CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Six Months Ended March 31,
|
|
2012
|
|
|
2011
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
Net income
|
|
$ |
111.2 |
|
|
$ |
143.3 |
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
115.2 |
|
|
|
109.2 |
|
|
Discounts and deferred issuance costs
|
|
|
20.1 |
|
|
|
22.4 |
|
|
Share-based compensation
|
|
|
16.7 |
|
|
|
22.9 |
|
|
Net loss on disposal and impairment
|
|
|
1.5 |
|
|
|
- |
|
|
Excess tax benefits from employee stock plans
|
|
|
(2.3 |
) |
|
|
(2.8 |
) |
|
Other non-cash items
|
|
|
3.8 |
|
|
|
(5.7 |
) |
|
Changes in operating assets and liabilities, excluding acquisitions:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(28.5 |
) |
|
|
3.8 |
|
|
Inventories
|
|
|
(14.6 |
) |
|
|
(6.2 |
) |
|
Accounts payable and accrued liabilities
|
|
|
3.8 |
|
|
|
(35.4 |
) |
|
Jackpot liabilities
|
|
|
(21.9 |
) |
|
|
(56.4 |
) |
|
Income taxes, net of employee stock plans
|
|
|
(11.5 |
) |
|
|
50.5 |
|
|
Other assets and deferred costs
|
|
|
(16.8 |
) |
|
|
18.1 |
|
|
Net operating cash flows
|
|
|
176.7 |
|
|
|
263.7 |
|
|
Investing
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(123.6 |
) |
|
|
(89.3 |
) |
|
Proceeds from assets sold
|
|
|
19.8 |
|
|
|
9.2 |
|
|
Jackpot annuity investments, net
|
|
|
23.6 |
|
|
|
26.6 |
|
|
Changes in restricted cash
|
|
|
3.2 |
|
|
|
23.0 |
|
|
Loans receivable cash advanced
|
|
|
- |
|
|
|
(0.5 |
) |
|
Loans receivable payments received
|
|
|
14.9 |
|
|
|
14.8 |
|
|
Unconsolidated affiliates, net
|
|
|
- |
|
|
|
16.5 |
|
|
Business acquisitions, net of cash acquired
|
|
|
(233.0 |
) |
|
|
- |
|
|
Net investing cash flows
|
|
|
(295.1 |
) |
|
|
0.3 |
|
|
Financing
|
|
|
|
|
|
|
|
|
|
Debt proceeds
|
|
|
- |
|
|
|
95.0 |
|
|
Debt repayments
|
|
|
- |
|
|
|
(195.0 |
) |
|
Employee stock plan proceeds
|
|
|
12.0 |
|
|
|
13.9 |
|
|
Excess tax benefits from employee stock plans
|
|
|
2.3 |
|
|
|
2.8 |
|
|
Share repurchases
|
|
|
(50.1 |
) |
|
|
- |
|
|
Noncontrolling interest acquired
|
|
|
(2.5 |
) |
|
|
- |
|
|
Dividends paid
|
|
|
(35.7 |
) |
|
|
(35.8 |
) |
|
Net financing cash flows
|
|
|
(74.0 |
) |
|
|
(119.1 |
) |
|
Foreign exchange rates effect on cash and equivalents
|
|
|
3.5 |
|
|
|
2.6 |
|
|
Net change in cash and equivalents
|
|
|
(188.9 |
) |
|
|
147.5 |
|
|
Beginning cash and equivalents
|
|
|
460.0 |
|
|
|
158.4 |
|
|
Ending cash and equivalents
|
|
$ |
271.1 |
|
|
$ |
305.9 |
|
SUPPLEMENTAL CASH FLOWS INFORMATION
“Depreciation and amortization” reflected in the cash flows statements are comprised of amounts presented separately on the income statements, plus “depreciation and amortization” included in cost of gaming operations, cost of product sales and discontinued operations.
|
Six Months Ended March 31,
|
|
2012
|
|
|
2011
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Unconsolidated affiliates
|
|
|
|
|
|
|
|
Proceeds from
|
|
|
- |
|
|
|
16.5 |
|
|
Net
|
|
$ |
- |
|
|
$ |
16.5 |
|
|
Jackpot funding
|
|
|
|
|
|
|
|
|
|
Change in jackpot liabilities
|
|
$ |
(21.9 |
) |
|
$ |
(56.4 |
) |
| |
|
|
|
|
|
|
|
|
|
Jackpot annuity purchases
|
|
|
(6.2 |
) |
|
|
(3.8 |
) |
|
Jackpot annuity proceeds
|
|
|
29.8 |
|
|
|
30.4 |
|
|
Net change in jackpot annuity investments
|
|
|
23.6 |
|
|
|
26.6 |
|
|
Net jackpot funding
|
|
$ |
1.7 |
|
|
$ |
(29.8 |
) |
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$ |
(34.5 |
) |
|
$ |
(8.4 |
) |
|
Gaming operations equipment
|
|
|
(87.1 |
) |
|
|
(80.2 |
) |
|
Intellectual property
|
|
|
(2.0 |
) |
|
|
(0.7 |
) |
|
Total
|
|
$ |
(123.6 |
) |
|
$ |
(89.3 |
) |
|
Payments
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
29.6 |
|
|
$ |
37.6 |
|
|
Income taxes
|
|
|
72.5 |
|
|
|
15.7 |
|
|
Non-cash investing and financing items:
|
|
|
|
|
|
|
|
|
|
Accrued capital asset additions
|
|
$ |
0.7 |
|
|
$ |
0.2 |
|
|
Interest accretion for jackpot annuity investments
|
|
|
10.2 |
|
|
|
11.5 |
|
| |
|
|
|
|
|
|
|
|
|
Business acquisitions/purchase price adjustments
|
|
|
|
|
|
|
|
|
|
Fair value of assets
|
|
$ |
352.3 |
|
|
$ |
- |
|
|
Fair value of liabilities
|
|
|
2.7 |
|
|
|
- |
|
See accompanying notes
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
Our fiscal year is reported on a 52/53-week period ending on the Saturday nearest to September 30. Similarly, our quarters end on the Saturday nearest to the last day of the quarter end month. For simplicity, fiscal periods in this report are presented using the calendar month end as outlined in the table below.
| |
|
Period End
|
| |
|
Actual
|
|
Presented as
|
|
Current quarter
|
|
March 31, 2012
|
|
March 31, 2012
|
|
Prior year quarter
|
|
April 2, 2011
|
|
March 31, 2011
|
|
Prior year end
|
|
October 1, 2011
|
|
September 30, 2011
|
Our consolidated interim financial statements include the accounts of International Game Technology, including all majority-owned or controlled subsidiaries and VIEs for which we are the primary beneficiary. All inter-company accounts and transactions have been eliminated.
Our consolidated interim financial statements for the current quarter ended March 31, 2012 were prepared without audit on a basis consistent with the comparative quarter ended March 31, 2011, and as appropriate, with the audited financial statements for the year ended September 30, 2011. Certain information and footnote disclosures have been condensed or omitted in conformity with SEC and US GAAP requirements.
Our consolidated interim financial statements include all adjustments of a normal recurring nature necessary to fairly state our consolidated results of operations, financial position, and cash flows for all periods presented. Interim period results are not necessarily indicative of full year results. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2011.
Unless otherwise indicated in this report:
|
·
|
references to years relate to our fiscal years ending September 30
|
|
·
|
dollar amounts in tables are presented in millions, except EPS and par value
|
|
·
|
current refers to the quarter ended March 31, 2012
|
|
·
|
italicized text with an attached superscript trademark or copyright notation indicates trademarks of IGT or its licensors, and additional IGT trademark information is available on our website at www.IGT.com
|
Our consolidated interim financial statements are prepared in conformity with US GAAP. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect reported amounts for assets, liabilities, revenues, expenses, and related disclosures. Actual results may differ from initial estimates.
