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: April 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 April 29, 2000
----- -----------------------------
Common Stock 72,152,977
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 Six Months Ended April 1, 2000 and April 3, 1999.....4
Condensed Consolidated Balance Sheets -
April 1, 2000 and October 2, 1999..............................5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended April 1, 2000 and April 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......20
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 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 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 Six Months Ended
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues
Product sales $118,656 $139,616 $228,416 $276,220
Gaming operations 99,397 81,255 196,154 166,357
-------- -------- -------- --------
Total revenues 218,053 220,871 424,570 442,577
-------- -------- -------- --------
Costs and Expenses
Cost of product sales 75,283 88,510 143,483 175,296
Cost of gaming operations 32,861 31,138 66,173 69,739
Selling, general and administrative 35,740 31,972 68,709 61,713
Depreciation and amortization 5,252 6,266 10,648 12,373
Research and development 13,318 10,408 26,707 21,112
Provision for bad debts 1,436 2,148 3,275 3,521
Impairment of assets and restructuring
charges - - 1,779 -
-------- -------- -------- --------
Total costs and expenses 163,890 170,442 320,774 343,754
-------- -------- -------- --------
Income from Operations 54,163 50,429 103,796 98,823
-------- -------- -------- --------
Other Income (Expense)
Interest income 13,001 14,570 27,105 26,113
Interest expense (25,621) (12,622) (50,914) (25,185)
Gain (loss) on the sale of assets (762) (100) (771) 3,870
Other (2,094) (1,404) 25,725 (956)
-------- -------- -------- --------
Other income (expense), net (15,476) 444 1,145 3,842
-------- -------- -------- --------
Income Before Income Taxes 38,687 50,873 104,941 102,665
Provision for Income Taxes 13,927 17,042 37,779 34,393
-------- -------- -------- --------
Net Income $ 24,760 $ 33,831 $ 67,162 $ 68,272
======== ======== ======== ========
Basic Earnings Per Share $ 0.33 $ 0.32 $ 0.83 $ 0.64
======== ======== ======== ========
Diluted Earnings Per Share $ 0.33 $ 0.32 $ 0.82 $ 0.64
======== ======== ======== ========
Weighted Average Common Shares
Outstanding 75,247 104,921 80,824 106,480
Weighted Average Common and Potential
Shares Outstanding 76,048 105,652 81,614 107,425
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated
financial statements.
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
April 1, October 2,
2000 1999
- ---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 193,108 $ 426,343
Investment securities at market value 28,833 18,546
Accounts receivable, net of allowances for doubtful
accounts of $15,370 and $8,904 183,295 193,479
Current maturities of long-term notes and contracts
receivable, net of allowances 56,251 74,987
Inventories, net of allowances for obsolescence of
$26,685 and $23,901:
Raw materials 58,849 60,616
Work-in-process 3,791 4,902
Finished goods 56,740 51,094
-------- --------
Total inventories 119,380 116,612
-------- --------
Investments to fund liabilities to jackpot winners 27,897 27,702
Deferred income taxes 21,946 23,977
Assets held for sale - 42,292
Prepaid expenses and other 59,813 51,302
-------- --------
Total Current Assets 690,523 975,240
-------- --------
Long-term notes and contracts receivable, net of
allowances and current maturities 60,298 60,870
-------- --------
Property, plant and equipment, at cost
Land 19,913 19,938
Buildings 75,968 76,050
Gaming operations equipment 82,486 87,499
Manufacturing machinery and equipment 114,831 114,912
Leasehold improvements 5,145 5,361
-------- --------
Total 298,343 303,760
Less accumulated depreciation and amortization (131,198) (121,644)
-------- --------
Property, plant and equipment, net 167,145 182,116
-------- --------
Investments to fund liabilities to jackpot winners 234,660 235,230
Deferred income taxes 94,727 89,474
Intangible assets 156,351 152,036
Other assets 83,397 70,094
-------- --------
Total Assets $1,487,101 $1,765,060
========== ==========
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Balance Sheets (continued from previous page)
<TABLE>
<CAPTION>
April 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 $ 1,942 $ 3,278
Accounts payable 44,022 55,705
Jackpot liabilities 67,543 81,141
Accrued employee benefit plan liabilities 15,799 23,746
Accrued interest 31,481 30,684
Other accrued liabilities 66,659 58,013
---------- ----------
Total Current Liabilities 227,446 252,567
