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GPIC > SEC Filings for GPIC > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for GAMING PARTNERS INTERNATIONAL CORP

Form 10-K for GAMING PARTNERS INTERNATIONAL CORP


31-Mar-2014

Annual Report


Item 7. 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 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."

For a Company Overview and information on our products, as well as general information, see Part I - Item 1. "Business."

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 radio frequency identification device (RFID) casino currency, RFID solutions for casino currency (consisting of low- and high-frequency RFID casino currency readers, antennas, casino currency authentication software, casino currency 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;


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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 GPI Mexicana, our maquiladora manufacturing operation 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, which includes RFID and non-RFID versions of both American-style chips and European-style plaques and jetons. Most of the products sold by GPI SAS are manufactured in France, with the remainder manufactured in Mexico.

• GPI Asia, with an office in Macau S.A.R., China, is the exclusive distributor of GPI USA and GPI SAS products in the Asia-Pacific region. GPI Asia primarily sells casino currency, manufactured in France or in Mexico, 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, typically representing approximately 60% of our revenues. The timing of these events is difficult to forecast and largely beyond our ability to influence, and results in 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. Our backlog, which reflects signed orders, was as follows at December 31, 2013 and December 31, 2012 (in millions):

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                          GPI SAS                GPI USA                GPI ASIA                Total
December 31, 2013   $    0.4 million       $    2.5 million       $    1.6 million       $    4.5 million
December 31, 2012   $    0.3 million       $    2.1 million       $    6.0 million       $    8.4 million

Outlook

For the year ended December 31, 2013, our currency sales were down 21.8% compared to the same period in 2012. This decrease is due primarily to fewer casino openings/expansions in the Asia-Pacific region and the United States. Although there are significant casino developments in progress in the Asia-Pacific region, we do not anticipate that there will be any significant casino openings in 2014. We anticipate most casino openings will take place in 2015 and beyond. Accordingly, we do not anticipate that our 2014 revenues will be significantly different from 2013. On March 13, 2014, we entered into a Letter of Intent to acquire the assets of GemGroup Inc. and its subsidiaries. Pursuant to the Letter of Intent, we paid an earnest money deposit of $1.0 million, which may be forfeited under certain conditions if the transaction does not close. The acquisition is subject to customary closing conditions and the negotiation of a mutually agreeable definitive asset purchase agreement. As such, we cannot provide any certainty that the transaction will be consummated. For additional information, see Part II Item 8. Financial Statement and Supplementary Data - Notes to Consolidated Financial Statements - Note 20.

We will continue to evaluate other potential strategic acquisitions and partnerships to grow our business however, no assurance can be given that these efforts will result in completed transactions or that any completed transactions will be successful. Additionally, we will pursue growth internally by continuing our focus on market-driven research and development of new products and product enhancements.


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Financial and Operational Highlights

For the fourth quarter of 2013, our revenues were $13.7 million, a decrease of $3.8 million, or 21.5%, compared to revenues of $17.5 million in 2012. For the fourth quarter of 2013, our net income was $0.6 million, a decrease of $1.1 million, or 65.2%, compared to net income of $1.7 million in 2012.

For the year ended December 31, 2013, our revenues were $56.2 million, a decrease of $6.7 million, or 10.7%, compared to revenues of $62.9 million in 2012. Our net income for 2013 was $1.2 million, a decrease of $4.9 million, or 80.8%, compared to net income of $6.1 million for 2012.

GPI SAS uses the euro as its functional currency. At December 31, 2013 and 2012, the US dollar to euro exchange rates were $1.3767 and $1.3218, respectively, which represents a 4.1% weaker dollar compared to the euro. The average exchange rates for the years ended December 31, 2013 and 2012 were $1.3275 and $1.2861, respectively, which represents a 3.2% weaker dollar compared to the euro.

Our Mexican manufacturing plant uses the US dollar as its functional currency. At December 31, 2013 and 2012, the Mexican peso to US dollar exchange rates were 13.0652 and 13.0101, respectively, which represents a 0.4% stronger dollar compared to the peso. The average exchange rates for the years ended December 31, 2013 and 2012 were 12.7696 pesos and 13.1683 pesos to the US dollar, respectively, which represents a 3.0% weaker dollar compared to the Mexican peso.

GPI Asia, our exclusive distributor for GPI USA and GPI SAS products in the Asia-Pacific region, uses the US dollar as its functional currency. At December 31, 2013 and 2012, the Macanese pataca to US dollar exchange rates were 7.8727 and 7.9800, respectively, which represents a 1.3% weaker dollar compared to the pataca. The average exchange rates for the years ended December 31, 2013 and 2012 were 7.8394 patacas and 7.8329 patacas to the US dollar, respectively, which represents a 0.1% stronger dollar compared to the Macanese pataca.

