igt_10q-010210.htm
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Quarterly Period Ended January 2, 2010
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____ to ____
Commission
File Number 001-10684
International
Game Technology
Nevada
|
88-0173041
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
9295
Prototype Drive
Reno,
Nevada 89521
(Address
of principal executive offices)
(775)
448-7777
(Registrant’s
telephone number, including area code)
www.IGT.com
(Registrant’s
website)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes [X]
No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes [ X ]
No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
Large
accelerated filer [X] Accelerated filer
[ ] Non-accelerated filer
[ ] Smaller reporting company
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):
Yes
[ ] No [X]
At
February 8, 2010, there were 296.7 million
shares of our $.00015625 par value common stock outstanding.
TABLE
OF CONTENTS
GLOSSARY
OF TERMS AND ABBREVIATIONS (as used in this
document)
|
iii
|
PART
I – FINANCIAL INFORMATION
|
1
|
Item 1. Unaudited
Condensed Consolidated Financial Statements
|
|
CONSOLIDATED
INCOME STATEMENTS
|
1
|
CONSOLIDATED
BALANCE SHEETS
|
2
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
3
|
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
5
|
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
FORWARD
LOOKING STATEMENTS
|
26
|
OVERVIEW
|
26
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
28
|
CRITICAL
ACCOUNTING ESTIMATES
|
29
|
CONSOLIDATED
OPERATING RESULTS – A Year Over Year Comparative Analysis
|
30
|
BUSINESS
SEGMENT RESULTS – A Year Over Year Comparative Analysis
|
33
|
LIQUIDITY
AND CAPITAL RESOURCES
|
35
|
Item 3. Quantitative
and Qualitative Disclosures about Market
Risk
|
37
|
Item 4. Controls
and Procedures
|
37
|
PART
II – OTHER INFORMATION
|
38
|
Item
1. Legal Proceedings
|
38
|
Item
1A. Risk Factors
|
38
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
43
|
Item
3. Defaults Upon Senior Securities
|
43
|
Item
4. Submission of Matters to a Vote of Security Holders
|
43
|
Item
5. Other Information
|
43
|
Item
6. Exhibits
|
44
|
GLOSSARY
OF TERMS AND ABBREVIATIONS (as
used in this document)
Fiscal
dates as presented:
|
Fiscal
dates -- actual:
|
December
31, 2009
|
January
2, 2010
|
December
31, 2008
|
January
3, 2009
|
September
30, 2009
|
October
3, 2009
|
|
|
Abbreviation/term as
presented
|
Definition
|
Anchor
|
Anchor
Gaming
|
ARS
|
auction
rate securities
|
AVP®
|
Advanced
Video Platform®
|
Bonds
|
7.5%
Notes due 2019
|
bps
|
basis
points
|
CAD
|
Canadian
dollars
|
CCSC
|
Colorado
Central Station Casino
|
CEO
|
Chief
Executive Officer
|
CFO
|
Chief
Financial Officer
|
CLS
|
China
LotSynergy Holdings, Ltd.
|
DCF
|
Discounted
cash flow
|
Debentures
|
2.6%
Convertible Debentures
|
EBITDA
|
earnings
before interest, tax, depreciation, and amortization
|
EPA
|
Environmental
Protection Agency
|
EPS
|
earnings
per share
|
ESP
|
estimated
selling price
|
FASB
|
Financial
Accounting Standards Board
|
GAAP
|
generally
accepted accounting principles
|
GSA
|
Gaming
Standards Association
|
ICR
|
Interest
coverage ratio
|
IGT
|
International
Game Technology
|
IP
|
intellectual
property
|
IRS
|
Internal
Revenue Service
|
LIBOR
|
London
Inter-Bank Offering Rate
|
MDA
|
management’s
discussion and analysis
|
MLD®
|
3-D
Multi-Layer Display
|
Notes
|
3.25%
Convertible Notes due 2014
|
OSHA
|
Occupational
Safety & Health Administration
|
pp
|
percentage
points
|
SEC
|
Securities
and Exchange Commission
|
SIP
|
Stock
Incentive Plan
|
TLR
|
Total
leverage ratio
|
TPE
|
Third-party
evidence
|
UK
|
United
Kingdom
|
US
|
United
States
|
VIE
|
variable
interest entity
|
VSOE
|
vendor
specific other evidence
|
WAP
|
wide
area progressive
|
*
|
not
meaningful (in table)
|
PART
I – FINANCIAL INFORMATION
Item
1.
|
Unaudited
Condensed Consolidated Financial
Statements
|
CONSOLIDATED
INCOME STATEMENTS
|
|
Quarters
Ended
|
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
(In
millions, except per share amounts)
|
|
Revenues
|
|
|
|
|
|
|
Gaming
operations
|
|
$ |
277.3 |
|
|
$ |
313.3 |
|
Product
sales
|
|
|
238.4 |
|
|
|
288.3 |
|
Total
revenues
|
|
|
515.7 |
|
|
|
601.6 |
|
Costs
and operating expenses
|
|
|
|
|
|
|
|
|
Cost
of gaming operations
|
|
|
104.1 |
|
|
|
151.9 |
|
Cost
of product sales
|
|
|
115.0 |
|
|
|
143.8 |
|
Selling,
general and administrative
|
|
|
90.0 |
|
|
|
114.9 |
|
Research
and development
|
|
|
46.7 |
|
|
|
53.5 |
|
Depreciation
and amortization
|
|
|
19.6 |
|
|
|
20.0 |
|
Restructuring
charges
|
|
|
0 |
|
|
|
17.4 |
|
Total
costs and operating expenses
|
|
|
375.4 |
|
|
|
501.5 |
|
Operating
income
|
|
|
140.3 |
|
|
|
100.1 |
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
16.0 |
|
|
|
16.5 |
|
Interest
expense
|
|
|
(43.2 |
) |
|
|
(35.5 |
) |
Other
|
|
|
(1.0 |
) |
|
|
(8.0 |
) |
Total
other income (expense)
|
|
|
(28.2 |
) |
|
|
(27.0 |
) |
Income
before tax
|
|
|
112.1 |
|
|
|
73.1 |
|
Income
tax provision
|
|
|
38.8 |
|
|
|
11.9 |
|
Net
income
|
|
$ |
73.3 |
|
|
$ |
61.2 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.25 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.25 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$ |
0.06 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
295.1 |
|
|
|
293.3 |
|
Diluted
|
|
|
297.4 |
|
|
|
293.4 |
|
See
accompanying notes
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
(In
millions, except par value)
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
173.0 |
|
|
$ |
146.7 |
|
Investment
securities
|
|
|
19.6 |
|
|
|
21.3 |
|
Restricted
cash and investments
|
|
|
84.4 |
|
|
|
79.4 |
|
Jackpot
annuity investments
|
|
|
67.0 |
|
|
|
67.2 |
|
Accounts
receivable, net
|
|
|
301.1 |
|
|
|
334.3 |
|
Current
maturities of notes and contracts receivable, net
|
|
|
170.0 |
|
|
|
154.8 |
|
Inventories
|
|
|
150.8 |
|
|
|
157.8 |
|
Deferred
income taxes
|
|
|
87.0 |
|
|
|
82.8 |
|
Other
assets and deferred costs
|
|
|
158.3 |
|
|
|
189.4 |
|
Total
current assets
|
|
|
1,211.2 |
|
|
|
1,233.7 |
|
Property,
plant and equipment, net
|
|
|
558.0 |
|
|
|
558.8 |
|
Jackpot
annuity investments
|
|
|
392.7 |
|
|
|
396.9 |
|
Notes
and contracts receivable, net
|
|
|
258.8 |
|
|
|
249.4 |
|
Goodwill
|
|
|
1,152.3 |
|
|
|
1,151.5 |
|
Other
intangible assets, net
|
|
|
247.2 |
|
|
|
259.2 |
|
Deferred
income taxes
|
|
|
161.2 |
|
|
|
172.2 |
|
Other
assets and deferred costs
|
|
|
292.4 |
|
|
|
306.4 |
|
Total Assets |
|
$ |
4,273.8 |
|
|
$ |
4,328.1 |
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$ |
12.5 |
|
|
$ |
5.3 |
|
Accounts
payable
|
|
|
99.8 |
|
|
|
90.5 |
|
Jackpot
liabilities, current portion
|
|
|
159.8 |
|
|
|
155.5 |
|
Accrued
employee benefits
|
|
|
11.7 |
|
|
|
32.8 |
|
Accrued
income taxes
|
|
|
7.4 |
|
|
|
9.4 |
|
Dividends
payable
|
|
|
17.8 |
|
|
|
17.8 |
|
Other
accrued liabilities
|
|
|
259.3 |
|
|
|
313.2 |
|
Total
current liabilities
|
|
|
568.3 |
|
|
|
624.5 |
|
Long-term
debt
|
|
|
1,943.3 |
|
|
|
2,014.7 |
|
Jackpot
liabilities
|
|
|
425.8 |
|
|
|
432.6 |
|
Other
liabilities
|
|
|
201.0 |
|
|
|
192.7 |
|
Total
Liabilities
|
|
|
3,138.4 |
|
|
|
3,264.5 |
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock: $.00015625 par value; 1,280.0 shares authorized; 337.4 and
337.2 issued; 296.6 outstanding
|
|
|
0.1 |
|
|
|
0.1 |
|
Additional
paid-in capital
|
|
|
1,418.2 |
|
|
|
1,407.5 |
|
Treasury
stock at cost: 40.8 and 40.6 shares
|
|
|
(801.0 |
) |
|
|
(799.3 |
) |
Retained
earnings
|
|
|
503.1 |
|
|
|
447.6 |
|
Accumulated
other comprehensive income
|
|
|
15.2 |
|
|
|
6.1 |
|
Total
IGT Stockholders' Equity
|
|
|
1,135.6 |
|
|
|
1,062.0 |
|
Non-Controlling
Interests
|
|
|
(0.2 |
) |
|
|
1.6 |
|
Total
Equity
|
|
|
1,135.4 |
|
|
|
1,063.6 |
|
Total Liabilities and
Stockholders' Equity |
|
$ |
4,273.8 |
|
|
$ |
4,328.1 |
|
See
accompanying notes
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Three
Months Ended December 31,
|
|
2009
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
Net
income
|
|
$ |
73.3 |
|
|
$ |
61.2 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation,
amortization, and asset charges
|
|
|
62.7 |
|
|
|
79.1 |
|
Discounts
and deferred issuance costs
|
|
|
13.8 |
|
|
|
5.9 |
|
Inventory
obsolescence
|
|
|
2.3 |
|
|
|
3.4 |
|
Bad
debt provisions
|
|
|
2.7 |
|
|
|
11.3 |
|
Share-based
compensation
|
|
|
9.0 |
|
|
|
10.8 |
|
Loss
on investments
|
|
|
(0.1 |
) |
|
|
5.3 |
|
Gain
on redemption of debt
|
|
|
0 |
|
|
|
(2.3 |
) |
Other
non-cash items
|
|
|
(0.4 |
) |
|
|
(2.6 |
) |
Excess
tax benefits from employee stock plans
|
|
|
(2.7 |
) |
|
|
0 |
|
Changes
in operating assets and liabilities, excluding
acquisitions:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
23.3 |
|
|
|
47.3 |
|
Inventories
|
|
|
8.8 |
|
|
|
3.4 |
|
Other
assets and deferred costs
|
|
|
15.7 |
|
|
|
20.6 |
|
Income
taxes, net of employee stock plans
|
|
|
27.4 |
|
|
|
(3.6 |
) |
Accounts
payable and accrued liabilities
|
|
|
(58.3 |
) |
|
|
(103.3 |
) |
Jackpot
liabilities
|
|
|
(8.8 |
) |
|
|
13.0 |
|
Cash
from operations
|
|
|
168.7 |
|
|
|
149.5 |
|
Investing
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(53.3 |
) |
|
|
(76.0 |
) |
Proceeds
from assets sold
|
|
|
0.8 |
|
|
|
1.3 |
|
Proceeds
from investment securities
|
|
|
1.9 |
|
|
|
0 |
|
Jackpot
annuity investments, net
|
|
|
10.8 |
|
|
|
7.2 |
|
Changes
in restricted cash
|
|
|
(5.0 |
) |
|
|
(11.6 |
) |
Loans
receivable cash advanced
|
|
|
(17.7 |
) |
|
|
(41.5 |
) |
Loans
receivable payments received
|
|
|
2.1 |
|
|
|
2.0 |
|
Investments
in unconsolidated affiliates
|
|
|
(4.9 |
) |
|
|
(10.3 |
) |
Business
acquisitions/VIE deconsolidation
|
|
|
(1.4 |
) |
|
|
(0.2 |
) |
Cash
from investing
|
|
|
(66.7 |
) |
|
|
(129.1 |
) |
Financing
|
|
|
|
|
|
|
|
|
Debt
proceeds
|
|
|
946.6 |
|
|
|
440.0 |
|
Debt
repayments
|
|
|
(1,009.2 |
) |
|
|
(417.8 |
) |
Employee
stock plan proceeds
|
|
|
2.4 |
|
|
|
0.1 |
|
Excess
tax benefits from employee stock plans
|
|
|
2.7 |
|
|
|
0 |
|
Dividends
paid
|
|
|
(17.8 |
) |
|
|
(42.9 |
) |
Cash
from financing
|
|
|
(75.3 |
) |
|
|
(20.6 |
) |
Foreign
exchange rates effect on cash
|
|
|
(0.4 |
) |
|
|
(5.1 |
) |
Net
change in cash and equivalents
|
|
|
26.3 |
|
|
|
(5.3 |
) |
Beginning
cash and equivalents
|
|
|
146.7 |
|
|
|
266.4 |
|
Ending
cash and equivalents
|
|
$ |
173.0 |
|
|
$ |
261.1 |
|
See
accompanying notes
Supplemental
Cash Flows Information
“Depreciation,
amortization, and asset charges” reflected in the cash flows statements are
comprised of amounts presented separately on the income statements, plus
“depreciation, amortization, and asset charges” included in cost of gaming
operations and cost of product sales.
Three
Months Ended December 31,
|
|
2009
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
Jackpot
funding
|
|
|
|
|
|
|
Change
in jackpot liabilities
|
|
$ |
(8.8 |
) |
|
$ |
13.0 |
|
|
|
|
|
|
|
|
|
|
Jackpot
annuity purchases
|
|
|
(2.4 |
) |
|
|
(5.8 |
) |
Jackpot
annuity proceeds
|
|
|
13.2 |
|
|
|
13.0 |
|
Net
change in jackpot annuity investments
|
|
|
10.8 |
|
|
|
7.2 |
|
Net
jackpot funding
|
|
$ |
2.0 |
|
|
$ |
20.2 |
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
(5.5 |
) |
|
$ |
(17.1 |
) |
Gaming
operations equipment
|
|
|
(46.3 |
) |
|
|
(57.3 |
) |
Intellectual
property
|
|
|
(1.5 |
) |
|
|
(1.6 |
) |
Total
|
|
$ |
(53.3 |
) |
|
$ |
(76.0 |
) |
Payments
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
41.1 |
|
|
$ |
28.0 |
|
Income
taxes
|
|
|
11.7 |
|
|
|
25.1 |
|
Non-cash
investing and financing items:
|
|
|
|
|
|
|
|
|
Accrued
capital asset additions
|
|
$ |
2.7 |
|
|
$ |
5.0 |
|
Interest
accretion for jackpot annuity investments
|
|
|
6.3 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
Business
acquisitions/purchase price adjustments and
|
|
|
|
|
|
|
|
|
VIE
deconsolidations
|
|
|
|
|
|
|
|
|
Fair
value of assets
|
|
$ |
(0.8 |
) |
|
$ |
0.2 |
|
Fair
value of liabilities
|
|
|
(2.2 |
) |
|
|
0 |
|
See
accompanying notes
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF
PRESENTATION AND CONSOLIDATION
Our
consolidated financial statements include the accounts of International Game
Technology (IGT, we, our, or the Company), including all majority-owned or
controlled subsidiaries and VIEs for which we are the primary beneficiary. All
appropriate inter-company accounts and transactions are eliminated.
We
prepare our consolidated financial statements in accordance with SEC and US GAAP
requirements and include all adjustments of a normal recurring nature that are
necessary to fairly present our consolidated results of operations, financial
position, and cash flows for all periods presented. Interim period results are
not necessarily indicative of full year results. This quarterly report includes
subsequent events evaluated through the date of financial statement issuance on
February 11,
2010 and should be read in conjunction with our most recent Annual Report on
Form 10-K.
Our
fiscal year is reported on a 52/53-week period that ends on the Saturday nearest
to September 30 each year. Similarly, our quarters end on the Saturday nearest
to the last day of the quarter end month. For simplicity, this report presents
all fiscal periods using the calendar month end as outlined in the table
below. Fiscal 2010 will contain 52 weeks and our results for the
current first quarter contained 13 weeks versus 14 weeks in the prior year
quarter.
|
Period
End
|
|
Presented as
|
|
Actual
|
Current
quarter
|
December
31, 2009
|
|
January
2, 2010
|
Prior
year quarter
|
December
31, 2008
|
|
January
3, 2009
|
Prior
fiscal year end
|
September
30, 2009
|
|
October
3, 2009
|
Our
consolidated financial statements are prepared in conformity with US GAAP.
