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 ended: July 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 88-0173041
(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 July 29, 2000
----- ----------------------------
Common Stock 72,474,372
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 and Nine Months Ended July 1, 2000 and July 3, 1999......4
Condensed Consolidated Balance Sheets -
July 1, 2000 and October 2, 1999...............................5
Condensed Consolidated Statements of Cash Flows -
Nine months ended July 1, 2000 and July 3, 1999................7
Notes to Condensed Consolidated Financial Statements.............9
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14
Item 3.Quantitative and Qualitative Disclosures About Market Risk......21
Part II - Other Information
Item 1.Legal Proceedings...............................................22
Item 2.Changes in Securities...........................................22
Item 3.Defaults Upon Senior Securities.................................22
Item 4.Submission of Matters to a Vote of Security Holders.............22
Item 5.Other Information...............................................22
Item 6.Exhibits and Reports on Form 8-K................................22
Signature..............................................................23
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
The following unaudited condensed consolidated financial statements were
prepared by International Game Technology (referred throughout this document,
together with its consolidated subsidiaries where appropriate, as "IGT,"
"Company," "we," "our," and "us") and include all normal adjustments considered
necessary to present fairly the financial position for the interim periods.
These adjustments are of a normal recurring nature. These financial statements
and notes are presented as permitted by the instructions to Form 10-Q and
therefore do not contain certain information included in 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 unaudited condensed consolidated financial statements
presented for the prior year comparable periods have been reclassified to be
consistent with the presentation used in the current fiscal periods, 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 is a registered trademark of Elvis Presley
Enterprises, Inc. 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 Shuffle Master, Inc.
<PAGE>
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Product sales $ 166,728 $ 167,573 $ 395,144 $ 443,793
Gaming operations 96,942 91,286 293,096 257,643
--------- --------- --------- ---------
Total revenues 263,670 258,859 688,240 701,436
--------- --------- --------- ---------
Costs and Expenses
Cost of product sales 101,495 106,339 244,978 281,635
Cost of gaming operations 30,247 33,759 96,418 103,498
Selling, general and administrative 38,218 34,552 106,927 96,265
Depreciation and amortization 5,210 6,468 15,858 18,841
Research and development 12,874 11,167 39,580 32,279
Provision for bad debts 4,009 3,240 7,284 6,761
Impairment of assets and restructuring charges (550) -- 1,229 --
--------- --------- --------- ---------
Total costs and expenses 191,503 195,525 512,274 539,279
--------- --------- --------- ---------
Income from Operations 72,167 63,334 175,966 162,157
--------- --------- --------- ---------
Other Income (Expense)
Interest income 11,682 13,938 38,787 40,052
Interest expense (25,618) (21,068) (76,532) (46,253)
Gain on the sale of assets 1,052 1,048 280 4,917
Other (491) (828) 25,235 (1,784)
--------- --------- --------- ---------
Other expense, net (13,375) (6,910) (12,230) (3,068)
--------- --------- --------- ---------
Income Before Income Taxes 58,792 56,424 163,736 159,089
Provision for Income Taxes 21,165 18,903 58,944 53,295
--------- --------- --------- ---------
Income Before Extraordinary Item 37,627 37,521 104,792 105,794
Extraordinary Loss on Early Redemption of Debt,
Net of Income Tax Benefit of $1,640 -- (3,254) -- (3,254)
--------- --------- --------- ---------
Net Income $ 37,627 $ 34,267 $ 104,792 $ 102,540
========= ========= ========= =========
Basic Earnings (Loss) Per Share
Continuing operations $ 0.52 $ 0.39 $ 1.34 $ 1.03
Extraordinary loss -- (0.03) -- (0.03)
--------- --------- --------- ---------
Net income $ 0.52 $ 0.36 $ 1.34 $ 1.00
========= ========= ========= =========
Diluted Earnings (Loss) Per Share
Continuing operations $ 0.51 $ 0.39 $ 1.33 $ 1.02
Extraordinary loss -- (0.03) -- (0.03)
--------- --------- --------- ---------
Net income $ 0.51 $ 0.36 $ 1.33 $ 0.99
========= ========= ========= =========
Weighted average common shares outstanding 72,212 95,378 77,953 102,819
Weighted average common and potential