Restricted Cash and Investments
We are required by gaming regulation to maintain sufficient reserves in restricted accounts to be used for the purpose of funding payments to WAP jackpot winners. Restricted amounts are based primarily on the jackpot meters displayed to slot players and vary by jurisdiction. Compliance with restricted cash and investments requirements for jackpot funding is reported to the gaming authorities in various jurisdictions.
Additionally, restricted cash and investments included online player deposits of $12.5 million at March 31, 2012 and $14.5 million at September 30, 2011.
Recently Adopted Accounting Standards or Updates
At the beginning of 2012, we adopted accounting standards issued in January 2010 that require separate disclosure of purchases, sales, issuances, and settlements of fair value instruments within the Level 3 reconciliation. The adoption of this ASU did not have a material impact on our financial statements.
Accruals for Casino Jackpot Liabilities
At the beginning of 2012, we adopted accounting standards issued in April 2010, clarifying that jackpot liabilities should not be accrued before they are won if the payout can be avoided. This ASU did not have a material impact on our financial statements.
In May 2011, the FASB issued an ASU to amend fair value measurements to achieve convergence between US GAAP and IFRS. See Note 8 for additional information about fair value measurements. This adoption in our second quarter of 2012 changed some fair value measurement principles and disclosure requirements, but did not have a material impact on our financial statements.
Recently Issued Accounting Standards or Updates—Not Yet Adopted
Qualitative Goodwill Impairment Assessment
In September 2011, the FASB issued an ASU to simplify the annual goodwill impairment test by allowing an entity to first assess qualitative factors, considering the totality of events and circumstances, to determine that there is a greater than 50% likelihood that the carrying amount of a reporting unit is less than its fair value. If so, then the two-step impairment test is not required. The ASU will be effective for our 2013 first quarter and we are currently evaluating whether we will adopt early, as permitted. This ASU is not expected to have a material impact on our financial statements.
Presentation of Other Comprehensive Income
In June 2011, the FASB issued an ASU to require other comprehensive income, including income reclassification adjustments, to be presented with net income in one continuous statement or in a separate statement consecutively following net income. In December 2011, the requirement to disclose the income reclassification adjustments by component was deferred indefinitely. This ASU will be effective for our 2013 first quarter and is not expected to have a material impact on our financial statements.
Offsetting Assets and Liabilities
In December 2011, the FASB issued an ASU to require new disclosures associated with offsetting financial instruments and derivative instruments on the balance sheet that will enable users to evaluate the effect on an entity’s financial position. This ASU will be effective for our 2014 first quarter and, is not expected to have a material impact on our financial statements.
2. VARIABLE INTERESTS AND AFFILIATES
Variable Interest Entities
New Jersey regulation requires that annuitized WAP jackpot payments to winners be administered through an individual trust set up for each WAP system. These trusts are VIEs and IGT is the primary consolidating beneficiary, because these VIE trusts are designed for the sole purpose of administering jackpot payments for IGT WAP winners and IGT guarantees all liabilities of the trusts. The assets of these consolidated VIEs can only be used to settle trust obligations and have been segregated on our balance sheet.
The consolidation of these VIEs primarily increases jackpot liabilities and related assets, as well as interest income and equivalent offsetting interest expense. Consolidated VIE trust assets and equivalent liabilities totaled $65.3 million at March 31, 2012 and $69.7 million at September 30, 2011.
Investments in Unconsolidated Affiliates
China LotSynergy Holdings, Ltd.
During the 2011 first quarter, we sold our CLS stock investment for net proceeds of $16.5 million and recognized a gain of $4.3 million.
The fair value of our CLS convertible note, including the default put, totaled $9.2 million at March 31, 2012 and $9.3 million at September 30, 2011. The adjusted cost basis of the note, including the conversion option derivative that did not require bifurcation, totaled $9.3 million at March 31, 2012 and $8.9 million at September 30, 2011. The fair value of the free standing derivative default put, was zero at March 31, 2012 and was $0.4 million at September 30, 2011.
See Note 8 and 9 for additional information about related fair value assumptions and derivatives.
|
Allowances for Credit Losses
|
|
March 31,
2012
|
|
|
September 30,
2011
|
|
|
Total
|
|
$ |
16.5 |
|
|
$ |
17.6 |
|
Customer Financing (Contracts and Notes)
| |
|
March 31,
2012
|
|
|
September 30,
2011
|
|
| Recorded Investment (principal and interest due, net of deferred interest and fees) |
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$ |
113.4 |
|
|
$ |
104.2 |
|
|
Collectively evaluated for impairment
|
|
|
282.7 |
|
|
|
260.7 |
|
|
Total
|
|
$ |
396.1 |
|
|
$ |
364.9 |
|
| |
|
|
|
|
|
|
|
|
| Allowances for Credit Losses |
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$ |
56.9 |
|
|
$ |
58.6 |
|
|
Collectively evaluated for impairment
|
|
|
13.6 |
|
|
|
12.8 |
|
|
Total
|
|
$ |
70.5 |
|
|
$ |
71.4 |
|
| |
|
Quarters Ended
March 31,
|
|
|
Six Months Ended
March 31,
|
|
|
Reconciliation of Allowances for Credit Losses
|
|
2012 |
|
|
2011 |
|
|
2012
|
|
|
2011
|
|
|
Beginning balance
|
|
$ |
70.1 |
|
|
$ |
77.7 |
|
|
$ |
71.4 |
|
|
$ |
78.4 |
|
|
Charge-offs
|
|
|
- |
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
(1.0 |
) |
|
Recoveries
|
|
|
- |
|
|
|
0.3 |
|
|
|
- |
|
|
|
0.4 |
|
|
Provisions
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
(0.9 |
) |
|
|
0.2 |
|
|
Ending balance
|
|
$ |
70.5 |
|
|
$ |
78.0 |
|
|
$ |
70.5 |
|
|
$ |
78.0 |
|
|
Current
|
|
$ |
