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GPIC > SEC Filings for GPIC > Form 10-Q on 13-May-2014All Recent SEC Filings

Show all filings for GAMING PARTNERS INTERNATIONAL CORP

Form 10-Q for GAMING PARTNERS INTERNATIONAL CORP


13-May-2014

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 our Form 10-K for the period ended December 31, 2013.

For an overview and information on our products, as well as general information, see Item 1. "Business" of our Form 10-K for the period ended December 31, 2013.

Overview of Our Business

We custom manufacture and supply casino currency under the brand names of Paulson®, Bourgogne et Grasset®, Blue Chip (BC®) 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; 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, and have sales offices in Las Vegas; Atlantic City, New Jersey; and Gulfport, Mississippi.

• GPI SAS sells primarily in Europe and Africa out of its office in Beaune, France. GPI SAS predominantly sells casino currencies, including both American-style, known as chips, and European-style, 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 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 March 31, 2014 and March 31, 2013 (in millions):

                                GPI USA      GPI Asia       GPI SAS      Total
              March 31, 2014   $     4.2     $     1.1     $     0.3     $  5.6
              March 31, 2013   $     4.7     $     3.5     $     0.4     $  8.6

Outlook

We do not anticipate that we will benefit from any significant casino openings in 2014. However, we believe there is opportunity to support major casino expansions in the second half of the year.

On March 13, 2014 we entered into a binding 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 I-Item 1. Financial Statements-Condensed Consolidated Notes to Financial
Statements-Note 8 and Part I-Item 1. Financial Statements-Condensed Consolidated Notes to Financial Statements-Note 13.

Financial and Operational Highlights

For the first quarter of 2014, our revenues were $10.6 million, a decrease of $4.2 million, or 28.5%, compared to revenues of $14.8 million for the same period of 2013. For the first quarter of 2014, our net loss was $1.1 million, a decrease of $1.6 million, or 312.2%, compared to net income of $0.5 million for the same period in 2013.

The decrease in our results for the three months ended March 31, 2014, was directly attributable to the lack of casino openings/ expansions.

GPI SAS uses the euro as its functional currency. At March 31, 2014 and December 31, 2013, the US dollar to euro exchange rates were relatively unchanged at $1.38. The average exchange rates for the three months ended March 31, 2014 and 2013 were $1.37 and $1.32, respectively, which represents a 3.8% weaker dollar compared to the euro.

GPI Mexicana uses the US dollar as its functional currency. At March 31, 2014 and December 31, 2013, the Mexican peso to US dollar exchange rates were 13.08 and 13.07, respectively, which represents a 0.1% stronger dollar compared to the peso. The average exchange rates for the three months ended March 31, 2014 and 2013 were 13.23 pesos and 12.65 pesos to the US dollar, respectively, which represents a 4.6% stronger dollar compared to the Mexican peso.

GPI Asia uses the US dollar as its functional currency. At March 31, 2014 and December 31, 2013, the Macanese pataca to US dollar exchange rates were 7.83 and 7.87, respectively, which represents a 0.5% weaker dollar compared to the pataca. The average exchange rates for the three months ended March 31, 2014 and 2013 were 7.85 patacas and 7.84 patacas to the US dollar, respectively, which represents a 0.1% stronger dollar compared to the pataca.

Other Matters

In May 2013, we purchased certain assets of Blue Chip. The 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. For additional information, see Part I-Item 1. Financial Statements-Condensed Consolidated Notes to Financial Statements-Note 2.

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. As of March 31, 2014, we have repurchased 282,922 shares and 215,590 shares remain authorized for repurchase.

On August 5, 2013, our Board of Directors voted to terminate our 10b5-1 purchase plan effective August 12, 2013. 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. For more information regarding the repurchase program, see Part I-Item 1. Financial Statements-Condensed Consolidated Notes to Financial Statements-Note 11.

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, 2013.

RESULTS OF OPERATIONS



The following tables summarize selected items from our condensed consolidated
statements of operations (in thousands) and as a percentage of revenues:



                                             Three Months Ended
                                                 March 31,                            Period-to-Period
                                      2014                       2013                      Change
Revenues                      $ 10,559        100.0 %    $ 14,768        100.0 %    $ (4,209 )      (28.5 )%
Cost of revenues                 7,800         73.9 %      10,488         71.0 %      (2,688 )      (25.6 )%
Gross profit                     2,759         26.1 %       4,280         29.0 %      (1,521 )      (35.5 )%
Selling, administrative,
and research and
development                      3,808         36.1 %       4,137         28.0 %        (329 )       (8.0 )%
Operating (loss) income         (1,049 )      (10.0 )%        143          1.0 %      (1,192 )     (833.6 )%
Other income and (expense)          55          0.5 %          79          0.5 %         (24 )      (30.4 )%
(Loss) income before income
taxes                             (994 )       (9.5 )%        222          1.5 %      (1,216 )     (547.7 )%
Income tax provision
(benefit)                          137          1.3 %        (311 )       (2.1 )%        448       (144.1 )%
Net (loss) income             $ (1,131 )      (10.8 )%   $    533          3.6 %    $ (1,664 )     (312.2 )%

