Edgar Filing: BALLY TECHNOLOGIES, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

o	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 October 31, 2013, was 38,971,000 which does not include 26,516,000 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 September 30, 2013 and June 30, 2013	3

	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2013 and 2012	4

	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2013 and 2012	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2013 and 2012	6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 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	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II.	OTHER INFORMATION	38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 6.	Exhibits	39

SIGNATURES		40

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PART I

ITEM 1. FINANCIAL STATEMENTS

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2013			June 30, 2013
	(in 000s, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	66,216		$	63,220
Restricted cash	13,422			12,939
Accounts and notes receivable, net of allowances for doubtful accounts of $14,272 and $14,813	258,743			248,497
Inventories	66,097			68,407
Prepaid and refundable income tax	13,249			21,845
Deferred income tax assets	38,659			38,305
Deferred cost of revenue	21,505			22,417
Prepaid assets	18,526			14,527
Other current assets	2,691			2,920
Total current assets	499,108			493,077
Restricted long-term investments	14,952			14,786
Long-term accounts and notes receivables, net of allowances for doubtful accounts of $2,369 and $1,764	61,862			65,456
Property, plant and equipment, net of accumulated depreciation of $63,556 and $60,556	36,709			35,097
Leased gaming equipment, net of accumulated depreciation of $217,561 and $209,680	109,028			113,751
Goodwill	172,386			172,162
Intangible assets, net	23,829			25,076
Deferred income tax assets	17,481			17,944
Income tax receivable	1,837			1,837
Deferred cost of revenue	13,182			12,105
Other assets, net	31,635			27,974
Total assets	$	982,009		$	979,265

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,954		$	25,863
Accrued and other liabilities	86,547			91,127
Jackpot liabilities	11,012			11,731
Deferred revenue	54,757			62,254
Income tax payable	12,957			11,345
Current maturities of long-term debt	26,447			24,615
Total current liabilities	225,674			226,935
Long-term debt, net of current maturities	527,500			580,000
Deferred revenue	30,647			23,696
Other income tax liability	9,489			12,658
Other liabilities	21,717			16,804
Total liabilities	815,027			860,093
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $.10 par value; 100,000,000 shares authorized; 65,472,000 and 65,318,000 shares issued and 38,956,000 and 38,855,000 outstanding	6,539			6,523
Treasury stock at cost, 26,516,000 and 26,463,000 shares	(1,081,949		)	(1,058,381		)
Additional paid-in capital	569,212			535,759
Accumulated other comprehensive loss	(10,733		)	(10,692		)
Retained earnings	684,123			646,339
Total Bally Technologies, Inc. stockholders’ equity	167,192			119,548
Noncontrolling interests	(210		)	(376		)
Total stockholders’ equity	166,982			119,172
Total liabilities and stockholders’ equity	$	982,009		$	979,265

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 September 30,
	2013			2012
	(in 000s, except per share amounts)
Revenues:
Gaming equipment and systems	$	147,387		$	134,011
Gaming operations	101,902			101,140
	249,289			235,151
Costs and expenses:
Cost of gaming equipment and systems (1)	54,506			55,354
Cost of gaming operations	30,619			30,993
Selling, general and administrative	72,427			64,516
Research and development costs	29,504			25,095
Depreciation and amortization	5,265			5,604
	192,321			181,562
Operating income	56,968			53,589
Other income (expense):
Interest income	2,481			1,144
Interest expense	(4,427		)	(4,617		)
Other, net	(900		)	(743		)
Income from operations before income taxes	54,122			49,373
Income tax expense	(16,172		)	(18,429		)
Net income	37,950			30,944
Less net income (loss) attributable to noncontrolling interests	166			(1,588		)
Net income attributable to Bally Technologies, Inc.	$	37,784		$	32,532

Basic and Diluted earnings per share attributable to Bally Technologies, Inc.:
Basic earnings per share	$	0.98		$	0.80
Diluted earnings per share	$	0.97		$	0.77

Weighted average shares outstanding:
Basic	38,381			40,868
Diluted	39,091			42,115

(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 September 30,
	2013			2012
	(in 000s)
Net Income	$	37,950		$	30,944

Other comprehensive income (loss):
Foreign currency translation adjustment before income taxes	(235		)	853
Income tax expense	—			—
Foreign currency translation adjustment	(235		)	853

