Edgar Filing: INTERNATIONAL GAME TECHNOLOGY

igt_10q-122912.htm

United States

Securities and Exchange Commission

Washington, D.C. 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 December 29, 2012

[ ] 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

Nevada	88-0173041
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6355 South Buffalo Drive, Las Vegas, Nevada 89113

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code: (702) 669-7777

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer [X]	Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares outstanding of each of the registrant’s classes of common stock, as of February 1, 2013:

264.4 million shares of common stock at $.00015625 par value.

TABLE OF CONTENTS

GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)		3


PART I – FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Interim Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)

Fiscal dates—actual:		Fiscal dates—as presented:
	December 29, 2012		December 31, 2012
	December 31, 2011		December 31, 2011
	September 29, 2012		September 30, 2012

Abbreviation/term	Definition
Anchor	Anchor Gaming
APIC	additional paid-in-capital
ASP	average sales price per machine unit
ASR	accelerated share repurchase transaction
ASU	Accounting Standards Update
5.5% Bonds	5.5% fixed rate notes due 2020
7.5% Bonds	7.5% fixed rate notes due 2019
bps	basis points
CEO	chief executive officer
CFO	chief financial officer
DAU	Daily Active Users
DCF	discounted cash flow
DoubleDown	Double Down Interactive LLC
EBITDA	earnings before interest, taxes, depreciation, and amortization
EPS	earnings per share
ERISA	Employee Retirement Income Security Act
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
GAAP	generally accepted accounting principles
IGT, we, our, the Company	International Game Technology and its consolidated entities
IGT rgs®	IGT Remote Game Server®
IP	intellectual property
IRS	Internal Revenue Service
LIBOR	London inter-bank offered rate
MAU	Monthly Active Users
MDA	management’s discussion and analysis of financial condition and results of operations
Notes	3.25% convertible notes due 2014
OSHA	Occupational Safety & Health Administration
pp	percentage points
R&D	research and development
SEC	Securities and Exchange Commission
SIP	2002 Stock Incentive Plan
SG&A	sales, general and administrative
UK	United Kingdom
US	United States
UTBs	unrecognized tax benefits
VIE	variable interest entity
VWAP	average daily volume weighted average price
VLT	video lottery terminal
WAP	wide area progressive
Yield	average revenue per unit per day
*	not meaningful (in tables)

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Interim Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			5

CONSOLIDATED BALANCE SHEETS			6

CONSOLIDATED STATEMENTS OF CASH FLOWS			7

SUPPLEMENTAL CASH FLOWS INFORMATION			8

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS			9

	1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES	9

	2.	VARIABLE INTERESTS AND AFFILIATES	10

	3.	RECEIVABLES	11

	4.	CONCENTRATIONS OF CREDIT RISK	12

	5.	INVENTORIES	12

	6.	PROPERTY, PLANT AND EQUIPMENT	1 3

	7.	GOODWILL AND OTHER INTANGIBLES	13

	8.	FAIR VALUE MEASUREMENTS	14

	9.	FINANCIAL DERIVATIVES	16

	10.	CREDIT FACILITIES AND INDEBTEDNESS	17

	11.	CONTINGENCIES	18

	12.	INCOME TAXES	23

	13.	EMPLOYEE BENEFIT PLANS	23

	14.	EARNINGS PER SHARE	24

	15.	BUSINESS SEGMENTS	25

	16.	DISCONTINUED OPERATIONS	26

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Quarters Ended
	December 31,
	2012			2011
(In millions, except per share amounts)
Revenues
Gaming operations	$	242.6		$	252.0
Product sales		234.8			180.9
Interactive		52.9			12.6
Total revenues		530.3			445.5

Costs and operating expenses
Cost of gaming operations		89.5			98.1
Cost of product sales		109.2			89.4
Cost of interactive		22.1			6.1
Selling, general and administrative		100.2			89.7
Research and development		54.4			46.9
Depreciation and amortization		19.0			15.4
Contingent acquisition related costs		17.5			-
Total costs and operating expenses		411.9			345.6
Operating income		118.4			99.9

Other income (expense)
Interest income		11.3			12.0
Interest expense		(31.7	)		(30.0	)
Other		(0.3	)		(2.8	)
Total other income (expense)		(20.7	)		(20.8	)

