<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000353944
<NAME> INTERNATIONAL GAME TECHNOLOGY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JAN-02-1999
<CASH> 182,363
<SECURITIES> 13,900
<RECEIVABLES> 178,701
<ALLOWANCES> 17,246
<INVENTORY> 139,478
<CURRENT-ASSETS> 672,621
<PP&E> 287,251
<DEPRECIATION> 114,400
<TOTAL-ASSETS> 1,564,059
<CURRENT-LIABILITIES> 224,518
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 547,161
<TOTAL-LIABILITY-AND-EQUITY> 1,564,059
<SALES> 136,604
<TOTAL-REVENUES> 221,706
<CGS> 86,786
<TOTAL-COSTS> 125,387
<OTHER-EXPENSES> 46,553
<LOSS-PROVISION> 1,372
<INTEREST-EXPENSE> 12,562
<INCOME-PRETAX> 51,795
<INCOME-TAX> 17,351
<INCOME-CONTINUING> 34,444
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,444
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</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: January 2, 1999
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 30, 1999
Common Stock 107,544,051
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 only 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. Operating results for the quarter are not necessarily
indicative of the results that may be expected for the fiscal year
ending October 2, 1999.
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, 1998. 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. The
Company maintains a presence in all regions where gaming is legal.
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 operators of proprietary gaming systems in the
world. The Company believes it manufactures the broadest range of
microprocessor-based gaming machines available. The gaming machine
product line includes both spinning reel slot machines and video
gaming machines. The Company has developed and operated electronically-
linked, inter-casino proprietary gaming machine systems for more than
ten years. These systems link gaming machines in various casinos to a
central computer which builds a "progressive" jackpot which increases
with every wager made throughout the system. The systems are designed
to increase gaming machine play for participating casinos by giving
players the opportunity to win jackpots substantially larger or more
frequent than those available from gaming machines which are not
linked to a progressive system. The progressive systems developed and
operated by the Company are collectively referred to as MegaJackpots.
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. In
addition, the Company has developed and sells computerized casino
management systems which provide casino operators with slot and table
game accounting, player tracking and specialized bonusing
capabilities.
<PAGE>
Item 1. Financial Statements, (continued)
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 (775) 448-7777.
The following trademarks are owned by IGT and are registered
with the U.S. Patent and Trademark Office: International Game
Technology; IGT; the IGT logo with spade design; Double Diamond;
Megabucks; Player's Edge-Plus; and Red, White & Blue. IGT also owns
the trademark rights to the following: Game King; iGame with Design
(interactive gaming); IGS; IGT Gaming systems; MegaJackpots; Nickels
Deluxe; Slot Line; S-Plus Limited Series; Super Megabucks; Totem
Pole; Vision Series; and Vision Slot. Elvis is a registered
trademark of Elvis Presley Enterprises. Wheel of Fortune is a
registered trademark of Califon Productions, Inc. Jeopardy! is a
registered trademark of Jeopardy Productions, Inc. Five-Deck Frenzy
is a trademark of Shufflemaster.
