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 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 001-10684
INTERNATIONAL GAME TECHNOLOGY
(Exact name of registrant as specified in charter)
Nevada 88-017304
(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 29, 2000
----- -------------------------------
Common Stock 75,028,106
par value $.000625 per share
<PAGE>
International Game Technology
Table of Contents
Part I - Financial Information
Page
Item 1.Financial Statements:
Condensed Consolidated Statements of Income -
Three Months Ended January 1, 2000 and January 2, 1999.........4
Condensed Consolidated Balance Sheets -
January 1, 2000 and October 2, 1999............................5
Condensed Consolidated Statements of Cash Flows -
Three months ended January 1, 2000 and January 2, 1999.........7
Notes to Condensed Consolidated Financial Statements.............9
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15
Item 3.Quantitative and Qualitative Disclosures About Market Risk......21
Part II - Other Information
Item 1.Legal Proceedings...............................................23
Item 2.Changes in Securities...........................................23
Item 3.Defaults Upon Senior Securities.................................23
Item 4.Submission of Matters to a Vote of Security Holders.............23
Item 5.Other Information...............................................23
Item 6.Exhibits and Reports on Form 8-K................................23
Signature..............................................................24
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The following condensed consolidated financial statements were prepared by
International Game Technology (referred throughout this document, together with
its consolidated subsidiaries where appropriate, as "IGT," "Company," "we,"
"our," and "us"), without audit, and include all normal adjustments considered
necessary to present fairly the financial position for the interim periods.
These adjustments are of a normal recurring nature. These financial statements
and notes are presented as permitted by the instructions to Form 10-Q and
therefore do not contain certain information included in IGT's audited
consolidated financial statements and notes for the year ended October 2, 1999.
Operating results for current periods do not indicate the results that may be
expected for the fiscal year ending September 30, 2000.
You should read these financial statements along with the financial
statements, accounting policies and notes included in our Annual Report on Form
10-K for the fiscal year ended October 2, 1999. We believe that the disclosures
in this document are adequate to make the information presented not misleading.
Certain amounts in the condensed consolidated financial statements presented for
the prior year comparable periods have been reclassified to be consistent with
the presentation used in the current fiscal periods, including the
reclassification of jackpot liabilities between current and long-term based on
recent experience with winners electing the option to take a single discounted
cash payment. This reclassification did not have a material impact on our
condensed consolidated financial statements.
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 and Wheel of Fortune are registered trademarks of
Califon Productions, Inc. Jeopardy! is a registered trademark of Jeopardy
Productions, Inc. Five-Deck Frenzy is a trademark of Shufflemaster.
<PAGE>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
January 1, January 2,
2000 1999
- --------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C>
Revenues
Product sales $ 109,760 $ 136,604
Gaming operations 96,757 85,102
--------- ---------
Total revenues 206,517 221,706
--------- ---------
Costs and Expenses
Cost of product sales 68,200 86,786
Cost of gaming operations 33,311 38,601
Selling, general and administrative 32,968 29,742
Depreciation and amortization 5,396 6,107
Research and development 13,388 10,704
Provision for bad debts 1,839 1,372
Impairment of assets and restructuring charges 1,779 --
--------- ---------
Total costs and expenses 156,881 173,312
--------- ---------
Income from Operations 49,636 48,394
--------- ---------
Other Income (Expense)
Interest income 14,104 11,544
Interest expense (25,293) (12,562)
Gain (loss) on sale of assets (10) 3,970
Other 27,819 449
--------- ---------
Other income, net 16,620 3,401
--------- ---------
Income Before Income Taxes 66,256 51,795
Provision for Income Taxes 23,852 17,351
--------- ---------
Net Income $ 42,404 $ 34,444
========= =========
Basic Earnings Per Share $ 0.49 $ 0.32
========= =========
Diluted Earnings Per Share $ 0.49 $ 0.32
========= =========
Weighted Average Common Shares Outstanding 86,401 108,017
Weighted Average Common and Potential Shares
Outstanding 87,180 109,169
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 1, October 2,
2000 1999
-----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 463,179 $ 426,343
Investment securities, at market value 18,415 18,546
Accounts receivable, net of allowances for doubtful
accounts of $11,470 and $8,904 204,041 193,479
Current maturities of long-term notes and contracts
receivable, net of allowances 54,999 74,987
Inventories, net of allowances for obsolescence of
$24,156 and $23,901:
Raw materials 62,560 60,616
Work-in-process 5,179 4,902
Finished goods 47,334 51,094
----------- -----------
Total inventories 115,073 116,612
----------- -----------
Investments to fund liabilities to jackpot winners 27,598 27,702
Deferred income taxes 24,119 23,977
