<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 183,567
<SECURITIES> 19,731
<RECEIVABLES> 145,625
<ALLOWANCES> 16,641
<INVENTORY> 156,861
<CURRENT-ASSETS> 636,208
<PP&E> 278,353
<DEPRECIATION> 106,719
<TOTAL-ASSETS> 1,476,194
<CURRENT-LIABILITIES> 170,989
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 599,482
<TOTAL-LIABILITY-AND-EQUITY> 1,476,194
<SALES> 317,859
<TOTAL-REVENUES> 570,084
<CGS> 183,351
<TOTAL-COSTS> 297,929
<OTHER-EXPENSES> 112,270
<LOSS-PROVISION> 3,660
<INTEREST-EXPENSE> 29,187
<INCOME-PRETAX> 170,397
<INCOME-TAX> 59,639
<INCOME-CONTINUING> 110,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,758
<EPS-PRIMARY> .97
<EPS-DILUTED> .96
</TABLE>
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 June 30, 1998
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)
(702) 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 July 31, 1998
Common Stock 112,225,207
par value $.000625 per share
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The accompanying condensed consolidated financial statements have
been prepared by the Company, without audit, and reflect all
adjustments, consisting only of normal recurring 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, 1997. 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 to 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. - Argentina S.A. ("IGT-Argentina"); I.G.T.
(Australia) Pty. Limited ("IGT-Australia"); IGT do Brasil Ltda. ("IGT-
Brazil"); IGT-Europe B.V. ("IGT-Europe"); IGT-Iceland Ltd. ("IGT-
Iceland"); IGT Japan K.K. ("IGT-Japan"); IGT-UK Limited ("IGT-UK");
International Game Technology - Africa (Proprietary) Limited ("IGT-
Africa"); and International Game Technology S.R. Ltda. ("IGT-Peru").
IGT is one of the largest manufacturers 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 wide area progressive systems and computer systems which
monitor slot machine play and track player activity. 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-Argentina was established in December 1993 and has an office
in Buenos Aires, Argentina to distribute and market gaming products
in Argentina.
IGT-Australia was established in March 1985 and is located in
Sydney, Australia. IGT-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. In March 1998, IGT-Australia
purchased certain of the assets from Olympic Amusement Pty. Limited
which was also a manufacturer and supplier of electronic gaming
machines and gaming systems to the Australian gaming market.
<PAGE>
IGT-Brazil opened an office in October 1994 in Sao Paulo, Brazil
and subsequently was incorporated in March 1995 to distribute and
market gaming products in Brazil.
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.
IGT-Japan was established in July 1990, and in November 1992,
opened an office in Tokyo, Japan. In April 1993, IGT-Japan was
approved to supply pachisuro gaming machines to the Japanese market.
IGT-UK was incorporated in January 1998 to acquire Barcrest
Limited. The acquisition was completed in March 1998. IGT-UK
designs and manufactures gaming machines, including amusement with
prize ("AWP") machines, and markets its products in the United
Kingdom, Europe and other markets.
IGT-Africa opened an office in September 1994 and subsequently
was incorporated in October 1995 to distribute and market gaming
products in Southern Africa. The office is located in Midrand, South
Africa.
IGT-Peru was established in July 1996 and opened an office in
Lima, Peru to support proprietary systems and to distribute and
market gaming products in Peru.
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 9295 Prototype Drive, Reno, Nevada 89511; its telephone
number is (702) 448-7777.
