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Bally Technologies, Inc. Reports Record Adjusted EPS of $1.10 and GAAP Diluted EPS of $0.70 for the Third Quarter of Fiscal 2014

Bally Technologies, Inc. (NYSE: BYI)

Neil P. Davidson, CFO of Bally Technologies, Inc. (Photo: Business Wire)

Neil P. Davidson, CFO of Bally Technologies, Inc. (Photo: Business Wire)

  • ADJUSTED EPS, WHICH INCLUDES $0.05 OF FOREIGN CURRENCY LOSSES, INCREASES TO A RECORD $1.10, UP 18 PERCENT FROM PRIOR YEAR
  • WIDE-AREA PROGRESSIVE REVENUE SETS A QUARTERLY RECORD
  • ACHIEVES NORTH AMERICA REPLACEMENT-UNIT SALES OF 2,496, UP 22 PERCENT FROM PRIOR YEAR
  • SYSTEMS REVENUE SETS A QUARTERLY RECORD FOR THE SIXTH CONSECUTIVE QUARTER OF $91 MILLION, UP 27 PERCENT FROM PRIOR YEAR
  • UPDATES FISCAL 2014 ADJUSTED EPS GUIDANCE TO $4.35 TO $4.50

Bally Technologies, Inc. (NYSE: BYI) (“Bally” or the “Company”), a leader in gaming machines, table game products, casino-management systems, interactive applications, and networked and server-based systems for the global gaming industry, today announced record quarterly revenue of $338 million and Adjusted EPS of $1.10 for the three months ended March 31, 2014, which includes a $0.05 per share loss from unfavorable foreign currency movements. Diluted earnings per share (“GAAP Diluted EPS”) were $0.70 for the three months ended March 31, 2014.

“We achieved outstanding financial and operational results in the quarter which helped drive a record 26 percent adjusted operating margin for the first nine months of fiscal 2014 versus 23 percent in the prior year,” said Ramesh Srinivasan, the Company’s President and Chief Executive Officer. “The ongoing SHFL integration has been pivotal in many respects to our results. Our Systems business continues to be a major factor as we gain a greater share of the industry’s increasing technology-related spend. On the EGM front, initial demand for our Pro Wave™ cabinet has been very robust, helping us to grow domestic replacement unit sales by 25 percent over last quarter. Combined with SHFL’s international strength, this was our highest quarterly EGM unit sale level in six years, despite the absence of Canada VLT units. We remain confident that our industry-leading innovation as evidenced by the Pro Wave platform and strength across a broad portfolio of products will help us grow our business into fiscal 2015 and beyond.”

“We continued to set a number of financial records this quarter while generating significant free cash flow,” said Neil Davidson, the Company’s Chief Financial Officer. “We remain committed to deleveraging our balance sheet, as evidenced by the $68 million of debt we repaid during the quarter, for a total of $101 million since the acquisition of SHFL, which lowered our leverage ratio to 3.9 times. In addition, we repurchased approximately 150,000 shares of our common stock for $10 million during the quarter. We will continue to prudently utilize excess free cash flow to pay down debt with the goal of achieving a leverage ratio of 3.0 times by the end of calendar 2015.”

Third Quarter Fiscal Year 2014 Highlights

           
Three Months Ended March 31,   Nine Months Ended March 31,

2014

 

%
Rev

     

2013

 

%
Rev

  2014 (3)    

%
Rev

  2013    

%
Rev

(dollars in millions, except per share amounts)
Revenues:                
Electronic Gaming Machines (“EGM”) $ 102.4   30% $ 85.8 33%

 

$

261.8   30% $ 251.1 34 %
Gaming Operations 101.4 30% 102.0 39% 300.6 34% 302.2 41 %
Systems 90.5 27% 71.3 28% 252.1 29% 179.3 25 %
Table Products 44.1 13%     58.4 7%
Total revenues $ 338.4 100% $ 259.1 100%

 

$

872.9 100% $ 732.6 100 %
 
Gross Margin: (1)
EGM $ 50.2 49% $ 43.5 51%

 