Long-term notes payable and capital lease
obligations, net of current maturities 990,961 990,436
Long-term jackpot liabilities 265,937 276,815
Other liabilities 8,855 3,024
---------- ----------
Total Liabilities 1,493,199 1,522,842
---------- ----------
Commitments and contingencies (see Note 9) - -
Stockholders' equity
Common stock, $.000625 par value; 320,000,000
shares authorized; 153,202,969 and 152,871,297
shares issued 96 96
Additional paid-in capital 267,521 261,941
Retained earnings 953,442 886,392
Treasury stock; 81,170,767 and 65,515,867 shares,
at cost (1,215,694) (897,234)
Accumulated other comprehensive loss (11,463) (8,977)
---------- ----------
Total Stockholders' Equity (6,098) 242,218
---------- ----------
Total Liabilities and Stockholders' Equity $1,487,101 $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>
Six Months Ended
April 1, April 3,
2000 1999
- -----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 67,162 $ 68,272
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 29,216 29,134
Amortization of discounts and deferred offering costs 1,205 -
Provision for bad debts 3,275 3,521
Impairment of assets and restructuring charges 1,779 -
Provision for inventory obsolescence 9,247 6,310
(Gain) loss on investment securities and fixed assets 771 (3,870)
Common stock awards 639 710
(Increase) decrease in assets:
Receivables 27,935 25,469
Inventories (21,190) (30,149)
Prepaid expenses and other (17,118) 1,607
Other assets (7,111) (3,699)
Net accrued and deferred income taxes, net of tax
benefit of employee stock plans 1,114 9,292
Decrease in accounts payable and accrued liabilities (15,099) (9,568)
Earnings of unconsolidated affiliates (in excess of)
less than distributions (10,587) 3,686
Other (112) 1
-------- --------
Total adjustments 3,964 32,444
-------- --------
Net cash provided by operating activities 71,126 100,716
-------- --------
Cash Flows from Investing Activities
Investment in property, plant and equipment (5,736) (6,081)
Proceeds from sale of property, plant and equipment 671 659
Purchase of investment securities (9,500) -
Proceeds from sale of investment securities - 8,791
Proceeds from investments to fund liabilities to jackpot
winners 12,337 20,902
Purchase of investments to fund liabilities to jackpot
winners (11,962) (19,489)
Proceeds from sale of other assets 41,914 -
Investment in unconsolidated affiliates (55) -
-------- --------
Net cash provided by investing activities 27,669 4,782
-------- --------
</TABLE>
(continued)
<PAGE>
Condensed Consolidated Statements of Cash Flows (continued from previous page)
<TABLE>
<CAPTION>
Six Months Ended
April 1, April 3,
2000 1999
- ----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from long-term debt 2,442 598,566
Principal payments on debt (3,812) (536,520)
Payments on jackpot liabilities (61,526) (58,240)
Collections from systems to fund jackpot liabilities 43,906 56,899
Proceeds from employee stock plans 4,562 2,473
Purchases of treasury stock (318,460) (140,774)
Payment of cash dividends - (6,458)
-------- --------
Net cash used in financing activities (332,888) (84,054)
-------- --------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 858 (3,697)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (233,235) 17,747
Cash and Cash Equivalents at:
Beginning of Period 426,343 175,413
-------- --------
End of Period $193,108 $193,160
======== ========
</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:
April 1, October 2,
2000 1999
-----------------------------------------------------------
(Dollars in thousands)
Current $12,689 $14,157
Long-term 3,930 5,497
------- -------
$16,619 $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 April 1, 2000:
Domestic
Nevada 31%
Native American casinos 21%
Atlantic City (distributor and other) 7%
Riverboats (greater Mississippi River area) 4%
Other US regions including joint ventures 8%
----
Total domestic 71%
----
International
Europe 10%
South America 9%
Australia 6%
Other international (individually
less than 3%) 4%
----
Total international 29%
----
Total 100%
====
<PAGE>
Notes to Condensed Consolidated Financial Statements, (continued)
3. Intangible Assets
Intangible assets consist of the following:
April 1, October 2,
2000 1999
---------------------------------------------------------
(Dollars in thousands)
Intellectual property $ 1,650 $ 1,650
Excess of cost over net assets
acquired 159,642 153,209
-------- --------
161,292 154,859
Less accumulated amortization (4,941) (2,823)
-------- --------
$156,351 $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 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 April 1,
2000, 72 positions have been eliminated resulting in payments of $1.1 million.