The condensed 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>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
(Amounts in thousands, except,
per share amounts)
<S> <C> <C> <C> <C>
Revenues
Product sales $130,843 $ 87,294 $317,859 $314,850
Gaming operations 92,139 76,555 252,225 202,753
Total revenues 222,982 163,849 570,084 517,603
Costs and Expenses
Cost of product sales 75,586 49,241 183,351 171,367
Cost of gaming operations 40,442 38,690 114,578 105,338
Selling, general and
administrative 29,021 21,619 72,755 71,510
Depreciation and amortization 5,861 3,091 12,667 8,599
Research and development 11,366 8,139 26,848 22,822
Provision for bad debts 496 1,170 3,660 6,269
Total costs and expenses 162,772 121,950 413,859 385,905
Income from Operations 60,210 41,899 156,225 131,698
Other Income (Expense)
Interest income 11,181 9,905 33,517 30,277
Interest expense (11,195) (8,132) (29,187) (21,900)
Gain on the sale of assets 10,332 10,414 11,414 11,366
Other (381) (1,050) (1,572) (2,495)
Other income, net 9,937 11,137 14,172 17,248
Income Before Income Taxes 70,147 53,036 170,397 148,946
Provision for Income Taxes 24,552 18,564 59,639 53,090
Net Income $ 45,595 $ 34,472 $110,758 $ 95,856
Basic Earnings Per Share $ 0.40 $ 0.29 $ 0.97 $ 0.78
Diluted Earnings Per Share $ 0.40 $ 0.29 $ 0.96 $ 0.77
Weighted Average Common Shares
Outstanding 113,385 119,242 113,675 122,543
Weighted Average Common and
Common Equivalent Shares
Outstanding 115,154 120,190 115,457 123,728
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 183,567 $ 151,771
Investment securities at market value 19,731 14,944
Accounts receivable, net of allowance
for doubtful accounts of $6,029
and $5,899 145,625 173,783
Current maturities of long-term notes
and contracts receivable, net of
allowances 62,464 74,686
Inventories, net of allowances for
obsolescence of $14,751 and $14,881:
Raw materials 90,648 50,484
Work-in-process 8,230 3,606
Finished goods 57,983 38,354
Total inventories 156,861 92,444
Investments to fund liabilities to
jackpot winners 39,600 35,088
Deferred income taxes 15,171 18,229
Prepaid expenses and other 13,189 10,601
Total current assets 636,208 571,546
Long-term notes and contracts receivable,
net of allowances and current maturities 35,066 32,524
Property, plant and equipment, at cost
Land 19,373 25,391
Buildings 71,835 74,366
Gaming operations equipment 74,842 66,240
Manufacturing machinery and equipment 107,779 97,564
Leasehold improvements 4,524 5,306
Construction in progress - 1,451
Total 278,353 270,318
Less accumulated depreciation and
amortization (106,719) (91,842)
Property, plant and equipment, net 171,634 178,476
Investments to fund liabilities to
jackpot winners 353,906 313,719
Deferred income taxes 112,774 98,072
Intangible assets 125,683 1,273
Other assets 40,923 19,442
Total Assets $1,476,194 $1,215,052
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Balance Sheets (continued from previous page)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes
payable and capital lease obligations $ 19,341 $ 25,414
Accounts payable 51,517 46,238
Jackpot liabilities 49,003 42,485
Accrued employee benefit plan liabilities 13,907 17,147
Accrued dividends payable 3,403 3,411
Other accrued liabilities 33,818 29,893
Total current liabilities 170,989 164,588
Long-term notes payable and capital lease
obligations, net of current maturities 244,442 140,713
Long-term jackpot liabilities 460,972 389,235
Other liabilities 214 669
Total Liabilities 876,617 695,205
Commitments and contingencies
Stockholders' equity
Common stock, $.000625 par value;
320,000,000 shares authorized;
152,503,837 and 151,882,710 shares
issued 95 95
Additional paid-in capital 254,939 243,950
Retained earnings 779,919 688,597
Treasury stock; 39,078,000 and 38,174,676
shares at cost (435,496) (413,617)
Net unrealized gain on investment
securities 120 822
Total Stockholders' Equity 599,577 519,847
Total Liabilities and Stockholders'
Equity $1,476,194 $1,215,052
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $110,758 $ 95,856
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 29,270 26,175
Provision for bad debts 3,660 6,269
Provision for inventory obsolescence 8,039 5,925
Gain on sale of investment securities and
fixed assets (11,413) (11,373)
Common stock awards 1,574 1,988
(Increase) decrease in assets, net of