$

128.3 49% $ 126.6 50 %
Gaming Operations 66.2 65% 72.0 71% 205.3 68% 211.8 70 %
Systems 63.9 71% 52.2 73% 182.1 72% 134.9 75 %
Table Products 31.2 71%     39.9 68%
Total gross margin $ 211.5 63% $ 167.7 65%

 

$

555.6 64% $ 473.3 65 %
 
Selling, general and administrative $ 88.2 26% $ 72.2 28%

 

$

251.6 29% $ 204.6 28 %
Research and development costs 36.7 11% 29.1 11% 98.9 11% 80.8 11 %
Depreciation and amortization 20.5 6%   5.7 3%   37.5 4% 17.0 3 %
Operating income $ 66.1 20% $ 60.7 23%

$

167.6

19% $   170.9 23

%

GAAP Diluted EPS $ 0.70 $ 0.93

$

2.21

   

 

$

  2.50  
 
Non-GAAP Measures: (2)
Adjusted Operating Income $ 90.6 27% $ 60.7 23%

 

$

228.7

26%

 

$

  170.9

23

%

Adjusted EBITDA $ 117.4 35% $ 85.0 33%

$

306.3

35%

 

$

  244.9

33

%

Adjusted EPS $ 1.10 $ 0.93

$

3.12

 

$

  2.50
 

(1)

 

Gross Margin excludes amortization related to intangible assets which are included in depreciation and amortization (“D&A”).

(2)

Adjusted Operating Income, Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, including share-based compensation and acquisition-related costs) and Adjusted EPS are Non-GAAP financial measures. Reconciliation between GAAP and Non-GAAP measures can be found at the end of this press release.

(3)

Results for the nine months ended March 31, 2014 include SHFL entertainment, Inc. (“SHFL”) results beginning on November 25, 2013.

 
 

 

          As of March 31,
2014     2013
End-of-period installed base:
Linked progressive systems 2,478 2,365
Rental and daily-fee games 16,048 14,953
Lottery systems (1) 12,629 12,059
Centrally determined systems 30,649 37,201
Utility products 8,905 NA
Proprietary Table Games (“PTG”) 3,016 NA
Table game progressive units, table game side bets, and add-ons 5,434 NA
                                           

(1)

Excludes 693 and 636 third-party Electronic Table System (“ETS”) seats operating as of March 31, 2014 and 2013, respectively.

 
 
       

Three Months Ended
March 31,

Nine Months Ended
March 31,

2014     2013 2014     2013
Operating Statistics

Units
Sold

 

Average Selling
Price (“ASP”)

Units
Sold

  ASP

Units
Sold

  ASP

Units
Sold

  ASP
New EGM 5,278 $ 17,203 4,923 $ 16,051 14,425 $ 16,502 14,096 $ 16,476
Utility products 788 16,088 NA NA 926 16,218 NA NA
 

Highlights of Certain Results for the Three Months Ended March 31, 2014

Overall

  • Total revenue increased 31 percent to a quarterly record $338 million as compared with $259 million last year.
  • Adjusted EBITDA increased 38 percent to a quarterly record $117 million as compared with $85 million last year.
  • Selling, general and administrative expenses (“SG&A”) decreased to 26 percent of total revenues from 28 percent last year and includes $6 million of one-time costs associated with the acquisition of SHFL. After adjusting for these one-time costs, SG&A was 24 percent of total revenues in the current period, down from 28 percent last year.
  • Research and development expenses (“R&D”) remained constant at 11 percent of total revenue.
  • Operating income increased 9 percent to $66 million as compared with $61 million last year. Adjusted Operating Income increased by 49 percent to a record $91 million. Adjusted operating margin increased to a record 27 percent from 23 percent last year.
  • GAAP Diluted EPS was $0.70 as compared with $0.93 last year. Adjusted EPS increased 18 percent to a quarterly record $1.10 from $0.93 last year. GAAP Diluted and Adjusted EPS for the current period included a $0.05 per share loss from unfavorable foreign currency movements.