Income from continuing operations before tax		97.7			79.1
Income tax provision		32.4			28.8

Income from continuing operations		65.3			50.3
Loss from discontinued operations, net of tax		-			(1.0	)

Net income	$	65.3		$	49.3
Other comprehensive income (loss), net of $0 tax
Foreign currency translation adjustment		3.4			6.1
Unrealized loss on available-for-sale securities		-			(0.2	)
Comprehensive income	$	68.7		$	55.2

Basic earnings (loss) per share
Continuing operations	$	0.25		$	0.17
Discontinued operations		-			-
Net income	$	0.25		$	0.17

Diluted earnings (loss) per share
Continuing operations	$	0.24		$	0.17
Discontinued operations		-			(0.01	)
Net income	$	0.24		$	0.16

Cash dividends declared per share	$	0.07		$	0.06

Weighted average shares outstanding
Basic		265.9			297.3
Diluted		267.9			299.0

See accompanying notes

CONSOLIDATED BALANCE SHEETS

	December 31,			September 30,
	2012			2012
(In millions, except par value)
Assets
Current assets
Cash and equivalents	$	200.7		$	206.3
Restricted cash and investment securities		75.0			79.7
Restricted cash and investment securities of VIEs		1.3			2.2
Jackpot annuity investments		46.4			46.9
Jackpot annuity investments of VIEs		13.2			13.3
Accounts receivable, net		323.7			346.6
Current maturities of contracts and notes receivable, net		219.4			218.2
Inventories		91.5			92.9
Deferred income taxes		87.8			96.7
Other assets and deferred costs		107.5			160.5
Total current assets		1,166.5			1,263.3
Property, plant and equipment, net		545.7			555.7
Jackpot annuity investments		249.3			252.3
Jackpot annuity investments of VIEs		41.7			43.4
Contracts and notes receivable, net		130.6			139.3
Goodwill		1,470.6			1,469.7
Other intangible assets, net		177.9			193.4
Deferred income taxes		120.8			106.5
Other assets and deferred costs		273.4			261.5
Total Assets	$	4,176.5		$	4,285.1

Liabilities and Shareholders' Equity
Liabilities
Current liabilities
Accounts payable	$	80.2		$	87.5
Jackpot liabilities, current portion		141.5			152.4
Accrued employee benefits		11.5			43.7
Accrued income taxes		10.4			8.1
Dividends payable		18.6			16.0
Other accrued liabilities		300.7			322.6
Total current liabilities		562.9			630.3
Long-term debt		1,775.5			1,846.4
Jackpot liabilities		319.9			328.6
Other liabilities		264.8			282.0
Total Liabilities		2,923.1			3,087.3
Commitments and Contingencies

Shareholders' Equity
Common stock: $.00015625 par value; 1,280.0 shares authorized; 269.6 and 343.5 issued; 264.5 and 266.1 outstanding		-			0.1
Additional paid-in capital		1,379.2			1,585.1
Treasury stock at cost: 5.1 and 77.4 shares		(84.2	)		(1,332.9	)
Retained earnings (accumulated deficit)		(49.5	)		941.0
Accumulated other comprehensive income		7.9			4.5
Total Equity		1,253.4			1,197.8
Total Liabilities and Shareholders' Equity	$	4,176.5		$	4,285.1

See accompanying notes

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended December 31,	2012			2011
(In millions)
Operating
Net income	$	65.3		$	49.3
Adjustments:
Depreciation and amortization		57.7			54.6
Contingent earn-out consideration		2.1			-
Discounts and deferred issuance costs		11.0			10.0
Share-based compensation		8.6			8.2
Net loss on disposal and impairment		-			1.5
Excess tax benefits from employee stock plans		(0.3	)		(1.8	)
Other non-cash items		10.9			3.5
Changes in operating assets and liabilities, excluding acquisitions:
Receivables		14.4			30.2
Inventories		2.6			(22.3	)
Accounts payable and accrued liabilities		(83.5	)		(57.0	)
Jackpot liabilities		(24.2	)		(5.9	)
Income taxes, net of employee stock plans		29.1			(7.0	)
Other assets and deferred costs		0.8			1.5
Net operating cash flows		94.5			64.8

