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| GPIC > SEC Filings for GPIC > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
The following discussion is intended to assist in the understanding of our results of operations and our present financial condition. The condensed consolidated financial statements and the accompanying notes contain additional detailed information that should be referred to when reviewing this material. Statements in this discussion may be forward-looking. Such forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those expressed. See Item 1A, Risk Factors of the Company's Form 10-K for the period ended December 31, 2007.
For a Company Overview and information on our products as well as general information, see Part I-Item 1. Businessof the Company's Form 10-K for the period ended December 31, 2007.
Overview of our Business
GPIC manufactures and supplies (under the brand names of Paulson®, Bourgogne et Grasset®, and Bud Jones®) casino chips including low frequency and high frequency RFID casino chips, low frequency and high frequency RFID readers, table layouts, playing cards, dice, gaming furniture, roulette wheels, table accessories, and other products that are used with casino table games such as blackjack, poker, baccarat, craps and roulette. GPIC is headquartered in Las Vegas, Nevada, with offices in Beaune, France; San Luis Rio Colorado, Mexico; Atlantic City, New Jersey; and Gulfport, Mississippi. GPIC sells its casino products directly to licensed casinos throughout the world. We operate in one segment and have two operating subsidiaries, GPI USA and GPI SAS, a French subsidiary. Our subsidiaries have the following product and distribution focus:
† GPI USA sells primarily in the United States and Canada. GPI USA sells our
full product line. Most of the products sold by GPI USA are manufactured in
Mexico with the remainder either manufactured in Las Vegas or France.
† GPI SAS sells internationally, with most sales occurring in Europe and Asia.
GPI SAS predominately sells casino chips including both American-style
casino chips and European-style casino chips, which are also known as
plaques and jetons. Most of the products sold by GPI SAS are manufactured in
France.
The Company has historically experienced significant fluctuations in its quarterly operating results and expects such fluctuations to continue in the future. The Company's operating results fluctuate due to a number of factors, but primarily reflect the opening of new casinos, the expansion of existing casinos, and large replacement orders for casino chips - our primary product line, which typically represents over 60% of revenues. The one-time or non-recurring nature of these events necessarily creates variability in revenue and earnings. Further, the timing of these one-time or non-recurring events is difficult to predict and, largely, beyond our ability to influence. While most large projects are pursued years in advance, both large and small sales opportunities arise with little prior notice. An indicator of future sales is found in our backlog report, which reports signed orders that are planned to be shipped within the remainder of the fiscal year.
Backlog
GPI USA GPI SAS Total
September 30, 2008 $ 6.9 million $ 2.5 million $ 9.4 million
September 30, 2007 $ 5.5 million $ 9.0 million $ 14.5 million
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A significant part of our strategy is to create new demand for casino chips through the use of RFID technology. A passive microchip with a small antenna is embedded in each chip. When chips are placed above a large antenna, which is embedded in a gaming table or cashier's stand and linked to a reading unit, they receive energy from the reading unit through the large antenna and can communicate with the reading unit. The data collected can allow applications ranging from chip authentication, accounting, tracking and inventory all the way to players' tracking and table management.
RFID represents a large portion of our consolidated operations. The following table highlights the growing importance of RFID casino chips, which have been sold to over 100 casinos and casino groups in North America, Europe, and Asia. The table shows the percentage by revenue of our casino chips sales that are RFID casino chips for the last five years, with 2008 representing nine months.
Overview of our Industry
Much of our growth in recent years has been as a result of the major developments in the gaming industry in Macau. Although the gaming industry has had great success in Macau, we anticipate fewer casino openings. In April 2008, a high-ranking government official in Macau, Edmund Ho, announced a freeze on new development beyond that which was currently underway or in discussion. Asia, primarily Macau, remains an important market and represented 24% of our revenues in the first three quarters of 2008.
The general slow down in the gaming industry, which appears attributable to growing economic problems in the United States and abroad, has negatively impacted our casino customers and therefore may be affecting our sales. To the extent these conditions continue, we anticipate our revenues in future quarters will be adversely affected. In the near term, we would expect any slowing effect to be associated with consumable products such as dice, cards and layouts more than casino chips. In the longer term, as casino openings are delayed or scaled back, we expect our revenues to be adversely affected.