The consolidated financial statements include the accounts of the
Company and all of its majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
<PAGE>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 31,
1999 1997
(Amounts in thousands, except per
share amounts)
<S> <C> <C>
Revenues
Product sales $136,604 $ 95,357
Gaming operations 85,102 69,654
Total revenues 221,706 165,011
Costs and Expenses
Cost of product sales 86,786 54,716
Cost of gaming operations 38,601 34,495
Selling, general and administrative 29,742 20,986
Depreciation and amortization 6,107 3,366
Research and development 10,704 7,276
Provision for bad debts 1,372 1,386
Total costs and expenses 173,312 122,225
Income from Operations 48,394 42,786
Other Income (Expense)
Interest income 11,544 11,175
Interest expense (12,562) (8,789)
Gain on sale of assets 3,970 1,041
Other 449 (574)
Other income, net 3,401 2,853
Income Before Income Taxes 51,795 45,639
Provision For Income Taxes 17,351 15,974
Net Income $ 34,444 $ 29,665
Basic Earnings Per Share $ 0.32 $ 0.26
Diluted Earnings Per Share $ 0.32 $ 0.26
Weighted Average Common Shares Outstanding 108,017 113,771
Weighted Average Common and Common
Equivalent
Shares Outstanding 109,169 115,719
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 2, September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 182,363 $ 175,413
Investment securities, at market value 13,900 19,354
Accounts receivable, net of allowances
for doubtful accounts of $7,765
and $5,512 178,701 189,521
Current maturities of long-term notes
and contracts receivable, net of
allowances 63,310 63,022
Inventories, net of allowances for
obsolescence of $17,259 and $18,574:
Raw materials 68,360 73,749
Work-in-process 5,887 3,746
Finished goods 65,231 55,659
Total inventories 139,478 133,154
Investments to fund liabilities to
jackpot winners 41,644 41,216
Deferred income taxes 18,402 16,517
Prepaid expenses and other 34,823 32,346
Total Current Assets 672,621 670,543
Long-term notes and contracts receivable,
net of allowances and current
maturities 32,385 37,750
Property, plant and equipment, at cost
Land 19,412 19,406
Buildings 71,103 71,136
Gaming operations equipment 80,600 73,222
Manufacturing machinery and equipment 110,924 109,576
Leasehold improvements 5,212 4,955
Total 287,251 278,295
Less accumulated depreciation and
amortization (114,400) (109,542)
Property, plant and equipment, net 172,851 168,753
Investments to fund liabilities to jackpot
winners 371,505 369,427
Deferred income taxes 146,242 131,708
Intangible assets 133,158 131,552
Other assets 35,297 33,895
Total Assets $1,564,059 $1,543,628
</TABLE>
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 2, September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term
notes payable and capital lease
obligations $ 34,525 $ 30,311
Accounts payable 53,423 57,277
Jackpot liabilities 74,294 50,659
Accrued employee benefit plan liabilities 7,089 17,512
Accrued dividends payable 3,225 3,266
Other accrued liabilities 51,962 41,515
Total Current Liabilities 224,518 200,540
Long-term notes payable and capital lease
obligations, net of current maturities 316,467 322,510
Long-term jackpot liabilities 475,735 479,217
Other liabilities 83 85
Total Liabilities 1,016,803 1,002,352
Commitments and contingencies - -
Stockholders' equity
Common stock, $.000625 par value;
320,000,000 shares authorized;
152,631,957 and 152,586,560
shares issued 95 95
Additional paid-in capital 257,551 256,656
Retained earnings 858,814 827,542
Treasury stock; 45,116,200 and 43,721,200
shares at cost (561,963) (535,797)
Accumulated other comprehensive income (7,241) (7,220)
Total Stockholders' Equity 547,256 541,276
Total Liabilities and Stockholders'
Equity $1,564,059 $1,543,628
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 31,
1999 1997
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 34,444 $ 29,665
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,078 8,707
Provision for bad debts 1,372 1,386
Provision for inventory obsolescence 3,520 1,937
Gain on investment securities and fixed assets (3,970) (1,042)
Common stock awards 384 649
(Increase) decrease in assets:
Receivables 16,388 26,588
Inventories (19,882) (20,777)
Prepaid expenses and other (2,175) 1,304
Other assets (872) 746
Net accrued and deferred income taxes, net
of tax benefit of employee stock plans (3,333) 12,525
Increase in accounts payable and accrued
liabilities (16,490) (13,820)
Earnings of unconsolidated affiliates in excess
of distributions (1,401) (11,269)
Other 53 (55)
Total adjustments (14,328) 6,879
Net cash provided by operating activities 20,116 36,544
</TABLE>
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 31,
1999 1997
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and equipment (2,944) (3,777)
Proceeds from sale of property, plant and
equipment 311 170
Purchase of investment securities - (267)
Proceeds from sale of investment securities 7,670 1,910
Proceeds from investments to fund liabilities
to jackpot winners 10,121 9,994
Purchase of investments to fund liabilities to
jackpot winners (12,627) (28,797)
Investment in unconsolidated affiliates - (654)
Net cash provided by (used in) investing
activities 2,531 (21,421)
Cash Flows from Financing Activities
Proceeds from long-term debt 225,296 16,314
Principal payments on debt (229,755) (55,260)
Payments on jackpot liabilities (13,429) (9,994)
Collections from systems to fund jackpot
liabilities 33,582 32,509
Proceeds from employee stock plans 257 754
Purchases of treasury stock (26,165) -
Payments of cash dividends (3,266) (3,455)
Net cash used in financing activities (13,480) (19,132)
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (2,217) 589
Net Increase (Decrease) in Cash and Cash
Equivalents 6,950 (3,420)
Cash and Cash Equivalents at:
Beginning of Period 175,413 151,771
End of Period $ 182,363 $148,351
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Fiscal Year
The Company changed its fiscal year end to the Saturday closest
to September 30, beginning with the fiscal year ending October 2,
1999. Similarly, each quarter will end on the Saturday closest to the
last day of the quarter end month.
