Edgar Filing: BALLY TECHNOLOGIES, INC.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-31558

BALLY TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

NEVADA		88-0104066
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6601 S. Bermuda Rd.

Las Vegas, Nevada 89119

(Address of principal executive offices)

(702) 584-7700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x		Accelerated Filer o

Non-Accelerated Filer o		Smaller Reporting Company o
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of shares of Common Stock, $0.10 par value, outstanding as of May 1, 2013, was 38,626,000 which do not include 26,445,000 shares held in treasury.

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TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of March 31, 2013 and June 30, 2012	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2013 and 2012	4

	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2013 and 2012	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2013 and 2012	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2013 and 2012	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION	36

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 6.	Exhibits	36

SIGNATURES		37

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PART I

ITEM 1. FINANCIAL STATEMENTS

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2013			June 30, 2012
	(in 000s, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	49,291		$	32,673
Restricted cash	14,474			13,645
Accounts and notes receivable, net of allowances for doubtful accounts of $14,183 and $14,073	260,877			264,842
Inventories	65,747			75,066
Prepaid and refundable income tax	25,256			13,755
Deferred income tax assets	39,485			42,822
Deferred cost of revenue	21,967			17,615
Prepaid assets	16,380			13,061
Other current assets	4,136			6,980
Total current assets	497,613			480,459
Restricted long-term investments	11,292			12,171
Long-term accounts and notes receivables, net of allowances for doubtful accounts of $3,667 and $3,029	44,094			55,786
Property, plant and equipment, net of accumulated depreciation of $59,635 and $58,823	33,195			30,667
Leased gaming equipment, net of accumulated depreciation of $207,002 and $185,846	119,147			121,151
Goodwill	172,068			171,971
Intangible assets, net	31,394			39,166
Deferred income tax assets	8,255			7,409
Income tax receivable	12,041			12,041
Deferred cost of revenue	12,299			16,542
Other assets, net	23,582			23,104
Total assets	$	964,980		$	970,467

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,025		$	41,414
Accrued and other liabilities	92,421			85,310
Jackpot liabilities	10,086			11,682
Deferred revenue	59,096			46,314
Income tax payable	3,505			12,226
Current maturities of long-term debt	22,747			17,091
Total current liabilities	216,880			214,037
Long-term debt, net of current maturities	467,500			494,375
Deferred revenue	21,066			26,715
Other income tax liability	17,445			13,922
Other liabilities	20,002			23,943
Total liabilities	742,893			772,992
Commitments and contingencies (Note 9)
Stockholders’ equity:
Special stock, 10,000,000 shares authorized: Series E, $100 liquidation value; 115 shares issued and outstanding	12			12
Common stock, $.10 par value; 100,000,000 shares authorized; 64,931,000 and 63,150,000 shares issued and 40,992,000 and 42,102,000 outstanding	6,487			6,309
Treasury stock at cost, 23,939,000 and 21,048,000 shares	(922,338		)	(790,633		)
Additional paid-in capital	541,097			489,002
Accumulated other comprehensive loss	(11,834		)	(13,477		)
Retained earnings	609,002			504,895
Total Bally Technologies, Inc. stockholders’ equity	222,426			196,108
Noncontrolling interests	(339		)	1,367
Total stockholders’ equity	222,087			197,475
Total liabilities and stockholders’ equity	$	964,980		$	970,467

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
	(in 000s, except per share amounts)
Revenues:
Gaming equipment and systems	$	157,102		$	136,032		$	430,436		$	370,262
Gaming operations	102,045			92,508			302,201			263,702
	259,147			228,540			732,637			633,964
Costs and expenses:
Cost of gaming equipment and systems (1)	61,419			59,046			168,978			160,220
Cost of gaming operations	29,992			25,017			90,320			73,107
Selling, general and administrative	72,218			63,764			204,586			182,290
Research and development costs	29,098			24,838			80,792			70,601
Depreciation and amortization	5,755			5,648			17,046			17,089
	198,482			178,313			561,722			503,307
Operating income	60,665			50,227			170,915			130,657
Other income (expense):
Interest income	1,191			1,225			3,738			3,695
Interest expense	(4,389		)	(4,150		)	(13,544		)	(13,232		)
Other, net	(1,534		)	325			(3,336		)	(2,259		)
Income from operations before income taxes	55,933			47,627			157,773			118,861
Income tax expense	(17,527		)	(17,713		)	(55,345		)	(44,254		)
Net income	38,406			29,914			102,428			74,607
Less net loss attributable to noncontrolling interests	(43		)	(53		)	(1,679		)	(20		)
Net income attributable to Bally Technologies, Inc.	$	38,449		$	29,967		$	104,107		$	74,627

Basic and Diluted earnings per share attributable to Bally Technologies, Inc.:
Basic earnings per share	$	0.95		$	0.70		$	2.56		$	1.73
Diluted earnings per share	$	0.93		$	0.67		$	2.50		$	1.65

Weighted average shares outstanding:
Basic	40,483			43,087			40,594			43,229
Diluted	41,199			45,052			41,614			45,138

(1) Cost of gaming equipment and systems exclude amortization related to certain intangibles, including core technology and license rights, which are included in depreciation and amortization.

