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TMCNet:  WMS INDUSTRIES INC /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 07, 2013]

WMS INDUSTRIES INC /DE/ - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the SEC on August 21, 2012 ("Form 10-K"). This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in "Cautionary Note" and Item 1A. "Risk Factors" in our Form 10-K and our more recent reports filed with the U.S. Securities and Exchange Commission. The following discussion and analysis is intended to enhance the reader's understanding of our business environment, financial condition and results of operations.



As used in this Report, the terms "we", "us", "our", and "WMS" mean WMS Industries Inc., a Delaware corporation, and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends on June 30.

All references to quarters, unless otherwise noted, refer to the quarters of our fiscal year.

Product names mentioned in this Report are trademarks of WMS Gaming Inc., except for the following marks: Facebook is a registered trademark of Facebook, Inc.; G2E is a registered trademark of the American Gaming Association and Reed Elsevier Inc. Used with permission.

OVERVIEW Our mission is: through imagination, talent and technology, we create and provide the world's most compelling gaming experiences. We serve the legalized gaming industry by designing, manufacturing and distributing gaming machines, custom mobile applications and interactive products and services to authorized customers in legal gaming venues worldwide. Our gaming machines include video and mechanical reel-spinning gaming machines and video lottery terminals ("VLTs"). Our interactive products and services include development and marketing of digital content, products, services and end-to-end solutions that address global online wagering and play-for-fun social, casual and mobile gaming opportunities. We are also addressing the next stage of casino gaming floor evolution with our WAGE-NET® networked gaming solution, a suite of systems technologies and applications designed to increase customers' revenue generating capabilities and operational efficiencies. Our gaming machine products are installed in all of the major regulated gaming jurisdictions in the United States, as well as in approximately 143 international gaming jurisdictions.

24-------------------------------------------------------------------------------- Table of Contents We generate revenue in two principal ways: product sales and gaming operations, as further described below. In fiscal 2010, we expanded the markets where we directly distribute our products by launching directly into Class II gaming markets in the United States and entering the Mexican and New South Wales, Australia markets and we continued to further penetrate these markets in fiscal 2011 and 2012, although demand in fiscal 2012 abated in Mexico and Australia due to unique circumstances in each market. We had previously served these markets through content licensing agreements with third parties for our game themes. In the December 2010 quarter, we launched an online casino site for residents in the United Kingdom, although we did not begin to market the site until February 2011. In the June 2011 quarter, we received the first regulatory approval for our WAGE-NET networked gaming system, the first family of portal applications, the Ultra Hit Progressive® ("UHP") family, and the first game in the UHP family, Jackpot Explosion®, and since then we have received additional approvals for these products and other networked gaming products in other gaming jurisdictions. In fiscal 2012, we expanded our interactive gaming products and services with the launch of our first non-wagering social game on Facebook and the sale of select WMS games for mobile devices and PC's and in July 2012, we grouped together all of our worldwide online wagering, social, casual and mobile gaming products and services in order to focus on their revenue growth, development and market efficiencies and to optimize the benefits of interactive gaming products and services for casino operators and their players. Also, in July 2012 we launched a second non-wagering social game on Facebook titled Jackpot Party® Social Casino. We expect to facilitate the continued expansion, investment, evolution and extension of our interactive products and services and increase our focus on this rapidly evolving growth area. In fiscal 2013, we expect to further penetrate each of the new markets and distribution channels we have entered over the last few years and look to further expand our distribution channels.

The recession and financial market crisis that began in 2008 has continued to disrupt the economy worldwide, reduced consumer discretionary spending and has led to a weakened global economic environment, all of which have been significant challenges for our industry. In calendar 2008 and 2009, some gaming operators delayed or canceled construction projects, resulting in fewer new casino openings and expansions in fiscal 2010 and 2011, coupled with many customers reducing their annual capital budgets for replacing gaming machines.

New unit demand for new casino openings and casino expansions increased in fiscal 2012; however, we expect demand for new casino openings and expansions to decrease in fiscal 2013. The economic crisis reduced disposable income for casino patrons and resulted in fewer patrons visiting casinos and lower spending by those patrons who did visit casinos. The economic crisis and operational challenges led to the review of our product plans and business strategies at the end of fiscal 2011 and beginning of fiscal 2012 and increased competition from our competitors lowered the number of new units we shipped over the last three fiscal years, resulting in lower revenues in fiscal 2012 than in fiscal 2011 and 2010.

In late fiscal 2011 and early fiscal 2012, with no leading indicators showing any significant increase in replacement demand, we conducted a thorough review of our business strategies and product plans. As a result of the strategic review, we announced that we would refine our product plans and restructure our organization to sharpen emphasis on our game content and product development strengths. Specifically, we have streamlined our product management and product development functions, simplified product plans and further prioritized on-time commercialization of new game themes, products and portal gaming applications.

As part of our restructuring, we implemented a 10% reduction in our workforce.

As part of the plan, in the six months ended December 31, 2011, we recorded $14.0 million of pre-tax impairment and restructuring charges, or $0.17 per diluted share, which includes $9.7 million, or $0.12 per diluted share, of pre-tax impairment and restructuring charges including $5.9 million of separation-related charges and $3.8 million of costs related to the decision to close two facilities, and $4.3 million pre-tax, or $0.05 per diluted share, of non-cash charges to write-down receivables following government enforcement actions at certain casinos in Mexico. In the June 2012 quarter, this write-down of receivables was reduced by $0.7 million, or $0.01 per diluted share, due to improvements in the situation. This situation has been very dynamic and while government actions continue to diminish, we continue to closely monitor the situation.

We had expected that with our launch of the network gaming-enabled Bluebird ®2 gaming machines in the December 2008 quarter, concurrent with certain of our competitors launching their networked gaming-enabled products, the industry would experience an improvement in the replacement cycle, which has been at an abnormally low level. However, as discussed above, the economy slowed just as the new gaming machines were being launched, so we did not see the expected improvement in the replacement cycle. Even with the adverse economic environment and its impact on our industry causing customers to constrain their capital budgets, we launched our Bluebird2 gaming machines in the December 2008 quarter with premium features at a significantly higher price, and demand outpaced our expectations. In late June 2010, we launched another new networked-enabled gaming machine, Bluebird xD™, as the replacement for our original Bluebird slant cabinets and it too had a significantly higher price, and once again demand outpaced our expectations. In the March 2012 quarter, we launched our new Bluebird2e gaming machine as an upgrade to our Bluebird2 gaming machines. The Bluebird2e gaming machines contain the emotive lighting feature that we launched with the Bluebird xD cabinet. We expect to launch our new upright cabinet, Blade™, for product sales and new participation cabinet, Gamefield xD™, in the March 2013 quarter and both will utilize our next-generation CPU-NXT®3 operating system platform. As we announced these new products and demonstrated them at the G2E® trade show in October 2012, we believe customers may have reduced the quantity ordered of our current products in the first half of fiscal 2013 to wait for these new products launching in the March 2013 quarter.

25-------------------------------------------------------------------------------- Table of Contents In the December 2012 quarter, we launched the initial placement of My Poker® xD cabinets to address a segment of the casino floor we have little presence in. We believe that as the economy improves and gaming operators see meaningful improvements in their profitability and cash flows, they will increase their annual capital budgets for replacement units, which will improve the replacement demand in future years, although we cannot predict when this will occur or the rate of increase in their capital budgets.

We believe several recent developments fueled by the challenging economic situation could expand our revenue opportunities over the long term. In the United States, legislators have passed or are considering enabling new or expanded gaming legislation in Ohio, Illinois, Kansas, Iowa, Maryland, California, New Hampshire, New York, Florida, Maine and Massachusetts.

Internationally, Singapore opened as a new market in fiscal 2010. In addition, legislation has been passed or discussed in Greece, Brazil, Japan and Taiwan that could open new market opportunities. In the United States, the States of Nevada and Delaware have adopted legislation to legalize certain forms of online gaming and federal legislators and certain other state legislators and governments in Canada and Europe have legalized or are considering legalizing certain forms of online gaming, which if passed could expand our revenue opportunities. The breadth and timing of these opportunities remain uncertain due to the political process in each of these jurisdictions, as well as the difficult credit environment facing our customers and the risk of continued economic uncertainty.

We review certain financial measures in assessing our financial condition and operating performance not only in connection with creating our forecasts and in making comparisons to financial results from prior periods, but also in making comparisons to our competitors' financial results and our internal plans. We focus on fluctuations in revenue, number of new units sold, average selling price, average participation installed base and average revenue per day, cost on both products sales and gaming operations and also pay close attention to our operating income, operating margin, net income, diluted earnings per share, total cash, total accounts and notes receivable, inventories and accounts payable and cash flows provided by or used in operating activities, investing activities and financing activities, as they are key indicators of our performance. We also measure changes in selling and administrative expenses as a percent of revenue, which indicate management's ability to control costs, as well as research and development costs as a percent of revenue, which demonstrate investment in technology and product development. Finally, we measure depreciation and amortization expense as a percentage of revenues as an indicator of the current cost of capital expenditures, primarily in gaming operations.

The measures listed above are not a comprehensive list of all factors considered by us in assessing our financial condition and operating performance, and we may consider other individual measures as required by trends and discrete events arising in a specific period, but they are the key indicators and these measures are discussed herein.