46.8 |
|
|
$ |
43.7 |
|
|
$ |
46.8 |
|
|
$ |
43.7 |
|
|
Non-current
|
|
$ |
23.7 |
|
|
$ |
34.3 |
|
|
$ |
23.7 |
|
|
$ |
34.3 |
|
| |
|
March 31, 2012
|
|
|
September 30, 2011
|
|
|
Age Analysis of Recorded Investment
|
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Past Due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-29 days
|
|
$ |
5.1 |
|
|
$ |
1.4 |
|
|
$ |
6.5 |
|
|
$ |
5.3 |
|
|
$ |
2.0 |
|
|
$ |
7.3 |
|
|
30-59 days
|
|
|
3.8 |
|
|
|
1.4 |
|
|
|
5.2 |
|
|
|
2.0 |
|
|
|
1.8 |
|
|
|
3.8 |
|
|
60-89 days
|
|
|
2.2 |
|
|
|
1.4 |
|
|
|
3.6 |
|
|
|
1.2 |
|
|
|
1.8 |
|
|
|
3.0 |
|
|
Over 90 days
|
|
|
6.5 |
|
|
|
41.7 |
|
|
|
48.2 |
|
|
|
6.3 |
|
|
|
31.0 |
|
|
|
37.3 |
|
|
Total past due
|
|
$ |
17.6 |
|
|
$ |
45.9 |
|
|
$ |
63.5 |
|
|
$ |
14.8 |
|
|
$ |
36.6 |
|
|
$ |
51.4 |
|
|
Total current
|
|
|
234.1 |
|
|
|
98.5 |
|
|
|
332.6 |
|
|
|
188.1 |
|
|
|
125.4 |
|
|
|
313.5 |
|
|
Grand total
|
|
$ |
251.7 |
|
|
$ |
144.4 |
|
|
$ |
396.1 |
|
|
$ |
202.9 |
|
|
$ |
162.0 |
|
|
$ |
364.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 90 days and accruing interest
|
|
$ |
2.6 |
|
|
$ |
0.1 |
|
|
$ |
2.7 |
|
|
$ |
2.6 |
|
|
$ |
0.1 |
|
|
$ |
2.7 |
|
|
Nonaccrual status (not accruing interest)
|
|
|
19.4 |
|
|
|
84.0 |
|
|
|
103.4 |
|
|
|
24.2 |
|
|
|
84.0 |
|
|
|
108.2 |
|
| |
|
March 31, 2012 |
|
|
September 30, 2011 |
|
| Recorded Investment by Credit Quality Indicator Using Credit Profile by Internally Assigned Risk Grade |
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Low
|
|
$ |
76.2 |
|
|
$ |
- |
|
|
$ |
76.2 |
|
|
$ |
43.9 |
|
|
$ |
- |
|
|
$ |
43.9 |
|
|
Medium
|
|
|
28.3 |
|
|
|
0.3 |
|
|
|
28.6 |
|
|
|
25.8 |
|
|
|
0.3 |
|
|
|
26.1 |
|
|
High*
|
|
|
147.2 |
|
|
|
144.1 |
|
|
|
291.3 |
|
|
|
133.2 |
|
|
|
161.7 |
|
|
|
294.9 |
|
|
Total recorded investment
|
|
$ |
251.7 |
|
|
$ |
144.4 |
|
|
$ |
396.1 |
|
|
$ |
202.9 |
|
|
$ |
162.0 |
|
|
$ |
364.9 |
|
|
* includes $84.0 of impaired Alabama notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
March 31, 2012
|
|
|
September 30, 2011
|
|
| |
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Recorded investment
|
|
$ |
1.8 |
|
|
$ |
84.0 |
|
|
$ |
85.8 |
|
|
$ |
5.2 |
|
|
$ |
84.0 |
|
|
$ |
89.2 |
|
|
Unpaid principal face
|
|
|
1.7 |
|
|
|
85.2 |
|
|
|
86.9 |
|
|
|
5.1 |
|
|
|
85.2 |
|
|
|
90.3 |
|
|
Related allowance
|
|
|
1.1 |
|
|
|
55.8 |
|
|
|
56.9 |
|
|
|
2.8 |
|
|
|
55.8 |
|
|
|
58.6 |
|
|
Average recorded investment
|
|
|
3.5 |
|
|
|
84.0 |
|
|
|
87.5 |
|
|
|
8.8 |
|
|
|
87.6 |
|
|
|
96.4 |
|
|
Interest income recognized on impaired loans
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
| |
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Contracts
|
|
|
Notes
|
|
|
Total
|
|
|
Quarter-to-date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.2 |
|
|
$ |
- |
|
|
$ |
0.2 |
|
|
Year-to-date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.5 |
|
|
$ |
0.3 |
|
|
$ |
0.8 |
|
|
Cash-basis
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.3 |
|
4. CONCENTRATIONS OF CREDIT RISK
|
Receivables By Legal Gaming Region At March 31, 2012
|
|
|
Nevada
|
|
|
10 |
% |
|
Alabama
|
|
|
5 |
|
|
Oklahoma
|
|
|
4 |
|
|
New Jersey
|
|
|
4 |
|
|
Other (less than 4% individually)
|
|
|
28 |
|
|
North America
|
|
|
51 |
% |
| |
|
|
|
|
|
Argentina
|
|
|
24 |
% |
|
Europe
|
|
|
7 |
|
|
Australia
|
|
|
5 |
|
|
Other (less than 4% individually)
|
|
|
13 |
|
|
International
|
|
|
49 |
% |
| |
|
March 31,
|
|
|
September 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
Raw materials
|
|
$ |
44.0 |
|
|
$ |
44.1 |
|
|
Work-in-process
|
|
|
3.8 |
|
|
|
2.4 |
|
|
Finished goods
|
|
|
42.8 |
|
|
|
26.5 |
|
|
Total
|
|
$ |
90.6 |
|
|
$ |
73.0 |
|
6. PROPERTY, PLANT AND EQUIPMENT
| |
|
March 31,
|
|
|
September 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
Land
|
|
$ |
62.7 |
|
|
$ |
62.6 |
|
|
Buildings
|
|
|
234.4 |
|
|
|
232.8 |
|
|
Leasehold improvements
|
|
|
18.0 |
|
|
|
17.3 |
|
|
Machinery, furniture and equipment
|
|
|
277.4 |
|
|
|
248.6 |
|
|
Gaming operations equipment
|
|
|
834.4 |
|
|
|
812.9 |
|
|
Total
|
|
|
1,426.9 |
|
|
|
1,374.2 |
|
|
Less accumulated depreciation
|
|
|
(844.9 |
) |
|
|
(822.1 |
) |
|
Property, plant and equipment, net
|
|
$ |
582.0 |
|
|
$ |
552.1 |
|
7. GOODWILL AND OTHER INTANGIBLES
|
Activity By Segment
|
|
North
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2012
|
|
America
|
|
|
International
|
|
|
Total
|
|
|
Beginning balance
|
|
$ |
1,042.8 |
|
|
$ |
188.6 |
|
|
$ |
1,231.4 |
|
|
Acquisitions (see Note 17)
|
|
|
234.6 |
|
|
|
- |
|
|
|
234.6 |
|
|
Foreign currency adjustments
|
|
|
- |
|
|
|
4.6 |
|
|
|
4.6 |
|
|
Ending balance
|
|
$ |
1,277.4 |
|
|
$ |
193.2 |
|
|
$ |
1,470.6 |
|
|
Additions
For the Six Months Ended March 31, 2012
|
|
Business
Combinations
(See Note 17)
|
|
|
Other
Additions
|
|
|
Weighted
Average Life
(Years)
|
|
|
Patents (including capitalized legal costs)
|
|
$ |
- |
|
|
$ |
0.7 |
|
|
|
4 |
|
|
Developed technology
|
|
|
51.8 |
|
|
|
- |
|
|
|
6 |
|
|
Customer relationships
|
|
|
47.3 |
|
|
|
- |
|
|
|
4 |
|
|
Trademarks
|
|
|
10.9 |
|
|
|
- |
|
|
|
5 |
|
|
Reaquired rights
|
|
|
- |
|
|
|
1.3 |
|
|
|
2 |
|
|
Total
|
|
$ |
110.0 |
|
|
$ |
2.0 |
|
|
|
|
|
| |
|
March 31, 2012
|
|
|
September 30, 2011
|
|
| |
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Ending Balances
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Patents
|
|
$ |
383.5 |
|
|
$ |
285.4 |
|
|
$ |
98.1 |
|
|
$ |
382.8 |
|
|
$ |
270.5 |
|
|
$ |
112.3 |
|
|
Developed technology
|
|
|
131.7 |
|
|
|
52.4 |
|
|
|
79.3 |
|
|
|
86.9 |
|
|
|
54.0 |
|
|
|
32.9 |
|
|
Contracts
|
|
|
23.5 |
|
|
|
19.7 |
|
|
|
3.8 |
|
|
|
25.5 |
|
|
|
19.5 |
|
|
|
6.0 |
|
|
Reacquired rights
|
|
|
14.7 |
|
|
|
2.7 |
|
|
|
12.0 |
|
|
|
13.4 |
|
|
|
2.1 |
|
|
|
11.3 |
|
|
Customer relationships
|
|
|
61.1 |
|
|
|
10.8 |
|
|
|
50.3 |
|
|
|
14.2 |
|
|
|
6.9 |
|
|
|
7.3 |
|
|
Trademarks
|
|
|
12.5 |
|
|
|
1.5 |
|
|
|
11.0 |
|
|
|
2.1 |
|
|
|
1.5 |
|
|
|
0.6 |
|
|
Total
|
|
$ |
627.0 |
|
|
$ |
372.5 |
|
|
$ |
254.5 |
|
|
$ |
524.9 |
|
|
$ |
354.5 |
|
|
$ |
170.4 |
|
| |
|
Quarters Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31,
|
|
|
March 31,
|
|
|
Future Annual Estimates
|
|
|
Aggregate Amortization
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
