UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 ending MARCH 31, 1996
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.)
5270 Neil Road, Reno, Nevada 89502
(Address of principal executive offices)
(702) 686-1200
(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 May 10, 1996
Common Stock 125,356,786
par value $.000625 per share
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
FORM 10-Q
The accompanying consolidated financial statements have been prepared
by the Company, without audit, and reflect all adjustments which are, in
the opinion of management, necessary for a fair statement of the results
for the interim periods. The statements have been prepared in accordance
with the regulations of the Securities and Exchange Commission (the "SEC"),
but omit certain information and footnote disclosures necessary to present
the statements in accordance with generally accepted accounting principles.
These financial statements should be read in conjunction with the
financial statements, accounting policies and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1995. Management believes that the disclosures are adequate to make
the information presented herein not misleading.
Organization
International Game Technology (the "Company") was incorporated in
December 1980 to acquire the gaming licensee and operating entity, IGT, and
facilitate the Company's initial public offering. In addition to its 100%
ownership of IGT, each of the following corporations is a direct or
indirect wholly-owned subsidiary of the Company: I.G.T.-Australia, Pty.
Ltd. ("IGT-Australia"); IGT-Europe b.v. ("IGT-Europe"); IGT-Iceland Ltd.
("IGT-Iceland"); IGT-Japan k.k. ("IGT-Japan"); I.G.T.-Argentina S.A. ("IGT-
Argentina"); IGT-do Brazil Ltda. ("IGT-Brazil"); and International Game
Technology-Africa (Pty) Ltd. ("IGT-Africa").
IGT is a world leader in the design and manufacture of computerized
casino gaming products and proprietary gaming systems in the world. The
Company believes it manufactures the broadest range of microprocessor-based
gaming machines available. The Company also develops and manufactures
"SMART" systems which monitor slot machine play and track player activity,
as well as wide area progressive systems. In addition to gaming product
sales and leases, the Company has developed and sells computerized linked
proprietary systems to monitor video lottery terminals and has developed
specialized video lottery terminals for lotteries and other applications.
The Company derives revenues related to the operations of these systems as
well as collects license and franchise fees for the use of the systems.
IGT-Australia, located in Sydney, Australia, manufactures
microprocessor-based gaming products and proprietary systems, and performs
engineering, manufacturing, sales and marketing and distribution operations
for the Australian markets as well as other gaming jurisdictions in the
Southern Hemisphere and Pacific Rim.
IGT-Europe was established in The Netherlands in February 1992 to
distribute and market gaming products in Eastern and Western Europe and
Northern Africa. Prior to providing direct sales, the Company sold its
products in these markets through a distributor.
IGT-Iceland was established in September 1993 to provide system
software, machines, equipment and technical assistance to support Iceland's
video lottery operations.
<PAGE>
Item 1. Financial Statements, (continued)
IGT-Japan was established in July 1990, and in November 1992 opened an
office in Tokyo, Japan. On April 16, 1993, IGT-Japan was approved to
supply Pachisuro gaming machines to the Japanese market.
IGT-Argentina was established in December 1993 and opened an office in
Buenos Aires, Argentina to distribute and market gaming products in
Argentina and Peru.
IGT-Brazil opened an office in Sao Paulo, Brazil in October 1994 and
subsequently was incorporated in March 1995 to distribute and market gaming
products in Brazil.
IGT-Africa opened an office in September 1994 in Johannesburg South
Africa and subsequently was incorporated in October 1995 to distribute and
market gaming products in Southern Africa.
Unless the context indicates otherwise, references to "International
Game Technology," "IGT" or the "Company" include International Game
Technology and its wholly-owned subsidiaries and their subsidiaries. The
principal executive offices of the Company are located at 5270 Neil Road,
Reno, Nevada 89502; its telephone number is (702) 686-1200.