Accordingly, we are required to make estimates, judgments and assumptions that
we believe are reasonable based on our historical experience, contract terms,
observance of known trends in our company and the industry as a whole, and
information available from other outside sources. Our estimates affect reported
amounts for assets, liabilities, revenues, expenses, and related disclosures.
Actual results may differ from initial estimates.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Recently
Issued Accounting Standards That Have Been Adopted
Fair
Value Measurements
In
September 2006, new accounting guidance was issued which refined the definition
of fair value, established a framework for measuring fair value, and expanded
disclosures about fair value measurements. The adoption of this guidance for
non-financial assets and liabilities beginning October 1, 2009 did not have a
material impact on our results of operations, financial position or cash
flows.
Revenue
Recognition For Software-enabled Products and Multi-element
Arrangements
In
October 2009, the FASB issued new revenue recognition accounting standards with
respect to certain software-enabled products and multi-element arrangements. We
elected to early adopt this new guidance prospectively for new or materially
modified arrangements entered into on or after the beginning of our first
quarter of fiscal 2010. For transactions entered into prior to the first quarter
of fiscal 2010, revenues will continue to be recognized based on prior revenue
recognition guidance.
Under the
new guidance, tangible products, containing both software and nonsoftware
components that function together to deliver a tangible product’s essential
functionality, will no longer be subject to software revenue accounting. The new
guidance also established a more economically aligned model for allocating
revenues among multiple deliverables in a multi-element arrangement, based on
relative selling prices. In order of preference, relative selling prices will be
estimated based on VSOE, TPE, or management’s ESP, and the residual method is no
longer allowed.
Most of
our products and services qualify as separate units of accounting, and the new
guidance does not change this premise. When VSOE or TPE is not available,
generally for new or highly customized offerings and solutions, estimated
selling price is the amount we would sell the product or service for
individually. The determination of ESP is made based on our normal pricing and
discounting practices, which consider multiple factors, such as market
conditions, competitive landscape, internal costs, and profit
objectives.
Under the
new guidance, revenues for machines and other software-enabled equipment in
certain bundled arrangements will no longer be deferred because VSOE is not
available for an undelivered element. Generally, revenues allocated to
non-software elements will be recognized upon delivery and customer acceptance,
and only revenues allocated to software elements will require deferral and
recognition over the lease or license term.
Although
this new accounting guidance is not currently expected to have a significant
effect on the timing or amount of revenues in periods after the initial
adoption, the impact is dependent upon the prevalence of future multi-element
arrangements and the evolution of new sales strategies. Adoption of the new
revenue recognition guidance for the first quarter of fiscal 2010 resulted in
$10.4 million of revenues which would have been recognized in later periods
under the prior guidance. Pro forma revenues that would have been reported under
the prior accounting guidance are reflected in the following table:
|
|
Quarter
Ended |
|
|
|
December
31, 2009 |
|
|
|
As
Reported
|
|
Pro
Forma
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Gaming
operations
|
|
$ |
277.3 |
|
|
$ |
270.4 |
|
Product
Sales
|
|
|
238.4 |
|
|
|
234.9 |
|
Total
|
|
$ |
515.7 |
|
|
$ |
505.3 |
|
Participating
Securities in Share-Based Payment Transactions
At the
beginning of fiscal 2010, we adopted new accounting guidance issued in June 2008
for determining whether instruments granted in share-based payment transactions
are participating securities which should be included in the computation of EPS
using the two-class method (see Note 13). Certain restricted stock granted under
our employee SIP (see Note 6) is considered a participating security because it
carries non-forfeitable rights to dividends. The adoption of this guidance was
insignificant to our financial statements and the effect of the required
retrospective application for prior periods presented is outlined in the table
below at the end of this section.
Business
Combinations and Noncontrolling Interests
At the
beginning of fiscal 2010, we adopted new accounting guidance issued in December
2007 revising the method of accounting for a number of aspects of business
combinations and noncontrolling interests (i.e. minority interests), such that
more assets and liabilities will be measured at fair value as of the acquisition
date. Certain contingent consideration liabilities will require remeasurement at
fair value in each subsequent reporting period. Noncontrolling interests will
initially be measured at fair value and classified as a separate component of
equity.
Acquisition
related costs, such as fees for attorneys, accountants, and investment bankers,
will be expensed as incurred and no longer be capitalized as part of the
business purchase price. For all acquisitions, regardless of the consummation
date, deferred tax assets and uncertain tax position adjustments occurring after
the measurement period will be recorded as a component of income tax expense,
rather than adjusted through goodwill. For business combinations and asset
purchases, the impact of this guidance on our results of operations or financial
position will vary depending on the specifics of each transaction.
This
adoption did not have a material impact on our consolidated financial position,
results of operations or cash flows. Income attributable to the noncontrolling
interests is presented as a component of other income (expense) as it was not
significant to our consolidated operating results. The required retrospective
presentation of noncontrolling interests as a separate component of
stockholders’ equity, rather than liabilities, is outlined in the table below at
the end of this section.
Convertible
Debt Instruments
At the
beginning of fiscal 2010, we adopted new accounting standards issued in May 2008
requiring the separation of liability (debt) and equity (conversion option)
components for convertible debt instruments that may settle in cash upon
conversion. This guidance requires separation of the liability and equity
components to reflect an effective nonconvertible borrowing rate when the debt
was issued.
We
estimated fair value of our Debentures and Notes using similar debt instruments
at issuance that did not have a conversion feature and allocated an equity
component included in paid-in capital that represents the estimated fair value
of the conversion feature at issuance.
The
adoption of this new accounting guidance increased first quarter noncash
interest expense $9.3 million for fiscal 2010 and $5.1 million for fiscal 2009.
On an annual basis for fiscal 2010 and 2009, noncash interest expense will
increase approximately $30.0 million and fiscal 2009 Debenture repurchase gains
decrease approximately $5.0 million, reducing diluted EPS approximately $0.06
for fiscal 2010 and $0.08 for 2009.
Additionally,
the new guidance decreased long-term debt, deferred tax assets and deferred
offer costs and increased stockholders’ equity. The effects of the required
retrospective application for prior periods presented are outlined in the table
below at the end of this section as it relates to our Debentures and Notes (see
Note 10). The adjustment to long-term debt represents the unamortized balance of
the revised discount.
Retrospective
Application of New Accounting Standards Adopted at the Beginning of Fiscal
2010
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
As
Previously
Reported
|
|
|
Convertible
Debt
|
|
|
Non-
controlling
Interests
|
|
|
Partici-
pating
Securities
|
|
|
As
Currently
Presented
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
(30.4 |
) |
|
$ |
(5.1 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(35.5 |
) |
Other
income (expense), net
|
|
|
(5.9 |
) |
|
|
(2.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(8.0 |
) |
Income
before tax
|
|
|
80.3 |
|
|
|
(7.2 |
) |
|
|
- |
|
|
|
- |
|
|
|
73.1 |
|
Income
tax provision
|
|
|
14.6 |
|
|
|
(2.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
11.9 |
|
Net
income
|
|
|
65.7 |
|
|
|
(4.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
61.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$ |
0.22 |
|
|
$ |
(0.01 |
) |
|
|
- |
|
|
|
- |
|
|
$ |
0.21 |
|
Diluted
EPS
|
|
|
0.22 |
|
|
|
(0.01 |
) |
|
|
- |
|
|
|
- |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
293.7 |
|
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
293.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes (noncurrent)
|
|
$ |
227.3 |
|
|
$ |
(55.1 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
172.2 |
|
Other
assets and deferred costs (noncurrent)
|
|
|
311.4 |
|
|
|
(5.0 |
) |
|
|
- |
|
|
|
- |
|
|
|
306.4 |
|
Total
assets
|
|
|
4,388.2 |
|
|
|
(60.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
4,328.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,169.5 |
|
|
|
(154.8 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,014.7 |
|
Other
liabilities
|
|
|
194.3 |
|
|
|
- |
|
|
|
(1.6 |
) |
|
|
- |
|
|
|
192.7 |
|
Total
liabilities
|
|
|
3,420.9 |
|
|
|
(154.8 |
) |
|
|
(1.6 |
) |
|
|
- |
|
|
|
3,264.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
capital
|
|
|
1,264.1 |
|
|
|
143.4 |
|
|
|
- |
|
|
|
- |
|
|
|
1,407.5 |
|
Retained
earnings
|
|
|
496.3 |
|
|
|
(48.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
447.6 |
|
Total
equity
|
|
|
967.3 |
|
|
|
94.7 |
|
|
|
1.6 |
|
|
|
- |
|
|
|
1,063.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
65.7 |
|
|
$ |
(4.5 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
61.2 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-cash items
|
|
|
(0.8 |
) |
|
|
- |
|
|
|
(1.8 |
) |
|
|
- |
|
|
|
(2.6 |
) |
Discounts
and deferred issuance costs
|
|
|
0.8 |
|
|
|
5.1 |
|
|
|
- |
|
|
|
- |
|
|
|
5.9 |
|
Gain
on redemption of debt
|
|
|
(4.4 |
) |
|
|
2.1 |
|
|
|
- |
|
|
|
- |
|
|
|
(2.3 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
|
(105.1 |
) |
|
|
- |
|
|
|
1.8 |
|
|
|
- |
|
|
|
(103.3 |
) |
Income
taxes, net of employee stock plans
|
|
|
(0.9 |
) |
|
|
(2.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3.6 |
) |
Recently
Issued Accounting Standards Not Yet Adopted
Consolidation
of Variable Interest Entities
In June
2009, the FASB issued new guidance which requires us to reassess our primary
beneficiary position for all VIE arrangements based on qualitative factors on an
on-going basis. This guidance is effective beginning with our first quarter of
fiscal 2011 and must be adopted through a cumulative-effect adjustment (with a
retrospective option). We continue to evaluate the extent to which this guidance
will impact our results of operations, financial position, or cash
flows.
In
January 2010, the FASB issued new guidance which will require added disclosures
related to assets and liabilities carried at fair value to identify significant
transfers between Level 1 and Level 2, as well as provide purchases, sales,
issuances, and settlements within the Level 3 reconciliation. This guidance is
effective for interim and annual reporting periods beginning after December 15,
2009 or IGT’s second quarter of fiscal 2010.
3. VARIABLE
INTEREST ENTITIES AND AFFILIATES
Variable
Interest Entities
As the
primary beneficiary, we consolidate our VIE WAP trusts in New Jersey that are
responsible for administering jackpot payments to winners. The VIE trust
consolidations increase jackpot liabilities and related assets, as well as
interest income and equivalent offsetting interest expense. Consolidated VIE
trust assets and equivalent liabilities totaled $88.3 million at December 31,
2009 and $91.3 million at September 30, 2009.
Investments
in Unconsolidated Affiliates
China
LotSynergy Holdings, Ltd.
At
December 31, 2009, our investments in CLS stock and convertible notes were
accounted for as available-for-sale securities reflected in the aggregate table
below. We determined that no features of the convertible notes met the
definition of a derivative requiring bifurcation at December 31, 2009. See Note
15 about related foreign currency derivatives and Note 16 for factors related to
fair value measurements.
For our
equity method joint ventures with CLS, IGT Synergy Holding Ltd. and Asiatic
Group Ltd., as of and for the three months ended December 31, 2009, we
recognized a loss of $0.1 million and $8.4 million remains to be funded on our
capital commitment.
Aggregate
Available-for-sale Investments in Unconsolidated Affiliates
December
31, 2009
|
|
Adjusted
Cost
|
|
|
Unrealized
gain
(loss)
|
|
|
Fair
Value
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
CLS
Stock
|
|
$ |
12.2 |
|
|
$ |
4.4 |
|
|
$ |
16.6 |
|
CLS
Convertible Note
|
|
|
78.6 |
|
|
|
5.6 |
|
|
|
84.2 |
|
Total
|
|
$ |
90.8 |
|
|
$ |
10.0 |
|
|
$ |
100.8 |
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
(In
millions)
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
80.1 |
|
|
$ |
74.9 |
|
Work-in-process
|
|
|
7.4 |
|
|
|
6.7 |
|
Finished
goods
|
|
|
63.3 |
|
|
|
76.2 |
|
Total
|
|
$ |
150.8 |
|
|
$ |
157.8 |
|
5. PROPERTY,
PLANT AND EQUIPMENT
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
(In
millions)
|
|
|
|
|
|
|
Land
|
|
$ |
62.7 |
|
|
$ |
62.7 |
|
Buildings
|
|
|
230.4 |
|
|
|
230.0 |
|
Leasehold
improvements
|
|
|
15.0 |
|
|
|
14.5 |
|
Machinery,
furniture and equipment
|
|
|
295.1 |
|
|
|
300.2 |
|
Gaming
operations equipment
|
|
|
847.9 |
|
|
|
832.4 |
|
Total
|
|
|
1,451.1 |
|
|
|
1,439.8 |
|
Less
accumulated depreciation
|
|
|
(893.1 |
) |
|
|
(881.0 |
) |
Property,
plant and equipment, net
|
|
$ |
558.0 |
|
|
$ |
558.8 |
|
6. SHARE-BASED
COMPENSATION
The
amount, frequency, and terms of share-based awards may vary based on competitive
practices, operating results, and government regulations. New IGT common shares
are issued upon option exercises or restricted share grants. Our current
practice is generally to grant restricted share awards in the form of units
without dividends. Forfeitures are typically due to employee
terminations.
On
November 4, 2009, IGT granted 2.7 million employee stock options with an
exercise price of $18.60 per share in exchange for the 5.3 million underwater
employee stock options surrendered in a shareholder approved exchange offer that
expired on November 3, 2009. The newly granted options have a six-year
contractual term and will vest ratably over two years. The exchange ratio was
calculated based on the fair values of the options surrendered and issued under
a value-for-value exchange and incremental compensation expense recognized was
not material. In connection with the exchange, we recorded $1.4 million of
deferred tax benefits.
At
December 31, 2009, shares available for grant under the IGT SIP totaled 16.0
million and we have $102.4 million of unrecognized share-based compensation
expected to be recognized over a weighted average period of 2.0 years. SIP
activity is reflected below as of and for the three months ended December 31,
2009.
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options |
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(thousands)
|
|
|
(per
share)
|
|
|
(years)
|
|
|
(millions)
|
|
Outstanding
at beginning of fiscal year
|
|
|
18,022 |
|
|
$ |
26.88 |
|
|
|
|
|
|
|
Granted
|
|
|
3,570 |
|
|
|
18.97 |
|
|
|
|
|
|
|
Exercised
|
|
|
(202 |
) |
|
|
12.03 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(217 |
) |
|
|
35.53 |
|
|
|
|
|
|
|
Expired
|
|
|
(177 |
) |
|
|
19.51 |
|
|
|
|
|
|
|
Stock
options exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,653 |
|
|
|
18.60 |
|
|
|
|
|
|
|
Cancelled
|
|
|
(5,306 |
) |
|
|
36.35 |
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
18,343 |
|
|
$ |
21.53 |
|
|
|
6.7 |
|
|
$ |
39.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest
|
|
|
18,077 |
|
|
$ |
21.59 |
|
|
|
6.7 |
|
|
$ |
38.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
7,585 |
|
|
$ |
26.72 |
|
|
|
4.5 |
|
|
$ |
9.8 |
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Grant
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Date
|
|
Vesting
|
|
|
Intrinsic
|
|
Restricted
Shares/Units |
|
Shares
|
|
|
Fair
Value
|
|
Period
|
|
|
Value
|
|
|
|
(thousands)
|
|
|
(per
share)
|
|
(years)
|
|
|
(millions)
|
|
Outstanding
at beginning of fiscal year
|
|
|
2,000 |
|
|
$ |
22.60 |
|
|
|
|
|
|
|
Granted
|
|
|
1,332 |
|
|
|
18.38 |
|
|
|
|
|
|
|
Vested
|
|
|
(464 |
) |
|
|
25.12 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(123 |
) |
|
|
36.85 |
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
2,745 |
|
|
$ |
19.57 |
|
|
|
1.9 |
|
|
$ |
51.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
to vest
|
|
|
2,691 |
|
|
$ |
19.60 |
|
|
|
2.0 |
|
|
$ |
50.5 |
|
7. ALLOWANCE
FOR RECEIVABLES
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
(In
millions)
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
24.0 |
|
|
$ |
23.4 |
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful notes and contracts
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
23.8 |
|
|
$ |
22.6 |
|
Non-current
|
|
|
10.8 |
|
|
|
10.6 |
|
|
|
$ |
34.6 |
|
|
$ |
33.2 |
|
8. CONCENTRATIONS
OF CREDIT RISK
Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of cash and equivalents, investments, and receivables. We place
short-term investments in high credit quality financial institutions and in
short-duration high-quality securities. With the exception of US Government and
Agency securities, our short-term investment policy limits the amount of credit
exposure in any one financial institution, industry group, or type of
investment. Cash on deposit may be in excess of Federal Deposit Insurance
Corporation limits.