shares outstanding 73,718 95,951 79,014 103,642
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
July 1, October 2,
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets
Cash and cash equivalents $ 204,021 $ 426,343
Investment securities at market value 20,578 18,546
Accounts receivable, net of allowances for doubtful
accounts of $13,762 and $8,904 190,040 193,479
Current maturities of long-term notes and contracts
receivable, net of allowances 58,017 74,987
Inventories, net of allowances for obsolescence of
$27,955 and $23,901:
Raw materials 76,302 60,616
Work-in-process 7,231 4,902
Finished goods 51,230 51,094
-------- --------
Total inventories 134,763 116,612
-------- --------
Investments to fund liabilities to jackpot winners 28,015 27,702
Deferred income taxes 22,276 23,977
Assets held for sale - 42,292
Prepaid expenses and other 72,720 51,302
-------- --------
Total Current Assets 730,430 975,240
-------- --------
Long-term notes and contracts receivable, net of
allowances and current maturities 75,218 60,870
-------- --------
Property, plant and equipment, at cost
Land 19,883 19,938
Buildings 75,856 76,050
Gaming operations equipment 81,784 87,499
Manufacturing machinery and equipment 120,187 114,912
Leasehold improvements 5,179 5,361
-------- --------
Total 302,889 303,760
Less accumulated depreciation and amortization (137,900) (121,644)
-------- --------
Property, plant and equipment, net 164,989 182,116
-------- --------
Investments to fund liabilities to jackpot winners 232,691 235,230
Deferred income taxes 102,703 89,474
Intangible assets 153,409 152,036
Other assets 79,993 70,094
---------- ----------
Total Assets $1,539,433 $1,765,060
========== ==========
(continued)
<PAGE>
Condensed Consolidated Balance Sheets (continued from previous page)
<TABLE>
<CAPTION>
July 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 $ 11,319 $ 3,278
Accounts payable 71,209 55,705
Jackpot liabilities 56,628 81,141
Accrued employee benefit plan liabilities 18,833 23,746
Accrued interest 10,987 30,684
Other accrued liabilities 62,251 58,013
----------- -----------
Total Current Liabilities 231,227 252,567
Long-term notes payable and capital lease obligations,
net of current maturities 991,231 990,436
Long-term jackpot liabilities 273,090 276,815
Other liabilities 817 3,024
----------- -----------
Total Liabilities 1,496,365 1,522,842
----------- -----------
Commitments and contingencies (See Note 9) -- --
Stockholders' equity
Common stock, $.000625 par value; 320,000,000 shares
authorized; 153,532,103 and 152,871,297 shares issued 96 96
Additional paid-in capital 274,078 261,941
Retained earnings 991,414 886,392
Treasury stock; 81,170,767 and 65,515,867 shares,
at cost (1,215,707) (897,234)
Accumulated other comprehensive loss (6,813) (8,977)
----------- -----------
Total Stockholders' Equity 43,068 242,218
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,539,433 $ 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>
Nine Months Ended
July 1, July 3,
2000 1999
-----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 104,792 $ 102,540
--------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary loss on debt retirement -- 4,894
Depreciation and amortization 41,454 45,400
Amortization of discounts and deferred offering costs 1,824 291
Provision for bad debts 7,284 6,761
Impairment of assets and restructuring charges 1,229 --
Provision for inventory obsolescence 13,037 12,403
Gain on investment securities and fixed assets (280) (4,917)
Common stock awards 958 921
(Increase) decrease in assets:
Receivables 1,217 (8,564)
Inventories (43,376) (27,180)
Prepaid expenses and other (30,307) (290)
Other assets 629 (2,934)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans (9,324) 21,338
Increase (decrease) in accounts payable and accrued liabilities (7,874) 7,645
Earnings of unconsolidated affiliates (in excess of) less than
distributions (15,327) 1,575
Other 230 (103)
--------- ---------
Total adjustments (38,626) 57,240
--------- ---------
Net cash provided by operating activities 66,166 159,780
--------- ---------
Cash Flows from Investing Activities
Investment in property, plant and equipment (13,562) (13,761)
Proceeds from sale of property, plant and equipment 1,067 2,296
Purchase of investment securities (9,500) (1,000)
Proceeds from sale of investment securities 12,670 10,684
Proceeds from investments to fund liabilities to jackpot
winners 19,296 30,659
Purchase of investments to fund liabilities to jackpot
winners (17,070) (27,544)
Proceeds from sale of other assets 41,914 --
Investment in unconsolidated affiliates (55) (3,945)
--------- ---------
Net cash provided by (used in) investing activities 34,760 (2,611)