Unrealized gain (loss) on derivative financial instruments before income taxes	299			(526		)
Income tax (expense) benefit	(105		)	184
Unrealized gain (loss) on derivative financial instruments	194			(342		)

Total other comprehensive income (loss), net of income taxes	(41		)	511

Comprehensive income	37,909			31,455
Less: comprehensive income (loss) attributable to noncontrolling interests	166			(1,588		)
Comprehensive income attributable to Bally Technologies, Inc.	$	37,743		$	33,043

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 THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

											Accumulated
											Other
				Series E					Additional		Comprehensive								Total
	Common Stock			Special		Treasury			Paid-In		Income (Loss)			Retained		Noncontrolling			Stockholders’
	Shares	Dollars		Stock		Stock			Capital		(“OCI”)			Earnings		Interests			Equity
	(in 000s)
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)	—	—		—		—			—		—			32,532		(1,588		)	30,944
Foreign currency translation adjustment	—	—		—		—			—		853			—		—			853
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—		(342		)	—		—			(342		)
Total comprehensive income	—	—		—		—			—		—			—		—			$	31,455
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	331	31		—		(843		)	8,881		—			—		—			8,069
Purchase of common stock for treasury	—	—		—		(67,233		)	—		—			—		—			(67,233		)
Share-based compensation	—	—		—		—			3,021		—			—		—			3,021
Balances at September 30, 2012	63,481	$	6,340	$	12	$	(858,709	)	$	500,904	$	(12,966	)	$	537,427	$	(221	)	$	172,787

Balances at June 30, 2013	65,318	$	6,523	$	—	$	(1,058,381	)	$	535,759	$	(10,692	)	$	646,339	$	(376	)	$	119,172
Net income (loss),	—	—		—		—			—		—			37,784		166			37,950
Foreign currency translation adjustment	—	—		—		—			—		(235		)	—		—			(235		)
Unrealized loss on derivative financial instruments, net of tax	—	—		—		—			—		194			—		—			194
Total comprehensive income	—	—		—		—			—		—			—		—			$	37,909
Issuance and receipt of restricted stock, ESPP shares, stock options and related tax and tax benefit	154	16		—		(1,068		)	7,491		—			—		—			6,439
Settlement of accelerated share repurchase forward contract	—	—		—		(22,500		)	22,500		—			—		—			—
Share-based compensation	—	—		—		—			3,462		—			—		—			3,462
Balances at September 30, 2013	65,472	$	6,539	$	—	$	(1,081,949	)	$	569,212	$	(10,733	)	$	684,123	$	(210	)	$	166,982

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

	Three Months Ended September 30,
	2013			2012
	(in 000s)
Cash flows from operating activities:
Net income	$	37,950		$	30,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,051			21,319
Share-based compensation	3,462			3,021
Amortization of deferred debt issuance costs	517			440
Income tax (benefit) expense	(3,169		)	1,105
Provision for doubtful accounts	661			4,616
Inventory write-downs	1,530			3,143
Excess tax benefit of stock option exercises	(1,852		)	(1,406		)
Other	46			(85		)
Change in operating assets and liabilities:
Accounts and notes receivable	(8,495		)	(2,610		)
Inventories	(9,962		)	(17,387		)
Prepaid and refundable income tax and income tax payable	12,059			2,947
Other current assets and other assets	(2,614		)	(8		)
Accounts payable	8,075			(7,880		)
Accrued liabilities and jackpot liabilities	(4,934		)	(4,779		)
Deferred revenue and deferred cost of revenue	(748		)	4,342
Net cash provided by operating activities	54,577			37,722
Cash flows from investing activities:
Capital expenditures	(5,232		)	(4,220		)
Restricted cash and investments	(648		)	2,102
Payments received from development financing	1,404			—
Additions to other long-term assets	(745		)	(347		)
Net cash used in investing activities	(5,221		)	(2,465		)
Cash flows from financing activities:
Proceeds from revolving credit facility	—			50,000
Payments on revolving credit facility	(45,000		)	—
Capitalized debt issuance costs	(1,350		)	—
Payments on long-term debt and capital leases	(5,658		)	(3,757		)
Acquisition-related contingent consideration	(131		)	—
Purchase of treasury stock	(1,068		)	(68,076		)
Excess tax benefit of stock option exercises	1,852			1,406
Proceeds from exercise of stock options and employee stock purchases	5,622			7,445
Net cash used in financing activities	(45,733		)	(12,982		)