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
[CAPTION]
THREE MONTHS ENDED SIX MONTHS ENDED
(Amounts in thousands, except March 31, March 31,
per share amounts) 1996 1995 1996 1995
<TABLE>
<S> <C> <C> <C> <C>
REVENUES:
Product sales $100,124 $101,785 $199,204 $215,929
Gaming operations 60,423 48,240 117,564 93,275
Total revenues 160,547 150,025 316,768 309,204
COSTS AND EXPENSES:
Cost of product sales 54,481 57,105 109,411 123,358
Gaming operations 31,038 22,634 61,314 41,650
Selling, general and
administrative 28,623 21,852 54,135 44,204
Depreciation and amortization 6,519 6,862 13,384 13,121
Research and development 6,369 7,217 12,671 14,297
Provision for bad debts 4,469 2,127 6,134 3,612
Total costs and expenses 131,499 117,797 257,049 240,242
INCOME FROM OPERATIONS 29,048 32,228 59,719 68,962
OTHER INCOME (EXPENSE):
Interest income 9,341 9,557 19,073 18,548
Interest expense (5,125) (5,280) (10,345) (10,394)
Loss on the sale of assets (3,239) (487) (3,253) (1,182)
Other 248 17 8,289 139
Other income, net 1,225 3,807 13,764 7,111
INCOME BEFORE INCOME TAXES 30,273 36,035 73,483 76,073
PROVISION FOR INCOME TAXES 10,903 12,973 26,453 27,386
NET INCOME $19,370 $23,062 $47,030 $48,687
PRIMARY EARNINGS PER SHARE $ 0.15 $ 0.18 $ 0.37 $ 0.37
FULLY DILUTED EARNINGS PER SHARE $ 0.15 $ 0.18 $ 0.37 $ 0.37
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 126,090 131,504 127,492 132,592
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ASSUMING FULL
DILUTION 126,176 131,504 127,580 132,592
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
[CAPTION]
MARCH 31, SEPTEMBER 30,
(Dollars in thousands) 1996 1995
CURRENT ASSETS: (Unaudited)
<TABLE>
<S> <C> <C>
Cash and cash equivalents $153,500 $241,613
Investment securities, at market value 51,896 47,813
Accounts receivable, net of allowances
for doubtful accounts of $6,843
and $5,182 115,143 113,196
Current maturities of long-term notes
and contracts receivable, net of
allowances 65,633 80,271
Inventories, net of allowances for
obsolescence of $17,627 and $14,902:
Raw materials 57,646 39,526
Work-in-process 4,336 4,836
Finished goods 40,345 29,463
Total inventories 102,327 73,825
Deferred income taxes 35,277 25,336
Investments to fund liabilities to
jackpot winners 23,442 19,465
Prepaid expenses and other 9,426 5,117
Total current assets 556,644 606,636
LONG-TERM NOTES AND CONTRACTS
RECEIVABLE, net of allowances and
current maturities 51,895 43,511
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 19,941 13,910
Buildings 14,669 14,270
Gaming operations equipment 65,665 68,096
Manufacturing machinery and equipment 70,986 62,454
Leasehold improvements 12,505 12,362
Construction in Progress 47,121 23,999
Total 230,887 195,091
Less accumulated depreciation
and amortization (78,452) (75,793)
Property, plant and equipment, net 152,435 119,298
INVESTMENTS TO FUND LIABILITIES
TO JACKPOT WINNERS 209,509 167,398
DEFERRED INCOME TAXES 38,147 27,735
OTHER ASSETS 11,194 7,120
Total Assets $1,019,824 $971,698
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
[CAPTION]
MARCH 31, SEPTEMBER 30,
(Dollars in thousands) 1996 1995
CURRENT LIABILITIES: (Unaudited)
<TABLE>
<S> <C> <C>
Current maturities of long-term notes
payable and capital lease obligations $ 8,855 $ 7,385
Accounts payable 30,336 28,862
Jackpot liabilities 28,983 25,072
Accrued employee benefit plan
liabilities 7,662 11,302
Accrued dividends payable 3,760 3,866
Accrued vacation liability 5,939 5,664
Other accrued liabilities 15,754 15,568
Total current liabilities 101,289 97,719
LONG-TERM NOTES PAYABLE AND CAPITAL
LEASE OBLIGATIONS, net of current
maturities 107,147 107,543
LONG-TERM JACKPOT LIABILITIES 252,094 212,341
DEFERRED INCOME TAXES 1,156 -
OTHER LIABILITIES 2,509 5
Total liabilities 464,195 417,608
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.000625 par value;
320,000,000 shares authorized;
150,461,266 and 150,118,534
shares issued 94 94
Additional paid-in capital 234,129 231,338
Retained earnings 504,538 463,039
Treasury stock; 25,071,546 and
21,268,046 shares at cost (187,497) (143,281)
Net unrealized gain on investment
securities 4,365 2,900
Total stockholders' equity 555,629 554,090
Total liabilities and stockholders'
equity $1,019,824 $971,698
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
[CAPTION]
SIX MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<TABLE>
