XNAS:SHFL Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

shuffle_10q-013112.htm


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 January 31, 2012
OR
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: 0-20820
 
 
SHUFFLE MASTER, INC.
(Exact name of registrant as specified in its charter)
 
Minnesota
 
41-1448495
(State or Other Jurisdiction
 
(IRS Employer Identification No.)
of Incorporation or Organization)
   
     
1106 Palms Airport Drive, Las Vegas
NV
89119
(Address of Principal
(State)
(Zip Code)
Executive Offices)
   
Registrant’s Telephone Number, Including Area Code: (702) 897-7150
 
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. Yes x No o
 
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
 
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.  (Check one):
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
As of March 1, 2012, there were 54,952,181 shares of our $.01 par value common stock outstanding.
 
 
1

 
 
SHUFFLE MASTER, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JANAURY 31, 2012
TABLE OF CONTENTS
 
   
Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited):
 
 
Condensed Consolidated Statements of Operations for the Three Months ended January 31, 2012 and 2011
3
 
Condensed Consolidated Balance Sheets as of January 31, 2012 and October 31, 2011
4
 
Condensed Consolidated Statements of Cash Flows for the Three Months ended January 31, 2012 and 2011
5
 
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 4.
Controls and Procedures
41
PART II—OTHER INFORMATION
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds
42
Item 3.
Defaults Upon Senior Securities
43
Item 4.
Mine Safety Disclosures
43
Item 5.
Other Information
43
Item 6.
Exhibits
43
Signatures
 
44
 
 
2

 
 
PART I

ITEM 1.  FINANCIAL STATEMENTS
SHUFFLE MASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
Revenue:
           
Product leases and royalties   $ 25,953     $ 23,576  
Product sales and service     30,100       20,239  
Total revenue     56,053       43,815  
Costs and expenses:
               
Cost of leases and royalties     8,951       7,182  
Cost of sales and service     11,281       7,465  
Gross profit     35,821       29,168  
Selling, general and administrative     17,180       16,201  
Research and development     7,527       5,916  
Total costs and expenses     44,939       36,764  
                 
Income from operations
    11,114       7,051  
                 
Other income (expense):
               
Interest income     139       126  
Interest expense     (477 )     (701 )
Other, net     175       157  
Total other income (expense)     (163 )     (418 )
Income from operations before tax
    10,951       6,633  
Income tax provision
    3,302       1,829  
Net income
  $ 7,649     $ 4,804  
                 
Basic earnings per share:
  $ 0.14     $ 0.09  
Diluted earnings per share:
  $ 0.14     $ 0.09  
                 
Weighted average shares outstanding:
               
Basic     55,064       54,132  
Diluted     55,653       54,895  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
3

 
 
SHUFFLE MASTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 
   
January 31,
   
October 31,
 
   
2012
   
2011
 
             
ASSETS
           
Current assets:
           
Cash and cash equivalents   $ 26,838     $ 22,189  
Accounts receivable, net of allowance for bad debts of $490 and $402     32,973       42,915  
Investment in sales-type leases and notes receivable, net of allowance for bad debts of $27 and $44     2,066       1,804  
Inventories     24,691       24,335  
Prepaid income taxes     4,091       3,279  
Deferred income taxes     4,984       4,911  
Other current assets     4,796       4,291  
Total current assets     100,439       103,724  
Investment in sales-type leases and notes receivable, net of current portion and net of allowance for bad debts of $2 and $5
    5,334       3,704  
Products leased and held for lease, net
    35,769       35,196  
Property and equipment, net
    12,795       12,849  
Intangible assets, net
    70,266       66,517  
Goodwill
    85,510       85,392  
Deferred income taxes
    2,903       3,038  
Other assets
    2,386       2,467  
Total assets
  $ 315,402     $ 312,887  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable   $ 4,629     $ 5,001  
Accrued liabilities and other current liabilities     16,109       21,135  
Deferred income taxes     89       96  
Customer deposits     3,320       3,407  
Income tax payable     4,285       2,595  
Deferred revenue     5,005       3,862  
Current portion of long-term debt     505       508  
Total current liabilities     33,942       36,604  
Long-term debt, net of current portion
    37,753       38,757  
Other long-term liabilities
    2,908       2,969  
Deferred income taxes
    1,417       942  
Total liabilities     76,020       79,272  
Commitments and Contingencies (See Note 11)
               
Shareholders' equity:
               
Common stock, $0.01 par value; 151,368 shares authorized; 54,711 and 54,196 shares issued and outstanding     547       542  
Additional paid-in capital     117,982       114,306  
Retained earnings     88,487       80,838  
Accumulated other comprehensive income     32,366       37,929  
Total shareholders' equity     239,382       233,615  
Total liabilities and shareholders' equity
  $ 315,402     $ 312,887  
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

 
4

 
 
SHUFFLE MASTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
(Unaudited)
 
   
Three Months Ended,
 
   
January 31,
 
   
2012
   
2011
 
       
Cash flows from operating activities:
           
Net income   $ 7,649     $ 4,804  
Adjustments to reconcile net income (loss) to cash provided by operating activities:                
Depreciation and amortization     6,017       5,761  
Amortization of debt issuance costs and debt discount     119       119  
Share-based compensation     932       735  
Provision for bad debts     92       98  
Write-down for inventory obsolescence     374       -  
Loss on sale of assets     33       59  
Loss (profit) on sale of leased assets     99       (1,501 )
Excess tax benefit from stock option exercises     (331 )     (600 )
Changes in operating assets and liabilities:                
Accounts receivable and investment in sales-type leases and notes receivable     7,158       12,324  
Inventories     (1,194 )     (4,843 )
Accounts payable and accrued liabilities     (6,156 )     (12,308 )
Customer deposits and deferred revenue     977       1,565  
Income taxes     1,598       105  
Deferred income taxes     671       1,224  
Prepaid income taxes     (812 )     47  
Other     (783 )     698  
Net cash provided by operating activities     16,443       8,287  
Cash flows from investing activities:
               
Proceeds from sale of assets     -       47  
Proceeds from sale of leased assets     41       2,086  
Payments for products leased and held for lease     (3,850 )     (4,277 )
Purchases of property and equipment     (882 )     (930 )
Purchases of intangible assets     (4,030 )     (4,910 )
Acquisition of business     (5,500 )     (6,499 )
Other     (218 )     (221 )
Net cash used by investing activities     (14,439 )     (14,704 )
Cash flows from financing activities:
               
Proceeds from Revolver     6,000       16,501  
Debt payments on Revolver     (7,000 )     (4,000 )
Proceeds from issuance of common stock, net     2,418       1,437  
Excess tax benefit from stock option exercises     331       600  
Other     (15 )     (14 )
Net cash used by financing activities     1,734       14,524  
Effect of exchange rate changes on cash
    911       4  
Net increase (decrease) in cash and cash equivalents
    4,649       8,111  
Cash and cash equivalents, beginning of year
    22,189       9,988  
Cash and cash equivalents, end of year
  $ 26,838     $ 18,099  
 
See Notes to Unaudited Condensed Consolidated Financial Statements. 
 
 
5

 
 
SHUFFLE MASTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION
 
Description of business.  Unless the context indicates otherwise, references to “Shuffle Master, Inc.,” “we,” “us,” “our,” or the “Company,” include Shuffle Master, Inc. and its consolidated subsidiaries.
 
We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service.  We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (“PTG”), which include live games, side bets and progressives as well as our newly introduced i-Gaming, which features online versions of our table games, social gaming and mobile applications; Electronic Table Systems (“ETS”), which include various e-Table game platforms; and Electronic Gaming Machines (“EGM”), which include video slot machines.

We lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale, a longer-term sales-type lease or other long-term financing. We offer our products worldwide in markets that are highly regulated. We manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as at our headquarters and manufacturing facility in Milperra, New South Wales, Australia. In addition, we outsource the manufacturing of certain of our sub-assemblies in the United States, Europe and Asia.

Utility. Our Utility segment develops products for licensed casino operators that enhance table game speed, productivity, profitability and security. Utility products include automatic card shufflers and roulette chip sorters. This segment also includes our i-Shoe® Auto card reading shoe that gathers data and enables casinos to track table game play and our i-Score baccarat viewer that displays current game results and trends. These products are intended to cost-effectively provide licensed casino operators and other users with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.

Proprietary Table Games. Our PTG segment develops and delivers proprietary table games that enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our proprietary table games, side bets, add-ons and progressives as well as our newly introduced i-Gaming products, which feature online versions of our table games, social gaming, and mobile applications.  Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker and blackjack table games and to electronic platforms such as Table Master® and i-Table®.
 
Electronic Table Systems.  Our ETS segment develops and delivers various products involving popular table game content using e-Table game platforms. Our primary ETS products are i-Table®, Table Master®, Vegas Star® and Rapid Table Games®.  Our i-Table® platform combines an electronic betting interface with a live dealer who deals the cards from our card reading shoe or shuffler that is designed to improve game speed and security while reducing many operating expenses associated with live tables. Our Table Master® and Vegas Star® products feature a virtual dealer which enables us to offer table game content in both traditional gaming markets and in markets where live table games are not permitted, such as some racinos, video lottery and arcade markets. Our Rapid Table Games® product enables the automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets combined with live dealer and game outcomes. This automation provides benefits to both casino operators and players, including greater security and faster speed of play.

Electronic Gaming Machines.  Our EGM segment develops and delivers our PC-based video slot machines into select markets, primarily in Australasia.  We offer a selection of video slot titles which include a range of bonus round options that can be configured as a network of machines or as stand-alone units. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform. Popular titles for our EGMs include Cats Hats & Bats, Eureka Gold Mine 2, Emerald Fortunes and King of Babylon. In addition, we continued to develop a popular range of games utilizing the Pink Panther brand, under license from MGM Resorts International (“MGM”) consumer products. In July 2010, we began initial deliveries of Equinox, our newest EGM product. Equinox offers widescreen displays and substantially improved graphics and user interfaces over older-style EGM machines.
 
 
6

 
 
Basis of presentation.  The accompanying Unaudited Condensed Consolidated Financial Statements include the results of operations, financial position and cash flows of Shuffle Master, Inc. and its consolidated subsidiaries. All material intercompany balances have been eliminated.  

In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on January 5, 2012.  The results of operations for the three months ended January 31, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.

Use of estimates and assumptions. The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Condensed Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis. Actual results could differ from those estimates.

Revenue recognition. We recognize revenues when all of the following have been satisfied:

 
·
persuasive evidence of an arrangement exists;

 
·
the price to the customer is fixed and determinable;

 
·
delivery has occurred and any acceptance terms have been fulfilled; and

 
·
collection is reasonably assured.

Revenues are reported net of incentive rebates and discounts. Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria are met.

Product lease and royalty revenue — Lease and royalty revenue is earned from the leasing of our tangible products and the licensing of our intangible products, such as our proprietary table games. When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay a fee to us based on a percentage of net win.   Lease and royalty revenue commences upon the completed installation of the product. Lease terms are generally cancellable with 30 days' notice.  We recognize revenue from our leases and licenses upon installation of our product on a month to month basis.

Product sales and service revenue — We generate sales revenue through the sale of equipment in each product segment, including sales revenue from sales-type leases and the sale of lifetime licenses for our proprietary table games. Our credit sales terms are primarily 60 days or less.  Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 24 to 36 months and are interest-bearing at market interest rates. Revenue from the sale of equipment is recorded in accordance with the contractual shipping terms. Products placed with customers on a trial basis are not recognized as revenue until the trial period ends, the customer accepts the product and all other relevant criteria have been met. If a customer purchases existing leased equipment, revenue is recorded on the effective date of the purchase agreement. Revenue on service and warranty contracts is recognized as the services are provided over the term of the contracts, which are generally one year. Revenue from the sale of lifetime licenses, under which we have no continuing obligation, is recorded on the effective date of the license agreement.

Multiple element arrangements — Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product.  Most of our products and services qualify as separate units of accounting. When vendor specific objective evidence or third-party evidence is not available, the management's best estimate of selling price ("BESP") is the amount we would sell the product or service for individually. The determination of BESP is made based on our normal pricing and discounting practices, which consider multiple factors, such as market conditions, competitive landscape, internal costs and profit objectives. Revenues allocated to future performance obligations elements are deferred and will be recognized upon delivery and customer acceptance.
 
 
7

 
 
Recently issued accounting standards or updates – not yet adopted

Fair value measurement disclosureIn May 2011, Financial Accounting Standards Board (“FASB”) issued an ASU on fair value measurement on how to measure fair value and on what disclosures to provide about fair value measurements. The ASU expands disclosure requirements particularly for Level 3 inputs to include following:
 
· For fair value categorized in Level 3 of the fair value hierarchy:
     
 
1.
a quantitative disclosure of the unobservable inputs and assumptions used in the measurement,

 
2.
a description of the valuation processes in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and

 
3.
a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.
     
· The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed.
 
This ASU will be effective for our second quarter of fiscal 2012 and is not expected to have a material impact on our financial statements.

Comprehensive income – In June 2011, FASB issued an ASU on presentation of comprehensive income to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of stockholders' equity, among other items. The guidance requires that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.

 This ASU will be effective for our first quarter of fiscal 2013 and as the update only requires a change in presentation, we do not expect to have a material impact on our financial statements.

2. SELECTED BALANCE SHEET DATA

The following provides additional disclosures for selected balance sheet accounts:
 
   
January 31,
   
October 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Net inventories:
           
Raw materials and component parts
  $ 13,195     $ 12,984  
Work-in-process
    4,161       3,947  
Finished goods
    7,335       7,404  
Total
  $ 24,691     $ 24,335  

   
January 31,
   
October 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Other current assets:
           
Other prepaid expenses
    2,816       2,302  
Other receivables
    1,181       1,271  
Other
    799       718  
Total
  $ 4,796     $ 4,291  
 
 
8

 

   
January 31,
   
October 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Products leased and held for lease:
           
Utility
  $ 48,535     $ 47,073  
Less: accumulated depreciation
    (31,409 )     (29,891 )
Utility, net     17,126       17,182  
                 
Proprietary Table Games
    8,013       6,158  
Less: accumulated depreciation
    (3,525 )     (2,496 )
Proprietary Table Games, net     4,488       3,662  
                 
Electronic Table Systems
    28,022       28,749  
Less: accumulated depreciation
    (15,608 )     (15,571 )
Electronic Table Systems, net     12,414       13,178  
                 
Electronic Gaming Machines
    2,006       1,266  
Less: accumulated depreciation
    (265 )     (92 )
Electronic Gaming Machines, net     1,741       1,174  
                 
Total, net   $ 35,769     $ 35,196  
 
 
   
January 31,
   
October 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Accrued and other current liabilities:
           
Accrued compensation
    9,068       13,932  
Accrued taxes
    1,295       2,124  
Other accrued liabilities
    5,746       5,079  
Total
  $ 16,109     $ 21,135  
 
 
9

 
 
3. INTANGIBLE ASSETS AND GOODWILL
 
Amortizable intangible assets.  All of our recorded intangible assets, excluding goodwill and the Stargames and CARD tradenames, are subject to amortization. We amortize our intangible assets as the economic benefits of the intangible asset are consumed or otherwise used up. Amortization expense was $2.2 million and $2.4 million for the three months ended January 31, 2012 and 2011, respectively. Amortization expenses are included in cost of leases and royalties and cost of sales and service, except for customer relationships which are included in selling, general and administrative expenses.