--------- ---------
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued from previous page)
<TABLE>
<CAPTION>
Nine Months Ended
July 1, July 3,
2000 1999
-----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from long-term debt 12,008 1,634,344
Principal payments on debt (3,812) (1,012,494)
Payments on jackpot liabilities (85,867) (90,495)
Collections from systems to fund jackpot liabilities 64,614 81,846
Proceeds from employee stock plans 9,745 2,737
Purchases of treasury stock (318,473) (300,510)
Penalties paid on early retirement of debt -- (4,658)
Payment of cash dividends -- (6,474)
----------- -----------
Net cash provided by (used in) financing activities (321,785) 304,296
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (1,463) (7,082)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (222,322) 454,383
Cash and Cash Equivalents at:
Beginning of Period 426,343 175,413
----------- -----------
End of Period $ 204,021 $ 629,796
=========== ===========
</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:
July 1, October 2,
2000 1999
(Dollars in thousands)
Current $15,856 $14,157
Long-term 3,486 5,497
------- -------
$19,342 $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 July 1, 2000:
Domestic
Native American casinos 24%
Nevada 23%
Riverboats (greater Mississippi River area) 7%
Atlantic City (distributor and other) 6%
Other US regions, including joint ventures 12%
----
Total domestic 72%
----
International
South America 8%
Europe 6%
Australia 5%
Japan 5%
Other international (individually less than 3%) 4%
----
Total international 28%
----
Total 100%
====
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
3. Intangible Assets
Intangible assets consist of the following:
July 1, October 2,
2000 1999
----------------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 1,650 $ 1,650
Excess of cost over net assets acquired 157,668 153,209
-------- --------
159,318 154,859
Less accumulated amortization (5,909) (2,823)
-------- --------
$153,409 $152,036
======== ========
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 nine months of
fiscal 2000, we recorded additional restructuring costs of $2.3 million related
to employee terminations. This restructuring will result in the elimination of
approximately 124 administrative and manufacturing positions. As of July 1,
2000, 118 positions have been eliminated resulting in payments of $1.8 million.
Other restructuring costs of $501,000 were paid during the first nine months of
fiscal 2000.
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 rescinded the law allowing
gaming devices in bingo halls throughout this market. In the first nine months
of fiscal 2000, we received payment of $1.1 million 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 for income before extraordinary item:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Income before extraordinary item $37,627 $37,521 $104,792 $105,794
======= ======= ======== ========
Weighted average common shares outstanding 72,212 95,378 77,953 102,819
Dilutive effect of stock options outstanding 1,506 573 1,061 823
------- ------- ------- --------
Weighted average common and potential
shares outstanding 73,718 95,951 79,014 103,642
======= ======= ======= ========
Basic earnings per share $ 0.52 $ 0.39 $ 1.34 $ 1.03
Diluted earnings per share $ 0.51 $ 0.39 $ 1.33 $ 1.02
Number of common shares excluded from
diluted EPS because option exercise price
was greater than average market price 64 2,054 764 1,325
</TABLE>
<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 Nine Months Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
(Dollars in thousands)
Net income $37,627 $34,267 $104,792 $102,540
Net change in other comprehensive
income 4,650 3,311 2,164 3,275
------- ------- -------- --------
Comprehensive income $42,277 $37,578 $106,956 $105,815
======= ======= ======== ========
8. Supplemental Cash Flows Information
Certain noncash investing and financing activities are not reflected in the
condensed consolidated statements of cash flows.
During fiscal 2000, notes receivable increased by $3.9 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 $6.5
million during the current year-to-date period and $29.0 million during the
comparable prior year period.
The tax benefit of employee stock plans totaled $1.4 million for the nine
month period ended July 1, 2000 and $450,000 for the same prior year period.
Interest payments totaled $94.7 million for the first nine months of fiscal
2000 and $36.8 million for the same period last year. Cash payments for income
taxes totaled $85.3 million for the nine months ended July 1, 2000 and $27.0
million for the nine months ended July 3, 1999.