| |
|
$ |
16.6 |
|
|
$ |
11.0 |
|
|
$ |
27.2 |
|
|
$ |
23.3 |
|
|
$ |
57.5 |
|
|
$ |
89.9 |
|
|
$ |
79.9 |
|
|
$ |
58.5 |
|
|
$ |
36.3 |
|
8. FAIR VALUE MEASUREMENTS
Financial Assets (Liabilities) Carried at Fair Value
| |
|
Fair
|
|
|
|
|
|
|
|
|
|
|
| |
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$ |
83.5 |
|
|
$ |
83.5 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Investments in unconsolidated affiliates
|
|
|
9.2 |
|
|
|
- |
|
|
|
- |
|
|
|
9.2 |
|
|
Derivative assets
|
|
|
84.8 |
|
|
|
- |
|
|
|
84.8 |
|
|
|
- |
|
|
Derivative liabilities
|
|
|
(87.0 |
) |
|
|
- |
|
|
|
(87.0 |
) |
|
|
- |
|
|
Acquisition contingent consideration payable
|
|
|
(90.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
(90.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$ |
76.9 |
|
|
$ |
76.9 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Investments in unconsolidated affiliates
|
|
|
9.3 |
|
|
|
- |
|
|
|
- |
|
|
|
9.3 |
|
|
Derivative assets
|
|
|
90.8 |
|
|
|
- |
|
|
|
90.8 |
|
|
|
- |
|
|
Derivative liabilities
|
|
|
(93.2 |
) |
|
|
- |
|
|
|
(93.2 |
) |
|
|
- |
|
Valuation Techniques and Balance Sheet Presentation
Money market funds were primarily money market securities valued based on quoted market prices in active markets.
Investments in unconsolidated affiliates were valued using an integrated lattice model incorporating market participant assumptions for publicly traded stock price (HK$0.11 at March 30, 2012), risk-free rate (.06%), credit rating (B+), bond yield (1.95%), daily stock price volatility (63%) and default recovery rate (40%). Generally, changes in risk free rate and credit rating will result in inverse changes in fair value, while changes in stock price, stock price volatility, bond yield and recovery rate result in directionally similar changes in fair value. Changes in credit rating are generally accompanied by directionally opposite changes in bond yield. These investments were presented as a component of other current assets. See Note 2.
Derivative assets and liabilities were valued using quoted forward pricing from bank counterparties, LIBOR credit default swap rates for non-performance risk, and net settlement amounts where appropriate. These are presented primarily as components of other assets, other liabilities, and notes payable. See Note 9.
Acquisition contingent consideration payable related to DoubleDown reaching certain earnings targets was valued with a DCF model applied to the expected payments determined based on probability-weighted internal earnings projections. We applied a rate of probability (15% - 65%) to each scenario, as well as a risk-adjusted discount rate of 19%, to derive the estimated fair value at March 31, 2012. Changes in the projections and/or the probabilities are the most significant assumptions and result in directionally similar changes in the fair value. Discount rate changes cause a directionally opposite change in the fair value. Acquisition contingent consideration payable was presented as a component of other current ($29.5 million) and noncurrent liabilities ($61.2 million) and changes in its fair value are recorded to contingent acquisition related costs on the income statement, along with accrued retention plan compensation. See Note 17.
Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)
|
Six Months Ended March 31,
|
|
2012
|
|
|
2011
|
|
| |
|
Investments
in
Unconsolidated
Affiliates
|
|
|
Acquisition
Contingent
Consideration
Payable
|
|
|
Investments
in
Unconsolidated
Affiliates
|
|
|
Beginning balance
|
|
$ |
9.3 |
|
|
$ |
- |
|
|
$ |
21.3 |
|
|
Gain (loss) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) - other
|
|
|
(0.4 |
) |
|
|
- |
|
|
|
(2.0 |
) |
|
Other comprehensive income
|
|
|
(0.2 |
) |
|
|
- |
|
|
|
1.0 |
|
|
Issuances
|
|
|
- |
|
|
|
(90.7 |
) |
|
|
- |
|
|
Interest accretion
|
|
|
0.5 |
|
|
|
- |
|
|
|
1.1 |
|
|
Ending balance
|
|
$ |
9.2 |
|
|
$ |
(90.7 |
) |
|
$ |
21.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) included in earnings related to instruments still held
|
|
$ |
(0.4 |
) |
|
$ |
- |
|
|
$ |
(2.0 |
) |
Financial Assets (Liabilities) Not Carried at Fair Value
| |
|
Carrying
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
| |
|
Value
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gain (Loss)
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jackpot investments
|
|
$ |
374.5 |
|
|
$ |
435.2 |
|
|
$ |
435.2 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
60.7 |
|
|
Contracts & notes receivable
|
|
|
325.6 |
|
|
|
316.3 |
|
|
|
- |
|
|
|
- |
|
|
|
316.3 |
|
|
|
(9.3 |
) |
|
Jackpot liabilities
|
|
|
(496.8 |
) |
|
|
(515.1 |
) |
|
|
- |
|
|
|
- |
|
|
|
(515.1 |
) |
|
|
(18.3 |
) |
|
Debt
|
|
|
(1,569.6 |
) |
|
|
(1,873.5 |
) |
|
|
(1,873.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(303.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jackpot investments
|
|
$ |
387.8 |
|
|
$ |
458.9 |
|
|
$ |
458.9 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
71.1 |
|
|
Contracts & notes receivable
|
|
|
293.5 |
|
|
|
294.6 |
|
|
|
- |
|
|
|
- |
|
|
|
294.6 |
|
|
|
1.1 |
|
|
Jackpot liabilities
|
|
|
(508.4 |
) |
|
|
(521.6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(521.6 |
) |
|
|
(13.2 |
) |
|
Debt
|
|
|
(1,553.1 |
) |
|
|
(1,879.5 |
) |
|
|
(1,879.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(326.4 |
) |
Valuation Techniques and Balance Sheet Presentation
Jackpot investments were valued based on quoted market prices.
Contracts and notes receivable were valued using DCF, incorporating expected payments and market interest rates relative to the credit risk of each customer (low 7.5%, medium 8%, high 9.5% - 11%). Credit risk is determined on a number of factors, including customer size, type, financial condition, historical collection experience, account aging, and credit ratings derived from credit reporting agencies and other industry trade reports. Contracts are secured by the underlying assets sold and notes are secured by the developed property and/or other assets. The high risk category includes most of our development financing loans in new markets and customers in regions with a history of currency or economic instability, such as South/Central America. See Notes 3 and 4.