Electronic Gaming Machines

  • Revenues increased 19 percent to $102 million as compared with $86 million last year, driven by higher replacement sales and the sale of 930 Equinox™ units and 211 ETS seats, partially offset by the absence of 788 Canadian VLT units sold in the prior year period.
  • ASP of new electronic gaming devices increased 7 percent to $17,203 per unit from $16,051 last year, primarily as a result of geographic mix and sales of the Pro Wave cabinet, which carry higher ASPs.
  • New-unit sales to international customers were 34 percent of total new unit shipments compared to 17 percent in the prior year period.
  • Gross margin decreased to 49 percent from 51 percent last year, primarily driven by $1 million of inventory-related charges that are included in acquisition-related costs. After adjusting for these costs, gross margin was 50 percent.

Gaming Operations

  • Revenues decreased slightly to $101 million as compared with $102 million last year, driven by lower yields on certain variable-fee games, partially offset by record wide-area progressive (“WAP”) revenue and the inclusion of 2,198 leased ETS seats.
  • Gross margin decreased to 65 percent from 71 percent last year, primarily due to higher jackpot expenses and $1 million of asset-related charges that are included in acquisition-related costs. After adjusting for asset-related charges, gross margin was 66 percent

Systems

  • Revenues increased 27 percent to an all-time record $91 million as compared with $71 million last year, driven primarily by hardware revenue.
  • Maintenance revenues increased 7 percent to $24 million as compared with $23 million last year.
  • Gross margin decreased to 71 percent from 73 percent last year, primarily as a result of the change in mix of products. Specifically, hardware sales were 44 percent of systems revenues, and software and service sales were 29 percent, as compared to 36 percent for hardware sales and 32 percent for software and services sales in the same period last year.

Table Products

  • Revenues from Table Products were $44 million, with Utility products revenue of $29 million and PTG revenue of $15 million.
  • Gross margin was 71 percent. Gross margin was impacted by $2 million of inventory-related charges that are included in acquisition-related costs. After adjusting for these costs gross margin was 76 percent.

Highlights of Certain Results for the Nine Months Ended March 31, 2014

Overall

  • Total revenue increased 19 percent to a record $873 million as compared with $733 million last year.
  • Adjusted EBITDA increased 25 percent to a record $306 million as compared with $245 million last year.
  • SG&A increased to 29 percent of total revenues from 28 percent last year, primarily driven by $33 million of one-time costs associated with the acquisition of SHFL. After adjusting for these one-time costs, SG&A was 25 percent of total revenues in the current period down from 28 percent last year.
  • R&D remained constant at 11 percent of total revenues.
  • Operating income decreased 2 percent to $168 million as compared with $171 million last year. Adjusted Operating Income increased 34 percent to a record $229 million. Adjusted operating margin increased to a record 26 percent from 23 percent last year.
  • GAAP Diluted EPS was $2.21 as compared with $2.50 last year. Adjusted EPS increased 25 percent to a record $3.12 from $2.50 last year. GAAP Diluted and Adjusted EPS for the current period included a $0.09 per share loss from unfavorable foreign currency movements.

Electronic Gaming Machines

  • Revenues increased 4 percent to $262 million as compared with $251 million last year, driven by the shipment of 2,220 units into the Illinois VGT market, 1,517 Equinox units, and 301 ETS seats, partially offset by the absence of 2,026 Canadian VLT units sold in the prior year period.
  • ASP of new gaming devices increased to $16,502 per unit from $16,476 last year, primarily as a result of geographic mix and sales of the Pro Wave cabinet which carry higher ASPs.
  • New-unit sales to international customers were 28 percent of total new unit shipments compared with 17 percent last year.
  • Gross margin decreased to 49 percent from 50 percent last year, primarily driven by $4 million of inventory-related charges that are included in acquisition-related costs. After adjusting for these costs, gross margin was 51 percent.

Gaming Operations

  • Revenues decreased slightly to $301 million as compared with $302 million last year, driven by lower yields on certain variable-fee games, partially offset by record WAP revenue and the inclusion of 2,198 leased ETS seats.
  • Gross margin decreased to 68 percent from 70 percent last year, primarily due to higher-than-expected jackpot expenses and $1 million of asset-related charges that are included in acquisition-related costs. After adjusting for asset-related charges, gross margin was 69 percent.