Our
receivables are concentrated in the following legalized gaming regions at
December 31, 2009:
North
America
|
|
|
|
International
|
|
|
Alabama
|
12
|
%
|
|
Argentina
|
22
|
%
|
Nevada
|
9
|
|
|
Europe
|
7
|
|
Oklahoma
|
6
|
|
|
Other
Latin America
|
6
|
|
Pennsylvania
|
5
|
|
|
Other
(less than 5% individually)
|
8
|
|
Other
(less than 5% individually)
|
25
|
|
|
|
43
|
%
|
|
57
|
%
|
|
|
|
|
Our net
carrying amount for development financing and accounts receivable extended in
Alabama to charitable bingo properties was approximately $83.0 million at
December 31, 2009. The legality of the operations of these properties has been
challenged by the Governor’s Task Force on Illegal Gambling.
Auction
Rate Securities
After
$1.9 million par were
called during the first quarter just ended, we held $19.7 million par of
trading ARS along with corresponding put rights at December 31, 2009. The
carrying fair values totaled $16.3 million for ARS and $3.3 million for put
rights at December 31, 2009. See Note 16 for our valuation techniques and
assumptions. The following changes in fair value were included in other income
(expense):
|
ª
|
$0.1 million net
gain ($0.4 million ARS gain and $0.3 million put loss) for the quarter
ended December 31, 2009 |
|
ª
|
$1.5 million net
loss ($6.2 million ARS loss and $4.7 million put gain) for the quarter
ended December 31, 2008 |
9. GOODWILL
AND OTHER INTANGIBLES
Activity
by Segment
|
|
North
|
|
|
|
|
|
|
|
Three
Months Ended December 31, 2009
|
|
America
|
|
|
International
|
|
|
Total
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,042.8 |
|
|
$ |
108.7 |
|
|
$ |
1,151.5 |
|
Foreign
currency adjustments
|
|
|
- |
|
|
|
0.8 |
|
|
|
0.8 |
|
Ending
balance
|
|
$ |
1,042.8 |
|
|
$ |
109.5 |
|
|
$ |
1,152.3 |
|
During
the quarter ended December 31, 2009, we added $0.7 million for capitalized
patent legal costs with a weighted average life of 6 years.
|
|
December
31, 2009
|
|
|
September
30, 2009
|
|
|
|
Accumulated |
|
|
Accumulated |
|
Balances
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite
lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
396.4 |
|
|
$ |
214.3 |
|
|
$ |
182.1 |
|
|
$ |
396.3 |
|
|
$ |
205.7 |
|
|
$ |
190.6 |
|
Developed
technology
|
|
|
76.7 |
|
|
|
39.7 |
|
|
|
37.0 |
|
|
|
76.7 |
|
|
|
37.3 |
|
|
|
39.4 |
|
Contracts
|
|
|
26.5 |
|
|
|
16.3 |
|
|
|
10.2 |
|
|
|
26.4 |
|
|
|
15.7 |
|
|
|
10.7 |
|
Reacquired
rights
|
|
|
13.4 |
|
|
|
0.3 |
|
|
|
13.1 |
|
|
|
13.4 |
|
|
|
0.1 |
|
|
|
13.3 |
|
Customer
relationships
|
|
|
8.8 |
|
|
|
5.0 |
|
|
|
3.8 |
|
|
|
8.8 |
|
|
|
4.8 |
|
|
|
4.0 |
|
Trademarks
|
|
|
3.6 |
|
|
|
2.6 |
|
|
|
1.0 |
|
|
|
3.6 |
|
|
|
2.4 |
|
|
|
1.2 |
|
Total
|
|
$ |
525.4 |
|
|
$ |
278.2 |
|
|
$ |
247.2 |
|
|
$ |
525.2 |
|
|
$ |
266.0 |
|
|
$ |
259.2 |
|
Aggregate
amortization expense totaled $12.8 million in the current quarter versus $11.5
million in the prior year quarter.
|
2010
|
2011
|
2012
|
2013
|
2014
|
(In
millions)
|
|
|
|
|
|
Estimated
annual amortization
|
$50.8
|
$44.5
|
$39.5
|
$36.0
|
$32.0
|
10. CREDIT
FACILITIES AND INDEBTEDNESS
Outstanding
Debt
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
Domestic
credit facility
|
|
$ |
737.0 |
|
|
$ |
100.0 |
|
Foreign
credit facilities
|
|
|
6.7 |
|
|
|
5.3 |
|
Debentures
|
|
|
5.8 |
|
|
|
707.0 |
|
Notes
|
|
|
850.0 |
|
|
|
850.0 |
|
Bonds
|
|
|
500.0 |
|
|
|
500.0 |
|
Total
principal
|
|
$ |
2,099.5 |
|
|
$ |
2,162.3 |
|
Debentures
discount
|
|
|
- |
|
|
|
(2.7 |
) |
Notes
discount
|
|
|
(145.2 |
) |
|
|
(152.1 |
) |
Bonds
discount
|
|
|
(2.6 |
) |
|
|
(2.6 |
) |
Swap
fair value adjustment (see Note 15)
|
|
|
4.1 |
|
|
|
15.1 |
|
Total
long-term debt, net
|
|
$ |
1,955.8 |
|
|
$ |
2,020.0 |
|
IGT was
in compliance with all applicable debt covenants at December 31, 2009. Embedded
features of all debt agreements were evaluated and did not require bifurcation
or had only a nominal value at December 31, 2009.
At the
beginning of fiscal 2010, we adopted new accounting standards requiring the
separation of liability (debt) and equity (conversion option) components of our
convertible debt instruments to reflect an effective nonconvertible borrowing
rate when the debt was issued. See Note 2 for prior period amounts
retrospectively recast under the new standards.
At
December 31, 2009, $0.7 billion was drawn ($0.6 billion extended and $0.1
billion non-extended), $1.1 billion was available, and $3.6 million was reserved
for letters of credit on our domestic revolving credit facility. The outstanding
amount carried a 2.54% weighted average interest rate.
Interest
under the credit facility is paid at least quarterly with rates and facility
fees based on our public debt ratings or debt to capitalization ratio.
Currently, extended commitments bear interest at LIBOR plus 260 bps with a
facility fee of 65 bps and non-extended commitments bear interest at LIBOR plus
37.5 bps with a facility fee of 12.5 bps.
Foreign
Credit Facilities
At
December 31, 2009, $6.7 million was drawn at a weighted average rate of 1.38%
and $41.4 million was available under our three revolving credit facilities in
Japan and $9.0 million was available under a revolving credit facility in
Australia. These foreign credit facilities generally renew annually and are
guaranteed by the parent company, International Game Technology, with maturities
in January, April, and August for Japan and in March for Australia.
2.6%
Convertible Debentures
On
December 15, 2009, $701.2 million in aggregate principal of Debentures were
validly tendered under the holders’ put option and accepted by IGT for payment.
On December 21, 2009, IGT gave call notice to the remaining Debenture holders
and completed final redemption of the remaining $5.8 million aggregate
outstanding principal on February 4, 2010.
As
recast, the equity component totaled $43.7 million and the effective interest
rate on the debt component was 6.2%. As of December 31, 2009, the discount was
fully amortized. For the
three months ended December 31, 2009 and 2008, respectively, the contractual
interest expense totaled $3.8 million and $5.8 million and the discount
amortization totaled $2.7 million and $5.2 million. The first quarter of fiscal
2009 also included $2.3 million (as recast) in other income (expense) related to
gains on Debentures repurchased.
As
recast, the equity component totaled $99.7 million and the effective interest
rate on the debt component was 8.7%. The contractual interest expense totaled
$6.9 million and interest expense related to the discount amortization totaled
$6.9 million for the first quarter of fiscal 2010. The remaining discount
amortization period was 4.3 years at December 31, 2009.
The
market price condition for convertibility of our Notes was not met and there
were no related note hedges or warrants exercised at December 31,
2009.
Interest
rate swaps executed in conjunction with our 7.5% Bonds due 2019 are described in
Note 15.
IGT has
been named in and has brought lawsuits in the normal course of business. We do
not expect the outcome of these suits, including the lawsuits described below,
to have a material adverse effect on our financial position or results of future
operations.
2004
Federal District Court of Nevada
On
December 7, 2004, IGT filed a complaint in US District Court for the District of
Nevada, alleging that defendants Alliance Gaming Corp., Bally Gaming Int'l,
Inc., and Bally Gaming, Inc. infringed six US patents held by IGT: US Patent
Nos. 6,827,646; 5,848,932; 5,788,573; 5,722,891; 6,712,698; and 6,722,985. On
January 21, 2005, defendants filed an answer denying the allegations in the
complaint and raising various affirmative defenses to IGT's asserted claims.
Defendants also asserted fourteen counterclaims against IGT, including
counterclaims for a declaratory judgment of non-infringement, invalidity, and
unenforceability of the asserted patents, and for antitrust violations and
intentional interference with prospective business advantage. IGT has
successfully moved for partial summary judgment on defendants’ counterclaims for
intentional interference with prospective business advantage and defendants’
antitrust allegations related to the gaming machine market. IGT denies the
remaining allegations. On May 9, 2007, the Court issued an order construing
disputed terms of the asserted patent claims. On October 16, 2008, the Court
issued summary judgment rulings finding certain of IGT’s patents, including
patents that IGT believes cover bonus wheel gaming machines, invalid as obvious.
The rulings also found that Bally was not infringing certain patents asserted by
IGT. Bally’s antitrust and unfair competition counterclaims remain pending. On
November 7, 2008, the Court issued an order staying the proceedings and
certifying the summary judgment and claim construction rulings for immediate
appeal. On December 1, 2008, IGT appealed the rulings to the US Court of Appeals
for the Federal Circuit. On January 8, 2009, Bally moved to dismiss the appeal
on jurisdictional grounds. On February 2, 2009, the Federal Circuit denied the
Bally motion without prejudice to the parties raising jurisdictional issues in
their merits briefs. On October 22, 2009, the Federal Circuit affirmed the
District Court’s summary judgment rulings. On December 7, 2009, Bally filed a
motion to lift the stay and schedule a trial on the remaining issues. A hearing
on the motion was held on February 1, 2010, at which the Court indicated that it
would revisit earlier motions for summary judgment on the issues not addressed
on appeal, including IGT’s motions for summary judgment on Bally’s antitrust and
unfair competition counterclaims. Consequently, a trial on Bally’s antitrust and
unfair competition counterclaims has not yet been scheduled.
2006
Federal District Court of Delaware
On April
28, 2006, IGT filed a complaint in US District Court for the District of
Delaware, alleging that defendants Bally Technologies, Inc., Bally Gaming Int'l,
Inc., and Bally Gaming, Inc. infringed nine US patents held by IGT: US Patent
Nos. RE 38,812; RE 37,885; 6,832,958; 6,319,125; 6,244,958; 6,431,983;
6,607,441; 6,565,434; and 6,620,046. The complaint alleges that the “BALLY POWER
BONUSING™” technology infringes one or more of the claims of the asserted IGT
patents. The lawsuit seeks monetary damages and an injunction. On June 30, 2006,
defendants filed an answer denying the allegations in the complaint and raising
various affirmative defenses to IGT’s asserted claims. Defendants also asserted
twelve counterclaims against IGT, including counterclaims for a declaratory
judgment of non-infringement, invalidity, and unenforceability of the asserted
patents, antitrust violations, unfair competition, and intentional interference
with prospective business advantage. IGT denies these allegations. Pursuant to
stipulation of the parties, all claims and counterclaims except those relating
to US Patent Nos. RE 37,885 ("the '885 patent"), RE 38,812 ("the '812 patent"),
and 6,431,983 have been dismissed. All proceedings relating to Bally’s
antitrust, unfair competition, and intentional interference counterclaims have
been stayed. On April 28, 2009, the court issued a summary judgment ruling
finding the '885 and '812 patents valid. The court also ruled that Bally's
"Power Rewards" and "ACSC Power Winners" products infringe certain claims of the
'885 and '812 patents. The court granted Bally's motion for summary judgment
that Bally's "SDS Power Winners" does not infringe the '885 patent and "Power
Bank" and "Power Promotions" do not infringe the '983 patent. The court denied
Bally's motion for summary judgment that the '983 patent is invalid. The parties
have agreed that Bally's counterclaim for a declaratory judgment on invalidity
of the '983 patent will be dismissed without prejudice. IGT’s motion for a
permanent injunction against Bally’s infringing products was denied. A trial to
determine the amount of damages incurred by IGT, and related matters, as a
result of Bally's infringement has not yet been scheduled.
2006
Federal District Court of Nevada
On
September 5, 2006, Bally Gaming, Inc. filed a complaint in US District Court for
the District of Nevada alleging that IGT is infringing US Patent No. 7,100,916,
entitled “Indicator Wheel System.” The products named in the
complaint are IGT’s gaming machines with “wheel” features, including, without
limitation, Wheel of Fortune®,
Wheel of Gold®, The Addams Family™, American Bandstand®, The
Apprentice™, Dilbert's™ Wheelbert™, Drew Carey Great Balls of Cash™,
Elvira®, I Dream of Jeannie®, I Love Lucy™, Indiana Jones™: Raiders of the Lost
Ark™, M*A*S*H*™, Megabucks® with Morgan Fairchild, Regis On the Town™,
Sinatra™ and The
Twilight Zone® gaming machines. The lawsuit seeks unspecified
monetary damages and an injunction. On October 6, 2006, IGT filed an answer and
counterclaims denying infringement and seeking a declaration that the patent is
invalid and non-infringed. On September 9, 2008, the Court granted IGT’s motion
for summary judgment of invalidity and final judgment in IGT’s favor was entered
on October 3, 2008. Bally appealed the decision to the US Court of Appeals for
the Federal Circuit. On October 22, 2009, the Federal Circuit affirmed the
District Court’s summary judgment ruling.
2006
Northern Federal District Court of California
On June
12, 2006, Aristocrat Technologies Australia PTY Ltd. and Aristocrat
Technologies, Inc. filed a patent infringement lawsuit against IGT. Aristocrat
alleged that IGT willfully infringed US Patent No. 7,056,215,
which issued on June 6, 2006. On December 15, 2006, Aristocrat filed
an amended complaint, adding allegations that IGT willfully infringed US Patent
No. 7,108,603, which issued on September 19, 2006. The IGT products named in the
original and amended complaints were the Fort Knox® mystery
progressive slot machines. On June 13, 2007, the US District Court for the
Northern District of California entered an order granting summary judgment in
favor of IGT declaring both patents invalid. The US Court of Appeals for the
Federal Circuit reversed this decision on September 22, 2008. IGT’s request for
a rehearing was denied on November 17, 2008. This case has recommenced in the
District Court. Pursuant
to agreement of the parties, this matter has been stayed.
Brochu
v. Loto Quebec
Loto
Quebec commenced an action in warranty against VLC, Inc., a wholly-owned
subsidiary of IGT, and another manufacturer of video lottery machines in October
2003, in the Superior Court of the Province of Quebec, District of Quebec,
seeking indemnification for any damages that may be awarded against Loto Quebec
in a class action suit, also filed in the Superior Court of the Province of
Quebec. The class action claim against Loto Quebec, to which neither IGT nor any
of its affiliates are parties, was filed by Jean Brochu on behalf of himself and
a class of other persons who allegedly developed pathological behaviors through
the play of video lottery machines made available by Loto Quebec in taverns and
other public locations. In this action, the plaintiff seeks to recover on behalf
of the class damages of approximately CAD$578.7 million, representing CAD$4,863
per class member, and CAD$119.0 million in punitive damages. Loto Quebec filed
its Plea in Defense in the main action in February 2006. On August 1, 2008, Loto
Quebec filed a discontinuance of the action in warranty against VLC.
Notwithstanding the discontinuance, Loto Quebec may still pursue the claims it
asserted, or could have asserted, in the action in warranty through arbitration
against VLC. The trial of the class action against Loto Quebec commenced on
September 15, 2008.
Shareholder
Actions
On July
30, 2009, International Brotherhood of Electrical Workers Local 697 filed a
putative securities fraud class action in the US District Court for the District
of Nevada, alleging causes of action under Sections 10(b) and 20(a) of the
Securities Exchange Act against IGT and certain of its officers, one of whom is
a director. The complaint alleges that between November 1, 2007 and October 30,
2008, the defendants inflated IGT's stock price through a series of materially
false and misleading statements or omissions regarding IGT's business,
operations, and prospects. The Court has not yet appointed a lead plaintiff
pursuant to the Private Securities Litigation Reform Act.
Derivative
Actions
Between
August 20, 2009 and September 17, 2009, the Company was nominally sued in a
series of derivative lawsuits filed in the US District Court for the District of
Nevada, captioned Fosbre v. Matthews et al., Case No. 3:09-cv-00467; Calamore v.
Matthews et al., Case No. 3:09-cv-00489-ECR-VPC; Israni v. Bittman, et al., Case
No. 3:09-cv-00536; and Aronson v. Matthews et al., Case No.
