UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 30, 2000
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
(Exact name of registrant as specified in charter)
Nevada 88-0173041
(State of Incorporation) (IRS Employer Identification No.)
9295 Prototype Drive, Reno, Nevada 89511
(Address of principal executive offices)
(775) 448-7777
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 27, 2001
----- -------------------------------
Common Stock
par value $.000625 per share 73,345,311
Table of Contents
Part I - Financial Information
Page
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three Months Ended December 30, 2000 and January 1, 2000.........5
Condensed Consolidated Balance Sheets -
December 30, 2000 and September 30, 2000.........................6
Condensed Consolidated Statements of Cash Flows -
Three months ended December 30, 2000 and January 1, 2000.........8
Notes to Condensed Consolidated Financial Statements..............10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........21
Part II - Other Information
Item 1. Legal Proceedings...................................................22
Item 2. Changes in Securities...............................................22
Item 3. Defaults Upon Senior Securities.....................................22
Item 4. Submission of Matters to a Vote of Security Holders.................22
Item 5. Other Information...................................................22
Item 6. Exhibits and Reports on Form 8-K....................................22
Signature...................................................................23
Part I - Financial Information
Item 1. Financial Statements
General
The following unaudited condensed consolidated financial statements were
prepared by International Game Technology (referred throughout this document,
together with its consolidated subsidiaries where appropriate, as IGT, Company,
we, our, and us) and include all normal adjustments considered necessary to
present fairly the financial position for the interim periods. These adjustments
are of a normal recurring nature. These financial statements and notes are
presented as permitted by the instructions to Form 10-Q and therefore do not
contain certain information included in our audited consolidated financial
statements and notes for the year ended September 30, 2000. Operating results
for current periods do not necessarily indicate the results that may be expected
for the fiscal year ending September 29, 2001.
You should read these financial statements along with the financial statements,
accounting policies and notes included in our Annual Report on Amended Form
10-K/A for the fiscal year ended September 30, 2000. We believe that the
disclosures in this document are adequate to make the information presented not
misleading. Certain amounts in the unaudited condensed consolidated financial
statements presented for the prior year comparable period have been
reclassified to be consistent with the presentation used in the current fiscal
period. In this report and in each of our reports, as amended, beginning with
our Report on Form 10-K for the year ended September 30, 2000, we have
reclassified our presentation of earnings from unconsolidated joint venture
operations. We previously reported earnings from unconsolidated joint ventures,
net of expenses, as a component of gaming operations revenues. In each of our
reports as amended, beginning with our Report on Form 10-K for the year ended
September 30, 2000 and going forward, we will report the net results of our
unconsolidated joint ventures as a separate component of operating income on our
income statement under a separate caption titled Earnings of Unconsolidated
Affiliates. This reclassification has no impact on our operating income, net
income, or earnings per share as reflected on our consolidated statements of
income and no impact on our consolidated balance sheets and statement of
cash flows.
The following are trademarks, service marks, and/or federally registered
trademarks of International Game Technology or its wholly-owned subsidiaries:
After Shock, All for One, Big Brother, Diamond Cinema, Dollars Deluxe, Double
Diamond 2000, Dynamite, EZ Pay, Fabulous 50's, Five Play Draw Poker, Game King,
High Rollers, IGT Gaming System, IGS, iGame, iGame Plus, Integrated Voucher
System, IVS, King Kebab, Little Green Men, Megabucks, MegaJackpots, Monedin
Joker, Multi-Denomination, Multi-Hand Poker, Neon Nights, Nickelmania, Nickels,
Nickels Deluxe, Party Time, Pokermania, Popper King, Psycho Cash Beast Club,
Quartermania, Quarters Deluxe, S2000, Revolution, S-Plus, Security Accounting
Management System, SAMS, Slotopoly, Super Nickelmania, Super Vision, Texas Tea,
Triple Play Draw Poker, Triple Play Poker, and Vision Series.
IGT designs, manufactures, produces, operates, uses, and/or otherwise has
permission to exploit certain gaming machines utilizing materials under license
from third-party licensors. More specifically, the games which have been
mentioned in this filing and their related trademark and copyright ownership
information are: "The Addams Family" is developed under agreement with Monaco
Entertainment Corporation; "Elvis, Elvis Presley, and King of Rock `n' Roll" are
registered trademarks of Elvis Presley Enterprises, Inc.; "Jeopardy!"(R) is a
registered trademark of Jeopardy Productions, Inc.; "Wheel of Fortune"(R) is a
registered trademark of Califon Productions, Inc.; "Regis' Cash Club" is a game
developed in conjunction with Philbin Enterprises; "$1,000,000 Pyramid "(TM) is
a trademark of CPT Holdings, Inc.; "I Dream of Jeannie" (TM) is a trademark of
CPT Holdings, Inc.,; "The Three Stooges"(R), the characters, names and all
related indicia are trademarks of C3 Entertainment, Inc.; " The
Honeymooners"(TM) is a trademark used under license; "Let's Make A Deal"(R) is a
trademark of Let's Make a Deal, is registered in the US and is pending
elsewhere, and is used under license; "Beverly Hillbillies" (TM) is a trademark
of CBS Worldwide Inc.; "Lifestyles of the Rich and Famous"(TM) is a trademark of
Rysher Entertainment, Inc.; "The Munsters" is a trademark of Universal Studios,
licensed by
Item 1. Financial Statements
Universal Studios Licensing, Inc.; "American Bandstand"(R)is a trademark of Dick
Clark Productions, Inc.; "Wheel of Gold" and "Totem Pole" are federally
registered trademarks of Anchor Gaming.