<S> <C> <C>
NET INCOME $47,030 $48,687
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 13,384 13,121
Provision for bad debts 6,134 3,612
Provision for inventory obsolescence 8,596 3,254
Loss on sale of assets 3,253 1,182
Common stock awards 176 -
(Increase) decrease in assets:
Receivables (480) 18,368
Inventories (40,393) 19,898
Prepaid expenses and other (2,078) 3,908
Other assets (5,370) (5,644)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 975 (2,714)
Accrued and deferred income taxes payable,
net of tax benefit of stock option and
purchase plans (26,591) (14,981)
Other 1,276 (175)
Total adjustments (41,118) 39,829
Net cash provided by operating activities 5,912 88,516
</TABLE>
(Continued)
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued from previous page)
(Unaudited)
[CAPTION]
SIX MONTHS ENDED
MARCH 31,
(Dollars in thousands) 1996 1995
<TABLE>
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment ($44,700) ($20,387)
Proceeds from sale of property,
plant and equipment 2,324 3,120
Purchase of investment securities (34,133) (6,902)
Proceeds from sale of investment securities 31,342 28,128
Proceeds from investments to fund
liabilities to jackpot winners 13,930 10,153
Purchase of investments to fund
liabilities to jackpot winners (60,018) (30,167)
Net cash used in investing activities (91,255) (16,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (3,329) (238)
Proceeds of long-term debt 3,912 825
Payments on liabilities to jackpot winners (13,930) (10,153)
Collections from systems to fund
liabilities to jackpot winners 57,594 39,476
Proceeds from stock options exercised 1,062 421
Payments of cash dividends (7,721) (7,881)
Payments to purchase treasury stock (44,215) (46,423)
Proceeds from employee stock purchase plan 1,047 958
Net cash used in financing activities (5,580) (23,015)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,810 (123)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (88,113) 49,323
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 241,613 142,730
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $153,500 $192,053
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted
against current and long-term maturities:
[CAPTION]
<TABLE>
March 31, September 30,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Current $ 3,227 $ 3,465
Long-term 12,490 10,149
$15,717 $13,614
</TABLE>
2. Construction of New Corporate Headquarters and Manufacturing Facility
In May 1994, the Company purchased a 78-acre site in Reno, Nevada for
approximately $6.0 million for the construction of an approximately 915,000
square foot office, manufacturing and warehousing facility. The
manufacturing and warehousing facility was completed in early calendar
1996. The Company anticipates that the office facility will be completed
in late calendar 1996, absent unexpected delays. The estimated total cost
of the facilities, including the site, is $82.4 million.
3. Income Taxes
The provision for income taxes is computed on pre-tax income reported
in the financial statements. 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.
4. Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts, contracts, and notes receivable. The Company
maintains cash and cash equivalents with various financial institutions in
amounts, which at times, may be in excess of the FDIC insurance limits.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a portion
of its products through third party distributors resulting in significant
distributor receivables. At March 31, 1996 accounts, contracts, and notes
receivable by region as a percentage of total receivables are as follows:
[CAPTION]
<TABLE>
<S> <C>
Nevada 33.4%
Riverboats (greater Mississippi River area) 14.7%
Colorado 7.1%
Native American Casinos (distributor) 6.3%
New Jersey (distributor) 4.1%
South America 3.6%
Asia 1.6%
Louisiana (distributor) 1.4%
Other Regions (individually less than 2%) 27.8%
Total 100.0%
</TABLE>
Effective September 30, 1993, the Company sold its equity ownership
interest in CMS International ("CMS") to Summit Casinos-Nevada, Inc.
("Summit"), whose owners include senior management of CMS. The Company
remains as guarantor on certain indebtedness of CMS, which had at March 31,
1996 an aggregate balance of $15.9 million. The notes that have been
guaranteed are also collateralized by the respective casino properties.
