UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

 

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ☒   No   ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ☐   No   ☒

As of July 31, 2017,2018, the number of shares outstanding of the Company's common stock, $0.01 par value, was 7,363,927.7,377,778.

 

See notes to Condensed Consolidated Financial Statements.

 

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 ("the Company"(the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") 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 AmericaU.S. GAAP 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 and are of a normal recurring nature.  The December 31, 20162017 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 America.U.S. GAAP.  These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 20162017 included in our Annual Report on Form 10-K.

The financial position and results of operations of our U.K. 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"Accumulated other comprehensive income (loss)loss, net of tax", in the Condensed Consolidated Balance Sheets.  Transaction gains and losses are included in "Interest and other income (expenses)(expense)" in the Condensed Consolidated Statements of Income.

The results of operations for the three and six months ended June 30, 20172018 are not necessarily indicative of the results to be expected for the full year.

The components of inventories, net are:

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, 20172018 and 2016:2017:

As of June 30, 2017, $168,0002018, $208 thousand of the accrued product warranty liability is classified as current in "Accrued liabilities" in the Condensed Consolidated Balance Sheets and the remaining $81,000$95 thousand is classified as long-termnon-current in "Other liabilities".

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

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options and restricted stock units, when the average market price of the common stock is lower than the exercise price of the related stock award during the period.  These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive.  For the three months ended June 30, 20172018 and 2016,2017, there were 407,000196 thousand and 827,000,407 thousand, respectively, of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share.  For the six months ended June 30, 20172018 and 2016,2017, there were 732,000147 thousand and 827,000,732 thousand, respectively, of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share.

 

Changes in shareholders' equity for the six months ended June 30, 20172018 were as follows (in thousands):

For the three months ended June 30, 2017,2018, our Board of Directors declared a quarterly cash dividend of $0.09 per share, totaling $663,000,$663 thousand, which was paid inon June 201715, 2018 to common shareholders of record at the close of business on May 19, 2017.21, 2018.  For the three months ended June 30, 2016,2017, dividends declared and paid totaled $609,000,$663 thousand, or $0.08$0.09 per share.  For the six months ended June 30, 20172018 and 2016,2017, dividends declared and paid totaled $1,250,000,$1.3 million, or $0.17$0.18 per share, and $1,232,000,$1.3 million, or $0.16$0.17 per share, respectively.

 

We recorded an income tax provision for the second quarter of 20172018 of $429,000$305 thousand at an effective tax rate of 33.1%20.1%, compared to an income tax provision during the second quarter of 20162017 of $355,000$429 thousand at an effective tax rate of 32.0%33.1%.  For the six months ended June 30, 2017,2018, we recorded an income tax provision of $888,000$483 thousand at an effective tax rate of 32.9%20.4%, compared to an income tax provision during the six months ended June 30, 20162017 of $666,000$888 thousand at an effective tax rate of 32.6%32.9%.  The effective tax rate for the three and six months ended June 30, 2018 was lower than the three and six months ended June 30, 2017 effective tax rate due to the passage of the Tax Cuts and Jobs Act (the "Tax Reform Act") enacted on December 22, 2017.  The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on undistributed foreign earnings. The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018 and, as a result, reduced our statutory U.S. corporate income tax rate from 34% to 21%.

We are subject to U.S. federal income tax, as well as income tax in certain state and foreign jurisdictions.  We have substantially concluded all U.S. federal income tax, state and local, and foreign tax regulatory examination matters through 2012.  During 2013, an examination of our 2010 federal tax return was completed.2013.  However, our federal tax returns for the years 20132014 through 20152016 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 Condensed Consolidated Financial Statements.  No state or foreign tax jurisdiction income tax returns are currently under examination.

As of June 30, 2017,2018, we had $111,000$104 thousand of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.  We expect $31,000$28 thousand of our  $111,000the $104 thousand of unrecognized tax benefits will reverse in 20172018 upon the expiration of the statute of limitations.

We recognize interest and penalties related to uncertain tax positions in the income tax provision.provision reported as "Deferred tax assets" in the Condensed Consolidated Balance Sheet.  As of June 30, 2017,2018, we have $25,000$23 thousand of accrued interest and penalties related to uncertain tax positions.  The Company maintains a valuation allowance against certain deferred tax assets where realization is not certain.