3:09-cv-00542-RCJ-VPC. Plaintiffs purportedly brought their respective actions
on behalf of the Company. The complaints assert claims against various current
and former officers and directors of the Company, for breaches of fiduciary
duties, unjust enrichment, abuse of control, gross mismanagement, waste of
corporate assets, and contribution and indemnification. The complaints seek an
unspecified amount of damages and allege similar facts as the securities class
action lawsuit. The complaints additionally allege that certain individual
defendants engaged in insider trading and that the director defendants
improperly handled Thomas J. Matthews’ resignation as Chief Executive Officer of
the Company. The actions were consolidated and subsequently a consolidated
derivative complaint was filed in December 2009. Defendants have moved to
dismiss that complaint.
On
September 30, 2009, the Company was nominally sued in a derivative lawsuit filed
in the Second Judicial District Court of the State of Nevada, County of Washoe.
Plaintiff purportedly filed the action on behalf of the Company. The lawsuit,
captioned Kurz et al. v. Hart et al., Case No. cv-0-9-02982, asserts claims
against various current and former officers and directors for breach of
fiduciary duties and unjust enrichment. The complaint generally makes the same
allegations as the federal derivative complaints and seeks an unspecified amount
of damages. The parties have stipulated to stay this action pending the motions
to dismiss in the above-mentioned consolidated federal derivative
action.
In a
letter dated October 7, 2009 to the Company’s Board of Directors, a shareholder
made factual allegations similar to those set forth in the above derivative and
securities class actions and demanded that the Board investigate, address and
remedy the harm allegedly inflicted on IGT. In particular, the letter alleges
that certain officers and directors grossly mismanaged the Company by
overspending in the area of R&D of server-based game technology despite a
looming recession to which the Company was particularly vulnerable; by making or
allowing false and misleading statements regarding the Company’s growth
prospects and earnings guidance; and by wasting corporate assets by causing the
Company to repurchase Company stock at inflated prices. The letter asserts that
this alleged conduct resulted in breaches of fiduciary duties and violations of
Section 10(b) of the Exchange Act and SEC Rule 10b-5.
On
October 2, 2009, two putative class action lawsuits were filed on behalf of
participants in the Company’s employee pension plans, naming as defendants the
Company, the IGT Profit Sharing Plan Committee, and several current and former
officers and directors. The complaints (which seek unspecified damages) allege
breaches of fiduciary duty under the Employee Retirement Income Security Act, 29
U.S.C §§ 1109 and 1132. The complaints allege similar facts as the securities
class action lawsuit. The complaints further allege that the defendants breached
fiduciary duties to Plan Participants by failing to disclose material facts to
Plan Participants, failing to exercise their fiduciary duties solely in the
interest of the Participants, failing to properly manage Plan assets, failing to
diversify Plan assets, and permitting Participants to elect to invest in Company
stock. The actions, filed in the US District Court for the District of Nevada,
are captioned Carr et al. v. International Game Technology et al., Case No.
3:09-cv-00584, and Jordan et al. v. International Game Technology et al., Case
No. 3:09-cv-00585. In October 2009, plaintiffs moved for consolidation of the
two actions which motion is currently pending. Defendants need not respond until
the Court rules on the consolidation motion.
Environmental
Matters
CCSC, a
casino operation sold by IGT in April 2003, is located in an area that has been
designated by the EPA as an active Superfund site because of contamination from
historic mining activity in the area. In order for Anchor Coin, an entity IGT
acquired in December 2001, to develop the CCSC site, it voluntarily entered into
an administrative order of consent with the EPA to conduct soil removal and
analysis (a requirement imposed on similarly situated property developers within
the region) in conjunction with re-routing mine drainage. The work and
obligations contemplated by the agreement were completed by Anchor in June 1998,
and the EPA subsequently issued a termination of the order.
The EPA,
together with other property developers excluding CCSC, continues remediation
activities at the site. While we believe our remediation obligations are
complete, it is possible that additional contamination may be identified and we
could be obligated to participate in remediation efforts. Under accounting
guidance for environmental remediation liabilities, we determined the incurrence
of additional remediation costs is neither probable nor reasonably estimable and
no liability has been recorded.
OSHA
/ Wrongful Termination Matter
On July
8, 2004, two former employees filed a complaint with the US Department of Labor,
OSHA alleging retaliatory termination in violation of the Sarbanes-Oxley Act of
2002. The former employees allege that they were terminated in retaliation for
questioning whether Anchor and its executives failed to properly disclose
information allegedly affecting the value of Anchor's patents in connection with
IGT's acquisition of Anchor in December 2001. The former employees also allege
that the acquired patents were overvalued on the financial statements of IGT.
Outside counsel, retained by an independent committee of our Board of Directors,
reviewed the allegations and found them to be entirely without
merit.
On
November 10, 2004, the employees withdrew their complaint filed with OSHA and
filed a notice of intent to file a complaint in federal court. On December 1,
2004, a complaint was filed under seal in the US District Court for the District
of Nevada, based on the same facts set forth above regarding their OSHA
complaint. IGT filed a motion for summary judgment as to all claims in
plaintiffs’ complaint. On June 14, 2007, the US District Court for the District
of Nevada entered an order granting summary judgment in favor of IGT as to
plaintiffs’ Sarbanes-Oxley whistle-blower claims and dismissed their state law
claims without prejudice. Plaintiffs’ motion for reconsideration of the District
Court’s decision was denied. Plaintiffs appealed to the US Court of Appeals for
the Ninth Circuit. Oral argument was heard on March 12, 2009, and on August 3,
2009, the Ninth Circuit reversed the District Court’s decision. IGT’s motion for
summary judgment on plaintiffs’ state law claims was argued on October 22, 2009
and granted in IGT’s favor on December 8, 2009. Plaintiffs currently have a
motion pending seeking reconsideration of the dismissal of their state law
claims, and IGT has a motion pending seeking to strike plaintiffs’ demand for a
jury trial. Trial has been scheduled to begin on June 1, 2010.
In
conjunction with the Anchor acquisition purchase price allocation as of December
31, 2001, IGT used the relief of royalty valuation methodology to estimate the
fair value of the patents at $164.4 million. The carrying value of the patents
at December 31, 2009 totaled $51.1 million.
Arrangements
with Off-Balance Sheet Risks
In the
normal course of business, we are party to financial instruments with
off-balance sheet risk, such as performance bonds and guarantees not reflected
in our balance sheet. We do not expect any material losses to result from these
arrangements and are not dependent on off-balance sheet financing arrangements
to fund our operations.
Performance
bonds outstanding related to gaming operations totaled $5.8 million at December
31, 2009. We are liable to reimburse the bond issuer in the event of exercise
due to nonperformance.
Letters
of Credit
Outstanding
letters of credit issued under our line of credit to ensure payment to certain
vendors and governmental agencies totaled $3.6 million at December 31,
2009.
IGT
Licensor Arrangements
Our sales
agreements that include software and IP licensing arrangements may provide a
clause whereby IGT indemnifies the third-party licensee against liability and
damages (including legal defense costs) arising from any claims of patent,
copyright, trademark infringement, or trade secret misappropriation. Should such
a claim occur, we could be required to make payments to the licensee for any
liabilities or damages incurred. Historically, we have not incurred any
significant costs due to infringement claims. As we consider the likelihood of
incurring future costs to be remote, no liability has been
recorded.
The
majority of our products are generally covered by a warranty for periods ranging
from 90 days to one year. We estimate accrued warranty costs in the table below
based on historical trends in product failure rates and expected costs to
provide warranty services.
Three
Months Ended December 31,
|
|
2009
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
7.9 |
|
|
$ |
8.4 |
|
Reduction
for payments made
|
|
|
(2.1 |
) |
|
|
(2.2 |
) |
Accrual
for new warranties issued
|
|
|
3.1 |
|
|
|
3.0 |
|
Adjustments
for pre-existing warranties
|
|
|
(1.8 |
) |
|
|
(0.9 |
) |
Balance
at end of period
|
|
$ |
7.1 |
|
|
$ |
8.3 |
|
We are
self-insured for various levels of workers’ compensation, directors’ and
officers’ liability, and electronic errors and omissions liability, as well as
employee medical, dental, prescription drug, and disability coverage. We
purchase stop loss coverage to protect against unexpected claims. Accrued
insurance claims and reserves include estimated settlements for known claims,
and actuarial estimates for claims incurred but not reported.
We are
subject to sales, use, income, gaming and other tax audits and administrative
proceedings in various US federal, state, local, and foreign jurisdictions.
While we believe we have properly reported our tax liabilities in each
jurisdiction, we can give no assurance that taxing authorities will not propose
adjustments that increase our tax liabilities.
Our
provision for income taxes is based on estimated effective annual income tax
rates. The provision differs from income taxes currently payable because certain
items of income and expense are recognized in different periods for financial
statement purposes than for tax return purposes. We reduce deferred tax assets
by a valuation allowance when it is more likely than not that some or all of the
deferred tax assets will not be realized.
Our
effective tax rate was 34.6% and 16.3% for the quarters ended December 31, 2009
and 2008, respectively. The prior year quarter tax rate was lower because of
nonrecurring tax benefits, including significant settlements with the IRS, the
reversal of accrued interest related to a tax accounting method change
application and other discrete items in fiscal 2009.
We file
income tax returns in the US federal, and various state, local and foreign
jurisdictions. The IRS began an audit of our US federal income tax returns for
fiscal years 2002 through 2005 in 2009. We are also subject to examination in
state and foreign jurisdictions for the same years. Based on the outcome of
taxing authority examinations and statute of limitations expiring in specific
jurisdictions, it is reasonably possible that unrecognized tax benefits could
significantly change within the next 12 months. However, an estimate
of the amount of possible change cannot be made at this time. We believe we have
recorded all appropriate provisions for outstanding issues for all jurisdictions
and open years. However, we can give no assurance that taxing authorities will
not propose adjustments that increase our tax liabilities.
At
December 31, 2009, we had $69.0 million of gross unrecognized tax benefits
excluding related accrued interest and penalties of $47.8 million. As of
December 31, 2009, $83.7 million of our unrecognized tax benefits, including
related accrued interest and penalties, would affect our effective tax rate, if
recognized. During the three months ended December 31, 2009, our unrecognized
tax benefits increased $1.2 million, and related interest and penalties
increased $1.3 million.
13. EARNINGS
PER SHARE RECONCILIATION
|
|
2009
|
|
|
2008
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
Net
income available to common shares (1)
|
|
$ |
73.3 |
|
|
$ |
61.2 |
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
295.1 |
|
|
|
293.3 |
|
Dilutive
effect of non-participating share-based awards
|
|
|
2.3 |
|
|
|
0.1 |
|
Diluted
weighted average common shares outstanding
|
|
|
297.4 |
|
|
|
293.4 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
$0.25 |
|
|
|
$0.21 |
|
Diluted
earnings per share
|
|
|
$0.25 |
|
|
|
$0.21 |
|
Weighted
average antidilutive share-based awards
shares
excluded from diluted EPS
|
|
|
9.8 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
(1)
Net Income available to participating securities was not
significant
|
|
14. OTHER
COMPREHENSIVE INCOME
|
|
Quarters
Ended
|
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
Net
income
|
|
$ |
73.3 |
|
|
$ |
61.2 |
|
Currency
translation adjustments
|
|
|
3.1 |
|
|
|
(28.9 |
) |
Investment
unrealized gains (losses)
|
|
|
6.0 |
|
|
|
(5.2 |
) |
Comprehensive
income
|
|
$ |
82.4 |
|
|
$ |
27.1 |
|
Foreign
Currency Hedging
We hedge
our net foreign currency exposure related to monetary assets and liabilities
denominated in nonfunctional currency. The notional amount of foreign currency
contracts hedging this exposure totaled $28.1 million at December 31, 2009 and
$24.9 million at September 30, 2009.
In May
2007, we executed 5-year forward contracts designated as a fair value hedge to
protect a portion of the US dollar value of our Hong Kong dollar investment in
the CLS convertible note (see Note 3). The notional amount of foreign currency
contracts hedging this exposure totaled $49.9 million for which there was no
ineffectiveness during the quarter ended December 31, 2009. The component of
gain/loss excluded from our assessment of hedge effectiveness was
immaterial.
Interest
Rate Management
In June
2009, we executed $250.0 million notional value of interest rate swaps, which
effectively exchange 7.5% fixed interest payments for variable rate interest
payments at one-month LIBOR plus 342 bps reset on the 15th of each month. Net
amounts receivable or payable under the swaps settle semiannually on June 15 and
December 15. The interest rate swaps are designated fair value hedges against
changes in the fair value of a portion of our Bonds. Our assessment determined
that the interest rate swaps are highly effective.
Presentation
of Derivative Amounts
Balance
Sheet Location and Fair Value
|
December
31,
2009
|
|
September
30,
2009
|
(In
millions)
|
|
|
|
|
|
Non-designated
Hedges
|
|
|
|
|
|
Foreign
currency contracts: Other assets (current)
|
$
0.3
|
|
|
$
0.2
|
|
Foreign
currency contracts: Other liabilities (current)
|
0.5
|
|
|
0.8
|
|
Designated
Hedges
|
|
|
|
|
|
Foreign
currency contracts: Other liabilities (current)
|
$
0.1
|
|
|
$
0.1
|
|
Interest
rate swaps: Other assets (noncurrent)
|
3.3
|
|
|
14.8
|
|
Interest
rate swaps: Long-term debt
|
4.1
|
|
|
15.1
|
|
|
Quarter
Ended
|
Income
Statement Location and Gain (loss)
|
December
31, 2009*
|
(In
millions)
|
|
|
Non-designated
Hedges
|
|
|
Foreign
currency contracts: Other income (expense)
|
$ 0.4
|
|
Designated
Hedges
|
|
|
Foreign
currency contracts: Other income (expense)
|
$ 0.1
|
|
Interest
rate swap - ineffectiveness: Other income
(expense)
|
0.5
|
|
Interest
rate swap - effectiveness: Interest expense
|
2.3
|
|
|
|
|
*The
prior year quarter not presented was prior to our adoption of revised
disclosure requirements.
|
16. FAIR
VALUE MEASUREMENTS
Financial
Assets (Liabilities) Carried at Fair Value
|
|
Fair
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$ |
82.8 |
|
|
$ |
82.8 |
|
|
$ |
- |
|
|
$ |
- |
|
Investments
in unconsolidated affiliates
|
|
|
100.8 |
|
|
|
16.6 |
|
|
|
- |
|
|
|
84.2 |
|
Investments
in ARS and put rights
|
|
|
19.6 |
|
|
|
- |
|
|
|
- |
|
|
|
19.6 |
|
Derivative
assets
|
|
|
3.6 |
|
|
|
- |
|
|
|
3.6 |
|
|
|
- |
|
Derivative
liabilities
|
|
|
(4.7 |
) |
|
|
- |
|
|
|
(4.7 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$ |
82.6 |
|
|
$ |
82.6 |
|
|
$ |
- |
|
|
$ |
- |
|
Investments
in unconsolidated affiliates
|
|
|
94.1 |
|
|
|
15.7 |
|
|
|
- |
|
|
|
78.4 |
|
Investments
in ARS and put rights
|
|
|
21.3 |
|
|
|
- |
|
|
|
- |
|
|
|
21.3 |
|
Derivative
assets
|
|
|
15.0 |
|
|
|
- |
|
|
|
15.0 |
|
|
|
- |
|
Derivative
liabilities
|
|
|
(16.0 |
) |
|
|
- |
|
|
|
(16.0 |
) |
|
|
- |
|
Reconciliation
of Items Carried at Fair Value Using Significant Unobservable Inputs (Level
3)
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Quarter
Ended
|
|
Investments
in Unconsolidated
Affiliates
|
|
|
Investments
in
ARS
|
|
|
Investments
in Unconsolidated
Affiliates
|
|
|
Investments
in
ARS
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
78.4 |
|
|
$ |
21.3 |
|
|
$ |
80.4 |
|
|
$ |
19.6 |
|
Total
gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in other income (expense) - other
|
|
|
- |
|
|
|
0.1 |
|
|
|
(3.9 |
) |
|
|
(1.5 |
) |
Included
in other comprehensive income
|
|
|
5.0 |
|
|
|
- |
|
|
|
(6.6 |
) |
|
|
2.0 |
|
Purchases,
issuances, accretion, settlements
|
|
|
0.8 |
|
|
|
(1.8 |
) |
|
|
1.2 |
|
|
|
- |
|
Ending
balance
|
|
$ |
84.2 |
|
|
$ |
19.6 |
|
|
$ |
71.1 |
|
|
$ |
20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gain (loss) included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
earnings related to instruments still held
|
|
$ |
- |
|
|
$ |
0.1 |
|
|
$ |
(3.9 |
) |
|
$ |
(1.5 |
) |
Valuation
Techniques and Balance Sheet Presentation
Investments
in unconsolidated affiliates carried at fair value are estimated using quoted
market prices when available or DCF models incorporating market participant
assumptions, including credit quality and market interest rates and/or a Black
Scholes formula and lattice models with certain assumptions, such as stock price
and volatility. These investments are presented as a component of other assets.
See Note 3.