Summit has agreed to indemnify and hold the Company harmless against any
liability arising under these guarantees. Management believes the
likelihood of losses relating to these guarantees is remote.
5. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not reflected
in the consolidated statements of cash flows.
The tax benefit of stock options exercised and awards granted totaled
$506,000 and $231,000 for the six months ended March 31, 1996 and 1995,
respectively.
Unrealized gains (losses) on investments, net of taxes totaling
$1,465,000 and ($2,157,000) were recorded as "Unrealized Gains (losses) on
Investments" in stockholder's equity for the six months ended March 31,
1996 and 1995, respectively.
On February 20, 1996, the Board of Directors declared a quarterly cash
dividend of $.03 per share, payable on June 3, 1996 to shareholders of
record at the close of business on May 1, 1996. At March 31, 1996, the
Company had accrued $3,760,000 for the payment of this dividend.
Payments of interest for the six months ended March 31, 1996 and 1995
were $11,912,000 and $9,943,000, respectively. Payments for income taxes
for the first six months of fiscal 1996 and 1995 were $46,500,000 and
$26,776,000, respectively.
<PAGE>
INTERNATIONAL GAME TECHNOLOGY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Contingencies
The Company has been named in and has brought lawsuits in the normal
course of business. Management does not expect the outcome of these suits,
including the lawsuit described below, to have a material adverse effect on
the Company's financial position or results of future operations.
The Company 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., ("Schreier") and two filed
in the United States District Court of Florida, Orlando Division, entitled
Poulos v. Caesar's World, Inc., et al. ("Poulos") and Ahern v. Caesar's
World, Inc., et al. ("Ahern"), which have been consolidated in a single
action. Also named as defendants in these actions were many, if not most,
of the largest gaming companies in the United States, and certain other
gaming equipment manufacturers. Each complaint is identical in its
material allegations. 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 actually an
opportunity to win on a given play. The complaints allege that the
defendants' acts constitute violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO"), and also give rise to claims for common
law fraud and unjust enrichment, and it seeks compensatory, special
consequential, incidental and punitive damages of several billion dollars.
The appropriate Courts granted defendants' motion to transfer venue of all
three matters to the U.S. District Court in Las Vegas, Nevada. On April
17, 1996, the U.S. District Court Judge hearing the matter in Nevada issued
an order based on several motions to dismiss filed by the various
defendants in the Poulos and Ahern matters. The order granted the
defendants' motions to dismiss, allowing the plaintiffs until May 31, 1996
to amend the complaints. Motions to dismiss are similarly pending before
the Court in the Schrier matter, awaiting a decision.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1995
Revenues for the second quarter of fiscal 1996 totaled $160.5 million
compared to $150.0 million in the second quarter of fiscal 1995. Net
income for the quarter was $19.4 million or $.15 per share for the current
quarter compared to $23.1 million or $.18 for the comparable prior year
period.
Revenues and Gross Profit Margins
Total revenues increased $10.5 million or 7% due primarily to growth
in the gaming operations segment.
Product sales revenue decreased slightly from $101.8 million in the
second quarter of fiscal 1995 to $100.1 million in the second quarter of
fiscal 1996 due to a decrease in unit volume, primarily in domestic
markets. Domestic machine sales totaled 13,063 and 14,844 in the second
quarter of fiscal 1996 and 1995, respectively. This 12% decrease in units
sold in domestic markets resulted from decreases in the riverboat,
racetrack and Louisiana markets due to fewer new casino openings in these
markets, partially offset by increases in units sold in Nevada.
International sales grew by 1,078 units or 38.7% compared to the prior
quarter, led primarily by sales in South America and Europe.
The Company anticipates that the slower growth of the U.S. market
experienced in fiscal 1995 and the first six months of fiscal 1996 will
continue in the near future. This decreased rate of growth may be offset,
in part, by future growth in international markets. The Company is
pursuing international opportunities in a variety of jurisdiction including
opportunities in South Africa, Asia and South America. The pace of growth
within domestic and international markets is, however, outside the control
of the Company and has been and continues to be influenced by public
opinion and the legal and electoral processes. As a result, the Company
cannot predict the rate at which domestic and international markets will
develop and any slowdown or delay in the growth of new markets will
adversely affect the Company's futute results.