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
	(in 000s)
Net Income	$	38,406		$	29,914		$	102,428		$	74,607

Other comprehensive income (loss):
Foreign currency translation adjustment before income taxes	(522		)	648			370			(2,536		)
Income tax expense	—			—			—			—
Foreign currency translation adjustment	(522		)	648			370			(2,536		)

Unrealized gain (loss) on derivative financial instruments before income taxes	1,196			124			1,959			(8,211		)
Income tax expense (benefit)	(419		)	(43		)	(686		)	2,874
Unrealized gain (loss) on derivative financial instruments	777			81			1,273			(5,337		)

Total other comprehensive income (loss), net of income taxes	255			729			1,643			(7,873		)
Comprehensive income	38,661			30,643			104,071			66,734

Less: comprehensive loss attributable to noncontrolling interests	(43		)	(53		)	(1,679		)	(20		)
Comprehensive income attributable to Bally Technologies, Inc.	$	38,704		$	30,696		$	105,750		$	66,754

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2013 AND 2012

	Common Stock			Series E Special		Treasury			Additional Paid-In		Accumulated Other Comprehensive Income (Loss)			Retained		Noncontrolling			Total Stockholders’
	Shares	Dollars		Stock		Stock			Capital		(“OCI”)			Earnings		Interests			Equity
	(in 000s)
Balances at June 30, 2011	61,541	$	6,149	$	12	$	(634,268	)	$	442,713	$	(3,064	)	$	401,363	$	1,687		$	214,592
Net income	—	—		—		—			—		—			74,627		(20		)	74,607
Foreign currency translation adjustment	—	—		—		—			—		(2,536		)	—		—			(2,536		)
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—		(5,337		)	—		—			(5,337		)
Total comprehensive income	—	—		—		—			—		—			—		—			$	66,734
Distributions to noncontrolling interests	—	—		—		—			—		—			—		(138		)	(138		)
Cumulative effect of adoption of ASU 2010-16	—	—		—		—			—		—			2,384		—			2,384
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	1,158	114		—		(1,157		)	23,648		—			—		—			22,605
Purchase of common stock for treasury	—	—		—		(81,608		)	—		—			—		—			(81,608		)
Share-based compensation	—	—		—		—			10,986		—			—		—			10,986
Balances at March 31, 2012.	62,699	$	6,263	$	12	$	(717,033	)	$	477,347	$	(10,937	)	$	478,374	$	1,529		$	235,555

Balances at June 30, 2012	63,150	$	6,309	$	12	$	(790,633	)	$	489,002	$	(13,477	)	$	504,895	$	1,367		$	197,475
Net income (loss)	—	—		—		—			—		—			104,107		(1,679		)	102,428
Foreign currency translation adjustment	—	—		—		—			—		370			—		—			370
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—		1,273			—		—			1,273
Total comprehensive income	—	—		—		—			—		—			—		—			$	104,071
Distributions to noncontrolling interests	—	—		—		—			—		—			—		(27		)	(27		)
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	1,781	178		—		(9,099		)	42,419		—			—		—			33,498
Purchase of common stock for treasury	—	—		—		(122,606		)	—		—			—		—			(122,606		)
Share-based compensation	—	—		—		—			9,676		—			—		—			9,676
Balances at March 31, 2013	64,931	$	6,487	$	12	$	(922,338	)	$	541,097	$	(11,834	)	$	609,002	$	(339	)	$	222,087