Jackpot liabilities were valued using DCF, incorporating expected future payment timing, estimated funding rates based on the treasury yield curve, and IGT's nonperformance credit risk. Expected annuity payments over 1-25 years (average 10 years) were discounted using the 10-year treasury yield curve rate (2.21%) for the estimated funding rate and the 10-year credit default swap rate (1.65%) for nonperformance risk. The present value (carrying value) of the expected lump sum payments were discounted using the 3-month treasury yield curve rate (.08%) with the 1-year credit default swap rate (.44%) for the current amounts and the 1-year treasury yield curve rate (.23%) with the 2-year credit default swap rate (.65%) for noncurrent amounts. Significant increases (decreases) in any of these inputs in isolation would result in a lower (higher) fair value measurement. Generally, changes in the estimated funding rates do not correlate with changes in nonperformance credit risk.
Debt was valued using quoted market prices or dealer quotes, for the identical financial instrument when traded as an asset in an active market. When our revolving credit facility has an outstanding balance, its level 2 fair value would be determined using DCF models of expected payments on outstanding borrowings at current borrowing rates. Carrying values above excluded swap adjustments and equity components of convertible debt.
Level 3 Valuation Process
Our valuation policies and procedures are determined by the Accounting Department, which ultimately reports to the Chief Financial Officer, in coordination with appropriate business asset owners and third-party valuation services when needed. Changes in fair value and methods for calibration, back testing, and other testing procedures of pricing models are evaluated through analytical review by managers of the responsible Accounting Department quarterly, by the Global Controller at inception and periodically with significant changes. Material valuations are discussed with the Audit Committee at inception and periodically if changes are significant or if impairment charges are recorded. Third-party information is evaluated for consistency with the FASB ASC for fair value measurement through analytical review and in-depth discussions with a variety of valuation experts.
Unobservable inputs are used only to the extent that observable inputs are not available and reflect management assumptions that cannot be corroborated with observable market data about what market participants would use in pricing the asset or liability, including assumptions about risk. Our unobservable inputs consist primarily of expected cash flows, stock price volatility, and other rates derived through extrapolation or interpolation. These inputs are developed based on the best information available, including trends deduced from available historical information and future expectations, using company specific data and market or industry published data. These inputs are validated for reasonableness by analytic comparison to other relevant valuation statistics whenever possible. Unobservable inputs depend on the facts and circumstances specific to a given asset or liability and require significant professional judgment.
The notional amount of foreign currency contracts hedging our exposure related to monetary assets and liabilities denominated in nonfunctional currency totaled $23.0 million at March 31, 2012 and $13.9 million at September 30, 2011.
In May 2007, we executed five-year forward contracts designated as fair value hedges to protect a portion of the US dollar value of our Hong Kong dollar investment in the CLS convertible note (See Note 2). In conjunction with the early redemption of this CLS investment negotiated in September 2010, we executed additional contracts which effectively reduced the cumulative amount of forward contracts. The notional amount of these foreign currency contracts totaled $6.4 million and there was no ineffectiveness during the three and six months ended March 31, 2012 and 2011.
In conjunction with our 7.5% Bonds issued in June 2009, we executed $250.0 million notional value of interest rate swaps that exchange 7.5% fixed interest payments for variable rate interest payments, at one-month LIBOR plus 342 bps, reset two business days before the 15th of each month. In April 2011, we additionally executed $250.0 million notional value interest rate swaps that exchange the remaining fixed interest payments on these Bonds for variable rate interest payments, based on six-month LIBOR plus 409 bps, reset in arrears two business days before June 15 and December 15 each year. All of these swaps terminate on June 15, 2019.
In conjunction with our 5.5% Bonds issued in June 2010, we executed $300.0 million notional value of interest rate swaps that terminate on June 15, 2020. These swaps effectively exchange 5.5% fixed interest payments for variable rate interest payments, based on the six-month LIBOR plus 186 bps, reset in arrears two business days before June 15 and December 15 each year. These swaps terminate on June 15, 2020.
All of our interest rate swaps are designated fair value hedges against changes in the fair value of a portion of their related bonds. Net amounts receivable or payable under our swaps settle semiannually on June 15 and December 15. Our assessments have determined that these interest rate swaps are highly effective.
Presentation of Derivative Amounts
| |
|
March 31,
|
|
|
September 30,
|
|
|
Balance Sheet Location and Fair Value
|
|
2012
|
|
|
2011
|
|
|
Non-designated Hedges
|
|
|
|
|
|
|
|
Foreign currency contracts: Other assets and deferred costs (current)
|
|
$ |
0.1 |
|
|
$ |
0.4 |
|
|
Foreign currency contracts: Other accrued liabilities
|
|
|
0.3 |
|
|
|
- |
|
|
Designated Hedges
|
|
|
|
|
|
|
|
|
|
Interest rate swaps: Other assets and deferred costs (noncurrent)
|
|
|
84.7 |
|
|
|
90.4 |
|
|
Interest rate swaps: Long-term debt
|
|
|
86.8 |
|
|
|
93.2 |
|
| |
|
Quarters Ended |
|
|
Six Months Ended |
|
| |
|
March 31,
|
|
|
March 31, |
|
|
Income Statement Location and Gain (loss)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Non-designated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts: Other income (expense)
|
|
$ |
0.1 |
|
|
$ |
0.6 |
|
|
$ |
0.6 |
|
|
$ |
1.3 |
|
|
Designated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap - ineffectiveness: Other income (expense)
|
|
$ |
0.6 |
|
|
$ |
(0.2 |
) |
|
$ |
0.9 |
|
|
$ |
0.3 |
|
|
Interest rate swap - effectiveness: Interest expense
|
|
|
6.3 |
|
|
|
4.8 |
|
|
|
12.2 |
|
|
|
9.4 |
|
10. CREDIT FACILITIES AND INDEBTEDNESS
Total Outstanding debt
| |
|
March 31,
|
|
|
September 30,
|
|
| |
|
2012
|
|
|
2011
|
|
|
Credit facilities
|
|
$ |
- |
|
|
$ |
- |
|
|
3.25% Convertible Notes
|
|
|
850.0 |
|
|
|
850.0 |
|
|
7.5% Bonds
|
|
|
500.0 |
|
|
|
500.0 |
|
|
5.5% Bonds
|
|
|
300.0 |
|
|
|
300.0 |
|
|
Total principal debt obligations
|
|
|
1,650.0 |
|
|
|
1,650.0 |
|
|
Discounts:
|
|
|
|
|
|
|
|
|
|
3.25% Convertible Notes
|
|
|
(77.1 |
) |
|
|
(93.5 |
) |
|
7.5% Bonds
|
|
|
(2.2 |
) |
|
|
(2.3 |
) |
|
5.5% Bonds
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
Swap fair value adjustments:
|
|
|
|
|
|
|
|
|
|
7.5% Bonds
|
|
|
58.2 |
|
|
|
61.8 |
|
|
5.5% Bonds
|
|
|
28.6 |
|
|
|
31.4 |
|
|
Total outstanding debt, net
|
|
$ |
1,656.4 |
|
|
$ |
1,646.3 |
|
IGT was compliant with all covenants and embedded features required no bifurcation at March 31, 2012.
Credit Facilities
At March 31, 2012, no amounts were outstanding under our domestic credit facility, $726.4 million was available, and $23.6 million was reserved for letters of credit and performance bonds. Our foreign credit facility in Australia was terminated in April 2012.
3.25% Convertible Notes
| |
|
Quarters Ended
|
|
|
Six Months Ended
|
|
| |
|
March 31,
|
|
|
March 31,
|
|
| |
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Contractual interest expense
|
|
$ |
6.9 |
|
|
$ |
6.9 |
|
|
$ |
13.8 |
|
|
$ |
13.8 |
|
|
Discount amortization
|
|
|
8.3 |
|
|
|
7.6 |
|
|
|
16.4 |
|
|
|
15.0 |
|
Bonds
Interest rate swaps executed in conjunction with our Bonds are described in Note 9.