Revenues from gaming operations in the second quarter grew to $60.4
million, 25% over the second quarter of fiscal 1995. The increase is due
to the installation of seven new progressive systems since the prior year
second quarter, as well as increased machine installations in virtually all
existing jurisdictions, with the largest increases in the Louisiana and
Native American markets. Additionally, second quarter gaming operations
revenues benefited from the introduction of gaming at two racetracks in
Delaware during the current fiscal year where the Company leases machines.
As of March 31, 1996, there were approximately 8,900 linked progressive
gaming machines operating on 41 16T systems in nine jurisdictions compared
to approximately 8,000 such machines operating at March 31, 1995.
The gross margin on product sales improved from 44% in the second
quarter of fiscal 1995 to 46% in the current quarter. This increase is due
primarily to improved margins on international sales over the prior year.
International sales comprised 20% of total product sales revenues compared
to 15% in the prior year. The gross margin on gaming operations was 49% in
the current quarter, decreasing from 53% in the comparable prior year
period. The decrease in gaming operations gross profit is due to an
increase in the cost of interest-sensitive annuities the Company purchases
to fund the jackpot payments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations, continued
Expenses
Selling, general and administrative expenses increased $6.8 million
due to costs associated with recent management changes as well as increased
advertising in Nevada. Research and development expenses totaled $6.4
million and $7.2 million in the second quarters of fiscal 1996 and 1995,
respectively, due primarily to an increase in customer-requested product
engineering. This custom engineering is charged to customers and,
therefore, included in cost of sales.
Depreciation and amortization expenses were $6.5 million and $6.9
million, for the quarters ended March 31, 1996 and 1995, respectively. The
decrease in depreciation expense is due to the acceleration of depreciation
in early 1996 for leasehold improvements from certain of the Company's
facilities in Reno, Nevada that were recently vacated. This decrease was
partially offset by an increase in depreciation related to a larger number
of units installed on the Company's linked progressive systems. The
provision for bad debts increased from $2.1 for the second quarter of
fiscal 1995 to $4.5 million in the current quarter. This increase is due
to reserves related to certain international developing markets.
Other Income and Expense
Interest income decreased $.2 million from the second quarter of
fiscal 1995. The decrease is the result of decreased interest income on
notes and contracts receivable related to lower receivable balances between
the periods and lower interest rates charged, offset by an increase in
interest income related to income-producing investments to fund future
jackpot payments. Additionally, cash has been invested in lower yielding,
tax preferred securities. Interest expense totaled $5.1 million and $5.3
million for the quarters ended March 31, 1996 and 1995, respectively. This
decrease was primarily the result of capitalization of $1.6 million of
interest associated with construction of the Company's manufacturing
facility (see Notes 2 and 5). Partially offsetting this decrease, system
interest expense resulting from a greater number of jackpot winners from
the Company's progressive systems increased $.9 million.
Loss on the sale of assets during the second quarter of fiscal 1996
increased $2.8 million over the comparable prior year quarter. This
increase is primarily the result of reserves established for the Company's
investment in China and other developing international markets as well as a
charge to write-off the Company's remaining investment in Radica Games,
Limited, which was sold during the second quarter of fiscal 1996.
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO
SIX MONTHS ENDED MARCH 31, 1995
Net income for the six months ended March 31, 1996 was $47.0 million
compared to $48.7. Earnings per share was unchanged between the two
periods at $.37 per share.
Revenues and Gross Profit Margins
Total revenues were $316.8 million and $309.2 million for the first
six months of fiscal 1996 and 1995, respectively. This fluctuation is the
net result of a 26% increase in gaming operations revenues and an 8%
decline in products sales.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations, continued
Product sales revenues totaled $199.2 million and $215.9 million for
the first half of fiscal 1996 and 1995, respectively. The decline in
revenues attributable to a decrease in unit volume was partially offset by
a 7% increase in average sales price per unit. Domestically, unit sales
decreased from 32,400 in the prior year period to 24,200 in the current
period. The decline is primarily due to declines in demand in the
riverboat market associated with fewer new casino openings in this market.
However, international unit sales increased 2,900 units, or 52%, for the
six-month period relative to the comparable prior year period. The largest
increases in international markets came from Europe and South America.