Condensed Consolidated Statements of Income
Three Months Ended
-----------------------------
December 30, January 1,
2000 2000
------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Revenues
Product sales $ 192,350 $ 109,760
Gaming operations 78,079 75,891
---------- ----------
Total revenues 270,429 185,651
---------- ----------
Costs and Expenses
Cost of product sales 115,203 68,200
Cost of gaming operations 34,055 33,311
Selling,general and administrative 39,598 32,968
Depreciation and amortization 4,869 5,396
Research and development 14,086 13,388
Provision for bad debts 5,752 1,839
Impairment of assets and restructuring (500) 1,779
---------- ----------
Total costs and expenses 213,063 156,881
---------- ----------
Earnings of Unconsolidated Affiliates 31,302 20,866
---------- ----------
Income from Operations 88,668 49,636
---------- ----------
Other Income (Expense)
Interest income 12,345 14,104
Interest expense (25,105) (25,293)
Gain (loss) on the sale of assets 109 (10)
Other 477 27,819
---------- ----------
Other income (expense), net (12,174) 16,620
---------- ----------
Income Before Income Taxes 76,494 66,256
Provision for Income Taxes 28,303 23,852
---------- ----------
Net Income $ 48,191 $ 42,404
========== ==========
Basic Earnings Per Share $ 0.66 $ 0.49
========== ==========
Diluted Earnings Per Share $ 0.64 $ 0.49
========== ==========
Weighted Average Common Shares Outstanding 72,761 86,401
Weighted Average Common and Potential Shares Outstanding 75,596 87,180
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Balance Sheets
December 30, September 30,
2000 2000
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 219,302 $ 244,907
Investment securities, at market value 23,666 21,473
Accounts receivable, net of allowances for doubtful
accounts of $16,217 and $13,831 242,756 219,948
Current maturities of long-term notes and contracts
receivable, net of allowances 67,496 76,320
Inventories, net of allowances for obsolescence
of $30,729 and $24,304:
Raw materials 98,656 98,081
Work-in-process 5,085 4,593
Finished goods 63,427 44,315
------------ ------------
Total inventories 167,168 146,989
------------ ------------
Investments to fund liabilities to jackpot winners 28,161 27,939
Deferred income taxes 29,877 29,086
Prepaid expenses and other 57,726 47,564
------------ ------------
Total Current Assets 836,152 814,226
------------ ------------
Long-term notes and contracts receivable,
net of allowances and current maturities 86,491 76,888
Property, plant and equipment, at cost
Land 19,903 19,889
Buildings 75,990 75,891
Gaming operations equipment 98,456 87,918
Manufacturing machinery and equipment 124,351 121,512
Leasehold improvements 5,040 4,996
------------ ------------
Total 323,740 310,206
Less accumulated depreciation and amortization (150,887) (143,297)
------------ ------------
Property, plant and equipment, net 172,853 166,909
------------ ------------
Investments to fund liabilities to jackpot winners 231,082 229,726
Deferred income taxes 97,864 97,670
Intangible assets, net 143,153 143,738
Other assets 92,558 94,559
------------ ------------
Total Assets $ 1,660,153 $ 1,623,716
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Balance Sheets
December 30, September 30,
2000 2000
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable $ - $ 4,621
Accounts payable 71,637 76,387
Jackpot liabilities 69,456 55,942
Accrued employee benefit plan liabilities 12,705 31,425
Accrued interest 10,875 31,369
Other accrued liabilities 70,747 59,249
------------ ------------
Total Current Liabilities 235,420 258,993
Long-term notes payable, net of current maturities 991,790 991,507
Long-term jackpot liabilities 259,424 267,985
Other liabilities 8,596 8,646
------------ ------------
Total Liabilities 1,495,230 1,527,131
------------ ------------
Commitments and contingencies - -
Stockholders' equity
Common stock: $.000625 par value; 320,000,000
shares authorized; 154,395,446 and 153,739,686
shares issued 96 96
Additional paid-in capital 296,176 278,825
Retained earnings 1,091,375 1,043,184
Treasury stock: 81,170,767 shares, at cost (1,215,707) (1,215,707)
Accumulated other comprehensive loss (7,017) (9,813)
------------ ------------
Total Stockholders' Equity 164,923 96,585
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,660,153 $ 1,623,716
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Statements of Cash Flows
Three Months Ended
-------------------------------
December 30, January 1,
2000 2000
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Operating Activities
Net income $ 48,191 $ 42,404
---------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,573 14,583
Amortization of discounts and deferred offering costs 646 597
Provision for bad debts 5,752 1,839
Provision for inventory obsolescence 6,966 2,230
Gain (loss) on the sale of assets (109) 10
Common stock awards 132 320
(Increase) decrease in assets:
Receivables (24,041) 24,624
Inventories (40,817) (7,108)
Prepaid expenses and other (12,539) 4,641
Other assets (2,048) (665)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans 10,835 (4,851)
Decrease in accounts payable and accrued liabilities (39,341) (40,242)
