-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WMT5EHWe6GBoodSb1R7OD6vccGu2xZY5ZqxceH15iNGOSD+Ahg6vXktzU3/UnPKv IUuFoZ+xRh3ffIqBUxjp4Q== /in/edgar/work/20000815/0000353944-00-000010/0000353944-00-000010.txt : 20000922 0000353944-00-000010.hdr.sgml : 20000921 ACCESSION NUMBER: 0000353944-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000701 FILED AS OF DATE: 20000815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL GAME TECHNOLOGY CENTRAL INDEX KEY: 0000353944 STANDARD INDUSTRIAL CLASSIFICATION: [3990 ] IRS NUMBER: 880173041 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10684 FILM NUMBER: 701980 BUSINESS ADDRESS: STREET 1: 9295 PROTOTYPE DRIVE CITY: RENO STATE: NV ZIP: 89511 BUSINESS PHONE: 7754487777 MAIL ADDRESS: STREET 1: 9295 PROTOTYPE DRIVE CITY: RENO STATE: NV ZIP: 89511 10-Q 1 0001.txt 3RD QUARTER 10-Q 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 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 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. Condensed Consolidated Statements of Income
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) 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
The accompanying notes are an integral part of these condensed consolidated financial statements. 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) Condensed Consolidated Balance Sheets (continued from previous page)
July 1, October 2, 2000 1999 - ------------------------------------------------------------------------------------- (Dollars in thousands) 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 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 1, July 3, 2000 1999 - ----------------------------------------------------------------------------------------- (Dollars in thousands) 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) --------- ---------
(continued) Condensed Consolidated Statements of Cash Flows (continued from previous page)
Nine Months Ended July 1, July 3, 2000 1999 - ----------------------------------------------------------------------------------- (Dollars in thousands) 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 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 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% ==== 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:
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) 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Condensed Consolidated Statements of Income for the nine months ended July 1, 2000 and the Condensed Consolidated Balance Sheet as of July 1,2000 and is qualified in its entirety by reference to such financial statements. 1000 9-MOS SEP-30-2000 OCT-03-1999 JUL-1-2000 204,021 20,578 190,040 29,618 134,763 730,430 302,889 137,900 1,487,101 231,227 0 0 0 96 274,078 1,539,433 395,144 688,240 244,978 341,396 163,594 7,284 76,532 163,736 58,944 104,792 0 0 0 104,792 1.34 1.33
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