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
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 material adverse effect on our financial position or
results of future operations.
Ahern
Along with a number of other public gaming corporations, IGT is a defendant
in three class action lawsuits, one filed in the United States District Court of
Nevada, Southern Division, entitled Larry Schreier v. Caesar's World, Inc., et
al., and two filed in the United States District Court of Florida, Orlando
Division, entitled Poulos v. Caesar's World, Inc., et al. and Ahern v. Caesar's
World, Inc., et al., which have been consolidated into a single action. The
Court granted the defendants' motion to transfer venue of the consolidated
action to Las Vegas. The actions allege that the defendants have engaged in
fraudulent and misleading conduct by inducing people to play video poker
machines and electronic slot machines, based on false beliefs concerning how the
machines operate and the extent to which there is an opportunity to win on a
given play. The amended complaint alleges that the defendants' acts constitute
violations of the Racketeer Influenced and Corrupt Organizations Act, and also
give rise to claims for common law fraud and unjust enrichment, and seeks
compensatory, special, consequential, incidental and punitive damages of several
billion dollars. In December 1997, the Court denied the motions that would have
dismissed the Consolidated Amended Complaint or that would have stayed the
action pending Nevada gaming regulatory action. The defendants filed their
consolidated answer to the Consolidated Amended Complaint on February 11, 1998.
At this time, motions concerning class certification are pending before the
Court.
WMS
On October 28, 1999, IGT filed a complaint in the United States District
Court, District of Nevada (Las Vegas) against WMS Gaming, Inc. ("WMS") and three
other defendants, including Silicon Gaming, Inc. ("Silicon"), alleging
infringement of a patent covering video gaming machines that use a combination
of push buttons on a panel and touch screens to perform the same functions in
the play of the game (the `397 Patent, entitled Gaming Machine and Method Using
Touch Screen). Subsequently, IGT's complaint was amended to include only WMS and
Silicon. In response, WMS filed its answer and counterclaim on February 15,
2000. The counterclaim alleges, among other things, that IGT engaged in unlawful
conduct under the federal (the Sherman and Clayton Acts) and state (the Nevada
Unfair Trade Practice Act) antitrust laws and that IGT tortuously interfered
with WMS' contractual relationships and prospective business advantage. WMS
seeks damages, including punitive damages of at least $100 million in connection
with the tortuous interference claim, declaratory and injunctive relief. Silicon
also filed a counterclaim asserting patent invalidity. This case is in the early
stages of discovery. No trial date has been set.
Under a settlement agreement reached in December 1999, the lawsuits
involving the infringement of our Telnaes Patent by the WMS Model 400 and 401
machines were dismissed. The settlement received from WMS of $27.0 million was
included in other income in the first quarter of fiscal 2000.
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
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 "Product Sales," and (2) the development, marketing and operation of
wide-area progressive systems, what we refer to as "Gaming Operations."
Three Months Ended Nine Months Ended
July 1, July 3, July 1, July 3,
Lines of Business 2000 1999 2000 1999
(Dollars in thousands)
Revenues
Product Sales $166,728 $167,573 $395,144 $443,793
Gaming Operations 96,942 91,286 293,096 257,643
-------- -------- -------- --------
Total $263,670 $258,859 $688,240 $701,436
======== ======== ======== ========
Operating Profit
Product Sales $ 29,100 $ 27,766 $ 59,300 $ 79,095
Gaming Operations 47,550 40,758 130,808 109,072
-------- -------- -------- --------
Total 76,650 68,524 190,108 188,167
-------- -------- -------- --------
Other non-allocated expense,
including interest expense (17,858) (12,100) (26,372) (29,078)
-------- -------- -------- --------
Income Before Income Taxes $ 58,792 $ 56,424 $163,736 $159,089
======== ======== ======== ========
There have been no differences from our last annual report in the basis of
measuring segment profit or loss, except that we have adjusted the allocation of
selling, general, administrative, research and development expenses in fiscal
2000 to correlate with each segment's pro-rata share of revenues. There have
been no material changes in the amount of assets for any operating segment since
our last annual report.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended July 1, 2000 Compared to the Three Months Ended July 3, 1999
Net income for the current quarter totaled $37.6 million or $0.51 per
diluted share compared to income before extraordinary item in the prior year
quarter of $37.5 million or $0.39 per diluted share. Net income in the prior
year period was $34.3 million or $0.36 per diluted share, including an
extraordinary loss of $3.3 million or $0.03 per diluted share resulting from a
prepayment penalty on the early redemption of our 7.84% Senior Notes due 2004.