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended March 31,
	2013			2012
	(in 000s)
Cash flows from operating activities:
Net income	$	102,428		$	74,607
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	66,006			61,325
Share-based compensation	9,676			10,986
Amortization of deferred debt issuance costs	1,319			1,351
Income tax expense	5,304			2,452
Provision for doubtful accounts	9,103			8,262
Inventory write-downs	4,108			4,003
Excess tax benefit of stock option exercises	(15,871		)	(4,589		)
Other	1,031			1,641
Change in operating assets and liabilities:
Accounts and notes receivable	10,654			(33,889		)
Inventories	(39,026		)	(83,414		)
Prepaid and refundable income tax and income tax payable	(4,117		)	22,584
Other current assets and other assets	(2,811		)	(4,227		)
Accounts payable	(12,407		)	(4,657		)
Accrued liabilities and jackpot liabilities	(2,772		)	10,686
Deferred revenue and deferred cost of revenue	6,831			8,048
Net cash provided by operating activities	139,456			75,169
Cash flows from investing activities:
Acquisition	—			(6,000		)
Capital expenditures	(11,003		)	(6,890		)
Restricted cash and investments	51			(4,013		)
Financing provided to customer	(1,228		)	—
Additions to other long-term assets	(905		)	(5,288		)
Net cash used in investing activities	(13,085		)	(22,191		)
Cash flows from financing activities:
Proceeds from revolving credit facility	55,000			10,000
Payments on revolving credit facility	(65,000		)	(30,000		)
Payments on long-term debt and capital leases	(11,305		)	(11,280		)
Distributions to noncontrolling interests	(27		)	(138		)
Purchase of treasury stock	(131,705		)	(74,976		)
Excess tax benefit of stock option exercises	15,871			4,589
Proceeds from exercise of stock options and employee stock purchases	26,475			18,875
Net cash used in financing activities	(110,691		)	(82,930		)

Effect of exchange rate changes on cash	938			(734		)

Cash and cash equivalents:
Increase (decrease) for period	16,618			(30,686		)
Balance, beginning of period	32,673			66,425
Balance, end of period	$	49,291		$	35,739

See accompanying notes to unaudited condensed consolidated financial statements.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED SUPPLEMENTAL CASH FLOW INFORMATION

The following supplemental information is related to the unaudited condensed consolidated statements of cash flows:

	Nine Months Ended March 31,
	2013		2012
	(in 000s)
Cash paid for interest	$	12,403	$	12,945
Cash paid for income taxes, net of refunds	54,906		19,244

Non-cash investing and financing transactions:
Transfer of inventory to leased gaming equipment (1)	$	59,998	$	80,246
Reclassify property, plant and equipment to inventory (1)	11,814		12,239
Accrued purchase of treasury stock	—		7,789
Liabilities assumed in acquisition	—		2,830

(1) As a result of the inability to separately identify the cash flows associated with the construction of leased gaming equipment, the Company has included all additions to leased gaming equipment as an increase in inventory under cash used in operating activities in the unaudited condensed consolidated statement of cash flows. In addition, cash generated from the sale of used gaming equipment classified as leased gaming equipment is also included in cash provided by operating activities in the unaudited condensed consolidated statement of cash flows. The Company has one process to procure raw materials for the assembly of both inventory and leased gaming equipment. The materials requisition planning process considers the number of devices the Company expects to build for sale and for use in its gaming operations during a particular period, but it does not separately earmark purchases for leased gaming equipment. Without such an earmarking process, the Company is unable to determine whether the parts used to construct leased gaming equipment during a particular period came from inventory on hand at the beginning of the period or was constructed from inventory procured during the period of deployment, thus requiring the expenditure of cash.

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BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bally Technologies, Inc. (“Bally” or the “Company”), a Nevada corporation, is 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. The Company’s innovations and 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. The Company also provides hardware, including spinning-reel and video gaming devices, specialty gaming devices, and wide-area progressive systems. Under its business-to-business model, the Company supports customers that include traditional land-based, riverboat, and Native American casinos, video lottery and central determination markets.

Principles of presentation and consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Bally Technologies, Inc., and its wholly owned and partially owned subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), include all adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for each period presented. All adjustments are of a normal, recurring nature. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules and regulations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012. References to specific U.S. GAAP within this report cite topics within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

All intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair value of financial instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.

All financial assets and liabilities are recognized or disclosed at fair value using a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

· Level 1: quoted prices in active markets for identical assets or liabilities;

· Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

· Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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The carrying amounts reflected in the accompanying unaudited condensed consolidated balance sheets for cash equivalents, accounts and notes receivable, investment securities to fund jackpot liabilities, accounts payable, jackpot liabilities and long-term debt approximate their respective fair values. Cash equivalents and investment securities to fund jackpot liabilities have Level 1 inputs with values based on quoted market prices. Accounts and notes receivable and jackpot liabilities have Level 3 inputs and were valued using Discounted Cash Flows (“DCF”) incorporating expected future payment timing and current borrowing rates. Long-term debt has Level 2 inputs and was valued using DCF incorporating expected future payment timing and current borrowing rates.

The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward contracts, generally with maturities of twelve months or less, to hedge recognized foreign currency assets and liabilities to reduce the risk that earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. The gains or losses resulting from changes in the fair value of these forward contracts, which are not designated as accounting hedges, are reported in other income (expense) in the unaudited condensed consolidated statements of operations, and generally offset the gains and losses associated with the underlying foreign-currency-denominated balances, which are also reported in other income (expense). As of March 31, 2013 and June 30, 2012, euro forward contracts for a total of $38.8 million and $38.0 million, respectively, or the equivalent of €30.0 million and €30.0 million, respectively, were outstanding. In addition, as of March 31, 2013, a pound sterling forward contract for $2.3 million, or the equivalent of £1.5 million, was outstanding.