Amortizable intangible assets are comprised of the following:
 
 
Weighted Average
 
January 31,
   
October 31,
 
 
Useful Life
 
2012
   
2011
 
     
(In thousands)
       
Amortizable intangible assets:
             
               
Patents, games and products
10 years
  $ 67,573     $ 68,999  
Less: accumulated amortization       (50,897 )     (52,145 )
        16,676       16,854  
Customer relationships
10 years
    26,990       25,688  
Less: accumulated amortization       (13,355 )     (12,829 )
        13,635       12,859  
Licenses and other
6 - 9 years
    23,044       18,925  
Less: accumulated amortization       (8,153 )     (7,581 )
        14,891       11,344  
Total     $ 45,202     $ 41,057  
 
The increase in amortizable intangible assets for the three months ended January 31, 2012 relates to our purchase of table games intellectual property and acquisition of licenses to be used in our EGM segment.

Tradenames. Intangibles with an indefinite life, consisting of the Stargames and CARD tradenames, are not amortized, and were $25.1 million and $25.5 million as of January 31, 2012 and October 31, 2011, respectively.
 
Goodwill.  Changes in the carrying amount of goodwill as of January 31, 2012, are as follows:
 
Activity by Segment
 
Utility
   
Proprietary
Table Games
   
Electronic
Table Systems
   
Electronic
Gaming
Machines
   
Total
 
   
(In thousands)
 
                               
Goodwill
  $ 42,560     $ 9,326     $ 34,188     $ 11,995     $ 98,069  
Accumulated impairments
    -       -       (22,137 )     -       (22,137 )
Balance as of October 31, 2010
  $ 42,560     $ 9,326     $ 12,051     $ 11,995     $ 75,932  
                                         
Foreign currency translation adjustment
    1,459       -       1,140       1,135     $ 3,734  
Acquisition
    4,799       -       -       -       4,799  
Other
    -       927       -       -       927  
Balance as of October 31, 2011
  $ 48,818     $ 10,253     $ 13,191     $ 13,130     $ 85,392  
                                         
Foreign currency translation adjustment
    (2,755 )     -       (172 )     (172 )   $ (3,099 )
Acquisition
    -       3,000       -       -       3,000  
Other
    -       217       -       -       217  
Balance as of January 31, 2012
  $ 46,063     $ 13,470     $ 13,019     $ 12,958     $ 85,510  
 
The $3.0 million of additional goodwill in our PTG segment relates to the acquisition of games and intellectual property that were treated as a business acquisition for accounting purposes.
 
The $0.2 million of additional goodwill in our PTG segment relates to our acquisition of certain assets from Bet Technology, Inc. (“BTI”) in 2004.  In 2004, we recorded an initial estimated liability of $7.6 million for contingent installment payments computed as the excess fair value of the acquired assets over the fixed installments and other direct costs.  In November 2004, we began paying monthly note installments based on a percentage of certain revenue from BTI games for a period of up to ten years, not to exceed $12.0 million.  The final principal and interest payment related to our initial estimated liability of $7.6 million was paid in February 2009 and all payments made subsequently have been recorded as additional goodwill.  As of January 31, 2012, we have paid approximately $10.7 million of the $12.0 million maximum amount.
 
 
10

 
 
4. DEBT

Debt consisted of the following:

   
January 31,
   
October 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Revolver
  $ 36,446     $ 37,446  
Other long term debt
    1,812       1,819  
Total Debt
    38,258       39,265  
Less: current portion
    (505 )     (508 )
Total long-term debt
  $ 37,753     $ 38,757  

$200.0 million senior secured revolving credit facility. On October 29, 2010, we entered into a senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A. as syndication agent and Union Bank, N.A. as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200.0 million consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200.0 million with a sub-facility for letters of credit of $25.0 million, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25.0 million, and a sub-facility for swing line loans of $20.0 million, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300.0 million, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest based the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of:

 
·
the Federal Funds Rate plus .50%

 
·
the prime commercial lending rate of the Administrative Agent, as defined; and

 
·
the one month LIBOR rate for such day plus 2.00%

Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of January 31, 2012 was 2.06%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of January 31, 2012, the amount drawn under the Revolver was $36.4 million and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $163.6 million of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.

Covenants. Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. As of January 31, 2012, our Total Leverage Ratio, Senior Leverage Ratio and Interest Expense Coverage Ratio were 0.48 to 1.0, 0.46 to 1.0 and 40.94 to 1.0, respectively.

Guarantors and collateral. The Revolver obligations under our Senior Secured Revolving Credit Facility are guaranteed by each existing and future wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and are secured by a first priority lien on substantially all of our and our guarantors’ assets.  
 
 
11

 
 
5. SHAREHOLDERS’ EQUITY
 
Common stock repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock.  As of January 31, 2012, $21.1 million remained outstanding under our board authorization.  We cancel shares that are repurchased.  No shares were repurchased during the three months ended January 31, 2012.  Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.
 
The timing of our common stock repurchases pursuant to our board of directors’ authorization is dependent on future opportunities and on our views, as they may change from time to time, as to the most prudent uses of our capital resources, including cash and borrowing capacity.

Other comprehensive income. For the three months ended January 31, 2012 and 2011, other comprehensive income consisted primarily of foreign currency translation adjustments.  The following table provides information related to other comprehensive income:
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
     (In thousands)  
Net income (loss)
  $ 7,649     $ 4,804  
Currency translation adjustment
    (5,563 )     820  
Total other comprehensive income (loss)
  $ 2,086     $ 5,624  

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

6. SHARE-BASED COMPENSATION
 
Share-based award plans.  In February 2004, our board of directors adopted and, in March 2004, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”). These approved plans replaced our prior plans and no further options may be granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant of stock options, stock appreciation rights (none issued) and restricted stock. In addition, the 2004 Plan provides for the grant of restricted stock units. Awards granted under the plans (collectively “Awards”) may be granted individually or in any combination. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may not be subsequently repriced. Equity granted under the 2004 Plan generally vests in equal increments over four years and expires in ten years. Equity granted under the 2004 Directors’ Plan generally vests over periods of one to two years.
 
The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 2.7 million of which no more than 1.9 million may be granted as restricted stock. The 2004 Directors’ Plan provides for the grants of Awards to our non-employee directors. The maximum number of Awards which may be granted is 1.1 million of which no more than 0.8 million may be granted as restricted stock.

In January 2009, our board of directors adopted and, in March 2009, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (as amended and restated on January 28, 2009) (the “Amended 2004 Plan”). The Amended 2004 Plan increased the number of shares available for issuance in addition to other related technical changes. Subject to the Amended 2004 Plan, the aggregate number of shares that may be granted under the Amended 2004 Plan may not exceed 5.2 million shares of which no more than 2.6 million shares may be granted as restricted stock.
 
As of January 31, 2012, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 0.9 million and 0.2 million shares available for grant, respectively.
 