Assets held for sale -- 42,292
Prepaid expenses and other 39,738 51,302
----------- -----------
Total Current Assets 947,162 975,240
----------- -----------
Long-term notes and contracts receivable, net of
allowances and current maturities 65,638 60,870
----------- -----------
Property, plant and equipment, at cost
Land 19,926 19,938
Buildings 75,997 76,050
Gaming operations equipment 86,916 87,499
Manufacturing machinery and equipment 114,636 114,912
Leasehold improvements 5,189 5,361
----------- -----------
Total 302,664 303,760
Less accumulated depreciation and amortization (125,556) (121,644)
----------- -----------
Property, plant and equipment, net 177,108 182,116
----------- -----------
Investments to fund liabilities to jackpot winners 234,584 235,230
Deferred income taxes 99,021 89,474
Intangible assets 158,038 152,036
Other assets 72,806 70,094
----------- -----------
Total Assets $ 1,754,357 $ 1,765,060
=========== ===========
</TABLE>
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 1, October 2,
2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term notes payable
and capital lease obligations $ 1,312 $ 3,278
Accounts payable 52,105 55,705
Jackpot liabilities 86,204 81,141
Accrued employee benefit plan liabilities 8,418 23,746
Accrued interest 11,099 30,684
Other accrued liabilities 68,236 58,013
----------- -----------
Total Current Liabilities 227,374 252,567
Long-term notes payable and capital lease
obligations, net of current maturities 990,696 990,436
Long-term jackpot liabilities 274,765 276,815
Other liabilities 3,697 3,024
----------- -----------
Total Liabilities 1,496,532 1,522,842
----------- -----------
Commitments and contingencies -- --
Stockholders' equity
Common stock, $.000625 par value; 320,000,000
shares authorized; 152,946,195 and 152,871,297
shares issued 96 96
Additional paid-in capital 263,354 261,941
Retained earnings 928,453 886,392
Treasury stock; 66,971,367 and 65,515,867 shares
at cost (923,919) (897,234)
Accumulated other comprehensive income (10,159) (8,977)
----------- -----------
Total Stockholders' Equity 257,825 242,218
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,754,357 $ 1,765,060
=========== ===========
</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 1, January 2,
2000 1999
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 42,404 $ 34,444
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,110 12,078
Amortization of discounts and deferred offering costs 597 --
Provision for bad debts 1,839 1,372
Impairment of assets and restructuring charges 1,779 --
Provision for inventory obsolescence 2,230 3,520
(Gain) loss on investment securities and fixed assets 10
(3,970)
Common stock awards 320 384
(Increase) decrease in assets:
Receivables 7,116 16,388
Inventories (5,635) (19,882)
Prepaid expenses and other 4,641 (2,175)
Other assets (665) (872)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans (4,851) (3,333)
Decrease in accounts payable and accrued liabilities (40,242) (16,490)
Earnings of unconsolidated affiliates in excess of
distributions (6,012) (1,401)
Other (343) 53
-------- --------
Total adjustments (26,106) (14,328)
-------- --------
Net cash provided by operating activities 16,298 20,116
-------- --------
</TABLE>
<PAGE>
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
January 1, January 2,
2000 1999
--------------------------------------------------------------------------------
Dollars in thousands)
<S> <C> <C>
Cash Flows from Investing Activities
Investment in property, plant and equipment (2,809) (2,944)
Proceeds from sale of property, plant and equipment 594 311
Purchase of investment securities (440) -
Proceeds from sale of investment securities - 7,670
Proceeds from sale of investments to fund liabilities to
jackpot winners 5,604 10,121
Purchase of investments to fund liabilities to jackpot
winners (4,854) (12,627)
Proceeds from sale of other assets 41,667 -
Investment in unconsolidated affiliates (55) -
-------- --------
Net cash provided by investing activities 39,707 2,531
-------- --------
Cash Flows from Financing Activities
Proceeds from long-term debt 637 225,296
Principal payments on debt (2,572) (229,755)
Payments on jackpot liabilities (14,291) (13,697)
Collections from systems to fund jackpot liabilities 22,622 33,850
Proceeds from employee stock plans and other 945 257
Purchases of treasury stock (26,685) (26,165)
Payments of cash dividends - (3,266)
-------- --------
Net cash used in financing activities (19,344) (13,480)
-------- --------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents 175 (2,217)
-------- -------
Net Increase in Cash and Cash Equivalents 36,836 6,950
Cash and Cash Equivalents at:
Beginning of Period 426,343 175,413
-------- --------
End of Period $463,179 $182,363
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Notes to Condensed Consolidated Financial Statements
1. Notes and Contracts Receivable
The following allowances for doubtful notes and contracts were netted
against current and long-term maturities:
January 1, October 2,
2000 1999
- --------------------------------------------------------
(Dollars in thousands)
Current $15,598 $14,157
Long-term 5,768 5,497
------- -------
$21,366 $19,654
======= =======
2. Concentrations of Credit Risk
The financial instruments that potentially subject IGT to concentrations of
credit risk consist principally of cash and cash equivalents and accounts,
contracts, and notes receivable. IGT maintains cash and cash equivalents with
various financial institutions in amounts which, at times, may be in excess of
the FDIC insurance limits.
