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BYI > SEC Filings for BYI > Form 10-Q on 6-May-2013All Recent SEC Filings

Show all filings for BALLY TECHNOLOGIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BALLY TECHNOLOGIES, INC.


6-May-2013

Quarterly Report


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

We begin this section with a summary of our operations as of March 31, 2013. The overview is followed by a detailed analysis of our results of operations and our financial condition and liquidity as of and for the three and nine months ended March 31, 2013 and 2012. References to "we," "our," "us," or the "Company" refer to Bally Technologies, Inc. and its subsidiaries.

Forward Looking Statements

Certain statements made or incorporated by reference in this Quarterly Report on Form 10-Q, in our other filings with the Securities and Exchange Commission ("SEC"), in our press releases and in statements made by or with the approval of authorized personnel constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief or current expectations with respect to, among other things, future events and financial trends affecting us. Forward looking statements are typically identified by words such as "believes," "estimates," "expects," "anticipates," "plans," "should," "would" and similar expressions.

Although we believe the expectations reflected in any forward looking statements are reasonable, readers are cautioned that forward looking statements involve known and unknown risks and uncertainties, are not guarantees of future performance and that actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied by such forward looking statements. These differences can arise as a result of the risks described in Item 1A, Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 (the "2012 10-K"), as well as other factors such as the impact of competition, the impact of any prolonged downturn in the economy or the financial markets, our ability to service debt, product development, foreign operations, dependence on key personnel, the ability to integrate future acquisitions, regulation by gaming authorities, the outcome of pending litigation matters, gaming taxes, market risks and the potential adverse effects to our financial condition, results of operations or prospects.

Forward looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward looking statements contained in this Quarterly Report on Form 10-Q will, in fact, transpire.


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Business Overview

We are a diversified global gaming company that designs, manufactures, operates, and distributes advanced technology-based gaming devices, systems, server-based solutions, custom mobile applications, and interactive applications. Our innovations and technology solutions allow our customers to more effectively manage their operations using our wide range of marketing, data management and analysis, accounting, player tracking, security, and other software applications and tools. We also provide hardware, including spinning-reel and video gaming devices, specialty gaming devices, and wide-area progressive systems. Under our business-to-business model, we support customers that include traditional land-based, riverboat, and Native American casinos, video lottery and central determination markets.

Our gaming equipment, gaming operations, and systems product lines have increasingly converged with the proliferation of high-speed networks. Key innovation drivers in our industry are Ethernet-based gaming floors, downloadable and server-based games and applications, and open protocols and common industry standards in game and system development. Players benefit from these advances by gaining more exciting experiences, better communication from casino owners, and superior customer service from gaming operators. Our customers benefit through operational efficiencies that can increase their profits and streamline their operations.

We derive our revenue from the following:

                        Three Months Ended March 31,           Nine Months Ended March 31,
                      2013       % Rev    2012     % Rev     2013      % Rev    2012     % Rev
                                              (dollars in millions)
Gaming Equipment    $    85.8       33 % $  79.3      35 % $   251.1      34 % $ 213.9      34 %
Gaming Operations       102.0       39 %    92.5      40 %     302.2      41 %   263.7      41 %
Systems                  71.3       28 %    56.8      25 %     179.3      25 %   156.4      25 %
                    $   259.1      100 % $ 228.6     100 % $   732.6     100 % $ 634.0     100 %




†   Gaming Equipment     -    Sale of gaming devices and related equipment, parts and
                              conversion kits;
†   Gaming Operations    -    Operation of linked progressive systems, video lottery
                              and centrally determined systems, and the rental of
                              gaming devices and content; and
†   Systems              -    Sale and support of specialized systems-based software,
                              hardware and interactive products and related recurring
                              maintenance revenue.

