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GPIC > SEC Filings for GPIC > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for GAMING PARTNERS INTERNATIONAL CORP


13-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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, 2012.

For a Company overview and information on our products, as well as general information, see Item 1. "Business," of the Company's Form 10-K for the period ended December 31, 2012.

Overview of Our Business

We custom manufacture and supply casino currency under the brand names of Paulson®, Bourgogne et Grasset®, and Bud Jones® (including low- and high-frequency RFID casino currency), RFID solutions for casino currency (consisting of low- and high-frequency RFID chip readers, antennas, chip authentication software, chip inventory software applications, and software maintenance services), 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; Macau S.A.R., China; San Luis Rio Colorado, Mexico; Atlantic City, New Jersey; and Gulfport, Mississippi. We sell our products to licensed casinos worldwide. We operate in one segment and have three operating subsidiaries: GPI USA (including maquiladora manufacturing operations in Mexico), GPI SAS, and GPI Asia. Our subsidiaries have the following distribution and product focus:

• GPI USA sells in the United States, Canada, the Caribbean, and Latin America. GPI USA sells our full product line, with most of the products manufactured at our facility in San Luis Rio Colorado, Mexico and the remainder either manufactured in France or purchased from United States vendors. We also warehouse inventory in San Luis, Arizona and at our Las Vegas, Nevada headquarters.

• GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly sells casino currency, including both American-style casino currency and European-style casino currency, which are also known as plaques and jetons. Most of the products sold by GPI SAS are manufactured in France, with the remainder manufactured in Mexico.

• GPI Asia, with offices in Macau S.A.R., China, is the exclusive distributor for GPI USA and GPI SAS products in the Asia-Pacific region. GPI Asia primarily sells American- and European-style casino currency, as well as RFID product solutions.

Historically, we have experienced significant fluctuations in our quarterly operating results and expect such fluctuations to continue. These fluctuations primarily reflect the opening of new casinos, the expansion of existing casinos, or large replacement orders for casino currency, our primary product line, which typically represents over 60% of our revenues. The timing of these events is difficult to forecast and largely beyond our ability to influence, which creates variability in our revenues and earnings. While we pursue most large projects years in advance, both large and small sales opportunities arise with little prior notice. An indicator of future revenue is found in our backlog, which reflects signed orders that we expect to ship during the following year. Our backlog at March 31, 2013 and March 31, 2012 was as follows (in millions):

                                GPI USA       GPI SAS      GPI Asia      Total
              March 31, 2013   $     4.7     $     0.4     $     3.5     $  8.6
              March 31, 2012   $     6.0     $     0.8     $     5.0     $ 11.8

Outlook

During 2013, we expect casino openings, expansions, and rebrandings in the United States to provide additional revenue opportunities for our Paulson chip, furniture, and accessories lines. We delivered the first sales of our newly developed casino currency product and table furniture line in the first quarter of 2013 and we will continue to focus our research and development on new RFID software and hardware and currency security features in order to meet customer demand.

We will also continue to evaluate potential strategic acquisitions and partnerships to grow our business and have engaged financial advisors to assist us in this regard; however, no assurance can be given that these efforts will result in completed transactions or that any completed transactions will be successful.

Financial and Operational Highlights

For the first quarter of 2013, our revenues were $14.8 million, a decrease of $0.6 million, or 4.3%, compared to revenues of $15.4 million for the same period of 2012. For the first quarter of 2013, our net income was $0.5 million, a decrease of $0.8 million, or 58.1%, compared to net income of $1.3 million for the first quarter of 2012.

GPI SAS uses the euro as its functional currency. At March 31, 2013 and December 31, 2012, the US dollar to euro exchange rates were $1.2816 and $1.3218, respectively, which represents a 3.0% stronger dollar compared to the euro for the period. The average exchange rates for the three months ended March 31, 2013 and 2012 were $1.3203 and $1.3110, respectively, which represents a 0.7% weaker dollar compared to the euro.

Our Mexican manufacturing plant uses the US dollar as its functional currency. At March 31, 2013 and December 31, 2012, the Mexican peso to US dollar exchange rates were 12.35 and 13.01, respectively, which represents a 5.0% weaker dollar compared to the peso. The average exchange rates for the three months ended March 31, 2013 and 2012 were 12.65 pesos and 13.02 pesos to the US dollar, respectively, which represents a 2.8% weaker dollar compared to the Mexican peso.

GPI Asia uses the US dollar as its functional currency. At March 31, 2013 and December 31, 2012, the Macanese pataca to US dollar exchange rates were 7.8309 and 7.9800, respectively, which represents a 1.9% weaker dollar compared to the pataca. The average exchange rates for the three months ended March 31, 2013 and 2012 were 7.8358 patacas and 7.8329 patacas to the US dollar, respectively, which represents a 0.04% stronger dollar compared to the pataca.