The Company may use interest rate derivatives to manage the interest expense generated by variable rate debt and foreign currency derivatives to manage foreign exchange risk. The Company’s derivative financial instruments are measured at fair value on a recurring basis, and the balances were as follows:

	Fair Value Measurements Using Input Type
	Level 1		Level 2		Level 3
	(in 000s)
As of March 31, 2013:
Assets:
Other assets, net:
Foreign currency derivative financial instrument	$		$	789	$	—

Liabilities:
Accrued and other liabilities:
Foreign currency derivative financial instruments	$	—	$	451	$	—
Interest rate derivative financial instrument	$	—	$	4,816	$	—
Other liabilities:
Interest rate derivative financial instrument	$	—	$	7,057	$	—

As of June 30, 2012:
Assets:
Other assets, net:
Foreign currency derivative financial instrument	$	—	$	2,850	$	—
Liabilities:
Accrued and other liabilities:
Foreign currency derivative financial instrument	$	—	$	115	$	—
Interest rate derivative financial instruments	$	—	$	4,804	$	—
Other liabilities:
Interest rate derivative financial instrument	$	—	$	9,028	$	—

The valuation techniques used to measure the fair value of the derivative financial instrument above in which the counterparties have high credit ratings, were derived from pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data. The Company’s discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves and foreign currency forward rates. See Note 5 to the unaudited condensed consolidated financial statements, Long-Term Debt.

Accounting for Derivative Instruments and Hedging Activity

The Company assesses, both at the inception of each designated hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Such highly effective derivatives are granted hedge accounting treatment. The interest rate derivative instruments meet these requirements and are accounted for as cash flow hedges.

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The impact of the cash flow hedge and non-designated foreign currency derivatives on the unaudited condensed consolidated financial statements is depicted below:

Cash Flow Hedging Relationship	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
	(in 000s)
For the three months ended March 31, 2013:
Interest rate swap agreements	$	(91	)	Interest expense	$	(1,287	)	Interest expense	$	—
For the three months ended March 31, 2012:
Interest rate swap agreement	$	(1,064	)	Interest expense	$	(1,188	)	Interest expense	$	—

Cash Flow Hedging Relationship	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
	(in 000s)
For the nine months ended March 31, 2013:
Interest rate swap agreements	$	(1,889	)	Interest expense	$	(3,848	)	Interest expense	$	(9	)
For the nine months ended March 31, 2012:
Interest rate swap agreement	$	(12,025	)	Interest expense	$	(3,813	)	Interest expense	$	—

	Amount of Gain (Loss) Recognized in Other Income (Expense)
	Three Months Ended		Three Months Ended			Nine Months Ended			Nine Months Ended
Non-Designated Derivative	March 31, 2013		March 31, 2012			March 31, 2013			March 31, 2012
	(in 000s)
Foreign Currency Forward Contracts	$	1,402	$	(1,105	)	$	(494	)	$	1,945

Inventories

Inventories are stated at the lower of cost, determined on a first in, first out basis, or market. Cost elements included in work-in-process and finished goods include raw materials, direct labor and manufacturing overhead. Inventories consist of the following:

	March 31, 2013		June 30, 2012
	(in 000s)
Raw materials	$	44,052	$	50,498
Work-in-process	2,021		1,713
Finished goods	19,674		22,855
Total	$	65,747	$	75,066

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Revenue recognition

The Company’s revenue recognition policy is to record revenue when all of the following criteria have been satisfied:

· Persuasive evidence of an arrangement exists;

· The price or fee to the customer is fixed or determinable;

· Collectability is reasonably assured;

· Delivery has occurred; and

· No significant contractual obligations remain.

Revenues are reported net of incentive rebates, discounts, sales taxes, and all other items of a similar nature. For products sold under arrangements with extended payment terms the probability of collection is evaluated based on a review of the customer’s credit worthiness and a review of historic collection experience on contracts with extended payment terms. As a result of such review, the Company recognizes revenue on extended payment term arrangements as the Company has determined that collectability is reasonably assured and the fee is considered fixed and determinable.

Games placed with customers on a trial basis are recorded as revenue once the trial period has ended, the customer has accepted the games, and all other revenue recognition criteria have been satisfied. Amounts billed to customers prior to completing the earnings process are deferred until the revenue recognition criteria are satisfied.