effects from acquisitions of businesses:
Receivables 59,356 28,984
Inventories (59,362) (30,448)
Prepaid expenses and other (2,500) 5,578
Other assets 10,959 (157)
Net deferred income tax asset, net of
tax benefit of employee stock plans (5,940) (28,108)
Decrease in accounts payable and accrued
liabilities, net of effects from
acquisitions of businesses (16,743) (10,477)
Earnings of unconsolidated affiliates in
excess of distributions (19,928) (4,075)
Other (175) (1,051)
Total adjustments (3,203) (10,770)
Net cash provided by operating activitie 107,555 85,086
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued from
previous page)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and
equipment $ (16,818) $ (27,257)
Proceeds from sale of property, plant
and equipment 24,212 7,691
Purchase of investment securities (9,398) (27,677)
Proceeds from sale of investment securities 4,587 71,091
Proceeds from investments to fund
liabilities to jackpot winners 28,369 24,817
Purchase of investments to fund liabilities
to jackpot winners (73,068) (79,018)
Investment in unconsolidated affiliates (1,422) (3,342)
Acquisition of businesses (180,790) -
Net cash used in investing activities (224,328) (33,695)
Cash Flows from Financing Activities
Proceeds from long-term debt 363,448 5,133
Principal payments on debt (256,229) (1,592)
Payments on jackpot liabilities (28,369) (24,817)
Collections from systems to fund jackpot
liabilities 106,624 96,886
Proceeds from employee stock plans 6,515 2,740
Payments of cash dividends (10,228) (11,054)
Payments to purchase treasury stock (21,879) (134,834)
Net cash provided by (used in) financing
activities 159,882 (67,538)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (11,313) 228
Net Increase (Decrease) in Cash and Cash
Equivalents 31,796 (15,919)
Cash and Cash Equivalents at:
Beginning of Period 151,771 169,900
End of Period $ 183,567 $ 153,981
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Acquisitions
In late March 1998, the Company completed the purchase of
Barcrest Limited ("Barcrest"), a Manchester, England-based
manufacturer and supplier of electronic gaming devices and the
purchase of certain of the assets of Olympic Amusements Pty. Limited
("Olympic"), a leading manufacturer and supplier of electronic gaming
machines, gaming systems and other gaming equipment and services to
the Australian gaming market. The purchase method of accounting for
business combinations was applied to the Barcrest and Olympic
acquisitions. Accordingly, the aggregate purchase price of $180.8
million was allocated to the net assets of $84.2 million based on
estimated fair values of the tangible assets, intangible assets and
liabilities at the dates of acquisition. The excess of the purchase
price over the net assets acquired, totaling $96.6 million, was based
on preliminary estimates and may be revised at a later date. These
acquisitions were funded primarily with additional borrowings on the
Company's line of credit, as well as long-term borrowing by the
Company's Australian subsidiary. Results of Barcrest and Olympic
since acquisition are included in the current quarter results of
operations.
2. Construction of New Cabinet Manufacturing Facility
The Company completed the construction of an 85,000 square foot
cabinet manufacturing facility adjacent to the corporate headquarters,
manufacturing and warehousing facility in Reno, Nevada in April 1998.
The total cost was approximately $4.4 million.
3. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were
netted against current and long-term maturities:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Current $10,612 $ 8,605
Long-term 6,442 9,624
$17,054 $18,229
</TABLE>
4. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Intellectual property $ 37,679 $ 1,550
Excess of cost over net
assets acquired 90,610 -
128,289 1,550
Less accumulated
amortization (2,606) (277)
$125,683 $ 1,273
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
5. 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.
6. 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.
Product sales and the resulting receivables are concentrated in
specific legalized gaming regions. The Company also distributes a
significant portion of its products through third party distributors
resulting in significant distributor receivables.
