Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BYI > SEC Filings for BYI > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for BALLY TECHNOLOGIES, INC.

Form 10-Q for BALLY TECHNOLOGIES, INC.


8-May-2014

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, 2014. 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, 2014 and 2013.

Forward Looking Statements

Certain statements made or incorporated by reference in this Quarterly Report on Form 10-Q, in our other filings with the 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, 2013 (the "2013 10-K"), as supplemented by the risks described in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2013, 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 acquisitions, including the Acquisition, 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.

Business Overview

We are a diversified global gaming supplier that designs, manufactures, operates and distributes EGMs, gaming operations, networked and casino-management systems, table game products and interactive applications that drive revenue and provide operating efficiencies for gaming operators. The Company supplies innovative hardware and games, including spinning-reel and video gaming devices, specialty gaming devices, table game products and wide-area progressive systems. The Company's casino-management technology solutions allow its 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. Under its business-to-business model, the Company supports customers that include traditional land-based, riverboat, and Native American casinos, interactive, video lottery and central determination markets.

Our EGMs, gaming operations, casino-management systems and table game 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, such as GSA protocols. We are confident that 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


Table of Contents

efficiencies that can increase their profits and streamline their operations as well as new ways to drive excitement and play on the casino floor through the ability to do system-based floor-wide promotions and slot tournaments.

We derive our revenue from the following:

                        Three Months Ended March 31,           Nine Months Ended March 31,
                      2014       % Rev    2013     % Rev    2014(1)    % Rev    2013     % Rev
                                              (dollars in millions)
EGM                 $   102.4       30 % $  85.8      33 % $   261.8      30 % $ 251.1      34 %
Gaming Operations       101.4       30 %   102.0      39 %     300.6      34 %   302.2      41 %
Systems                  90.5       27 %    71.3      28 %     252.1      29 %   179.3      25 %
Table Products           44.1       13 %       -       - %      58.4       7 %       -       - %
                    $   338.4      100 % $ 259.1     100 % $   872.9     100 % $ 732.6     100 %



(1) Results for the nine months ended March 31, 2014 include the Acquisition beginning on November 25, 2013.

†   EGM                    -    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
†   Systems                -    Sale and support of specialized systems-based
                                software, hardware and interactive products and
                                related recurring maintenance revenue
†   Table Products         -    Monthly royalties from proprietary table games as
                                well as sale and lease of table utility products,
                                including automatic card shufflers, deck checkers
                                and roulette chip sorters

On November 25, 2013, the Company completed the Acquisition for total purchase consideration of $1.38 billion (see Note 2 to the unaudited condensed consolidated financial statements, Business Combination). The Acquisition was funded primarily from proceeds of a new Term Loan B and borrowings from our existing Revolving Credit Facility (see Note 7 to the unaudited condensed consolidated financial statements, Long-Term Debt). Revenue from SHFL was approximately $103.2 million from the date of the Acquisition through March 31, 2014.

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 (adjusted to remove the effect of asset charges and loss contingencies, acquisition-related costs, 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.

The gaming sector was negatively impacted by a prolonged reduction in consumer spending and limited resources available to fund capital projects. While consumer spending on gaming activities has increased, as a result of this prolonged economic environment we provided select customers more favorable 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 to certain customers 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 Illinois, Ohio, Maryland, Louisiana, Mississippi, Massachusetts, New York 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 renewed economic uncertainty. We are also engaged in expanding our position in South Africa, Australia, Macau, New Zealand, the Philippines and Mexico, and into potential new markets in Eastern Europe, Greece, Taiwan, South Korea, Japan and Brazil.


Table of Contents

EGM



                                       Three Months Ended March 31,         Nine Months Ended March 31,
                                         2014               2013               2014              2013
                                                      (dollars in millions, except ASP)
Revenues                            $         102.4    $          85.8    $        261.8    $        251.1

New EGM units sold (1)                        5,278              4,923            14,425            14,096
Average Selling Price ("ASP")       $        17,203    $        16,051    $       16,502    $       16,476



(1) Includes 211 and 301 ETS seats sold during the three and nine months ended March 31, 2014, respectively.