Investing
Capital expenditures		(37.6	)		(49.2	)
Proceeds from assets sold		4.6			17.0
Jackpot annuity investments, net		9.9			6.8
Changes in restricted cash		5.7			(10.7	)
Notes receivable payments received		7.6			7.4
Net investing cash flows		(9.8	)		(28.7	)

Financing
Debt repayments		(75.0	)		-
Employee stock plan proceeds		1.5			6.9
Excess tax benefits from employee stock plans		0.3			1.8
Share repurchases and forward contracts		-			(4.4	)
Dividends paid		(16.1	)		(17.8	)
Net financing cash flows		(89.3	)		(13.5	)
Foreign exchange rates effect on cash and equivalents		(1.0	)		2.1
Net change in cash and equivalents		(5.6	)		24.7
Beginning cash and equivalents		206.3			460.0
Ending cash and equivalents	$	200.7		$	484.7

See accompanying notes

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 revenues and discontinued operations.

Three Months Ended December 31,	2012			2011
(In millions)

Jackpot funding
Change in jackpot liabilities	$	(24.2	)	$	(5.9	)

Jackpot annuity purchases		(1.8	)		(5.4	)
Jackpot annuity proceeds		11.7			12.2
Net change in jackpot annuity investments		9.9			6.8
Net jackpot funding	$	(14.3	)	$	0.9

Capital expenditures
Property, plant and equipment	$	(7.3	)	$	(9.8	)
Gaming operations equipment		(30.1	)		(39.0	)
Intellectual property		(0.2	)		(0.4	)
Total	$	(37.6	)	$	(49.2	)

Payments from operating cash flows
Interest	$	28.4		$	28.6
Income taxes		0.4			31.8
Acquisition related retention bonuses		29.3			-

Non-cash investing and financing items:
Accrued capital asset additions	$	(1.6	)	$	0.4
Interest accretion for jackpot annuity investments		4.6			5.2

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	December 29, 2012	December 31, 2012
Prior year quarter	December 31, 2011	December 31, 2011
Prior year end	September 29, 2012	September 30, 2012

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 December 31, 2012 were prepared without audit on a basis consistent with the comparative quarter ended December 31, 2011, and as appropriate, with the audited financial statements for the year ended September 30, 2012. 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, 2012.

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 per share amounts and par value

current refers to the quarter ended December 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

Use of Estimates

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.

Treasury Stock Retirement

In December 2012, we retired 75.0 million treasury shares, which decreased treasury stock by $1,252.2 million, APIC by $215.1 million, and retained earnings by $1,037.1 million.

Recently Adopted Accounting Standards or Updates

Qualitative Impairment Assessment for Goodwill and Other Indefinite-Lived Intangibles

At the beginning of 2013, we adopted an ASU issued in September 2011 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. We also adopted an ASU issued in July 2012 to simplify the impairment testing for other indefinite-lived intangibles in a similar fashion. The adoption of these ASUs did not have a material impact on our financial statements.

Recently Issued Accounting Standards or Updates—Not Yet Adopted

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 Trusts

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 $56.2 million at December 31, 2012 and $58.9 million at September 30, 2012.

Latin America Distributor

In March 2012, we contracted with a third party distributor in Latin America to sell IGT products. The distributor is a VIE as it is unable to finance its activities without additional support from IGT; however, the distributor was not consolidated because IGT does not have contractual or implied control. Under the agreement, our maximum exposure consisted of note financing of $0.8 million provided for operating costs and contract financing under a revolving line of credit of $13.0 million for IGT product purchases. We recognized $5.6 million in revenues related to this distributor during the 2013 first quarter. Contracts and notes receivable due from this distributor totaled $11.2 million at December 31, 2012, $5.6 million current and $5.6 million non-current.

3. RECEIVABLES

Accounts Receivable

Allowances for Credit Losses		December 31, 2012				September 30, 2012
Total		$	21.3			$	19.1

Customer Financing (Contracts and Notes)

	December 31, 2012		September 30, 2012
Recorded Investment (principal and interest due, net of deferred interest and fees)
Individually evaluated for impairment	$	124.6	$	123.2
Collectively evaluated for impairment		302.0		307.1
Total	$	426.6	$	430.3

Allowances for Credit Losses
Individually evaluated for impairment	$	63.0	$	59.9
Collectively evaluated for impairment		13.6		12.9
Total	$	76.6	$	72.8