Gaming operations revenue increased to $117.6 million in the current
period from $93.3 million from the first half of fiscal 1995. This 26%
increase is attributable to several factors. The Company has introduced
seven new progressive systems since the prior year period, primarily in
Native American, Louisiana and Nevada markets. Additionally, play has
increased in virtually all jurisdictions including Nevada and Native
American Megabucks systems.
Gross profits on total revenues were $146.0 million and $144.2 million
for the six months ended March 31, 1996 and 1995, respectively. The gross
margin on product sales increased from 43% to 45% due to a 5% reduction in
production employees in the current period relative to the prior year
period. Improved gross margins on international sales also contributed to
this improvement.
Expenses
Selling, general and administrative expenses increased from $44.2
million for the first half of fiscal 1995 to $54.1 million in the current
period. This increase is due to costs associated with relocation to the
Company's new manufacturing facility of $3.2 million and costs relating to
recent management changes of $2.7 million. Research and development
expenses totaled $12.7 million and $14.3 million for the first half of
fiscal 1996 and 1995, respectively. This decline is due to an increase
in the amount of custom research and development on customer orders which
results in a charge to cost of sales and reduced research and development.
Depreciation and amortization increased by $263,000 from the prior
year period. This increase is the net result of $1.2 million greater
depreciation related to progressive systems due to the increased number of
installed machines, offset by a decrease in depreciation for the recently
vacated leased facilities in Reno, Nevada. Depreciation was accelerated in
the prior year to recognize the expense while such facilities were in use.
The provision for bad debts increased $2.5 million from the prior year
period due to reserves established for sales to certain developing
international markets.
Other Income and Expense
Interest income increased to $19.1 million from $18.5 million in the
six-month period ended March 31, 1996 compared to March 31, 1995. Interest
income from notes and contracts receivable was down $2.3 million due to
lower average balances and a decrease in the interest rates charged.
Systems related interest income grew $1.6 million compared to the first
half of 1995 due to increased play, resulting in increased income-producing
investments to fund future jackpot payments. Interest expense was
unchanged between the two periods.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations, continued
However, interest expense related to jackpot liabilities increased $1.6
million over the first half of fiscal 1995 in response to increased play on
the Company's progressive systems. This increase is offset by a decrease
in interest expense related to capitalization of interest costs associated
with construction of the Company's new facility (see Note 2).
The loss on sale of assets increased $2.1 million between the six
months ended March 31, 1996 and 1995. This increase is primarily due to
reserves established related to the Company's investment in China and other
developing international markets together with a charge of $1.5 million to
write-off the Company's remaining investment in Radica Games, Limited,
which was sold during the second quarter of fiscal 1996.
Other income increased $8.2 million due primarily to a $7.6 million
settlement of a lawsuit which was received by IGT-Australia from the State
of Victoria, Australia in the first quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital decreased $53.6 million to $455.4 million during the
six months ended March 31, 1996. The primary factor for this decrease was a
decrease in cash and cash equivalents of $88.1 million caused by cash used
in investing activities of $91.3 million relating primarily to the
construction of the Company's new manufacturing facility (see Note 2).
Offsetting this decrease in working capital was an increase in inventory of
$28.5 million. Inventories have been increased to insulate the Company's
customers from the impact of the relocation and the resulting production
down time (see Note 2). Additionally, the Company anticipates that there
may be a seasonal increase in demand for it's products in the upcoming
quarter.
Cash Flow
During the six months ended March 31, 1996, the Company generated cash
from operating activities of $5.9 million. Collections on receivables
approximately equal to sales provided operating cash while increases in
inventories and decreases in accrued and deferred income taxes payable used
operating cash.
This increase in operating cash was offset by cash used in investing
activities of $91.3 million as discussed above and cash used in financing
activities of $5.6 million which was the net effect of activity related to
operation of the Company's progressive systems and the purchase of treasury
stock.
Lines Of Credit
As of March 31, 1996, the Company had a $50.0 million unsecured bank
line of credit with various interest rate options available to the Company.