Revenues and Gross Profit Margins
Total revenues for the third quarter of fiscal 2000 grew to $263.7 million
compared to $258.9 million in the third quarter of fiscal 1999. Worldwide, IGT
shipped 32,000 gaming machines for product sales of $166.7 million during the
current quarter versus 33,700 units and $167.6 million in the comparable prior
year quarter. Domestic unit shipments totaled 12,600 in the current quarter
compared to 13,000 units in the year earlier quarter. Although we experienced a
slight decline in total unit sales domestically, per unit revenue improved due
to the popularity of the new, feature-rich games. Current quarter sales
benefited from the commencement of legalized gaming in California. IGT sales
during the third quarter to California Native American casinos totaled 1,900
units, representing approximately 64% of all machines shipped into this new
market. International shipments for the quarter totaled 19,400 machines or 61%
of the total units compared to 20,700 units in the prior year period. In Japan,
the new Terminator pachisuro game received favorable reviews resulting in sales
of 7,000 units during the quarter.
Revenues from gaming operations for the current quarter increased 6% to
$96.9 million from $91.3 million for the same quarter last year. The installed
base of Wheel of Fortune machines grew to over 10,000, with the placement of 900
video and 200 spinning reel units during the last three months. The continued
popularity of Wheel of Fortune contributed to a 44% quarterly growth in joint
venture revenues. Additionally, the success of Triple Play Poker, Partytime, and
Elvis in MegaJackpot and stand-alone formats, as well as the inclusion of
Sodak's Native American MegaJackpot related revenue, contributed to the overall
growth in gaming operations revenues. MegaJackpot games began operating in the
California Native American market during the current quarter. IGT's latest
MegaJackpot game theme, The Addams Family, debuted in May 2000 to excellent
reviews, with 140 units on line and orders for 1,400 units outstanding at the
end of our third quarter. The installed base of our MegaJackpot machines,
including joint venture units, totaled 17,600 units at the end of the current
quarter compared to 14,600 machines one year earlier. Of the current installed
base, approximately 14,600 units are new platform, higher performing games.
Gross profit on total revenues for the third quarter of fiscal 2000
increased 11% to $131.9 million compared to $118.8 million for the third quarter
of fiscal 1999. This positive movement related to growth in profitability for
both product sales and gaming operations. The gross profit margin on product
sales reached 39% for the current quarter compared to 37% in the prior year
quarter of fiscal 1999. Improvements in the domestic product margin were due
primarily to the reductions in inventory obsolescence and the inclusion of
Sodak's product sales as the result of our acquisition in September 1999.
International product margins increased as well, due to variations in product
mix. The gross profit from gaming operations grew to $66.7 million or 69% in the
current quarter versus $57.5 million or 63% for the third quarter of fiscal
1999. This growth was largely due to joint venture revenues, reported net of
expenses for accounting purposes, which grew to $28.6 million from $19.9 million
in the same quarter last year. Also contributing to this improvement were the
inclusion of Sodak's gaming operations revenues and the impact of higher
interest rates which lowered the cost of funding jackpot payments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Expenses and Operating Income
Selling, general and administrative expenses increased $3.6 million to $38.2
million in the third quarter of fiscal 2000 compared to $34.6 million for 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 19% or $1.3 million from the
prior year quarter, 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 $1.7 million to $12.9 million
for the current quarter reflecting increases in domestic engineering personnel
and prototype costs. Bad debt expense totaled $4.0 million in the current
quarter compared to $3.2 million for the third quarter of fiscal 1999. The
increase in bad debt expense was primarily due to additional specific reserves
related to Latin American receivables.
Operating income grew to $72.2 million or 27% of revenues in the current
quarter compared to $63.3 million or 24% of revenues in the third quarter of
fiscal 1999. This improvement is due to the increased gross profit in both
product sales and gaming operations, partially offset by higher operating
expenses, as discussed above.