 
12

 
 
A summary of activity related to stock options is presented below:
 
               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
   
(In thousands, except per share amount)
 
Outstanding at November 1, 2011
    4,638     $ 14.04              
Granted
    430       12.13              
Exercised
    (348 )     6.94              
Forfeited or expired
    (195 )     19.19              
                             
Outstanding at January 31, 2012
    4,525     $ 14.19       5.4     $ 10,273  
                                 
Fully vested and expected to vest at Janaury 31, 2012
    4,469     $ 14.22       5.4     $ 10,185  
                                 
Exercisable at January 31, 2012
    3,256     $ 15.81       4.1     $ 6,742  
 
 
For the three months ended January 31, 2012 and 2011, we issued 0.4 million stock options in each year, with an aggregate fair market value of $2.7 million and $2.1 million, respectively. For the three months ended January 31, 2012, 0.3 million stock options were exercised, the tax effect/benefit from stock option exercises affected our deferred tax asset or income tax payable as well as our additional paid-in capital by an equal amount and had no effect on our income tax provision. As of January 31, 2012, there was approximately $5.8 million of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 2.0 years.

A summary of activity related to restricted stock is presented below:
 
         
Weighted
             
         
Average
   
Remaining
   
Aggregate
 
         
Grant-Date
   
Vesting
   
Intrinsic
 
   
Shares
   
Fair Value
   
Period
   
Value
 
   
(In thousands, except per share amount)
 
Nonvested at November 1, 2011
    394     $ 10.53              
Granted
    414       11.88              
Vested
    (90 )     11.84              
Forfeited
    (10 )     4.30              
                             
Nonvested at January 31, 2012
    708     $ 11.24       2.03     $ 9,021  
                                 
Expected to vest
    663     $ 11.21       1.99     $ 8,485  
 
 
The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period. As of January 31, 2012, there was approximately $7.3 million of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.2 years.
 
 
13

 
 
Recognition of compensation expense.  The following table shows information about compensation costs recognized:
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Compensation costs:
           
Stock options
  $ 491     $ 521  
Restricted stock
    441       214  
Total compensation cost
  $ 932     $ 735  
Related tax benefit
  $ (324 )   $ (256 )
 
Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility is based on a combination of implied and historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant date and its exercise date and is based on historical factors. Expected dividend yield is based on our expectation that dividends will not be paid within the average expected life of existing options. Risk free interest rate is based on U.S. Treasury rates appropriate for the expected term. We estimate the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the weighted-average assumptions noted in the following table:
 
   
Three Months Ended
 
   
January 31, 2012
 
Option valuation assumptions:
     
Expected dividend yield
 
None
 
Expected volatility
    64.9 %
Risk-free interest rate
    0.7 %
Expected term
 
4.5 years
 
 
7. INCOME TAXES

Our effective income tax rate from continuing operations for the three months ended January 31, 2012 and 2011 was 30.2% and 27.6%, respectively. The higher effective income tax rate for the three months ended January 31, 2012 compared to the prior year period is primarily attributable to a discrete tax benefit recorded in the prior year period for the reinstatement of the U.S. Federal R&D Tax Credit.  Our effective income tax rate may fluctuate due to changes in the amount and mix of domestic and foreign income, changes in tax legislation, changes in valuation allowances and changes in assessments of uncertain tax positions, as well as accumulated interest and penalties.
 
 
14

 
 
8. EARNINGS PER SHARE
 
Shares used to compute basic and diluted earnings per share from operations are as follows:
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
    (In thousands, except per share amount)  
             
Net income available to common shares
  $ 7,649     $ 4,804  
                 
Basic
               
Weighted average shares
    55,064       54,132  
                 
Diluted
               
Weighted average shares, basic
    55,064       54,132  
Dilutive effect of options
    589       763  
Weighted average shares, diluted
    55,653       54,895  
                 
Basic earnings per share
  $ 0.14     $ 0.09  
Diluted earnings per share
  $ 0.14     $ 0.09  
Weighted average anti-dilutive shares excluded from diluted EPS
    2,946       3,211  
 
9. FAIR VALUE MEASUREMENT
 
We utilize a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.
 
Cash and cash equivalents, accounts receivable, the current portion of our investment in sales-type leases and notes receivable are not presented in the table below as their carrying value approximates fair value due to their short term nature.  It is impracticable to estimate the fair value of the long-term portion of our investment in sales-type leases and notes receivable as it is comprised of many insignificant balances, customers with different credit profiles and various interest rates.  The fair value of our Revolver as of January 31, 2012 and October 31, 2011 has been calculated based on market borrowing rates available as of January 31, 2012 and October 31, 2011, respectively, for debt with similar terms and maturities. The following table provides the fair value measurement information about the Company’s long-term debt.
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
   
   
January 31,
2012
   
January 31,
2012
   
October 31,
2011
   
October 31,
2011
 
Fair Value
Hierarchy
      (In thousands)    
                           
Revolver
  $ 36,446     $ 36,836     $ 37,446     $ 37,679  
Level 2
 
 
15

 
 
10. OPERATING SEGMENTS
 
The following provides financial information concerning our reportable segments of our operations:
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Revenue:
           
Utility
  $ 19,616     $ 17,361  
Proprietary Table Games
    13,675       11,226  
Electronic Table Systems
    8,264       8,131  
Electronic Gaming Machines
    14,498       7,097  
    $ 56,053     $ 43,815  
Gross profit:
               
Utility
  $ 11,183     $ 10,848  
Proprietary Table Games
    11,542       9,262  
Electronic Table Systems
    4,129       4,650  
Electronic Gaming Machines
    8,967       4,408  
    $ 35,821     $ 29,168  
Operating income (loss):
               
Utility
  $ 9,450     $ 9,228  
Proprietary Table Games
    9,905       8,375  
Electronic Table Systems
    717       1,813  
Electronic Gaming Machines
    5,853       1,764  
Unallocated Corporate
    (14,811 )     (14,129 )
    $ 11,114     $ 7,051  
Depreciation and amortization:
               
Utility
  $ 1,776     $ 1,252  
Proprietary Table Games
    1,253       1,313  
Electronic Table Systems
    1,657       2,198  
Electronic Gaming Machines
    198       68  
Unallocated Corporate
    1,133       930  
    $ 6,017     $ 5,761  
Capital expenditures:
               
Utility
  $ 1,220     $ 2,197  
Proprietary Table Games
    1,540       5,429  
Electronic Table Systems
    1,720       1,561  
Electronic Gaming Machines
    4,258       -  
Unallocated Corporate
    24       930  
    $ 8,762     $ 10,117  
 
 
16

 
 
REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area:
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Revenue:
                       
United States
  $ 26,184       46.7 %   $ 26,005       59.4 %
Canada
    1,518       2.7 %     1,392       3.2 %
South America
    1,053       1.9 %     768       1.7 %
Europe
    1,587       2.8 %     1,406       3.2 %
Australia
    18,694       33.4 %     10,951       25.0 %
Asia
    6,649       11.9 %     2,954       6.7 %
Other
    368       0.6 %     339       0.8 %
    $ 56,053       100.0 %   $ 43,815       100.0 %

11. COMMITMENTS AND CONTINGENCIES
 
Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual employment agreement. As of January 31, 2012 and October 31, 2011, minimum aggregate severance benefits totaled $5.2 million and $6.6 million, respectively.

Legal proceedings. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict.  We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  We have not recorded any loss accruals for these contingencies unless otherwise noted below. Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period.  We assume no obligation to update the status of pending litigation, except as may be required by applicable law, statute or regulation.