The following accounting pronouncements will be adopted in future reporting periods:

In May 2014,February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract's performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Entities have the option of using either a full retrospective approach or modified retrospective approach to adopt the amended guidance.  The amended guidance applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification.  We are currently evaluating the impact this ASU may have on our consolidated financial position, results of operations or cash flows.  During the first quarter of 2017 we engaged a national accounting firm to assist management in implementing the new standard.

ASU 2017-04, Intangibles - GoodwillNo. 2014-09," Revenue from Contracts with Customers" and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this standardrelated amendments (collectively, ASC 606) are effective for yearsreporting periods beginning after December 15, 2019, with early adoption permitted2017, and interim periods therein.  This ASU is intended to clarify the principles for any impairment test performed on testing dates afterrecognizing revenue by removing inconsistencies in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements.  Entities have the option of using either a full retrospective approach or modified retrospective approach to adopt the amended guidance.  We adopted ASC 606 effective January 1, 2017.2018 and elected the modified retrospective approach.  The Company is currently evaluatingresults for periods before 2018 were not adjusted for the impact thatnew standard and no cumulative effective for the change in accounting was recognized through retained earnings at the date of adoption.

The Company's revenue recognition method prior to the adoption of ASU 2017-04 will haveASC 606 can be found under Note 2. Summary of significant accounting policies within the "Notes to Consolidated Financial Statements" in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

In accordance with ASC 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations (most commonly when contracts include product and extended warranties). A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price.

Except for the changes below, we have consistently applied the accounting policies to all periods presented in the consolidated financial statements.  As noted above, we adopted ASC 606 using the modified retrospective approach which allows the Company to record any changes using the cumulative effect.  The adoption of the ASC 606 did not require the Company to record an adjustment to retained earnings at January 1, 2018 and did not have an impact on the consolidated income statement during the first six months of 2018, basic or diluted earnings per share, consolidated statement of cash flows or consolidated balance sheet at June 30, 2018.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation-Stock Compensation: Scope of modification accounting".  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.  ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including during an interim period for which financial statements have not yet been made available for issuance.2017.  The amendments should beare applied prospectively to an award modified on or after the adoption date.  The Company is -currently evaluating the impact that the adoption of ASU 2017-09 will have on its financial statements.

 

Certain statements included in this report, including without limitation statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "project" or "continue", or the negative thereof, or other similar words.  All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of our most recently filed Annual Report on Form 10-K.  Actual results may differ materially from those discussed in, or implied by, the forward-looking statements.  The forward-looking statements speak only as of the date of this report and we assume no duty to update them.  As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to "we", "us", "our", the "Company" and "TransAct" refer to the consolidated operations of TransAct Technologies Incorporated, and its consolidated subsidiaries.

TransAct Technologies Incorporated ("TransAct") is a global leader in developing and selling software-driven technology and printing solutions for high growth markets including restaurant solutions, POSpoint of sale ("POS") automation and banking, casino and gaming, lottery, mobile and oil and gas.  Our world-class products are designed from the ground up based on market and customer requirements and are sold under the AccuDate™, Epic, EPICENTRAL™, Ithaca®, and Printrex® and Responder® brand names.  Known and respected worldwide for innovative designs and real-world service reliability, our thermal inkjet and impactinkjet printers and terminals generate top-quality labels and transaction records such as receipts, tickets, coupons, register journals and other documents, as well as printed logging and plotting of data. We sell our products to original equipment manufacturers ("OEMs"), value-added resellers ("VARs"), select distributors, as well as directly to end-users.  Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. TransAct also provides world-class service, spare parts, accessories and printing supplies to its growing worldwide installed base of products. Through our TransAct Services Group ("TSG"), we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the restaurant and hospitality, banking, retail, casino and gaming, government and oil and gas exploration markets.  Through our webstore, www.transactsupplies.com, and our direct selling team, we address the demand for these products. We operate in one reportable segment, the design, development, and marketing of software-driven technology and printing solutions for high growth markets, and provide related services, supplies and spare 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 Annual Report on Form 10-K for the year ended December 31, 2016.2017.  We have reviewed those policies and determined that they remain our critical accounting policies for the six months ended June 30, 2017.2018.