Other Income and Expense
Other income and expense resulted in a net expense for the current quarter
of $13.4 million compared to $6.9 million in the third quarter of fiscal 1999,
primarily related to increased interest expense from the outstanding $1.0
billion Senior Notes. Operation of IGT's MegaJackpot 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.
Business Segments Operating Profit (See Note 10 of Notes to Condensed
Consolidated Financial Statements)
Operating profit for our product sales and gaming operations segments
reflects an allocation of selling, general and administrative expenses, research
and development expenses, interest income and interest expense to each of these
business segments.
Product sales operating profit for the current quarter increased 5% to $29.1
million compared to $27.8 million in the prior year period or 17% of related
revenues in both the current and prior year periods. This fluctuation reflects
the increased gross profit on product sales, partially offset by increased
operating costs, predominantly related to bad debt expense.
Fiscal 2000 third quarter operating profit for the gaming operations segment
increased $6.8 million or 17% compared to the prior year period. This
improvement resulted from the growth of the installed base and excellent player
acceptance of our new MegaJackpot games, the inclusion of gaming operations
revenue from Sodak, and higher interest rates which lowered the cost of funding
jackpot payments.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Nine Months Ended July 1, 2000 Compared to the Nine Months Ended July 3, 1999
Net income for the first nine months of fiscal 2000 totaled $104.8 million
or $1.33 per diluted share, including the effects of the following one-time
events:
- a loss of $1.4 million ($0.9 million net of tax) on the sale of the
gaming systems business unit purchased as a part of the Australia
Olympic acquisition;
- receipt of a patent infringement legal settlement of $27.0 million
($17.3 million net of tax); and
- restructuring charges of $1.2 million ($0.8 million, net of tax)
related to our Australian and Brazilian operations.
Excluding these one-time events, net income for the nine months ended July 1,
2000 totaled $89.2 million or $1.13 per diluted share compared to income before
extraordinary item in the prior year period of $105.8 million or $1.02 per
diluted share. Net income for the nine months ended July 3, 1999 was $102.5
million or $0.99 per diluted share, including an extraordinary loss of $3.3
million or $0.03 per diluted share related to the early redemption of our 7.84%
Senior Notes due 2004.
Revenues and Gross Profit Margins
Revenues for the first nine months of fiscal 2000 totaled $688.2 million
compared to $701.4 million in the first nine months of fiscal 1999. Worldwide,
IGT shipped 74,300 gaming machines for product sales of $395.1 million during
the nine months ended July 1, 2000 versus 91,600 units and $443.8 million in the
comparable prior year period. International shipments for the current
year-to-date period totaled 45,700 machines or 62% of the total units compared
to 59,100 units in the prior year period. Barcrest contributed 26,900 gaming
machines, a 14% increase, as a result of continuing strength in its home market
of the U.K., as well as positive gains in the Spanish market. In Japan, we sold
7,000 units of the new Terminator pachisuro game in the current fiscal period.
Domestic unit shipments totaled 28,600 during the current year-to-date period
compared to 32,500 machines for the same period of last year. Shipments during
the prior year-to-date period included sales of over 13,000 machines to new
casino openings in Nevada, Washington, Midwestern markets and the Ontario
Lottery Commission in Canada. In the current year-to-date period, new casinos
represented fewer shipments and consisted primarily of the Belterra Resort in
Indiana, the Greektown Casino in Michigan and the opening of the California
Native American market in late June. Although domestic unit shipments declined
12%, revenues experienced only a 3% decrease, as a result of the increasing
popularity of our new games, along with higher sales of ancillary equipment.