Revenues increased in the three months ended March 31, 2014 due primarily to higher North America replacement sales and the sale of 930 Equinox™ units and 211 ETS seats. In addition, there was a 7% increase in ASP to $17,203 in the three months ended March 31, 2014, when compared to $16,051 in the same period last year, due primarily to sale of the new Pro Wave premium cabinet. The increases in revenues were partially offset by the absence of 788 Canadian Video Lottery Terminal ("VLT") units sold in the prior period. EGM sales attributable to the Acquisition were approximately $24.9 million during the three months ended March 31, 2014.

Revenue increased in the nine months ended March 31, 2014 due primarily to the shipment of 2,220 units into the Illinois VGT market, 1,517 Equinox units and 301 ETS seats, partially offset by the absence of 2,026 Canadian VLT units sold in the prior year period. In addition, there was a slight increase in ASP to $16,502, when compared to $16,476 in the same period last year, due primarily to geographic mix and sales of the new Pro Wave premium cabinet. EGM sales attributable to the Acquisition were approximately $38.4 million during the nine months ended March 31, 2014.

EGM gross margins were consistent at 49% in both the three and nine months ended March 31, 2014, respectively, when compared to 51% and 50% in the three and nine months ended March 31, 2013, respectively. The decline in gross margins in the current fiscal year was due primarily to inventory-related charges from the Acquisition of approximately $1.0 million and $4.0 million in the three and nine months ended March 31, 2014, respectively.

We expect increases in ASP in the remainder of fiscal year 2014, as compared to the first nine months of fiscal year 2014, due to the release of our new Pro Wave premium cabinet during the third quarter. In addition, we believe the SHFL content, which provides us with an additional style of game, will further strengthen our content portfolio in the U.S. and Canada markets in both EGM and Gaming Operations.

Gaming Operations



                                        Three Months Ended March 31,            Nine Months Ended March 31,
                                          2014                2013               2014                2013
                                                               (dollars in millions)
Revenues                             $         101.4     $         102.0    $         300.6     $         302.2

End of period installed base:
Linked progressive systems                                                            2,478               2,365
Rental and daily-fee games                                                           16,048              14,953
Lottery systems(1)                                                                   12,629              12,059
Centrally determined systems                                                         30,649              37,201



(1) Excludes 693 and 636 third-party ETS seats operating as of March 31, 2014 and 2013, respectively.

Revenues decreased during the three and nine months ended March 31, 2014 as compared to prior year periods due primarily to lower yields on certain variable fee games which were partially offset by an increase in wide-area progressive ("WAP") revenue and the inclusion of 2,198 leased ETS seats. Gaming operation revenues attributable to the Acquisition were approximately $4.8 million and $6.4 million during the three and nine months ended March 31, 2014, respectively. Gross margin decreased in both the three and nine months ended March 31, 2014 as compared to prior year periods due primarily to higher jackpot expense, and the inclusion of lower margin leased ETS units.

We have recently released or expect to release in the fourth quarter of fiscal year 2014 new WAP titles including James Cameron's Titanic, The Magic of David Copperfield, Grease Pink Ladies, and other premium games. In addition, the Duo Fu Duo Cai link has recently rolled-out in the U.S. on a fixed daily fee in most markets. The Duo Fu Duo Cai link has been one of the top performers in Asia.


Table of Contents

The installed base of centrally determined systems has declined primarily due to certain customers who have upgraded these systems to utilize some of our more sophisticated player tracking, bonus and marketing applications, which are included in systems maintenance revenues. In addition, the decline is also due to the removal of certain license fees in Mexico. The license fees are single-dollar-per-day units and make up a nominal amount of revenue.