Litigation
From time to time, in the normal course of its operations, the Company is a party to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability will be incurred and the amount or range of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.
2004 Federal District Court of Nevada
On December 7, 2004, IGT filed a complaint in US District Court for the District of Nevada, alleging that defendants Alliance Gaming Corp., Bally Gaming Int'l, Inc., and Bally Gaming, Inc. infringed six US patents held by IGT: US Patent Nos. 6,827,646; 5,848,932; 5,788,573; 5,722,891; 6,712,698; and 6,722,985. On January 21, 2005, defendants filed an answer denying the allegations in the complaint and raising various affirmative defenses to IGT's asserted claims. Defendants also asserted fourteen counterclaims against IGT, including counterclaims for a declaratory judgment of non-infringement, invalidity, and unenforceability of the asserted patents, and for antitrust violations and intentional interference with prospective business advantage. IGT successfully moved for partial summary judgment on defendants’ counterclaims for intentional interference with prospective business advantage and defendants’ antitrust allegations related to the gaming machine market. IGT denies the remaining allegations.
On May 9, 2007, the Court issued an order construing disputed terms of the asserted patent claims. On October 16, 2008, the Court issued summary judgment rulings finding certain of IGT’s patents, including patents that IGT believes cover bonus wheel gaming machines, invalid as obvious. The rulings also found that Bally was not infringing certain patents asserted by IGT. Bally’s antitrust and unfair competition counterclaims remain pending. On November 7, 2008, the Court issued an order staying the proceedings and certifying the summary judgment and claim construction rulings for immediate appeal.
On December 1, 2008, IGT appealed the rulings to the US Court of Appeals for the Federal Circuit. On January 8, 2009, Bally moved to dismiss the appeal on jurisdictional grounds. On February 2, 2009, the Federal Circuit denied the Bally motion without prejudice to the parties raising jurisdictional issues in their merits briefs. On October 22, 2009, the Federal Circuit affirmed the District Court’s summary judgment rulings. On December 7, 2009, Bally filed a motion to lift the stay and schedule a trial on the remaining issues. At the February 1, 2010 hearing on the motion, the Court indicated that it would revisit earlier motions for summary judgment on the issues not addressed on appeal, including IGT’s motions for summary judgment on Bally’s antitrust and unfair competition counterclaims.
On November 29, 2010, the Court granted summary judgment in favor of IGT on all antitrust and unfair competition counterclaims by Bally and dismissed all other remaining claims. Bally has appealed the grant of summary judgment.
2006 Federal District Court of Delaware
On April 28, 2006, IGT filed a complaint in US District Court for the District of Delaware, alleging that defendants Bally Technologies, Inc., Bally Gaming Int'l, Inc., and Bally Gaming, Inc. infringed nine US patents held by IGT: US Patent Nos. RE 38,812; RE 37,885; 6,832,958; 6,319,125; 6,244,958; 6,431,983; 6,607,441; 6,565,434; and 6,620,046. The complaint alleges that the “BALLY POWER BONUSING™” technology infringes one or more of the claims of the asserted IGT patents. The lawsuit seeks monetary damages and an injunction.
On June 30, 2006, defendants filed an answer denying the allegations in the complaint and raising various affirmative defenses to IGT’s asserted claims. Defendants also asserted twelve counterclaims against IGT, including counterclaims for a declaratory judgment of non-infringement, invalidity, and unenforceability of the asserted patents, antitrust violations, unfair competition, and intentional interference with prospective business advantage. IGT denies these allegations. Pursuant to stipulation of the parties, all claims and counterclaims, except those relating to US Patent Nos. RE 37,885 ("the '885 patent"), RE 38,812 ("the '812 patent"), and 6,431,983 (“the ‘983 patent”), have been dismissed. All proceedings relating to Bally’s antitrust, unfair competition, and intentional interference counterclaims were stayed.
On April 28, 2009, the court issued a summary judgment ruling finding the '885 and '812 patents valid. The court also ruled that Bally's "Power Rewards" and "ACSC Power Winners" products infringe certain claims of the '885 and '812 patents. The court granted Bally's motion for summary judgment that Bally's "SDS Power Winners" does not infringe the '885 patent and "Power Bank" and "Power Promotions" do not infringe the '983 patent. The court denied Bally's motion for summary judgment that the '983 patent is invalid. The parties have agreed that Bally's counterclaim for a declaratory judgment on invalidity of the '983 patent will be dismissed without prejudice. IGT’s motion for a permanent injunction against Bally’s infringing products was denied.
On April 28, 2010, the court entered an order dismissing without prejudice Bally’s remaining counterclaims (antitrust, unfair competition and intentional interference with business relationships) and entered final judgment in favor of IGT and against the Bally defendants and Bally appealed.
On October 6, 2011, the United States Federal Circuit Court of Appeals affirmed the judgment in favor of IGT and against Bally. A trial to determine the amount of damages incurred by IGT, and related matters, as a result of Bally's infringement has been scheduled for November 2012.
Aristocrat
2006 Northern Federal District Court of California
On June 12, 2006, Aristocrat Technologies Australia PTY Ltd. and Aristocrat Technologies, Inc. filed a patent infringement lawsuit against IGT. Aristocrat alleged that IGT willfully infringed US Patent No. 7,056,215 (the “’215 patent”), which issued on June 6, 2006. On December 15, 2006, Aristocrat filed an amended complaint, adding allegations that IGT willfully infringed US Patent No. 7,108,603, which issued on September 19, 2006. The IGT products named in the original and amended complaints were the Fort Knox® mystery progressive slot machines. On June 13, 2007, the US District Court for the Northern District of California entered an order granting summary judgment in favor of IGT declaring both patents invalid. The US Court of Appeals for the Federal Circuit reversed this decision on September 22, 2008. IGT’s request for a rehearing was denied on November 17, 2008.
This case recommenced in the District Court and on May 13, 2010, the District Court entered an order granting IGT’s motion for summary judgment of non-infringement. Aristocrat appealed this judgment. Proceedings on IGT’s claim that Aristocrat committed inequitable conduct in reviving the ‘215 patent application continued in the District Court. A trial was held the week of April 4, 2011 on that inequitable conduct issue, and that claim was dismissed on May 6, 2011.
IGT and Aristocrat entered into an agreement, effective September 30, 2011, settling the lawsuit. On October 6, 2011, the parties filed a letter with the court advising the court that, in accordance with the parties’ resolution of several disputes between them, the case will be concluded by dismissal with prejudice following the final resolution of the pending appeal of the judgment of non-infringement. In connection with the settlement, IGT was granted an irrevocable paid-up license to the Aristocrat patents that were the subject of the litigation and related patents.
2010 Central Federal District Court of California
On November 15, 2010, IGT filed a complaint in the US District Court for the Central District of California against Aristocrat Leisure Limited of Australia and its US affiliate Aristocrat Technologies, Inc. (collectively “Aristocrat”) seeking a preliminary and permanent injunction and damages for the infringement of US Patent No. 6,620,047 (the “’047 patent”) and US Patent No. RE 39,370 (the “’370 patent”) in violation of 35 U.S.C. section 271.
On January 28, 2011, IGT asserted an additional claim against Aristocrat for infringement of US Patent No 7,063,615 (the “’615 patent”) seeking similar relief. IGT asserted that Aristocrat infringes on the ‘047, the ‘370, and the ‘615 patents in connection with the sale and distribution of gaming devices, including the Viridian WS slot machine, without authorization or license from IGT. Aristocrat has denied infringement, filed various affirmative defenses and counterclaimed for patent invalidity.