Product sales and the resulting receivables are concentrated in specific
legalized gaming regions. We also distribute a portion of our products through
third party distributors resulting in significant distributor receivables.
Accounts, contracts, and notes receivable by region as a percentage of total
receivables are as follows at January 1, 2000:
Region
-----------------------------------------------------
Nevada 30%
Native American casinos 17%
Other US regions including joint ventures 11%
Australia 9%
South America 9%
Europe 8%
Other international (individually less than 3%) 7%
Atlantic City (distributor and other) 5%
Riverboats (greater Mississippi River area) 4%
----
Total 100%
====
3. Intangible Assets
Intangible assets consist of the following:
January 1, October 2,
2000 1999
------------------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 1,650 $ 1,650
Excess of cost over net assets acquired 160,279 153,209
------- -------
161,929 154,859
Less accumulated amortization (3,891) (2,823)
------- -------
$158,038 $152,036
======== ========
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
4. Impairment of Assets and Restructuring Costs
In the fourth quarter of 1999, the recoverability of certain IGT-Australia
intangible assets was evaluated. Based on our review, we determined the
impairment of the intangible assets to be their total unamortized value of $86.8
million and recorded this charge. In addition, we commenced a restructuring of
our IGT-Australia operation and recorded restructuring charges of approximately
$6.0 million. The charges included inventory obsolescence of $4.0 million and
$2.0 million in asset and facility redundancy costs. In the first quarter of
fiscal 2000, we recorded additional restructuring costs of $2.1 million related
to employee terminations. This restructuring will result in the elimination of
approximately 124 administrative and manufacturing positions. As of January 1,
2000, 69 positions have been eliminated resulting in payments of $1.0 million.
Other restructuring costs of $162,000 were paid during the current quarter.
Impairment charges of $5.3 million were recorded in the fourth quarter of
fiscal 1999, relating to changes in the recoverability of inventory and
receivables in Brazil. The government in Brazil recently rescinded the law
allowing gaming devices in bingo halls throughout this market. In the first
quarter of fiscal 2000, we received payment of $358,000 for receivables
previously considered fully impaired.
5. Earnings Per Share
The following table shows the reconciliation of basic earnings per share
("EPS") to diluted EPS:
Three Months Ended
January 1, January 2,
2000 1999
------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income $42,404 $34,444
Weighted average common shares outstanding 86,401 108,017
Dilutive effect of stock options outstanding 779 1,152
------- -------
Weighted average common and potential
shares outstanding 87,180 109,169
======= =======
Basic earnings per share $ 0.49 $ 0.32
Diluted earnings per share $ 0.49 $ 0.32
Options to purchase 1.3 million and 833,000 shares of common stock at
January 1, 2000 and January 2, 1999, respectively, were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of the common shares.
Subsequent to the end of the quarter during the period of January 2, 2000 to
January 29, 2000, we purchased 11.0 million shares, or approximately 13% of our
outstanding common stock pursuant to an issuer-tender offer. There were no other
transactions during the same period which would have materially changed the
number of common shares or potential common shares outstanding.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
6. Income Taxes
Our provision for income taxes is based on estimated effective annual income
tax rates. The provision differs from income taxes currently payable because
certain items of income and expense are recognized in different periods for
financial statement and tax return purposes.