Other Matters

On December 1, 2011, our Board of Directors approved a stock repurchase program, which authorized us to repurchase up to five percent, or 409,951 shares, of our then-outstanding shares of common stock. We purchased 98,512 shares under this program through November 30, 2012, at which time our Board of Directors increased the number of shares available for repurchase under the program to 400,000 shares, an increase of 88,561 shares. As of March 31, 2013, we have 251,660 shares available for repurchase under the program. For more information regarding this program, see Part II, Item 2 of this Quarterly Report on Form 10-Q and Note 10 contained in the "Condensed Consolidated Notes to Financial Statements" of this Quarterly Report on Form 10-Q.

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 condensed 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, 2012.

RESULTS OF OPERATIONS

The following table summarizes selected items from the Company's condensed consolidated statements of operations (in thousands) and as a percentage of revenues:

                                         Three Months Ended
                                             March 31,                              Period-to-Period
                                 2013                         2012                       Change
Revenues                $  14,768         100.0 %    $  15,425         100.0 %   $    (657 )        (4.3 )%
Cost of revenues           10,488          71.0 %       10,110          65.5 %         378           3.7 %
Gross profit                4,280          29.0 %        5,315          34.5 %      (1,035 )       (19.5 )%
Selling, general, and
administrative              4,137          28.0 %        3,771          24.4 %         366           9.7 %
Operating income              143           1.0 %        1,544          10.1 %      (1,401 )       (90.7 )%
Other income and
(expense)                      79           0.5 %          110           0.7 %         (31 )       (28.2 )%
Income before income
taxes                         222           1.5 %        1,654          10.8 %      (1,432 )       (86.6 )%
Income tax (benefit)

provision (311 ) (2.1 )% 383 2.5 % (694 ) (181.2 )% Net income $ 533 3.6 % $ 1,271 8.3 % $ (738 ) (58.1 )%

The following table presents certain data by geographic area (in thousands) and as a percentage of revenues:

                                 Three Months Ended
                                      March 31,                         Period-to-Period
                            2013                     2012                    Change
Revenues
The Americas        $  7,274        49.2 %   $  8,364        54.2 %   $  (1,090 )     (13.0 )%
Asia Pacific           6,819        46.2 %      5,028        32.6 %       1,791        35.6 %
Europe and Africa        675         4.6 %      2,033        13.2 %      (1,358 )     (66.8 )%
Total               $ 14,768       100.0 %   $ 15,425       100.0 %   $    (657 )      (4.3 )%

The following table presents the Company's revenues by product line (in thousands) and as a percentage of revenues:

                                        Three Months Ended
                                             March 31,                              Period-to-Period
                                 2013                        2012                        Change

Casino currency
without RFID (1)        $   5,077          34.5 %   $   8,881          57.6 %   $   (3,804 )       (42.8 )%
Casino currency with
RFID (1)                    4,349          29.4 %         665           4.3 %        3,684         554.0 %

Total casino currency       9,426          63.9 %       9,546          61.9 %         (120 )        (1.3 )%

Playing cards               1,447           9.8 %       1,325           8.5 %          122           9.2 %
Table layouts               1,036           7.0 %       1,172           7.6 %         (136 )       (11.6 )%
Table accessories and
other products                800           5.4 %       1,002           6.5 %         (202 )       (20.2 )%
Dice                          618           4.2 %         596           3.9 %           22           3.7 %
Gaming furniture              538           3.6 %         843           5.5 %         (305 )       (36.2 )%
RFID solutions                497           3.4 %         408           2.6 %           89          21.8 %
Shipping                      406           2.7 %         533           3.5 %         (127 )       (23.8 )%
Total                   $  14,768         100.0 %   $  15,425         100.0 %   $     (657 )        (4.3 )%

(1) Casino currency includes our American-style gaming chips and our European-style plaques and jetons, as well as our new casino currency product.

Comparison of Operations for the Three Months Ended March 31, 2013 and 2012

Revenues. For the three months ended March 31, 2013, our revenues were $14.8 million, a decrease of $0.6 million, or 4.3%, compared to revenues of $15.4 million during the same period in 2012. The net decrease in revenues was primarily due to the following:

· a $2.9 million decrease in sales of casino currency without RFID in the Asia-Pacific and European regions in the first quarter of 2013, compared to the first quarter of 2012, when we had significant sales to casinos in Macau and the United Kingdom;
· a $0.9 million decrease in sales of Paulson chips without RFID to casinos in the United States; and
· a $0.5 million decrease in sales of furniture and accessories to casinos in the United States; offset by
· a $3.4 million increase in sales of casino currencies with RFID, relating to our initial sale of a new casino currency product to an Asia-Pacific casino.