IGT and Aristocrat entered into an agreement, effective September 30, 2011, settling the lawsuit and on October 4, 2011, the court entered an order dismissing the lawsuit. In connection with the settlement, IGT granted Aristocrat a non-exclusive license to certain IGT patents. IGT and Aristocrat are currently involved in arbitration concerning Aristocrat’s payment of royalties under the license agreement.
Rice (formerly Piercey) v Atlantic Lotteries
On May 11, 2010, Atlantic Lottery Corporation commenced an action against International Game Technology, VLC, Inc. and IGT-Canada, wholly-owned subsidiaries of International Game Technology, and other manufacturers of video lottery machines in the Supreme Court of New Foundland and Labrador seeking indemnification for any damages that may be awarded against Atlantic Lottery Corporation in a class action suit also filed in the Supreme Court of New Foundland and Labrador. In December 2011, the plaintiff filed a motion seeking leave to substitute a new plaintiff in place of Rice and to make certain amendments to plaintiff’s statement of claim. In January 2012, Atlantic Lottery Corporation filed a motion to dismiss the action for abuse of process. By a decision, dated April 5, 2012, the Court granted defendants’ motion to strike plaintiff’s statement of claim, terminating the action.
Securities Class Action
On July 30, 2009, International Brotherhood of Electrical Workers Local 697 filed a putative securities fraud class action in the US District Court for the District of Nevada, alleging causes of action under Sections 10(b) and 20(a) of the Exchange Act against IGT and certain of its current and former officers and directors. The complaint alleges that between November 1, 2007 and October 30, 2008, the defendants inflated IGT's stock price through a series of materially false and misleading statements or omissions regarding IGT's business, operations, and prospects. In April 2010, plaintiffs filed an amended complaint. In March 2011, defendants’ motion to dismiss that complaint was granted in part and denied in part. The Court found that the allegations concerning statements about the seasonality of game play levels and announcements of projects with Harrah’s and City Center were sufficient to state a claim. Plaintiffs did not state a claim based on the remaining statements about earnings, operating expense, or forward-looking statements about play levels and server-based technology.
The parties have settled this action. On February 1, 2012, at the direction of the Court, the plaintiffs filed a Notice of Pending Settlement. On March 28, 2012, the parties submitted to the Court a stipulation to settle the litigation for a payment of $12.5 million which will be covered by insurance. On March 30, 2012 the Court issued an order of preliminary approval. At March 31, 2012, we recorded $12.5 million in other accrued liabilities with a corresponding insurance receivable in current other assets.
Between August 20, 2009 and September 17, 2009, the Company was nominally sued in a series of derivative lawsuits filed in the US District Court for the District of Nevada, captioned Fosbre v. Matthews et al., Case No. 3:09-cv-00467; Calamore v. Matthews et al., Case No. 3:09-cv-00489; Israni v. Bittman, et al., Case No. 3:09-cv-00536; and Aronson v. Matthews et al., Case No. 3:09-cv-00542. Plaintiffs purportedly brought their respective actions on behalf of the Company. The complaints asserted claims against various current and former officers and directors of the Company, for breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution and indemnification. The complaints sought an unspecified amount of damages and alleged similar facts as the securities class action lawsuit.
The complaints additionally alleged that certain individual defendants engaged in insider trading and that the director defendants improperly handled Thomas J. Matthews’ resignation as Chief Executive Officer of the Company. The actions were consolidated and subsequently a consolidated derivative complaint was filed in December 2009. Defendants moved to dismiss that complaint. On July 6, 2010, the Court granted the defendants’ motion to dismiss, with leave to amend. After plaintiffs elected not to amend, the court entered judgment in favor of the defendants. The plaintiff in Israni v. Bittman, et al. appealed to the US Court of Appeals for the Ninth Circuit. On April 2, 2012, the appeals court affirmed the district court’s decision dismissing the action.
In a letter dated October 7, 2009 to the Company’s Board of Directors, a shareholder made factual allegations similar to those set forth in the above derivative and securities class actions and demanded that the Board investigate, address and remedy the harm allegedly inflicted on IGT. In particular, the letter alleged that certain officers and directors grossly mismanaged the Company by overspending in the area of R&D of server-based game technology despite a looming recession to which the Company was particularly vulnerable; by making or allowing false and misleading statements regarding the Company’s growth prospects and earnings guidance; and by wasting corporate assets by causing the Company to repurchase Company stock at inflated prices. The letter asserts that this alleged conduct resulted in breaches of fiduciary duties and violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. On July 9, 2010, the shareholder filed a derivative lawsuit in the US District Court for the District of Nevada, captioned Sprando v. Hart, et al., Case No. 3:10-cv-00415 and asserting claims similar to those described above. No claims were asserted against the Company, which is a nominal defendant. On July 25, 2011, the Court granted the Company’s motion to dismiss with prejudice. Plaintiff then appealed to the US Court of Appeals for the Ninth Circuit.
In February 2011, another shareholder sent a letter to the Company’s Board of Directors requesting that the Board investigate allegations similar to those set forth in the derivative actions described above and bring a lawsuit against various of the Company’s current or former officers and directors. In response the Board of Directors formed a litigation committee comprised of disinterested outside directors and assisted by outside counsel to investigate and evaluate the allegations raised in this letter. At the conclusion of this investigation, the committee concluded and recommended that it would not be in the best interests of the Company or its shareholders to pursue the proposed claims. The Board considered and accepted this recommendation and the Company informed the shareholder of the Board’s resolution in September 2011. On March 15, 2012, the shareholder filed a derivative action in state court in Reno, Nevada (Gusinsky v. Thomas J. Matthews, et. al.), Second Judicial Court of the State of Nevada.
On April 8, 2011, the Company was nominally sued in a derivative complaint filed in the US District Court for the District of Nevada, captioned Arduini v. Hart, et al., Case No. 3:11-cv-00255. The claims and allegations in this complaint are similar to those asserted in the securities class action and derivative actions described above. A motion to dismiss has been filed. On March 14, 2012, defendants’ motion to dismiss the action was granted.
On October 2, 2009, two putative class action lawsuits were filed on behalf of participants in the Company’s employee pension plans, naming as defendants the Company, the IGT Profit Sharing Plan Committee, and several current and former officers and directors. The actions, filed in the US District Court for the District of Nevada, are captioned Carr et al. v. International Game Technology et al., Case No. 3:09-cv-00584, and Jordan et al. v. International Game Technology et al., Case No. 3:09-cv-00585. The actions were consolidated. The consolidated complaint (which seeks unspecified damages) asserts claims under the Employee Retirement Income Security Act, 29 U.S.C §§ 1109 and 1132.
The consolidated complaint is based on allegations similar to those in the securities and derivative lawsuits described above, and further alleges that the defendants breached fiduciary duties to plan participants by failing to disclose material facts to plan participants, failing to exercise their fiduciary duties solely in the interest of the participants, failing to properly manage plan assets, and permitting participants to elect to invest in Company stock. In March 2011, defendants’ motion to dismiss the consolidated complaint was granted in part and denied in part. On March 16, 2012, the Court denied plaintiff’s motion for class certification.
CCSC, a casino operation sold by IGT in April 2003, is located in an area that has been designated by the EPA as an active Superfund site because of contamination from historic mining activity in the area. In order for Anchor Coin, an entity IGT acquired in December 2001, to develop the CCSC site, it voluntarily entered into an administrative order of consent with the EPA to conduct soil removal and analysis (a requirement imposed on similarly situated property developers within the region) in conjunction with re-routing mine drainage. The work and obligations contemplated by the agreement were completed by Anchor in June 1998, and the EPA subsequently issued a termination of the order.
The EPA, together with other property developers excluding CCSC, continues remediation activities at the site. While we believe our remediation obligations are complete, it is possible that additional contamination may be identified and we could be obligated to participate in remediation efforts. Under accounting guidance for environmental remediation liabilities, we determined the incurrence of additional remediation costs is neither probable nor reasonably estimable and no liability has been recorded.