Net Sales. Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the three months ended June 30, 20172018 and 20162017 were as follows (in thousands, except percentages):

Net sales for the second quarter of 2017 decreased $1,205,000,2018 increased $1.2 million, or 8%, from the same period in 2016.2017.  Printer and terminal sales volume decreased 21%increased 6% to approximately 36,00039 thousand units driven primarily by a 38% decreasean 81% increase in unit volume from the POS automation and banking market, a 29% decrease in unit volume in the casino and gaming market and, to a lesser extent, a 45% decrease14% increase in unit volume infrom the restaurant solutionsPOS automation and banking market.  These decreasesincreases were partially offset by a 23% increasean 83% decline in unit volume from the lottery market.  The average selling price of our printers and terminals increased approximately 3%7% in the second quarter of 20172018 compared to the second quarter of 20162018 due primarily due to the decreased volume of POS automation and banking printers sold duringlower lottery printer sales.

Revenue from the restaurant solutions market includes sales of terminals that combine hardware and software (including software sold on a subscription basis) in a device that includes an operating system, touchscreen and one or two thermal print mechanisms that print easy-to-read food rotation labels, grab-and-gograb and go labels for prepared foods, and "enjoy by" date labels to help food service establishments and restaurants (including fine dining, casual dining, quick-serve convenience and hospitality establishments) effectively manage food spoilagesafety and automate and manage back-of-the-restaurant operations.  A summary of sales of our worldwide restaurant solutions products for the three months ended June 30, 20172018 and 20162017 is as follows (in thousands, except percentages):

The decreaseincrease in domestic restaurant solutions revenue fromterminal sales in the second quarter of 20162018 compared to the second quarter of 2017 was primarily driven by lowerthe initial shipments of the AccuDate XL to two existing customers in support of large-scale, multi-quarter rollouts of the terminal.  This increase was partially offset by decreased sales of our AccuDate 9700 terminal to our former U.S. distributor.  Duringdistributor during the second quarter of 2017 we sold our first large scale order2018 compared to the second quarter of the2017.  Shipments of AccuDate XL terminal as we continue to see growth opportunitiesterminals exceeded sales of AccuDate 9700 terminals for the first time in the restaurant solutions market.second quarter of 2018.  We expect sales of our restaurant solutions terminals to continue to increase in the second half of 20172018 compared to 2016,2017 as we start to see the initial benefitsbenefit from the strategic selling and marketing investments we initiated in the first half ofimplemented during 2017.

Revenue from the POS automation and banking market includes sales of thermal and impact printers used primarily by restaurants (including fine dining, casual dining, quick-servequick serve and hospitality establishments) located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels.  In addition, revenue includes sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations.  A summary of sales of our worldwide POS automation and banking products for the three months ended June 30, 20172018 and  20162017 is as follows (in thousands, except percentages):

The decreaseincrease in both domestic and international POS automation and banking product revenue from the second quarter of 20162017 was primarily driven by a 27% decreasean 21% increase in sales of our Ithaca® 9000 printer, largelyas sales to McDonalds as we startedMcDonald's have returned to see a slowingthe near record levels experienced during 2017.  We expect this level of new initiatives being rolled out by McDonalds duringsales to McDonald's to continue into the secondthird quarter of 2017 compared to the record pace in the second quarter of 2016.  We expect sales to McDonalds to decrease for the full year 2017 compared to the full year 2016 as McDonalds nears completion of the implementation of their initiatives started in 2015.  Additionally, we experienced 45%2018.  This increase was partially offset by 71% lower sales of our legacy banking and other POS printers for the second quarter of 20172018 compared to the second quarter of 2016.2017.  We expect sales of these legacy products to continue to decline during 2017,the second half of 2018, as we continueexpect to deemphasize these productsexit the banking market at the end of 2018 and shift saleshave shifted our focus to our newer restaurant solution products.