The priorities for the utilization of our cash flow are to: continue to enhance stockholder value by emphasizing internal and external investments to create and license advanced technologies and intellectual property; seek acquisitions or licensing deals that can extend our presence and product lines, increase our distribution channels, enhance our intellectual property portfolio and expand our earnings potential; and, when appropriate, repurchase shares in the open market or in privately negotiated transactions. For the six months ended December 31, 2012, our research and development spending increased $6.2 million compared to the prior year and we spent $32.9 million on property, plant and equipment and $38.6 million on additions to gaming operations equipment, and we funded approximately $5.0 million of common stock repurchases. We also had $25.0 million net borrowings on our credit facility and had $85.0 million long-term debt outstanding at December 31, 2012.

Product Sales Product sales revenue includes the sale to casinos and other gaming machine operators of new and used gaming machines and VLTs, parts and conversion kits (including game theme, hardware or operating system conversions). In July 2011, we sold our Systems In Progress GmbH subsidiary ("SiP"). This subsidiary was immaterial to our Condensed Consolidated Financial Statements. In fiscal 2011, we also notified our customers that we were winding down the support for our Bluebird gaming machines with no new game content available after July 1, 2012, but we would continue to service and supply replacement parts through July 2015.

We derive product sales revenue from the sale of the following: • Multi-line, multi-coin video gaming machines, in our Bluebird, Bluebird2, Bluebird2e and Bluebird xD branded gaming machines; • Mechanical reel-spinning gaming machines in our Bluebird, Bluebird2, Bluebird2e and Bluebird xD branded gaming machines; • Replacement parts and game theme conversion kits for our Bluebird, Bluebird2, Bluebird2e, Bluebird xD, Twinstar™, Twinstar2, Helios™ and CPU-NXT and CPU-NXT2 operating system upgrade kits; and • Used gaming machines manufactured by us or our competitors that are acquired on a trade-in basis or that we previously leased to casinos as participation gaming machines.

26 -------------------------------------------------------------------------------- Table of Contents In early October 2012 at our industry's largest trade show, we demonstrated our new Blade cabinet that we expect to begin shipping in the March 2013 quarter.

Customers may delay purchases of our existing cabinets until the Blade cabinet is approved in their jurisdiction and we may also experience lower average selling prices of our existing cabinets due to higher discounts off of the list price.

Gaming Operations We earn revenues from leasing gaming machines and VLTs to casinos and other licensed gaming machine operators under operating leases; operating an online gaming site, offering non-wagering social games on Facebook, offering our games on third-party online gaming platforms that are interoperable with our game servers; selling select WMS games that have been ported to operate on mobile devices and PC's; we earn revenues from placing our networked gaming system and applications, which is a system that links groups of networked-enabled gaming machines to a server in the casino data center; and earn royalties that we receive from third parties under license agreements to use our game content and intellectual property.

Our gaming operations include the following product lines: • Participation games, which are gaming machines owned by us that we lease based upon any of the following payment methods: (1) a percentage of the casino's net win, which is the casino's earnings generated by casino patrons playing the gaming machine; (2) fixed daily fees; or (3) a percentage of the amount wagered ("coin-in") or a combination of a fixed daily fee plus a percentage of the amount wagered. We have the ability to lease these gaming machines on a participation basis because of the superior performance of the game and/or the popularity of the brand, which generates higher wagering and net win to the casinos or gaming machine operators than the gaming machines we sell outright. Participation games include: • Wide-area progressive ("WAP") participation games; • Local-area progressive ("LAP") participation games; and • Stand-alone participation games.

• Casino-owned daily fee games, where the casino or gaming machine operator purchases the base gaming machine and pays a lower daily lease fee for the top-box and game; • Gaming machines and VLT's placed at casinos and other licensed gaming machine operators under operating lease arrangements; • Revenues from licensing our game content and intellectual properties to third parties; • Revenues from our online gaming casino in the United Kingdom, which was launched in November 2010, and beginning in fiscal 2012 revenues from our Lucky Cruise™ non-wagering social game on Facebook and in July 2012, our Jackpot Party Social Casino on Facebook, revenues from the sale of select WMS games that have been ported to operate on mobile devices, revenues from the retail sales of CD's containing WMS games or direct downloads of WMS games from internet distributors and revenues when an online player uses a WMS or Jadestone game on one of our customers' online gaming sites; and • Beginning in June 2011, networked gaming revenues where the casinos or other gaming machine operators use our WAGE-NET networked gaming system to link groups of gaming machines to remote servers in their locations that allows casinos and other gaming machine operators to purchase new applications and system-wide features for distribution over the WAGE-NET system. Also in the June 2011 quarter, we received the first regulatory approval of our WAGE-NET networked gaming system, the first family of portal applications, the Ultra Hit Progressive ("UHP") family, and the first game in the UHP family, the Jackpot Explosion theme, and since then we have received additional approvals for these products and other networked gaming products in other gaming jurisdictions. At December 31, 2012, we had approximately 2,100 networked gaming machines functioning, primarily on a non-trial basis, at approximately 100 casino properties globally.

OUR FOCUS We continue to operate in a challenging economic environment and the combination of economic uncertainty, lower demand for replacement products and reduced opportunities from new or expanded casinos has negatively impacted our industry.

We expect to benefit from certain new and expansion projects currently in process in calendar 2013, but the breadth and timing of such opportunities remains uncertain due to the difficult credit environment facing our customers and the risk of continued economic uncertainty.

27-------------------------------------------------------------------------------- Table of Contents As we navigate these macroeconomic challenges, we focused on four key strategic priorities: 1) Continue to grow our installed participation product base and improve our daily average revenue; 2) Garner increased ship share in our global product sales by leveraging our product development expertise and developing differentiated, high-earning games, game content and products for our customers worldwide; 3) Invest in the establishment, development and operation of our interactive gaming products and services; and 4) Drive margin improvements: 1. Strategic Priority: Continue to grow our installed participation product base and improve our daily average revenue: Quarter Ended December 31, 2012, Result: During the quarter ended December 31, 2012, our average installed base of participation gaming machines decreased 1.0% over the quarter ended December 31, 2011 while, at December 31, 2012, our total installed participation footprint grew 3.7% to 9,624 units compared to 9,282 units at December 31, 2011. Our average revenue per day declined 5.5% in the December 2012 quarter from the December 2011 quarter to $63.89. Our focus in fiscal 2013 is to increase the percentage of the installed base that are coin-in gaming machines as they generate the highest profit of our three lease models and to convert a portion of our installed base from Bluebird gaming machines to Bluebird2, Bluebird xD and our new Gamefield xD gaming machines. The percentage of coin-in gaming machines in our installed base was 36.7% of the installed base at December 31, 2012, compared to 38.6% of the installed base at December 31, 2011. The coin-in gaming machines decrease was in our non-WAP gaming machines as our WAP installed base was 3,330 units at December 31, 2012 compared to 2,971 units at December 31, 2011. We have successfully converted approximately 70% of the participation installed base to Bluebird2 and Bluebird xD gaming machines, although this required a higher capital investment over the last two years. We invested $38.6 million in gaming operations capital in the six months ended December 31, 2012 and $35.6 million in six months ended December 31, 2011. We expect that the amount of capital invested in gaming operations will decline modestly for the next two years as a lower amount of capital spent on our participation gaming machines will be partially offset by increased capital spent on gaming machines for operating leases as we expect a portion of the new VLT market in Illinois will be conducted through operating leases. In fiscal 2011 and the first half of fiscal 2012, we experienced delays in launching new products due to the new technologies we were imbedding in our participation products and as a result of not having as many new participation game themes approved, some of our older game theme performance lagged resulting in a higher level of removals of participation gaming machines, which caused a reduction in the installed base. We expect that with an anticipated increase in participation game themes that our installed base will grow in the balance of fiscal 2013 and continue to grow in fiscal 2014.

2. Strategic Priority: Garner increased ship share in our global product sales by leveraging our product development expertise and developing differentiated, high-earning games, game content and products for our customers worldwide.

Quarter Ended December 31, 2012, Result: The replacement cycle for gaming machines has been abnormally low for several years and the challenges facing our industry and the overall global economy have continued, all of which have reduced overall industry demand for gaming machines from previous levels. We believe capital budgets for replacing gaming machines were relatively flat for calendar 2010 and 2011 and increased modestly in 2012. We believe demand from new casino openings and casino expansions declined from fiscal 2010 to fiscal 2011 but grew in fiscal 2012. We expect new unit demand from new casino openings and expansions to be lower in fiscal 2013 than in fiscal 2012 but that replacement demand will increase due to the Canadian provincial lotteries beginning to replace their existing VLTs and the opening of the new VLT market in Illinois. The average selling price on a VLT is lower than a Class III gaming machine. In this challenging environment, our December 2012 new unit shipments on which we recognized revenue were up 0.2% from the prior-year period due to the increase in VLT demand more than offsetting the decline in Class III gaming machine demand. International new unit shipments accounted for 42.8% of global shipments in the December 2012 quarter, compared with 43.1% for the December 2011 quarter. Overall, international new unit shipments increased in fiscal 2011 but shrank in fiscal 2012, as in fiscal 2011 the growth in Mexico and New South Wales, Australia and Singapore coupled with modest growth in Asia and Latin America, more than offset lower shipments to Europe, which remains impacted by the challenging economic environment. In fiscal 2012, demand from Mexico and New South Wales, Australia abated due to unique circumstances in each country and demand from Europe continued to be lower. Demand from Mexican customers was lower following government enforcement actions at certain casinos in Mexico that began in the September 2011 quarter and demand from Australian customers was lower as they await enablement of new national versus state gaming standards.