Investments
in ARS are valued using DCF, with certain assumptions related to lack of
liquidity and observable market transactions. Related put rights are valued
based on the difference between the ARS par and fair value, discounted for the
broker’s non-performance risk and the time remaining until the exercise period.
The ARS and related put rights are presented as a component of other assets. See
Note 8.
Derivative
assets and liabilities are valued using quoted forward pricing from bank
counterparties and LIBOR credit default swap rates for non-performance risk, and
approximate the net settlement amount if the contracts were settled at the
reporting date. These are presented primarily as components of other assets,
other liabilities, and notes payable. See Note 15.
Financial
Assets (Liabilities) Not Carried at Fair Value
|
|
Carrying
|
|
|
|
|
|
Unrealized
|
|
December
31, 2009
|
|
Amount
|
|
|
Fair
Value
|
|
Gain
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Jackpot
investments
|
|
$ |
459.7 |
|
|
$ |
501.9 |
|
|
$ |
43.1 |
|
|
$ |
0.9 |
|
Notes
& contracts receivable
|
|
|
428.8 |
|
|
|
436.1 |
|
|
|
7.3 |
|
|
|
- |
|
Jackpot
liabilities
|
|
|
(585.6 |
) |
|
|
(576.2 |
) |
|
|
9.4 |
|
|
|
|
|
Credit
facilities & indebtedness
|
|
|
(1,951.7 |
) |
|
|
(2,343.6 |
) |
|
|
- |
|
|
|
391.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Unrealized
|
|
September
30, 2009
|
|
Amount
|
|
|
Fair
Value
|
|
Gain
|
|
|
Loss
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jackpot
investments
|
|
$ |
464.1 |
|
|
$ |
518.0 |
|
|
$ |
54.1 |
|
|
$ |
0.2 |
|
Notes
& contracts receivable
|
|
|
404.2 |
|
|
|
413.8 |
|
|
|
9.6 |
|
|
|
- |
|
Jackpot
liabilities
|
|
|
(588.1 |
) |
|
|
(595.5 |
) |
|
|
- |
|
|
|
7.4 |
|
Credit
facilities & indebtedness
|
|
|
(2,004.9 |
) |
|
|
(2,435.0 |
) |
|
|
- |
|
|
|
430.1 |
|
Valuation
Techniques and Balance Sheet Presentation
Jackpot
investments are valued based on quoted market prices.
Notes and
contracts receivable are valued using DCF incorporating expected payments and
current market interest rates relative to the credit risk of each
customer.
Jackpot
liabilities are valued using DCF models incorporating estimated funding rates,
future payment timing, and IGT's nonperformance credit risk.
Credit
facilities and indebtedness are valued at quoted market prices or dealer quotes
for the identical liability when traded as an asset in an active market when
available. Otherwise, the fair value is determined using DCF models of expected
payments on outstanding borrowings at current borrowing rates. The swap fair
value adjustment presented as a component of notes payable is excluded from the
credit facilities amounts not carried at fair value in the table above. The
prior period reflects the retrospective application of new accounting guidance
for convertible debt instruments. See Note 2 and Note 10.
17. BUSINESS
SEGMENTS
We view
our business in the following two operating segments based on customer
regions:
|
ª |
North America
includes our operations in the US and
Canada |
|
ª
|
International
encompasses our efforts in all other jurisdictions
worldwide |
Certain
income and expenses related to company-wide initiatives are managed at the
corporate level and not allocated to any operating segment. We do not recognize
inter-company revenues or expenses upon the transfer of gaming products between
operating segments. Segment accounting policies are consistent with those of our
consolidated financial statements and segment profit is measured on the basis of
operating income.
Our
business segments are designed to allocate resources within a framework of
management responsibility. Operating costs from one segment may benefit other
segments. Realignment of our business development and administrative functions
resulted in changes to segment allocations and prior period operating income and
income before tax have been recast accordingly.
|
|
Quarters
Ended
|
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
(In
millions)
|
|
|
|
|
|
|
NORTH
AMERICA
|
|
|
|
|
|
|
Revenues
|
|
$ |
369.6 |
|
|
$ |
482.5 |
|
Gaming
operations
|
|
|
234.3 |
|
|
|
267.5 |
|
Product
sales
|
|
|
135.3 |
|
|
|
215.0 |
|
Gross
profit
|
|
|
215.1 |
|
|
|
245.4 |
|
Gaming
operations
|
|
|
142.1 |
|
|
|
136.8 |
|
Product
sales
|
|
|
73.0 |
|
|
|
108.6 |
|
Operating
income
|
|
|
116.3 |
|
|
|
106.9 |
|
Income
before tax
|
|
|
121.1 |
|
|
|
113.6 |
|
|
|
|
|
|
|
|
|
|
INTERNATIONAL
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
146.1 |
|
|
$ |
119.1 |
|
Gaming
operations
|
|
|
43.0 |
|
|
|
45.8 |
|
Product
sales
|
|
|
103.1 |
|
|
|
73.3 |
|
Gross
profit
|
|
|
81.5 |
|
|
|
60.5 |
|
Gaming
operations
|
|
|
31.1 |
|
|
|
24.6 |
|
Product
sales
|
|
|
50.4 |
|
|
|
35.9 |
|
Operating
income
|
|
|
45.1 |
|
|
|
22.3 |
|
Income
before tax
|
|
|
49.0 |
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
CORPORATE
(net unaollocated costs)
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(21.1 |
) |
|
$ |
(29.1 |
) |
Loss
before tax
|
|
|
(58.0 |
) |
|
|
(61.2 |
) |
|
|
|
|
|
|
|
|
|
CONSOLIDATED
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
515.7 |
|
|
$ |
601.6 |
|
Gaming
operations
|
|
|
277.3 |
|
|
|
313.3 |
|
Product
sales
|
|
|
238.4 |
|
|
|
288.3 |
|
Gross
profit
|
|
|
296.6 |
|
|
|
305.9 |
|
Gaming
operations
|
|
|
173.2 |
|
|
|
161.4 |
|
Product
sales
|
|
|
123.4 |
|
|
|
144.5 |
|
Operating
income
|
|
|
140.3 |
|
|
|
100.1 |
|
Income
before tax
|
|
|
112.1 |
|
|
|
73.1 |
|
On
February 8, 2010, IGT announced to employees its decision to close international
operations in Japan due to ongoing difficult market conditions and changes in
the Company’s future core business strategy. The closure is part of the
Company’s ongoing focus on operating efficiencies in all areas of its business.
The closure is targeted for completion by the early part of IGT’s third quarter
of fiscal 2010.
First
quarter operations in Japan reflected a net loss of $2.5 million in fiscal 2010
and $1.2 million in fiscal 2009. At December 31, 2009, the carrying amount of
related assets totaled $17.2 million and liabilities totaled $16.5 million.
Fiscal year 2009 operations in Japan reflected a net loss of $21.2
million.
Total
charges related to the closure are still developing and will depend on the
culmination of certain asset sales and property lease cancellations. We
currently estimate charges, including severance, of up to $20.0 million in the
aggregate, will be recorded in the second and third quarters of fiscal
2010.
In
connection with the closure of these operations, we anticipate repayment and
termination of our foreign credit facilities in Japan (see Note
10).
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD
LOOKING STATEMENTS
This
report contains statements that do not relate to historical or current facts,
but are “forward looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to analyses
and other information based on forecasts of future results and estimates of
amounts not yet determinable. These statements may also relate to future events
or trends, our future prospects and proposed new products, services,
developments, or business strategies, among other things. These statements can
generally (although not always) be identified by their use of terms and phrases
such as anticipate, appear, believe, could, would, estimate, expect, indicate,
intend, may, plan, predict, project, pursue, will, continue, and other similar
terms and phrases, as well as the use of the future tense.
Examples
of forward looking statements in this report include, but are not limited to,
the following categories of expectations about:
|
ª
|
our
ability to introduce new products and their impact on replacement
demand
|
|
ª
|
the
timing, features, benefits, and expected success of new product
introductions
|
|
ª
|
growth
of our business through technology and IP
acquisition
|
|
ª
|
our
leadership position in the market
|
|
ª
|
the
advantages offered to customers by our anticipated products and product
features
|
|
ª
|
gaming
growth, expansion, and new market
opportunities
|
|
ª
|
fluctuations
in future gross margins and tax
rates
|
|
ª
|
increasing
product sales or machine placements
|
|
ª
|
legislative
or regulatory developments and related market
opportunities
|
|
ª
|
available
capital resources to fund future operating requirements, capital
expenditures, payment obligations, and share
repurchases
|
|
ª
|
the
timing and amount of future share repurchases and
dividends
|
|
ª
|
losses
from off-balance sheet arrangements
|
|
ª
|
financial
returns to shareholders related to management of our
costs
|
|
ª
|
the
outcome and expense of litigation
|
|
ª
|
anticipated
increased revenue yields if general economic conditions
improve
|
Actual
results could differ materially from those expressed or implied in our forward
looking statements. Our future financial condition and results of operations, as
well as any forward looking statements, are subject to change and to inherent
known and unknown risks and uncertainties. See Item 1A, Risk Factors, in this
report for a discussion of these and other risks and uncertainties. You should
not assume at any point in the future that the forward looking statements in
this report are still valid. We do not intend, and undertake no obligation, to
update our forward looking statements to reflect future events or
circumstances.
The
following MDA is intended to enhance the reader’s understanding of our
operations and current business environment. It should be read in conjunction
with our Annual Report on Form 10-K for the year ended September 30, 2009.
Italicized text with an attached superscript trademark or copyright notation in
this document indicates trademarks of IGT or its licensors. For a complete list
of trademark and copyright ownership information, please visit our website at
www.IGT.com.
International
Game Technology is a global company specializing in the design, manufacture, and
marketing of electronic gaming equipment and systems products. We are a leading
supplier of gaming products to the world with fiscal 2009 annual revenues
exceeding $2.1 billion. We provide a diverse offering of quality products and
services at competitive prices, designed to increase the potential for operator
profits by enhancing the gaming player experience.
We manage
operations in two geographic segments, North America and International, with
certain unallocated company-wide income and expenses managed at the corporate
level. See BUSINESS SEGMENT RESULTS below and Note 17 of our Unaudited Condensed
Consolidated Financial Statements for additional segment information and
financial results.
Our first
quarter results reflect measured progress in numerous aspects of our business,
in spite of a challenging global business environment. During the quarter, we
introduced innovative products and technologies at the G2E gaming conference in
Las Vegas, installed the first large-scale deployment of server-based gaming,
and achieved our highest operating margin in six quarters. We also continue to
improve the talent within our management ranks, adding fresh perspectives and a
wealth of experience, with the recent additions of our vice president of core
products, chief marketing officer, and executive vice president of new
media.
The
combination of economic uncertainty, intense competition, lower replacement
demand, and limited near-term opportunities from new or expanding markets
continues to negatively impact results. Our customers continue to experience
diminished casino play levels as a result of low consumer confidence and reduced
discretionary spending. This not only adversely affects our gaming operations
revenues, with approximately 85% dependent on play levels, but it also
constrains casino capital spending which negatively impacts for-sale product
demand.
During
the first quarter of 2010, we introduced our Sex and the City® games into
the marketplace with great success, using go-to-market strategies focused on
selective placement designed to maximize unit productivity for the operator. Our
gaming operations installed base grew modestly during the quarter and
encompasses a diverse mix of units customized for a wide variety of distinct
markets and a broad range of yield characteristics. Our average per unit revenue
yield has been reduced by lower play levels, as well as an increasing installed
base mix of lower-yielding lease machines. Our gaming operations installed base
continues to provide steady recurring cash flows and we anticipate increased
revenue yields as general economic conditions improve.
During
the first quarter, historically our slowest quarter, we shipped 200 additional
for-sale replacement units compared to the prior year. We continue to receive
broad acceptance of our AVP® sbX™-enabled models, which
comprised 92% of our North America sales during the first quarter of fiscal
2010. Customer interest remains high for our innovative MLD® machines that provide
flexibility between video slots and 3-D reel replication, with over 1,700 MLD® units shipped in the
current quarter. We anticipate these trends to continue as our legacy for-sale
products are phased out. While we are encouraged by incremental improvement in
customer
interest, we remain cautious about the overall market environment, as
well as predicting the timing and scale of a rebound in the replacement
cycle.
We
continue with our renewed strategic focus on process improvement, with our “Ease
of Doing Business” program designed to reduce the order-to-delivery cycle and
product development programs designed to bring more compelling products to
market faster at a lower cost. In today’s gaming market we face highly capable
competitors, demanding gaming patrons, and increasing game complexity. This
market requires constant enhancements, innovations, and improvements to the
quality of game content across all product platforms, particularly in video
slots. The goal of our initiatives is to build and deliver compelling products
and strong systems to support the casino of the future, as well as provide more
entertainment value to the player. We believe excellent content drives product
sales, increases replacement cycle opportunities, and enhances our installed
base.
During
the first quarter of fiscal 2010, IGT went live at the CityCenter ARIA Resort
and Casino in Las Vegas with the industry’s first large-scale GSA compliant
sbX™ server-based open
platform. The ARIA casino floor features a one-of-a-kind combination of the IGT
sbX™ network,
incorporating the unique player interactive Service Window, sbX™ Floor Manger and Media Manager, the IGT Advantage® casino management
system, 100 WMS Industries, Inc. machines, and 970 IGT DynamiX™ machines. IGT
DynamiX™
complete solution machines combine AVP®, MLD® and Multi-Game
technologies.
We
continue to market our sbX™ Tier One package, which was
released for sale in the latter half of fiscal 2009, providing slot operators
with an incremental step towards full enterprise-wide sbX™. This smaller scale
solution is designed for easy implementation at the slot-bank level and
accommodates up to 100 machines with access to a standard library of available
IGT game content for AVP®
Video, Video Poker and MLD®. Additionally, in January 2010 we also
announced our first international contracts for the installation of sbX™ Experience Management systems
in Finland, France, and Italy.
IGT’s
sbX™ allows operators
the flexibility to reconfigure the gaming floor mix in seconds, more effectively
market to players, and offer players personalization, customization and game
choices at a single machine location. The sbX™ system is designed to be
a product of collaboration with an emphasis on interoperability among multiple
machine vendors, creating a seamless experience for the player, and a more
cost-effective floor management solution for operators. We expect to realize a
growing benefit from sbX™
technology as we differentiate IGT gaming products with new ways to
engage, entertain, and interact with the casino player.
We are
dependent, in part, on new market opportunities to generate growth. Legislative
actions and the passage of voter referendums are providing new and expanding
opportunities in Illinois, Ohio, Kansas, Maryland, and Pennsylvania. Development
projects in Maryland, Kansas, and Pennsylvania received approval and licensing
with openings anticipated over the next two years. State legislatures in
Kentucky, Massachusetts, and New Hampshire continue to consider gaming as a way
to provide tax revenues in support of public programs. Future gaming expansion
is also anticipated in international markets, especially Southeast Asia and
Italy. Although the extent and timing is uncertain, we believe new market
opportunities will grow as the economy improves and new jurisdictions consider
gaming tax revenues as a means to address budget shortfalls.
We remain
focused on efficient use of capital in all aspects of our business, taking a
prudent and cautious approach in order to preserve maximum flexibility. During
the first quarter of fiscal 2010, we realized a positive impact from our fiscal
2009 employee restructuring and cost reduction efforts. We expect to realize
further benefit throughout fiscal 2010 and anticipate
achieving our goal of a 30% operating margin when business conditions
normalize. As we continue the process of evaluating our business in conjunction
with assessment of the Company’s long-term strategic goals, we may also further
evaluate past and potential investments to determine if and how they fit into
our organizational structure going forward. Changes in our intended
relationship, as well as changes in market conditions or operating results,
related to our affiliates or subsidiaries may cause us to reassess cash flows,
recoverability, useful lives, and fair value measurements that may result in
material losses or impairment charges.
RECENTLY
ISSUED ACCOUNTING STANDARDS
Revenue
Recognition For Software-enabled Products and Multi-element
Arrangements
In
October 2009, the FASB issued new revenue recognition accounting standards with
respect to certain software-enabled products and multi-element arrangements. We
elected to early adopt this new guidance prospectively for new or materially
modified arrangements entered into on or after the beginning of our first
quarter of fiscal 2010. For transactions entered into prior to the first quarter
of fiscal 2010, revenues will continue to be recognized based on prior revenue
recognition guidance.
Under the
new guidance, tangible products, containing both software and non-software
components that function together to deliver a tangible product’s essential
functionality, will no longer be subject to software revenue accounting. The new
guidance also established a more economically aligned model for allocating
revenues among multiple deliverables in a multi-element arrangement, based on
relative selling prices. In order of preference, relative selling prices will be
estimated based on VSOE, TPE, or management’s ESP, and the residual method is no
longer allowed.
Most of
our products and services qualify as separate units of accounting, and the new
guidance does not change this premise. When VSOE or TPE is not available,
generally for new or highly customized offerings and solutions, estimated
selling price is the amount we would sell the product or service for
individually. The determination of ESP is made based on our normal pricing and
discounting practices, which consider multiple factors, such as market
conditions, competitive landscape, internal costs, and profit
objectives.