2. Subsequent Event
On January 27, 1999, the Company signed a Heads of Agreement with
Access Systems Pty., Ltd. ("Access") of Sydney, Australia to develop a
global Internet gaming software alliance. The Company will own a
minority interest in Access and will use the equity method of
accounting for this investment.
3. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were
netted against current and long-term maturities:
<TABLE>
<CAPTION>
January 2, September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Current $ 9,481 $10,602
Long-term 6,468 6,126
$15,949 $16,728
</TABLE>
4. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
January 2, September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Intellectual property $ 38,266 $ 37,129
Excess of cost over net
assets acquired 101,384 98,778
139,650 135,907
Less accumulated
amortization (6,492) (4,355)
$133,158 $131,552
</TABLE>
5. 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
portion of its products through third party distributors resulting in
significant distributor receivables.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
Accounts, contracts, and notes receivable by region as a
percentage of total receivables are as follows:
<TABLE>
<CAPTION>
January 2, 1999
<S> <C>
Region
Nevada 27%
Atlantic City (distributor and other) 13%
South America 10%
Australia 10%
Europe 9%
Riverboats (greater Mississippi River area) 9%
Native American casinos (distributor) 6%
Colorado 5%
Japan 5%
Other regions (individually less than 3%) 6%
Total 100%
</TABLE>
In September 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
January 2, 1999, had an aggregate outstanding principal balance of
$14.0 million. The guaranteed notes have scheduled payments of $8.4
million on December 1, 1998 and $5.6 million on January 1, 2000 and
are collateralized by the respective casino properties. To the
Company's knowledge, the principal payment due December 1, 1998 along
with accrued interest of $182,000 has not been paid. In the event the
notes are not repaid in accordance with the terms, the Company expects
to be required to make payment under the guarantee to the lender or
make other arrangements satisfactory to the lender. In such an event,
the Company would record a receivable from CMS and assess the
collectibility of the receivable.
6. Earnings Per Share
The following table shows the reconciliation of basic earnings
per share ("EPS") to diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 31,
1999 1997
(Dollars in thousands, except
per share amounts)
<S> <C> <C>
Net income $ 34,444 $ 29,665
Weighted average common shares
outstanding 108,017 113,771
Dilutive effect of stock options
outstanding 1,152 1,948
Weighted average common and common
equivalent shares outstanding 109,169 115,719
Basic earnings per share $ 0.32 $ 0.26
Diluted earnings per share $ 0.32 $ 0.26
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
Options to purchase 833,000 and 50,000 shares of common stock at
January 2, 1999 and December 31, 1997, respectively, 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. There were no transactions during the period
January 3, 1999 to February 5, 1999 which would have materially
changed the number of common shares or potential common shares
outstanding.
7. Income Taxes
The 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.
8. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," which was adopted by the Company
beginning October 1, 1998. SFAS No. 130 requires the reporting of
comprehensive income and its components in the financial statements.
This Statement also requires that an entity classify items of other
comprehensive income by their nature in an annual financial statement.
The Company intends to disclose this information in its Annual Report
on Form 10-K for the year ending October 2, 1999. Items of other
comprehensive income include cumulative foreign currency translation
adjustments and net unrealized gains on investment securities. The
Company's total comprehensive income is as follows:
<TABLE>
<CAPTION>
Three Months Ended
January 2, December 31,
1999 1997
(Dollars in thousand)
<S> <C> <C>
Net income $34,444 $29,665
Net change in other comprehensive
income (21) (4,433)
Comprehensive income $34,423 $25,232
</TABLE>
9. Supplemental 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 $11.1 million and
$2.2 million during the three months ended January 2, 1999 and
December 31, 1997, respectively, as the net result of transfers
between inventory and fixed assets.