Reconciliation of Allowances for Credit Losses	First Quarter Ended December 31,
	2012		2011
Beginning balance	$	72.8	$	71.4
Charge-offs		-		-
Recoveries		-		-
Provisions		3.8		(1.3	)
Ending balance	$	76.6	$	70.1
Current	$	56.8	$	43.2
Non-current	$	19.8	$	26.9

Age Analysis of Recorded Investment	December 31, 2012						September 30, 2012
	Contracts		Notes		Total		Contracts		Notes		Total
Past Due:
1-29 days	$	8.6	$	1.4	$	10.0	$	6.6	$	-	$	6.6
30-59 days		5.2		1.4		6.6		6.0		1.4		7.4
60-89 days		3.2		1.4		4.6		1.4		1.4		2.8
Over 90 days		8.5		42.5		51.0		6.3		40.0		46.3
Total past due	$	25.5	$	46.7	$	72.2	$	20.3	$	42.8	$	63.1
Total current (1)		286.8		67.6		354.4		288.1		79.1		367.2
Grand total	$	312.3	$	114.3	$	426.6	$	308.4	$	121.9	$	430.3

Over 90 days and accruing interest	$	2.6	$	0.1	$	2.7	$	1.4	$	0.3	$	1.7
Nonaccrual status (not accruing interest)		14.0		75.0		89.0		13.8		75.0		88.8

(1)

includes impaired Alabama notes of $31.2 at December 31, 2012 and $35.0 at September 30, 2012

Recorded Investment by Credit Quality Indicator Using Credit Profile by Internally Assigned Risk Grade

	December 31, 2012						September 30, 2012
	Contracts		Notes		Total		Contracts		Notes		Total
Low	$	83.6	$	-	$	83.6	$	87.8	$	-	$	87.8
Medium		77.9		0.1		78.0		68.3		0.2		68.5
High (2)		150.8		114.2		265.0		152.3		121.7		274.0
Total recorded investment	$	312.3	$	114.3	$	426.6	$	308.4	$	121.9	$	430.3

(2)

includes $75.0 of impaired Alabama notes receivable

Impaired loans	December 31, 2012						September 30, 2012
	Contracts		Notes		Total		Contracts		Notes		Total
Recorded investment	$	24.3	$	75.0	$	99.3	$	2.5	$	75.0	$	77.5
Unpaid principal face		24.3		75.0		99.3		2.5		75.0		77.5
Related allowance		4.5		58.5		63.0		1.4		58.5		59.9
Average recorded investment		13.4		75.0		88.4		3.9		79.5		83.4

Interest income recognized on impaired loans:
Quarter-to-date
Total	$	0.4	$	-	$	0.4	$	-	$	-	$	-
Cash-basis		-		-		-		-		-		-
Year-to-date
Total	$	0.4	$	-	$	0.4	$	-	$	-	$	-
Cash-basis		-		-		-		-		-		-

4. CONCENTRATIONS OF CREDIT RISK

Receivables By Legal Gaming Region At December 31, 2012
Nevada	11	%
Canada	5
California	5
New Jersey	4
Oklahoma	4
Other (less than 4% individually)	24

North America	53	%
Argentina	20	%
Europe	8
Australia	5
Mexico	5
Other (less than 4% individually)	9
International	47	%

5. INVENTORIES

	December 31, 2012		September 30, 2012
Raw materials	$	53.6	$	48.8
Work-in-process		2.0		2.4
Finished goods		35.9		41.7
Total	$	91.5	$	92.9

6. PROPERTY, PLANT AND EQUIPMENT

	December 31, 2012			September 30, 2012

Land	$	62.7		$	62.7
Buildings		235.5			236.7
Leasehold improvements		15.7			15.3
Machinery, furniture and equipment		291.9			287.9
Gaming operations equipment		811.2			813.5
Total		1,417.0			1,416.1

Less accumulated depreciation		(871.3	)		(860.4	)

Property, plant and equipment, net	$	545.7		$	555.7

7. GOODWILL AND OTHER INTANGIBLES

Goodwill

Activity By Segment For the Three Months Ended December 31, 2012	North America		International		Total
Beginning balance	$	1,275.6	$	194.1	$	1,469.7
Foreign currency		-		0.9		0.9
Ending balance	$	1,275.6	$	195.0	$	1,470.6

Other Intangibles

During the quarter ended December 31, 2012, $0.2 million of patent legal costs were capitalized with a weighted average life of 3.5 years.