Revenues from customers in Argentina were lower in the six months ended December 31, 2012 as government authorities modified rules related to importing product. We expect international demand in fiscal 2013 to be flat with fiscal 2012. Also, we believe the higher-priced Bluebird2, Bluebird xD and Bluebird2e units had an impact on the unit volume customers were able to buy with fixed capital budgets. We are still preparing to launch our products in the new VLT market in Italy in the future. Although much effort is still needed before the first revenue-earning WMS gaming machines are placed in Italy, we will have additional development work to complete as a result of new requirements that the regulator has mandated in Italy that will be effective after a transition period. In addition, we continue to achieve benefits from the opening of new international offices and the addition of new geographically dispersed sales account executives.

To further diversify our revenue streams, we directly entered the Class II and central determinant market in fiscal 2010 following expiration of our previous licensing agreements for those markets. We shipped our first gaming machines to a 28 -------------------------------------------------------------------------------- Table of Contents Class II market in the September 2009 quarter, and we have continued to penetrate this market in subsequent quarters. In June 2012, we received approval of a CPU-NXT2-based operating system on our Bluebird2 cabinet for the Class II markets and shipped our first gaming machines operating on this new system in the June 2012 quarter. We expect that shipments to these markets in fiscal 2013 and 2014 will exceed shipments in fiscal 2012.

We launched our Bluebird xD gaming machine late in the June 2010 quarter and, given customer response, we achieved strong demand for this product throughout fiscal 2012 and 2011. For the three months ended December 31, 2012, Bluebird xD gaming machines accounted for 26.3% of our global new unit sales which compares to 33.6% in the three months ended December 31, 2011. We launched an enhanced version of our Bluebird2 product, the Bluebird2e cabinet with an emotive lighting feature in the March 2012 quarter. During the December 2012 quarter, the majority of the global Bluebird2 product line new unit sales were Bluebird2e units and we would expect this to also occur in future periods. We launched our Bluebird2-lite cabinet in the September 2012 quarter which is a lower cost cabinet for select international markets. We expect to launch our new gaming cabinet, Blade, using the latest version of our operating system software, CPU-NXT3, in the March 2013 quarter.

We are dependent, in part, on innovative new products, casino openings and expansions, continued market penetration and new market opportunities to generate growth. We have continued to invest in research and development activities to be able to offer creative and high earning products to our customers and in the three months ended December 31, 2012, such expenses totaled 17.0% of revenues or $26.7 million compared to 14.6% or $23.7 million in the prior-year period. Expansion and new market opportunities may come from political action as governments look to gaming to provide tax revenues in support of public programs and view gaming as a key driver for tourism.

3. Strategic Priority: Invest in the establishment, development and operation of our interactive gaming products and services.

Quarter Ended December 31, 2012, Result: In the December 2010 quarter, we launched a business-to-consumer, online casino website for residents in the United Kingdom, although we did not begin to market the site until February 2011. Our Jackpotparty.com online casino offers a variety of our popular slot games and certain card and table games. The success of our gaming content, technology foundation and interactive capabilities allows us to provide online capabilities to consumers in other jurisdictions primarily on a business-to-business ("B2B") basis. In the United States, the States of Nevada and Delaware have adopted legislation to legalize certain forms of online gaming and federal legislators and certain other state legislators and governments in Canada and Europe have legalized or are considering legalizing certain forms of online gaming, which, if passed, could expand our revenue opportunities depending on the type of online gaming approved. The breadth and timing of these opportunities remain uncertain due to the political process in each of these jurisdictions, as well as the difficult credit environment facing our customers and the risk of continued economic uncertainty. In fiscal 2012, we began earning revenues from our Lucky Cruise non-wagering social game on Facebook and revenues from the sale of select WMS games that have been ported to operate on mobile devices and PC's. We further expanded our online, social, casual and mobile gaming presence through the acquisitions of Jadestone and Phantom for $33.6 million in late fiscal 2012. We paid $16.4 million at closing, $0.5 million in the September 2012 quarter and $2.1 in the December 2012 quarter, and have additional consideration of a maximum of $14.6 million in the future for both acquisitions. These acquisitions individually and in the aggregate were not material to our Condensed Consolidated Financial Statements. Additionally, in fiscal 2012 we entered into an agreement to provide an end-to-end B2B online casino site in Belgium in collaboration with Groupe Partouche and early fiscal 2013 we created a strategic alliance with Dragonfish, the independent B2B division of 888 Holdings plc, that expands our B2B online product offering in the United States with one of the world's leading online poker solutions. In July 2012, we launched Jackpot Party Social Casino on Facebook, which enhanced our revenue earning opportunities. We will focus on the revenue growth, development and market efficiencies of our worldwide online, social, casual and mobile gaming products and services to optimize the benefits of our interactive products and services for casino operators and their players.

4. Strategic Priority: Drive Margin Improvements.

Quarter Ended December 31, 2012, Result: Our operating margin decreased 850 basis points to 4.4% for the quarter ended December 31, 2012, from 12.9% for the prior-year period.

Our research and development costs increased as a percentage of revenues to 17.0% in the quarter ended December 31, 2012 from 14.6% of revenues in the quarter ended December 31, 2011 and in total increased $3.0 million, or 12.7%, over the prior year period. The increase is primarily caused by higher development costs to re-engineer and re-purpose our library of slot gaming content for distribution as our interactive products and services, the impact of the Phantom EFX and Jadestone acquisitions in the June 2012 quarter, along with an increase in spending for our innovative new casino gaming products. Our selling and administrative expenses increased as a percentage of revenue to 24.1% in the quarter ended December 31, 2012 from 20.5% of revenues in the quarter ended December 31, 2011 and in total increased by $4.7 million, or 14.2%, over the prior year. The increase is primarily caused by $2.5 million of expenses related to our recently announced sales transaction, the increase in online marketing costs to expand the player base for interactive products and services, the impact of the Phantom EFX and Jadestone acquisitions in the June 2012 quarter and the incremental expenses related to our implementation of 29-------------------------------------------------------------------------------- Table of Contents an upgraded enterprise-wide ERP system partially offset by ongoing cost savings initiatives. Our depreciation and amortization expense increased as a percentage of revenue to 18.4% in the quarter ended December 31, 2012 from 13.1% of revenues in the quarter ended December 31, 2011 and increased $7.8 million, or 36.8%, over the prior year due to the higher level of capital spent in fiscal 2011 and 2012 to upgrade the installed base of our participation gaming machines to new Bluebird2 and Bluebird xD gaming machines, depreciation on a new facility that was placed in service in August 2012, depreciation on capitalized costs related to an upgrade of our Oracle ERP system as we have now gone live with the new system and from amortization of finite-lived intangible assets from our two acquisitions in the June 2012 quarter. By driving margin improvements in future periods, we believe we will be able to increase net income and generate the necessary capital to fund the other elements of our business strategy.

We are still implementing our lean sigma and strategic sourcing initiatives, and we continue to realize positive results. We believe these initiatives will continue to drive margin improvement in future years through disciplined cost management, especially with the Bluebird xD and new Bluebird2e product line, where we expect to improve margins to be comparable to our Bluebird2 product line. Longer term, we expect to benefit from an expanded volume of business that should result in greater volume discounts from our raw material suppliers and enable us to spread our manufacturing overhead costs over a larger number of units thereby reducing the cost per unit. We also expect our gaming operations will continue to expand with both the installed base and revenue per day increasing in fiscal 2013.

We believe our product development capabilities, combined with additional functionalities and enhanced features of our advanced technologies and gaming platforms, enable us to optimize the entertainment value of our products and improve our operating margins. In fiscal 2013 and 2014, we expect to significantly increase our spending to grow our interactive products and services and also increase spending to accelerate product innovation efforts and as a result research and development expenses are expected to increase to 15% to 16% of revenues. We expect selling and administrative expenses to grow modestly as a percentage of revenues in fiscal 2013 and 2014 primarily due to increased spending to grow our interactive products and services and as we grow and support our increased overall revenues. Due to higher capital spending in our gaming operations over the past two years and the completion of two major property, plant and equipment projects in early fiscal 2013, we expect that depreciation and amortization expense will increase as a percentage of revenues in fiscal 2013 and 2014 in comparison to fiscal 2012.

Common Stock Repurchase Program See Note 10. "Stockholders' Equity and Equity Compensation Plan - Common Stock Repurchase Program" to our Condensed Consolidated Financial Statements and Notes thereto included in this report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES For a description of our critical accounting policies and estimates, see Item 7.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, and Note 2. "Principal Accounting Policies - Revenue Recognition" to the Consolidated Financial Statements included in that report. We have not made any changes in critical accounting policies and estimates during the three months or six months ended December 31, 2012.

RESULTS OF OPERATIONS Recent Developments On January 30, 2013, WMS Industries Inc. ("WMS") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Scientific Games Corporation ("Scientific Games"), Scientific Games International, Inc., a wholly owned subsidiary of Scientific Games, and SG California Merger Sub, Inc., a wholly owned subsidiary of Scientific Games ("Merger Sub"). The Merger Agreement provides for the merger of Merger Sub with and into WMS, with WMS surviving as a wholly owned subsidiary of Scientific Games (the "Merger"). The Merger Agreement was unanimously approved by our Board of Directors. At the effective time of the Merger, each share of WMS' common stock issued and outstanding immediately prior to such time, other than our treasury shares, shares owned by Scientific Games or Merger Sub, and shares with respect to which appraisal rights are properly exercised and not withdrawn under Delaware law, will be automatically cancelled and converted into the right to receive $26.00 in cash, without interest, on the terms and subject to the conditions set forth in the Merger Agreement. Following consummation of the Merger, our stock will be delisted from the New York Stock Exchange.