7. Comprehensive Income
Items of other comprehensive income include cumulative foreign currency
translation adjustments and net unrealized gains and losses on investment
securities. Our total comprehensive income is as follows:
Three Months Ended
January 1, January 2,
2000 1999
---------------------------------------------------------------------
(Dollars in thousand)
Net income $42,404 $34,444
Net change in other comprehensive income (1,182) (21)
-------- -------
Comprehensive income $41,222 $34,423
======= =======
8. Supplemental Cash Flows Information
Certain noncash investing and financing activities are not reflected in the
condensed consolidated statements of cash flows.
In December 1999, notes receivable increased by $4.1 million as the result
of converting our investment in Access Systems Pty., Ltd. ("Access") from an
equity to a debt instrument.
We manufacture gaming machines which are used on our proprietary systems and
are leased to customers under operating leases. As the net result of transfers
between inventory and fixed assets, property, plant and equipment increased $4.9
million during the current period and $11.1 million during the comparable prior
year period.
The tax benefit of employee stock plans totaled $148,000 for the three
months ended January 1, 2000 and $253,000 during the year earlier period.
Interest payments totaled $44.6 million for the first three months of fiscal
2000 and $12.0 million for the first three months of fiscal 1999. Cash payments
for income taxes totaled $25.9 million for the three months ended January 1,
2000 and $19.3 million for the three months ended January 2, 1999.
9. Contingencies
We have been named in and have brought lawsuits in the normal course of
business. We do not expect the outcome of these suits, including the lawsuits
described below, to have a major effect on our financial position or results of
future operations.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
Ahern
Along with a number of other public gaming corporations, IGT is a defendant
in three class action lawsuits, one filed in the United States District Court of
Nevada, Southern Division, entitled Larry Schreier v. Caesar's World, Inc., et
al., and two filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern v. Caesar's
World, Inc., et al., which have been consolidated into a single action. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. The actions allege that the defendants have engaged in
fraudulent and misleading conduct by inducing people to play video poker
machines and electronic slot machines, based on false beliefs concerning how the
machines operate and the extent to which there is an opportunity to win on a
given play. The amended complaint alleges that the defendants' acts constitute
violations of the Racketeer Influenced and Corrupt Organizations Act, and also
give rise to claims for common law fraud and unjust enrichment, and seeks
compensatory, special, consequential, incidental and punitive damages of several
billion dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
WMS
In May 1994, WMS Industries, Inc. instituted a declaratory judgment action
(the "Model 400 Action") against IGT, in the United States District Court for
the Northern District of Illinois. The action sought a declaration that a
certain patent issued in 1984 and owned by IGT (the "Telnaes Patent") was
invalid and that certain reel-type slot machines then made by WMS did not
infringe the Telnaes Patent. We counterclaimed alleging that the Telnaes Patent
was infringed by WMS' reel-type slot machines.
In September 1996, the Trial Court reached a decision in favor of IGT,
finding the Telnaes Patent valid, finding WMS' model 400 slot machine to
infringe the Telnaes Patent, in which we sought a preliminary and permanent
injunction and treble damages. In July 1999, the US Court of Appeals for the
Federal Circuit affirmed the Trial Court's decision that the Telnaes Patent is
valid and that the WMS model 400 slot machine infringed the patent. The Court
affirmed the damages awarded of approximately $10 million plus accrued interest.
Additionally, in November 1996, we commenced an action against WMS in the
Trial Court seeking a judgment declaring that WMS' Model 401 slot machine also
infringed the Telnaes patent. In December 1996, the Court granted our motion for
a preliminary injunction and enjoined WMS from the manufacture, use and sale of
the Model 401 slot machine. WMS filed a notice of appeal on May 7, 1998. In July
1999, in a second suit on WMS' Model 401 machine that was heard by the Federal
Circuit Court of Appeals at the same time, the Court reversed the District
Court's granting of a preliminary injunction to IGT prohibiting the make, use or
sale of WMS' Model 401 machine. The Appellate Court ruled that a different
interpretation of the patent claims than that made by the District Court was
appropriate.
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
Under a settlement agreement reached in December 1999, the two
above-mentioned lawsuits were dismissed and WMS agreed to pay IGT approximately
$27.0 million, as well as $1.7 million related to certain limited WMS operations
previously conducted under a license from IGT. Until February 24, 2002 when the
Telnaes Patent expires, WMS will refrain from making, using, selling or offering
for sale its Model 400 and 401 machines, or any other machine that infringes the
Telnaes Patent.