Other Matters

In May 2013, we purchased certain assets of The Blue Chip Company, LLC (Blue Chip), a privately-held manufacturer of compression-molded casino currency. This acquisition is part of our overall acquisition strategy to use our cash to acquire companies, products or technologies that enable us to grow and diversify our product offerings. We completed the asset acquisition on May 31, 2013 for a total consideration of $0.8 million.

On December 1, 2011, our Board of Directors approved a stock repurchase program which authorized the repurchase of up to five percent, or 409,951 shares, of common stock. On November 30, 2012, the Board of Directors increased the number of shares available for repurchase to 498,512 shares.

On August 5, 2013, our Board of Directors voted to terminate our 10b5-1 purchase plan effective August 12, 2013 and to cease any repurchases of our common stock under the repurchase program for a minimum of six months after the effective date of the termination of the 10b5-1 purchase plan. While the 10b5-1 purchase plan was terminated, the repurchase program remains in effect. However, there is no assurance that we will repurchase any additional shares under the repurchase program. As of December 31, 2013, a total of 282,922 shares have been purchased under the repurchase program and 215,590 shares remain authorized for repurchase. For more information regarding the repurchase program, see Part II - Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14.

On December 18, 2012, we paid a $1.48 million dividend, or $0.1825 per share, to our common stockholders. No dividends were paid in 2013.


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Results of Operations

The following table summarizes selected items from the Company's Consolidated Statements of Income (in thousands) and as a percentage of revenues for the years ended December 31:

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                                       2013                                          2012                                   Year to Year Change
Revenues            $        56,173                100.0 %        $          62,896               100.0 %       $        (6,723 )               (10.7 )%
Cost of revenues             38,584                 68.7 %                   40,384                64.2 %                (1,800 )                (4.5 )%
Gross profit                 17,589                 31.3 %                   22,512                35.8 %                (4,923 )               (21.9 )%
Selling,
administrative,              16,970                 30.2 %                   15,352                24.4 %                 1,618                  10.5 %
and research and
development
Operating income                619                  1.1 %                    7,160                11.4 %                (6,541 )               (91.4 )%
Other income and                  4                  0.0 %                      290                 0.5 %                  (286 )               (98.6 )%
(expense)
Income before                   623                  1.1 %                    7,450                11.9 %                (6,827 )               (91.6 )%
income taxes
Income tax
(benefit)                      (543 )               (1.0 )%                   1,375                 2.2 %                (1,918 )              (139.5 )%
provision
Net income          $         1,166                  2.1 %        $           6,075                 9.7 %       $        (4,909 )               (80.8 )%

The following table presents certain data by geographic location (in thousands) and as a percentage of revenues for the years ended December 31:

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                                       2013                                          2012
Revenues
The Americas        $          31,096                55.3 %       $          32,891                52.3 %
Asia-Pacific                   21,003                37.4 %                  25,532                40.6 %
Europe and Africa               4,074                 7.3 %                   4,473                 7.1 %
Total               $          56,173               100.0 %       $          62,896               100.0 %

The following table details the Company's revenues by product line (in thousands) and as a percentage of revenues for the years ended December 31:

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                                       2013                                          2012                                   Year to Year Change
Casino currency     $          20,327                36.2 %       $          29,860                47.5 %       $        (9,533 )              (31.9 )%
without RFID
Casino currency                12,237                21.8 %                  11,805                18.8 %                   432                  3.7 %
with RFID
Total casino                   32,564                58.0 %                  41,665                66.3 %                (9,101 )              (21.8 )%
currency
Playing cards                   6,526                11.6 %                   5,551                 8.8 %                   975                 17.6 %
Table layouts                   4,314                 7.7 %                   4,425                 7.0 %                  (111 )               (2.5 )%
Table accessories
and other                       3,494                 6.2 %                   3,323                 5.3 %                   171                  5.1 %
products
RFID solutions                  2,566                 4.6 %                     839                 1.3 %                 1,727                205.8 %
Dice                            2,489                 4.4 %                   2,287                 3.6 %                   202                  8.8 %
Gaming furniture                2,410                 4.3 %                   2,882                 4.6 %                  (472 )              (16.4 )%
Shipping                        1,810                 3.2 %                   1,924                 3.1 %                  (114 )               (5.9 )%
Total               $          56,173               100.0 %       $          62,896               100.0 %       $        (6,723 )              (10.7 )%


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Comparison of Operations for the Years Ended December 31, 2013 and 2012

Revenues For the year ended December 31, 2013, revenues were $56.2 million, a decrease of $6.7 million, or 10.7%, compared to revenues of $62.9 million in 2012. This decrease in revenues in 2013 was due primarily to fewer casino openings/ expansions in 2013 compared to 2012.