Systems



                        Three Months Ended March 31,                Nine Months Ended March 31,
                    2014                   2013                  2014                  2013
                                                 (dollars in millions)
Hardware          $    39.7        44 %  $    25.6       36 % $     95.7        38 %  $  54.0       30 %
Software and
services               26.3        29 %       22.8       32 %       82.2        33 %     58.6       33 %
Maintenance            24.5        27 %       22.9       32 %       74.2        29 %     66.7       37 %
                  $    90.5       100 %  $    71.3      100 % $    252.1       100 %  $ 179.3      100 %

Our Systems revenues are comprised of:

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

† 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.

Revenues increased during the three and nine months ended March 31, 2014 as compared to the prior year periods due primarily to large system installations during the respective periods coupled with the continued growth of our recurring customer base. Gross margins declined as compared to the prior year periods due primarily to the higher mix of hardware revenues generated during the periods.

Elite Bonusing Suite installations and recently developed software modules like the Bally Enterprise Progressive System ("BEPS") continue to gain traction with new installations completed in multiple casinos. R&D investments in Systems have improved revenues in the past few years. Efforts in our R&D labs are currently under way to mobile-enable our various Systems products, enable better integration of all aspects of gaming across the entire gaming floor and beyond, and to create increasingly more sophisticated marketing tools.

Table Products



                                         Three Months Ended March 31,              Nine Months Ended March 31,
                                            2014                  2013               2014(1)                2013
                                                           (dollars in millions, except ASP)
Revenues                            $                44.1     $          -    $                58.4     $          -

Utility                                               788                -                      926                -
ASP                                 $              16,088     $          -    $              16,218     $          -

Proprietary Table Games ("PTGs")                        2                -                        2                -
ASP                                 $              34,125     $          -    $              34,125     $          -

End of period installed base:
Utility                                                                                       8,905                -
PTGs                                                                                          3,016                -
Table game progressive units,
table side bets and add-ons                                                                   5,434                -



(1) Results for the nine months ended March 31, 2014 include the Acquisition beginning on November 25, 2013.

Revenues increased during the three and nine months ended March 31, 2014 as compared to the prior year periods due entirely to the Acquisition and the revenues from proprietary table games and utility products, including automatic card shufflers, deck checkers and roulette chip sorters during the period.


Table of Contents

Operating Expenses



                       Three Months Ended March 31,             Nine Months Ended March 31,
                              % of                % of                % of                % of
                    2014     Revenue    2013     Revenue    2014     Revenue    2013     Revenue
                                              (dollars in millions)
Selling,
general and
administrative
("SG&A")          $   88.2        26 % $  72.2        28 % $ 251.6        29 % $ 204.6        28 %

Research and
development
costs ("R&D")     $   36.7        11 % $  29.1        11 % $  98.9        11 % $  80.8        11 %

The increase in SG&A expenses as compared to the prior year periods was due primarily to costs related to the Acquisition. During the three and nine months ended March 31, 2014, we incurred Acquisition-related costs of $6.2 million and $33.1 million, respectively. Acquisition costs primarily included advisory, legal, debt, accounting and valuation fees.

The increase in R&D costs was attributable to the Acquisition and our continued focus on our technology assets, the expansion of technical resources, and the competitive landscape that requires continuous development of future generations of gaming products and systems. During the nine months ended March 31, 2014, R&D expense increased $18.1 million, when compared to the same period last year, and was consistent at 11% of total revenues in both periods.

Liquidity

Total cash and cash equivalents increased $27.3 million in the nine months ended March 31, 2014, when compared to an increase of $16.6 million in the same period last year. Net cash provided by operating activities was $149.5 million and $139.5 million for the nine months ended March 31, 2014 and 2013, respectively. Cash provided by operating activities in the current period was positively impacted by improvements in changes in inventories.

During the nine months ended March 31, 2014, we completed the Acquisition for total purchase consideration of $1.38 billion (see Note 2 to the unaudited condensed consolidated financial statements, Business Combination). The Acquisition was funded primarily from proceeds of a new Term Loan B of $1.1 billion and borrowings from our existing Revolving Credit Facility of $330 million (see Note 7 to the unaudited condensed consolidated financial statements, Long-Term Debt). In addition, during the nine months ended March 31, 2014, we made payments on our Secured Credit Facility of $152.4 million, purchased treasury stock of $14.9 million, and paid debt issue costs of $33.0 million.