On December 8, 1998, the Board of Directors declared a quarterly
cash dividend of $0.03 per share, payable on March 1, 1999 to
shareholders of record at the close of business on February 1, 1999.
At January 2, 1999, the Company had accrued $3.2 million for the
payment of this dividend.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
The tax benefit of employee stock plans totaled $253,000 and
$135,000 for the three month periods ended January 2, 1999 and
December 31, 1997, respectively.
Payments of interest for the three month periods ended January
2, 1999 and December 31, 1997 were $12.0 million and $9.1 million,
respectively. Payments for income taxes were $19.3 and $1.4 million
for the three month periods ended January 2, 1999 and December 31,
1997, respectively.
10. 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 September 30, 1997 Form
10-K that its 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. In September 1997,
the Company notified ACCS that it would not renew the agreement. ACCS
subsequently filed suit in the U.S. District Court for the District of
New Jersey 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 and ACCS have executed a settlement agreement that resolves
all outstanding claims. The agreement has been lodged with the court
and is pending court approval. The agreement provides that, among
other things, ACCS will remain the Company's distributor pursuant to
the 1993 agreement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended January 2, 1999 Compared to the Three Months Ended
December 31, 1997
Net income for the quarter totaled $34.4 million or $.32 per
diluted share compared to $29.7 million or $.26 per diluted share in
the prior year. Growth in international product sales and continued
gains in proprietary systems revenue contributed most significantly to
the 16% improvement in net income.
Revenues and Gross Profit Margins
Total revenues for the first quarter of fiscal 1999 grew 34% to
$221.7 million from $165.0 million in the first quarter of fiscal
1998. The Company shipped 32,200 gaming machines resulting in product
sales of $136.6 million for the current quarter compared to 14,600
units and $95.4 million in the comparable prior year quarter.
Internationally, machine sales totaled 25,000 units, or 78% of total
units, during the current quarter versus 6,000 units, or 41% of total
units, during the prior year quarter. The replacement markets in the
United Kingdom and Japan contributed the majority of these
international sales. Japanese sales totaled more than 14,000 units,
driven by the introduction of the Company's latest pachisuro game,
Popper King. Barcrest, the Company's UK subsidiary acquired in March
1998, sold 7,500 gaming machines in the current quarter. Australia
sales contributed 2,200 machines in the current quarter.
The Company shipped 7,200 gaming machines domestically during the
quarter compared to 8,600 in the year earlier period. Domestic
shipments for the current period included sales to the Ontario Lottery
Commission ("OLC"), the Isle of Capri resort in Blackhawk, Colorado
and a partial shipment to Mirage's Beau Rivage in Biloxi, Mississippi.
The OLC has ordered a total of 3,000 units from the Company
representing a 55% share of the first 5,500 machines ordered by the
OLC in this new market. 800 of these units were shipped during the
quarter. Certain domestic deliveries originally expected for the
first quarter of 1999 were rescheduled to the second fiscal quarter
including shipments to a major new casino in Las Vegas. The overall
decrease in sales domestically was most pronounced in the Native
American, Nevada and Riverboat jurisdictions due to fewer casino
openings and expansions compared to the prior period.