Accounts, contracts, and notes receivable by region as a
percentage of total receivables are as follows:
<TABLE>
<CAPTION>
June 30, 1998
<S> <C>
Nevada 28 %
Atlantic City (distributor and other) 12 %
Riverboats (greater Mississippi River area) 11 %
South America 10 %
Native American casinos (distributor) 6 %
Australia 5 %
Colorado 5 %
Canada 3 %
Europe 3 %
Other regions (individually less than 3%) 17 %
Total 100 %
</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, at June 30, 1998, had an aggregate balance of $14.3 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 it is unlikely that the Company will
incur losses relating to these guarantees.
7. Earnings Per Share
Effective October 1, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
Weighted average shares for the three and nine month periods ended
June 30, 1997 have been restated in accordance with SFAS No. 128. The
following tables show the reconciliation of basic earnings per share
("EPS") to diluted EPS available to common stockholders:
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
(Amounts in thousands,
except per share amounts)
Weighted Weighted
Net Average Net Average
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $45,595 113,385 $.40 $34,472 119,242 $.29
Effect of Dilutive
Securities
Stock options
outstanding - 1,769 - - 948 -
Diluted EPS $45,595 115,154 $.40 $34,472 120,190 $.29
</TABLE>
Options to purchase 52,000 shares of common stock at June 30, 1998
and 979,000 shares of common stock at June 30, 1997 were not included
in the computation of diluted EPS for the respective quarter because
the options' exercise price was greater than the average market price
of the common shares.
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1998 1997
(Amounts in thousands,
except per share amounts)
Weighted Weighted
Net Average Net Average
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $110,758 113,675 $ .97 $95,856 122,543 $ .78
Effect of Dilutive
Securities
Stock options
outstanding - 1,782 (.01) - 1,185 (.01)
Diluted EPS $110,758 115,457 $ .96 $95,856 123,728 $ .77
</TABLE>
Options to purchase 55,000 shares of common stock at June 30, 1998
and 128,000 shares of common stock at June 30, 1997 were not included
in the computation of year-to-date diluted EPS because the options'
exercise price was greater than the average market price of the common
shares. The Company has purchased a total of 2.7 million shares, or
approximately 2%, of its outstanding common stock during the period
July 1, 1998 to August 13, 1998. There were no other transactions in
the same period which would have materially changed the number of
common shares or potential common shares outstanding.
8. Supplemental Statement of Cash Flows Information
Certain noncash investing and financing activities are not
reflected in the condensed consolidated statements of cash flows.
The Company manufactures gaming machines which are used on its
proprietary systems and are leased to customers under operating
leases. Property, plant and equipment increased $8.2 million and
<PAGE>
Notes to Condensed Consolidated Financial Statements, continued
$12.4 million in the nine month periods ended June 30, 1998 and 1997,
respectively, as the net result of transfers between inventory and
fixed assets.
The tax benefit of employee stock plans totaled $2.9 million and
$247,000 for the nine month periods ended June 30, 1998 and 1997,
respectively.
Payments of interest for the nine month periods ended June 30,
1998 and 1997 were $29.3 million and $22.4 million, respectively.
Payments for income taxes were $61.4 million and $75.0 million for
the nine month periods ended June 30, 1998 and 1997, respectively.
The fair value of assets acquired and liabilities assumed in
conjunction with acquisitions of business during the quarter (see
Note 1) totaled $103.6 million and $19.4 million, respectively.
9. 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 previously disclosed in its Form 10-K that the
exclusive distributorship agreement between the Company and Atlantic
City Coin and Slot Service Company ("ACCS") whereby ACCS agreed to
sell certain products on behalf of the Company, principally into the
Atlantic City, New Jersey market, was expected to end in June 1998
upon expiration of the term of the agreement. ACCS subsequently filed
suit against the Company seeking, among other things, injunctive
relief under the New Jersey Franchise Practices Act. On July 13, 1998,
the Court granted ACCS' motion for injunctive relief, preliminarily
enjoining the Company's termination of the 1993 agreement. The
Company has appealed the Court's decision. ACCS also seeks damages,
alleging breach of contract and other common law claims. A trial date
has not been set regarding these claims.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended June 30, 1998 Compared to the Three Months Ended
June 30, 1997
Net income for the three months ended June 30, 1998 was $45.6
million or $.40 per diluted share versus $34.5 million or $.29 per
diluted share for the three months ended June 30, 1997. The 32%
growth in net income was the result of increases in revenues from both
the product sales and gaming operations segments.