Table of Contents

Results of Operations



The summary financial results and operating statistics are as follows:



                               Three Months Ended March 31,            Nine Months Ended March 31,
                              2014        %        2013      %      2014(2)       %       2013      %
                                                      (dollars in millions)
Revenues:
EGM                        $    102.4      30 %  $   85.8     33 % $    261.8      30 %  $ 251.1     34 %
Gaming Operations               101.4      30 %     102.0     39 %      300.6      34 %    302.2     41 %
Systems                          90.5      27 %      71.3     28 %      252.1      29 %    179.3     25 %
Table Products                   44.1      13 %         -      - %       58.4       7 %        -      - %
Total revenues             $    338.4     100 %  $  259.1    100 % $    872.9     100 %  $ 732.6    100 %

Gross Margin(1):
EGM                        $     50.2      49 %  $   43.5     51 % $    128.3      49 %  $ 126.6     50 %
Gaming Operations                66.2      65 %      72.0     71 %      205.3      68 %    211.8     70 %
Systems                          63.9      71 %      52.2     73 %      182.1      72 %    134.9     75 %
Table Products                   31.2      71 %         -      - %       39.9      68 %        -      - %
Total gross margin         $    211.5      63 %  $  167.7     65 % $    555.6      64 %  $ 473.3     65 %

Selling, general and
administrative             $     88.2      26 %  $   72.2     28 % $    251.6      29 %  $ 204.6     28 %
Research and development
costs                            36.7      11 %      29.1     11 %       98.9      11 %     80.8     11 %
Depreciation and
amortization                     20.5       6 %       5.7      3 %       37.5       4 %     17.0      3 %
Operating income           $     66.1      20 %  $   60.7     23 % $    167.6      19 %  $ 170.9     23 %



(1) Gross Margin excludes amortization related to intangible assets which are included in depreciation and amortization.

(2) Results for the nine months ended March 31, 2014 included the Acquisition beginning on November 25, 2013.

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Total revenues increased $79.3 million to $338.4 million, or 31%, in the three months ended March 31, 2014, when compared to the same period last year, as a result of the following:

EGM Revenue. Revenue increased by $16.6 million, or 19%, to approximately $102.4 million primarily as a result of:

† higher North America replacement sales and the sale of 930 Equinox units and 211 ETS seats, partially offset by the absence of 788 Canadian VLT units sold in the prior year period; and

† a 7% increase in ASP to $17,203 in the three months ended March 31, 2014, when compared to $16,051 in the same period last year, due primarily to sale of the new Pro Wave premium cabinet and higher ASPs in certain international jurisdictions.

EGM sales attributable to the Acquisition were approximately $24.9 million during the three months ended March 31, 2014.

EGM Gross Margin. Gross margin decreased to 49% in the three months ended March 31, 2014 from 51%, in the same period last year, due primarily to inventory-related charges related to the Acquisition of approximately $1.0 million.

Gaming Operations Revenue. Revenue decreased $0.6 million, or 1%, to approximately $101.4 million in the three months ended March 31, 2014, when compared to the same period last year, primarily as a result of:

†          lower yields on certain variable fee games; partially offset by



†          an increase in WAP revenue and the inclusion of 2,198 leased ETS
seats.

Gaming Operation revenues attributable to the Acquisition were approximately $4.8 million during the three months ended March 31, 2014.

Gaming Operations Gross Margin. Gross margin decreased to 65% from 71% in the three months ended March 31, 2014, when compared to the same period last year, due primarily to higher jackpot expenses, the inclusion of lower margin leased ETS seats, and approximately $1.0 million of asset charges related to the Acquisition.

Systems Revenue. Revenue increased $19.2 million, or 27%, to approximately $90.5 million in the three months ended March 31, 2014, when compared to the same period last year, due to several system installations during the quarter which increased hardware revenue by $14.1 million and software and services . . .

  Add BYI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BYI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.