Other restructuring costs of $422,000 were paid during the first half 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 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------------------------------------------------------------------------------
(Amounts in thousand,
except per share amounts)
<S> <C> <C> <C> <C>
Net income $24,760 $ 33,831 $67,162 $ 68,272
======= ======== ======= ========
Weighted average common shares
outstanding 75,247 104,921 80,824 106,480
Dilutive effect of stock options
outstanding 801 731 790 945
------ ------- ------ -------
Weighted average common and potential
shares outstanding 76,048 105,652 81,614 107,425
======= ======= ======= =======
Basic earnings per share $ 0.33 $ 0.32 $ 0.83 $ 0.64
Diluted earnings per share $ 0.33 $ 0.32 $ 0.82 $ 0.64
Number of common shares excluded
from diluted EPS because option
exercise price was greater than
average market price 862 1,354 1,278 868
</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 Six Months Ended
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---------------------------------------------------------------------------
(Dollars in thousands)
Net income $24,760 $33,831 $67,162 $68,272
Net change in other comprehensive
income (1,304) (15) (2,486) (36)
------- ------- ------- -------
Comprehensive income $23,456 $33,816 $64,676 $68,236
======= ======= ======= =======
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 $5.0
million during the current period and $19.8 million during the comparable prior
year period.
The tax benefit of employee stock plans totaled $400,000 for both of the six
month periods ended April 1, 2000 and April 3, 1999.
Interest payments totaled $49.2 million for the first half of fiscal 2000
and $24.4 million for the same period last year. Cash payments for income taxes
totaled $59.0 million for the six months ended April 1, 2000 and $22.7 million
for the six months ended April 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 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). 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 $100.0 million in connection with the tortuous interference claim,
declaratory and injunctive relief. 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.
<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 Six Months Ended
April 1, April 3, April 1, April 3,
Lines of Business 2000 1999 2000 1999
---------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Product Sales $118,656 $139,616 $228,416 $276,220
Gaming operations 99,397 81,255 196,154 166,357
-------- -------- -------- --------
Total $218,053 $220,871 $424,570 $442,577
======== ======== ======== ========
Operating Profit
Product Sales $ 14,316 $ 25,801 $ 30,200 $ 51,329
Gaming operations 42,923 35,800 83,258 68,314
-------- -------- -------- --------
Total 57,239 61,601 113,458 119,643
-------- -------- -------- --------
Other non-allocated income
(expense), including interest
expense (18,552) (10,728) (8,517) (16,978)
-------- -------- -------- --------
Income Before Income Taxes $ 38,687 $ 50,873 $104,941 $102,665
======== ======== ======== ========
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 April 1, 2000 Compared to the Three Months Ended
April 3, 1999
Net income for the current quarter totaled $24.8 million or $0.33 per
diluted share, including a loss of $1.4 million ($900,000 net of tax) on the
sale of the gaming systems business unit purchased as a part of the Australia
Olympic acquisition. Excluding the loss on the sale, net income for the quarter
ended April 1, 2000 totaled $25.7 million or $0.34 per diluted share compared to
$33.8 million or $0.32 per diluted share in the prior year quarter.