Revenues and Gross Profit Margins
Total revenues for the third quarter of fiscal 1998 were $223.0
million, compared to $163.8 million reported for the prior year third
quarter. This improvement reflects a 50% increase in product sales
and 20% growth in gaming operations revenues. Gaming operations
revenues totaled $92.1 million for the current quarter compared to
$76.6 million for the quarter ended June 30, 1997. This growth was
due to continued strong performance of the Wheel of Fortuner games,
improved play on the Nevada Megabucks system where the jackpot was at
a record level at the end of the quarter and the addition of
Jeopardy!r in five jurisdictions and Super Megabucks in Nevada since
the prior year quarter. The installed base of machines operating on
the Company's MegaJackpotT systems grew to 13,900 machines in the
current quarter compared to 11,000 one year earlier.
Product sales totaled $130.8 million and $87.3 million for the
quarters ended June 30, 1998 and 1997, respectively. Machine
shipments of 22,100 for the current quarter increased 56% compared to
the prior year quarter. International product sales revenues
contributed to the overall improvement during the third quarter due to
the Company's recent acquisitions and the commencement of shipments to
new casinos in the Gauteng province of South Africa. International
units sales totaled 12,500 and 4,100 for the quarters ended June 30,
1998 and 1997, respectively. Barcrest, the Company's newly acquired
subsidiary in the UK, contributed 6,100 units along with approximately
1,000 Olympic units sold in Australia. Domestic shipments totaled
9,500 units compared to 10,100 units in the prior year period.
Although domestic shipments declined approximately 5%, domestic
product sales revenues increased $9.6 million as a result of the
growing mix of new products, including VisionT and Game KingT, which
have higher average sales prices.
Gross profit on total revenues for the third quarter of fiscal
1998 was $107.0 million compared to $75.9 million for the third
quarter of fiscal 1997. The gross profit margin on gaming operations
revenue grew to 56% in the current quarter from 49% in the third
quarter of fiscal 1997. This improvement was primarily due to profits
from joint venture activities of $18.6 million, which for accounting
purposes are reported net of expenses in gaming operations revenue,
partially offset by higher costs of interest sensitive assets which
the Company purchases to fund jackpot payments. The gross margin on
product sales was 42% during the third quarter versus 44% in the same
period last year. This decrease was primarily attributable to a
higher percentage of international sales in the quarter and an
increasing mix of new platform products. The new platform products,
such as VisionT and Game KingT, have lower gross margin percentages,
yet higher gross margin dollars.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Expenses
Third quarter results include the expenses of the newly acquired
Barcrest and Olympic businesses. Selling, general and administrative
expenses increased $7.4 million to $29.0 million for the quarter ended
June 30, 1998 due primarily to acquisitions along with increased
marketing expenses. Goodwill amortization from acquisitions
contributed approximately $2.2 million to the increase in depreciation
and amortization expense over the comparable prior year period.
Research and development expense increased to $11.4 million for
the quarter ended June 30, 1998 from $8.1 million in the prior year
quarter. The additional research and development centers in the UK
and Australia and the Company's commitment to new product development
domestically contributed to the increase. Bad debt expense declined
relative to the third quarter of fiscal 1997 as the Company aligned
the receivable reserve with favorable collection experience.