Cost of Revenues For the year ended December 31, 2013, cost of revenues was $38.6 million, a decrease of $1.8 million, or 4.5%, compared to cost of revenues of $40.4 million for 2012. As a percentage of revenues, our cost of revenues increased to 68.7% in 2013 compared to 64.2% in 2012. The increased cost of revenues was driven by the same factors described under Gross Profit below.

Gross Profit For the year ended December 31, 2013, gross profit was $17.6 million, a decrease of $4.9 million, or 21.9%, compared to gross profit of $22.5 million for 2012. As a percentage of revenues, our gross profit decreased to 31.3% from 35.8%. This gross profit percentage decrease was primarily related to:

• a decrease in casino currency sales, which resulted in fixed manufacturing costs being allocated over lower production volumes in these products;

• a shift in our mix of revenues from our higher-margin currency products toward lower-margin products such as cards; and

• an exceptionally large imbalance in product demand in the first quarter of 2013, which significantly affected the utilization of our production facilities, resulting in one production facility incurring significant overtime and the other having low utilization rates.

Selling, Administrative, and Research and Development Expenses The following table details the selling, administrative, and research and development expenses (in thousands) and as a percentage of revenues for the years ended December 31:

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                                       2013                                         2012                                   Year to Year Change
Marketing and       $           5,988               10.6 %       $           6,111                9.7 %       $          (123 )                (2.0 )%
sales
General and                     9,023               16.1 %                   7,252               11.5 %                 1,771                  24.4 %
administrative
Research and                    1,959                3.5 %                   1,989                3.2 %                   (30 )                (1.5 )%
development
Total selling,
administrative,     $          16,970               30.2 %       $          15,352               24.4 %       $         1,618                  10.5 %
and research and
development

For the year ended December 31, 2013, selling, administrative, and research and development expenses were $17.0 million, an increase of $1.6 million, or 10.5%, compared to selling, administrative, and research and development expenses of $15.4 million in 2012. Selling, administrative, and research and development expenses increased as a percent of revenue to 30.2% in 2013 from 24.4% in 2012.

Marketing and sales expenses decreased from 2012 to 2013 by $0.1 million. This decrease is primarily due to a decrease in trade shows and other marketing expenses.

General and administrative expenses increased from 2012 to 2013 by $1.8 million. This is primarily due to an increase of $1.0 million in legal fees, including increased expenses related to patent filings in 2013 and the effect of a 2012 credit related to the settlement of employment litigation in France, as well as increases of $0.2 million in compensation expense, $0.1 million in public company expenses, $0.1 million in insurance expenses and $0.1 million in gaming license expenses.

Research and development expenses remained relatively unchanged from year to year.


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Other Income and (Expense) The following table details other income and (expense) items (in thousands) and as a percentage of revenues for the years ended December 31:

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                                        2013                                           2012                                   Year to Year Change
Interest income     $          223                   0.4 %         $         382                    0.6 %                   (159 )               (41.6 )%
Interest expense                (9 )                (0.0 )%                   (8 )                 (0.0 )%                    (1 )               (12.5 )%
(Loss) on foreign
currency                      (224 )                (0.4 )%                  (91 )                 (0.1 )%                  (133 )               146.2 %
transactions
Other income, net               14                   0.0 %                     7                    0.0 %                      7                 100.0 %
Total other
income and          $            4                   0.0 %         $         290                    0.5 %         $         (286 )               (98.6 )%
(expense)

For the year ended December 31, 2013, other income and (expense) decreased by $0.3 million compared to the prior year. This was primarily due to a $0.2 million decrease in net interest income related to lower average balances and yields on marketable securities during 2013, and a $0.1 million increase in foreign currency loss associated with the US dollar weakening against the Euro.

Income Taxes During the year ended December 31, 2013, our effective tax benefit rate was 87.1%, compared to an expense rate of 18.5% for the year ended December 31, 2012. Our effective tax rate for the year ended December 31, 2013 differed from the statutory rate primarily because of the foreign rate differential on the income from our Macau subsidiary, GPI Asia, combined with the benefit from a research credit from our French subsidiary, GPI SAS. Our effective tax rate for the year ended December 31, 2012 differed from the statutory rate as a result of the utilization of our foreign tax credit carryforwards, combined with the foreign rate differential on the income from our Macau subsidiary, GPI Asia, and the benefit from a research credit from our French subsidiary, GPI SAS.