	December 31, 2012						September 30, 2012
Ending Balances			Accumulated						Accumulated
	Cost		Amortization		Net		Cost		Amortization		Net
Patents	$	377.5	$	315.2	$	62.3	$	379.6	$	310.7	$	68.9
Developed technology		129.0		68.9		60.1		131.9		68.3		63.6
Contracts		23.9		21.5		2.4		23.9		21.1		2.8
Reacquired rights		14.7		4.0		10.7		14.7		3.5		11.2
Customer relationships		61.2		28.0		33.2		61.1		23.9		37.2
Trademarks		12.5		3.3		9.2		12.5		2.8		9.7
Total	$	618.8	$	440.9	$	177.9	$	623.7	$	430.3	$	193.4

Aggregate Amortization	First Quarters Ended December 31,				Future Annual Estimates
	2012		2011		2013		2014		2015		2016		2017
	$	15.6	$	10.6	$	54.6	$	52.7	$	36.6	$	22.3	$	10.3

8. FAIR VALUE MEASUREMENTS

Financial Assets (Liabilities) Carried at Fair Value

	Fair Value			Level 1		Level 2			Level 3
December 31, 2012
Money market funds	$	172.3		$	172.3	$	-		$	-
Derivative assets		114.9			-		114.9			-
Derivative liabilities		(114.9	)		-		(114.9	)		-
Acquisition contingent consideration payable		(118.5	)		-		-			(118.5	)

September 30, 2012
Money market funds	$	77.0		$	77.0	$	-		$	-
Derivative assets		118.2			-		118.2			-
Derivative liabilities		(119.7	)		-		(119.7	)		-
Acquisition contingent consideration payable		(116.4	)		-		-			(116.4	)

Valuation Techniques and Balance Sheet Presentation

Money market funds were primarily money market securities valued based on quoted market prices in active markets.

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 (13% - 100%) to each scenario, as well as a risk-adjusted discount rate of 18%, to derive the estimated fair value at December 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 liabilities, $45.0 million current and $73.5 million noncurrent at December 31, 2012 and $42.8 million current and $73.6 million noncurrent at September 30, 2012. An increase of $2.1 million to the payable fair value was recorded during the first quarter to contingent acquisition related costs on the income statement along with $15.4 million of accrued retention plan compensation. Changes in fair value were primarily due to the time-value of money and updated probability-weighted internal earnings projections.

Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)

Three Months Ended December 31,	2012			2011
	Acquisition Contingent Consideration Payable			Investments in Unconsolidated Affiliates
Beginning balance	$	(116.4	)	$	9.3
Gain (loss) included in:
Other income (expense) - other		-			(0.1	)
Other comprehensive income		-			(0.2	)
Issuances		-			-
Accretion (interest and fair value adjustment)		(2.1	)		0.3
Settlements		-			-
Ending balance	$	(118.5	)	$	9.3

Net change in unrealized gain (loss) included in earnings related to instruments still held	$	-		$	(0.1	)

Financial Assets (Liabilities) Not Carried at Fair Value

	Carrying Value			Fair Value			Level 1			Level 2			Level 3			Unrealized Gain (Loss)
December 31, 2012
Jackpot investments	$	350.6		$	412.3		$	412.3		$	-		$	-		$	61.7
Contracts & notes receivable		350.0			349.7			-			-			349.7			(0.3	)
Jackpot liabilities		(461.4	)		(471.6	)		-			-			(471.6	)		(10.2	)
Debt		(1,660.9	)		(1,873.4	)		(1,808.4	)		(65.0	)		-			(212.5	)

September 30, 2012
Jackpot investments	$	355.9		$	422.0		$	422.0		$	-		$	-		$	66.1
Contracts & notes receivable		357.5			353.5			-			-			353.5			(4.0	)
Jackpot liabilities		(481.0	)		(503.0	)		-			-			(503.0	)		(22.0	)
Debt		(1,726.9	)		(1,955.4	)		(1,815.4	)		(140.0	)		-			(228.5	)

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% - 11.25%). 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 Latin 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 (1.71%) for the estimated funding rate and the 10-year credit default swap rate (2.16%) for nonperformance risk. The present value (carrying value) of the expected lump sum payments were discounted using the 3-month treasury yield curve rate (.01%) with the 1-year credit default swap rate (.49%) for the current amounts and the 1-year treasury yield curve rate (.14%) with the 2-year credit default swap rate (.84%) 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.