Consummation of the Merger is subject to customary conditions, including without limitation (i) approval of the Merger Agreement by WMS' stockholders, (ii) expiration or early termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, as amended, and (iii) receipt and effectiveness of specified licenses, permits, and other approvals, issued by certain governmental authorities in relation to our gaming operations. At this time, we expect to consummate the Merger by the end of 2013. The Merger Agreement contains certain limitations on the operations of WMS during the period prior to the effective time of the Merger, including a prohibition on share repurchases by the Company.

30 -------------------------------------------------------------------------------- Table of Contents In late October 2012, superstorm Sandy struck New Jersey, New York, Connecticut and several other east coast states causing substantial damage and power outages to the areas. While within a week our customers re-opened their casinos, we currently expect the aftermath of superstorm Sandy to reduce casino visitation in Atlantic City, New Jersey and other affected casinos, which may negatively impact demand for new gaming machines and the revenue per day for our participation gaming machines for future months.

Seasonality See Note 1. "Basis of Presentation and Business Overview" to the Condensed Consolidated Financial Statements and Notes thereto included in this report.

Impact of Inflation During the past three years, the general level of inflation affecting us has been relatively low. Our ability to pass on future cost increases in the form of higher sales prices will depend on the prevailing competitive environment and the acceptance of our products in the marketplace.

Impairment, Restructuring and Other Charges Given the continuing lower levels of capital spending by casinos over the last three years and with no leading indicators suggesting that demand will increase in the near-term, we conducted a thorough review of our product plans and business strategies at the end of fiscal 2011 and beginning of fiscal 2012. We still believe our long-term vision is intact but, as a result of this review, we refined our product plans and restructured our organization. Specifically, we streamlined our product management and product development functions, simplified our product plans and further prioritized on-time commercialization of new game themes, products and portal applications.

In addition, we implemented a broader impairment analysis and restructuring and recorded additional charges in the September 2011 quarter amounting to $14.0 million pre-tax, or $0.17 per diluted share. These product plan realignment and restructuring actions are expected to better direct resources and focus on near-term revenue opportunities and reduced our overall organizational staffing by approximately 10% to a level that better correlates with the current operating environment, while maintaining our ability to create great games that engage current players and attract new players.

31-------------------------------------------------------------------------------- Table of Contents The following table summarizes the detail of the charges recorded in the six months ended December 31, 2011 (in millions, except per diluted share amounts): Six Months Ended December 31, 2011 Per Pre-tax diluted DESCRIPTION OF CHARGES amounts share IMPAIRMENT AND RESTRUCTURING CHARGES Non-cash Charges Impairment of property, plant and equipment $ 0.6 $ 0.01 Cash Charges Restructuring charges, primarily separation charges 9.1 0.11 Total Impairment and Restructuring Charges 9.7 0.12 OTHER CHARGES Non-cash charges to write-down Mexican customer receivables (recorded in selling and administrative expenses) 4.3 0.05 TOTAL IMPAIRMENT, RESTRUCTURING AND OTHERCHARGES $ 14.0 $ 0.17 The six-month period ended December 31, 2011, includes $14.0 million of pre-tax charges, or $0.17 per diluted share, which includes $9.7 million, or $0.12 per diluted share, of pre-tax impairment and restructuring charges including $5.9 million of separation-related charges and $3.8 million of costs related to the decision to close two facilities, and $4.3 million pre-tax, or $0.05 per diluted share, of non-cash charges to write-down receivables following government enforcement actions at certain casinos in Mexico, which was partially offset by a $0.7 million, or $0.01 per diluted share, pre-tax reduction in the reserve for bad debts related to government enforcement actions at certain casinos in Mexico in the three-month period ended June 30, 2012.

Three Months Ended December 31, 2012 compared to Three Months Ended December 31, 2011 Below are our Revenues and Operating Margins and Key Performance Indicators for the three months ended December 31, 2012 and 2011. This information should be read in conjunction with the Condensed Consolidated Statements of Income included in this report (in millions, except unit and per share data): Three Months Ended Increase/ December 31, (Decrease) 2012 2011 2012 vs. 2011 Variance Dollar % Product Sales Revenues: New gaming machine sales revenues $ 75.6 $ 79.1 $ (3.5 ) (4.4 ) Other product sales revenues 9.2 18.4 (9.2 ) (50.0 ) Total product sales revenues $ 84.8 $ 97.5 $ (12.7 ) (13.0 ) Average sales price per new unit $ 15,558 $ 16,325 $ (767 ) (4.7 ) New unit shipments to the U.S. and Canada 2,778 2,759 19 0.7 New unit shipments to International markets 2,080 2,087 (7 ) (0.3 ) Total new units on which revenue was recognized 4,858 4,846 12 0.2 Used units shipments 924 1,575 (651 ) (41.3 ) Total units shipments 5,782 6,421 (639 ) (10.0 ) Conversion kit units sales 1,390 5,000 (3,610 ) (72.2 ) Cost of product sales $ 43.2 $ 48.7 $ (5.5 ) (11.3 ) Gaming Operations Revenues: Participation revenues $ 54.6 $ 58.4 $ (3.8 ) (6.5 ) Interactive products and services revenues 13.0 1.2 11.8 nm Other gaming operations revenues 5.1 5.1 0.0 0.0 Total gaming operations revenues $ 72.7 $ 64.7 $ 8.0 12.4 Installed base of participation units at period end 9,624 9,282 342 3.7 32 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Increase/ December 31, (Decrease) 2012 2011 2012 vs. 2011 Variance Dollar % Average installed participation units 9,281 9,376 (95 ) (1.0 ) Average daily revenue per participation unit $ 63.89 $ 67.62 $ (3.73 ) (5.5 ) Cost of gaming operations $ 13.7 $ 14.4 $ (0.7 ) (4.9 ) Total revenues $ 157.5 $ 162.2 $ (4.7 ) (2.9 ) Total operating income $ 7.0 $ 21.0 $ (14.0 ) (66.7 ) Total operating margin 4.4 % 12.9 % (850 )bp (65.9 ) Net income $ 4.3 $ 16.1 $ (11.8 ) (73.3 ) Earnings Per Share: Basic $ 0.08 $ 0.29 $ (0.21 ) (72.4 ) Diluted $ 0.08 $ 0.29 $ (0.21 ) (72.4 ) bp basis points Revenues Total revenues for quarter ended December 31, 2012, decreased 4.7% or $2.9 million, compared to the December 31, 2011 quarter, reflecting: • A $3.5 million, or 4.4%, decrease in new unit sales revenue as a result of: • A 12 unit, or 0.2%, increase in new units sold as: • New units sold in the United States and Canada totaled2,778 units, an increase of 0.7%, in the December 2012 quarter. Replacement units shipped to U.S. and Canadian customers increased 10.6% over the prior-year period to 2,434 units, while new gaming machine sales for new casino openings and expansions totaled 344 units compared to approximately 600 units in the December 2011 quarter.

Sales of Bluebird xD units accounted for 26.3% of new units sold in the December 2012 quarter and 33.6% of new units sold in the December 2011 quarter.

• International new units sold decreased 0.3% from the prior year to 2,080 units, and represented 42.8% of global shipments compared to 43.1% in the December 2011 quarter reflecting continued low demand in Europe, lower demand in New South Wales, Australia as operators await implementation of new national gaming standards and lower revenues in Argentina as government authorities modified rules related to importing product.

• A 4.7% decrease in the average selling price of new gaming machines to $15,558, principally reflecting the mix impact and lower average selling prices associated with VLTs and the new Bluebird2-lite cabinet for select international markets, as well as the impact of the competitive marketplace and our current line-up of gaming cabinets being amongst the oldest in the industry.

• A $9.2 million, or 50.0%, decrease in other product sales revenues, reflecting lower conversion kit sales revenue compared to the year-ago period and lower used gaming machine revenues as a result of a smaller number of trade-in units accepted that translated into a smaller number of unit sales than the year-ago period as: • We earned revenue on approximately 1,390 conversion kits in the December 2012 quarter, compared to approximately 5,000conversion kits in the prior-year period; and • We sold 924 used gaming machines at a lower average price during the December 2012 quarter, compared to 1,575 used gaming machines in the prior-year period. The average sales price of used gaming machines decreased in the December 2012 quarter principally reflecting a smaller number of trade-in units accepted which translated into a smaller number of unit sales at slightly lower prices than in the December 2011 quarter.

• Participation revenues were down $3.8 million, or 6.5%, due primarily to: • The average installed base of participation gaming machines in the December 2012 quarter decreased slightly year over year. We were able to increase the installed base by December 31, 2012, up 342 units from December 31, 2011.

33 -------------------------------------------------------------------------------- Table of Contents • Overall average revenue per day decreased by $3.73, or 5.5%, from the prior year principally reflecting lower average revenue per day in our percentage of coin-in gaming machines due to product performance and the competitive marketplace.

• An $11.8 million increase in interactive products and services revenue, primarily reflecting the July 2012 launch of our Jackpot Party Social Casino on Facebook and continued growth in the UK online gaming revenues.