Financial and Operational Highlights
Our net income for the third quarter of 2008 was $1.2 million, an increase of $0.8 million, or 200%, from the third quarter of 2007. Our revenues for the third quarter of 2008 were $13.8 million, a decrease of $1.4 million, or 9%, from the third quarter of 2007. The increase in net income in the third quarter of 2008 compared to the third quarter of 2007 is due to improved operational performance as exhibited by improved gross profit margins and lower selling and administrative expenses, as well as a gain on foreign currency transactions and a lower effective tax rate.
In the second quarter of 2008 we completed the move of plastic injection molding for Bud Jones casinos chips from Las Vegas to our manufacturing facility in Mexico. In the third quarter we began to see the benefits of the move and expect further savings in the future.
GPI SAS uses the euro as its functional currency. As of September 30, 2008 and December 31, 2007 the US dollar to euro exchange rates were 1.4303 and 1.4721, respectively, which was a 2.8% change. The average exchange rates for the nine months ended September 30, 2008 and September 30, 2007 were 1.5219 and 1.3444, which was a 13% change.
In July 2008, GPI SAS was certified ISO 9001 compliant, which provides external validation to our quality control processes.
Other Matters
The Company hired Gregory Gronau in October 2008 as its Executive Vice President and Chief Operating Officer. The appointment of Mr. Gronau is part of a succession plan necessitated by the planned retirement of the Company's President and Chief Executive Officer, Gerard Charlier, in September 2009. While it is the current intention of the Board of Directors to appoint Mr. Gronau to the positions of President and Chief Executive Officer upon the retirement of Mr. Charlier, no assurance can be given that Mr. Gronau will be appointed to such positions.
CRITICAL ACCOUNTING ESTIMATES
Financial statement preparation requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and disclosure of contingent assets and liabilities. The accompanying consolidated financial statements are prepared using the same critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
RESULTS OF OPERATIONS
The following table summarizes selected items from the Company's Consolidated Statements of Income as a percentage of revenues:
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 66.9 % 68.3 % 66.9 % 71.7 %
Gross Profit 33.1 % 31.7 % 33.1 % 28.3 %
Product development 0.6 % 0.5 % 0.4 % 0.6 %
Marketing and sales 6.0 % 7.9 % 7.0 % 8.6 %
General and administrative 17.0 % 17.1 % 18.3 % 22.1 %
Operating income (loss) 9.5 % 6.2 % 7.4 % (3.0 )%
Gain (loss) on foreign currency
transactions 2.0 % (0.1 )% 0.0 % (0.2 )%
Interest income 0.4 % 0.6 % 0.4 % 0.6 %
Interest expense (0.2 )% (0.3 )% (0.2 )% (0.4 )%
Other income, net 0.2 % 0.2 % 0.2 % 0.8 %
Income (loss) before income
taxes 11.9 % 6.6 % 7.8 % (2.2 )%
Income tax expense (benefit) 3.0 % 4.1 % 1.8 % (0.3 )%
Net income (loss) 8.9 % 2.5 % 6.0 % (1.9 )%
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The following table presents certain data by geographic area (in thousands):
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Net revenues to
external
customers
United States $ 9,307 67.4 % $ 8,144 53.6 % $ 26,119 58.3 % $ 23,912 61.5 %
Europe
(includes
Russia) 1,175 8.5 % 1,183 7.8 % 4,347 9.7 % 3,645 9.3 %
Asia 2,190 15.8 % 5,049 33.2 % 10,793 24.1 % 9,394 24.2 %
Other(1) 1,148 8.3 % 820 5.4 % 3,542 7.9 % 1,945 5.0 %
Total $ 13,820 100.0 % $ 15,196 100.0 % $ 44,801 100.0 % $ 38,896 100.0 %
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The following table details the Company's revenues by product line (in thousands):
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Casino chips:
American-style
casino chips $ 6,585 47.7 % $ 8,694 57.2 % $ 22,514 50.3 % $ 19,789 50.9 %
European-style
plaques and jetons 1,489 10.8 % 1,305 8.6 % 6,416 14.3 % 3,694 9.5 %
Total casino chips 8,074 58.5 % 9,999 65.8 % 28,930 64.6 % 23,483 60.4 %
Table layouts 1,358 9.8 % 1,310 8.6 % 3,779 8.4 % 3,841 9.9 %
Playing cards 1,028 7.4 % 985 6.5 % 3,026 6.8 % 2,883 7.4 %
Gaming furniture 1,149 8.3 % 761 5.0 % 2,429 5.4 % 2,286 5.9 %