Other Income and Expense
Other income for the quarter decreased $1.2 million from the same
quarter of fiscal 1997. Operation of the Company's MegaJackpotT
systems results in interest income from both the investment of systems
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
equal and increase at the same rate based on the growth in total
jackpot winners. Interest income from investment of systems cash
increased $800,000 over the comparable prior year period as a result
of growth in proprietary systems. Interest expense on the corporate
and Australian lines of credit increased $2.0 million over the June
30, 1997 quarter due to borrowings related to the recent acquisitions.
The Company sold its Australian manufacturing and office facility
at a gain of approximately $10.4 million during the quarter. The
Company will lease back approximately one third of the facility for
its Australian operations. The gain on the sale of assets in the
prior period related to sales of investment securities.
Nine Months Ended June 30, 1998 Compared to the Nine Months Ended June
30, 1997
Net income for the nine months ended June 30, 1998 was $110.8
million or $.96 per diluted share compared to $95.9 million or $.77
per diluted share for the nine months ended June 30, 1997. Growth in
gaming operations revenues and profitable results from newly acquired
businesses contributed to the overall increase in net income.
Revenues and Gross Profit Margins
Revenues for the nine months ended June 30, 1998 totaled $570.1
million as compared to $517.6 million for the first nine months of
fiscal 1997. This increase resulted primarily from 24% growth in
gaming operations revenues. Revenues from gaming operations were
$252.2 million and $202.8 million for the nine months ended June 30,
1998 and 1997, respectively. Continued popularity of the Wheel of
FortuneR games and increased play on Nevada Megabucks due to a record
level jackpot, contributed to the increase in gaming operations
revenues. At June 30, 1998, the Company had approximately 13,900
MegaJackpotT machines online including 4,900 Wheel of FortuneR games,
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
compared to a total of 11,000 machines including 2,000 Wheel of
FortuneR games last year. Total joint venture games were
approximately 5,900 at the end of June. New system introductions
including Jeopardy!R in five jurisdictions and Super Megabucks in
Nevada also positively impacted gaming operations revenue relative to
the prior year. The current year-to-date period benefited from a full
nine months of play in the Missouri market where the Company
introduced MegaJackpotsT in the third quarter of fiscal 1997.
Product sales revenues were $317.9 million and $314.9 million for
the nine months ended June 30, 1998 and 1997, respectively.
Domestically, product sales for the first nine months of fiscal 1998
totaled $203.5 million on shipments of 27,300 units compared to
revenues of $233.3 million on sales of 39,900 units reflecting a
decline in unit volume offset by improvement in the average unit
price. Machine shipments to the Nevada market declined due to fewer
new casino openings in the current period compared to the prior year
period. The improvement in average price resulted from the increased
mix of new platform products, including VisionT and Game KingT, which
grew from 29% of the total units at the beginning of the year to over
40% at the end of the period.
The decline in domestic machine shipments was partially offset by
a 54% increase in sales to international markets due primarily to the
Company's recent international acquisitions. International machine
sales totaled 22,000 for the period ended June 30, 1998 versus 14,300
in the comparable prior year period. Since its acquisition in March
1998, Barcrest has sold 6,100 units. Approximately 1,000 Olympic
units were sold in Australia over the same period.
The gross profits on total revenues were $272.2 million and
$240.9 million for the nine months ended June 30, 1998 and 1997,
respectively. The gross margin on gaming operations revenue improved
to 55% from 48% in the year earlier period. This improvement resulted
from the Company's share of joint venture profits of $46.1 million
which, for accounting purposes, are recorded net of expenses in gaming
operations revenues, partially offset by higher costs of interest-
sensitive assets the Company purchases to fund jackpot payments. The
gross margin on product sales was 42% for the current period versus
46% for the prior year period. This decrease was primarily
attributable to a higher percentage of international sales which carry
lower gross margins and an increasing mix of new platform products.
Expenses
Selling, general and administrative expenses increased $1.2
million to $72.8 million due primarily to additional expenses from the
newly acquired businesses. Depreciation and amortization expense
increased $4.1 million over the prior year due to goodwill
amortization related to the Barcrest and Olympic acquisitions as well
as increased depreciation on the domestic administrative facility.