Impairment (recoveries) of assets and restructuring charges (500) 1,779
Earnings of unconsolidated affiliates (in excess of) less
than distributions 3,548 (6,012)
Other - (343)
---------- ----------
Total adjustments (77,943) (8,598)
---------- ----------
Net cash provided by (used in) operating activities (29,752) 33,806
---------- ----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Condensed Consolidated Statements of Cash Flows
Three Months Ended
-----------------------------
December 30, January 1,
2000 2000
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash Flows from Investing Activities
Investment in property, plant and equipment (4,470) (2,809)
Proceeds from sale of property, plant and equipment 238 594
Purchase of investment securities - (440)
Proceeds from sale of investment securities 812 -
Proceeds from investments to fund liabilities to
jackpot winners 5,594 5,604
Purchase of investments to fund liabilities to jackpot
winners (7,172) (4,854)
Cash advanced on loans receivable (10,068) (18,169)
Cash received on loans receivable 6,006 661
Proceeds from sale of other assets - 41,667
Investment in unconsolidated affiliates - (55)
----------- -----------
Net cash provided by (used in) investing activities (9,060) 22,199
----------- -----------
Cash Flows from Financing Activities
Principal payments on debt (4,549) (2,572)
Proceeds from long-term debt - 637
Payments on jackpot liabilities (13,582) (14,291)
Collections from systems to fund jackpot liabilities 20,799 22,622
Proceeds from employee stock plans 11,069 945
Purchases of treasury stock - (26,685)
------------ -----------
Net cash provided by (used in) financing activities 13,737 (19,344)
----------- -----------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents (530) 175
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (25,605) 36,836
Cash and Cash Equivalents at:
Beginning of Period 244,907 426,343
---------- ----------
End of Period $ 219,302 $ 463,179
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Notes to Condensed Consolidated Financial Statements
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted against
current and long-term maturities:
December 30, September 30,
2000 2000
---------------------------------------------------------
(Dollars in thousands)
Current $16,018 $14,607
Long-term 4,500 3,426
------- -------
$20,518 $18,033
======= =======
2. Concentrations of Credit Risk
The financial instruments that potentially subject IGT to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. IGT maintains cash and cash equivalents with
various financial institutions in amounts which, at times, may be in excess of
the FDIC insurance limits.
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. We also distribute a portion of our products through
third party distributors resulting in significant distributor receivables.
Accounts, contracts, and notes receivable by region as a percentage of total
receivables at December 30, 2000 were as follows:
Domestic Region
Native American casinos 33%
Nevada 30%
Atlantic City (distributor and other) 6%
Riverboats (greater Mississippi River area) 4%
Other US regions (individually less than 3%) 5%
-----
Total domestic 78%
-----
International Region
Europe 7%
Australia 7%
Latin America 4%
Other international (individually less than 3%) 4%
-----
Total international 22%
-----
Total 100%
=====
Notes to Condensed Consolidated Financial Statements
3 Intangible Assets
Intangible assets consisted of the following:
December 30, September 30,
2000 2000
------------------------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 1,650 $ 1,650
Excess of cost over net assets acquired 149,087 148,631
---------- ----------
150,737 150,281
Less accumulated amortization (7,584) (6,543)
---------- ----------
$ 143,153 $ 143,738
========== ==========
4. Impairment of Assets and Restructuring Costs
IGT -Australia
In the fourth quarter of fiscal 1999, given the unfavorable operating results,
poor product performance, loss of customer confidence and market share,
personnel turnover and changes in the regulatory environment in Australia, we
determined it necessary to re-evaluate the recoverability of the identifiable
intangible assets and goodwill recorded in connection with IGT-Australia's March
1998 acquisition of Olympic Amusements Pty. Ltd. As a result of our review, we
determined that the total unamortized balance of the identifiable intangible
assets and goodwill was impaired and recorded a charge of $86.8 million. In an
effort to return IGT-Australia to a profitable operation, we also developed a
restructuring plan. In connection with the plan, in the fourth quarter of fiscal
1999 we recorded a total of $6.0 million in restructuring costs, composed of
$4.0 million for inventory obsolescence and $2.0 million for asset and facility
redundancy costs. During fiscal 2000, we recorded additional restructuring
charges of $1.9 million related to employee terminations. As of December 30,
2000 the restructuring plan for IGT-Australia was substantially complete. No
additional charges were recorded in fiscal 2001. While we have been sucessful
in returing IGT-Australia to profitablity, we operate in a highly competitive
and stringent regulatory environment.