Cost of Revenues. For the three months ended March 31, 2013, cost of revenues was $10.5 million, an increase of $0.4 million, or 3.7%, compared to cost of revenues of $10.1 million for the same period in 2012. As a percentage of revenues, our cost of revenues increased to 71.0% in 2013, compared to 65.5% in 2012.

Gross Profit.For the three months ended March 31, 2013, gross profit was $4.3 million, a decrease of $1.0 million, or 19.5%, compared to gross profit of $5.3 million for the same period in 2012. As a percentage of revenues, our gross profit decreased from 34.5% to 29.0%. This gross profit percentage decrease was primarily related to:

· a shift in our mix of revenues from our higher-margin Paulson chips toward lower-margin casino currency products;
· an exceptionally large imbalance in product demand; and
· the late deferral of the delivery of a major order until later in the year. This shift in product demand created an imbalance which significantly affected the utilization of our production facilities, resulting in one production facility incurring significant overtime and the other to have low utilization rates.

Selling, Administrative, and Research and Development Expenses. The following table presents the selling, administrative, and research and development expenses (in thousands) and as a percentage of revenues:

                                        Three Months Ended
                                             March 31,                               Period-to-Period
                                 2013                        2012                         Change

Marketing and sales     $   1,505          10.2 %   $   1,501           9.7 %   $        4             0.3 %
General and
administrative              2,099          14.2 %       1,873          12.1 %          226            12.1 %
Research and
development                   533           3.6 %         397           2.6 %          136            34.3 %
Total selling,
administrative, and
research and
development             $   4,137          28.0 %   $   3,771          24.4 %   $      366             9.7 %

For the three months ended March 31, 2013, selling, administrative, and research and development expenses were $4.1 million, an increase of $0.4 million, or 9.7%, compared to selling, administrative, and research and development expenses of $3.8 million during the same period in 2012. Selling, administrative, and research and development expenses increased as a percent of revenue to 28.0% in the first three months of 2013 from 24.4% in the same period in 2012.

Marketing and sales expenses were unchanged during the first quarter of 2013 compared to the same period in 2012. This is primarily due to an increase of $0.1 million in trade shows related to the Company's marketing in Asia, offset by a decrease of $0.1 million in compensation expenses.

General and administrative expenses increased by $0.2 million during the first quarter of 2013 compared to the same period in 2012. This is primarily due to increases of $0.1 million in bad-debt expense and $0.1 million in patent and other legal fees.

Research and development expenses increased by $0.1 million during the first quarter of 2013, compared to the same period in 2012. This is primarily due to increased headcount for RFID software development and increased subcontract development for new casino currency security features and RFID hardware.

Other Income and (Expense). The following table presents other income and (expense) items (in thousands) and as a percentage of revenues:

                                        Three Months Ended
                                             March 31,                               Period-to-Period
                                 2013                        2012                         Change
Interest income         $      61           0.4 %   $     122           0.8 %    $      (61 )        (50.0 )%
Interest expense               (2 )         0.0 %          (1 )         0.0 %            (1 )        100.0 %
Gain (loss) on
foreign currency
transactions                   14           0.1 %         (18 )        (0.1 )%           32         (177.8 )%
Other income, net               6           0.0 %           7           0.0 %            (1 )        (14.3 )%
Total other income
and (expense)           $      79           0.5 %   $     110           0.7 %    $      (31 )        (28.2 )%

Income Taxes. Our effective income tax rate for the three months ended March 31, 2013 and 2012 was (-168.1)% and 23.2%, respectively. Our negative effective tax rate for the three months ended March 31, 2013 primarily resulted from a tax benefit from the discrete release of our valuation allowance related to foreign tax credits. This rate was also affected by the foreign rate differential on income from our Macau subsidiary, GPI Asia, and the benefit from a research credit from our French subsidiary, GPI SAS. Without the release of this valuation allowance related to foreign tax credits, our effective income tax rate for the three months ended March 31, 2013 would have been 20.3%. Our effective tax rate for the three months ended March 31, 2012 differed from the statutory rate primarily due to the foreign rate differential on income from our Macau subsidiary, GPI Asia, combined with the benefit from a research credit from our French subsidiary, GPI SAS.

We account for uncertain tax positions in accordance with applicable accounting guidance. There were no unrecognized tax benefits reported at March 31, 2013 or December 31, 2012.

Liquidity and Capital Resources

Sources of Liquidity and Capital Resources. Our primary source of liquidity and capital resources has been cash from operations. Other sources of capital include, but are not limited to, marketable securities and potential bank credit facilities, both in the United States and abroad. We believe that the combination of these resources will satisfy our needs for operational working capital, capital expenditures, purchases of common stock under our stock repurchase program, litigation, potential dividends or acquisitions, for a minimum of the next 12 months.

At March 31, 2013, we had $17.0 million in cash and cash equivalents and $7.7 million in marketable securities, totaling $24.7 million. Of this amount, $12.4 million is held by GPI USA, $10.4 million is held by GPI SAS, and $1.9 million is held by GPI Asia.