TableMAX – In April 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a complaint (the “First Complaint”) against us in the United States District Court for the District of Nevada.  This case is a patent infringement claim alleging that our Table Master® product infringes U.S. Patents 5,688,174, 6,921,337 and 7,201,661.  The First Complaint sought injunctive relief and an unspecified amount of damages, including claims for attorneys’ fees, costs, increased damages and disbursements.  In August 2009, TableMAX Holdings, Inc. and TableMAX Gaming, Inc. voluntarily dismissed the First Complaint.  On the same date, TableMAX IP Holdings, Inc., TableMAX Gaming, Inc. and Vegas Amusement, Inc. (collectively “TableMAX”), the alleged owner of Patents 5,688,174, 6,921,337 and 7,201,661, filed a new complaint (the “New Complaint”) making allegations materially the same as the allegations in the First Complaint.  In August 2009, TableMAX filed an amended complaint (the “Second Complaint”), which superseded and is materially the same as the New Complaint, except that the plaintiffs added a new claim that Table Master® infringes U.S. Patent 7,575,512, which was issued on August 18, 2009.  In August 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint that sought to enjoin future sales of our Table Master® product.  In October 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument and the Court also denied without prejudice various motions for summary judgment that we filed. During the discovery process, TableMAX made new allegations that certain of our Vegas Star® products infringe one of the patents in the Second Complaint. In January 2010, TableMAX filed a Second Amended Complaint (the "Third Complaint"), which has materially the same allegations as the Second Complaint, except that it alleges that our Vegas Star® product allegedly infringes all of the patents in suit. A document produced in the discovery process appears to limit TableMAX's allegations of infringement regarding our Vegas Star® product to only one of TableMAX's patents in suit.
 
The Court set the Markman hearing for December 2010.  In November 2010, the Court granted our Motion to Stay. The stay was granted because of pending reexamination proceedings before the United States Patent and Trademark Office as to the four patents that are the subject of the lawsuit.  The reexamination proceedings were initiated as a result of our request. We believe that the final results of the reexamination proceedings will be beneficial to us in future Court proceedings. It is possible that all four reexamination proceedings will conclude in fiscal 2012 and thus the stay may be lifted in fiscal 2012. At present, the case remains stayed.  We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.
 
 
17

 
 
Macau Rapid Baccarat® Patent Issue – On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Shuffle Master, Inc. (“SMI”) Rapid Baccarat® unit related to a claim by a Macau patent holder of our alleged patent infringement.  On October 27, 2009, the governmental official in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials.  In November 2009, the patent holder appealed this finding to the Macau Courts. On or about January 20, 2010, over our objection, the judge considering the patent holder’s appeal found that his appeal was timely filed.  We are not aware of any proceeding against our subsidiary, Shuffle Master Asia Limited (“SMAL”) or any of its directors yet being commenced.

On or about February 2010, we filed an appeal (the “First SMAL Appeal”) to this decision.  On or about March 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the “Second SMAL Appeal”) to have the higher Macau court hear the First SMAL Appeal.   On June 2, 2010, the Judge denied the patent holder’s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors.  The patent holder has subsequently appealed the June 2, 2010, decision to a higher Macau court, which appeal has not yet been heard.  In the event the patent holder’s appeal is successful, it is likely that legal proceedings will be commenced against SMAL and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau.  The Company does not carry insurance with respect to this matter.  We believe that the claim is without merit and we intend to continue to defend this matter vigorously.

Wright Matter – On November 7, 2009, Sam Wright was playing a SMI Vegas Star® craps machine at the Harrah’s Casino New Orleans.  Mr. Wright played a game that ended in a losing result.  After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42.0 million appeared on the machine.  On or about April 2010, we received notice that Mr. Wright had filed a patron dispute with the Louisiana State Police Gaming Division.  The patron dispute requested that Harrah’s New Orleans Casino and the Company acknowledge a gaming debt of $42.0 million to Mr. Wright.
 
 
In October 2010, the Louisiana State Police Gaming Division concluded in regard to the patron dispute that there was no violation of state law, rule or internal control. Mr. Wright was unsuccessful in the patron dispute.

In November 2010, Mr. Wright filed a Petition for Damages (the “Wright Complaint”) with the Civil District Court for the Parish of Orleans, State of Louisiana, naming  the Company, Jazz Casino Company, LLC d/b/a Harrah’s New Orleans Casino and Harrah’s New Orleans Management Company (collectively, “Harrah’s) as defendants.  The Petition claimed damages of approximately $43.0 million plus possible treble damages, attorneys’ fees and costs.  The Company could have had possible indemnity obligations to Harrah’s if a judgment had been entered.   In February 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana.   On February 28, 2012, the Company attended a Court ordered settlement conference, in which the Wright Complaint and the Declaratory Relief Complaint (discussed below) were settled between the parties without admission of liability by either the Company or Harrah’s.  The Wright Compliant and the Declaratory Relief Complaint shall be dismissed with prejudice.

Axis Surplus Insurance Company (“Axis”) is the Company’s insurance carrier with respect to the Wright Complaint.  In November 2011, we filed a Complaint for Declaratory Judgment (the “Declaratory Relief Complaint”) in the United States District Court for the Eastern District of Louisiana against Axis seeking, pursuant to our policy (a) Axis’ providing of full policy coverage and defense; (b) Axis’ paying all legal fees and expenses incurred by us in the defense of the Wright Complaint; and (c) Axis making all reasonable efforts to protect us from risk of excess judgment.  The Declaratory Relief Complaint will be dismissed with prejudice as discussed above.

 
18

 
 
12. SUBSEQUENT EVENTS
 
On March 5, 2012, through our wholly-owned subsidiary Shuffle Master International, Inc., we entered into a definitive agreement to acquire Ongame Network Ltd., a limited liability company incorporated and existing under the laws of Gibraltar (“Ongame”), from bwin.party services (Austria) GmbH (“bwin.party”). Ongame is one of the world’s largest business to business online poker providers.
 
The acquisition is subject to completion of certain conditions, including the continued material accuracy of the parties’ representations and warranties; the performance of and compliance with all covenants in the definitive agreement; and the receipt of required regulatory approvals.  The closing of the transaction is expected to occur not more than nine months following execution of the definitive agreement (the “Closing”).  As consideration for the acquisition of the shares of Ongame, and indirectly the acquisition of Ongame’s subsidiaries, at the Closing we will pay €19.5 million in cash, subject to certain adjustments at Closing.  We may also become obligated to additionally pay up to €10 million in cash within five years of Closing contingent upon the commencement of legalized, real-money online poker in the U.S. occurring, if at all, within five years of Closing.  The €10 million contingent payment decreases through the five-year period.  The contingent payment will be €10 million if real-money online poker is legalized in the U.S. on or before 730 days following Closing, €7 million if legalized on or after 731 days following Closing and on or before 1,095 days following Closing, €5 million on or after 1,096 days following Closing and on or before 1,461 days following Closing, and €3 million on or after 1,462 days following Closing and on or before 1,826 days following Closing.  We expect to fund the acquisition with cash on hand and/or availability on the Senior Secured Revolving Credit Facility.
 
The obligations of the signatories under the definitive agreement are guaranteed by each party’s ultimate parent entity to the benefit of the respective other party.
 
 
19

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995
 
This Form 10-Q contains forward-looking statements. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology intended to identify performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Examples of such forward looking statements include, without limitation, statements about or relating to the following:

·  
Business strategies, including with respect to development of new or enhanced products, investment of capital to maximize returns and build our economic engine, and our focus on leasing structures for commercialization of certain products to increase returns and gross margins;

·  
Increasing our Proprietary Table Games content through development or acquisitions of new proprietary titles;

·  
Expectations of increases in gross margins and revenues from leasing of certain products;

·  
The growth opportunities and revenue potential from our i-Table®, i-Table Roulette and MD3 Shuffler products;

·  
The benefits of our products;

·  
Continued volatility in sales revenue from our Utility segment and expected increases in leasing revenue in such segment;

·  
Expectations to begin revenue generation from Vegas Star Live Roulette;

·  
Expectations that Electronic Gaming Machines revenues will continue to come from sales of EGMs in Australia;

·  
Expected growth of additional international markets, including Asia and Latin America;

·  
Expectations of Equinox placement in 2012 exceeding 2011 levels;

·  
Cash and capital resources being sufficient to satisfy requirements for working capital, capital expenditures, debt service, and other liquidity requirements of existing operations for at least the next 12 months;

·  
Growing capital expenditures in proportion to revenue as a result of our leasing model extending into more capital-intensive products; and

·  
Expectations with respect to foreign currency exchange rate fluctuation risk.