Systems

  • Revenues increased 41 percent to a record $252 million as compared with $179 million last year, driven primarily by hardware revenue.
  • Maintenance revenues increased 10 percent to a record $74 million as compared with $67 million last year.
  • Gross margin decreased to 72 percent from 75 percent last year, primarily as a result of the change in mix of products. Specifically, hardware sales were 38 percent of systems revenues, and software and service sales were 33 percent, as compared to 30 percent for hardware sales and 33 percent for software and services sales in the same period last year.

Table Products

  • Revenues from Table Products were $58 million, with Utility products revenue of $38 million and PTG revenue of $20 million.
  • Gross margin was 68 percent. Gross margin was impacted by $3 million of inventory-related charges that are included in acquisition-related costs. After adjusting for these costs, gross margin was 74 percent.

Fiscal 2014 Business Update

The Company updated full-year fiscal 2014 guidance for Adjusted EPS to $4.35 to $4.50. Adjusted EPS is calculated in accordance with the table included in this press release. The range excludes current and expected losses from unfavorable foreign currency movements. For clarity, this guidance includes $3.21 per share of results for the nine months ended March 31, 2014 which is comprised of Adjusted EPS of $3.12 plus an add-back of $0.09 per share loss from unfavorable foreign currency movements incurred during the first nine months of fiscal 2014. This results in a range of Adjusted EPS expected for the remaining three months of fiscal 2014 of $1.14 to $1.29.

The Company has provided this range of adjusted earnings guidance for fiscal 2014 to give investors general information on the overall direction of its business at this time. The guidance provided is subject to numerous uncertainties, including, among others, overall economic and capital market conditions, the market for gaming devices and systems, changes in gaming legislation, the timing of new jurisdictions and casino openings, the timing and completion of new systems installations, competitive product introductions, complex revenue recognition rules related to the Company’s business, and assumptions about the Company’s new product introductions and regulatory approvals. The Company does not intend and undertakes no obligation to update its forward-looking statements, including forecasts, potential opportunities for growth in new and existing markets, and future prospects for proposed new products. Accordingly, the Company does not intend to update guidance during the quarter. Additional information about the factors that could potentially affect the Company’s financial results included in today’s press release can be found in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the U.S. Securities and Exchange Commission.

Non-GAAP Financial Measures

The following table reconciles the Company’s net income attributable to Bally Technologies, Inc., as determined in accordance with generally accepted accounting principles (“GAAP”), to Adjusted EBITDA:

      Three Months Ended       Nine Months Ended
March 31, March 31,
2014     2013 2014     2013

(in millions)

Net income attributable to Bally Technologies, Inc. $ 27.4 $ 38.4 $ 86.4 $ 104.1
Interest expense, net 18.8 3.2 30.1 9.8
Income tax expense 16.2 17.5 44.5 55.3
Depreciation and amortization 41.3 22.4 93.4 66.0
Share-based compensation 3.3 3.5 10.4 9.7
Acquisition-related costs 6.2 33.1
Inventory step-up and obsolescence 4.2 8.4
Adjusted EBITDA $ 117.4 $ 85.0 $ 306.3 $ 244.9

Adjusted EBITDA is a supplemental Non-GAAP financial measure used by the Company’s management and by some industry analysts to evaluate the Company’s ability to service debt, and is used by some investors and financial analysts in the gaming industry in measuring and comparing Bally’s leverage, liquidity, and operating performance to other gaming companies. Adjusted EBITDA should not be considered an alternative to operating income or net cash from operations as determined in accordance with GAAP. Not all companies calculate Adjusted EBITDA the same way, and the Company’s presentation may be different from those presented by other companies.