• Other gaming operations revenue was flat year over year.

We expect to generate modest revenue growth in fiscal 2013 and fiscal 2014 as we increase our global market penetration due to the popularity of our products, launch new products and gaming cabinets, expand market distribution opportunities, grow our participation installed base through the introduction of new and innovative participation games and increase revenues from our interactive products and services and networked gaming operations. Likewise in fiscal 2013 and 2014, we expect modest improvements in lowering the cost of our gaming machines resulting from the ongoing implementation of process improvements throughout the entire organization with the utilization of lean sigma tools to improve quality and eliminate waste, improved results from our strategic sourcing initiatives and the benefits from ongoing efforts to level the production schedule throughout each quarter, which will be partially offset by the impact of higher VLT sales which have a lower average selling price than our Class III gaming machines.

Our cost of product sales and cost of gaming operations may not be comparable to other companies as they exclude the following amounts of depreciation and amortization, which are included in the depreciation and amortization line item, and distribution expenses included in the selling and administration line item (in millions of dollars): Three Months Ended Increase/ December 31, (Decrease) 2012 2011 Dollar Percent Depreciation and amortization Cost of Product Sales $ 2.1 $ 1.4 $ 0.7 50.0 % Cost of Gaming Operations 17.8 13.1 4.7 35.9 Distribution expenses 5.8 6.2 (0.4 ) (6.5 ) Operating Expenses Operating expenses were as follows (in millions of dollars): Three Months Ended Increase/ December 31, (Decrease) 2012 2011 Amount % Costs and Expenses: Cost of product sales $ 43.2 $ 48.7 $ (5.5 ) (11.3 )% As a percentage of product sales revenues 50.9 % 49.9 % 100 bp 2.0 Cost of gaming operations 13.7 14.4 (0.7 ) (4.9 ) As a percentage of gaming operations revenues 18.8 % 22.3 % (350 )bp (15.7 ) Research and development expense 26.7 23.7 3.0 12.7 As a percentage of total revenues 17.0 % 14.6 % 240 bp 16.4 Selling and administrative expense 37.9 33.2 4.7 14.2 As a percentage of total revenues 24.1 % 20.5 % 360 bp 17.6 Depreciation and amortization expense 29.0 21.2 7.8 36.8 As a percentage of total revenues 18.4 % 13.1 % 530 bp 40.5 Total costs and expenses $ 150.5 $ 141.2 $ 9.3 6.6 % Cost of product sales was $43.2 million, or 50.9% of product sales revenues, for the December 2012 quarter, compared to $48.7 million, or 49.9% of product sales revenues, for the prior-year period. The December 2012 quarter reflects: lower cost of VLTs, lower per unit costs due to our strategic sourcing, supply chain and other continuous improvement initiatives and lower used gaming machine and conversion kit sales.

Cost of gaming operations was $13.7 million, or 18.8% of gaming operations revenues, for the December 2012 quarter, compared to $14.4 million, or 22.3% of gaming operations revenues for the prior-year period. The December 2012 quarter primarily reflects: the higher mix of lower costs revenues from interactive products and services and a more favorable jackpot expense experience on wide-area progressive games; while improving year over year as a percent of gaming operations revenues.

34 -------------------------------------------------------------------------------- Table of Contents Research and development expenses increased 12.7% to $26.7 million in the December 2012 quarter, compared to $23.7 million in the prior-year period. The year-over-year increase reflects: • Higher development costs for our planned expanded product development initiatives for the continued creation of intellectual property and the ongoing expansion of our product portfolio; and • Increase in spending for our interactive products and services including the impact of the two acquisitions in the June 2012 quarter; partially offset by • Decreased payroll-related costs associated with headcount decreases coupled with cost containment measures on non-payroll related costs.

Selling and administrative expenses increased 4.7%, or $14.2 million, to $37.9 million in the December 2012 quarter, compared to $33.2 million in the prior-year period while increasing by 360 basis points as a percentage of revenues to 24.1%. The year-over-year increase reflects: • Increased spend in our online marketing costs to expand the player base for interactive products and services; • Incremental costs for our networked gaming and interactive products and services including the impact of the two acquisitions in the June 2012 quarter; • Incremental expenses related to our implementation of an upgraded enterprise-wide ERP system; and • Increased expenses of $2.5 million related to our recently announced sales transaction; partially offset by • Decreased payroll-related costs associated with headcount decreases coupled with cost containment measures on non-payroll related costs.

Depreciation and amortization expense increased by $7.8 million, or 36.8%, to $29.0 million in the December 2012 quarter, compared to $21.2 million in the prior-year period. The increase in depreciation and amortization expense reflects increased capital spending on gaming operations equipment throughout fiscal 2011 and 2012 and the September 2012 quarter to upgrade our installed base of participation gaming machines to Bluebird2 and Bluebird xD gaming machines, depreciation for a new facility that was placed in service in August 2012, amortization of finite-lived intangible assets from our two acquisitions in the June 2012 quarter and depreciation on the upgraded enterprise-wide ERP system which we placed in service in October 2012.

Operating Income and Operating Margin Our operating income decreased by $14.0 million, or 66.7%, in the December 2012 quarter on a 2.9% decrease in total revenues. Our operating margin of 4.4% represented an 850-basis point decrease over the 12.9% operating margin achieved in the prior-year period. This decrease reflects: • $11.8 million of lower profit after subtracting cost of product sales and cost of gaming operations from product sales revenues and gaming operations revenues, respectively; • $7.8 million of higher depreciation and amortization expense; • $4.7 million of higher selling and administrative costs; and • $3.0 million of higher research and development costs, all as discussed above.

Interest Expense We incurred interest expense of $1.0 million and $0.4 million, net of amounts capitalized for construction-in-progress, in the quarters ended December 31, 2012 and 2011, respectively.

Interest Income and Other Income and Expense, Net Interest income and other income and expense, net was income of $3.9 million and $4.2 million for the quarters ended December 31, 2012 and 2011, respectively.

Income Taxes The estimated effective income tax rates were approximately 56.5% and 35.0% for the quarters ended December 31, 2012 and 2011, respectively.

The December 2012 quarter estimated effective tax rate in comparison to the December 2011 quarter effective tax rate reflects: • A lower estimated annualized domestic manufacturing deduction; • A decrease in estimated annual pre-tax income compared to the December 2011 quarter; 35 -------------------------------------------------------------------------------- Table of Contents • No U.S. Federal research and development tax credit in the December 2012 quarter, compared to a research and development tax credit, net of $0.7 million in the December 2011 quarter; and • A non-U.S. tax charge of $2.0 million in the December 2012 quarter.

The December 2011 quarter estimated effective tax rate in comparison to the December 2010 quarter effective tax rate of 35.9% reflects: • A higher estimated domestic manufacturing deduction of $1.4 million; • A decrease in estimated pre-tax income compared to fiscal 2010; and • An estimated reduction of the effective tax rate by $0.1 million due to the research and development tax credit, which was not in effect in the prior year period; partially offset by • A decrease in the estimated impact of other permanent tax items in the first quarter of $1.5 million.

At June 30, 2012, no deferred income tax provision had been recorded for United States Federal taxes related to approximately $39.3 million of undistributed net earnings of certain foreign subsidiaries, which are considered to be permanently reinvested. Determination of the deferred income tax liability on these unremitted earnings is not practicable because such liability, if any, depends on the circumstances existing if and when the remittance occurs. We have approximately $28.9 million of cash and cash equivalents in our international subsidiaries at December 31, 2012, and we believe we could readily convert such cash to other currencies including United States Dollars, although based on current banking and governmental regulations we cannot repatriate all of this cash, including approximately $15.3 million of cash and cash equivalents in Argentina.

We believe the impact of not being able to fully repatriate this cash and cash equivalents on the overall liquidity of the Company is immaterial, as at December 31, 2012, we had $72.8 million of unrestricted cash and cash equivalents (which includes the $28.9 million of foreign-based cash), and our annual cash flow from operations was $156.8 million in fiscal 2012 and $71.2 million for the six months ended December 31, 2012. In addition, we have access to our new $400 million amended and restated revolving credit facility that we entered into in October 2011 that expires in five years of which only $85.0 million was borrowed at December 31, 2012, and, if necessary, could access additional debt or equity offerings.

Earnings Per Share The decrease in earnings per share in the December 2012 quarter is attributable to the decrease in net income for the quarter, largely related to lower revenues and higher expenses; partially offset by a lower number of diluted shares outstanding as a result of our share repurchases over the last twelve months.

Diluted earnings per share decreased 72.4% to $0.08 for the quarter ended December 31, 2012, from $0.29 for prior-year period. The share repurchases over the last twelve months did not materially impact the December 2012 quarter earnings per share.