Dice 464 3.4 % 523 3.4 % 1,450 3.2 % 1,602 4.1 %
Table accessories
and other products 1,177 8.5 % 1,028 6.8 % 3,624 8.1 % 3,274 8.4 %
Shipping 570 4.1 % 590 3.9 % 1,563 3.5 % 1,527 3.9 %
Total $ 13,820 100.0 % $ 15,196 100.0 % $ 44,801 100.0 % $ 38,896 100.0 %
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Revenues For the three months ended September 30, 2008, revenues were $13.8 million, a decrease of $1.4 million, or 9%, compared to revenues of $15.2 million for the three months ended September 30, 2007. In the third quarter of 2008, GPI SAS recorded revenues of $4.0 million, a decrease of $2.6 million, or 39%, compared to $6.6 million in 2007. The decrease was primarily attributable to lower sales of American-style casino chips to casinos in Macau and the decrease would have been larger if the euro had not strengthened against the US dollar by 10% during the third quarter 2008 compared to the third quarter 2007. In the third quarter of 2008, GPI USA recorded revenues of $9.8 million, an increase of $1.2 million, or 14%, as compared to revenues of $8.6 million in 2007. The increase in revenues at GPI USA was primarily attributable to increased sales of American-style casino chips.
For the nine months ended September 30, 2008, revenues were $44.8 million, an increase of $5.9 million, or 15%, compared to revenues of $38.9 million for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, GPI SAS recorded revenues of $16.6 million, an increase of $2.6 million, or 19%, compared to $14.0 million in 2007. The strengthening of the euro against the US dollar caused GPI SAS' revenues to be 13% higher during the nine months ended September 30, 2008 compared to 2007. The additional increase in GPI SAS's revenues was attributable to significantly stronger sales of both American-style and European-style casino chips in the first six months of 2008 compared to 2007 partially offset by lower sales of American-style casino chips in the third quarter of 2008 compared to 2007. For the nine months ended September 30, 2008, GPI USA recorded revenues of $28.2 million, an increase of $3.3 million, or 13%, as compared to revenues of $24.9 million in 2007. This increase was due primarily to stronger sales of American-style casino chips in the United States.
Cost of Revenues For the three months ended September 30, 2008, cost of revenues was $9.2 million, a decrease of $1.2 million, or 11%, compared to cost of revenues of $10.4 million for the three months ended September 30, 2007. As a percentage of revenues, the cost of revenues decreased to 66.9% in 2008 from 68.3% in 2007.
For the nine months ended September 30, 2008, cost of revenues was $30.0 million, an increase of $2.1 million, or 7%, compared to cost of revenues of $27.9 million for the nine months ended September 30, 2007. As a percentage of revenues, the cost of revenues decreased to 66.9% for the nine month period ended September 30, 2008 compared to 71.7% for the same period in 2007.
Gross Profit Gross profit for the three months ended September 30, 2008 decreased by $0.2 million, or 5%, compared to 2007. This occurred as a result of the decrease in revenues of $1.4 million and a decrease in cost of revenues of $1.2 million. As a percentage of revenues, our gross margin increased to 33.1% from 31.7%. The gross margin increase was primarily driven by an increase in revenues and associated production at GPI USA and a more favorable product mix due to increased sales of higher margin casino chips.
Gross profit for the nine months ended September 30, 2008 increased by $3.8 million, or 35%, compared to 2007. This occurred as a result of the increase in revenues of $5.9 million and an increase in cost of revenues of $2.1 million. As a percentage of revenues, our gross margin increased to 33.1% from 28.3%. The gross margin increase was primarily driven by 1) the increase in revenues and associated production at both GPI USA and GPI SAS in the three quarters of 2008 compared to 2007, which allowed fixed costs to be allocated over higher production volumes and 2) a more favorable product mix due to increased sales of higher margin casino chips. These favorable factors were partially offset by a $0.2 million charge related to a quality issue with RFID casino chips.