IGT-Brazil
In the fourth quarter of fiscal 1999, the government in Brazil rescinded the law
allowing gaming devices in bingo halls throughout this market. At that time, we
recorded impairment charges of $5.3 million relating to our assessment of the
recoverability of our inventories and receivables in Brazil. Payments collected
for receivables previously considered fully impaired totaled $500,000 and
$358,000 in the first quarter of fiscal 2001 and 2000.
Notes to Condensed Consolidated Financial Statements
5. Earnings Per Share
The following table shows the reconciliation of basic earnings per share (EPS)
to diluted EPS:
Three Months Ended
-----------------------------
December 30, January 1,
2000 2000
---------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Income before extraordinary item $ 48,191 $ 42,404
========= ========
Weighted average common shares outstanding 72,761 86,401
Dilutive effect of stock options outstanding 2,835 779
--------- --------
Weighted average common and potential shares
outstanding 75,596 87,180
========= ========
Basic earnings per share $ 0.66 $ 0.49
Diluted earnings per share $ 0.64 $ 0.49
Number of common shares excluded from diluted EPS because
option exercise price was greater than average market price 148 1,293
6. Income Taxes
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 and tax return purposes.
7. Comprehensive Income
Items of other comprehensive income include cumulative foreign currency
translation adjustments and net unrealized gains and losses on investment
securities. Our total comprehensive income is as follows:
Three Months Ended
----------------------------------
December 30, January 1,
2000 2000
------------------------------------------------------------------------------
(Dollars in thousand)
Net income $ 48,191 $42,404
Net change in other comprehensive income 2,796 (1,182)
-------- -------
Comprehensive income $ 50,987 $41,222
======== =======
8. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected in the
consolidated statements of cash flows.
We manufacture gaming machines which are used on our proprietary systems and are
leased to customers under operating leases. Transfers between inventory and
fixed assets resulted in an increase to property, plant and equipment of $13.2
million during the current period and $4.9 million during the comparable prior
year period.
The tax benefit of stock options and the employee stock purchase plan totaled
$6.2 million for the three months ended December 30, 2000 and $148,000 during
the year earlier period.
Notes to Condensed Consolidated Financial Statements
Payments of interest were $45.1 million for the first three months of fiscal
2001 and $44.6 million for the first three months of fiscal 2000. Payments for
income taxes were $12.8 million and $25.9 million for the three months ended
December 30, 2000 and January 1, 2000.
9. Contingencies
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.
Ahern
Along with a number of other public gaming corporations, IGT is a defendant in
three class action lawsuits: one filed in the United States District Court of
Nevada, Southern Division, entitled Larry Schreier v. Caesar's World, Inc., et
al, and two filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern v. Caesar's
World, Inc., et al., which have been consolidated into a single action. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. The actions allege that the defendants have engaged in
fraudulent and misleading conduct by inducing people to play video poker
machines and electronic slot machines, based on false beliefs concerning how the
machines operate and the extent to which there is an opportunity to win on a
given play. The amended complaint alleges that the defendants' acts constitute
violations of the Racketeer Influenced and Corrupt Organizations Act, and also
give rise to claims for common law fraud and unjust enrichment, and seeks
compensatory, special, consequential, incidental and punitive damages of several
billion dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
Acres
In February 1999, the Spin for Cash Wide Area Progressive Joint Venture (Joint
Venture), to which IGT and Anchor Gaming, Inc. (Anchor) are partners, and Anchor
filed an action in US District Court, District of Nevada against Acres Gaming,
Inc. (Acres). IGT is not a party to this action. The complaint alleges, among
other things, infringement of certain secondary event patents owned by Anchor
and licensed to the Joint Venture. In April 1999, Acres responded by filing an
answer and counterclaim against the Joint Venture and Anchor. In addition, in
April 1999, Acres filed an action in Oregon state circuit court against the
Joint Venture and Anchor alleging wrongful use of Acres' intellectual property.
The Oregon state circuit court action has been removed to the US District Court,
District of Oregon, and has been stayed pending the outcome of the Nevada
actions.