10. Business Segments
IGT operates principally in two lines of business: (1) the development,
manufacturing, marketing and distribution of gaming products, what we refer to
as "Gaming Product Sales," and (2) the development, marketing and operation of
wide-area progressive systems, what we refer to as "Gaming Operations."
Three Months Ended
January 1, January 2,
Lines of Business 2000 1999
---------------------------------------------------------------------
(Dollars in thousand)
Revenues
Manufacture of gaming products $109,760 $136,604
Gaming operations 96,757 85,102
-------- --------
Total $206,517 $221,706
======== ========
Operating Profit
Manufacture of gaming products $ 15,884 $25,528
Gaming operations 40,335 32,514
------- -------
Total 56,219 58,042
------- -------
Other income (expense), including interest
expense 10,037 (6,247)
------- -------
Income Before Income Taxes $66,256 $51,795
======= =======
Depreciation and Amortization
Manufacture of gaming products $ 1,382 $ 1,326
Gaming operations 6,423 4,648
Corporate 5,305 6,104
------- -------
Total $13,110 $12,078
======= =======
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
IGT's operations are based in the United States and internationally. The
table below presents information as to our operations by these two regions.
Three Months Ended
January 1, January 2,
Geographic Areas 2000 1999
---------------------------------------------------------------------
(Dollars in thousand)
Revenues
Domestic
Unaffiliated customers $159,566 $140,293
Inter-area transfers 9,721 8,092
International
Unaffiliated customers 46,951 81,413
Inter-area transfers 1,506 2,701
Eliminations (11,227) (10,793)
-------- --------
Total $206,517 $221,706
======== ========
Operating Profit
Domestic $ 60,778 $ 47,848
International (4,559) 10,194
-------- --------
Total 56,219 58,042
-------- --------
Other income (expense), including
interest expense 10,037 (6,247)
-------- --------
Income Before Income Taxes $ 66,256 $ 51,795
======== ========
On a consolidated basis we do not recognize intersegment revenues or
expenses upon the transfer of gaming products between subsidiaries. Operating
profit is revenue and interest income related to investments to fund jackpot
liabilities less cost of sales and operating expenses, including related
operating depreciation and amortization, provisions for bad debts, and an
allocation of a portion of selling, general and administrative and research and
development expenses. Other expense includes interest expense, interest income
and gain (loss) on sale of assets.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended January 1, 2000 Compared to the Three Months Ended
January 2, 1999
Net income for the current quarter totaled $42.4 million or $.49 per diluted
share, including a legal settlement of $27.0 million ($17.3 million net of tax)
received from WMS Gaming, Inc. ("WMS") and restructuring charges of $1.8 million
($1.2 million, net of tax) primarily related to our Australian operations. The
settlement resulted from lawsuits related to IGT's claim that WMS infringed upon
our Telnaes patent for virtual reel technology (see Note 9 in Notes to Condensed
Consolidated Financial Statements). Net income for the quarter ended January 1,
2000, before the one-time events described above, totaled $26.3 million or $0.30
per diluted share compared to $34.4 million or $0.32 per diluted share in the
prior year quarter.
Revenues and Gross Profit Margins
Revenues for the first quarter of fiscal 2000 totaled $206.5 million
compared to $221.7 million in the first quarter of fiscal 1999. Worldwide, IGT
shipped 19,500 gaming machines for product sales of $109.8 million during the
current quarter versus 32,200 units and $136.6 million in the comparable prior
year quarter. Domestic unit shipments increased 16% to 8,400 in the current
quarter compared to 7,200 machines in the year earlier quarter. Domestic
shipments for the current period included 1,500 machines to Greektown in
Michigan, representing a 67% market share. The overall increase in sales
domestically was primarily due to expansion in Michigan, Iowa and West Virginia,
as well as continued growth in the Native American markets. Current quarter
international sales of 11,200 units represented 57% of total units, compared to
25,000 units, or 78% of total units, during first quarter of fiscal 1999. The
prior year quarter included record sales of 14,000 units in Japan, attributable
to our most popular pachisuro game, Popper King. Comparably, the current quarter
included sales of 1,600 units in this market.