Revenue from the casino and gaming market includes sales of thermal ticket 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 thermal roll-fed printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes, Skills with Prizes and Fixed Odds Betting Terminals at non-casino gaming establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology.  In addition, casino and gaming market revenue includes sales of the EPICENTRAL™ print system, our software solution (including annual software maintenance for) the EPICENTRAL^TM print system,maintenance), that enables casino operators to create promotional coupons and marketing messages and to print them in real-time at the slot machine. A summary of sales of our worldwide casino and gaming products for the three months ended June 30, 20172018 and 20162017 is as follows (in thousands, except percentages):

The increase in domestic sales of our casino and gaming products was due largely to a 28%an 8% increase in domestic sales of our thermal casino printersprinter sales in the second quarter of 20172018 compared to the second quarter of 2016 due to strength in the overall domestic casino market, including2017, driven primarily by increased sales to our OEMsOEMs.  Additionally, we experienced a significant increase in domestic sales of our off-premise gaming printers to support a new casino openingan OEM based in New York.  Epicentral software sales were relatively consistent as wethe U.S.  We did not complete any new domestic installations of our EPICENTRAL™ software systems in the second quarter 2016of 2018 or 2017.  Sales of EpicentralEPICENTRAL™ are project based, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.

The decreaseincrease in international sales was primarily due to a 78% decrease in sales in the second quarter of 20172018 compared to the same period 2016second quarter of 2017 was due to a 366% increase in sales of our thermal casino printers due mainly to lower sales to our European and Asian distributors and OEMs in Asia.  We also experienced a 47% decrease153% increase in sales of our off-premise gaming printerprinters in Europe, Australia and Asia.  These increases were due to the early success of the transition away from using our previous exclusive worldwide distributor whose contract ended at the end of 2017.  We expect international sales of both our thermal casino printers and off-premise gaming printers to continue to increase in the second quarterhalf of 2017 due2018, as we benefit from the transition to lower salesselling directly to our Europeanslot machine manufacturers and Australian distributors.  Sales of our off-premiseend user casino and gaming printers are largely project-oriented and therefore may fluctuate significantly from quarter-to-quarter and year-to-year.  customers in Europe.

Revenue from the lottery market includes sales of thermal on-line and other lottery printers primarily to International Game Technology and its subsidiaries ("IGT") and, to a lesser extent, other lottery system companies for various lottery applications. A summary of sales of our worldwide lottery printers for the three months ended June 30, 20172018 and 20162017 is as follows (in thousands, except percentages):

Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year andyear-to-year.  However, our lottery market sales are not indicative of IGT's overall business or revenue.  While we expect to increase sales of our lottery printers to other customers, we expect total lottery printer sales to be lower for the 2018 fiscal year compared to the 2017 fiscal year, as we have shifted our focus away from the lottery market to our higher-value, technology enabled restaurant solutions and casino and gaming products.

Printrex branded printers are sold into markets that include wide format, desktop and rack mounted and vehicle mounted black/white thermal printers used by customers to log and plot oil field, seismic and down hole well drilling data in the oil and gas exploration industry.  It also includes high-speed color inkjet desktop printers used to print logs at the data centers of the oil and gas field service companies.  Revenue in this market also includes sales of vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles and other mobile printing applications.  A summary of sales of our worldwide Printrex printers for the three months ended June 30, 20172018 and 20162017 is as follows (in thousands, except percentages): 

The increase in domestic sales of Printrex printers in the second quarter of 20172018 compared to the second quarter of 20162017 resulted from a 219%84% increase in sales of our mobile printer related to a one-time orderdomestic and a 43% increase ininternational sales of our oil and gas printers.  Though we began to see improvement in demand fromThis increase was partially offset by 76% lower sales of our oilmedical and gas customers during the first six months of 2017, the industry continues to be impacted by low worldwide oil prices which could negatively impact our sales during the remainder of 2017.

TSG:

Revenue from TSG includes sales of consumable products (including inkjet(inkjet cartridges, ribbons, receipt paper, color thermal paper, food safety labels and other printing supplies), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges.  A summary of sales in our worldwide TSG market for the three months ended June 30, 20172018 and 20162017 is as follows (in thousands, except percentages):

The increasedecrease in domestic revenue from TSG for the second quarter of 20172018 as compared to the prior year period was due primarily to decreased replacement part sales, service revenue and non-Printrex consumable product sales.  Replacement part sales decreased 6% due to 116%lower sales of lottery printer spare parts to IGT.  Service revenue declined 9% in the second quarter of 2018 compared to the second quarter of 2017 due to paper testing sales that occurred in 2017 but did not repeat in 2018.  Non-Printrex consumables declined 5% due to lower sales of our legacy HP inkjet cartridges used in our banking printers, as we continue to deemphasize our sales of this commoditized consumable product and expect to exit the banking market at the end of 2018.  The decrease in Non-Printrex consumables was partially offset by AccuDate label sales which nearly tripled in second quarter of 2018 compared to the second quarter of 2017.  Based on our backlog of orders and contractual commitments for replacement parts for our installed base of lottery printers, we expect TSG sales to decrease for the full year 2018 compared to the unusually high level of spare parts sales, largely from lottery printer spare part sales to IGT, during 2017.