Six Months Ended December 31, 2012 compared to Six Months Ended December 31, 2011 Below are our Revenues and Operating Margins and Key Performance Indicators for the six months ended December 31, 2012 and 2011. This information should be read in conjunction with the Condensed Consolidated Statements of Income included in this report (in millions, except unit and per share data): Six Months Ended Increase/ December 31, (Decrease) 2012 2011 2012 vs. 2011 Variance Dollar % Product Sales Revenues: New gaming machine sales revenues $ 136.4 $ 144.0 $ (7.6 ) (5.3 ) Other product sales revenues 36.4 40.6 (4.2 ) (10.3 ) Total product sales revenues $ 172.8 $ 184.6 $ (11.8 ) (6.4 ) Average sales price per new unit $ 15,766 $ 16,440 $ (674 ) (4.1 ) New units shipments to the U.S. and Canada 5,231 5,289 (58 ) (1.1 ) New units shipments to International markets 3,418 3,475 (57 ) (1.6 ) Total new units on which revenue was recognized 8,649 8,764 (115 ) (1.3 ) Used units shipments 2,584 4,047 (1,463 ) (36.2 ) Total units shipments 11,233 12,811 (1,578 ) (12.3 ) 36 -------------------------------------------------------------------------------- Table of Contents Six Months Ended Increase/ December 31, (Decrease) 2012 2011 2012 vs. 2011 Variance Dollar % Conversion kit unit sales 3,790 10,500 (6,710 ) (63.9 ) Cost of product sales $ 84.5 $ 91.5 $ (7.0 ) (7.7 ) Gaming Operations Revenues: Participation revenues $ 111.6 $ 121.7 $ (10.1 ) (8.3 ) Interactive products and services revenues 22.5 1.9 20.6 nm Other gaming operations revenues 9.7 9.6 0.1 1.0 Total gaming operations revenues $ 143.8 $ 133.2 $ 10.6 8.0 Installed base of participation units at period end 9,624 9,282 342 3.7 Average installed participation units 9,392 9,488 (96 ) (1.0 ) Average daily revenue per participation unit $ 64.58 $ 69.72 $ (5.14 ) (7.4 ) Cost of gaming operations $ 28.9 $ 28.7 $ 0.2 0.7 Total revenues $ 316.6 $ 317.8 $ (1.2 ) (0.4 ) Total operating income $ 19.6 $ 24.5 $ (4.9 ) (20.0 ) Total operating margin 6.2 % 7.7 % (150 ) bp (19.5 ) Net income $ 13.6 $ 19.9 $ (6.3 ) (31.7 ) Earnings Per Share: Basic $ 0.25 $ 0.36 $ (0.11 ) (30.6 ) Diluted $ 0.25 $ 0.35 $ (0.10 ) (28.6 ) bp basis points Revenues Total revenues for the six months ended December 31, 2012, decreased 0.4% or $1.2 million, compared to the six months ended December 31, 2011, reflecting: • A $7.6 million, or 5.3%, decrease in new unit sales revenue as a result of: • A 115 unit, or 1.3%, decrease in new units sold as: • New units sold in the United States and Canada totaled5,231 units, a decrease of 1.1%, in the six months ended December 31, 2012.

Replacement units shipped to U.S. and Canadian customers increased 9.5% over the prior-year period to 4,160 units due to higher VLT unit shipments, while new gaming machine sales for new casino openings and expansions totaled 1,071 units compared to approximately 1,530 units in the six months ended December 31, 2011. Sales of Bluebird xD units accounted for 28.5% of new units sold in the six months ended December 31, 2012 and 32.9% of new units sold in the six months ended December 31, 2011.

• International new units sold decreased 1.6% from the prior year to 3,418 units, and represented 39.5% of global shipments compared to 39.7% in the prior period reflecting continued low demand in Europe, decreased industry demand in Mexico because of government enforcement actions that began in August 2011 against certain casinos, lower demand in New South Wales, Australia as operators await implementation of new national gaming standards and lower revenues in Argentina as government authorities modified rules related to importing product.

• A 4.1% decrease in the average selling price of new gaming machines to $15,766, principally reflecting a higher mix of lower-priced video lottery terminals and the new Bluebird2-lite cabinet for select international markets, as well as the impact of the competitive marketplace and our current line-up of gaming cabinets being amongst the oldest in the industry.

37 -------------------------------------------------------------------------------- Table of Contents • A $4.2 million, or 10.3%, decrease in other product sales revenues, reflecting a decrease in conversion kit revenue, used game revenues and part sales revenues; partially offset by higher other revenues, including one-time VLT software game set revenues as: • We earned revenue on approximately 3,790 conversion kits in the six months ended December 31, 2012, compared to approximately 10,500 conversion kits in the prior-year period; and • We sold 2,584 used gaming machines at a higher average price in the six months ended December 31, 2012, compared to 4,047 used gaming machines in the prior-year period. The average sales price of used gaming machines increased in the six months ended December 31, 2012 principally reflecting sales of Bluebird2 units which are just beginning to enter the used market and have a higher market value than older used product.

• Participation revenues were down $10.1 million, or 8.3%, due primarily to: • A 1.0% decrease, or 96 units, in the average installed base of participation gaming machines in the six months ended December 31, 2012 driven by the decline in performance of our installed base of gaming machines and the competitive marketplace. We were able to increase the installed base by December 31, 2012, up 342 units from December 31, 2011.

• Overall average revenue per day decreased by $5.14, or 7.4%, principally reflecting lower average revenue per day in our percentage of coin-in gaming machines due to product performance and the competitive marketplace.

• A $20.6 million increase in interactive products and services revenue, primarily reflecting the July 2012 launch of our Jackpot Party Social Casino on Facebook and continued growth in the UK online gaming revenues.

• A $0.1 million, or 1.0%, increase in other gaming operations revenue, primarily reflecting higher incremental revenue from networked gaming solutions; partially offset by lower operating lease revenue and royalty revenues from licensing proprietary intellectual property and technologies.

Our cost of product sales and cost of gaming operations may not be comparable to other companies as they exclude the following amounts of depreciation and amortization, which are included in the depreciation and amortization line item, and distribution expenses included in the selling and administration line item (in millions of dollars): Six Months Ended Increase/ December 31, (Decrease) 2012 2011 Dollar Percent Depreciation and amortization Cost of Product Sales $ 4.1 $ 2.8 $ 1.3 46.4 % Cost of Gaming Operations 35.4 27.2 8.2 30.1 Distribution expenses 11.9 12.0 (0.1 ) (0.8 ) Operating Expenses Operating expenses were as follows (in millions of dollars): Six Months Ended December 31, Increase/(Decrease) 2012 2011 Amount % Costs and Expenses: Cost of product sales $ 84.5 $ 91.5 $ (7.0 ) (7.7 )% As a percentage of product sales revenues 48.9 % 49.6 % (70 )bp (1.4 ) Cost of gaming operations 28.9 28.7 0.2 0.7 As a percentage of gaming operations revenues 20.1 % 21.5 % (140 )bp (6.5 ) Research and development expense 54.3 48.1 6.2 12.9 As a percentage of total revenues 17.2 % 15.1 % 210 bp 13.9 Selling and administrative expense 72.3 71.5 0.8 1.1 As a percentage of total revenues 22.8 % 22.5 % 30 bp 1.3 Impairment and restructuring charges 0.0 9.7 (9.7 ) (100.0 ) As a percentage of total revenues 0.0 % 3.1 % (310 )bp (100.0 ) Depreciation and amortization expense 57.0 43.8 13.2 30.1 As a percentage of total revenues 18.0 % 13.8 % 420 bp 30.4 Total costs and expenses $ 297.0 $ 293.3 $ 3.7 1.3 % 38 -------------------------------------------------------------------------------- Table of Contents Cost of product sales was $84.5 million, or 48.9% of product sales revenues, for the six months ended December 31, 2012, compared to $91.5 million, or 49.6% of product sales revenues, for the prior-year period. The six months ended December 31, 2012 reflects: progress on lowering the cost of product and the mix of business, coupled with lower costs due to a decrease in new gaming machines sold, partially offset by the additional cost of a one-time VLT software game set.

Cost of gaming operations was $28.9 million, or 20.1% of gaming operations revenues, for the six months ended December 31, 2012, compared to $28.7 million, or 21.5% of gaming operations revenues for the prior-year period. The six months ended December 31, 2012 primarily reflects the additional costs associated with interactive products and services, partially offset by the favorable WAP jackpot experience in the six months ended December 31, 2012.

Research and development expenses increased 12.9% to $54.3 million in the six months ended December 31, 2012, compared to $48.1 million in the prior-year period. The year-over-year increase reflects: • Higher development costs for our planned expanded product development initiatives for the continued creation of intellectual property and the ongoing expansion of our product portfolio; and • Increase in spending for our interactive products and services, including the impact of the two acquisitions in the June 2012 quarter; partially offset by • Decreased payroll-related costs associated with headcount decreases coupled with cost containment measures on non-payroll related costs.

Selling and administrative expenses increased 1.1%, or $0.8 million, to $72.3 million in the six months ended December 31, 2012, compared to $71.5 million in the prior-year period while increasing by 30 basis points as a percentage of revenues to 22.8%. The year-over-year increase reflects: • Increased spend in our online marketing costs to expand the player base for interactive products and services; • Incremental costs for our networked gaming and interactive products and services, including the impact of the two acquisitions in the June 2012 quarter; and • Incremental expenses related to our implementation of an upgraded enterprise-wide ERP system; • Increased expenses of $2.5 million related to our recently announced sales transaction; partially offset by • $4.3 million of non-cash charges recorded in the six months ended December 31, 2011 to write-down receivables following government enforcement actions at certain casinos in Mexico; and • Decreased payroll-related costs associated with headcount decreases coupled with cost containment measures on non-payroll related costs.

The six months ended December 31, 2011 results include $9.7 million, or $0.12 per diluted share, of pre-tax impairment and restructuring charges including $5.9 million of separation-related charges and $3.8 million of costs related to the decision to close two facilities.