We review certain financial measures in assessing our financial condition and operating performance not only in connection with creating our internal forecasts and in making comparisons to financial results from prior periods, but also in making comparisons to our competitors' financial results. We focus on fluctuations in revenue, cost and gross margin and also pay close attention to changes in our consolidated operating income, net income, diluted earnings per share, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, including asset charges and loss contingencies and share-based compensation), cash flows from operations and free cash flow (cash flows from operating activities less capital expenditures) as they are key indicators of our success. We also measure changes in selling, general and administrative ("SG&A") expenses as a percent of revenue, which indicate management's ability to control costs, as well as changes in research and development ("R&D") costs as a percent of revenue, which demonstrate investment in technology and product development. The measures listed above are not a comprehensive list of all factors considered by us in assessing our financial condition and operating performance, and we may consider other individual measures as required by trends and discrete events arising in a specific period, but they are the key indicators.

We continue to operate in a challenging economic environment. The gaming sector was and continues to be negatively impacted by lower consumer spending and limited resources available to fund capital projects. As a result of the challenging economic environment, we have provided select customers a greater amount of payment terms for periods up to one year, and in some cases for periods up to three years. We expect to continue to extend credit for these longer periods for the foreseeable future.

There are several new and potential gaming market developments that we believe will benefit us in the long term. In our domestic market, we are focused on approved new jurisdictional opportunities and expansions in Canada, Illinois, Ohio, Maryland, Louisiana, Mississippi, Florida, Massachusetts, Pennsylvania and California, and the potential for new market opportunities in New Hampshire, Kentucky and Texas. The breadth and timing of such opportunities remain uncertain due to the legislative process in these jurisdictions, as well as the difficult credit environment facing certain of our customers and the risk of the gaming industry impact of continued economic uncertainty. We are also engaged in expanding our position in South Africa, Australia, New Zealand, Italy, the Philippines, Vietnam, and Mexico, and from potential new markets in Eastern Europe, Greece, Taiwan, South Korea, Japan, and Brazil. Our entry into the Italian VLT market was delayed by a lengthened regulatory approval process that developed in that market after we submitted our products for approval. As a result, certain customers and partners have modified their business approach to the market, which has, at least in the near term, reduced the amount of business we expected from the Italian VLT market. We received regulatory approval for our products and began deploying VLTs in Italy during July 2012.


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Gaming Equipment



                                              Three Months Ended March 31,         Nine Months Ended March 31,
                                                2013               2012               2013              2012
                                                             (dollars in millions, except ASP)
Revenues                                   $          85.8    $          79.3    $        251.1    $        213.9

New gaming devices                                   4,923              4,147            14,096            11,182
New unit Average Selling Price ("ASP")     $        16,051    $        17,073    $       16,476    $       16,978

Gaming equipment revenues improved in the three and nine months ended March 31, 2013 due primarily to an increase in the number of new gaming devices sold as a result of our investments in key platform and hardware innovations. Our Pro Series™ cabinets with ALPHA 2 technology are state of the art for the industry with regards to ergonomics, processing power, display technology, input device, operating system, sound and serviceability. This platform allows for the development of new, more compelling games and also facilitates our game download solution for customers. Our Pro Series cabinets also feature the iDeck, a multi-touch fully programmable and downloadable button panel which offers opportunity to add more interaction to the game-play experience with mystery bonus events, virtual shooting galleries and skill-based bonus games. We have and will continue to expand the number of game-development teams producing content on our new ALPHA 2 technology.

Gaming equipment gross margins increased to 51% and 50% in the three and nine months ended March 31, 2013, respectively, when compared to 46% and 44% in the three and nine months ended March 31, 2012, respectively, primarily driven by benefits from continued cost reductions on the Pro Series line of cabinets and sales mix.