Under the
new guidance, revenues for machines and other software-enabled equipment in
certain bundled arrangements will no longer be deferred because VSOE is not
available for an undelivered element. Generally, revenues allocated to
non-software elements will be recognized upon delivery and customer acceptance,
and only revenues allocated to software elements will require deferral and
recognition over the lease or license term.
Although
this new accounting guidance is not currently expected to have a significant
effect on the timing or amount of revenues in periods after the initial
adoption, the impact is dependent upon the prevalence of future multi-element
arrangements and the evolution of new sales strategies. Adoption of the new
revenue recognition guidance for the first quarter of fiscal 2010 resulted in
$10.4 million of revenues which would have been recognized in later periods
under the prior guidance. Pro forma revenues that would have been reported under
the prior accounting guidance are reflected in the following table:
|
|
Quarter
Ended
December
31, 2009
|
|
|
|
As
Reported
|
|
Pro
Forma
|
|
(In
millions)
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Gaming
operations
|
|
$ |
277.3 |
|
|
$ |
270.4 |
|
Product
Sales
|
|
|
238.4 |
|
|
|
234.9 |
|
Total
|
|
$ |
515.7 |
|
|
$ |
505.3 |
|
Convertible
Debt Instruments
At the
beginning of fiscal 2010, we adopted new accounting standards issued in May 2008
requiring the separation of liability (debt) and equity (conversion option)
components for convertible debt instruments that may settle in cash upon
conversion. This guidance requires separation of the liability and equity
components to reflect an effective nonconvertible borrowing rate when the debt
was issued.
We
estimated fair value of our Debentures and Notes using similar debt instruments
at issuance that did not have a conversion feature and allocated an equity
component included in paid-in capital that represents the estimate fair value of
the conversion feature at issuance.
The
adoption of this new accounting guidance increased first quarter noncash
interest expense $9.3 million for fiscal 2010 and $5.1 million for fiscal 2009.
On an annual basis for fiscal 2010 and 2009, noncash interest expense will
increase approximately $30.0 million and fiscal 2009 Debenture repurchase gains
decrease approximately $5.0 million, reducing diluted EPS approximately $0.06
for fiscal 2010 and $0.08 for 2009.
Additionally,
the new guidance decreased long-term debt, deferred tax assets and deferred
offer costs and increased stockholders’ equity. The effects of the required
retrospective application for prior periods presented are outlined in Note 2 of
our Unaudited Condensed Consolidated Financial Statements as it relates to our
Debentures and Notes. See the Liquidity section later in this MDA and Note 10 of
our Unaudited Condensed Consolidated Financial Statements for additional
information about our Debentures and Notes.
Other
recently issued accounting standards that may impact our financial statements
are discussed further in Note 2 of our Unaudited Condensed Consolidated
Financial Statements.
CRITICAL
ACCOUNTING ESTIMATES
Our
consolidated financial statements were prepared in conformity with accounting
principles generally accepted in the US. Accordingly, we are required to make
estimates incorporating judgments and assumptions we believe are reasonable
based on our historical experience, contract terms, trends in our company and
the industry as a whole, as well as information available from other outside
sources. Our estimates affect amounts recorded in the financial statements and
actual results may differ from initial estimates.
We
consider the following accounting estimates to be the most critical to fully
understand and evaluate our reported financial results. They require us to make
subjective or complex judgments about matters that are inherently uncertain or
variable. Senior management discussed the development, selection and disclosure
of the following accounting estimates, considered most sensitive to changes from
external factors, with the Audit Committee of our Board of
Directors:
|
ª
|
goodwill,
other intangible assets, royalties, and affiliate
investments
|
|
ª
|
jackpot
liabilities and expenses
|
|
ª
|
inventory
and gaming operations equipment
|
Except
for the prospective adoption of accounting standards related to revenue
recognition for new arrangements that include software-enabled products and
multiple deliverables as discussed above, there have been no significant changes
in our critical accounting estimates since those presented in our Annual Report
on Form 10-K—Item 7 for the fiscal year ended September 30, 2009.
CONSOLIDATED
OPERATING RESULTS – A Year Over Year Comparative Analysis
|
|
Quarters
Ended
|
|
|
Favorable
|
|
|
|
December
31,
|
|
|
(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
(In
millions except units & EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
515.7 |
|
|
$ |
601.6 |
|
|
$ |
(85.9 |
) |
|
|
-14 |
% |
Gaming
operations
|
|
|
277.3 |
|
|
|
313.3 |
|
|
|
(36.0 |
) |
|
|
-11 |
% |
Product
sales
|
|
|
238.4 |
|
|
|
288.3 |
|
|
|
(49.9 |
) |
|
|
-17 |
% |
Machines
|
|
|
161.2 |
|
|
|
190.9 |
|
|
|
(29.7 |
) |
|
|
-16 |
% |
Non-machine
|
|
|
77.2 |
|
|
|
97.4 |
|
|
|
(20.2 |
) |
|
|
-21 |
% |
Gross
profit
|
|
$ |
296.6 |
|
|
$ |
305.9 |
|
|
$ |
(9.3 |
) |
|
|
-3 |
% |
Gaming
operations
|
|
|
173.2 |
|
|
|
161.4 |
|
|
|
11.8 |
|
|
|
7 |
% |
Product
sales
|
|
|
123.4 |
|
|
|
144.5 |
|
|
|
(21.1 |
) |
|
|
-15 |
% |
Gross
margin
|
|
|
58 |
% |
|
|
51 |
% |
|
7
|
pp |
|
|
14 |
% |
Gaming
operations
|
|
|
62 |
% |
|
|
52 |
% |
|
10
|
pp |
|
|
19 |
% |
Product
sales
|
|
|
52 |
% |
|
|
50 |
% |
|
2
|
pp |
|
|
4 |
% |
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
operations installed base
|
|
|
62,200 |
|
|
|
60,900 |
|
|
|
1,300 |
|
|
|
2 |
% |
Fixed
|
|
|
9,700 |
|
|
|
15,700 |
|
|
|
(6,000 |
) |
|
|
-38 |
% |
Variable
|
|
|
52,500 |
|
|
|
45,200 |
|
|
|
7,300 |
|
|
|
16 |
% |
Revenue
Recognition units*
|
|
|
11,900 |
|
|
|
15,500 |
|
|
|
(3,600 |
) |
|
|
-23 |
% |
Operating
income
|
|
$ |
140.3 |
|
|
$ |
100.1 |
|
|
$ |
40.2 |
|
|
|
40 |
% |
Operating
margin
|
|
|
27 |
% |
|
|
17 |
% |
|
10
|
pp |
|
|
59 |
% |
Net
income
|
|
$ |
73.3 |
|
|
$ |
61.2 |
|
|
$ |
12.1 |
|
|
|
20 |
% |
Diluted
EPS
|
|
$ |
0.25 |
|
|
$ |
0.21 |
|
|
$ |
0.04 |
|
|
|
19 |
% |
* Represents
units recognized in revenues, irrespective of the timing of
shipment.
Certain units associated with a systems lease are prorated based on
revenues recognized.
|
|
Improved
consolidated net income was primarily the result of fiscal 2009 operating cost
reduction efforts. North America revenue declines were partially offset by
increases internationally. Revenue declines in both gaming operations and
product sales were driven by fewer new openings, more intense competition, and
the extended weakness in the economy hindering casino play levels and capital
spending. Favorable changes in foreign exchange rates increased first quarter
revenues by approximately $8.6 million over the prior year.
The prior
year quarter operating results included charges for workforce restructuring and
additional bad debt provisions related to increased customer credit risk due to
the economic downturn. Additionally, the prior quarter included an extra week
due to our 52/53-week accounting year, primarily benefiting gaming operations
and increasing operating expenses.
Prior
periods presented have been adjusted for the required retrospective application
of new convertible debt accounting standards adopted during the first quarter of
fiscal 2010. The new accounting guidance required the separation of liability
and equity components of our convertible debt, which increased interest expense
and stockholder’s equity and decreased EPS and long-term debt. Additionally,
certain revenues were recognized during the current quarter earlier than
previously anticipated as a result of the adoption of new revenue recognition
accounting standards for certain software-enable products and multi-element
arrangements.
Pending
legal issues in Alabama have caused several charitable bingo properties to close
their operations. At issue is the definition of “bingo.” Our
charitable bingo operations and investments in Alabama represented approximately
2% or $9.4 million of quarterly consolidated revenues and 2% or $98.5 million of
total assets, primarily development financing notes, as of and for December 31,
2009.
Consolidated
Gaming Operations
Decreased
first quarter gaming operations revenues was largely due to the extra week
contributing approximately $22.4 million in the prior year, as well as lower
play levels most predominant in North America. Growth in our
International installed base offset declines in North America, reflecting
strength in our geographic diversity. Decreased average revenues per unit
reflect continued growth in our gaming operations installed base mix of lower
priced lease and stand alone units, as well as lower play levels.
Gross
profit and margin improvement was driven by reduced costs, primarily jackpot
expense largely due to favorable interest rate changes, depreciation, royalties,
and service labor. The prior year quarter gross profit also included
approximately $11.5 million related to the extra week. Jackpot expense decreased
$27.0 million overall, $19.0 million due to favorable interest rate movement
compared to the prior year quarter. Additional information is available about
factors affecting jackpot expense in our Annual Report on Form 10-K for the year
ended September 30, 2009 under the caption MDA—CRITICAL ACCOUNTING
ESTIMATES—Jackpot Liabilities and Expenses.
Consolidated
Product Sales
First
quarter product sales revenues and gross profit were down over the prior year
predominantly in North America, partially offset by International improvement.
Gross margin improved primarily on reduced material costs and obsolescence, as
well as favorable product mix offsetting unfavorable geographic mix, and
favorable changes in foreign exchange rates.
Deferred
revenue decreased $15.2 million during the first quarter of fiscal 2010 to
$106.8 million at December 31, 2009, primarily due to the completion of
obligations under multi-element contracts. During the current quarter, we
shipped 1,900 units for which revenues were deferred and recognized revenues for
2,600 units previously shipped, for a net decrease of 700 units in deferred
revenue. “Units shipped” represent all units shipped to customers during the
period and include units shipped for which revenues were deferred to future
periods.
|
|
Quarters
Ended
|
|
|
Favorable
|
|
|
|
December
31,
|
|
|
(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$ |
90.0 |
|
|
$ |
114.9 |
|
|
$ |
24.9 |
|
|
|
22 |
% |
Research
and development
|
|
|
46.7 |
|
|
|
53.5 |
|
|
|
6.8 |
|
|
|
13 |
% |
Depreciation
and amortization
|
|
|
19.6 |
|
|
|
20.0 |
|
|
|
0.4 |
|
|
|
2 |
% |
Restructuring
charges
|
|
|
- |
|
|
|
17.4 |
|
|
|
17.4 |
|
|
|
100 |
% |
Total
|
|
$ |
156.3 |
|
|
$ |
205.8 |
|
|
$ |
49.5 |
|
|
|
24 |
% |
Percent
of revenues
|
|
|
30 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
First
quarter operating expenses in fiscal 2010 were favorably impacted by our fiscal
2009 cost reduction efforts, bad debt provisions (down $8.6 million), and lower
legal and compliance fees (down $5.0 million). Excluding the extra
week, which added approximately $12.6 million to the prior year quarter, and
restructuring charges, operating expenses decreased $19.5 million or 11% in the
first quarter of fiscal 2010 over the prior year quarter.
Other
Income (Expense) and Taxes
|
|
Quarters
Ended
|
|
|
Favorable
|
|
|
|
December
31,
|
|
|
(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
16.0 |
|
|
$ |
16.5 |
|
|
$ |
(0.5 |
) |
|
|
-3 |
% |
WAP
|
|
|
6.4 |
|
|
|
7.5 |
|
|
|
(1.1 |
) |
|
|
-15 |
% |
Other
|
|
|
9.6 |
|
|
|
9.0 |
|
|
|
0.6 |
|
|
|
7 |
% |
Interest
Expense
|
|
|
(43.2 |
) |
|
|
(35.5 |
) |
|
|
(7.7 |
) |
|
|
-22 |
% |
WAP
|
|
|
(6.3 |
) |
|
|
(7.3 |
) |
|
|
1.0 |
|
|
|
14 |
% |
Other
|
|
|
(36.9 |
) |
|
|
(28.2 |
) |
|
|
(8.7 |
) |
|
|
-31 |
% |
Other
|
|
|
(1.0 |
) |
|
|
(8.0 |
) |
|
|
7.0 |
|
|
|
88 |
% |
Total
other income (expense)
|
|
$ |
(28.2 |
) |
|
$ |
(27.0 |
) |
|
$ |
(1.2 |
) |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
$ |
38.8 |
|
|
$ |
11.9 |
|
|
$ |
(26.9 |
) |
|
|
|
|
Effective
tax rate
|
|
|
34.6 |
% |
|
|
16.3 |
% |
|
|
(18.3 |
) |
|
pp
|
|
The
unfavorable variance in total other income (expense) was primarily due to
increased interest expense resulting from increased borrowing costs on our
recent refinancing, nearly offset by reduced investment write-downs and lower
foreign exchange losses.
The prior
year period has been recast for the retrospective application of new accounting
standards adopted during the first quarter of fiscal 2010 requiring the
separation of liability and equity components of our convertible debt to reflect
an effective nonconvertible borrowing rate when the debt was issued. This
resulted in an increase to noncash interest expense of $9.3 million in the
current quarter and $5.1 million in the prior year quarter. See Note 2 and Note
10 of our Unaudited Condensed Consolidated Financial Statements for additional
information about the impact of the adoption of the new convertible debt
accounting standard.
WAP
interest income and expense is related to previous jackpot winner liabilities
and accretes at approximately the same rate. WAP interest income also includes
earnings on restricted cash and investments held for future
winners.
The
increase in our effective tax rate in the first quarter of fiscal 2010 was
primarily due to nonrecurring tax benefits in the prior year quarter, including
significant IRS settlements, accrued interest reversed for a method change and
other discrete items. Differences between our effective income tax rate and the
US federal statutory rate of 35% principally result from the
geographical distribution of taxable income, differences between the book and
tax treatment of certain items, and changes in uncertain tax
positions.
It is
reasonably possible that unrecognized tax benefits could significantly change
with the next 12 months based on the outcome of taxing authority examinations
and statute of limitations expiring in specific jurisdictions. However, an
estimate of the amount of possible change cannot be made at this time. While
changes in uncertain tax positions and the actual distribution of taxable income
may cause volatility in future effective tax rates, we currently expect that our
annual effective tax rate (inclusive of discrete items) for fiscal 2010
will be between 36% and 38%.
BUSINESS
SEGMENT RESULTS – A Year Over Year Comparative Analysis
Operating
income for each regional segment below reflects applicable operating expenses.
See Note 17 of our Unaudited Condensed Consolidated Financial Statements for
additional business segment information.
|
|
Quarters
Ended
|
|
|
Favorable
|
|
|
|
December
31,
|
|
|
(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
(In
millions except units)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
369.6 |
|
|
$ |
482.5 |
|
|
$ |
(112.9 |
) |
|
|
-23 |
% |
Gaming
operations
|
|
|
234.3 |
|
|
|
267.5 |
|
|
|
(33.2 |
) |
|
|
-12 |
% |
Product
sales
|
|
|
135.3 |
|
|
|
215.0 |
|
|
|
(79.7 |
) |
|
|
-37 |
% |
Machines
|
|
|
83.7 |
|
|
|
137.4 |
|
|
|
(53.7 |
) |
|
|
-39 |
% |
Non-machine
|
|
|
51.6 |
|
|
|
77.6 |
|
|
|
(26.0 |
) |
|
|
-34 |
% |
Gross
profit
|
|
$ |
215.1 |
|
|
$ |
245.4 |
|
|
$ |
(30.3 |
) |
|
|
-12 |
% |
Gaming
operations
|
|
|
142.1 |
|
|
|
136.8 |
|
|
|
5.3 |
|
|
|
4 |
% |
Product
sales
|
|
|
73.0 |
|
|
|
108.6 |
|
|
|
(35.6 |
) |
|
|
-33 |
% |
Gross
margin
|
|
|
58 |
% |
|
|
51 |
% |
|
7
|
pp |
|
|
14 |
% |
Gaming
operations
|
|
|
61 |
% |
|
|
51 |
% |
|
10
|
pp |
|
|
20 |
% |
Product
sales
|
|
|
54 |
% |
|
|
51 |
% |
|
3
|
pp |
|
|
6 |
% |
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
operations installed base
|
|
|
45,800 |
|
|
|
46,900 |
|
|
|
(1,100 |
) |
|
|
-2 |
% |
Fixed
|
|
|
6,600 |
|
|
|
6,700 |
|
|
|
(100 |
) |
|
|
-1 |
% |
Variable
|
|
|
39,200 |
|
|
|
40,200 |
|
|
|
(1,000 |
) |
|
|
-2 |
% |
Revenue
Recognition units
|
|
|
5,500 |
|
|
|
9,500 |
|
|
|
(4,000 |
) |
|
|
-42 |
% |
Operating
income
|
|
$ |
116.3 |
|
|
$ |
106.9 |
|
|
$ |
9.4 |
|
|
|
9 |
% |
Operating
margin
|
|
|
31 |
% |
|
|
22 |
% |
|
9
|
pp |
|
|
41 |
% |
Cost
reduction efforts and reduced bad debt provisions combined to offset lower
revenues and resulted in improved first quarter operating income for North
America. Fewer new openings, strong competition, and extended weakness in the
economy drove revenue declines in both gaming operations and product
sales.