Gaming Operations Revenue. Gaming operations revenue consists of the operation of linked progressive systems and the rental of gaming devices, game content and the related systems placed with customers. Fees under these arrangements are earned and recognized based on a share of money wagered, a share of the net winnings, or on a fixed daily rate. The daily fee entitles the customer to full use of the gaming device and includes maintenance, licensing of the game content software and connection to a linked progressive system, where applicable. In certain markets, the Company also charges a daily system connection fee for the customer to connect to a central determination system and/or back-office system. The Company does not consider these arrangements to have multiple revenue-generating activities as the services offered are a comprehensive solution in exchange for a daily fee and all of the products and services are delivered simultaneously. Gaming operations revenue is recognized under general revenue recognition guidance as the deliverables provide the customer with rights to use tangible gaming devices and software that is essential to the functionality of the gaming devices.

Gaming Equipment Revenue. Gaming Equipment revenue is generated from the sale of gaming devices and licensing rights to game content software that is installed in the gaming device, parts, and other ancillary equipment. Arrangements may also include sales of game content conversion kits which enable customers to replace game content without purchasing a new gaming device. Gaming equipment arrangements do not include maintenance and product support fees beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as title and risk of loss have passed to the customer and all other revenue recognition criteria have been satisfied.

As the combination of game content software and the tangible gaming device function together to deliver the product’s essential functionality, revenue from the sale of gaming devices is recognized under general revenue recognition guidance. Game content conversion kits are considered software deliverables and are recognized in accordance with software revenue recognition guidance.

Systems Revenue. Systems revenue arrangements generally include a combination of systems software licenses, systems-based hardware products, maintenance and product support fees and professional services. The primary function of systems software licensed by the Company is to aid customers to more effectively run their business with marketing, data management and analysis, accounting, player tracking and security features.

Revenue for systems software and maintenance and product support fees is recognized under software revenue recognition guidance. Although the systems software and certain systems-based hardware function together, the primary functionality of the systems software is derived from the software and the systems software is not essential to the functionality of the systems-based hardware.

The Company licenses systems software on a perpetual basis or under time-based licenses. Revenue from perpetual license software is recognized at the inception of the license term provided all revenue recognition criteria have been satisfied. Revenue from maintenance and product support fees sold with perpetual licenses is recognized over the term of the support period. The Company’s time-based licenses are generally for twelve month terms and are bundled with software maintenance and product support fees. All revenue from such arrangements is recognized over the term of the license.

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Systems-based hardware includes embedded software that is essential to the functionality of the hardware. Accordingly, revenue related to all systems-based hardware sales and related maintenance and product support fees are recognized under general revenue recognition guidance. Revenue from the sale of systems-based hardware is generally recognized upon delivery when title and risk of loss have passed to the customer and all other revenue recognition criteria are satisfied. However, in the case of arrangements involving a systems installation, revenue on the systems-based hardware is generally not recognized until the system has been installed and the customer has accepted the system. Hardware maintenance and product support fees are recognized on a straight-line basis over the term of the support period which is generally twelve months.

Software maintenance and product support provides customers with rights to unspecified software product upgrades, maintenance and patches released during the term of the support period. The Company’s software maintenance and product support arrangements are generally for twelve month periods. Software maintenance and product support is recognized on a straight-line basis over the term of the support period.

Multiple Element Arrangements. The Company enters into revenue arrangements that may consist of multiple deliverables of its products and services. For example, customers may enter into arrangements with the Company for the implementation of systems software and the sale of gaming devices. Arrangements for the implementation of systems software will generally include a combination of systems software licenses, systems-based hardware products, maintenance and product support fees, and professional services. Certain gaming equipment arrangements may also include the sale of gaming devices and game content conversion kits.

Revenue arrangements with multiple deliverables are allocated to separate units of accounting if the deliverables meet both of the following criteria:

· The delivered items have value to the customer on a stand-alone basis. The items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered items on a standalone basis; and

· If the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the Company.

At the inception of a multiple element arrangement, fees under the arrangement are allocated to the nonsoftware deliverables, and to the software deliverables as a group based on their relative selling price. Software deliverables are further subject to separation and allocation based on software revenue recognition guidance as described in the following paragraph. When applying the relative selling price method, a hierarchy is used for estimating the selling price based first on vendor-specific objective evidence (“VSOE”), then third-party evidence (“TPE”) and finally management’s estimate of the selling price (“ESP”). Revenue for each unit of accounting is recognized when the relevant recognition criteria for each respective element has been met.

In allocating arrangement fees under the relative selling price hierarchy, the Company uses VSOE for all products which have been sold on a stand-alone basis. As TPE is generally not available, the Company uses ESP for products that are not sold on a stand-alone basis and for recently introduced products that are sold on a stand-alone basis but for which a history of stand-alone sales has not yet been developed. Following these guidelines, the Company uses either VSOE or ESP for gaming devices, system-based hardware products, maintenance and product support fees associated with perpetual licenses and professional services; and ESP for perpetual and time-based software licenses and maintenance and product support fees associated with time-based licenses.

