenses for the second quarter of 2010 increased $133,000, or 20%, due primarily to an increase of $58,000 in employee compensation related expenses resulting largely from annual salary increases and higher incentive compensation, an increase of $49,000 in outside testing and pre-production expenses related to new product development projects, as well as an increase of $16,000 in travel compared to the prior year period.  

Selling and Marketing. Selling and marketing information is summarized below (in thousands, except percentages):

Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, e-commerce and other promotional marketing expenses.  Selling and marketing expenses for the second quarter of 2010 increased $163,000, or 11%, primarily due to $86,000 increased travel related expenses compared to the prior year period. In addition, selling and marketing expenses increased $75,000 due to higher employee compensation related expenses associated with increased headcount within the sales departments and higher sales commissions resulting from higher sales volume.

General and Administrative. General and administrative information is summarized below (in thousands, except percentages):