Gaming Operations



                                        Three Months Ended March 31,            Nine Months Ended March 31,
                                           2013                2012              2013                2012
                                                               (dollars in millions)
Revenues                             $          102.0     $         92.5    $         302.2     $         263.7

End of period installed base:
Linked progressive systems                                                            2,365               1,388
Rental and daily-fee games                                                           14,953              14,824
Video lottery systems                                                                12,059              10,989
Centrally determined systems                                                         37,201              47,450

Revenues increased during the three and nine months ended March 31, 2013 due primarily to the significant investments we have made in our game development studios and game platform in recent years, the continued placement of premium games, including the recently released Pawn Stars™, Hot Shot Progressive™, and Cash Wizard Tiki Magic™, the continued success of Cash Connection™, the latest wide-area progressive ("WAP") link, and the benefit from a full nine months of results from games placed in Resorts World New York City in late calendar year 2011. The release of Michael Jackson King of Pop™, GREASE™, Betty Boop's™ Fortune Teller, and Cash Spin Jackpot™, all on our WAP link Cash Connection, drove another WAP record for revenue and units placed. In addition, we anticipate releasing a new WAP game, NASCAR®, during the fourth quarter of fiscal year 2013.

The installed base of centrally determined systems has declined as certain customers have upgraded these systems to utilize more sophisticated player tracking, bonus and marketing applications, and are now covered under systems maintenance.

Systems



                             Three Months Ended March 31,              Nine Months Ended March 31,
                          2013                  2012                 2013                 2012
                                                     (dollars in millions)
Hardware                $    25.6       36 %  $    20.4      36 % $     54.0       30 %  $  51.0      33 %
Software and services        22.8       32 %       16.8      30 %       58.6       33 %     50.0      32 %
Maintenance                  22.9       32 %       19.6      34 %       66.7       37 %     55.4      35 %
                        $    71.3      100 %  $    56.8     100 % $    179.3      100 %  $ 156.4     100 %

Our Systems revenues are comprised of:

† Hardware, including our iVIEW player-user-interface device and specialized system-based products.


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† Software and services, including licenses of our core systems and suite of player tracking, bonusing, and marketing applications and customized system solutions.

† Maintenance, providing access to future enhancements or upgrades to the system software for a fee based on a percent of the license fee.

The combination of iVIEW DM and Elite Bonusing Suite and other features such as Universal Card across multiple properties are becoming increasingly compelling return-on-investment propositions with multiple customer instances of demonstrable value generated from such implementations. During the nine months ended March 31, 2013, one large casino customer in Las Vegas, Nevada successfully launched NASCAR® Virtual Racing™ across the casino floor on both iVIEW and iVIEW DM. We have had several large installations during the current fiscal year and are also making good progress with international systems installations including Canada, South Africa, and New Zealand.

We have continued to invest in the basics of enterprise software development, delivery, customer support and services discipline, on improving core products, providing quality upgrade options for our customers, and increasing customer satisfaction levels through better service and support.

Operating Expenses



                       Three Months Ended March 31,             Nine Months Ended March 31,
                              % of                % of                % of                % of
                    2013     Revenue    2012     Revenue    2013     Revenue    2012     Revenue
                                              (dollars in millions)
Selling,
general and
administrative    $   72.2        28 % $  63.8        28 % $ 204.6        28 % $ 182.3        29 %

Research and
development
costs             $   29.1        11 % $  24.8        11 % $  80.8        11 % $  70.6        11 %

The increase in SG&A expenses in the three and nine months ended March 31, 2013 was due primarily to increases in payroll and related expenses. Payroll and related expenses increased due primarily to an increase in headcount in the comparative periods.

The increase in R&D costs in both periods was attributable to our continued focus on our technology assets. R&D was consistent at 11% of total revenues in each period.

Liquidity

Total cash and cash equivalents increased $16.6 million in the nine months ended March 31, 2013, when compared to a decrease of $30.7 million in the same period last year. Net cash provided by operating activities was $139.5 million and $75.2 million for the nine months ended March 31, 2013 and 2012, respectively. Cash provided by operating activities in the current period was positively impacted by improvements in net income and decreases in accounts receivable and inventory, which were offset by an increase in prepaid and refundable income tax and an increase in the excess tax benefit of stock option exercises, when compared to the same period last year.