Pre-tax income (loss) by taxing jurisdictions for the years ended December 31 (in thousands) was as follows:

[[Image Removed]]                  [[Image Removed]]      [[Image Removed]]
                                           2013                  2012
France (GPI SAS)                   $        (1,461 )      $           1,244
United States (GPIC and GPI USA)              (379 )                  3,053
Macau (GPI Asia)                             1,911                    2,343
Mexico (GPI Mexicana)                          552                      810
Total pre-tax income               $           623        $           7,450

Our corporate tax rate is calculated on a consolidated basis. Included in the United States numbers are the costs of GPIC, which include such items as regulatory fees, board of director expenses, investor relations expenses, auditing and review fees, and corporate legal expenses. We do not allocate these costs to our subsidiaries. In 2013 and 2012, these costs totaled $1.6 million and $1.3 million, respectively.

Liquidity and Capital Resources

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

At December 31, 2013, we had $14.5 million in cash and cash equivalents and $5.7 million in marketable securities, totaling $20.2 million. Of this amount, $11.0 million is held by GPI USA, $6.1 million is held by GPI SAS, and $3.1 million is held by GPI Asia. Of those amounts held outside of the United States, we would be subject to taxation in the United States if we were to repatriate those amounts, though foreign tax credits may be available to offset such taxes. We may repatriate amounts from GPI SAS and, accordingly, our financial statements reflect the tax impacts that would result from repatriation. We do not anticipate repatriation from GPI Asia and, accordingly, our financial statements do not reflect the tax impacts that would result from repatriation.


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Working Capital (See Consolidated Balance Sheets) The following summarizes our cash and cash equivalents (in thousands), working capital (in thousands), and current ratio for the years ended December 31:

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                           2013                  2012                       Year to Year Change
Cash and cash       $          14,492     $          14,038     $            454                  3.2 %
equivalents
Working capital                32,069                31,348                  721                  2.3 %
Current ratio                     6.3                   3.2

At December 31, 2013, working capital totaled $32.1 million, an increase of $0.8 million, or 2.3%, compared to working capital of $31.3 million at December 31, 2012. This increase is due to a decrease in current assets of $7.7 million, offset by a decrease in current liabilities of $8.4 million. The decrease in current assets was due primarily to a decrease in marketable securities of $7.8 million. The decrease in current liabilities was due primarily to a decrease in deferred income tax liability of $2.9 million, a decrease in customer deposits and deferred revenue of $2.4 million, and a decrease in accrued liabilities of $2.3 million.

Cash Flows (See Consolidated Statements of Cash Flows) The following summarizes our cash flow (in thousands) for the years ended December 31:

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                            2013                   2012                       Year to Year Change
Operating           $        (4,008 )      $         7,017        $       (11,025 )              (157.1 )%
Activities
Investing                     5,554                    216                  5,338               2,471.3 %
Activities
Financing                    (1,012 )               (2,493 )                1,481                 (59.4 )%
Activities
Effect of                       (80 )                   16                    (96 )              (600.0 )%
exchange rates
Net change          $           454        $         4,756        $        (4,302 )               (90.5 )%

Net cash flows used by operating activities were $4.0 million during 2013, a decrease of $11.0 million, compared to net cash flows provided by operating activities of $7.0 million for 2012. The decrease in cash flows from operations was primarily due to an increase in prepaid expenses of $1.7 million, and a reduction in current liabilities of $5.6 million. During 2012, the Company generated $8.6 million of cash flows from operations but reduced operating assets and liabilities by $1.6 million.

Net cash flows provided by investing activities were $5.5 million in 2013, an increase of $5.3 million, compared to net cash flows provided by investing activities of $0.2 million in 2012. This increase in net cash flows provided by investing activities was primarily due to an increase in net sales of marketable securities of $6.5 million in 2013, compared to 2012, offset by the $0.8 million acquisition of assets from Blue Chip in May 2013, and an increase in capital expenditures of $0.4 million in 2013, compared to 2012.

Net cash flows used in financing activities were $1.0 million in 2013, a decrease of $1.5 million, compared to net cash flows used in financing activities of $2.5 million in 2012. This decrease in net cash flows used in financing activities was primarily due to our not paying a dividend in 2013, a decrease from dividends paid during 2012 of $1.5 million.

Facilities

Las Vegas, Nevada. In Las Vegas, we own a 60,000 square-foot building. This . . .

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