Revenues and Gross Profit Margins
Revenues for the second quarter of fiscal 2000 totaled $218.1 million compared
to $220.9 million in the second quarter of fiscal 1999. Worldwide, IGT shipped
22,700 gaming machines for product sales of $118.7 million during the current
quarter versus 25,800 units and $139.6 million in the comparable prior year
quarter. International shipments for the quarter grew to 15,100 machines or 67%
of the total units compared to 13,500 units in the prior year period. Barcrest
contributed 11,900 gaming machines, a 47% increase, as a result of continuing
strength in its home market of the U.K., as well as positive gains in the
Spanish market. Domestic unit shipments totaled 7,600 in the current quarter
compared to 12,300 units in the year earlier quarter. The prior year quarter
included large shipments to newly opened casinos including Mandalay Bay and
Venetian resorts in Las Vegas, as well as to the Ontario Lottery, totaling
approximately 5,100 units. There were no major new openings during the current
quarter. Although unit shipments declined 38%, domestic revenues experienced
only a 22% decrease, as a result of the increasing popularity of our new games
along with higher systems and ancillary equipment sales.
Revenues from gaming operations in the second quarter of fiscal 2000
increased 22% to $99.4 million from $81.3 million for the same quarter last
year. The rapid rollout and excellent player acceptance of video Wheel of
Fortune, along with continued growth in the installed base of the original Wheel
of Fortune systems, contributed to a 38% 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. The installed base of all MegaJackpot machines grew
to 16,800 units at the end of the current quarter compared to 14,600 machines
one year earlier. Of these, 9,500 are operated in accordance with the joint
venture with Anchor Gaming, including 3,000 video Wheel of Fortune games. Four
older, less productive systems were discontinued during the quarter.
Gross profit on total revenues for the second quarter of fiscal 2000
increased 9% to $109.9 million compared to $101.2 million for the second quarter
of fiscal 1999, related primarily to growth in gaming operations. The gross
profit margin percentage on product sales was 37% for the second quarters of
both fiscal 2000 and 1999. Despite the higher mix of international units, we
maintained the prior year margin levels due to improved domestic operating
efficiencies. The gross margin on gaming operations grew to $66.5 million or 67%
in the current quarter versus $50.1 million or 62% for the second quarter of
fiscal 1999. This improvement was largely due to joint venture revenues,
reported net of expenses for accounting purposes, which grew to $25.5 million
from $18.5 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
Expenses
Selling, general and administrative expenses increased $3.7 million to $35.7
million in the second 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 16% from the prior year quarter to $5.3 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 $2.9 million to $13.3 million
for the current quarter reflecting an increase in engineering personnel
domestically. Bad debt expense totaled $1.4 million in the current quarter
compared to $2.1 million for the second quarter of fiscal 1999. The decline in
bad debt expense was primarily due to specific reserves recorded in the prior
year related to Latin American receivables.
Operating income improved to $54.2 million or 25% of revenues in the current
quarter compared to $50.4 million or 23% of revenues in the second quarter of
fiscal 1999, due primarily to the improved gross profit margin in gaming
operations and the increased operating efficiencies in domestic product sales
discussed above.
Other Income and Expense
Other income and expense resulted in a net expense for the current quarter
of $15.5 million versus income of $400,000 in the second quarter of fiscal 1999,
primarily related to increased interest expense from our outstanding $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.
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 for the current quarter totaled $14.3 million
or 12% of related revenues compared to $25.8 million or 18% of manufacturing
revenues in the prior period. The fluctuation reflects decreased sales volume
due to fewer new casino openings, increased research and development costs and
increased interest expense allocated to the manufacturing segment from the $1.0
billion Senior Notes.
Fiscal 2000 second quarter operating profit for the gaming operations
segment increased $7.1 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 MegaJackpots gaming systems, 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
Six Months Ended April 1, 2000 Compared to the Six Months Ended April 3, 1999
Net income for the first half of fiscal 2000 totaled $67.2 million or $.82
per diluted share, including the effects of the following one-time events:
*a loss of $1.4 million ($900,000 net of tax) on the sale of the gaming
systems business unit purchased as a part of the Australia Olympic
acquisition;
*a patent infringement 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)
related primarily to our Australian operations.