During the nine months ended March 31, 2013, we made payments of $65.0 million and $11.3 million on our revolving credit facility and term loan facility, respectively, made capital expenditures of $11.0 million, and repurchased $131.7 million of our common stock. These cash outlays were partially offset by proceeds of $55.0 million from borrowings under our credit facility, and proceeds of $26.5 million from the exercise of employee stock options and purchases of common stock under our 2008 Employee Stock Purchase Plan (the "2008 ESPP").


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Results of Operations



The summary financial results and operating statistics are as follows:



                           Three Months Ended March 31,             Nine Months Ended March 31,
                          2013        %        2012      %        2013        %       2012       %
                                                   (dollars in millions)
Revenues:
Gaming Equipment       $     85.8      33 %  $   79.3     35 % $    251.1      34 %  $ 213.9      34 %
Gaming Operations           102.0      39 %      92.5     40 %      302.2      41 %    263.7      41 %
Systems                      71.3      28 %      56.8     25 %      179.3      25 %    156.4      25 %
Total revenues         $    259.1     100 %  $  228.6    100 % $    732.6     100 %  $ 634.0     100 %

Gross Margin:
Gaming Equipment(1)    $     43.5      51 %  $   36.6     46 % $    126.6      50 %  $  95.0      44 %
Gaming Operations            72.0      71 %      67.5     73 %      211.8      70 %    190.6      72 %
Systems(1)                   52.2      73 %      40.4     71 %      134.9      75 %    115.0      74 %
Total gross margin     $    167.7      65 %  $  144.5     63 % $    473.3      65 %  $ 400.6      63 %

Selling, general and
administrative         $     72.2      28 %  $   63.8     28 % $    204.6      28 %  $ 182.3      29 %
Research and
development costs            29.1      11 %      24.8     11 %       80.8      11 %     70.6      11 %
Depreciation and
amortization                  5.7       3 %       5.7      2 %       17.0       3 %     17.1       3 %
Operating income       $     60.7      23 %  $   50.2     22 % $    170.9      23 %  $ 130.6      21 %



(1) Gross Margin from Gaming Equipment and Systems excludes amortization related to certain intangibles, including core technology and license rights, which are included in depreciation and amortization.

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Total revenues increased $30.5 million to $259.1 million, or 13%, in the three months ended March 31, 2013, when compared to the same period last year, as a result of the following:

Gaming Equipment Revenue. Gaming Equipment revenue increased by $6.5 million, or 8%, to approximately $85.8 million primarily as a result of:

† a 19% increase in new gaming device sales to 4,923 units in the three months ended March 31, 2013, when compared to 4,147 units in the same period last year, driven by higher domestic replacement sales, including the shipment of 788 Canadian VLTs, as well as by the shipment of 656 units into the Illinois Video Gaming Terminal ("VGT") market; offset by

† a 6% decrease in ASP to $16,051 in the three months ended March 31, 2013, when compared to $17,073 in the same period last year, due primarily to a higher mix of lower-ASP VLT and VGT units sold in the current quarter and lower-ASP units sold in certain international markets.

Gaming Equipment Gross Margin. Gaming Equipment gross margin increased to 51% in the three months ended March 31, 2013 from 46%, in the same period last year, due primarily to continued cost reductions on the Pro Series line of cabinets and sales mix.

Gaming Operations Revenue. Gaming Operations revenue increased $9.5 million, or 10%, to approximately $102.0 million in the three months ended March 31, 2013, when compared to the same period last year, primarily as a result of:

† an increase in participation and rental revenue due to an increase in our end of period installed base of games, the continuing placements of higher yield premium products, and newer and more popular game titles; and

† an increase in linked progressive revenue driven by growth in the installed base of games due primarily to the introduction of our WAP link Cash Connection in late fiscal year 2012.


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Gaming Operations Gross Margin. Gaming Operations gross margin decreased to 71% in the three months ended March 31, 2013 from 73% in the same period last year, due primarily to higher jackpot expense.

Systems Revenue. Systems revenue increased $14.5 million, or 26%, to approximately $71.3 million in the three months ended March 31, 2013, when compared to the same period last year. The increase in revenue was comprised of a $3.3 million, or 17%, increase in maintenance revenue due to the increased install base of customers on our systems, a $5.2 million, or 25%, increase in hardware revenue, and a $6.0 million, or 36%, increase in software and services revenue during the same period.