Notes to Condensed Consolidated Financial Statements
10. Business Segments
IGT operates principally in two lines of business: the development,
manufacturing, marketing and distribution of gaming products, referred to as
"product sales", and the development, marketing and operation of wide-area
progressive systems and gaming equipment leasing, referred to as "proprietary
gaming". The proprietary gaming segment includes our wholly-owned gaming
operations and our unconsolidated joint venture activities reported as earnings
of unconsolidated affiliates. Gaming operations and joint venture activities are
viewed as a single business segment because the nature of the products in the
joint ventures are the same as the products in our wholly-owned gaming
operations. The same management group monitors all activities of the proprietary
gaming segment. The joint venture is an integral part of our proprietary gaming
segment.
There have been no material changes in the basis of measuring segment profit or
in the amount of identifiable assets for any operating segment since our last
annual report.
The table below presents information as to our operations by these lines of
business as of:
Three Months Ended
--------------------------------
December 30, January 1,
2000 2000
-----------------------------------------------------------------------------------------
(Dollars in thousand)
Revenues
Product sales $ 192,350 $ 109,760
Proprietary gaming
Gaming operations 78,079 75,891
Earnings of unconsolidated affiliates 31,302 20,866
--------- ----------
Total proprietary gaming 109,381 96,757
--------- ----------
Total 301,731 206,517
Less earnings of unconsolidated affiliates (31,302) (20,866)
--------- ----------
Total Revenue $ 270,429 $ 185,651
========= ==========
Operating Profit
Product sales $ 38,705 $ 15,884
Proprietary gaming
Gaming operations 29,517 24,037
Earnings of unconsolidated affiliates 25,733 16,298
--------- ----------
Total Proprietary Gaming 55,250 40,335
--------- ----------
Total 93,955 56,219
Other non-allocated (income) expense,
including interest (17,461) 10,037
--------- ----------
Income Before Income Taxes $ 76,494 $ 66,256
========= ==========
11. Acquisitions
In December 2000, IGT entered into an Agreement and Plan of Merger with Silicon
Gaming, Inc. (Silicon). Silicon, headquartered in Palo Alto, California, designs
and manufactures a full line of innovative wagering products and holds an
extensive library of game applications. Under the terms of the transaction, the
total consideration paid by IGT would be approximately $45.0 million adjusted by
certain asset and liability
Notes to Condensed Consolidated Financial Statements
balances as of the acquisition date. The business combination is expected to be
completed in March 2001, conditioned upon regulatory approvals, Silicon
shareholder approval and other customary closing conditions.
12. Derivatives and Hedging Activities
IGT adopted Statement of Financial Accounting Standard No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities," on October 1,
2000. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation.
During the current period, IGT entered into forward exchange contracts to hedge
our net exposure, by currency, related to the monetary assets and liabilities of
our operations denominated in non-functional currency. These forward exchange
contracts were not designated as hedging instruments under SFAS 133, and gains
and losses were recognized in current earnings.
The adoption of SFAS 133 did not have a material impact on our financial
condition or results of operations.
13. Reclassifications
Certain amounts in the unaudited condensed consolidated financial
statements presented for the prior year comparable periods have been
reclassified to be consistent with the presentation used in the current fiscal
periods. In this report and in each of our reports, as amended, beginning with
our Report on Form 10-K for the year ended September 30, 2000, we have
reclassified our presentation of earnings from unconsolidated joint venture
operations. We previously reported earnings from unconsolidated joint ventures,
net of expenses, as a component of gaming operations revenues. In each of our
reports as amended, beginning with our Report on Form 10-K for the year ended
September 30, 2000 and going forward, we will report the net results of our
unconsolidated joint ventures as a separate component of operating income on our
income statement under a separate caption titled Earnings of Unconsolidated
Affiliates.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended December 30, 2000 Compared to the Three Months Ended
January 1, 2000
Net income for the current quarter totaled $48.2 million or $0.64 per
diluted share compared to income before one-time items in the prior year quarter
of $26.3 million or $0.30 per diluted share. The prior year net income of $42.4
million or $0.49 per diluted share included a legal settlement gain of $27.0
million ($17.3 million, net of tax) and restructuring charges of $1.8 million
($1.2 million, net of tax) primarily related to our Australian operations.
Operating Income
Operating income grew 79% to $88.7 million or 33% of revenues for the quarter
just ended compared to $49.6 million or 27% of revenues in the first quarter of
fiscal 2000. This improvement was due to the increased gross profit margins in
both product sales and gaming operations and increased earnings of
unconsolidated affiliates, partially offset by higher operating expenses, as
discussed above.
Revenues, Gross Profit Margins and Earnings of Unconsolidate Affiliates
Total revenues for the first quarter of fiscal 2001 grew to $270.4 million
compared to $185.7 million in the first quarter of fiscal 2000, reflecting a 75%
increase in product sales revenue and a 3% increase in game operations revenue.