Revenues from gaming operations in the first quarter of fiscal 2000
increased 14% to $96.8 million from $85.1 million for the same quarter last
year. This growth resulted from the success of Elvis, Triple Play Poker in
MegaJackpot and stand-alone formats, the inclusion of Sodak's Native American
MegaJackpot related revenue, and the introduction of Wheel of Fortune in a
nickel video format in September 1999. The installed base of machines operating
on MegaJackpots systems grew to 16,200 units at the end of the current quarter
compared to 14,300 machines one year earlier. Eleven older, less productive
systems were discontinued during the quarter, while new games such as Elvis and
Triple Play Poker continued to grow. Positive customer reaction increased the
installed base of video Wheel of Fortune to approximately 1,700 units in six
jurisdictions by the end of the current quarter.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Gross profit on total revenues for the first quarter of fiscal 2000
increased 9% to $105.0 million compared to $96.3 million for the first quarter
of fiscal 1999, related primarily to growth in gaming operations. The gross
margin percentage on product sales improved to 38% for the current quarter from
36% in the year earlier period, due primarily to improved domestic margins. The
domestic gross margin for the current quarter increased to 40% from 37% in the
prior year, as the result of reductions in inventory obsolescence, as well as
the elimination of the distributor discount to Sodak. The gross margin on gaming
operations grew to $63.4 million or 66% in the current quarter versus $46.5
million or 55% for the first quarter of fiscal 1999.
Expenses
Selling, general and administrative expenses increased $3.2 million to $33.0
million in the first quarter of fiscal 2000 compared to the same prior year
period. This fluctuation is primarily due to the inclusion of Sodak's operating
expenses. Depreciation and amortization expense, not included in cost of sales,
for the current quarter declined 12% from the prior year quarter to $5.4 million
primarily due to the write-off of intangible assets in Australia in the fourth
quarter of fiscal 1999. The addition of goodwill and fixed assets relating to
the acquisition of Sodak partially offset this decline.
Research and development expenses increased $2.7 million to $13.4 million
for the current quarter reflecting an increase in engineering personnel
domestically. Bad debt expense totaled $1.8 million in the current quarter
compared to $1.4 million for the first quarter of fiscal 1999. An increase in
provisions for domestic receivables was offset by a decline in international bad
debt expense, reflecting the current quarter product sales mix. Restructuring
charges of $1.8 million resulted primarily from severance related costs in
Australia.
Operating income for the current quarter, excluding the restructuring
charges, totaled $51.4 million or 25% of revenues versus $48.4 million or 22% of
revenues in the first quarter of fiscal 1999 due primarily to the improved gross
profit margin in gaming operations, as well as the increase in domestic product
sales which carry higher gross margins.
Other Income and Expense
Other income, net for the quarter totaled $16.6 million compared to $3.4
million in the first quarter of fiscal 1999. The $27.0 million settlement from
WMS was partially offset by increased interest expense from our $1.0 billion
Senior Notes. Operation of our MegaJackpots systems results in interest income
from both the investment of cash and from investments purchased to fund jackpot
payments. Interest expense on the jackpot liability is accrued at the rate
earned on the investments purchased to fund the liability. Therefore, interest
income and expense relating to funding jackpot winners are similar and increase
at approximately the same rate based on the growth in total jackpot winners.
Our worldwide tax rate increased to 36% from 33.5% in the year earlier
quarter, as a result of additions to the valuation allowance for international
deferred tax assets and nondeductible goodwill related to the Sodak acquisition.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business Segments Operating Profit (See Note 10 of Notes to Condensed
Consolidated Financial Statements)
Operating profit for our manufacturing and gaming operations segments
reflects an allocation of selling, general and administrative expenses,
engineering expenses, interest income and interest expense to each of these
business segments.
Manufacturing operating profit totaled $15.8 million or 14% of related
revenues compared to $25.5 million or 19% of manufacturing revenues in the prior
period. This fluctuation reflects improvement in the gross margin to 38% of
product sales revenues from 36% in the year earlier period. Increased research
and development costs and an increase in interest expense allocated to the
manufacturing segment from the $1.0 billion Senior Notes offset the improvement
in manufacturing gross profit. Impairment of assets and restructuring charges
also negatively impacted the manufacturing operating profit.
Fiscal 2000 first quarter operating profit for the gaming operations segment
increased $7.8 million or 24% compared to the prior year period. This
improvement resulted from the growth in MegaJackpots related revenue, higher
interest rates which lowered the cost of funding jackpot payments and the
inclusion of gaming operations revenue from Sodak.
Financial Condition, Liquidity and Capital Resources
We believe that existing cash balances, short-term investments and available
borrowing capacity together with funds generated from operations will be
sufficient to meet operating requirements for at least the next twelve months.
IGT's cash and short-term investments are available for strategic investments,
mergers and acquisitions, as well as to fund our stock repurchase program.