OSHA / Wrongful Termination Matter
On July 8, 2004, two former employees filed a complaint with the US Department of Labor, OSHA alleging retaliatory termination in violation of the Sarbanes-Oxley Act of 2002. The former employees allege that they were terminated in retaliation for questioning whether Anchor and its executives failed to properly disclose information allegedly affecting the value of Anchor's patents in connection with IGT's acquisition of Anchor in December 2001. The former employees also allege that the acquired patents were overvalued on the financial statements of IGT. Outside counsel, retained by an independent committee of our Board of Directors, reviewed the allegations and found them to be entirely without merit.
In conjunction with the Anchor acquisition purchase price allocation as of December 31, 2001, IGT used the relief of royalty valuation methodology to estimate the fair value of the patents at $164.4 million. The carrying value of the patents at March 31, 2012 totaled $22.2 million.
On November 10, 2004, the employees withdrew their complaint filed with OSHA and filed a notice of intent to file a complaint in federal court. On December 1, 2004, a complaint was filed under seal in the US District Court for the District of Nevada, based on the same facts set forth above regarding their OSHA complaint. IGT filed a motion for summary judgment as to all claims in plaintiffs’ complaint. On June 14, 2007, the US District Court for the District of Nevada entered an order granting summary judgment in favor of IGT as to plaintiffs’ Sarbanes-Oxley whistle-blower claims and dismissed their state law claims without prejudice. Plaintiffs’ motion for reconsideration of the District Court’s decision was denied.
Plaintiffs appealed to the US Court of Appeals for the Ninth Circuit. Oral argument was heard on March 12, 2009, and on August 3, 2009, the Ninth Circuit reversed the District Court’s decision. IGT’s motion for summary judgment on plaintiffs’ state law claims was argued on October 22, 2009 and granted in IGT’s favor on December 8, 2009. On April 13, 2010, the District Court granted IGT’s motion to strike the plaintiffs’ jury demand and granted IGT’s motion to retax costs and fees. It denied plaintiffs’ motion for certification and/or reconsideration.
On February 8, 2011, a jury verdict was entered in favor of the plaintiffs as to their Sarbanes-Oxley claims and plaintiffs were awarded damages in an amount equal to approximately $2.2 million. On March 9, 2011, IGT filed a Renewed Motion for Judgment as a Matter of Law and Motion for a New Trial or for Remittitur. On May 24, 2011, the Court denied these motions, and on May 27, 2011, the Court entered an amended judgment for prejudgment interest of approximately $1.3 million, attorneys’ fees of approximately $1.0 million, and court costs of approximately $132,000. IGT filed a notice of appeal to the US Court of Appeals for the Ninth Circuit on June 21, 2011, which is pending. On July 1, 2011 plaintiffs filed a notice of cross appeal.
Arrangements with Off-Balance Sheet Risks
In the normal course of business, we are party to financial instruments with off-balance sheet risk, such as performance bonds not reflected in our balance sheet. We do not expect any material losses to result from these arrangements and are not dependent on off-balance sheet financing arrangements to fund our operations.
Performance bonds outstanding related to certain gaming operations equipment totaled $14.6 million at March 31, 2012. We are liable to reimburse the bond issuer in the event of exercise due to our nonperformance.
Outstanding letters of credit issued under our domestic credit facility to ensure payment to certain vendors and governmental agencies totaled $9.0 million at March 31, 2012.
IGT Licensor Arrangements
Our sales agreements that include software and IP licensing arrangements may require IGT to indemnify the third-party licensee against liability and damages (including legal defense costs) arising from any claims of patent, copyright, trademark infringement, or trade secret misappropriation. Should such a claim occur, we could be required to make payments to the licensee for any liabilities or damages incurred. Historically, we have not incurred any significant settlement costs due to infringement claims. As we consider the likelihood of incurring future costs to be remote, no liability has been recorded.
We are self-insured for various levels of workers’ compensation, directors’ and officers’ liability, and electronic errors and omissions liability, as well as employee medical, dental, prescription drug, and disability coverage. We purchase stop loss coverage to protect against unexpected claims. Accrued insurance claims and reserves include estimated settlements for known claims, and actuarial estimates for claims incurred but not reported.
We are subject to sales, use, income, gaming and other tax audits and administrative proceedings in various US federal, state, local, and foreign jurisdictions. While we believe we have properly reported our tax liabilities in each jurisdiction, we can give no assurance that taxing authorities will not propose adjustments that increase our tax liabilities.
The majority of our products are generally covered by a warranty for periods ranging from 90 days to one year. We estimate accrued warranty costs in the table below based on historical trends in product failure rates and expected costs to provide warranty services.
|
Six Months Ended March 31,
|
|
2012
|
|
|
2011
|
|
|
Beginning balance
|
|
$ |
6.2 |
|
|
$ |
9.3 |
|
|
Reduction for payments made
|
|
|
(2.8 |
) |
|
|
(3.3 |
) |
|
Accrual for new warranties issued
|
|
|
4.4 |
|
|
|
4.9 |
|
|
Adjustments for pre-existing warranties
|
|
|
(2.9 |
) |
|
|
(2.3 |
) |
|
Ending balance
|
|
$ |
4.9 |
|
|
$ |
8.6 |
|
12. INCOME TAXES
Our provision for income taxes is based on an estimated effective annual income tax rate, as well as the impact of discrete items, if any, occurring during the period. The provision differs from income taxes currently payable because certain items of income and expense are recognized in different periods for financial statement purposes than for tax return purposes. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.
Our effective tax rate for the six months ended March 31, 2012 increased to 35.9% from 32.2% for the same prior year period. The prior year effective tax rate was positively impacted by favorable discrete items including an increase in the manufacturing deduction and the retroactive reinstatement of the R&D tax credit. The current year effective tax rate was negatively impacted by losses in foreign jurisdictions for which there are no associated tax benefits and the expiration of the R&D tax credit.
At March 31, 2012, our gross UTBs totaled $120.8 million, excluding related accrued interest and penalties of $22.0 million. At March 31, 2012, $77.9 million of our UTBs, including related accrued interest and penalties, would affect our effective tax rate if recognized. During the six months ended March 31, 2012, our UTBs increased $4.4 million and related interest and penalties increased $1.8 million.
We are currently under audit by the IRS for amended returns filed for 1999, 2006 and 2007, as well as our originally filed returns for 2008 and 2009. We are also subject to examination in various state and foreign jurisdictions. We believe we have recorded all appropriate provisions for outstanding issues for all jurisdictions and open years. However, we can give no assurance that taxing authorities will not propose adjustments that increase our tax liabilities.
13. EMPLOYEE BENEFIT PLANS
SIP As Of And For The Six Months Ended March 31, 2012
| |
|
|
|
|
Weighted Average
|
|
|
|
|
| |
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
| |
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
| Options |
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
| |
|
(thousands)
|
|
|
(per share)
|
|
|
(years)
|
|
|
(millions)
|
|
|
Outstanding at beginning of fiscal year
|
|
|
15,245 |
|
|
$ |
18.85 |
|
|
|
|
|
|
|
|
Granted
|
|
|
294 |
|
|
|
16.21 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(723 |
) |
|
|
12.12 |
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(364 |
) |
|
|
16.44 |
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,272 |
) |
|
|
27.79 |
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
13,180 |
|
|
$ |
18.37 |
|
|
|
6.4 |
|
|
$ |
17.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
12,878 |
|
|
$ |
18.42 |
|
|
|
6.3 |
|
|
$ |
17.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
7,894 |
|
|
|