North
America Gaming Operations
Gaming
operations revenues were down $19.1 million related to the extra week in the
prior year quarter and lower play levels, as well as retraction in our installed
base. A greater mix of lower yielding lease units and fewer WAP units also
contributed to lower revenues per unit. With 86% of our North America installed
base at December 31, 2009 comprised of variable fee games that earn a percentage
of machine play levels, gaming operations is significantly impacted by lower
play levels.
The first
quarter of fiscal 2010 also included approximately $6.9 million of accumulated
lease fees as a result of adopting new accounting standards that would have been
recognized in future periods under the prior guidance. See further discussion
about new revenue recognition standards for software-enabled products and
multi-element arrangements above under RECENTLY ISSUED ACCOUNTING
STANDARDS.
Gross
profit and margin improvement was driven by reduced jackpot expense largely due
to interest rate changes, as well as lower depreciation, royalties and service
labor costs. Additionally, the prior year quarter included
approximately $9.8 million of gross profit related to the extra
week.
North
America Product Sales
Product
sales revenues and gross profit decreased during the first quarter of fiscal
2010 on lower volume of machine units and non-machine sales, partially offset by
a favorable mix of non-machine products and higher priced MLD® machine models. The
first quarter of fiscal 2010 also included approximately $3.5 million in
revenues as a result of adopting new accounting standards that would have been
recognized in later periods under the prior guidance. See further discussion
about new revenue recognition standards for software-enabled products and
multi-element arrangements above under RECENTLY ISSUED ACCOUNTING
STANDARDS.
First
quarter gross margin improved primarily due to reduced material costs and
obsolescence, as well as an increasing mix of our premium-priced AVP® and MLD® machines.
Fewer new openings continued to adversely affect unit shipments. Replacement
units comprised 57% of 5,300 first quarter shipments in fiscal 2010 compared to
36% of 7,800 units shipped in the prior year.
|
|
Quarters
Ended
|
|
|
Favorable
|
|
|
|
December
31,
|
|
|
(Unfavorable)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
(In
millions except units)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
146.1 |
|
|
$ |
119.1 |
|
|
$ |
27.0 |
|
|
|
23 |
% |
Gaming
operations
|
|
|
43.0 |
|
|
|
45.8 |
|
|
|
(2.8 |
) |
|
|
-6 |
% |
Product
sales
|
|
|
103.1 |
|
|
|
73.3 |
|
|
|
29.8 |
|
|
|
41 |
% |
Machines
|
|
|
77.5 |
|
|
|
53.5 |
|
|
|
24.0 |
|
|
|
45 |
% |
Non-machine
|
|
|
25.6 |
|
|
|
19.8 |
|
|
|
5.8 |
|
|
|
29 |
% |
Gross
profit
|
|
$ |
81.5 |
|
|
$ |
60.5 |
|
|
$ |
21.0 |
|
|
|
35 |
% |
Gaming
operations
|
|
|
31.1 |
|
|
|
24.6 |
|
|
|
6.5 |
|
|
|
26 |
% |
Product
sales
|
|
|
50.4 |
|
|
|
35.9 |
|
|
|
14.5 |
|
|
|
40 |
% |
Gross
margin
|
|
|
56 |
% |
|
|
51 |
% |
|
5
|
pp |
|
|
10 |
% |
Gaming
operations
|
|
|
72 |
% |
|
|
54 |
% |
|
18
|
pp |
|
|
33 |
% |
Product
sales
|
|
|
49 |
% |
|
|
49 |
% |
|
-
|
pp |
|
|
- |
|
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
operations installed base
|
|
|
16,400 |
|
|
|
14,000 |
|
|
|
2,400 |
|
|
|
17 |
% |
Fixed
|
|
|
3,100 |
|
|
|
9,000 |
|
|
|
(5,900 |
) |
|
|
-66 |
% |
Variable
|
|
|
13,300 |
|
|
|
5,000 |
|
|
|
8,300 |
|
|
|
166 |
% |
Revenue
Recognition units
|
|
|
6,400 |
|
|
|
6,000 |
|
|
|
400 |
|
|
|
7 |
% |
Operating
income
|
|
$ |
45.1 |
|
|
$ |
22.3 |
|
|
$ |
22.8 |
|
|
|
102 |
% |
Operating
margin
|
|
|
31 |
% |
|
|
19 |
% |
|
12
|
pp |
|
|
63 |
% |
International
operating income grew in the first quarter of fiscal 2010 primarily due to
higher product sales volume and cost reduction efforts. Foreign exchange rates
were favorable to international revenues by approximately $8.0 million in the
current quarter compared to the prior year.
On
February 8, 2010, IGT announced to employees its decision to close international
operations in Japan due to ongoing difficult market conditions and changes in
the Company’s future core business strategy. The closure is part of
the Company’s ongoing focus on operating efficiencies in all areas of its
business. The closure is targeted for completion by the early part of
IGT’s third quarter of fiscal 2010. First
quarter operations in Japan reflected revenues of $0.1 million in fiscal 2010
and $5.7 million in fiscal 2009. Operating losses were $2.5 million
in the first quarter of fiscal 2010 and $1.9 million in fiscal
2009.
International
Gaming Operations
First
quarter gaming operations revenues declined primarily due to approximately $3.3
million related to the extra week in the prior year
quarter. Additionally, installed base growth was offset by a greater
mix of lower-yielding units and conversions of fixed to variable pricing
arrangements. Installed base growth was most significant in the UK. Current
quarter gross profit and margin improved primarily due to lower depreciation
from a maturing installed base. Additionally, the prior year quarter included
approximately $1.7 million of gross profit related to the extra
week.
International
Product Sales
Product
sales revenues and gross profit improved in the current quarter primarily due to
volume increases in Latin America and Europe, improved non-machine
contributions, and favorable changes in foreign exchange rates.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
of Liquidity
At
December 31, 2009, our principal sources of liquidity were cash and equivalents
(including restricted cash), cash from operations, and $1.2 billion available on
our credit facilities worldwide. Other potential sources of capital
include, but are not limited to, the issuance of public or private placement
debt, bank credit facilities and the issuance of equity or convertible debt
securities. Based on past performance and current expectations, we
believe the combination of these resources will satisfy our needs for working
capital, jackpot liabilities, capital expenditures, debt service, and other
liquidity requirements associated with our existing operations for the
foreseeable future.
Restricted
cash and investments, as well as jackpot annuity investments, are available only
for funding jackpot winner payments. Unrestricted cash and equivalents increased
$26.3 million to $173.0 million at December 31, 2009. Working capital
increased to $642.9 million at December 31, 2009 from $609.2 million at
September 30, 2009, primarily due to reductions in accrued
liabilities.
Our
investments included ARS of $19.7 million par at December 31, 2009 that have no
active market, as well as corresponding put rights exercisable from June 30,
2010 through July 2, 2012. There has been no interruption in ARS interest
receipts and we expect to fully realize the par value without significant loss.
See Note 8 and Note 16 of our Unaudited Condensed Consolidated Financial
Statements regarding our ARS recorded fair value and gain/loss.
|
|
|
|
|
Favorable
|
|
Three
Months Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
(Unfavorable)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Operations
|
|
$ |
168.7 |
|
|
$ |
149.5 |
|
|
$ |
19.2 |
|
Investing
|
|
|
(66.7 |
) |
|
|
(129.1 |
) |
|
|
62.4 |
|
Financing
|
|
|
(75.3 |
) |
|
|
(20.6 |
) |
|
|
(54.7 |
) |
Effects
of exchange rates
|
|
|
(0.4 |
) |
|
|
(5.1 |
) |
|
|
4.7 |
|
Net
Change
|
|
$ |
26.3 |
|
|
$ |
(5.3 |
) |
|
$ |
31.6 |
|
Operating
cash flows increased during the first three months of fiscal 2010 versus the
same prior year period primarily due to higher net income and net changes in
operating assets and liabilities. Additional cash provided from
payables and income taxes, was partially offset by cash used by operating
receivables and jackpot liabilities.
Cash
flows related to jackpot liabilities fluctuate based on the timing of jackpots
and winner payments, volume of play, and market variations in applicable
interest rates as described in Note 1 of our Consolidated Financial Statements
in our most recent Annual Report on Form 10-K.
The net
change in operating receivables resulted in operating cash flows of $23.3
million in the first quarter of fiscal 2010. Excluding notes and contracts,
average days sales outstanding for the trailing twelve months ended December 31,
2009 decreased to 54 days from 58 days from September 30, 2009 with lower
receivables and revenues.
The
decrease in inventory resulted in $8.8 million of operating cash flows during
the first quarter of fiscal 2010. Inventory turns for the trailing twelve months
ended December 31, 2009 declined slightly to 2.9 versus 3.0 at September 30,
2009.
Investing
Cash Flows
The
decrease in cash used for investing during the first three months of fiscal 2010
compared to fiscal 2009 was primarily due to decreased net development
financing, lower capital expenditures, and decreased restricted cash
requirements.
Capital
expenditures in the table below decreased over the prior year period with cost
reductions efforts and reduced machine placements.
|
|
|
|
|
|
|
|
Increase
|
|
Three
Months Ended December 31,
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$ |
5.5 |
|
|
$ |
17.1 |
|
|
$ |
(11.6 |
) |
Gaming
operations equipment
|
|
|
46.3 |
|
|
|
57.3 |
|
|
|
(11.0 |
) |
Intellectual
property
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
(0.1 |
) |
Total
capital expenditures
|
|
$ |
53.3 |
|
|
$ |
76.0 |
|
|
$ |
(22.7 |
) |
The
increase in cash used for financing in the first three months of fiscal 2010 was
primarily due to increased debt repayments, partially offset by decreased
dividends versus the prior year period.
Credit Facilities (See Note 10
of our Unaudited Condensed Consolidated Financial Statements)
At
December 31, 2009, $1.2 billion was available on our revolving credit facilities
worldwide and we were in compliance with all debt covenants at December 31,
2009.
At
December 31, 2009, $1.1 billion was available on our domestic revolving credit
facility, $0.7 billion was drawn ($0.6 billion extended and $0.1 billion
non-extended), and $3.6 million was reserved for letters of credit. The domestic
credit facility subjects us to a number of financial covenants and our ability
to comply with these covenants may be adversely impacted by an extended economic
downturn. The financial covenants include a minimum ICR of 3.00 and a maximum
TLR of 3.75, which reduces to 3.5 on April 1, 2010 and 3.25 on April 1,
2011. At December 31, 2009, our ICR was 8.4 and our TLR was
2.9.
At
December 31, 2009, $50.4 million was available on our foreign revolving credit
facilities in Japan and Australia, after $6.7 million drawn in Japan.
Additionally, we will be terminating the Japan credit facilities with the
closure of these operations to be completed in the early part of our third
quarter of fiscal 2010 as further discussed in Note 18 or our Unaudited
Condensed Consolidated Financial Statements.
On
December 15, 2009, $701.2 million in aggregate principal of Debentures were
validly tendered under the holders’ put option and accepted by IGT for payment.
This tender was funded with borrowings under our domestic credit facility.
On
December 21, 2009, we gave call notice to the remaining Debenture holders and
completed final redemption of the remaining $5.8 million aggregate outstanding
principal on February 4, 2010 using cash on hand.
|
|
December
31,
|
|
|
September
30,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2009
|
|
|
(Decrease)
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
4,273.8 |
|
|
$ |
4,328.1 |
|
|
$ |
(54.3 |
) |
Liabilities
|
|
|
3,138.4 |
|
|
|
3,264.5 |
|
|
|
(126.1 |
) |
Stockholders'
equity
|
|
|
1,135.4 |
|
|
|
1,063.6 |
|
|
|
71.8 |
|
The
decrease in total assets was primarily due to reduced deferred costs related to
deferred revenues recognized during the quarter and tax payments, partially
offset by increased cash and investments. Liabilities decreased primarily due to
Debentures repurchased and lower accrued liabilities. Stockholders’ equity
increased primarily due to current period earnings.
Arrangements
with Off-Balance Sheet Risk
In the
normal course of business, we are a party to financial instruments with
off-balance sheet risk, such as performance bonds, guarantees and product
warranties not reflected in our balance sheet. We may provide indemnifications
of varying scope and terms to customers, vendors, lessors, business partners and
other parties with respect to certain matters, including but not limited to,
losses arising:
|
ª
|
out
of our breach of agreements with those
parties
|
|
ª
|
from
services to be provided by us
|
|
ª
|
from
IP infringement claims made by third
parties
|
Additionally,
we have agreements with our directors and certain officers that require us,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers. We have also
agreed to indemnify certain former officers and directors of acquired companies.
We maintain director and officer insurance, which may cover our liabilities
arising from these indemnification obligations in certain
circumstances.
It is not
possible to determine the maximum potential obligations under these
indemnification undertakings due to the unique facts and circumstances involved
in each particular agreement. Such indemnification undertakings may not be
subject to maximum loss clauses. Historically, we have not incurred material
costs related to indemnification obligations.
We do not
expect any material losses to result from these arrangements, and we are not
dependent on off-balance sheet financing arrangements to fund our operations.
See also Note 11 of our Unaudited Condensed Consolidated Financial
Statements.
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Except
for the changes described below, our assessment of sensitivity to market risk
has not changed significantly since those presented in our Annual Report on Form
10-K--Item 7A for the fiscal year ended September 30, 2009.
With
$701.2 million in aggregate principal of Debentures tendered on December 15,
2009 and the final redemption completed February 4, 2010, we no longer have
associated market risk. See Note 10 of our Unaudited Condensed Consolidated
Financial Statements for additional information regarding the
Debentures.
Item
4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in our periodic reports
filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules and
forms, and that such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate, to allow for timely
decisions regarding required disclosure. We recognize that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving desired control objectives. Judgment is
required when designing and evaluating the cost-benefit relationship of
potential controls and procedures.
As of the
end of the period covered by this report, with the supervision and participation
of management, including our CEO and CFO, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our CEO and CFO have concluded that, as of the end of such period,
our disclosure controls and procedures were effective at the reasonable
assurance level.
Changes
in Internal Control Over Financial Reporting
As a part
of our normal operations, we update our internal controls as necessary to
accommodate any modifications to our business processes or accounting
procedures. No change occurred during the most recent fiscal quarter that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
For a
description of our legal proceedings, see Note 11 of our Unaudited Condensed
Consolidated Financial Statements, which is incorporated by reference in
response to this item.
There
have been no material changes in our assessment of risk factors affecting our
business since those presented in our Annual Report on Form 10-K, Item 1A, for
the fiscal year ended September 30, 2009. For convenience, our updated risk
factors are included below.
Our business is vulnerable
to changing economic conditions and to other factors that adversely affect the
casino industry, which have negatively impacted and could continue to negatively
impact the play levels of our participation games, our product sales, and our
ability to collect outstanding receivables from our
customers.
Demand
for our products and services depends largely upon favorable conditions in the
casino industry, which is highly sensitive to casino patrons’ disposable incomes
and gaming activities. Discretionary spending on entertainment activities could
decline for reasons beyond our control, such as continued negative economic
conditions, natural disasters, acts of war or terrorism, or health issues (such
as concerns about the H1N1 Virus). Any prolonged or significant decrease in
consumer spending on entertainment activities could result in reduced play
levels on our participation games, causing our cash flows and revenues from a
large share of our recurring revenue products to decline. Unfavorable economic
conditions have also resulted in a tightening in the credit markets, decreased
liquidity in many financial markets, and significant volatility in the credit
and equity markets.
A decline
in the relative health of the gaming industry and the difficulty or inability of
our customers to obtain adequate levels of capital to finance their ongoing
operations reduces their resources available to purchase our products and
services, which adversely affects our revenues. If we experience a significant
unexpected decrease in demand for our products, we could also be required to
increase our inventory obsolescence charges.
Furthermore,
the extended economic downturn has impacted and could continue to impact the
ability of our customers to make timely payments to us. We have, and may
continue, to incur additional provisions for bad debt related to credit concerns
on certain receivables.
A decline in and/or
sustained low interest rates causes an increase in our jackpot expense which
could limit or reduce our future profits.
Changes
in prime and/or treasury and agency interest rates during a given period cause
fluctuations in jackpot expense largely due to the revaluation of future winner
liabilities. When rates increase, jackpot liabilities are reduced as it costs
less to fund the liability. However, when interest rates decline or remain low
the value of the liability (and related jackpot expense) increases because the
cost to fund the liability increases. Our results may continue to be negatively
impacted by continuing low interest rates or further declines in interest rates,
resulting in increased jackpot expense and a reduction of our investment income,
which could limit or reduce our future profits.