The following tables reconcile the Company’s GAAP to Non-GAAP Financial Measures:

Three Months Ended March 31, 2014

                             

 

Gross SG&A Operating Net
Revenues     Margin (1)     Expenses     D&A     Income     Income (2)     EPS
 
GAAP Measures $ 338.4 $ 211.5 $ 88.2 $ 20.5 $ 66.1 $ 27.4 $ 0.70
GAAP % 63% 26% 20%
Amortization of purchased intangibles (14.1) 14.1 9.1 0.23
Acquisition-related costs     4.2     (6.2)         10.4     6.7     0.17
Total adjustments     4.2     (6.2)     (14.1)     24.5     15.8     0.40

Adjusted Non-GAAP Measures

$ 338.4 $ 215.7 $ 82.0 $ 6.4 $ 90.6 $ 43.2 $ 1.10
Adjusted %       64%     24%           27%            
               

(1)

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

(2)

Adjustments are tax effected at 35.5%.

 
 

Nine Months Ended March 31, 2014

                             
Gross SG&A Operating Net
Revenues     Margin (1)     Expenses     D&A     Income     Income (2)     EPS
 
GAAP Measures $ 872.9 $ 555.6 $ 251.6 $ 37.5 $ 167.6 $ 86.4 $ 2.21
GAAP % 64% 29% 19%
Amortization of purchased intangibles (19.6) 19.6 12.7 0.32
Acquisition-related costs 8.4 (33.1) 41.5 26.7 0.68
IRS audit one-time benefit                     (3.6)     (0.09)
Total adjustments     8.4     (33.1)     (19.6)     61.1     35.8     0.91
Adjusted Non-GAAP Measures $ 872.9 $ 564.0 $ 218.5 $ 17.9 $ 228.7 $ 122.2 $ 3.12
Adjusted %       65%     25%           26%            
               

(1)

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

(2)

Adjustments are tax effected at 35.5%, except there is no tax effect on the IRS audit one-time benefit.

Adjusted EPS and other such adjusted measures are supplemental Non-GAAP financial measures that the Company’s management believes more accurately reflects the Company’s operating results for the periods presented. Adjusted measures should not be considered an alternative to GAAP measures as determined in accordance with GAAP.

Earnings Conference Call and Webcast

As previously announced, the Company is hosting a conference call and webcast today at 4:30 p.m. EDT (1:30 p.m. PDT). The conference-call dial-in number is 866-524-3160 or 412-317-6760 (International); passcode “Bally”. The webcast can be accessed by visiting BallyTech.com and selecting “Investor Relations.” Interested parties should initiate the call and webcast process at least five minutes prior to the beginning of the presentation. For those who miss this event, an archived version will be available at BallyTech.com until June 2, 2014.

About Bally Technologies, Inc.

Founded in 1932, Bally Technologies (NYSE: BYI) provides the global gaming industry with innovative games, table game products, systems, mobile, and iGaming solutions that drive revenue and provide operating efficiencies for gaming operators. For more information, please contact Mike Trask, Senior Manager, Marketing & Corporate Communications, at 702-532-7451, or visit http://www.ballytech.com. Connect with Bally on Facebook, Twitter, YouTube, LinkedIn and Pinterest.

This press release may contain “forward looking” statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and is subject to the safe harbors created thereby. Forward looking statements are subject to change and involve risks and uncertainties that could significantly affect future results, including those risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. Although the Company believes any expectations expressed in any forward looking statements are reasonable, future results may differ materially from those expressed in any forward looking statements. The Company undertakes no obligation to update the information in this press release except as required by law and represents that the information speaks only as of today’s date.

— BALLY TECHNOLOGIES, INC. —

                                                       

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2014 AND 2013

 
Three Months Ended Nine Months Ended
March 31, March 31,
2014

 

2013

2014

 