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

                                 Three Months Ended
                                      March 31,                         Period-to-Period
                            2014                     2013                    Change
Revenues:
The Americas        $  5,270        49.9 %   $  7,274        49.2 %   $  (2,004 )     (27.6 )%
Asia Pacific           4,805        45.5 %      6,819        46.2 %      (2,014 )     (29.5 )%
Europe and Africa        484         4.6 %        675         4.6 %        (191 )     (28.3 )%
Total               $ 10,559       100.0 %   $ 14,768       100.0 %   $  (4,209 )     (28.5 )%

The following tables present our revenues by product line (in thousands) and as a percentage of revenues:

                                            Three Months Ended
                                                 March 31,                           Period-to-Period
                                      2014                      2013                      Change

Casino currency with RFID     $  3,880         36.7 %   $  4,349         29.4 %   $    (469 )      (10.8 )%
Casino currency without
RFID                             2,276         21.6 %      5,077         34.5 %      (2,801 )      (55.2 )%
Total casino currency            6,156         58.3 %      9,426         63.9 %      (3,270 )      (34.7 )%

Playing cards                    1,538         14.6 %      1,447          9.8 %          91          6.3 %
Table layouts                      856          8.1 %      1,036          7.0 %        (180 )      (17.4 )%
Table accessories and other
products                           651          6.2 %        800          5.4 %        (149 )      (18.6 )%
Dice                               510          4.8 %        618          4.2 %        (108 )      (17.5 )%
Gaming furniture                   256          2.4 %        538          3.6 %        (282 )      (52.4 )%
RFID solutions                     246          2.3 %        497          3.4 %        (251 )      (50.5 )%
Shipping                           346          3.3 %        406          2.7 %         (60 )      (14.8 )%
Total                         $ 10,559        100.0 %   $ 14,768        100.0 %   $  (4,209 )      (28.5 )%

Comparison of Operations for the Three Months Ended March 31, 2014 and 2013

Revenues. For the three months ended March 31, 2014, our revenues were $10.6 million, a decrease of $4.2 million, or 28.5%, compared to revenues of $14.8 million during the same period in 2013. The decrease in revenues was primarily attributable to the lack of casino openings/ expansions in 2014.

Cost of Revenues. For the three months ended March 31, 2014, cost of revenues was $7.8 million, a decrease of $2.7 million, or 25.6%, compared to cost of revenues of $10.5 million for the same period in 2013. As a percentage of revenues, our cost of revenues increased to 73.9% in 2014 compared to 71.0% in 2013.

Gross Profit. For the three months ended March 31, 2014, gross profit was $2.8 million, a decrease of $1.5 million, or 35.5%, compared to gross profit of $4.3 million for the same period in 2013. As a percentage of revenues, our gross profit decreased from 29.0% to 26.1%. This is mainly due to a decrease in sales of our currency products which caused fixed manufacturing costs to be allocated over lower production volumes.

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

                                            Three Months Ended
                                                 March 31,                           Period-to-Period
                                      2014                      2013                      Change

Marketing and sales           $  1,303         12.3 %   $  1,505         10.2 %   $    (202 )       (13.4 )%
General and administrative       2,068         19.7 %      2,099         14.2 %         (31 )        (1.5 )%
Research and development           437          4.1 %        533          3.6 %         (96 )       (18.0 )%
Total selling,
administrative, and
research and development      $  3,808         36.1 %   $  4,137         28.0 %   $    (329 )        (8.0 )%

For the three months ended March 31, 2014, selling, administrative, and research and development expenses were $3.8 million, a decrease of $0.3 million, or 8.0%, compared to selling, administrative, and research and development expenses of $4.1 million during the same period in 2013. Selling, administrative, and research and development expenses increased as a percent of revenue to 36.1% in the first three months of 2014 from 28.0% in the same period in 2013.

Marketing and sales expenses decreased by $0.2 million during the third quarter of 2014, compared to the same period in 2013. This is primarily due to a decrease of $0.1 million in compensation.

General and administrative expenses, and research and development expenses remained relatively unchanged in the first quarter of 2014 compared to the same period in 2013.