Both domestic and international revenues experienced marked improvements over
the same quarter one year ago. Gross profit on total revenues for the first
quarter of fiscal 2001 increased 44% to $121.2 million compared to $84.1 million
for the first quarter of fiscal 2000. This improvement was attributable
primarily to growth in profitability quarter-over-quarter in product sales.
Worldwide, IGT shipped 30,000 gaming machines for product sales of $192.4
million during the current quarter versus 19,500 machines and $109.8 million in
the same quarter last year. Domestic shipments increased 79% to 15,000 units for
the current quarter from 8,400 units in the year earlier quarter. This increase
is due to strong growth in the replacement sales, which grew domestically to 62%
in the current period, up from 40% in the year earlier period, as well as the
continued expansion in the Native American markets, especially California.
Domestic product sales were driven mainly by the popularity of IGT's video reel
offerings including Little Green Men(TM), Texas Tea(TM), and Double Diamond
2000(TM) which debuted at the October 1999 World Gaming Congress and Expo(R).
Newer games, including Cleopatra(TM) and Neon Nights(TM) first introduced at the
October 2000 show, have yet to impact sales revenue, but are becoming important
contributors to our backlog.
International shipments, comprising half of total units sold during the current
quarter, increased 34% to 15,000 units compared to 11,200 units in the
comparable prior year quarter. Unit sales in Australia increased 83% over the
prior year quarter due to the successful introduction of new games pushing
earnings and units to record levels. Barcrest's unit sales improved by 30% to
8,800 units, marking the success of new AWP games, including Revolution(TM),
King Kebab(TM), and Big Brother(TM).
The gross profit margin on product sales improved to 40% in the current quarter
compared to 38% in the comparable prior year quarter attributable to a stronger
mix of new video products and a higher percentage of domestic sales to overall
product revenue.
Revenue from gaming operations for the current quarter improved to $78.1 million
compared to $75.9 million in the same quarter last year. Gross profit in gaming
operations improved to $44.0 million for the current quarter versus $42.6
million in the year earlier period. The gross margin percent remained constant
at 56% quarter-over-quarter.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Earnings of unconsolidated affiliates, reported net of expenses for accounting
purposes, grew by 50% to $31.3 million from $20.9 million in the comparable
prior year quarter, due to the continued popularity of the Wheel of Fortune(R)
games.
The continued growth in the proprietary gaming segment, which includes our
wholly-owned gaming operations and our unconsolidated joint venture activities
reported as earnings of unconsolidated affiliates, reflects a positive customer
response to IGT's newer game themes including The Addams Family (TM),
Jeopardy!(R) Video, and the joint venture games of Wheel of Fortune(R) and I
Dream of Jeannie(TM). The installed base of our proprietary gaming machines,
including placement under joint ventures, increased 29% to 20,900 units at
December 30, 2000 compared to 16,200 one year earlier. Of the current installed
base, approximately 18,300 units are new platform, higher performing games,
including 11,500 joint venture Wheel of Fortune(R) units. During the current
quarter, 847 legacy units were discontinued.
Operating Expenses
Current quarter operating expenses totaled $63.8 million or 24% of total
revenues compared to $55.4 million or 30% in the prior year quarter. The $6.6
million increase in selling, general and administrative expenses reflects
increased incentives related to higher sales volumes. Research and development
expenses increased to $14.1 million for the current quarter, primarily due to
new game development costs. Bad debt expense increased $3.9 million over the
prior year quarter primarily due to increased sales volumes.
Other Income and Expense
Other expense, net, for the current quarter, totaled $12.2 million compared to
other income, net, of $16.6 million in the prior year quarter. The prior year
period benefited from the $27.0 million legal settlement. Operation of our
MegaJackpots(TM) systems results in interest income from both the investment of
cash and from investments purchased to fund jackpot payments. Interest expense
on the jackpot liability is accrued at the rate earned on the investments
purchased to fund the liability. Therefore, interest income and expense relating
to funding jackpot winners are similar and increase at approximately the same
rate based on the growth in total jackpot winners.
Our consolidated tax rate increased to 37% from 36% in the year earlier quarter.
We expect this tax rate to be in effect for the full fiscal year 2001.
Business Segments Operating Profit (See Note 10 of Notes to Condensed
Consolidated Financial Statements)
IGT's operating profit by business segment reflects an appropriate allocation of
selling, general and administrative expenses, research and development expenses,
interest income, and interest expense. Gaming operations and earnings from our
joint venture activities are included in the proprietary gaming segment.
Product sales operating profit for the quarter just ended grew to $38.7 million
or 20% of related revenues compared to $15.9 million or 14% in the prior year
quarter. This positive movement resulted from an increase in unit sales and an
improved gross margin partially offset by higher incentive and bad dept
expenses, both due to increased sales volumes. Operating profit for the
proprietary gaming segment in the first quarter of fiscal 2001 totaled $55.3
million, an increase of $14.9 million or 37% over the same quarter last year.