Revenues from gaming operations in the first quarter increased
22% to $85.1 million compared to $69.7 million for the same period
last year. This increase is primarily attributable to the continued
popularity of the Wheel of Fortune game and strong play on Nevada
Megabucks where the largest slot machine jackpot of more than $27
million was won in November 1998. In comparison to the prior year,
the introductions of new games including Jeopardy, Slotopoly and Elvis
in various jurisdictions and the addition of wide area progressive
gaming in Iowa also contributed positively to the overall increase in
gaming operations revenues. The installed base of machines operating
on MegaJackpot systems grew to 14,300 units at the end of the current
quarter compared to 12,300 machines one year earlier.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
The gross profit on total revenues for the first quarter of
fiscal 1999 increased 27% to $96.3 million compared to $75.8 million
for the first quarter of fiscal 1998. This resulted from an
improvement of $9.2 million in product sales gross profit and $11.3
million increase in gaming operations gross profit. The gross profit
on product sales grew to $49.8 million from $40.6 million reported for
the corresponding quarter of fiscal 1998. The gross margin percentage
on product sales was 36% for the current quarter versus 43% in the
year earlier period. This fluctuation was due to the larger mix of
international sales, which grew to 58% of total revenue from 36% in
the first quarter of fiscal 1998. The gross margin percentage
domestically was influenced by lower volumes and a higher mix of new
product lines, which carry higher margin dollars but lower margin
percentages. The gross margin on gaming operations grew to $46.5
million or 55% in the current quarter versus $35.2 million or 51% for
the first quarter of fiscal 1998. The improvement in gross profit
margin is primarily due to joint venture activities totaling $19.5
million, which, for accounting purposes, are reported net of expenses
in gaming operations revenue, partially offset by declining interest
rates which increased the costs of interest sensitive assets the
Company purchases to fund jackpot payments.
Expenses
Selling, general and administrative expenses increased $8.8
million to $29.7 million in the first quarter of fiscal 1999 in
comparison to the same prior year period. This fluctuation is
primarily due to the inclusion of operating expenses attributable to
the businesses acquired in the UK and Australia in March 1998, along
with increased domestic advertising, marketing, and compliance
expenses related to new product offerings. Depreciation and
amortization expense totaled $6.1 million and $3.4 million for the
quarters ended January 2, 1999 and December 31, 1997, respectively.
This increase is primarily due to goodwill amortization and additional
depreciation expense arising from the acquired assets.
Research and development expenses increased to $10.7 million for
the current quarter compared to $7.3 million for the first quarter of
fiscal 1998. The additional research and development centers in the UK
and Australia and the Company's commitment to new product development
domestically resulted in the increase. The provision for bad debts
totaled $1.4 million in both the first quarter of fiscal 1999 and
1998. An increase in provisions for international receivables was
offset by a decline in domestic bad debt expense reflecting the
current quarter product sales mix.
Operating expenses as a percent of total revenues were 22% for
the current quarter versus 20% in the first quarter of fiscal 1998.
This fluctuation is primarily attributable to lower sales volume of
IGT-Australia units in addition to the inclusion of operating expenses
from the Olympic acquisition.
Other Income and Expense
Other income for the quarter increased $548,000 over the first
quarter of fiscal 1998. Operation of the Company's MegaJackpotTM
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 $583,000 over the comparable prior year period as a result
of growth in proprietary systems.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
An increase in gains on the sale of investment securities was offset
by increased interest expense. Interest expense on the corporate and
Australian lines of credit increased $3.0 million over the December
31, 1997 quarter due to borrowings related to recent acquisitions and
treasury stock purchases.
The Company's worldwide tax rate declined to 33.5% during the
first quarter and the Company expects that rate to be in effect for
the full year. The change reflects the expiration of tax
contingencies, implementation of beneficial tax strategies related to
the IGT Foreign Sales Corporation, research and development credits
and structuring of foreign acquisitions, as well as an increase in
foreign operations in jurisdictions which have lower statutory tax
rates.
Liquidity and Capital Resources
Working Capital
Working capital declined $21.9 million to $448.1 million during
the three months ended January 2, 1999. Changes in current assets
which contributed to the overall fluctuation in working capital
included a decrease in accounts receivable resulting from improvement
in the average collection period. An increase in inventories as a
result of inventories acquired and timing of deliveries of inventory
committed for sale also contributed to the fluctuation. Accrued
income taxes increased due to the timing of estimated tax payments
along with a $10.4 million decrease in accrued employee benefit plan
liabilities, resulting from payments during the current period.
Current jackpot liabilities increased in response to the overall
growth in progressive systems.
Cash Flows
The Company's cash and cash equivalents totaled $182.4 million at
January 2, 1999, a $7.0 million increase from the prior fiscal year
end. Cash provided by operating activities for the quarters ended
January 2, 1999 and December 31, 1997 totaled $20.1 million and $35.9
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 flows 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 $17.6 million and $3.7 million
for the periods ended January 2, 1999 and December 31, 1997,
respectively.