Research and development expenses for the nine months ended June
30, 1998 increased $4.0 million versus the comparable fiscal 1997
period as result of the product development domestically and the
additional engineering centers in the UK and Australia. Bad debt
expense for the year to date period declined $2.6 million due to
favorable experience with uncollectible accounts and notes receivable.
Other Income and Expense
Other income and expense for the nine month period ended June 30,
1998 declined $3.1 million due to a $3.2 million increase in interest
expense on the corporate line of credit partially offset by an
increase in interest income from investment of systems cash. The gain
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
on the sale of assets in the current period resulted from the sale of
the Australian manufacturing and office facility at a gain of
approximately $10.4 million. The gain on the sale of assets in the
prior period related to sales of investment securities.
Liquidity and Capital Resources
Working Capital
Working capital increased $58.3 million to $465.2 million during
the nine months ended June 30, 1998. Working capital increased $17.9
million as a result of the acquisitions of businesses (See Note 1 of
the Notes to Condensed Consolidated Financial Statements). Changes in
current assets contributing to the overall fluctuation in working
capital include decreases in accounts receivable and current
maturities of long-term notes and contracts receivable related to
lower sales volume and an increase in inventory domestically. Accrued
income taxes increased due to the timing of estimated tax payments,
partially offset by a $3.2 million decrease in accrued employee
benefit plan liabilities, resulting from payments during the current
period.
Cash Flow
The Company's cash and cash equivalents totaled $183.6 million at
June 30, 1998, a $31.8 million increase from the prior year end. Cash
provided by operating activities for the nine months ended June 30,
1998 and 1997 totaled $107.6 million and $85.1 million, respectively.
During these periods, fluctuations in receivables and inventories were
influenced by sales volumes and timing and resulted in the most
significant changes in cash flow from operating activities.
The Company's proprietary systems provide cash through
collections from systems to fund jackpot liabilities and use cash to
purchase investments to fund liabilities to jackpot winners. The net
cash provided by these activities was $33.6 million and $17.9 million
for the periods ended June 30, 1998 and 1997, respectively.
Proceeds from additional borrowings of $107.2 million, net of
principal repayments, were used to acquire businesses during the
period (See Note 1 of the Notes to Condensed Consolidated Financial
Statements). Purchases of treasury stock of $134.8 million were the
primary use of financing cash in the comparable prior year period.
Reclassifications
Certain amounts in the prior period financial statements have
been reclassified to be consistent with the presentation used in the
current period.
Lines of Credit
As of June 30, 1998, the Company had a $250.0 million unsecured
bank line of credit with various interest rate options available to
the Company. 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 June 30, 1998, $157.6 million was available
under this line of credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
In March 1998, IGT-Australia entered into a facility agreement
which includes a $72.4 million note requiring quarterly principal
payments commencing in March 1999 through December 2003. The
agreement also includes an $18.1 million line of credit which is
supported by a guarantee from the Company. Both the note and line of
credit bear interest at various rates. At June 30, 1998, $18.1
million was available under the line of credit.
IGT-Japan had a $4.9 million line of credit available as of June
30, 1998. The line is supported by a guarantee from the Company and
bears interest at 1.8%. At June 30, 1998, $3.5 million was available
under this line of credit.
The Company is required to comply, and is in compliance, with
certain covenants contained in these agreements which, among other
things, limit financial commitments the Company may make without the
written consent of the lenders and require the maintenance of certain
financial ratios, minimum working capital and net worth of the
Company.
Stock Repurchase Plan
A stock repurchase plan was originally authorized by the Board
of Directors in October 1990. As of July 31, 1998, the Company was
authorized to purchase a remaining 12.7 million shares under the
Board authorization. During the period October 1, 1997 to August 13,
1998, the Company reacquired 3.6 million shares for an aggregate
purchase price of $85.3 million, including a total of 2.7 million
shares purchased since June 30, 1998.