The line of credit is available for funding operations and to facilitate
standby letters of credit. The Company is charged a nominal fee on amounts
used against the line as security for letters of credit. Funds available
under this line are reduced by any amounts used as security for letters of
credit. At March 31, 1996, $48.0 million was available under this line of
credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
IGT-Australia had a $5,500,000 (Australian) bank line of credit
available as of March 31, 1996. Interest is paid at the lenders reference
rate plus 1 %. This line is secured by equitable mortgages, and has a
provision for review and renewal annually in May. At March 31, 1996, no
funds were drawn under this line.
The Company is required to comply, and is in compliance, with certain
covenants contained in these line of credit agreements which, among other
things, limit financial commitments the Company may make without written
consent of the lender and require the maintenance of certain financial
ratios, minimum working capital and net worth of the Company.
Stock Repurchase
A stock repurchase program was originally authorized by the Board of
Directors in October 1990. This repurchase program currently allows for
the purchase of up to 50.0 million shares. During the second quarter of
fiscal 1996, the Company purchased 1,459,000 shares of its own outstanding
stock for a total of $16.9 million in cash. As of March 31, 1996, the
Company has purchased a total of 25.1 million shares (adjusted for stock
splits) under this repurchase program.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" in March 1995. This statement, effective for the Company's fiscal year
ended September 30, 1997, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management believes
that if SFAS No. 121 had been adopted at March 31, 1996, it would not have
had a significant effect on the financial position or results of operations
of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which will be effective for the Company's fiscal year
ended September 30, 1997. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on the fair value
of the equity instrument awarded. Companies are permitted, however, to
continue to apply APB Opinion No. 25, which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company
has not determined which method under SFAS No. 123 it will implement.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Sections 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events, including the following:
statements regarding the rate of future growth of domestic and
international gaming markets; statements regarding new markets for linked
progressive systems and the statement regarding seasonal increased demand
for the Company's products. In addition, statements containing
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, (the "Act"), (continued)
expressions such as "believes," "anticipates" or "expects" used in the
Company's periodic reports on Forms 10-K and 10-Q filed with the SEC are
intended to identify forward-looking statements. The Company cautions that
these and similar statements included in this report and in previously
filed periodic reports including reports filed on Forms 10-K and 10-Q are
further qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statement, including,
without limitation, the following: decline in demand for gaming products or
reduction in the growth rate of new markets; the effect of economic
conditions; a decline in the market acceptability of gaming; political and
economic instability in developing international markets; a decline in the
demand for replacement machines with imbedded bill acceptors; a decrease in
the desire of established casinos to upgrade machines in response to added
competition from newly constructed casinos; the loss of a distributor;
changes in interest rates causing a reduction of investment income or in
the market interest rate sensitive investments loss or retirement of key
executives; approval of pending patent applications or infringement upon
existing patents; the effect of regulatory and governmental actions;
unfavorable determination of suitability by regulatory authorities with
respect to officers, directors or key employees; the limitation,
conditioning or suspension of any gaming license; adverse results of
significant litigation matters; fluctuations in exchange rates, tariffs and
other barriers. Many of the foregoing factors have been discussed in the
Company's prior SEC filings and, had the amendments to the Securities Act
of 1933 and Securities Exchange Act of 1934 become effective at a different
time, would have been discussed in an earlier filing.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
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: May 15, 1996
INTERNATIONAL GAME TECHNOLOGY
By:/s/ Scott Shackelton
Scott Shackelton
Vice President
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> MAR-31-1996
<CASH> 153,500
<SECURITIES> 51,896
<RECEIVABLES> 184,003
<ALLOWANCES> 3,227
<INVENTORY> 102,327
<CURRENT-ASSETS> 556,644
<PP&E> 230,887
<DEPRECIATION> 78,452
<TOTAL-ASSETS> 1,019,824
<CURRENT-LIABILITIES> 101,289
<BONDS> 0
<COMMON> 94
0
0
<OTHER-SE> 555,629
<TOTAL-LIABILITY-AND-EQUITY> 1,019,824
<SALES> 199,204
<TOTAL-REVENUES> 316,768
<CGS> 109,411
<TOTAL-COSTS> 170,725
<OTHER-EXPENSES> 70,190
<LOSS-PROVISION> 6,134
<INTEREST-EXPENSE> 10,345
<INCOME-PRETAX> 73,483
<INCOME-TAX> 26,453
<INCOME-CONTINUING> 47,030
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,030
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