This improvement resulted from the growth of the installed base of
MegaJackpots(TM) units, the improvement in joint
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
venture earnings, reported net of expenses for accounting purposes, and
favorable player acceptance of our new games.
Financial Condition, Liquidity and Capital Resources
Capital Resources
IGT's sources of capital include cash flows from operations, the issuance of
public or private placement debt, bank borrowings, and the issuance of equity
securities. We believe that our available short-term and long-term capital
resources are sufficient to fund our capital expenditure and operating capital
requirements, scheduled debt payments, interest and income tax obligations,
strategic investments, acquisitions, and share repurchases. Our sources of
capital afford us the financial flexibility to target acquisition of businesses
that offer opportunities to implement our operating strategies, increase our
rates of return, and improve shareholder value.
Credit Facilities
Our domestic and foreign borrowing facilities totaled $266.1 million at December
30, 2000. The reserve for letters of credit totaled $2.8 million and the
remaining $263.3 million was available for future borrowings. We are required to
comply with certain covenants contained in these agreements which, among other
things, limit financial commitments we may make without the written consent of
the lenders and require the maintenance of certain financial ratios. At December
30, 2000, we were in compliance with all applicable covenants.
Summary of Cash Activities
In the first quarter of 2001, IGT's cash decreased $25.6 million due to net cash
used in operating and investing activities partially offset by net cash provided
by financing activities.
Our proprietary MegaJackpots(TM) systems provide cash through collections from
systems to fund jackpot liabilities and from maturities of US government
securities purchased to fund jackpot liabilities. Cash is used to make payments
to jackpot winners or to purchase investments to fund liabilities to jackpot
winners. These activities provided cash of $5.6 million in the first three
months of fiscal 2001 and $9.1 million in comparable prior year period.
Fluctuations in net cash flows from systems represent differences between the
growth in liabilities for jackpots and the actual payments to the winners during
the period, based on the timing of the jackpot cycles and the volume of play
across all of our MegaJackpots(TM) systems.
Operating Activities: Cash used by operating activities in the first three
months of fiscal 2001 totaled $29.8 million compared to cash provided in the
prior year period of $33.8 million. The most significant fluctuations related to
sales volumes and timing in receivables, inventories, prepaid expenses and
accrued income taxes. The decrease in accrued liabilities is due to the timing
of the interest payments on the $1.0 billion dollar Senior Notes.
Investing Activities: Use of cash from investing activities included purchases
of property, plant, and equipment totaling $4.5 million in the current three
month period compared to $2.8 million in the prior year period. Cash provided by
investing activities in the prior period was primarily due to proceeds from the
sale of the Miss Marquette riverboat held for sale as part of the Sodak
acquisition.
Financing Activities: The primary sources of cash in financing activities in the
current period were collections from systems and proceeds from employee stock
plans. The primary use of cash in financing activities in the prior year period
related to treasury stock purchases.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Stock Repurchase Plan
IGT's stock repurchase plan was originally authorized by our Board of Directors
in October 1990. As of January 27, 2001, the remaining share repurchase
authorization, as amended, totaled 10.8 million additional shares. No additional
shares have been repurchased during the period October 1, 2000 to January 27,
2001.
Recently Issued Accounting Standards
On June 30, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments and hedging activities and is in
effect for the current quarter. The adoption of this statement during the
current quarter has not had a material impact on our financial condition or
results of operations. See Note 12 of Notes to Condensed Consolidated
Financial Statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 clarifies existing accounting principles related to revenue recognition in
financial statements and is effective for the fourth quarter of our fiscal year
2001. We believe that the adoption of this statement will not have a material
impact on our financial condition or results of operations.
Euro Currency Conversions
On January 1, 1999, 11 of 15 member countries of the European Union fixed
conversion rates between their existing currencies and one common currency, the
"euro". Conversion to the euro eliminated currency exchange rate risk between
the member countries. The euro trades on currency exchanges and may be used in
business transactions. Beginning in January 2002, new euro-denominated bills and
coins will be issued and the former currencies will be withdrawn from
circulation.