Depreciation and amortization expense increased by $13.2 million, or 30.1%, to $57.0 million in the six months ended December 31, 2012, compared to $43.8 million in the prior-year period. The increase in depreciation and amortization expense reflects increased capital spending on gaming operations equipment throughout fiscal 2011 and 2012 and the three months ended September 30, 2012 to upgrade our installed base of participation gaming machines to Bluebird2 and Bluebird xD gaming machines, depreciation for a new facility that was placed in service in August 2012, amortization of finite-lived intangible assets from our two acquisitions in the June 2012 quarter and depreciation on the upgraded enterprise-wide ERP system which we placed in service in October 2012.

Operating Income and Operating Margin Our operating income decreased by $4.9 million, or 20.0%, in the six months ended December 31, 2012 on a 0.4% decrease in total revenues. Our operating margin of 6.2% represented a 150-basis point decrease over the 7.7% operating margin achieved in the prior-year period. This decrease reflects: • $6.3 million of lower profit after subtracting cost of product sales and cost of gaming operations from product sales revenues and gaming operations revenues, respectively; • $13.2 million of higher depreciation and amortization expense; and • $6.2 million of higher research and development costs; • $0.8 million of higher selling and administrative costs; partially offset by • $9.7 million of lower impairment and restructuring costs, all as discussed above.

39 -------------------------------------------------------------------------------- Table of Contents Interest Expense We incurred interest expense of $1.7 million and $0.8 million, net of amounts capitalized for construction-in-progress, in the six months ended December 31, 2012 and 2011, respectively.

Interest Income and Other Income and Expense, Net Interest income and other income and expense, net was income of $6.3 million and $6.9 million in the six months ended December 31, 2012 and 2011, respectively.

Income Taxes The estimated effective income tax rates were approximately 43.8% and 35.0% in the six months ended December 31, 2012 and 2011, respectively.

The six months ended December 31, 2012 estimated effective tax rate in comparison to the six months ended December 31, 2011 effective tax rate reflects: • A lower estimated annualized domestic manufacturing deduction; • A decrease in estimated annual pre-tax income compared to the six months ended December 2011; • No U.S. Federal research and development tax credit in the six months ended December 2012, compared to a research and development tax credit, net of $0.8 million in the six months ended December 2011; and • A non-U.S. tax charge of $2.0 million in the six months ended December 2012.

The six months ended December 31, 2011 estimated effective tax rate in comparison to the six months ended December 31, 2010 effective tax rate of 32.9% reflects: • A higher estimated domestic manufacturing deduction of $1.4 million; • A decrease in estimated pre-tax income compared to fiscal 2010; • An estimated reduction of the effective tax rate by $0.1 million due to the research and development tax credit, which was not in effect in the prior year period; partially offset by • A decrease in the estimated impact of other permanent tax items in the first quarter of $1.5 million.

Earnings Per Share The decrease in earnings per share in the six months ended December 31, 2012 is attributable to the decrease in net income for the six months ended, largely related to lower revenues and higher expenses; partially offset by lower number of diluted shares outstanding as a result of our share repurchases over the last twelve months. Diluted earnings per share decreased 28.6% to $0.25 for the six months ended December 31, 2012, from $0.35 for prior-year period. The share repurchases over the last twelve months favorably impacted the six months ended December 31, 2012 earnings per share by $0.01.

LIQUIDITY AND CAPITAL RESOURCES The recession and financial market crisis that began in 2008 has continued to disrupt the economy worldwide, reduced consumer discretionary spending and has led to a weakened global economic environment, all of which have been significant challenges for our industry. The economic crisis reduced disposable income for casino patrons and resulted in fewer patrons visiting casinos and lower spending by those patrons who did visit casinos. This has resulted in lower industry-wide unit demand from gaming operators and lower play levels on gaming machines in most gaming jurisdictions. As a result, gaming operators delayed or canceled construction projects, resulting in fewer new casino openings and expansions in fiscal year 2010 and 2011, coupled with many customers reducing their annual capital budgets for replacing gaming machines.

New unit demand for new casino openings and casino expansion increased in fiscal 2012; however, we expect such demand to decrease in fiscal 2013. The macroeconomic challenges due to the economic crisis and the operational challenges that led to the review of our product plans and business strategies at the end of fiscal 2011 and beginning of fiscal 2012 and increased competition from our competitors has lowered the number of new units we shipped over the last three fiscal years, resulting in lower revenues in fiscal 2012 than in fiscal 2011 and 2010. The macroeconomic challenges remained in the six months ended December 31, 2012, we generated slightly less revenue during that period than in the six months ended December 31, 2011.

Our cash flow from operations is largely dependent on our profitability, the amount of working capital necessary to support our revenue base and extended financing terms. Therefore, in any given reporting period, the amount of cash consumed or generated by operations will primarily relate to the rate of revenue and profitability increase or decrease, and the increase or decrease in working capital required to operate our business. In periods when revenues are increasing, the expanded working capital needs will be funded from available cash, cash equivalents, cash flow from operations, and, if necessary, proceeds from our revolving credit facility or additional debt or additional equity 40-------------------------------------------------------------------------------- Table of Contents offerings. We utilize these sources to fund acquisitions, investments in property, plant and equipment, gaming operations equipment and agreements to license or acquire third-party brands, intellectual properties or technologies that we have not developed internally. In addition, we will from time to time issue or retire borrowings or repurchase equity in an effort to maintain a cost-effective capital structure consistent with our anticipated capital requirements. With the ongoing uncertainty in the credit and capital markets, there can be no assurance that other sources of capital will be available to us on acceptable terms or at all. Based on past performance and current expectation, we believe the combination of these resources will satisfy our needs for working capital, jackpot liabilities, capital expenditures and other liquidity requirements associated with our existing operations into the foreseeable future. Our primary sources of liquidity are: • Existing cash and cash equivalents; • Cash flows provided by operating activities; and • Debt capacity available under our $400 million amended and restated revolving credit facility that we entered into in October 2011 that expires in five years and, if necessary, additional debt or equity offerings.

Selected balance sheet accounts are summarized as follows (in millions): December 31, June 30, Increase / (Decrease) 2012 2012 Dollar Percent Total cash, cash equivalents, and restricted cash(1) $ 87.8 $ 76.1 $ 11.7 15.4 % Total current assets(A) 474.0 452.3 21.7 4.8 Total assets 1,146.7 1,154.1 (7.4 ) (0.6 ) Total current liabilities(B) 115.6 170.8 (55.2 ) (32.3 ) Long-term debt 85.0 60.0 25.0 41.7 Stockholders' equity 898.3 877.3 21.0 2.4 Net working capital (A) - (B) 358.4 281.5 76.9 27.3 Trailing-twelve month statistics: Average days outstanding for total accounts and notes receivable(2) 184 204 (20 ) (9.8 ) Inventory turns(3) 3.3 3.5 (0.2 ) (5.7 ) (1) Pursuant to various jurisdictional gaming regulations, we maintain certain restricted cash accounts to ensure availability of funds to pay wide-area progressive jackpot awards either in lump sum payments or in installments.

Cash, cash equivalents and restricted cash include restricted cash of $15.0 million and $13.8 million as of December 31, 2012, and June 30, 2012, respectively. Cash required for funding WAP systems jackpot payments is considered restricted cash and is not available for general corporate purposes.

(2) Our average days outstanding for total accounts and notes receivable was less at December 31, 2012, in comparison to June 30, 2012, as the total accounts and notes receivable decreased by $42.7 million over that six month period and the trailing-twelve month revenue for the period ending December 31, 2012 slightly decreased by $1.3 million from the revenues in the trailing-twelve month period ended June 30, 2012.

(3) Our inventory turns decreased at December 31, 2012, in comparison to June 30, 2012, due to seasonally lower new unit sales volume and the actual inventory balance increased by $2.4 million from June 30, 2012.

Our net working capital increased $76.9 million from June 30, 2012, and was primarily affected by the following components: • A decrease in current liabilities of $55.2 million, or 32.3%, to $115.6 million due to $28.1 million of lower other accrued liabilities primarily due to the timing of tax payments, lower accounts payable of $25.5 million and $1.6 million of lower accrued compensation and related benefits; • An increase in cash, cash equivalents and restricted cash of $11.7 million; • An increase in inventories of $2.4 million, or 4.5%, to $55.7 million from $53.3 million at December 31, 2012, due to higher raw materials and higher finished goods. Inventory turns were 3.3x at December 31, 2012, compared to 3.5x at June 30, 2012; and • A $7.6 million, or 2.4%, aggregate increase in current accounts and notes receivable and other current assets.

As described in Note 12. "Commitments, Contingencies and Indemnifications" to our Condensed Consolidated Financial Statements and Notes thereto included in this report, we have royalty and license fee commitments for brand, intellectual property and technology licenses of $64.9 million that are not recorded in our accompanying Condensed Consolidated Balance Sheets.

We believe that total cash, cash equivalents and restricted cash of $87.8 million at December 31, 2012, inclusive of $15.0 million of restricted cash, and cash flow provided by operating activities will be adequate to fund our anticipated level of expenses, 41-------------------------------------------------------------------------------- Table of Contents cash to be invested in property, plant and equipment and gaming operations equipment, cash to be used to develop, license or acquire intangibles and other assets, technologies or intellectual properties from third parties, the levels of inventories and receivables required in the operation of our business and any repurchases of common stock for the upcoming fiscal year. At December 31, 2012, we held approximately 74.2 million pesos, or $15.3 million, of cash and cash equivalents in Argentina. Currently, the Argentine government is imposing restrictions on currency movements that might make it costly or impossible to convert the pesos into U.S dollars and have those dollars leave the country.