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

                                             Three Months Ended
                                                 March 31,                            Period-to-Period
                                      2014                       2013                      Change
Interest income               $     78          0.7 %    $     61          0.4 %   $      17          27.9 %
Other income                         2          0.0 %           6          0.0 %          (4 )       (66.7 )%
Interest expense                     -          0.0 %          (2 )        0.0 %           2        (100.0 )%
(Loss) gain on foreign
currency transactions              (25 )       (0.2 )%         14          0.1 %         (39 )      (278.6 )%
Total other income and
(expense)                     $     55          0.5 %    $     79          0.5 %   $     (24 )       (30.4 )%

Income Taxes. Our effective income tax rate for the three months ended March 31, 2014 and 2013 was (13.78%) and (140.01)%, respectively. Our effective tax rate for the three months ended March 31, 2014 was unfavorably affected by an increase in our valuation allowance related to foreign tax credits, offset by a favorable impact from 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 increase in the valuation allowance related to foreign tax credits, our effective tax rate for the three months ended March 31, 2014 would have been 17.60%.

Our effective tax rate for the three months ended March 31, 2013 differed from the statutory rate primarily due to the release of valuation allowance related to foreign tax credits, combined with 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.

We account for uncertain tax positions in accordance with applicable accounting guidance. There were no unrecognized tax benefits reported at March 31, 2014 or December 31, 2013.

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 liquidity and capital resources 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, any purchases of common stock under our stock repurchase program, litigation, potential dividends or acquisitions.

At March 31, 2014, we had $13.8 million in cash and cash equivalents and $5.9 million in marketable securities, totaling $19.7 million. Of this amount, $10.5 million is held by GPI USA, $6.8 million is held by GPI SAS, and $2.4 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.

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

                             March 31,       December 31,        Period-to-Period
                               2014              2013                 Change
Cash and cash equivalents   $    13,813     $       14,492     $    (679 )      (4.7 )%
Marketable securities             5,855              5,724           131         2.3 %
Working capital                  31,986             32,069           (83 )      (0.3 )%
Current ratio                       6.0                6.3

At March 31, 2014, working capital totaled $32.0 million, a decrease of $0.1 million, or 0.3%, compared to working capital of $32.1 million at December 31, 2013. The change in working capital was due to an increase in current liabilities of $0.4 million, offset by an increase in current assets of $0.3 million.. The increase in current liabilities was due primarily to an increase of $0.6 million in customer deposits and deferred revenue, offset by a $0.2 million decrease in accounts payable. The increase in current assets was due primarily to an increase in other current assets of $1.3 million, offset by decreases in cash, cash equivalents and marketable securities of $0.5 million, accounts receivables of $0.4 million, and prepaid expenses of $0.1 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
                              2014          2013              Change

Operating activities       $       513     $  (932 )   $  1,445       (155.0 )%
Investing activities            (1,189 )     4,839       (6,028 )     (124.6 )%
Financing activities                 -        (722 )        722       (100.0 )%
Effect of exchange rates            (3 )      (271 )        268        (98.9 )%
Net change                 $      (679 )   $ 2,914     $ (3,593 )     (123.3 )%

The increase in cash flows provided by operating activities was primarily caused by an increase in liabilities of $3.1 million, offset by a decrease in assets of $1.3 million and a decrease in non-cash items of $0.3 million.

The decrease in cash flows provided by investing activities was primarily due to a decrease in net sales of marketable securities of $5.5 million to fund our cash requirements offset by the payment of a $1.0 million deposit for the acquisition of GemGroup Inc. (see Part I-Item 1. Financial Statements-Condensed Consolidated Notes to Financial Statements-Note 8), offset by a decrease in capital expenditures of $0.6 million during the three months ended March 31, 2014, compared to the same period in 2013.

The decrease in cash flows used by financing activities was due to the lack of common stock repurchases in the three months ended March 31, 2014.

Capital Expenditures. We plan to purchase approximately $0.9 million in property, plant, and equipment during the remainder of 2014. In the first quarter of 2014, we purchased $0.1 million of property, plant, 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.

Backlog. At March 31, 2014, our backlog of signed orders for 2014 was $5.6 million, consisting of $4.2 million for GPI USA, $1.1 million for GPI Asia, and $0.3 million for GPI SAS. 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.

Contractual Obligations and Commercial Commitments

There was no material change in our contractual obligations and commercial commitments during the three months ended March 31, 2014.

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 our ability 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 our Form 10-K for the period ended December 31, 2013. We do not intend, and undertake no obligation, to update our forward-looking statements to reflect future events or circumstances.

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