2013

(in 000s, except per share amounts)
Revenues:
Gaming equipment and systems $ 209,329 $ 157,102 $ 534,114 $ 430,436
Product lease, operation and royalty 129,070 102,045 338,767 302,201
338,399 259,147 872,881 732,637
Costs and expenses:
Cost of gaming equipment and systems (1) 86,307 61,419 213,729 168,978
Cost of product lease, operation and royalty(1) 40,537 29,992 103,521 90,320
Selling, general and administrative 88,248 72,218 251,661 204,586
Research and development costs 36,677 29,098 98,890 80,792
Depreciation and amortization 20,523 5,755 37,460 17,046
272,292 198,482 705,261 561,722
Operating income 66,107 60,665 167,620 170,915
Other income (expense):
Interest income 1,976 1,191 6,946 3,738
Interest expense (20,861 ) (4,389 ) (37,083 ) (13,544 )
Other, net (3,453 ) (1,534 ) (5,562 ) (3,336 )
Income from operations before income taxes 43,769 55,933 131,921 157,773
Income tax expense (16,200 ) (17,527 ) (44,477 ) (55,345 )
Net income 27,569 38,406 87,444 102,428

Less net income (loss) attributable to noncontrolling interests

125 (43 ) 1,005 (1,679 )

Net income attributable to Bally Technologies, Inc.

$ 27,444 $ 38,449 $ 86,439 $ 104,107
 
Basic and Diluted earnings per share attributable to Bally Technologies, Inc.:
Basic earnings per share $ 0.71 $ 0.95 $ 2.25 $ 2.56
Diluted earnings per share $ 0.70 $ 0.93 $ 2.21 $ 2.50
 
Weighted average shares outstanding:
Basic 38,614 40,483 38,493 40,594
Diluted 39,205 41,199 39,156 41,614
 

(1)

Cost of gaming equipment and systems and product lease, operation and royalty exclude amortization related to intangible assets which are included in depreciation and amortization.

 
 
         

BALLY TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2014 AND JUNE 30, 2013

 

March 31,
2014

     

June 30,
2013

(in 000s, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 90,484 $ 63,220
Restricted cash 13,779 12,939
Accounts and notes receivable, net of allowances for doubtful accounts of $15,772 and $14,813 306,637 248,497
Inventories 91,812 68,407
Prepaid and refundable income tax 31,259 21,845
Deferred income tax assets 50,913 38,305
Deferred cost of revenue 15,460 22,417
Prepaid assets 20,458 14,527
Other current assets 5,023 2,920
Total current assets 625,825 493,077
Restricted long-term investments 16,703 14,786
Long-term accounts and notes receivables, net of allowances for doubtful accounts of $1,492 and $1,764 63,696 65,456
Property, plant and equipment, net of accumulated depreciation of $70,574 and $60,556 71,514 35,097
Leased gaming equipment, net of accumulated depreciation of $242,063 and $209,680 131,369 113,751
Goodwill 997,522 172,162
Intangible assets, net 519,868 25,076
Deferred income tax assets 3,683 17,944
Income tax receivable 979 1,837
Deferred cost of revenue 8,861 12,105
Other assets, net 53,979 27,974
Total assets $ 2,493,999 $ 979,265
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 33,921 $ 25,863
Accrued and other liabilities 110,240 91,127
Jackpot liabilities 12,566 11,731
Deferred revenue 41,851 62,254
Income tax payable 2,225 11,345
Current maturities of long-term debt 41,182 24,615
Total current liabilities 241,985 226,935
Long-term debt, net of current maturities 1,831,061 580,000
Deferred revenue 25,038 23,696
Other income tax liability 11,448 12,658
Deferred income tax liabilities 135,046 171
Other liabilities 24,293 16,633
Total liabilities 2,268,871 860,093
Commitments and contingencies
Stockholders’ equity:

Common stock, $.10 par value; 100,000,000 shares authorized; 65,983,000 and 65,318,000 shares issued and 39,266,000 and 38,855,000 outstanding

6,590 6,523
Treasury stock at cost, 26,717,000 and 26,463,000 shares (1,095,737 ) (1,058,381 )
Additional paid-in capital 586,224 535,759
Accumulated other comprehensive loss (5,356 ) (10,692 )
Retained earnings 732,778 646,339
Total Bally Technologies, Inc. stockholders’ equity 224,499 119,548
Noncontrolling interests 629 (376 )
Total stockholders’ equity 225,128 119,172
Total liabilities and stockholders’ equity $ 2,493,999 $ 979,265
 
 

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