Our operating subsidiaries affected by the euro conversion have established
plans to address the issues raised by the euro currency conversion. These issues
include: the need to adapt financial systems and business processes; changes
required to equipment, such as coin validators and note acceptors, to
accommodate euro-denominated transactions in our current products; and the
impact of one common currency on pricing. We do not expect material system and
equipment conversion costs related exclusively to the euro. Due to numerous
uncertainties, we cannot reasonably estimate the long-term effects that one
common currency will have on pricing and the resulting impact, if any, on our
financial condition or results of operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information, which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate", "believe", "could", "estimate", "expect", "intend", "may",
"plan", "predict", "project", "will", "would" and similar terms and phrases,
including references to assumptions.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Such forward-looking statements and IGT's operations, financial condition and
results of operations involve known and unknown risks and uncertainties. Such
risks and factors include, but are not limited to, the following:
o a decline in demand for IGT's gaming products or reduction in the
growth rate of new and existing markets;
o delays of scheduled openings of newly constructed or planned casinos;
o the effect of changes in economic conditions;
o a decline in public acceptance of gaming;
o unfavorable public referendums or anti-gaming legislation;
o unfavorable legislation affecting or directed at manufacturers or
operators of gaming products and systems;
o delays in approvals from regulatory agencies;
o political and economic instability in developing markets for IGT's
products;
o a decline in the demand for replacement machines;
o a decrease in the desire of established casinos to upgrade machines in
response to added competition from newly constructed casinos;
o a decline in the appeal of IGT's gaming products or an increase in the
popularity of existing or new games of competitors;
o changes in interest rates causing a reduction of investment income or
in market interest rate sensitive investments;
o loss or retirement of our key executives or other key employees;
o approval of pending patent applications of parties unrelated to IGT
that restrict our ability to compete effectively with products that are
the subject of such pending patents or infringement upon existing
patents;
o the effect of regulatory and governmental actions, including regulatory
or governmental actions challenging our compliance with applicable
gaming regulations;
o unfavorable determinations or challenges of suitability by gaming
regulatory authorities with respect to our officers, directors or key
employees;
o the limitation, conditioning, suspension or revocation of any of our
gaming licenses;
o fluctuations in foreign exchange rates, tariffs and other barriers;
o adverse changes in the credit worthiness of parties with whom IGT has
forward currency exchange contracts;
o the loss of sublessors of leased properties no longer used by IGT;
o with respect to legal actions pending against IGT, the discovery of
facts not presently known to IGT or determinations by judges, juries or
other finders of fact which do not accord with IGT's evaluation of the
possible liability or outcome of existing litigation.
We do not undertake to update our forward-looking statements to reflect future
events or circumstances.
Item 3. Quantitative and Qualitative Factors about Market Risk
Market Risk
Under established procedures and controls, we enter into contractual
arrangements or derivatives, in the ordinary course of business, to hedge our
exposure to foreign exchange rate and interest rate risks. The counterparties to
these contractual arrangements are major financial institutions and we believe
that credit loss in the event of nonperformance is remote.
Foreign Currency Risk
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At December 30, 2000, we had net foreign currency exposure of $54.3
million hedged with $52.9 million in currency forward contracts. At September
30, 2000, we had net foreign currency exposure of $58.0 million, of which $63.5
million was hedged with currency forward contracts. In addition, from time to
time, we may enter into forward exchange contracts to establish with certainty
the US dollar amount of future firm commitments denominated in a foreign
currency.
Given our foreign exchange position, a ten percent adverse change in foreign
exchange rates upon which these foreign exchange contracts are based would
result in exchange gains and losses. In all material aspects, these exchange
gains and losses would be fully offset by exchange gains and losses on the
underlying net monetary exposures for which the contracts are designated as
hedges. We do not expect material exchange rate gains and losses from unhedged
foreign currency exposures.
As currency exchange rates change, translation of the income statements of our
international businesses into US dollars affects year-over-year comparability of
operating results. IGT does not generally hedge translation risks because cash
flows from international operations are generally reinvested locally.
Changes in the currency exchange rates that would have the largest impact on
translating our international operating results include the Australian dollar,
the British pound and the Japanese yen. We estimate that a ten percent change in
foreign exchange rates would impact reported operating results by less than $1.0
million in the current three month period and in the prior year comparable
period. This sensitivity analysis disregards the possibility that rates can move
in opposite directions and that gains from one area may or may not be offset by
losses from another area.
Interest Rate Risk IGT's results of operations are exposed to fluctuations in
bank lending rates and the cost of US government securities, both of which are
used to fund liabilities to jackpot winners. We record expense for future
jackpots based on these rates which are impacted by market interest rates and
other economic conditions. Therefore, the gross profit on our proprietary gaming
segment decreases when interest rates decline. We estimated that a 10% decline
in interest rates would have impacted gaming operations gross profit by $0.6
million and earnings from unconsolidated affiliates by $0.4 million in the
current period versus $0.5 million and $0.2 million in the prior year comparable
period. IGT currently does not manage this exposure with derivative financial
instruments.
Our outstanding Senior Notes carry interest at fixed rates. If interest rates
increased by ten percent, we estimated the fair market value of these notes
would have decreased approximately $38.0 million at December 30, 2000 and $40.1
million at September 30, 2000.
Part II - Other Information
Item 1. Legal Proceedings
(See Note 9 of Notes to Condensed Consolidated Financial Statements.)
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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: August 3, 2001
INTERNATIONAL GAME TECHNOLOGY
By: /s/ Maureen Mullarkey
------------------------------
Maureen Mullarkey
Senior Vice President and
Chief Financial Officer