Although we currently believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us, as well as our projections of the future, about which we cannot be certain. Forward-looking statements reflect and are subject to inherent known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Risk factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to, the following:

·  
Failure to maintain our regulatory licenses or obtain new licenses where necessary;

·  
Legislative and regulatory changes that impact us or our customers;

·  
Non-compliance with the covenants in our senior secured credit agreement, including as a result of factors that are beyond our control;

 
20

 
 
·  
High volatility or extreme changes in foreign currency exchange rates;

·  
Difficulties or delays in, or being prevented from, carrying out acquisitions and subsequent integration of acquired businesses;

·  
Difficulties in maintaining and protecting our intellectual property rights;

·  
Potential infringement of the intellectual property rights of third parties;

·  
Adverse outcomes with respect to litigation regarding intellectual property, including our payment of damages, constraints on our business and operations and invalidation of our intellectual property;

·  
Involvement in other legal proceedings, and adverse outcomes with respect to such proceedings which could have a materially adverse effect on our business or prospects;

·  
Disruption or delays in our or our suppliers’ manufacturing processes that could prevent us from meeting demand for our products;

·  
Revenue losses in any of our business segments due to technical difficulties or fraudulent activities experienced by end users;

·  
Inability to obtain market acceptance of products currently in development;

·  
Inability to maintain a competitive technological position with respect to our competitors and competitive products;

·  
Lower than expected revenues from our transition in certain products to a lease-based commercialization model;

·  
Decreased demand for our products, including as a result of developments with respect to competitive products;

·  
Adverse economic conditions in the gaming industry, which is our sole industry of focus; and

·  
Adverse developments with respect to economic, political, legal and other risks associated with our international sales and operations.

In addition, refer to the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, as filed with the Securities and Exchange Commission on January 5, 2011, or the Form 10-K, and as incorporated by reference in Part II, Item 1A of this 10-Q, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure that the forward-looking statements will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, these statements should not be regarded as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by each of these cautionary statements above.
 
The following discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” in the Form 10-K and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years.
 
 
21

 
 
Overview
 
We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service.  We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (“PTG”), which include live table games, side bets and progressives as well as our newly introduced i-Gaming, which features online versions of our table games, social gaming and mobile applications; Electronic Table Systems (“ETS”), which include various e-Table game platforms; and Electronic Gaming Machines (“EGM”), which include video slot machines.  Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.  Our products are manufactured at our headquarters and manufacturing facility in Las Vegas, Nevada, at our Australian headquarters in Milperra, New South Wales, Australia, as well as outsourced, for certain sub-assemblies in the United States, Europe and Asia.

See Note 1 to our Condensed Consolidated Financial Statements for a more detailed discussion of our four segments.
 
Strategy
 
We believe we enhance our customer and shareholder value through our execution of the following strategic priorities:
 
 
·
An unwavering commitment to create innovative solutions and services for casino operators and compelling gaming experiences for players through enhanced customer centricity.

 
·
Reinforce our relationships with our customers by providing enhanced efficiencies, security and profitability on the casino floor. We continue to work toward developing innovative products that anticipate and respond to their needs.

 
·
Maintain a cost-conscious mindset, promote a lean culture, and serve as prudent stewards of shareholder capital.

 
·
Seek long-term profitability and sustainability through our recurring revenue model. We plan to continue to invest capital in our lease business to maximize our return and build on our economic engine.

 
·
Foster the spirit of invention and the commitment to innovation that is at the heart of our success.  With nearly 2,500 patents, trademarks and copyrights granted and pending, our pipeline for new intellectual property is robust. We believe our intellectual property collectively represents one of the strongest portfolios in the industry and our success depends upon our ability to preserve and protect these core assets.

 
·
Capitalize on emerging markets and the worldwide proliferation of gaming.  A large part of our success in fiscal 2011 was turning opportunities into achievements.  As new markets continue to emerge across the globe and as existing gaming markets continue to evolve, we strive to make the most of every opportunity that arises.
 
 
22

 
 
 
·
Sound balance sheet management to fuel growth through:
 
o
continued investment in our recurring revenue model, global intellectual property and research and development (“R&D”). We believe this will promote growth on the Company’s top and bottom line without relying on the introduction of significant new markets;
 
o
continued examination of acquisitions.  We are seeking opportunities that are accretive to earnings, have strong existing recurring revenues, and merit our efforts of integration; and
 
o
use of our financial resources to improve our return to shareholders through continued deleveraging.

 
·
Promote and foster internal staff development and deepen our bench strength.  We know our success is directly attributable to the caliber of our workforce and we remain committed to each and every employee’s development.  We will continue to set the talent bar high.

 
·
Drive margin improvement across all product categories. Our overall gross margin has shown continuous improvement over the past three fiscal years.  We plan to continue our process improvement initiatives and uncover additional operational efficiencies.

 
·
Capitalize on opportunities created from existing online gaming markets and prepare ourselves for the potential legalization of Internet gambling in the United States.  The gaming landscape is quickly evolving and we will strive to be a leading content-provider in this arena.  We believe online gaming represents a significant opportunity for our future growth.

We are focused on our customers and on value-creation for our shareholders.  We seek to maintain continuous improvement while keeping innovation at the core of our success.  We believe that continued execution of our strategic plan is the best method to foster the growth of our business in fiscal 2012.

Sources of Revenue
 
We derive our revenue from the lease, license and sale of our products and by providing service to our leased and in some cases, previously sold units. Consistent with our strategy, we have a continuing emphasis on leasing or licensing our products.  When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay us a fee based on a percentage of net win.  Product lease contracts typically include parts and service. When we sell our products, we offer casinos a choice between a cash sale or to a lesser extent, long-term financing. We also offer a majority of our products for sale with an optional parts and service contract.

Currently, Utility segment revenue is derived substantially from our automatic card shufflers. In addition to leasing shufflers, we also sell and service them. In the PTG segment, the majority of games placed are licensed to our customers on month-to-month license arrangements, which provides us with monthly royalty revenue. In the ETS segment, we derive revenue from leases, sales and service contracts. In the EGM segment, we derive revenue from selling the full EGM complement, as well as game conversion kits.

The following points should be noted as they relate to each of our segments:

Utility

 
·
We expect to continue increasing lease revenues in our Utility segment within the United States.  One of the current growth drivers for this segment has been the Ace® shuffler upgrade initiative. We expect the next revenue driver to be our new MD3 shuffler.  The MD3 is our next generation upgrade for the legacy MD series shufflers. As the MD1 reaches its end of life where replacement parts will no longer be available, our strategy is to encourage our customers to upgrade the MD1 shufflers, both leased and previously sold, with the MD3 shuffler. The majority of these placements are leases.

 
·
We expect to continue seeing volatility in sales revenue in our Utility segment outside the United States.  While we encourage leasing outside the United States, a large majority of our international Utility product placements historically have been sales.  We are starting to see increased lease activity in international markets such as Australia, Asia and Latin America. Growth drivers for the Utility segment outside the United States are new jurisdictional openings, such as the new openings in Singapore and the Philippines during fiscal 2010, as well as the expansion of existing markets such as Macau. In the current quarter we have seen an increase in the demand for our shufflers in Macau, particularly the MD3.
 