This creates a foreign currency risk in case of devaluation. We believe that we take a prudent and conservative approach to maintaining our available liquidity while credit market and economic conditions remain uncertain. We continue to focus on reinvesting in our business through our installed base of gaming operations machines, as well as other strategic capital deployment objectives to expand our geographic reach, product lines and customer base. For fiscal 2013 and 2014, we expect cash flow provided by operating activities to continue to be strong. We do not believe we will need to raise a significant amount of additional capital in the short-term or long-term, and as a result of amending and restating our revolving credit agreement in October 2011, we have access to our $400 million revolving credit facility through October 2016. We will, however, assess market opportunities as they arise.

Total Accounts and Notes Receivable See Note 2. "Principal Accounting Policies - Accounts and Notes Receivable, Allowance for Doubtful Accounts and Bad Debt and Credit Quality of Notes Receivable" to our Condensed Consolidated Financial Statements and Notes thereto included in this report.

Inventories - Excess and Obsolescence Our inventory write-downs primarily arise from excess quantities of raw material inventories purchased for production of gaming machines and from raw material parts becoming obsolete when replaced by a new part and we are unable to fully realize the value of the old part. When we discontinue support of a gaming machine style, make significant changes to an existing gaming machine design or transition to a new gaming machine style, we may experience higher levels of inventory write-downs. We use historical usage and forecasted demand planning in both purchasing and production processes and conduct quarterly reviews for excess and obsolete inventories. Any inventory write-downs are recorded in the period they are identified to reflect any anticipated inventory losses arising from inventory values in excess of cost or market.

As we introduce new gaming machines that utilize new raw material parts, we reduce the quantity of raw material purchases for existing gaming machines based upon anticipated customer demand and expected end of life production and support of the global installed base of the existing gaming machines. Favorable customer acceptance in excess of estimated customer demand for the new gaming machines can result in excess quantities of raw materials being on-hand for the existing gaming machines. In the December 2008 quarter, we introduced the Bluebird2 gaming machine and the demand for this gaming machine exceeded our expectations, resulting in fewer Bluebird gaming machines being sold. In the March 2012 quarter, we introduced the new Bluebird2e product and in the September 2012 quarter we introduced the Bluebird2-lite cabinet; however, these products were an enhancement of the Bluebird2 product line using substantially all of the same parts. In the March 2013 quarter, we expect to introduce our new Blade cabinet, which continues to utilize elements of the internal componentry in the Bluebird2 and Bluebird2e cabinets. We seek to reduce excess raw materials through several strategies such as: (1) reselling them back to the supplier, (2) using them to maintain our installed base of leased gaming operations machines, (3) selling them to customers to support their existing gaming machines which are recorded as part sales, (4) using them to refurbish used gaming machines, (5) selling them to a third party or (6) scrapping them.

We have a defined process to control changes in the design of our gaming machines to reduce the possibility that we cannot utilize existing parts before new parts are implemented and therefore reduce the impact of obsolete inventories. We use the same six strategies noted above to reduce the impact of inventory write-downs for obsolete parts. For the three months ended December 31, 2012, we recorded raw material and finished goods inventory write-downs totaling approximately $0.2 million compared to $0.9 million in the prior-year period and $0.8 million and $3.5 million for the six months ended December 31, 2012 and December 31, 2011, respectively.

Revolving Credit Facility See Note 9. "Revolving Credit Facility" to our Condensed Consolidated Financial Statements and Notes thereto included in this report.

Common Stock Repurchase Program See Note 10. "Stockholders' Equity and Equity Compensation Plan - Common Stock Repurchase Program" to our Condensed Consolidated Financial Statements and Notes thereto included in this report.

42-------------------------------------------------------------------------------- Table of Contents Cash Flows Summary Our cash is utilized to acquire materials for the manufacture of goods for resale, to pay payroll, operating expenses, interest, and taxes and to fund research and development activities, invest in gaming operations equipment, property, plant and equipment and license or acquire intangibles and other non-current assets from third parties and fund share repurchases. Cash flows from operating, investing and financing activities, as reflected in our Condensed Consolidated Statements of Cash Flows, are summarized in the following table (in millions): Six Months Ended December 31, Change 2012 2011 Dollar Percent Net cash provided by (used in): Operating activities $ 71.2 $ 65.7 $ 5.5 8.4 % Investing activities (78.0 ) (73.5 ) (4.5 ) (6.1 ) Financing activities 18.5 (2.3 ) 20.8 nm Effect of exchange rates on cash and cash equivalents (1.2 ) (1.3 ) 0.1 7.7 Net increase (decrease) in cash and cash equivalents $ 10.5 $ (11.4 ) $ 21.9 192.1 % Operating activities: The $5.5 million increase in cash provided by operating activities in the six months ended December 31, 2012, compared to the six months ended December 31, 2011, resulted from: • A $15.1 million positive impact from $13.8 million increase of depreciation and amortization expense, a $0.7 million positive impact from lower tax benefits from deferred income taxes, a $0.4 million increase in share-based compensation and a $0.2 million impact from lower tax benefit from exercise of stock options; • A $4.5 million positive impact from a lower increase in the changes in operating assets and liabilities; partially offset by • A $7.8 million negative impact from a decrease from other non-cash items; • A $6.3 million negative impact from the decrease in net income.

Investing Activities: The $4.5 million increase in cash used by investing activities for the six months ended December 31, 2012, compared to the six months ended December 31, 2011, was primarily due to: • A $3.0 million increase in the amount invested in gaming operations machines, top-boxes and related equipment during the six months ended December 31, 2012 to $38.6 million; • A $1.8 million increase in the amount invested in property, plant and equipment during the six months ended December 31, 2012 to $32.9 million, as we continue to invest in facility expansion, higher spending on information technology, as well as investments in manufacturing tools and capitalized software development costs; partially offset by • A $0.3 million decrease in payments to develop, license or acquire long-term intangible and other non-current assets as we invested $6.5 million in the six months ended December 31, 2012.

Financing Activities: The $20.8 million increase in cash provided by financing activities for the six months ended December 31, 2012, compared to the six months ended December 31, 2011, was primarily due to: • Lower treasury stock purchases by $32.1 million in the six months ended December 31, 2012, as $5.0 million of treasury stock was repurchased compared to $37.1 million in the six months ended December 31, 2011; and • Lower debt issuance costs of $2.5 million related to our amended and restated credit facility; partially offset by • Lower net proceeds of $10.0 million from net borrowings under our revolving credit agreement in the six months ended December 31, 2012 compared to the prior six month period; • A $2.6 million increase in additional consideration related to acquisitions in the six months ended December 31, 2012; and • A $1.2 million decrease in cash received and tax benefits realized from exercised stock options.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS We are not dependent on off-balance sheet financing arrangements to fund our operations. We utilize financing arrangements for operating leases of equipment and facilities, none of which are in excess of our current needs; however in the six months ended December 31, 2011, we provided impairment and restructuring charges to accrue the costs of abandoning leasehold improvements and lease costs over the remaining contractual lease life of two leased facilities, aggregating $4.6 million.

43 -------------------------------------------------------------------------------- Table of Contents We also have minimum guaranteed royalty payments amounting to $64.9 million at December 31, 2012 for intellectual property and technologies that are not recorded on our accompanying Condensed Consolidated Balance Sheets. Typically, we are obligated to make minimum commitment royalty payments over the term of our licenses and to advance payment against those commitments.

Our obligations under these arrangements and under other contractual obligations at December 31, 2012, were as follows (in millions): Less More than 1-3 3-5 than Contractual Obligations Total 1 Year Years Years 5 Years Operating leases $ 28.7 $ 6.2 $ 10.4 $ 3.6 $ 8.5 Royalty and license fee payments 64.9 7.5 35.8 21.6 - Accrued WAP jackpot liability 10.7 10.7 - - - Non-cancelable raw material purchase orders 6.7 6.7 - - - Performance bonds 6.0 6.0 - - - Additional consideration, including imputed interest, related to acquisitions 16.1 4.5 11.6 - - Payment of revolving credit facility (a) 85.0 - - 85.0 - Interest on long-term debt (a) 6.7 1.8 3.6 1.3 - Other, including guaranteed minimums in employment agreements 19.8 9.3 7.1 1.6 1.8 Total $ 244.6 $ 52.7 $ 68.5 $ 113.1 $ 10.3 (a) Repayments of principal amounts of borrowings under the revolving credit facility on December 31, 2012 are assumed to occur at the end of term of our revolving credit agreement in October 2016. Interest on long-term debt assumes the amount of debt outstanding at December 31, 2012 remains outstanding thru the end of term and interest is based on the effective interest rate at December 31, 2012, which was 2.1%.

As of December 31, 2012, we had a liability for unrecognized income tax benefits of $4.1 million. We cannot make a reasonable estimate of the period of cash settlement for the liability for unrecognized income tax benefits. See Note 8.

"Income Taxes" to our Condensed Consolidated Financial Statements and Notes thereto included in this report.

Indemnifications, Special Purpose Entities and Derivative Instruments, Letters of Credit, Self-Insurance and Product Warranty See Note 12. "Commitments, Contingencies and Indemnifications" to our Condensed Consolidated Financial Statements and Notes thereto included in this report.

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