Working Capital (See Condensed Consolidated Balance Sheets). The following summarizes our cash and cash equivalents (in thousands), working capital (in thousands), and current ratio:

                             March 31,       December 31,        Period-to-Period
                               2013              2012                 Change
Cash and cash equivalents   $    16,952     $       14,038     $    2,914       20.8 %
Working capital                  30,089             31,348         (1,259 )     (4.0 )%
Current ratio                       4.4                3.2

At March 31, 2013, working capital totaled $30.1 million, a decrease of $1.2 million, or 4.0%, compared to working capital of $31.3 million at December 31, 2012. This decrease is due to a decrease in current assets of $6.8 million, offset by a decrease in current liabilities of $5.6 million. The decrease in current assets was due primarily to a decrease in marketable securities of $5.8 million, a decrease in accounts receivable of $0.7 million, and a decrease in inventory of $0.4 million, offset by an increase of $2.9 million in cash and cash equivalents. The decrease in current liabilities was due primarily to decreases in customer deposits and deferred revenue of $1.5 million, and in accrued liabilities of $1.2 million.

Cash Flows (See Condensed Consolidated Statements of Cash Flows). The following summarizes our cash flows (in thousands):

                             Three Months Ended
                                  March 31,              Period-to-Period
                              2013          2012              Change

Operating activities       $     (932 )    $  (390 )   $   (542 )      139.0 %
Investing activities            4,839        1,826        3,013        165.0 %
Financing activities             (722 )       (360 )       (362 )      100.6 %
Effect of exchange rates         (271 )         72         (343 )     (476.4 )%
Net change                 $    2,914      $ 1,148     $  1,766        153.8 %

Net cash flows used in operating activities were $0.9 million during the three months ended March 31, 2013, a decrease of $0.5 million, compared to net cash flows used of $0.4 million during the same period in 2012. This decrease in cash flows used was based on a decrease in net income of $0.7 million compared to the prior period quarter, offset by the timing of non-cash items and working capital changes.

Net cash flows provided by investing activities were $4.8 million during the three months ended March 31, 2013, an increase of $3.0 million, compared to net cash flows provided by investing activities of $1.8 million during the same period in 2012. This increase in cash flows provided by investing activities was primarily due to an increase in net sales of marketable securities of $3.4 million, offset by an increase in capital expenditures of $0.4 million, during the three months ended March 31, 2013, compared to the same period in 2012.

Net cash flows used in financing activities were $0.7 million during the three months ended March 31, 2013, an increase of $0.4 million, compared to net cash flows used in financing activities of $0.3 million during the same period in 2012. This increase in cash flows used in financing activities was primarily due to the repurchase of common stock of $0.7 million during the three months ended March 31, 2013, compared to repurchases of common stock of $0.3 million during the same period in 2012.

Capital Expenditures. We plan to purchase approximately $0.7 million in property, plant, and equipment during the remainder of 2013. In the first quarter of 2013, we purchased $0.7 million of property, plant, and equipment; of that amount, $0.5 million was used to purchase machinery and equipment.

Cash Dividend. Our Board of Directors has no current plans to pay a regular dividend on our common stock, but may evaluate the merit of paying a dividend from time to time. We paid a $1.48 million dividend, or $0.1825 per share, in December 2012.

Backlog. At March 31, 2013, our backlog of signed orders for 2013 was $8.6 million, consisting of $4.7 million for GPI USA, $3.5 million for GPI Asia, and $0.4 million for GPI SAS. At March 31, 2012, our backlog of signed orders for 2012 was $11.8 million, consisting of $6.0 million for GPI USA, $5.0 million for GPI Asia, and $0.8 million for GPI SAS.

Contractual Obligations and Commercial Commitments

There was no material change in the Company's contractual obligations and commercial commitments during the three months ended March 31, 2013.

Forward-Looking Information Statements and Risk Factors

Throughout this Form 10-Q, we make some forward-looking statements which do not relate to historical or current facts, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable that, while considered reasonable by us, are inherently subject to significant business, economic, and competitive risks and uncertainties, many of which are beyond our control and are subject to change. The statements also relate to our future prospects and anticipated performance, development, and business strategies such as statements relating to anticipated future sales or the timing thereof, potential acquisitions, the long-term growth and prospects of our business or any jurisdiction, the duration or effects of unfavorable economic conditions which may reduce our product sales, and the long-term potential of the RFID gaming chips market and the ability of the Company to capitalize on any such growth opportunities. These statements are identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, feel, or the negative or other variations thereof, and other similar terms and phrases, including references to assumptions.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those expressed or implied. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent known and unknown risks and uncertainties such as those identified in Part I-Item 1A, "Risk Factors," of the Company's Form 10-K for the period ended December 31, 2012. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

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