 
23

 
 
Proprietary Table Games

 
·
More than 83% of our total PTG segment revenue is derived from royalties and leases.  While we have a strong leasing presence in the United States, we are constantly looking to expand our proprietary table games in other parts of the world where the current penetration of proprietary table games is lower.  With the opening of new casino markets in Asia, we have recently seen some successes with new lease placements of our premium table games as well as progressives and side bets.

 
·
Although the majority of our PTG revenue comes from our premium table games, we also offer a number of progressive upgrades and side bets.  These products are available for our own proprietary table game titles as well as public domain games such as poker, blackjack, baccarat and pai gow poker.  These progressives and side bets, offered almost exclusively through leases, are providing a growing share of our total PTG revenue.

 
·
We also pursue opportunities to place PTG products in new properties and jurisdictions in the United States.  As noted above, several states have approved live table games over the past year, and we have seen significant placements of our table game products in those new jurisdictions.

 
·
We intend to increase our PTG content through development and acquisition of new proprietary titles. By increasing our footprint with new titles, we hope to increase our domestic market penetration and expand further into international markets.

 
·
We intend to seek enforcement against parties that infringe our intellectual properties for Internet gaming in legalized markets where legal systems and availability of cost-effective remedies are available to us.

Electronic Table Systems

 
·
Although we continually pursue opportunities to increase lease revenues in our ETS segment within the United States, we have seen some of our leased ETS products returned from those same markets as some states have approved live table games.  While this has caused some setbacks in the growth of our domestic ETS business, we have been able to return some of these products to service in other markets such as Latin America.  However, the new placements are not yet performing to the same revenue and profitability levels as the units that were removed.

 
·
Through development of new products and enhancements of our existing products we expect to generate revenue and growth for the ETS segment.  New products include the following:

 
o
The new i-Table® and i-Table® Roulette combine an electronic betting interface with a live table game and graphically-enhanced central display screens.  We expect these products to provide us with growth opportunities in domestic and international markets if they achieve customer acceptance;

 
o
We expect to begin generating revenue from our Vegas Star® Live Roulette product, which is an automated roulette game in the United States; and

 
o
In Australia, we have begun generating revenue from placements of our new multi-game feature on Rapid Table Games®, which offers enhanced live statistics at the touch of a button and betting can be conducted across multiple games.

Electronic Gaming Machines

 
·
Our EGM segment is primarily a sales model and we expect to continue to realize substantially all of our EGM revenues from sales of EGMs in our primary market, Australia.

 
·
Initial deliveries of Equinox began in July 2010, and we experienced record placements during the fourth quarter of fiscal 2011, as Equinox gained broader market acceptance. While we would not expect to see this record growth continue indefinitely, we expect Equinox placements in fiscal 2012 will continue above 2011 levels.

 
·
A portion of our EGM revenue base comes from conversions of existing units to new game titles.  We are continually developing new titles for our existing machines, and installation of these new titles provides us with an ongoing source of conversion revenue.

 
·
We are pursuing opportunities for sales growth in additional jurisdictions in Australia.  We also expect growth in additional international markets such as Asia and Latin America. Initial installations into Asia began during the third quarter 2011, of which a majority was Equinox and in the current year we have placed units in Latin America.
 
 
24

 
 
Expenses
 
Our direct expenses primarily include cost of products sold, depreciation of leased assets, and amortization of product-related intangible assets, service, manufacturing overhead, shipping and installation.  Indirect expenses include other costs directly identified with each segment, such as R&D, product approval costs, product-related litigation expenses, amortization of patents and other product-related intellectual property, sales commissions and other directly-allocable sales expenses.  We continue to expend significant R&D efforts on the development of our newer generation shuffler products, such as the MD3 and one2six® Plus, our i-Shoe® Auto card recognition products, as well as other table accessories, such as the i-Shoe® and the i-Scoredisplay. With our expansion into the e-Table markets, we continue to spend significant R&D dollars on developing and implementing new gaming mediums, such as the i-Table®, our newest e-Table that combines a variety of our products to create an exciting new table game experience. We are also spending increased R&D dollars on the new Equinox EGM cabinets and related game content.

The amounts classified as unallocated corporate expenses consist primarily of costs related to overall corporate management and support functions. These include costs related to executive management, accounting and finance, general sales support, legal and compliance costs, office expenses and other amounts for which allocation to specific segments is not practicable.

Gross Margin

The number and mix of products placed and the average lease or sales price are the most significant factors affecting our gross margins. Our continuing emphasis on leasing versus selling, the shift in product mix, timing of installations and related upfront installation charges, as well as changes in non-cash depreciation and amortization expenses attributable to our acquisitions, impact our margins.

In general, lease gross margin is greater than the sales gross margin for the same products. However, total gross profit from leasing is lower in a given reporting period than those of a sale due to the much higher price of a sale versus a lease.  A number of factors impact gross margins, including the number and mix of products placed and the average lease or sales price of those products. For example, in our PTG segment, premium table games warrant a higher average lease price than a PTG add-on such as a felt side-bet or a progressive. For Utility products, when a new shuffler is introduced into the market, we use introductory lease pricing. After the introductory pricing period expires, the price generally increases to the monthly “list” lease price, which we believe will increase future revenues because most customers keep the products beyond the introductory pricing period. Accordingly, we anticipate that gross margins will increase under our lease model.

We occasionally record inventory adjustments related to obsolescence or declines in the net realizable value of some products.  While those adjustments occur in the normal course of business, it can cause negative pressure on our margins. We also occasionally dispose of leased assets that are no longer in service and are no longer usable.

In addition to the lease versus sale strategy, we expect to see continual improvement in our gross margins through value engineering to reduce manufacturing costs. Our focus is currently on savings attributable to component parts, product redesign and lower cost manufacturing opportunities within each of our segments.  
 
 
25

 
 
The following table presents our various revenues and expenses as a percentage of revenue:
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three Months Ended
 
   
January 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Revenue:
                       
Utility
  $ 19,616       35.0 %   $ 17,361       39.6 %
Proprietary Table Games
    13,675       24.4 %     11,226       25.6 %
Electronic Table Systems
    8,264       14.7 %     8,131       18.6 %
Electronic Gaming Machines
    14,498       25.9 %     7,097       16.2 %
                                 
Total revenue
    56,053       100.0 %     43,815       100.0 %
Cost of revenue
    20,232       36.1 %     14,647       33.4 %
                                 
Gross profit
    35,821       63.9 %     29,168       66.6 %
Selling, general and administrative
    17,180       30.6 %     16,201       37.0 %
Research and development
    7,527       13.5 %     5,916       13.5 %
                                 
Income from operations
    11,114       19.8 %     7,051       16.1 %
Other income (expense):
                               
Interest income
    139       0.2 %     126       0.3 %
Interest expense
    (477 )     (0.9 %)     (701 )     (1.6 %)
Other, net
    175       0.4 %     157       0.3 %
Total other income (expense)
    (163 )     (0.3 %)     (418 )     (1.0 %)
                                 
Income from operations before tax
    10,951       19.5 %     6,633       15.1 %
Income tax provision
    3,302       5.9 %     1,829       4.1 %
Net income
  $ 7,649       13.6 %   $ 4,804       11.0 %
 
 
26

 

The following table provides additional information regarding our revenue, gross profit and gross margin:
 
REVENUE AND GROSS MARGIN

   
Three Months Ended
       
   
January 31,
   
Percentage
 
   
2012
   
2011
   
Change
 
     (In thousands)        
Revenue:
                 
Leases and royalties
  $ 25,953     $ 23,576       10.1 %
Sales and service
    30,100       20,239       48.7 %
Total
  $ 56,053     $ 43,815       27.9 %
                         
Cost of revenue:
                       
Leases and royalties
  $ 8,951     $ 7,182       24.6 %
Sales and service
    11,281       7,465       51.1 %
Total
  $ 20,232     $ 14,647       38.1 %
                         
Gross profit:
                       
Leases and royalties
  $ 17,002     $ 16,394       3.7 %
Sales and service
    18,819       12,774       47.3 %
Total
  $ 35,821     $ 29,168       22.8 %
                         
Gross margin:
                       
Leases and royalties
    65.5 %     69.5 %        
Sales and service
    62.5 %     63.1 %        
Total
    63.9 %     66.6 %        
 
 
Three months ended January 31, 2012 compared to three months ended January 31, 2011

Revenue

Our revenue for the three months ended January 31, 2012 increased $12.2 million over the same prior year period, primarily due to the following:
 
 
·
Increase of $9.9 million in our sales and service revenue:
 
o
Increase most notably in our EGM segment driven by a substantial increase in sold units due to the continued popularity of our Equinox cabinet; and
 
o
$2.3 million in settlement and license fees from online operators driven by our strategy to protect and license our intellectual property.