Revenues from gaming operations in the first nine months of fiscal 2000
increased 14% to $293.1 million from $257.6 million for the same period last
year. The excellent player acceptance of video Wheel of Fortune, along with
continued growth in the installed base of the original Wheel of Fortune,
contributed to a 31% year-to-date growth in joint venture revenues. Joint
venture revenues, reported net of expenses for accounting purposes, grew to
$75.6 million for the current nine month period from $57.9 million for the
comparable prior year period. Additionally, the success of Triple Play Poker,
Partytime and Elvis in MegaJackpot and stand-alone formats, as well as the
inclusion of Sodak's Native American MegaJackpot related revenue, contributed to
the overall growth in gaming operations revenues. In the latter part of the
current nine month period, we expanded our MegaJackpot games into the California
Native American market. The total installed base of our MegaJackpot machines,
including joint venture units, grew to 17,600 units at the end of the current
period compared to 14,600 machines one year earlier. Of the current installed
base, approximately 14,600 units are new platform, higher performing games,
including 10,100 original and video version Wheel of Fortune games. Seventeen
older, less productive legacy systems were discontinued during the first nine
months of fiscal 2000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Gross profit on total revenues for the first nine months of fiscal 2000
increased 10% to $346.8 million compared to $316.3 million for the first nine
months of fiscal 1999, related primarily to growth in gaming operations. The
gross profit margin on product sales was 38% for the first nine months of fiscal
2000 and 37% for the same period of fiscal 1999. International margins decreased
due to lower unit volume in Japan and Australia. These were offset by improved
domestic margins, primarily due to the inclusion of Sodak as the result of our
acquisition in September 1999. The gross profit on gaming operations grew to
$196.7 million or 67% in the current year-to-date period versus $154.1 million
or 60% for the same period last year. This improvement was primarily due to the
overall increase in revenues from our MegaJackpot systems, including joint
venture revenues, reported net of expenses for accounting purposes. The
inclusion of Sodak's gaming operations revenues and the impact of higher
interest rates, which lowered the cost of funding jackpot payments, also
contributed to this margin growth.
Expenses
Selling, general and administrative expenses increased $10.6 million to
$106.9 million in the first nine months 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 nine months declined 16% from the prior year period to
$15.9 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 $7.3 million to $39.6 million
for the current nine month period, primarily due to increased engineering
personnel domestically. Bad debt expense totaled $7.3 million in the current
year-to-date period compared to $6.8 million for the same period of fiscal 1999.
The fluctuation in bad debt expense was primarily due to additional specific
reserves related to Latin American receivables.
Operating income reached $176.0 million or 26% of revenues in the current
nine month period compared to $162.2 million or 23% of revenues in the same
period last year. This improvement is due to the increased gross profit margins
in both product sales and gaming operations, partially offset by higher
operating expenses, as discussed above.
Other Income and Expense
Other expense, net, for the current nine month period totaled $12.2 million
versus $3.1 million in the first nine months of fiscal 1999. Increased interest
expense from our outstanding $1.0 billion Senior Notes was offset by the $27.0
million legal settlement received. Operation of our MegaJackpot 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
period, 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 (continued)
Business Segments Operating Profit (See Note 10 of Notes to Condensed
Consolidated Financial Statements)
Operating profit for our product sales and gaming operations segments
reflects an allocation of selling, general and administrative expenses, research
and development expenses, interest income and interest expense to each of these
business segments.
Product sales operating profit for the first nine months of fiscal 2000
totaled $59.3 million or 15% of related revenues compared to $79.1 million or
18% in the same period last year. The fluctuation reflects decreased sales
volume largely due to fewer new casino openings, increased research and
development costs and increased interest expense allocated to the product sales
segment from our outstanding $1.0 billion Senior Notes.
In the first nine months of fiscal 2000, operating profit for the gaming
operations segment increased $21.7 million or 20% compared to the prior year
period. This improvement resulted from the growth of the installed base and
excellent player acceptance of our new MegaJackpot systems games, the inclusion
of gaming operations revenue from Sodak, and higher interest rates which lowered
the cost of funding jackpot payments.
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 restricted 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 $223.5 million to $499.2 million during the first
nine months of fiscal 2000. This decline is primarily due to reductions in cash
and cash equivalents used to repurchase treasury stock. Additional changes in
current assets that contributed to the overall fluctuation in working capital
included a decrease in receivables, offset by an increase in inventories, both
as a result of sales volumes and timing. Changes in current liabilities included
decreases in jackpot and other accrued liabilities, offset by an increase in
accounts payable. Accrued liabilities includes accrued interest on new
borrowings.
Cash Flows
IGT's cash and cash equivalents totaled $204.0 million at July 1, 2000, a
$222.3 million decrease from the prior fiscal year end. Cash provided by
operating activities totaled $66.2 million in the first nine months of fiscal
2000 compared to $159.8 million during the same prior year period. During these
periods, fluctuations in receivables, payables, inventories, and accrued income
taxes, influenced by sales volumes and timing, resulted in the most significant
changes in cash flows from operating activities. The current period increase in
prepaid expenses was predominantly related to adjustments made to estimated tax
liabilities. In the current period, the decrease in accrued liabilities is due
to the timing of the interest payments on our outstanding $1.0 billion Senior
Notes.