Working Capital
Working capital declined $2.9 million to $719.8 million during the first
three months of fiscal 2000. Changes in current assets which contributed to the
overall fluctuation in working capital included a decrease in receivables as a
result of sales volume. Changes in current liabilities included a decrease in
accrued interest and accrued employee benefit plan liabilities, resulting from
payments during the current period. This decrease was partially offset by an
increase in other accrued liabilities, due to the timing of estimated tax
payments. Additionally, current jackpot liabilities increased in response to the
overall growth in our MegaJackpots systems.
Cash Flows
IGT's cash and cash equivalents totaled $463.2 million at January 1, 2000, a
$36.8 million increase from the prior fiscal year end. Cash provided by
operating activities totaled $16.3 million in the first three months of fiscal
2000 compared to $20.1 million during the same prior year period. During these
periods, fluctuations in receivables, payables and inventories, influenced by
sales volumes and timing, resulted in the most significant changes in cash flows
from operating activities. In the current period, the decrease in accrued
liabilities is due to the timing of the interest payments on our $1 billion
Senior Notes.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Our proprietary systems provide cash through collections from systems to
fund jackpot liabilities and from maturities of US government securities
purchased to fund jackpot liabilities. Cash is used to make payments to jackpot
winners or to purchase investments to fund liabilities to jackpot winners. These
activities provided cash of $9.1 million in the first three months of fiscal
2000 and $17.6 million during the comparable prior year period.
Cash provided by investing activities increased to $39.7 million in the
first three months of fiscal 2000 from $2.5 million during the year earlier
period. This increase resulted primarily from the proceeds of the October 1999
sale of the Miss Marquette Iowa riverboat which was held for sale when IGT
acquired Sodak. Purchases of treasury stock of $26.7 million in the current
period and $26.2 million in the comparable year earlier period were the primary
uses of financing cash.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
which consists of income from operations excluding depreciation and amortization
as reflected on IGT's consolidated statements of cash flows, totaled $62.7
million in the current quarter versus $60.5 million for the first quarter of
fiscal 1999.
Credit Facilities
Our domestic and foreign borrowing facilities totaled $276.5 million at
January 1, 2000. Of this amount, $1.3 million was drawn, $3.2 million was
reserved for letters of credit and the remaining $272.0 million was available.
We are required to comply with certain covenants contained in these agreements
which, among other things, limit financial commitments we may make without the
written consent of the lenders and require the maintenance of certain financial
ratios. At January 1, 2000, we were in compliance with all applicable covenants.
Stock Repurchase Plan
A stock repurchase plan was initially authorized by the Board of Directors
in October 1990. As of January 29, 2000, the remaining share repurchase
authorization, as amended, totaled 14.0 million additional shares. During the
period October 3, 1999 to January 29, 2000, we repurchased 12.5 million shares
for an aggregate purchase price of $257.8 million, including 11.0 million shares
repurchased pursuant to an issuer-tender offer at $21.00 per share.
Recently Issued Accounting Standards
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 first quarter of our fiscal year 2001. We believe that
adoption of this statement will not have a material impact on our financial
condition or results of operations.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Year 2000
The term Year 2000 or Y2K is used to refer to a worldwide computer-related
problem where software programs in computer systems will not work properly when
processing a date later than December 31, 1999. If IGT or its customers,
suppliers, or other third parties failed to make corrections for programs that
have defined dates using a two-digit year, this could have resulted or may yet
result in system failure or malfunction of certain computer equipment, software,
and other devices dependent upon computerized mechanisms that are date
sensitive. As of January 29, 2000, our information systems have not been
adversely affected by the change to the calendar year 2000. There were no
internal system disruptions and we were not aware of any failures affecting
third parties with whom we conduct business.
We utilized both internal and external resources to accomplish our Year 2000
plan. The total cost was $2.7 million and was funded from operating cash flows.
Approximately $2.2 million of this total was for the replacement of
non-compliant equipment and software, which we capitalized as fixed assets in
fiscal 1999. We continue to monitor internal and third party information
technology systems for Y2K issues but do not anticipate significant future
difficulties. While we continue to believe that Y2K issues will not materially
affect our consolidated financial position or results of operations, it remains
uncertain to what extent if any we may be impacted.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies. These
forward-looking statements are identified by their use of terms and phrases such
as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions.
Such forward-looking statements and IGT's operations, financial condition
and results of operations involve known and unknown risks, and uncertainties.