Selling, General, and Administrative Expenses The following table details the selling, general, and administrative expenses for the three months and nine months ended September 30 (in thousands):
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 Revenue % 2007 Revenue % 2008 Revenue % 2007 Revenue %
Product
development $ 80 0.6 % $ 77 0.5 % $ 170 0.4 % $ 217 0.6 %
Marketing and
sales 834 6.0 % 1,194 7.9 % 3,147 7.0 % 3,332 8.6 %
General and
administrative 2,348 17.0 % 2,593 17.1 % 8,195 18.3 % 8,586 22.1 %
Total selling,
general, and
administrative
expenses $ 3,262 23.6 % $ 3,864 25.5 % $ 11,512 25.7 % $ 12,135 31.3 %
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Selling, general, and administrative expenses decreased by $0.6 million for the three months ended September 30, 2008 compared to 2007, while decreasing as a percent of revenue from 25.5% in 2007 to 23.6% in 2008. Marketing and sales decreased by $0.4 million due to a reduction in staff and lower commission expense. General and administrative expenses decreased $0.2 million.
Selling, general and administrative expenses decreased $0.6 million for the nine months ended September 30, 2008 compared to September 30, 2007, while decreasing as a percent of revenue from 31.3% in 2007 to 25.7%. Marketing and sales decreased $0.2 million. General and administrative expenses decreased by $0.4 million. Professional fees decreased by $0.6 million. Partially offsetting this decrease was the 13% increase in the value of the euro compared to the US dollar, which makes euro-based expenses at GPI SAS higher when translated into US dollars.
Other Income (Expense) The following table details the Other Income (Expense) items for the three months and nine months ended September 30 (in thousands:)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 Revenue % 2007 Revenue % 2008 Revenue % 2007 Revenue %
Gain(loss) on
foreign
currency
transactions $ 280 2.0 % $ (8 ) (0.1 )% $ 12 0.0 % $ (87 ) (0.2 )%
Interest
income 61 0.4 % 89 0.6 % 181 0.4 % 250 0.6 %
Interest
expense (30 ) (0.2 )% (49 ) (0.3 )% (105 ) (0.2 )% (147 ) (0.4 )%
Other income,
net 27 0.2 % 26 0.2 % 74 0.2 % 312 0.8 %
Total other
income
(expense) $ 338 2.4 % $ 58 0.4 % $ 162 0.4 % $ 328 0.8 %
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For the three months ended September 30, 2008, other income (expense) increased by $0.3 million compared to the 2007 period due primarily to the decrease in the value of the euro compared to the US dollar during the quarter resulting in a gain on foreign currency transactions.
For the nine months ended September 30, 2008 compared to 2007, other income decreased by $0.2 million due primarily to a refund check from the French Social Security Administration received in 2007.
Income Taxes Our effective income tax rate for the three months ended September 30, 2008 was 25% compared to the effective income tax rate of 62% for the three months ended September 30, 2007. The Company's effective tax rate for the quarter ended September 30, 2008, was positively impacted by the utilization of foreign tax credits. The effective tax rate for the quarter ended September 30, 2007 differed from the statutory rate as a result of the Company's repatriation of non-cash dividends from GPI SAS in 2007 and recognition of the difference in the book and tax basis in shares of GPI SAS.
Our effective income tax rate for the nine months ended September 30, 2008 was 23% compared to 17% for the same period of 2007. The Company's effective tax rate for the nine months ended September 30, 2008 was positively impacted by the utilization of foreign tax credits and the release of a prior year reserve for uncertain tax positions, related to the successful resolution of the GPI SAS tax audit by the French Tax Administration. The Company's effective tax rate for the nine months ended September 30, 2007 differed from the statutory rate as a result of the Company's repatriation of non-cash dividends from GPI SAS in 2007 and recognition of the difference in the book and tax basis in shares of GPI SAS.