Systems Gross Margin. Systems gross margin increased to 73% in the three months ended March 31, 2013 from 71%, in the same period last year, primarily as a result of a change in the mix of products sold in the comparative periods including an increase in maintenance revenue and software and services revenue which involve minimal variable costs.

Selling, General and Administrative Expenses. SG&A expenses increased $8.4 million, or 13%, in the three months ended March 31, 2013, when compared to the same period last year, due primarily to increases in payroll and related expenses. Payroll and related expenses increased due primarily to an increase in headcount in the comparative periods primarily as a result of our expansion into international markets.

Research and Development Costs. R&D costs increased $4.3 million, or 17%, in the three months ended March 31, 2013, when compared to the same period last year, due primarily to increased product development efforts requiring an increase in employees. R&D was consistent at 11% of total revenues in both periods.

Depreciation and Amortization Expense. Depreciation and amortization expense was consistent at $5.7 million in each period.

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012

Total revenues increased $98.6 million to $732.6 million, or 16%, in the nine months ended March 31, 2013, when compared to the same period last year, as a result of the following:

Gaming Equipment Revenue. Gaming Equipment revenue increased by $37.2 million, or 17%, to approximately $251.1 million primarily as a result of:

† a 26% increase in new gaming device sales to 14,096 units in the nine months ended March 31, 2013, when compared to 11,182 units in the same period last year, driven by higher domestic replacement sales, including Canadian VLT shipments, as well as by the shipments into the Illinois VGT market; offset by

† a 3% decrease in ASP to $16,476 in the nine months ended March 31, 2013, when compared to $16,978 in the same period last year, due primarily to a higher mix of lower-ASP VLT and VGT units sold.

Gaming Equipment Gross Margin. Gaming Equipment gross margin increased to 50% in the nine months ended March 31, 2013 from 44%, in the same period last year, due primarily to continued cost reductions on certain models of the Pro Series line of cabinets and sales mix.

Gaming Operations Revenue. Gaming Operations revenue increased $38.5 million, or 15%, to approximately $302.2 million in the nine months ended March 31, 2013, when compared to the same period last year, primarily as a result of:

† an increase in participation and rental revenue due to an increase in our end of period installed base of games, the continuing placements of higher yield premium products, and newer and more popular game titles;

† an increase in linked progressive revenue driven by growth in the installed base of games due primarily to the introduction of our WAP link Cash Connection in late fiscal year 2012; and

† the performance of our lottery systems due to increases in our end of period installed base of games due primarily to previous placed games at Resorts World Casino New York City which opened in late calendar year 2011.

Gaming Operations Gross Margin. Gaming Operations gross margin decreased to 70% in the nine months ended March 31, 2013 from 72% in the same period last year, due primarily to higher jackpot expense.

Systems Revenue. Systems revenue increased $22.9 million, or 15%, to approximately $179.3 million in the nine months ended March 31, 2013, when compared to the same period last year, which was comprised primarily of an $11.3 million, or 20%, increase in maintenance revenue due to the increased install base of customers on our systems, a $3.0 million, or 6%, increase in hardware revenue, and a $8.6 million, or 17%, increase in software and services revenue during the same period.


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Systems Gross Margin. Systems gross margin increased to 75% in the nine months ended March 31, 2013 from 74%, in the same period last year, primarily as a result of a change in the mix of products sold in the comparative periods including an increase in maintenance revenue and software and services revenue which involve minimal variable costs.

Selling, General and Administrative Expenses. SG&A expenses increased $22.3 million, or 12%, in the nine months ended March 31, 2013, when compared to the same period last year, due primarily to increases in payroll and related expenses. Payroll and related expenses increased due primarily to an increase in headcount in the comparative periods primarily as a result of our expansion into international markets, and certain compensation related to executive transitions.

Research and Development Costs. R&D costs increased $10.2 million, or 14%, in . . .

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