Effect of exchange rate changes on cash	(627		)	863

Cash and cash equivalents:
Increase for period	2,996			23,138
Balance, beginning of period	63,220			32,673
Balance, end of period	$	66,216		$	55,811

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:

	Three Months Ended September 30,
	2013		2012
	(in 000s)
Cash paid for interest	$	4,386	$	4,455
Cash paid for income taxes, net of refunds	7,196		13,885

Non-cash investing and financing transactions:
Transfer of inventory to leased gaming equipment (1)	$	13,172	$	21,295
Reclassify property, plant and equipment to inventory (1)	3,567		2,453

(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, 2013. 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 enters 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 September 30, 2013 and June 30, 2013, euro forward contracts for a total of $25.6 million and $33.0 million, respectively, or the equivalent of €15.9 and €25.3 million, were outstanding. In addition, as of September 30, 2013 and June 30, 2013, pound sterling forward contracts for a total of $2.4 million and $2.3 million, respectively, or the equivalent of £1.5 million and £1.5 million, were outstanding.

The Company also uses interest rate derivatives to manage the interest expense generated by variable rate debt. See Note 5 to the unaudited condensed consolidated financial statements, Long-Term Debt. 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 September 30, 2013:
Assets:
Other current assets:
Foreign currency derivative financial instrument	$	—	$	36	$	—
Liabilities:
Accrued and other liabilities:
Foreign currency derivative financial instrument	$	—	$	868	$	—
Interest rate derivative financial instrument	$	—	$	4,653	$	—
Other liabilities:
Interest rate derivative financial instrument	$	—	$	4,664	$	—

As of June 30, 2013:
Assets:
Other current assets:
Foreign currency derivative financial instrument	$	—	$	397	$	—
Liabilities:
Accrued and other liabilities:
Foreign currency derivative financial instrument	$	—	$	22	$	—
Interest rate derivative financial instrument	$	—	$	4,689	$	—
Other liabilities:
Interest rate derivative financial instrument	$	—	$	4,927	$	—

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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.

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.

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 Loss Recognized in OCI on Derivative (Effective Portion)			Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Loss Recognized in Income on Derivative (Ineffective Portion)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion)
	(in 000s)
For the three months ended September 30, 2013:
Interest rate swap agreement	$	(985	)	Interest expense	$	(1,284	)	Interest expense	$	—
For the three months ended September 30, 2012:
Interest rate swap agreement	$	(1,757	)	Interest expense	$	(1,231	)	Interest expense	$	(9	)

	Amount of Gain (Loss) Recognized in Other Income (Expense)
	(in 000s)
Non-Designated Derivative	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012
Foreign Currency Forward Contracts	$	(1,429	)	$	(832	)

The pre-tax changes in other comprehensive income for the three months ended September 30, 2013 and 2012 are as follows:

	Amount
	(in 000s)
Interest Rate Derivative Financial Instrument OCI Rollforward:	Three Months Ended September 30, 2013			Three Months Ended September 30, 2012
Beginning balance	$	(9,616	)	$	(13,832	)
Amount recognized in OCI on derivative	(985		)	(1,757		)
Amount reclassified from OCI into income	1,284			1,231
Unrealized gain (loss) on derivative financial instruments	$	(9,317	)	$	(14,358	)

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The following tables reconcile the net fair values of assets and liabilities, subject to offsetting arrangements that are recorded in the unaudited condensed consolidated balance sheets:

Offsetting of Derivative Assets

			Gross Amounts Offset in the Unaudited		Net Amounts of Assets Presented in the Unaudited		Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Description	Gross Amounts of Recognized Assets		Condensed Consolidated Balance Sheets		Condensed Consolidated Balance Sheets		Financial Instruments			Cash Collateral Pledged		Net Amount
	(in 000s)
As of September 30, 2013:
Foreign currency derivative financial instrument	$	36	$	—	$	36	$	(36	)	$	—	$	—

As of June 30, 2013:
Foreign currency derivative financial instrument	$	397	$	—	$	397	$	(22	)	$	—	$	375