Purchases of treasury stock of $26.2 million was the primary use
of financing cash in the current period. Principal payments in excess
of borrowings was the primary use of financing cash in the prior
period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
Federal legislation was passed October 21, 1998 which permits
jackpot winners to elect to receive the discounted value of
progressive jackpots won in lieu of annual installments. For
jackpots won after this date, the Company has made this offer to
winners in jurisdictions which have also permitted such payments.
For jackpots won prior to the effective date of the legislation, the
winner may make this election after July 1, 1999. As a result,
fiscal 1999 cash flows from operating activities may increase due to
the realization of deferred tax assets related to the timing of the
tax deductibility of jackpot payments. The realization of the
deferred tax asset is dependent upon the number of winners who make
this election and enabling gaming regulatory rule changes in
jurisdictions operating progressive systems. The Company cannot
predict the cash flow impact at this time.
Lines of Credit
As of January 2, 1999, 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 amounts reserved as
security for letters of credit. At January 2, 1999, $64.5 million
was available under this line of credit and $3.5 million was reserved
as security for letters of credit.
IGT-Australia entered into a facility agreement in March 1998
which included an $18.4 million line of credit. The line bears
interest at various rates and is supported by a guarantee from the
Company. At January 2, 1999, $8.6 million was available under this
line.
IGT-Japan had a $6.2 million line of credit available as of
January 2, 1999. The line is supported by a guarantee from the
Company and bears interest at various rates. At January 2, 1999,
approximately $6.2 million was available under this line.
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 February 5, 1999, the Company was
authorized to purchase a remaining 21.9 million shares under the
Board authorization. During the period October 1, 1998 to February
5, 1999, the Company reacquired 1.4 million shares for an aggregate
purchase price of $26.9 million.
Recently Issued Accounting Standards
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
October 2, 1999. Management intends to comply with the disclosure
requirements of this statement in its fiscal 1999 Annual Report on
Form 10-K and does not anticipate a material impact on the results of
operations for each segment.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
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.
Year 2000
The Year 2000 readiness issue, which is common to most
businesses, arises from the inability of computer information systems
with date-sensitive processes to properly recognize and accurately
process date-sensitive information on and beyond January 1, 2000. If
the Company or its customers, suppliers, or other third parties fail
to make corrections for programs that have defined dates using a two-
digit year, this could result in system failure or malfunction of
certain computer equipment, software, and other devices dependent upon
computerized mechanisms that are date sensitive. This problem may
cause disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Assessments of the potential
cost and effects of Year 2000 issues vary significantly among
businesses, and it is difficult to predict the actual impact.
Recognizing this uncertainty, management has and is continuing to
actively analyze, assess, and plan for various Year 2000 contingencies
across the Company.
The Company has undertaken various initiatives intended to ensure
that its computer equipment and software will function properly with
respect to dates in and beyond the Year 2000. Information technology
("IT") systems impacted by the Year 2000 issue include systems
commonly thought of as IT systems, such as accounting, data processing
and telephone/PBX systems, as well as systems that are not commonly
thought of as IT systems, such as alarm systems, security systems, fax
machines, mail machines, automated assembly lines, and other
miscellaneous systems. Both IT and non-IT systems may contain
imbedded technology which compounds the identification, assessment,
remediation, and testing efforts.
All subsidiaries of the Company will perform the identification,
assessment, remediation and testing phases. However, the Company has
identified its largest manufacturing locations, IGT (North America),
IGT-UK, IGT-Japan and IGT-Australia as critical operating locations as
most other subsidiaries are dependent upon these locations. IGT and
IGT-UK have substantially completed the identification and assessment
phases. IGT-Australia has completed the identification process and is
progressing through the assessment phase, which is scheduled for
completion by March 31, 1999. IGT-Japan utilizes a third party to
manufacture its products and has received assurance that this
manufacturer is Year 2000 ready. At this stage, the Company believes
that its Year 2000 deficiencies will be remedied through computer
equipment and software replacement or modification in a timely
fashion.