The Company uses the residual method to recognize revenue allocated to software deliverables. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and is recognized as revenue. In arrangements in which the Company does not have VSOE of fair value of all undelivered software elements, revenue is deferred until delivery occurs or VSOE of fair value has been established for any remaining undelivered software elements. In the event the only undelivered software element is maintenance and product support for which VSOE of fair value does not exist, the revenue is recognized ratably over the maintenance and product support period.

The establishment of VSOE requires judgment as to whether there is a sufficient quantity of items sold on a stand-alone basis and whether the prices demonstrate an appropriate level of concentration to conclude that VSOE exists. In determining ESP, management considers a variety of information including historic pricing and discounting practices, competitive market activity, internal costs, and the pricing and discounting practices of products sold in bundled arrangements.

Recently adopted accounting pronouncements

On December 31, 2011, the Company chose to early adopt new accounting guidance to make the presentation of items within other comprehensive income (“OCI”) more prominent. The new standard requires companies to present items of net income, items of OCI and total comprehensive income in one continuous statement or two separate consecutive statements, and companies are no longer allowed to present items of OCI only in the statement of stockholders’ equity. The Company chose to present the items in two separate consecutive statements. The new guidance was applied retrospectively.

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Effective December 31, 2011, new accounting guidance for testing goodwill impairment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company has not yet utilized this method in its evaluation of goodwill impairment.

Effective September 30, 2012, new accounting guidance for testing indefinite-lived intangible assets permits an entity to first access qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. The outcome of the assessment is used as a basis for determining whether it is necessary to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with ASC Topic 350. The Company has not yet utilized this method in its evaluation of indefinite-lived intangible assets impairment.

Recently issued accounting pronouncements not yet adopted

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities which requires an entity to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. The new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company expects to adopt this guidance in fiscal year 2014 and does not believe it will have a significant impact on its consolidated results of operations, financial condition and cash flows.

In February 2013, the FASB issued new accounting guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. Under the guidance, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. The guidance did not change the requirements for reporting net income or other comprehensive income in the financial statements. The new guidance is effective for annual reporting periods beginning on or after December 15, 2012, and interim periods within those annual periods. The Company expects to adopt this guidance in fiscal year 2014 and does not believe it will have a significant impact on its consolidated results of operations, financial condition and cash flows.

The Company believes there is no additional new accounting guidance adopted but not yet effective that is relevant to the readers of our financial statements. However, there are numerous new proposals under development which, if and when enacted, may have a significant impact on its financial reporting.

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2. EARNINGS PER SHARE

Basic earnings per share are computed by dividing earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflect the additional dilution from all potentially dilutive securities.

The computation of basic and diluted earnings per share applicable to the Company’s common stock is as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2013		2012		2013		2012
	(in 000s, except per share amounts)
Net income attributable to Bally Technologies, Inc.	$	38,449	$	29,967	$	104,107	$	74,627

Weighted average shares outstanding	40,483		43,087		40,594		43,229
Dilutive effect of:
Stock options, Restricted Stock Units (“RSU”) and restricted stock	716		1,965		1,020		1,909
Weighted average diluted shares outstanding	41,199		45,052		41,614		45,138

Basic and diluted earnings per share attributable to Bally Technologies, Inc.:
Basic earnings per share	$	0.95	$	0.70	$	2.56	$	1.73

Diluted earnings per share	$	0.93	$	0.67	$	2.50	$	1.65

Certain securities were excluded from the diluted per share calculation because their inclusion would be anti-dilutive. Such securities consist of the following:

	Three Months Ended March 31,		Nine Months Ended March 31,
	2013	2012	2013	2012
	(in 000s)
Stock options, RSU and restricted stock	76	524	115	713

3. ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable are stated at face value less an allowance for doubtful accounts. The Company generally grants customers credit terms for periods of 30 to 120 days, but may also grant extended payment terms to some customers for periods up to three years, with interest generally at market rates.

The Company has one portfolio segment, the casino industry customer, and four classes of receivables including its trade receivables with a contract term less than one year, trade receivables with a contract term greater than one year, sales-type leasing arrangements, and notes receivable, which are related to development financing loans. Trade receivables with contract terms greater than one year relate to the sale of gaming equipment and systems transactions, and are generally collateralized by the related equipment sold, although the value of such equipment, if repossessed, may be less than the receivable balance outstanding. Sales-type leasing arrangements relate to gaming equipment and include options to purchase the equipment at the end of the lease term at established prices. Customers with sales-type leasing arrangements typically have a long-standing credit history with the Company.