Excluding these one-time events, net income for the six months ended April 1,
2000 totaled $52.0 million or $0.64 per diluted share compared to $68.3 million
or $0.64 per diluted share in the prior year period.
Revenues and Gross Profit Margins
Revenues for the first six months of fiscal 2000 totaled $424.6 million
compared to $442.6 million in the first half of fiscal 1999. Worldwide, IGT
shipped 42,300 gaming machines for product sales of $228.4 million during the
six months ended April 1, 2000 versus 58,000 units and $276.2 million in the
comparable prior year period. International shipments for the current
year-to-date period totaled 26,300 machines or 62% of the total units compared
to 38,400 units in the prior year period. Barcrest contributed 18,600 gaming
machines, a 20% increase, as a result of continuing strength in its home market
of the U.K., as well as positive gains in the Spanish market. Fiscal 1999 totals
were positively effected by record sales in Japan, attributable to our most
popular pachisuro game, Popper King. Domestic unit shipments totaled 16,000
during the current year-to-date period compared to 19,500 machines for the same
period of last year. This decrease related to fewer new casino openings in the
first six months of fiscal 2000. Although unit shipments declined 18%, domestic
revenues experienced only a 7% decrease, as a result of the increasing
popularity of our new games, along with higher systems and ancillary equipment
sales.
Revenues from gaming operations in the first six months of fiscal 2000
increased 18% to $196.2 million from $166.4 million for the same period last
year. The rapid rollout and excellent player acceptance of video Wheel of
Fortune, along with continued growth in the installed base of the original Wheel
of Fortune systems, contributed to a 24% year-to-date 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. The installed base of all MegaJackpot machines grew
to 16,800 units at the end of the current period compared to 14,600 machines one
year earlier. Of these, 9,500 are operated in accordance with the joint venture
with Anchor Gaming, including 3,000 video Wheel of Fortune games. Sixteen older,
less productive legacy systems were discontinued during the first half of fiscal
2000.
Gross profit on total revenues for the first half of fiscal 2000 increased
9% to $214.9 million compared to $197.5 million for the first six months of
fiscal 1999, related primarily to growth in gaming operations. The gross profit
margin percentage on product sales was 37% for the first six months of both
fiscal 2000 and 1999. Decreased international margins were offset by improved
domestic margins, primarily due to reductions in inventory obsolescence, the
elimination of the distributor discount to Sodak, and improved domestic
operating efficiencies. The gross margin on gaming operations grew to $130.0
million or 66% in the current year-to-date period versus $96.6 million or 58%
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, which totaled $47.1
million for the current year period and $38.0 million for
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
the prior year period. 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 $7.0 million to $68.7
million in the first half 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 six months declined 14% from the prior year period to $10.6
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 $5.6 million to $26.7 million
for the current six month period, primarily due to increased engineering
personnel domestically. Bad debt expense totaled $3.3 million in the current
year-to-date period compared to $3.5 million for the same period of fiscal 1999.
The decline in bad debt expense was primarily due to specific reserves recorded
in the prior year related to Latin American receivables.
Operating income, excluding restructuring charges, improved to $105.6
million or 25% of revenues in the current six month period compared to $98.8
million or 22% of revenues in the same period last year. This increase is due
primarily to the improved gross profit margin in gaming operations and the
increased operating efficiencies in domestic product sales discussed above.
Other Income and Expense
Other income, net, for the current six month period totaled $1.1 million versus
$3.8 million in the first half of fiscal 1999. The $27.0 million settlement from
WMS was 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
period, 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 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 for the first six months of fiscal 2000
totaled $30.2 million or 13% of related revenues compared to $51.3 million or
19% in the same period last year. The fluctuation reflects decreased sales
volume due to fewer new casino openings, increased research and development
costs and increased interest expense allocated to the manufacturing segment from
our outstanding $1.0 billion Senior Notes.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In the first half of fiscal 2000, operating profit for the gaming operations
segment increased $14.9 million or 22% compared to the prior year period. This
improvement resulted from the growth of the installed base and excellent player
acceptance of our new MegaJackpots gaming systems, the inclusion of gaming
operations revenue from Sodak, and higher interest rates.