Offsetting of Derivative Liabilities

				Gross Amounts Offset in the Unaudited		Net Amounts of Liabilities Presented in the Unaudited			Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Description	Gross Amounts of Recognized Liabilities			Condensed Consolidated Balance Sheets		Condensed Consolidated Balance Sheets			Financial Instruments		Cash Collateral Pledged		Net Amount
	(in 000s)
As of September 30, 2013:
Foreign currency derivative financial instruments	$	(868	)	$	—	$	(868	)	$	36	$	—	$	(832	)
Interest rate derivative financial instrument	$	(9,317	)	$	—	$	(9,317	)	$	—	$	—	$	(9,317	)

As of June 30, 2013:
Foreign currency derivative financial instruments	$	(22	)	$	—	$	(22	)	$	22	$	—	$	—
Interest rate derivative financial instrument	$	(9,616	)	$	—	$	(9,616	)	$	—	$	—	$	(9,616	)

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Accounts and notes receivable and allowances for doubtful accounts

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 generally up to three years, with interest generally at market rates.

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.

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:

	September 30, 2013		June 30, 2013
	(in 000s)
Raw materials	$	44,335	$	42,464
Work-in-process	2,006		1,508
Finished goods	19,756		24,435
Total	$	66,097	$	68,407

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 except for gaming industry taxes on certain Gaming Operations revenue. The gross amounts of these gaming taxes are not presented separately in the financial statements because they are not significant. 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 when 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.

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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.

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.

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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

Effective September 30, 2012, new accounting guidance for testing indefinite-lived intangible assets permits an entity to first assess 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.

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On July 1, 2013, the Company adopted new accounting guidance for disclosures about offsetting assets and liabilities which requires an entity to disclose both gross and net information about derivatives, repurchase and reverse repurchase agreements, securities borrowings and lending transactions eligible for offset in the statement of financial position. This information is intended to enable users of the financial statements to understand the effect of these arrangements on the Company’s financial position. The adoption of this guidance did not have a significant impact on the Company’s consolidated results of operations, financial condition and cash flows.

On July 1, 2013, the Company adopted new accounting guidance to improve the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). Under the guidance, an entity is required to provide information about the amounts reclassified out of 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 adoption of this guidance did not have a significant impact on the Company’s consolidated results of operations, financial condition and cash flows.

Recently issued accounting pronouncements not yet adopted

In February 2013, the FASB issued new accounting guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, including debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The Company expects to adopt this guidance in fiscal year 2015 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.

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 September 30,
	2013		2012
	(in 000s, except per share amounts)

Net income attributable to Bally Technologies, Inc.	$	37,784	$	32,532

Weighted average shares outstanding	38,381		40,868
Dilutive effect of:
Stock options, Restricted Stock Units (“RSU”) and restricted stock	710		1,247
Weighted average diluted shares outstanding	39,091		42,115

Basic and diluted earnings per share attributable to Bally Technologies, Inc.
Basic earnings per share	$	0.98	$	0.80

Diluted earnings per share	$	0.97	$	0.77

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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 September 30,
	2013	2012
	(in 000s)
Stock options, RSU and restricted stock	—	272

3. ACCOUNTS AND NOTES RECEIVABLE

The Company has one portfolio segment, the gaming 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’s accounts and notes receivable were as follows:

	Accounts and Notes Receivable as of September 30, 2013						Accounts and Notes Receivable as of June 30, 2013
	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	$	179,039	$	2,294	$	176,745	$	170,598	$	1,589	$	169,009

Contract term greater than one year:
Trade receivables, current	84,582		72,431		12,151		82,600		63,193		19,407
Trade receivables, noncurrent	34,890		13,379		21,511		40,178		17,961		22,217
	119,472		85,810		33,662		122,778		81,154		41,624

Lease receivables, current	6,386		6,386		—		6,701		6,701		—
Lease receivables, noncurrent	12,611		12,611		—		9,928		9,928		—
	18,997		18,997		—		16,629		16,629		—

Notes receivable, current	3,008		3,008		—		3,411		3,411		—
Notes receivable, noncurrent	16,730		16,730		—		17,114		17,114		—
	19,738		19,738		—		20,525		20,525		—

Total current	273,015		84,119		188,896		263,310		74,894		188,416
Total noncurrent	64,231		42,720		21,511		67,220		45,003		22,217
Total	$	337,246	$	126,839	$	210,407	$	330,530	$	119,897	$	210,633