Such risks and factors include, but are not limited to, the following:
o a decline in demand for IGT's gaming products or reduction in the growth
rate of new and existing markets
o delays of scheduled openings of newly constructed or planned casinos
o the effect of changes in economic conditions
o a decline in public acceptance of gaming
o unfavorable public referendums or anti-gaming legislation o unfavorable
legislation affecting or directed at manufacturers or operators of gaming
products and systems
o delays in approvals from regulatory agencies
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
o political and economic instability in developing international markets for
IGT's products
o a decline in the demand for replacement machines
o a decrease in the desire of established casinos to upgrade machines in
response to added competition from newly constructed casinos
o a decline in the appeal of IGT's gaming products or an increase in the
popularity of existing or new games of competitors
o the loss of a significant distributor
o changes in interest rates causing a reduction of investment income or in
market interest rate sensitive investments
o loss or retirement of our key executives
o approval of pending patent applications of parties unrelated to IGT that
restrict our ability to compete effectively with products that are the
subject of such pending patents or infringement upon existing patents
o the effect of regulatory and governmental actions
o unfavorable determination of suitability by gaming regulatory authorities
with respect to IGT's officers, directors or key employees
o the limitation, conditioning, suspension or revocation of any of our gaming
licenses o fluctuations in foreign exchange rates, tariffs and other
barriers o adverse changes in the credit worthiness of parties with whom
IGT has forward currency exchange contracts
o the loss of sublessors of the leased properties no longer used by IGT
o IGT's inability to successfully remedy the Year 2000 readiness issue
o with respect to legal actions pending against IGT, the discovery of facts
not presently known to IGT or determinations by judges, juries or other
finders of fact which do not accord with our evaluation of the possible
liability or outcome of existing litigation.
We do not undertake to update our forward-looking statements to reflect
future events or circumstances.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Under established procedures and controls, IGT 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 IGT 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
We routinely use forward exchange contracts to hedge our net exposures, by
currency, related to the monetary assets and liabilities of our operations
denominated in non-functional currency. The primary business objective of this
hedging program is to minimize the gains and losses resulting from exchange rate
changes. At January 1, 2000 and October 2, 1999, IGT had net foreign currency
transaction exposure of $55.0 million and $41.7 million, respectively. At
January 1, 2000 and October 2, 1999, $41.2 million and $38.8 million of the
exposure was hedged with currency forward contracts. In addition, from time to
time, we may enter into forward exchange contracts to establish with certainty
the US dollar amount of future firm commitments denominated in a foreign
currency.
Given our balanced foreign exchange objective, 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. Exchange
rate gains and losses from unhedged foreign currency exposures are not expected
to be material.
As currency exchange rates change, translation of the income statements of
IGT's international businesses into US dollars affects year-over-year
comparability of operating results. IGT does not generally hedge translation
risks because cash flows from international operations are generally reinvested
locally. IGT does not enter into hedges to minimize volatility of reported
earnings.
Changes in the currency exchange rates that would have the largest impact on
translating IGT's international operating results include the Australian dollar,
British pound and the Japanese yen. We estimate that a 10% change in foreign
exchange rates would impact reported current and prior year-to-date operating
results 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
IGT's results of operations are exposed to fluctuations in the costs of US
Government securities used to fund liabilities to jackpot winners. IGT records
gaming operations expense for future jackpots based on current rates for these
US 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 $0.7 million in the current
year-to-date period and $1.0 million in the prior year period. IGT currently
does not manage this exposure with derivative financial instruments. The
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk, (continued)
$1.0 billion Senior Notes issued in May 1999 carry interest at fixed rates. If
interest rates increased by 10%, then the fair market value of the Notes would
decrease approximately $39.0 million at January 1, 2000 and $45.0 million at
October 2, 1999.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
(See Note 9 of Notes to Condensed Consolidated Financial Statements.)
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(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: February 14, 2000
INTERNATIONAL GAME TECHNOLOGY
By:/s/Maureen Mullarkey
Maureen Mullarkey
Vice President, Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statements of Income for the three months ended January
1, 2000 and the Condensed Consolidated Balance Sheet as of January 1,2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> INTERNATIONAL GAME TECHNOLOGY
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<S> <C>
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<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> JAN-1-2000
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<SECURITIES> 18,415
<RECEIVABLES> 204,041
<ALLOWANCES> 27,068
<INVENTORY> 115,073
<CURRENT-ASSETS> 947,162
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0
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<OTHER-SE> 257,729
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