The Company has also provided development financing to certain customers in the form of notes receivable with repayment terms of three to ten years. These notes may require scheduled quarterly principal reductions and may also include accelerated payment terms based upon a percentage of net-win from gaming devices sold or leased to these customers. Notes receivable as of March 31, 2013, include $15.9 million, net of discounts of $3.3 million, related to development financing loans made to HBG Connex S.P.A. (“HBG”) to allow it to make advance payments necessary to obtain gaming licenses in the Italian Video Lottery Terminal (“VLT”) market. HBG has initiated arbitration proceedings against the Company as a result of alleged damages from delays in obtaining regulatory approval of certain gaming equipment to be leased to HBG (see Note 9 to the unaudited condensed consolidated financial statements, Commitments and Contingencies) and has not made required payments on the notes receivable. The Company has not recorded an impairment as management expects to collect amounts due under the notes receivable.

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The Company’s accounts and notes receivable were as follows:

	Accounts and Notes Receivable as of March 31, 2013						Accounts and Notes Receivable as of June 30, 2012
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
	(in 000s)
Contract term less than one year:
Trade and other receivables, current	$	180,309	$	2,407	$	177,902	$	173,889	$	3,655	$	170,234

Contract term greater than one year:
Trade receivables, current	79,278		57,553		21,725		85,075		41,213		43,862
Trade receivables, noncurrent	32,567		12,255		20,312		30,476		7,213		23,263
	111,845		69,808		42,037		115,551		48,426		67,125

Lease receivables, current	6,098		6,098		—		14,763		14,763		—
Lease receivables, noncurrent	4,664		4,664		—		15,070		15,070		—
	10,762		10,762		—		29,833		29,833		—

Notes receivable, current	9,375		9,375		—		5,188		5,188		—
Notes receivable, noncurrent	10,530		10,530		—		13,269		13,269		—
	19,905		19,905		—		18,457		18,457		—

Total current	275,060		75,433		199,627		278,915		64,819		214,096
Total noncurrent	47,761		27,449		20,312		58,815		35,552		23,263
Total	$	322,821	$	102,882	$	219,939	$	337,730	$	100,371	$	237,359

The activity related to the allowance for doubtful accounts for the nine months ended March 31, 2013 is summarized below:

	Allowance for Doubtful Accounts
	Beginning Balance as of June 30, 2012			Charge- offs		Recoveries		Provision			Ending Balance as of March 31, 2013			Ending Balance Individually Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
	(in 000s)
Contract term less than one year:
Trade and other receivables, current	$	(6,138	)	$	1,042	$	—	$	184		$	(4,912	)	$	(2,051	)	$	(2,861	)

Contract term greater than one year:
Trade receivables, current	(7,935		)	5,471		557		(7,364		)	(9,271		)	(7,068		)	(2,203		)
Trade receivables, noncurrent	(1,279		)	1,285		—		(1,117		)	(1,111		)	—			(1,111		)
	(9,214		)	6,756		557		(8,481		)	(10,382		)	(7,068		)	(3,314		)

Lease receivables, current	—			—		—		—			—			—			—
Lease receivables, noncurrent	—			—		—		—			—			—			—
	—			—		—		—			—			—			—

Notes receivable, current	—			—		—		—			—			—			—
Notes receivable, noncurrent	(1,750		)	—		—		(806		)	(2,556		)	(2,556		)	—
	(1,750		)	—		—		(806		)	(2,556		)	(2,556		)	—

Total current	$	(14,073	)	$	6,513	$	557	$	(7,180	)	$	(14,183	)	$	(9,119	)	$	(5,064	)
Total noncurrent	(3,029		)	1,285		—		(1,923		)	(3,667		)	(2,556		)	(1,111		)
Total	$	(17,102	)	$	7,798	$	557	$	(9,103	)	$	(17,850	)	$	(11,675	)	$	(6,175	)

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The activity related to the allowance for doubtful accounts for the nine months ended March 31, 2012 is summarized below:

	Allowance for Doubtful Accounts
	Beginning Balance as of June 30, 2011			Charge- offs		Recoveries		Provision			Ending Balance as of March 31, 2012			Ending Balance Individually Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
	(in 000s)
Contract term less than one year:
Trade and other receivables, current	$	(5,875	)	$	719	$	241	$	(1,290	)	$	(6,205	)	$	(2,506	)	$	(3,699	)

Contract term greater than one year:
Trade receivables, current	(5,184		)	336		241		(2,900		)	(7,507		)	(4,497		)	(3,010		)
Trade receivables, noncurrent	(507		)	1,041		—		(2,322		)	(1,788		)	(457		)	(1,331		)
	(5,691		)	1,377		241		(5,222		)	(9,295		)	(4,954		)	(4,341		)

Lease receivables, current	—			—		—		—			—			—			—
Lease receivables, noncurrent	—			—		—		—			—			—			—
	—			—		—		—			—			—			—