Internationally, TSG revenue increased due to a 98% increase in sales of replacement parts and accessories due mainly to IGT's purchase of a high volume of spare parts for their growing installed base of our thermal lottery printer in the second quarter of 2017.  We also experienced a 7% increase in non-Printrex consumables due to higher sales of inkjet cartridges and the first revenue contribution from our new restaurant solutions label products.  We expect TSG sales to be higher in the full year 2017 compared to 2016 due to increased orders from IGT for replacement parts for the lottery market.

Gross Profit.  Gross profit information for the three months ended June 30, 20172018 and 20162017 is summarized below (in thousands, except percentages):

Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers and expenses associated with installations of our EPICENTRAL™ print system.  In the second quarter of 2017,2018, gross profit increased $447,000,$561 thousand, or 8%9%, compared to the same period in 2017 and our gross margin improved 690slightly by 10 basis points as we experienced a more favorablepoints.  The increase in gross profit was driven by 8% higher sales mix in the second quarter of 2017 compared2018.  We expect our gross margins to continue to improve during the second quarterhalf of 2016, due primarily to a greater portion of2018 as our sales coming from sales of higher margin spare parts to IGTmix shifts towards higher-value, technology driven solutions in the second quarter of 2017.restaurant solutions and casino and gaming markets.

Operating Expenses - Engineering, Design and Product Development.  Engineering, design and product development expense information for the three months ended June 30, 20172018 and 20162017 is summarized below (in thousands, except percentages):

Engineering, design and product development expenses primarily include salary and payroll related expenses for our hardware and software engineering staff, depreciation and design expenses (including prototype printer expenses, outside design, development and testing services, and supplies).  Such expenses decreased $69,000,increased $163 thousand, or 6%, due primarily to higher product development costs16% in the second quarter of 2016 related to the substantial completion of certain software development projects for our Epicentral™ software and restaurant solutions terminals2018 compared to the second quarter of 2017.2017 due primarily to the hiring of additional engineering staff and increased prototype expenses to support new product development in the restaurant solutions and casino and gaming markets.  We expect engineering, design and product development expenses to be higher for the full year 2018 compared to full year 2017, due to the expanded engineering staff to support new product development for the restaurant solutions market.

Operating Expenses - Selling and Marketing. Selling and marketing expense information for the three months ended June 30, 20172018 and 20162017 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. Such expenses increased by $175,000,$45 thousand, or 9%2%, in the second quarter of 20172018 compared to the second quarter of 2016 as we have started2017 due primarily to implement our plan to build our internal infrastructure, including the hiring of aadditional sales staff in the U.K. to support our new direct sales forceselling model for the casino and implementation of a direct marketing campaign dedicated to the restaurant solutionsgaming market in 2017.Europe.  This increase was partially offset by the retirement of our EVP, Sales and Marketing in December 2017, whose position was replaced by an existing employee of TransAct, as well as the elimination of commission expense to our former international casino and gaming distributor, Suzo-Happ.  We expect selling and marketing expenses to be higher in 20172018 compared to 2016 as we continue2017 due to commit more resources forthe build-out of our internal sales infrastructure to sell directly to slot machine manufacturers and continue direct marketing campaigns targeted to the restaurant solutions market to address significant market opportunities.end user casino and gaming customers in Europe during 2018.

Operating Expenses - General and Administrative. General and administrative expense information for the three months ended June 30, 20172018 and 20162017 is summarized below (in thousands, except percentages):

General and administrative expenses primarily include salaries, incentive compensation, and other payroll related expenses for our executive, accounting, human resource and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company.  General and administrative expenses increased $135,000,$41 thousand, or 7%2%, in the second quarter of 20172018 compared to the second quarter of 20162017 due primarily to higher recruitingincentive compensation expenses in 2017 related to the planned expansion of sales staff for our restaurant solutions market.and legal expenses incurred during 2018.  We expect general and administrative expenses for the full year 2017in 2018 to be higher than the full year 20162017 due to theincreased recruiting expenses forrelated to the expansion our restaurant solutions sales staff, sales staff for our European casino and gaming market, explained above.   and engineering staff.