The Company is utilizing both internal and external resources to
accomplish its Year 2000 plan, which began in December 1997 and is
expected to be substantially completed by June 1999. The Company
estimates that as of January 31, 1999, it had completed approximately
40% of the initiatives necessary to fully address potential Year 2000
issues. The remaining project efforts are underway and are anticipated
to be completed prior to any currently anticipated impact on its
computer equipment and
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
software. The Company engaged third parties to review the IGT and IGT-
UK information systems plans and has incorporated the recommendations
of such parties into the plan.
The Company has also initiated efforts to ensure the readiness of
its products and services. As part of its assessment of current
products and services, IGT is currently upgrading all wide-area
progressive jackpot system software. The Company has installed the
software upgrade in Nevada and received approval for the software
update from regulators in most other jurisdictions. The Company is in
the process of notifying all of its customers who may have products
with Year 2000 readiness issues and expects this notification to be
completed by March 1999.
IGT uses an AS400 for the majority of its North American software
applications, including the manufacturing process, and has identified
this as a critical system. The assessment and remediation efforts on
the system have been substantially completed. The testing phase is
expected to be completed by June 1999. IGT-UK is in the process of
implementing Oracle as an enterprise wide improvement to its
information systems and a resolution to Year 2000 readiness issues.
Implementation of this system is expected to be complete by March
1999.
The Company has also surveyed its key vendors and service
providers to determine the extent to which interfaces with such
entities are vulnerable to Year 2000 issues. As of January 31, 1999,
the Company had received responses from approximately 50% of such
third parties, a majority of which have provided assurances that they
are either Year 2000 ready or expect to address all their significant
Year 2000 issues on a timely basis. A follow-up mailing to
significant vendors and service providers that did not initially
respond, or whose responses were deemed unsatisfactory by the Company,
is in process, to be completed by March 1999. Although the Company
has developed a system of communicating with vendors to understand
their ability to continue providing services and products through the
Year 2000 without interruption, 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.
The Company believes that the cost of its Year 2000 efforts are
not expected to exceed $3 million, which will be funded from operating
cash flows. Approximately $2.1 million of this total is for the
replacement of non-compliant equipment and software which is expected
to be capitalized as fixed assets in fiscal 1999. As of January 31,
1999, the Company had incurred costs of approximately $1.1 million,
including the cost of third party reviews. Two of the Company's
subsidiaries are implementing enterprise wide information system
improvements which also resolve Year 2000 issues. The cost of
implementing these systems has not been included in this cost because
the implementations were not initiated specifically to resolve the
Year 2000 issue. A significant portion of the software remediation
costs are not likely to be incremental to the Company's results of
operations, but rather will represent the redeployment of existing
information technology and other resources. As a result of the
redeployment of internal resources for the Year 2000 remediation
efforts, certain enhancements of the Company's current systems may be
postponed. The Company does not expect the postponement of these
enhancements to have a significant impact on the Company's financial
condition or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
The Year 2000 issue presents a number of other risks and
uncertainties that could impact the Company, including, but not
limited to, third parties whose services the Company relies on to
produce and sell our products, such as key suppliers and customers,
public utilities, telecommunication providers, financial institutions,
or certain regulators of the various jurisdictions where the Company
does business, which could result in lost production, sales, or
administrative difficulties on the part of the Company. The Company
believes that the implementation of new business systems and
completion of the Year 2000 project as scheduled will significantly
reduce the risk of operational difficulties within our operating
systems, facilities and products. The Company's Year 2000 project
requires the majority of its application systems to be remedied and
tested by June 30, 1999. In those instances where completion by the
end of 1999 is not assured, appropriate contingency plans are in
development or to be determined by March 1999. While the Company
continues to believe the Year 2000 issues will not materially affect
its consolidated financial position or results of operations, it
remains uncertain as to what extent, if any, the Company may be
impacted.
Item 2a. Quantitative and Qualitative Factors about Market Risk
Market Risk
Under established procedures and controls, the Company enters
into contractual arrangements, or derivatives, in the ordinary course
of business to hedge its exposure to foreign exchange rate and
interest rate risk. The counterparties to these contractual
arrangements are major financial institutions. Although the Company
is exposed to credit loss in the event of nonperformance by these
counterparties, management believes that losses related to
counterparty credit risk is not likely.