Recently Issued Accounting Standards
On June 30, 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This
statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position, and is effective for the
Company's fiscal year ending September 30, 1999. Management intends
to comply with the disclosure requirements of this statement.
On June 30, 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information." This statement
establishes additional standards for segment reporting in financial
statements and is effective for the Company's fiscal year ending
September 30, 1999. Management intends to comply with the disclosure
requirements of this statement and does not anticipate a material
impact on the results of operations for each segment.
On June 30, 1998, the FASB issued 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 effective for the Company's
fiscal year ending September 30, 2000. Management believes that
adoption of this statement will not have a material impact on its
financial condition or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
Year 2000 Compliance
At June 30, 1998, the Company had substantially completed its
assessment phase to identify and evaluate the changes to computer
systems necessary to achieve a year 2000 date conversion with no
affect on customers or disruption to business operations. A
significant portion of the software remediation costs are not likely
to be incremental to the Company, but rather will represent the
redeployment of existing information technology resources. As a
result of the redeployment of internal resources for the year 2000
project, certain enhancements of the Company's current systems will be
postponed. The Company does not expect that the cost of remediation
efforts, which are currently in progress, or the postponement of these
projects will have a significant impact on the Company's financial
condition or results of operations.
The Company is in the process of obtaining assurances from
software vendors that timely updates will be made available to ensure
that all purchased software will be year 2000 compliant. The Company
has communicated formally with all of its significant suppliers to
determine the extent to which the Company is vulnerable to year 2000
issues. However, there can be no assurance that the systems of other
companies on which the Company may rely will be timely converted or
that such failure to convert by another company would not have an
adverse effect on the Company's systems.
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 and other portions
of this report on Form 10-Q contain 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: the
statement that the Company believes it is unlikely that it will incur
any losses relating to its guarantee of
certain indebtedness of CMS; the statement that the outcome of
pending legal actions will not have a material adverse effect on the
Company's financial position or results of operations; the growing
mix of new platform products; the statement that software remediation
costs are not likely to be incremental; and the statement that the
cost of remediation efforts are not likely to have a significant
impact on the Company's financial position or results of operations.
In addition, statements containing expressions such as "believes,"
"anticipates," "plans" 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 and
existing markets; delays of scheduled openings of newly constructed
casinos; the effect of economic conditions; a decline in the market
acceptability of gaming; unfavorable public referendums or anti-
gaming legislation; delays or lack of funding from regulatory
agencies for racetrack operations; political and economic instability
in developing international markets; a decline in the demand for
replacement machines; a decrease in the desire of established casinos
to upgrade machines in response to added competition from newly
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, continued
constructed casinos; changes in player appeal for gaming products;
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; fluctuations in foreign exchange
rates, tariffs and other barriers and with respect to legal actions,
the discovery of facts not presently known to the Company or
determinations by judges, juries or other finders of fact which do
not accord with the Company's evaluation of the possible liability or
outcome of existing litigation.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The information set forth in Note 9 to the Condensed
Consolidated Financial Statements and Note 10 to the
Consolidated Financial Statements of the Company's Annual
Report on Form 10-K is incorporated herein by reference.
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
The Company hereby advises stockholders that a stockholder
proposal submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934 for inclusion in the Company's proxy
statement and form of proxy for the 1999 Annual Meeting of
Stockholders must be received by the Company by September 20,
1998. Such a proposal must also comply with the requirements
as to form and substance established by the Securities and
Exchange Commission for such proposals. A stockholder
otherwise desiring to bring discussion before an annual meeting
of stockholders (including any proposal relating to the
nomination of a director to be elected to the Board of
Directors) must submit a proposal that is received at the
principal executive offices of the Company on or before
December 1, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE>
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 14, 1998
INTERNATIONAL GAME TECHNOLOGY
By:/s/ Maureen Imus
Maureen Imus
Vice President, Finance and
Chief Financial Officer