Notes receivable, current	—			—		—		—			—			—			—
Notes receivable, noncurrent	—			—		—		(1,750		)	(1,750		)	(1,750		)	—
	—			—		—		(1,750		)	(1,750		)	(1,750		)	—

Total current	$	(11,059	)	$	1,055	$	482	$	(4,190	)	$	(13,712	)	$	(7,003	)	$	(6,709	)
Total noncurrent	(507		)	1,041		—		(4,072		)	(3,538		)	(2,207		)	(1,331		)
Total	$	(11,566	)	$	2,096	$	482	$	(8,262	)	$	(17,250	)	$	(9,210	)	$	(8,040	)

The Company evaluates the credit quality of its accounts and notes receivable and establishes an allowance for doubtful accounts based on a combination of factors including, but not limited to, customer collection experience, economic conditions, and the customer’s financial condition. In addition to specific account identification, which includes the review of any modifications of accounts and notes receivable, if applicable, the Company utilizes historic collection experience for the most recent twelve month period to establish an allowance for doubtful accounts. Receivables are written off only after the Company has exhausted all collection efforts.

Gaming is a highly regulated industry requiring customers to obtain a gaming operator’s license and verify with the applicable regulatory agency that they have the financial resources to operate a gaming establishment. Many of the Company’s customers, including new casinos that have opened in recent years, are owned by existing multi-property customers that have established a favorable payment history with the Company. Customer accounts typically include a mix of trade receivables balances with terms for periods of 30 to 120 days and financing receivables resulting from extended payment terms.

The Company monitors the credit quality of its accounts receivable by reviewing an aging of customer invoices. Invoices are considered past due if a scheduled payment is not received within contractually agreed upon terms. The Company’s notes receivable are reviewed quarterly, at a minimum, for impairment. The Company also reviews a variety of other relevant qualitative information such as collection experience, economic conditions and specific customer financial conditions to evaluate credit risk in recording the allowance for doubtful accounts or as an indicator of an impaired loan.

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The Company accrues interest, if applicable, on its accounts and notes receivables per the terms of the agreement. Interest is not accrued on past due accounts and notes receivable, or individual amounts that the Company has determined and specifically identified as not collectible. The following summarizes the aging of past due receivables, excluding trade accounts receivable with a contract term less than one year, as of March 31, 2013:

	1 to 90 Days Past Due		91 to 180 Days Past Due		181 + Days Past Due		Total Past Due		Current		Total Receivable		Recorded Investment in Receivables on Nonaccrual Status		Recorded Investment 90 Days and Accruing
	(in 000s)
Trade receivables	$	8,385	$	3,766	$	6,201	$	18,352	$	93,493	$	111,845	$	18,352	$	—
Lease receivables	—		—		—		—		10,762		10,762		—		—
Notes receivable	1,512		1,498		4,781		7,791		12,114		19,905		18,731		—
Total	$	9,897	$	5,264	$	10,982	$	26,143	$	116,369	$	142,512	$	37,083	$	—

The following summarizes the aging of past due receivables, excluding trade accounts receivable with a contract term less than one year, as of June 30, 2012:

	1 to 90 Days Past Due		91 to 180 Days Past Due		181 + Days Past Due		Total Past Due		Current		Total Receivable		Recorded Investment in Receivables on Nonaccrual Status		Recorded Investment 90 Days and Accruing
	(in 000s)
Trade receivables	$	7,278	$	4,197	$	8,735	$	20,210	$	95,341	$	115,551	$	20,210	$	—
Lease receivables	—		—		—		—		29,833		29,833		—		—
Notes receivable	1,427		1,423		319		3,169		15,288		18,457		18,457		—
Total	$	8,705	$	5,620	$	9,054	$	23,379	$	140,462	$	163,841	$	38,667	$	—

The aging of customer invoices is based on their contractually agreed upon payment terms, which in certain rare circumstances have been modified from the original financing terms. The modifications of original financing terms are infrequent and generally do not represent a concession as they result only in a delay of payment that is typically insignificant to our total trade, lease and notes receivable balances. There were no significant modifications of accounts and notes receivable during the period.

Impairment is recognized when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a note arrangement. Due to an individual customer’s filing of a bankruptcy petition, the Company recognized an impairment charge on notes receivable of $1.8 million in fiscal year 2012 and an additional $0.8 million in the nine months ended March 31, 2013 after estimating the fair value of the collateral less costs to sell.

	Impaired Loans
	Recorded Investment		Unpaid Principal Balance		Related Allowance			Average Recorded Investment		Interest Income Recognized
	(in 000s)
As of March 31, 2013:
With an allowance recorded:
Notes receivable	$	2,856	$	2,856	$	(2,556	)	$	2,856