 
·
Increase of $2.4 million in our leases and royalties revenue was primarily due to our strategic focus on leasing:
 
o
Driven primarily by increased Utility lease re
 
o
venue due to an 11.0% increase in shuffler units on lease, primarily in the United States and Asia;
 
o
Increased PTG lease and royalty revenue due to a 23.5% increase in units on lease;
 
 
·
Impact of foreign currency fluctuations:
 
o
Total revenue was positively impacted by approximately $0.9 million due to the exchange effect of a weakening U.S. dollar.
 
 
27

 
 
Gross margin

Our gross margin for the three months ended January 31, 2012 decreased 270 basis points (“bps”) to 63.9% as compared to the same prior year period, reflecting the following:
 
 
·
Segment margin performance:
 
o
Decreased margins in ETS which were unfavorably impacted by reductions in average monthly lease prices in the United States and a decrease in average sales price primarily due to the mix of products sold as compared to the prior year quarter;
 
o
Decreased margins in the Utility segment, which was impacted by reductions in shuffler average sales price and proportionally higher depreciation on newly leased shufflers; and

 
·
Offset by changes in product mix:
 
o
Settlement and license fees of $2.3 million from online operators with little associated direct costs; and
 
o
EGM contributed approximately 25.9% of total revenue as compared to 16.2% in the prior year period and contributed to strong overall margin performance.
 
 
28

 
 
The following table provides additional information regarding our operating expenses:
 
OPERATING EXPENSES
 
   
Three Months Ended
       
   
January 31,
   
Percentage
 
   
2012
   
2011
   
Change
 
   
(In thousands)
       
                   
Selling, general and administrative
  $ 17,180     $ 16,201       6.0 %
Percentage of revenue
    30.6 %     37.0 %        
                         
Research and development
  $ 7,527     $ 5,916       27.2 %
Percentage of revenue
    13.5 %     13.5 %        
                         
Total operating expenses
  $ 24,707     $ 22,117       11.7 %
Percentage of revenue
    44.1 %     50.5 %        
 
Three months ended January 31, 2012 compared to three months ended January 31, 2011

Selling, general & administrative (“SG&A”) expenses:

SG&A expenses increased $1.0 million for the three months ended January 31, 2012, as compared to the same prior year period. This increase primarily reflects the following:

 
·
Compensation expense:
 
o
Increase of approximately $1.1 million in payroll and related expenses, partially driven by hire of several executive level positions, including the Chief Executive Officer, the General Counsel, and the Chief Strategic Officer, as well as sales and profit driven compensation expenses due to increased revenue during the three months ended January 31, 2012, as compared to the prior year period.

 
·
Professional fees:
 
o
Increase in professional fees of approximately $0.3 million, related to the higher expenses incurred for accounting and legal professional expenses.

These increases were offset by:

 
·
Trade show expenses:
 
o
Decrease of $0.4 million in trade show expenses, as the prior period included trade show expenses related to the Global Gaming Expo in Las Vegas, there were no such expenses during the current period.
 
Research & development (“R&D”) expenses:

R&D expenses increased $1.6 million for three months ended January 31, 2012 as compared the same prior year period. The following projects have been the focus of our R&D efforts during the three months ended January 31, 2012:

 
·
EGM:
 
o
Additional R&D efforts were spent on developing additional EGM games for the new Equinox cabinet and to support ongoing business growth.

 
·
ETS:
 
o
Expenses primarily related to the ongoing development of Table Master and further development of the i-Table®, i-Table® Roulette and Rapid Table Games®, including the development of proprietary side bets for our i-Table®.

 
·
Utility:
 
o
Expenses primarily related to development of next generation shufflers, as well as ongoing development of our existing Utility products.

 
·
PTG:
 
o
Ongoing enhancements to the successful progressive offering to our table game titles including the development of our Operator Wide Area Progressive (“O-WAP”); and
 
o
Development of online platforms and versions of our table games for online, social gaming and mobile applications.
 
 
29

 
 
The following table provides additional information regarding our depreciation and amortization expenses:
 
DEPRECIATION AND AMORTIZATION EXPENSES
 
   
Three Months Ended
       
   
January 31,
   
Percentage
 
   
2012
   
2011
   
Change
 
   
(In thousands)
       
Gross margin:
                 
Depreciation
  $ 2,855     $ 2,410       18.5 %
Amortization
    1,389       1,627       (14.6 %)
Total
    4,244       4,037       5.1 %
                         
Operating expenses:
                       
Depreciation
    944       973       (3.0 %)
Amortization
    829       751       10.4 %
Total
    1,773       1,724       2.8 %
                         
Total:
                       
Depreciation
    3,799       3,383       12.3 %
Amortization
    2,218       2,378       (6.7 %)
Total
  $ 6,017     $ 5,761       4.4 %
 
Depreciation expense is primarily comprised of depreciation associated with products leased and held for lease and to a lesser extent depreciation of property, plant and equipment. Amortization expense is primarily comprised of amortization associated with intellectual property and customer relationships.

Three months ended January 31, 2012 compared to three months ended January 31, 2011

Total depreciation and amortization included in gross margin increased 5.1% in the three months ended January 31, 2012 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility, ETS and EGM segments as the underlying intangible assets reached the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses increased 2.8% in the three months ended January 31, 2012 as compared to the same prior year period. The increase in amortization expenses relates primarily to amortization of the intellectual property acquired under purchase agreement with Newton Shuffler, LLC during prior year period.
 
 
30

 
 
SEGMENT OPERATING RESULTS  
 
Utility Segment Operating Results

Three months ended January 31, 2012 compared to three months ended January 31, 2011

   
Three Months Ended
             
   
January 31,
   
Increase
   
Percentage
 
   
2012
   
2011
   
(Decrease)
   
Change
 
   
(In thousands, except for units/seats and per unit/seat amounts)
 
Utility Segment Revenue:
                       
Lease
  $ 11,293     $ 10,006     $ 1,287       12.9 %
Sales - Shuffler
    5,193       4,440       753       17.0  
Sales - Chipper
    168       113       55       48.7  
Service
    1,708       1,628       80       4.9  
Other
    1,254       1,174       80       6.8  
Total sales and service
    8,323       7,355       968       13.2  
Total Utility segment revenue
  $ 19,616     $ 17,361     $ 2,255       13.0 %
                                 
Utility segment gross profit
  $ 11,183     $ 10,848     $ 335       3.1 %
Utility segment gross margin
    57.0 %     62.5 %                
                                 
Utility segment operating income
  $ 9,450     $ 9,228     $ 222       2.4 %
Utility segment operating margin
    48.2 %     53.2 %