Our corporate tax rate is calculated on a consolidated basis. Our corporate costs are not allocated to our French subsidiary, GPI SAS.
Income Tax Uncertainties During the year ended December 31, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109(FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. Under the requirements of FIN 48, the Company must review all of its tax positions and make a determination as to whether its position is more likely than not to be sustained upon examination by regulatory authorities. The more-likely-than-not recognition threshold must continue to be met in each reporting period to support continued recognition of a benefit. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on the cumulative probability analysis of the amount that is more likely than not to be realized upon ultimate settlement or disposition of the underlying issue.
The French Tax Administration completed an audit of GPI SAS for tax years 2004, 2005, and 2006 and in March 2007, sent a notice seeking additional taxes of 551,000 euros based on their findings. In July 2007, they revised their assessment to 531,000 euros. In June 2008, after a discussion of the merits of the assessment, the French Tax Administration agreed with our position that no additional taxes were due and renounced its claim. Therefore, the Company reversed the accrual of $217,000 that had been made under Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). The impact of this reversal was a non-cash income tax benefit of $209,000, and a credit to Accumulated Other Comprehensive Income of $8,000.
After the change described above regarding the resolution of the French Tax Administration audit, there are no unrecognized tax benefits as of September 30, 2008.
Liquidity and Capital Resources
Overview As of September 30, 2008, we had $6.7 million in cash and cash equivalents and $5.5 million in current marketable securities. Of the cash and cash equivalents and marketable securities, $4.2 million is held by GPI USA and $8.0 million is held by GPI SAS. It may be impractical or costly to transfer cash from our French subsidiary to the United States due to unfavorable tax consequences. If our cash needs increase, we will evaluate other cash sources, including lending facilities in the United States and abroad. We believe that the combination of our cash flow from operations and cash on hand will be sufficient to fund expenses from routine operations for a minimum of the next twelve months.
Working Capital Working capital totaled $20.3 million at September 30, 2008 and $16.9 million at December 31, 2007. Working capital increased due to an increase in current assets of $2.7 million and a decrease in current liabilities of $0.7 million. The increase in current assets was due primarily to increases of $2.8 million in cash and marketable securities and $1.6 million in inventories offset by a $1.3 million decrease in accounts receivable. The increase in inventories was due primarily to pending shipments and decrease in accounts receivable is due to lower sales in the third quarter of 2008 compared to the fourth quarter of 2007. The main reason for the decrease in current liabilities was due to a decrease in accrued liabilities of $1.1 million, primarily related to the $0.6 million payment for the Proposition 65 legal settlement.
Cash Flow Overall, our cash balance increased from December 31, 2007 to September 30, 2008 by $2.0 million.
Net cash provided by operating activities was $4.5 million during the nine months ended September 30, 2008 compared to $0.0 million used by operating activities during the same period in 2007. For the period ended September 30, 2008, $4.8 million of cash was provided by net income-related activities and $0.2 million of cash was provided by a decrease in current assets. These increases were offset by a decrease in current liabilities of $0.5 million. In the period ended September 30, 2007, $1.3 million of cash was provided by net income related activities. In 2007, cash was also provided by a decrease in current assets of $3.0 million offset by a $1.7 million increase in current liabilities.
Our investing activities resulted in net cash used of $1.8 million for the nine months ended September 30, 2008 compared to $0.8 million in net cash provided by investing activities for the same period in 2007. This $2.6 million change was largely attributable to a $3.6 million change in marketable securities, with proceeds of $2.7 million in 2007 combined with net purchases of $0.9 million in 2008. The change in marketable securities was offset by a decrease in cash spent on acquisition of property and equipment of $1.1 million.
Net cash flow used in financing activities was $0.6 million for the nine months ended September 30, 2008 and $0.7 million for the nine months ended September 30, 2007.
Line of Credit In September 2008, GPI SAS secured a one year 1,000,000 euro line of credit for short term needs. Interest is at a variable rate and based on Euro Interbank Offered Rate plus 0.35%. As of September 30, 2008, this line of credit was fully available.
Long-term Debt In February 2001, GPI SAS borrowed 2.6 million euros . . .
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