Foreign Currency Risk
The Company routinely uses forward exchange contracts to hedge
its net exposures, by currency, related to the foreign currency
denominated monetary assets and liabilities of its operations. The
primary business objective of this hedging program is to maintain an
approximately balanced position in foreign currencies so that gains
and losses resulting from exchange rate changes are minimized. At
January 2, 1999, the Company had net foreign currency transaction
exposure of $53.8 million of which $49.0 million was hedged with
currency forward contracts. In addition, from time to time, the
Company may enter into forward exchange contracts to establish with
certainty the U.S. dollar amount of future firm commitments
denominated in a foreign currency.
Given the Company's balanced foreign exchange position, a ten
percent adverse change in foreign exchange rates upon which these
contracts are based would result in exchange gains and losses from
these contracts that would, in all material aspects, be fully offset
by exchange gains and losses on the underlying net monetary exposures
for which the contracts are designated as hedges.
As currency exchange rates change, translation of the income
statements of the Company's international businesses into U.S.
dollars affects year-over-year comparability of operating results.
The Company does not generally hedge translation risks because cash
flows from international operations are generally reinvested locally.
IGT does not enter into hedges to minimize volatility of reported
earnings.
<PAGE>
Item 2a. Quantitative and Qualitative Factors about Market Risk,
(continued)
Changes in the currency exchange rates that would have the
largest impact on translating the Company's international operating
profit include the Australian dollar, British pound and the Japanese
yen. Management estimates that a 10% change in foreign exchange
rates would impact reported quarterly operating profit by less than
$1.0 million. 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
The Company's results of operations are exposed to fluctuations
in the costs of U.S. Government securities used to fund liabilities
to jackpot winners. The Company records gaming operations expense
for future jackpots based on current rates for these U.S. Government
securities which are impacted by market interest rates and other
economic conditions. Therefore, the gross profit on gaming
operations decreases when interest rates decline. Management
estimates that a 10% decline in interest rates would impact gaming
operations gross profit by $1.0 million. The Company currently does
not manage this exposure with derivative financial instruments.
The Company uses an interest rate swap to effectively convert
floating rate debt in Australia to fixed rate debt. A one percentage
point adverse change in the interest rates upon which this contract
is based would, in all material respects, be offset by interest
expense on the underlying debt.
<PAGE>
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 outcome of pending legal actions are not expected
to have a material adverse effect on the Company's financial position
or results of operations; and statements regarding estimated
completion dates and costs for the Year 2000 project. 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 such statements included in this
report and in previously filed periodic reports including reports
filed on Forms 10-K and 10-Q and the Company's operations, financial
condition and results of operations are subject to risks and other
important factors, including, without limitation, the following: a
decline in demand for the Company's gaming products or reduction in
the growth rate of new and existing markets; delays of scheduled
openings of newly constructed or planned casinos; the effect of
changes in economic conditions; a decline in the market acceptability
of gaming; unfavorable public referendums or legislation, including
anti-gaming legislation; delays or lack of funding from regulatory
agencies; 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 constructed
casinos; a decline in player appeal for the Company's gaming products
or an increase in the popularity of existing or new games of
competitors; 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 Company
executives; approval of pending patent applications of parties
unrelated to the Company that restrict the ability of the Company to
compete effectively with products that are the subject of such
pending patents or infringement upon existing patents; the effect of
regulatory and governmental actions; unfavorable determination of
suitability by gaming regulatory authorities with respect to Company
officers, directors or key employees; the limitation, conditioning or
suspension of any Company gaming license; fluctuations in foreign
exchange rates, tariffs and other barriers; adverse changes in the
credit worthiness of parties with whom the Company has forward
currency exchange contracts; the loss of sublessors of the leased
properties abandoned by the Company; with respect to legal actions to
which the Company is a party, 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; and with
respect to the Year 2000, discovery of deficiencies not currently
identified by the Company in its assessments.
<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
The Company filed an 8-K dated December 23, 1998.
<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: February 16, 1999
INTERNATIONAL GAME TECHNOLOGY
By:/s/Maureen Imus
Maureen Imus
Chief Financial Officer and
Vice President, Finance