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 used cash of $19.0 million in the first nine months of fiscal 2000
and $5.5 million during the comparable prior year period. Fluctuations in net
cash flows from systems represent differences between the growth in liabilities
for jackpots and the actual payments to the winners during the period, based on
the timing of the jackpot cycles and the volume of play across all of our
MegaJackpot systems.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash provided by investing activities increased to $34.8 million in the
first nine months of fiscal 2000 from cash used of $2.6 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.
Cash used in financing activities totaled $321.8 million and $304.3 million
for the current and prior year-to-date periods. This use of funds related
primarily to the purchases of treasury stock of $318.5 million during the
current nine month period compared to $300.5 million in the prior year period.
In the first nine months of fiscal 1999, proceeds, net of repayments, from
borrowings of $617.2 million were used primarily to fund stock repurchases and
working capital.
Earnings before interest, taxes, depreciation, and amortization ("EBITDA")
totaled $87.2 million for the current quarter and $227.9 million for the nine
months ended July 1, 2000 versus $82.4 million and $215.5 million for the
comparable periods of fiscal 1999. EBITDA consists of income from operations,
excluding depreciation and amortization as reflected on IGT's consolidated
statements of cash flows, IGT's share of depreciation in joint venture earnings
(which for accounting purposes are reported net of expenses), and
impairment/restructuring charges.
Credit Facilities
Our domestic and foreign borrowing facilities totaled $267.3 million at July
1, 2000. Of this amount, $11.3 million was drawn, $2.8 million was reserved for
letters of credit and the remaining $253.2 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 July 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 July 29, 2000, the remaining share repurchase
authorization, as amended, totaled 10.8 million additional shares. During the
period October 3, 1999 to July 29, 2000, we repurchased 15.7 million shares for
an aggregate purchase price of $318.5 million, including 11.0 million shares
repurchased pursuant to an issuer tender offer at $21 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. However, due to the complexity of this
statement, it remains uncertain to what extent, if any, we may be impacted.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 clarifies existing accounting principles related to revenue
recognition in financial statements. SAB 101 is effective for the fourth quarter
of our fiscal year 2001. We have not yet completed our analysis of the impact
that SAB 101 will have on our current revenue recognition practices.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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
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 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. IGT had net foreign currency transaction exposure of $58.7 million at
July 1, 2000 and $41.7 million at October 2, 1999. Of this exposure, $54.6
million at July 1, 2000 and $38.8 million at October 2, 1999 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 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 have impacted 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 bank lending
rates and the costs of US Government securities, which are used to fund
liabilities to jackpot winners. IGT records gaming operations expense for future
jackpots based on these rates which are impacted by market interest rates and
other economic conditions. Therefore, the gross profit on gaming operations
decreases when interest rates decline. We estimate that a 10% decline in
interest rates would have impacted gaming operations gross profit by $2.2
million in the current year-to-date period and $2.5 million in the prior year
period. IGT currently does not manage this exposure with derivative financial
instruments.
Our outstanding Senior Notes issued in May 1999 carry interest at fixed
rates. If interest rates increased by 10%, we estimate the fair market value of
the notes would have decreased approximately $42.1 million at July 1, 2000 and
$45.0 million at October 2, 1999.
<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
We want to remind stockholders that a stockholder proposal submitted
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 for inclusion
in our proxy statement and form of proxy for the 2001 Annual Meeting of
Stockholders must be received by us by September 29, 2000. Such a proposal must
also comply with the requirements as to form and substance established by the
Securities and Exchange Commission for such proposals. A stockholder otherwise
desiring to bring discussion before an annual meeting of stockholders (including
any proposal relating to the nomination of a director to be elected to the Board
of Directors) must submit a proposal that is received at our principal executive
offices on or before December 13, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 15, 2000
INTERNATIONAL GAME TECHNOLOGY
By:/s/G. Thomas Baker
G. Thomas Baker
President, Chief Operating Officer,
and Chief Financial Officer