Operating Income.  Operating income information for the three months ended June 30, 20172018 and 20162017 is summarized below (in thousands, except percentages):

Our operating income increased by $206,000,$312 thousand, or 19%24%, in the second quarter of 2018 compared to the second quarter of 2017, and our operating margin increased to 9.6%11% of net sales primarilylargely due to higher gross margin onprofit resulting from an 8% increase in sales, as well as proportionately lower operating expenses as a more favorablepercentage of net sales, mix, somewhat offset by 8% lower sales and 5% higher operating expenses, in the second quarter of 20172018 compared to the second quarter of 2016.prior year period.

Interest expense.  We recorded net interest expense of $8,000$6 thousand in the second quarter of 20172018 compared to $7,000$8 thousand in the second quarter of 2016.2017.  We do not expect significant changes in net interest expense for the remainder of 2017.2018.

Other expense, net.  We recorded other expense of $2,000$97 thousand in the second quarter of 2018 compared to $2 thousand in the second quarter of 2017 compareddue to other income of $15,000higher foreign exchange losses recorded by our U.K. entity in the second quarter of 2016.  The change was primarily due2018.  Going forward we may continue to experience more foreign currency transaction exchange losses recordedvolatility as we increase our casino and gaming sales in 2017 of $2,000 compared to foreign currency transaction exchange gains of $10,000 recorded by our U.K. subsidiary and a gain of $5,000 recorded on the disposal of a fixed asset in the second quarter of 2016.Europe.

Income Taxes.  We recorded an income tax provision for the second quarter of  20172018 of $429,000$305 thousand at an effective tax rate of 33.1%20.1%, compared to an income tax provision during the second quarter of 20162017 of $355,000$429 thousand at an effective tax rate of 32.0%33.1%.  The effective tax rate in the second quarter of 2018 was lower than the effective tax rate in the second quarter of 2017 due to the passage of the Tax Reform Act that was signed on December 22, 2017.  The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on undistributed foreign earnings. The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018 and, as a result, reduced our statutory U.S. corporate income tax rate from 34% to 21%.  We expect our effective tax rate to be between 32%20% and 33%21% for the full year 2017.

Net Income.  We reported net income for the second quarter of 20172018 of $867,000,$1.2 million, or $0.12$0.16 per diluted share compared to $753,000,$867 thousand, or $0.10$0.12 per diluted share, for the second quarter of 2016.2017.

Net Sales. Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the six months ended June 30, 20172018 and 20162017 were as follows (in thousands, except percentages):

Net sales for the first half of 20172018 decreased $1,565,000,$599 thousand, or 5%2%, from the same period in 2016.2017. Printer sales volume decreased by 10%12% to approximately 80,00070,000 units in the first half of 2018 driven primarily by a 19% and 12%an 81% decrease in unit volume from the POS automation and bankinglottery market and casino and gaming market, respectively, and, to a lesser extent, a 43%10% decrease in the restaurant solutionsPOS automation and banking market.  These decreases were partially offset by a 7%an increase in sales volume of 38% in the casino and gaming market and, to a lesser extent, a 32% increase in unit volume from the restaurant solutions market.  Although unit volume decreased in the first six months of 2018 primarily due to the decreased volume of lottery market. Theprinters sold during the first half of 2018, which carry lower prices than our other products, the average selling price of our printers remained relatively consistentincreased 11% during the first half of 20172018 compared to the first half of 2016, increasing by 1%.2017.

International sales decreased $1,482,000,increased $920 thousand, or 25%20%, primarily driven by 41% and 88% lower65% higher international sales in the casino and gaming market and the POS automation and banking market, respectively.  These decreases weremarket.  This increase was partially offset approximately $1by a $1.1 million in  higher sales decrease in our international lottery market during the first half of 2018 compared to the first half of 2017.

A summary of sales of our worldwide restaurant solutions products for the six months ended June 30, 20172018 and 20162017 is as follows (in thousands, except percentages):