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The activity related to the allowance for doubtful accounts for the quarter ended September 30, 2013 is summarized below:

	Allowance for Doubtful Accounts
	Beginning Balance as of June 30, 2013			Charge- offs		Recoveries		Provision			Ending Balance as of September 30, 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	$	(4,505	)	$	24	$	—	$	321		$	(4,160	)	$	(1,224	)	$	(2,936	)

Contract term greater than one year:
Trade receivables, current	(10,308		)	3		560		(367		)	(10,112		)	(7,712		)	(2,400		)
Trade receivables, noncurrent	(1,764		)	10		—		(615		)	(2,369		)	(655		)	(1,714		)
	(12,072		)	13		560		(982		)	(12,481		)	(8,367		)	(4,114		)

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

Notes receivable, current	—			—		—		—			—			—			—
Notes receivable, noncurrent	—			—		—		—			—			—			—
	—			—		—		—			—			—			—

Total current	(14,813		)	27		560		(46		)	(14.272		)	(8,936		)	(5,336		)
Total noncurrent	(1,764		)	10		—		(615		)	(2,369		)	(655		)	(1,714		)
Total	$	(16,577	)	$	37	$	560	$	(661	)	$	(16,641	)	$	(9,591	)	$	(7,050	)

The activity related to the allowance for doubtful accounts for the quarter ended September 30, 2012 is summarized below:

	Allowance for Doubtful Accounts
	Beginning Balance as of June 30, 2012			Charge- offs		Recoveries		Provision			Ending Balance as of September 30, 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	$	(6,138	)	$	821	$	—	$	(1,256	)	$	(6,573	)	$	(2,457	)	$	(4,116	)

Contract term greater than one year:
Trade receivables, current	(7,935		)	56		177		(2,399		)	(10,101		)	(6,985		)	(3,116		)
Trade receivables, noncurrent	(1,279		)	295		—		(155		)	(1,139		)	(174		)	(965		)
	(9,214		)	351		177		(2,554		)	(11,240		)	(7,159		)	(4,081		)

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		)	877		177		(3,655		)	(16,674		)	(9,442		)	(7,232		)
Total noncurrent	(3,029		)	295		—		(961		)	(3,695		)	(2,730		)	(965		)
Total	$	(17,102	)	$	1,172	$	177	$	(4,616	)	$	(20,369	)	$	(12,172	)	$	(8,197	)

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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 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.

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 September 30, 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	$	7,212	$	3,458	$	8,114	$	18,784	$	100,688	$	119,472	$	18,784	$	—
Lease receivables	—		—		—		—		18,997		18,997		—		—
Notes receivable	—		—		—		—		19,738		19,738		—		—
Total	$	7,212	$	3,458	$	8,114	$	18,784	$	139,423	$	158,207	$	18,784	$	—

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, 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	$	9,636	$	2,851	$	6,869	$	19,356	$	103,422	$	122,778	$	19,356	$	—
Lease receivables	—		—		—		—		16,629		16,629		—		—
Notes receivable	—		—		—		—		20,525		20,525		—		—
Total	$	9,636	$	2,851	$	6,869	$	19,356	$	140,576	$	159,932	$	19,356	$	—

The aging of customer invoices and note balances are based on contractually agreed upon payment terms, which in certain rare circumstances have been modified from the original financing terms. The modification 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 total trade, lease and notes receivable balances.

The Company provided development financing to certain customers in the form of notes receivable. There were no significant modifications of accounts 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. There were no recorded investments in impaired loans as of September 30, 2013 and June 30, 2013.

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The fair value of accounts and notes receivable, net, is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers, with similar credit ratings and remaining maturities. As of September 30, 2013 and June 30, 2013, the fair value of the accounts and notes receivable, net, approximate the carrying value.

4. GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

		September 30, 2013							June 30, 2013
	Useful Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(dollars in 000s)
Computer software	3 - 5	$	40,722	$	(36,217	)	$	4,505	$	39,484	$	(35,796	)	$	3,688
License rights	3 - 13	13,094		(8,183		)	4,911		12,819		(7,215		)	5,604
Trademarks	5 - 10	2,430		(2,245		)	185		2,430		(2,239		)