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 $259.6 million to $463.1 million during the first
six 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 as a result of sales volume. Changes in
current liabilities included decreases in accounts payable and jackpot
liabilities, offset by an increase in accrued liabilities. Accrued liabilities
includes accrued interest on new borrowings.
Cash Flows
IGT's cash and cash equivalents totaled $193.1 million at April 1, 2000, a
$233.2 million decrease from the prior fiscal year end. Cash provided by
operating activities totaled $71.1 million in the first six months of fiscal
2000 compared to $100.7 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 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 $17.2 million in the first six months of fiscal 2000 and
provided $72,000 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 our
MegaJackpot systems.
Cash provided by investing activities increased to $27.7 million in the
first six months of fiscal 2000 from $4.8 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 $318.5 million in the current six
month period and $140.8 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 $68.8
million and $133.0 million for the current quarter and six months versus $65.9
million and $128.0 million for the comparable periods of fiscal 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Credit Facilities
Our domestic and foreign borrowing facilities totaled $279.9 million at
April 1, 2000. Of this amount, $1.9 million was drawn, $3.2 million was reserved
for letters of credit and the remaining $274.8 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 April 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 April 29, 2000, the remaining share repurchase
authorization, as amended, totaled 10.8 million additional shares. During the
period October 3, 1999 to April 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.
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
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
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 $55.9 million at
April 1, 2000 and $41.7 million at October 2, 1999. Of this exposure, $51.7
million at April 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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk, (continued)
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 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. We estimate that a 10% decline in interest rates
would have impacted gaming operations gross profit by $1.5 million in the
current year-to-date period and $1.7 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 $44.0 million at April 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 (a) On March 6,
2000, the Company held its annual meeting of stockholders.
(b) The following directors were elected to serve until the next annual
meeting: Albert J. Crosson, Wilbur K. Keating, Charles N. Mathewson, Bob
Miller, Frederick B. Rentschler, John J. Russell and Rockwell A. Schnabel.
These directors constitute all of the directors of the Company, with the
exception of Mr. John J. Russell who resigned on March 24, 2000. Voting at
the meeting was as follows:
Motion Votes Cast Votes
For Withheld
--------------------- ------------ ----------
Albert J. Crosson 58,982,460 448,699
Wilbur K. Keating 58,970,214 460,945
Charles N. Mathewson 58,983,997 447,162
Bob Miller 58,112,724 1,318,435
Frederick B. Rentschler 58,905,462 525,697
John J. Russell 58,839,231 591,928
Rockwell A. Schnabel 58,992,254 438,905
Item 5. Other Information
None.
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: May 16, 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 six months ended April 1,
2000 and the Condensed Consolidated Balance Sheet as of April 1,2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> APR-1-2000
<CASH> 193,108
<SECURITIES> 28,833
<RECEIVABLES> 183,295
<ALLOWANCES> 28,059
<INVENTORY> 119,380
<CURRENT-ASSETS> 690,523
<PP&E> 298,343
<DEPRECIATION> 131,198
<TOTAL-ASSETS> 1,487,101
<CURRENT-LIABILITIES> 227,446
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 267,521
<TOTAL-LIABILITY-AND-EQUITY> 1,487,101
<SALES> 228,416
<TOTAL-REVENUES> 424,570
<CGS> 143,483
<TOTAL-COSTS> 209,656
<OTHER-EXPENSES> 107,843
<LOSS-PROVISION> 3,275
<INTEREST-EXPENSE> 50,914
<INCOME-PRETAX> 104,941
<INCOME-TAX> 37,779
<INCOME-CONTINUING> 67,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,162
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.82
</TABLE>