Our outstanding Notes
subject us to additional risks.
Our Notes
issued in May 2009 contain a net settlement feature, which entitles holders to
receive cash up to $1,000 per Note and shares for any excess conversion value as
determined by the respective governing indentures. Consequently, if a
significant number of Notes are converted or redeemed, we would be required to
make significant cash payments to the holders who convert or redeem the
Notes.
In
connection with the offering of the Notes, we entered into additional separate
transactions for note hedges and warrant transactions. In connection with these
transactions, the hedge counterparties and/or their respective affiliates may
enter into various derivative transactions with respect to our common stock and
may enter into or unwind various derivative transactions and/or purchase or sell
our common stock in secondary market transactions prior to maturity of the
Notes. These activities could have the effect of increasing or preventing a
decline in, or having a negative effect on, the value of our common stock and
could have the effect of increasing or preventing a decline in the value of our
common stock during any conversion reference period related to a conversion of
the Notes. The warrant transactions could separately have a dilutive effect from
the issuance of our common stock pursuant to the warrants.
Our outstanding domestic
credit facility subjects us to financial covenants which may limit our
flexibility.
Our
Domestic Credit Facility subjects us to a number of financial covenants,
including a minimum ratio of EBITDA to interest expense minus interest on
jackpot liabilities and a maximum ratio of debt to EBITDA. Our failure or
inability to comply with these covenants will cause an event of default that, if
not cured, could cause the entire outstanding borrowings under our Domestic
Credit Facility, Bonds and Notes to become immediately due and payable. In
addition, our interest rate under the Domestic Credit Facility can vary based on
our public credit rating or our debt to capitalization ratio. Each of these
measures may be adversely impacted by unfavorable economic
conditions. The Domestic Credit Facility also includes restrictions
that may limit our flexibility in planning for, or reacting to, changes in our
business and the industry.
Slow growth in the
establishment of new gaming jurisdictions or the number of new casinos, declines
in the rate of replacement of existing gaming machines and ownership changes and
consolidation in the casino industry could limit or reduce our future
profits.
Demand
for our products is driven substantially by the establishment of new gaming
jurisdictions, the addition of new casinos or expansion of existing casinos
within existing gaming jurisdictions and the replacement of existing gaming
machines. The establishment or expansion of gaming in any jurisdiction typically
requires a public referendum or other legislative action. As a result, gaming
continues to be the subject of public debate, and there are numerous active
organizations that oppose gaming. Opposition to gaming could result in
restrictions on or even prohibitions of gaming operations or the expansion of
operations in any jurisdiction.
In
addition, the construction of new casinos or expansion of existing casinos
fluctuates with demand, general economic conditions and the availability of
financing. The rate of gaming growth in North America has diminished and machine
replacements are at historically low levels. Slow growth in the establishment of
new gaming jurisdictions or delays in the opening of new or expanded casinos and
continued declines in, or low levels of demand for, machine replacements could
reduce the demand for our products and our future profits. Changes in ownership
or business combinations in the casino industry could also lead to decreased
spending on our products, downward pricing pressures or a slowing in the rate of
gaming machine replacements, or require our current customers to switch to our
competitors’ products, any of which could negatively impact our results of
operations.
Demand for our products and
the level of play of our products could be adversely affected by changes in
player and operator preferences.
As a
supplier of gaming machines, we must offer themes and products that appeal to
gaming operators and players. If we are unable to anticipate or react timely to
any significant changes in player preferences, such as a negative change in the
trend of acceptance of our newest systems innovations or jackpot fatigue
(declining play levels on smaller jackpots), the demand for our gaming products
and the level of play of our gaming products could decline. Further, our
products could suffer a loss of floor space to table games and operators may
reduce revenue sharing arrangements, each of which would harm our sales and
financial results. In addition, general changes in consumer behavior, such as
reduced travel activity or redirection of entertainment dollars to other venues,
could result in reduced demand and reduced play levels for our gaming
products.
Our ability to operate in
our existing markets or expand into new jurisdictions could be adversely
affected by changing regulations, new interpretations of existing laws or
problems with obtaining or maintaining needed licenses or
approvals.
We
operate only in jurisdictions where gaming is legal. The gaming industry is
subject to extensive governmental regulation by US federal, state and local
governments, as well as tribal officials or organizations and foreign
governments. While the regulatory requirements vary by jurisdiction, most
require:
|
ª
|
licenses
and/or permits
|
|
ª
|
findings
of suitability
|
|
ª
|
documentation
of qualifications, including evidence of financial
stability
|
|
ª
|
other
required approvals for companies who manufacture or distribute gaming
equipment and services
|
|
ª
|
individual
suitability of officers, directors, major stockholders and key
employees
|
Any
delays in obtaining or difficulty in maintaining regulatory approvals needed for
expansion within existing markets or into new jurisdictions can negatively
affect our opportunities for growth. Further, changes in existing gaming
regulations or new interpretations of existing gaming laws may hinder or prevent
us from continuing to operate in those jurisdictions where we currently do
business, which would harm our operating results. In particular, the enactment
of unfavorable legislation or government efforts affecting or directed at
manufacturers or gaming operators, such as referendums to increase gaming taxes
or requirements to use local distributors, would likely have a negative impact
on our operations.
For
example, in a case arising from the seizure of certain non-IGT charitable
“bingo” machines by the Alabama Governor’s Task Force on Illegal Gambling, the
State Supreme Court recently established a six-part definition of “bingo” with
which Alabama charitable gaming machines must comply. Modifications were made to
our Alabama games that we believe comply with the court’s standards. However, we
can give no assurance that our modifications will be determined to comply with
the new standards or that we will not encounter further legal, regulatory,
financial, or competitive issues, which could have an adverse impact on our
Alabama operations. Recently, two charitable bingo halls, VictoryLand and
Country Crossing, voluntarily ceased operations. IGT has supplied product and
development financing to these properties. Our charitable bingo
operations and
investments in Alabama represented approximately 2% of quarterly consolidated
revenues and total assets, primarily development financing loans, as of and for
December 31, 2009.
Our success in the
competitive gaming industry depends in large part on our ability to develop and
manage frequent introductions of innovative products.
The
gaming industry is intensely competitive, and many of our competitors have
substantial resources and specialize in the development and marketing of their
products. Increased competition has negatively impacted, and may continue to
negatively impact, our results. Because the gaming industry is characterized by
dynamic customer demand and rapid technological advances, we must continually
introduce and successfully market new themes and technologies in order to remain
competitive and effectively stimulate customer demand. We invest heavily in
product development in various disciplines from hardware, software, and firmware
engineering to game design, video, multimedia, graphics, and
sound. There is no assurance that our investments in research and
development will lead to successful new technologies or timely new
products. Our customers will accept a new product only if it is
likely to increase operator profits more than competitors’ products. There is no
certainty that our new products will attain this market acceptance or that our
competitors will not more effectively anticipate or respond to changing customer
preferences. In addition, any delays by us in introducing new products on
schedule could negatively impact our operating results by providing an
opportunity for our competitors to introduce new products and gain market share
ahead of us. For example, our business and results could be adversely affected
if we experience delays or problems in our continued deployment of sbX™ gaming management
systems, or if we do not gain market acceptance for these systems.
New products require
regulatory approval and may be subject to complex and dynamic revenue
recognition standards, which could materially affect our financial
results.
As we
introduce new products and transactions become increasingly complex, additional
analysis and judgment is required to account for and recognize revenues in
accordance with generally accepted accounting principles. Transactions may
include multiple element arrangements and/or software components and applicable
accounting principles or regulatory product approval delays could change the
timing of revenue recognition and could adversely affect our financial results
for any given period. Fluctuations may occur in our deferred revenues and
reflect our continued shift toward more multiple element contracts that include
systems and software.
Investments and development
financing loans could adversely impact liquidity or cause us to incur loan
losses or record a charge to earnings if our investments become
impaired.
We invest
in and/or provide financing for expansion or construction of gaming locations
and other business purposes, including locations abroad. Such investment and
financing activities subject us to increased credit risk in certain regions,
which could be exacerbated by current unfavorable economic conditions or other
political or economic instability in those regions. We monitor our investments
and financing activities to assess impairment on a quarterly basis.
We have
in the past and may in the future incur losses on these types of investments and
loans. Our results of operations, liquidity or financial position may be
negatively impacted if we are unable to collect on loans or derive benefit from
our investments.
Our gaming machines and
online operations may experience losses due to technical problems or fraudulent
activities.
We
incorporate security features into the design of our gaming machines and other
systems, including those responsible for our online operations, which are
designed to prevent us and our patrons from being defrauded. We also monitor our
software and hardware to avoid, detect and correct any technical errors.
However, there can be no guarantee that our security features or technical
efforts will continue to be effective in the future. If our security systems
fail to prevent fraud or if we experience any significant technical
difficulties, our operating results could be adversely affected. Additionally,
if third parties breach our security systems and defraud our patrons, or if our
hardware or software experiences any technical anomalies, the public may lose
confidence in our gaming machines and operations or we could become subject to
legal claims by our customers or to investigation by gaming
authorities.
We may be unable to protect
our IP.
A
significant portion of our revenues is generated from products using certain IP
rights and our operating results would be negatively impacted if we are
unsuccessful in protecting these rights from infringement. In addition, some of
our most popular games and features are based on trademarks, patents and other
IP licensed from third parties. The continued success of these games may depend
upon our ability to retain or expand these licenses with reasonable terms. We
also depend on trade secret law to protect certain proprietary knowledge and
have entered into confidentiality agreements with those of our employees who
have access to this information. However, there can be no guarantees that our
employees will not breach these agreements, and if these agreements are breached
it is unlikely that the remedies available to us will be sufficient to
compensate us for the damages suffered.
We may be subject to claims
of IP infringement or invalidity and adverse outcomes of litigation could
unfavorably affect our operating results.
Periodically,
we receive notification from others claiming that we are infringing upon their
patent, trademark or other IP rights. Regardless of their merit, such claims may
cause us to incur significant costs. Responding to these claims could also
require us to stop selling or to redesign our products, to pay significant
amounts in damages or to enter into agreements to pay significant licensing fees
or royalties. Additionally, if any of these claims prove successful, it could
limit our ability to bring new products to market in the future. Our assessment
of current IP litigation could change in light of the discovery of facts not
presently known to us or determinations by judges, juries or others that do not
accord with our evaluation of the possible liability or outcome of such
litigation.
Business combinations and
investments in intellectual properties or affiliates present risk, and we may
not be able to realize the financial and strategic goals that were contemplated
at the time of the transaction, which could materially affect our financial
results.
We have
invested in strategic business combinations and acquisitions of important
technologies and IP that we believe will expand our geographic reach, product
lines, and/or customer base. We may encounter difficulties in the
assimilation of acquired operations, technologies and/or products, or an
acquisition may prove to be less valuable than the price we paid. Any of these
events or circumstances may require us to record substantial impairment charges
on goodwill and other intangible assets, resulting in a negative impact on our
operating results.
Moreover,
as we continue the process of evaluating our business in conjunction with an
assessment of the company’s long-term strategic goals, we will also further
evaluate past and potential investments to determine if and how they will fit
into our organizational structure going forward. If an event or change occurs in
affiliate relationships or agreements associated with business combinations, we
may be required to reassess cash flows, recoverability, useful lives, and fair
value measurements, which may result in material impairment
charges.
Failure to attract, retain
and motivate key employees may adversely affect our ability to
compete.
Our
success depends largely on recruiting and retaining talented employees. The
market for qualified executives and highly skilled, technical workers is
intensely competitive. The loss of key employees or an inability to hire a
sufficient number of technical staff could limit our ability to develop
successful products and cause delays in getting new products to
market.
Current environmental laws
and regulations, or those enacted in the future, could result in additional
liabilities and costs.
The
manufacturing of our products may require the use of materials that are subject
to a variety of environmental, health and safety laws and regulations.
Compliance with these laws could increase our costs and impact the availability
of components required to manufacture our products. Violation of these laws may
subject us to significant fines, penalties or disposal costs, which could
negatively impact our results of operations, financial position or cash
flows.
The risks related to
operations in foreign countries and outside of traditional US jurisdictions
could negatively affect our results.
We
operate in many countries outside of the US and in tribal jurisdictions with
sovereign immunity which subjects us to certain inherent risks
including:
|
ª
|
social,
political or economic instability
|
|
ª
|
additional
costs of compliance
|
|
ª
|
tariffs
and other trade barriers
|
|
ª
|
fluctuations
in foreign exchange rates outside the
US
|
|
ª
|
adverse
changes in the creditworthiness of parties with whom we have significant
receivables or forward currency exchange
contracts
|
|
ª
|
expropriation,
nationalization and restrictions on repatriation of funds or
assets
|
|
ª
|
difficulty
protecting our intellectual
property.
|
Such
developments could adversely affect our financial condition and results of
operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
Form
8-K, Item 2.05 Costs Associated with
Exit or Disposal Activities
On
February 8, 2010, IGT announced to employees its decision to close international
operations in Japan due to ongoing difficult market conditions and changes in
the Company’s future core business strategy. The closure is part of the
Company’s ongoing focus on operating efficiencies in all areas of its business.
The closure is targeted for completion by the early part of IGT’s third quarter
of fiscal 2010.
First
quarter operations in Japan reflected a net loss of $2.5 million in fiscal 2010
and $1.2 million in fiscal 2009. At December 31, 2009, the carrying amount of
related assets totaled $17.2 million and liabilities totaled $16.5 million.
Fiscal year 2009 operations in Japan reflected a net loss of $21.2
million.
Total
charges related to the closure are still developing and will depend on the
culmination of certain asset sales and property lease cancellations. We
currently estimate cash and non-cash charges, including severance, of up to
$20.0 million in the aggregate, will be recorded in the second and third quarter
of fiscal 2010.
Form
8-K, Item 5.02 (e) Departure of
Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers
In
connection with the departure of David D. Johnson as Executive Vice President,
General Counsel, and Secretary of International Game Technology, effective as of
January 4, 2010, Mr. Johnson received a lump sum payment in cash constituting
one year of salary (determined based on his highest annual salary during the
previous two years) and the pro rata portion of his target bonus opportunity for
fiscal year 2010. Mr. Johnson also received one year of accelerated
vesting of his outstanding equity incentive awards and continuing medical
benefits under COBRA for one year.
10.1*
|
Amended
and Restated Employment Agreement, dated December 1, 2009, between
International Game Technology and Thomas J. Matthews (incorporated by
reference to Exhibit 10.1 to Registrant’s Report on Form 8-K filed
December 7, 2009).
|
10.2*
|
Executive
Transition Agreement, dated to be effective October 23, 2009, between
International Game Technology and Patrick W. Cavanaugh (incorporated by
reference to Exhibit 10.1 to Registrant’s Report on Form 8-K filed
December 23, 2009).
|
10.3*
|
Executive
Transition Agreement, dated to be effective October 23, 2009, between
International Game Technology and David D. Johnson (incorporated by
reference to Exhibit 10.2 to Registrant’s Report on Form 8-K filed
December 23, 2009).
|
10.4*
|
Summary
of Named Executive Officer and Director Compensation Arrangements at
January 31, 2010
|
10.5*
|
Executive
Transition Agreement, dated to be effective October 23, 2009, between
International Game Technology and Anthony
Ciorciari.
|
10.6*
|
Employment
Agreement, dated November 30, 1993, between International Game Technology
and Paulus Karskens.
|
10.7
|
Second
Amended and Restated Credit Agreement, dated as of June 8, 2009, with
Wells Fargo Bank, N.A. as Administrative Agent, Bank of America, N.A., as
Syndication Agent, The Royal Bank of Scotland PLC, the Bank of
Tokyo-Mitsubishi UFJ, Ltd./Union Bank of California, N.A., and Mizuho
Corporate Bank, Ltd., as Co-Documentation Agents, and Banc of America
Securities LLC, Wells Fargo Bank, N.A. and RBS Securities, Inc., as Joint
Lead Arrangers and Joint Book Managers, and a syndicate of other
lenders.
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a–14(a) of the Exchange Act,
as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a–14(a) of the Exchange Act,
as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a–14(b) of the Exchange Act
and section 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a–14(b) of the Exchange Act
and section 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
|
101.SCH**
|
XBRL
Taxonomy Extension Schema
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation
|
101.LAB**
|
XBRL
Taxonomy Extension Labels
|
101.PRE**
|
XBRL
Taxonomy Extension Presentation
|
** XBRL
information is furnished and not filed or a part of a registration statement or
prospectus for purposes of sections 11 or 12 of the Securities and Exchange Act
of 1933, as amended, is deemed not filed for purposes of section 18 of the
Securities and Exchange Act of 1034, as amended, and otherwise is not subject to
liability under these sections.
*
Management contract or compensatory plan or arrangement
Signature
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: February
11, 2010
INTERNATIONAL
GAME TECHNOLOGY
|
|
|
|
|
/s/Patrick
W. Cavanaugh
|
|
|
|
|
Patrick
W. Cavanaugh
|
|
|
|
|
Executive
Vice President and Chief Financial Officer, and Treasurer
|
|
(Principal Financial Officer)