The majority of our debt was level 1 and valued using quoted market prices or dealer quotes for the identical financial instrument when traded as an asset in an active market. Outstanding borrowings under our revolving credit facility were level 2 and fair value was determined using DCF of expected payments at current borrowing rates. Carrying values in the table 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.

9. FINANCIAL DERIVATIVES

Foreign Currency Hedging

The notional amount of foreign currency contracts hedging our exposure related to monetary assets and liabilities denominated in nonfunctional currency totaled $42.0 million at December 31, 2012 and $34.1 million at September 30, 2012.

Interest Rate Management

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

Balance Sheet Location and Fair Value	December 31, 2012		September 30, 2012
Non-designated Hedges
Foreign currency contracts: Other assets and deferred costs (current)	$	0.2	$	0.1
Foreign currency contracts: Other accrued liabilities		0.3		0.2

Designated Hedges
Interest rate swaps: Other assets and deferred costs (noncurrent)		114.7		118.1
Interest rate swaps: Long-term debt		114.6		119.5

	First Quarter Ended December 31,
Income Statement Location and Gain (loss)	2012			2011
Non-designated Hedges
Foreign currency contracts: Other income (expense)	$	(0.1	)	$	0.5

Designated Hedges
Interest rate swap - ineffectiveness: Other income (expense)	$	1.4		$	0.3
Interest rate swap - effectiveness: Interest expense		5.0			5.9

10. CREDIT FACILITIES AND INDEBTEDNESS

Total Outstanding debt

	December 31, 2012			September 30, 2012
Credit facilities	$	65.0		$	140.0
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		1,715.0			1,790.0

Discounts:
3.25% Convertible Notes		(51.1	)		(60.0	)
7.5% Bonds		(2.0	)		(2.1	)
5.5% Bonds		(1.0	)		(1.0	)

Swap fair value adjustments:
7.5% Bonds		73.8			77.0
5.5% Bonds		40.8			42.5

Total outstanding debt, net	$	1,775.5		$	1,846.4

IGT was compliant with all covenants and embedded features required no bifurcation at December 31, 2012.

Credit Facilities

At December 31, 2012, $65.0 million was outstanding under our $750 million revolving domestic credit facility, $661.9 million was available, and $23.1 million was reserved for letters of credit and performance bonds.

3.25% Convertible Notes

	First Quarter Ended December 31,
	2012		2011
Contractual interest expense	$	6.9	$	6.9
Discount amortization		8.9		8.1
Remaining discount amortization period (years)		1.4

Bonds

Interest rate swaps executed in conjunction with our bonds are described in Note 9.

11. CONTINGENCIES

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. Except as otherwise stated below, we have concluded that we cannot estimate the reasonably possible loss or range of loss, including reasonably possible losses in excess of amounts already accrued, for each specific matter disclosed below. 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.

Bally

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 denied 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 remained 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 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 a 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. On December 17, 2012 the United States Court of Appeals for the Federal Circuit affirmed the rulings in IGT’s favor. On January 14, 2013, Bally filed a petition for rehearing of its appeal.

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.

Atlantic Lotteries

In an action brought in the Supreme Court of New Foundland and Labrador by Babstock and Small as representatives of a purported class of persons allegedly harmed by VLT gaming in the Province of New Foundland and Labrador; Atlantic Lottery Corporation has impleaded VLC, Inc. IGT-Canada, Inc., International Game Technology and other third party defendants seeking indemnification for any judgment recovered against Atlantic Lottery Corporation in the main action. Plaintiffs filed a motion for class action certification on September 17, 2012. No hearing date for the motion on class certification has been set.

Shareholder Actions

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. On March 30, 2012 the Court issued an order of preliminary approval and the settlement was paid into escrow by insurance in April 2012. The Court approved the stipulated settlement on October 19, 2012.

Derivative Actions

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 appealed to the US Court of Appeals for the Ninth Circuit on August 23, 2011.

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. Plaintiff filed an amended complaint on September 24, 2012. The Company was named as a nominal defendant only. On January 9, 2013, the Court granted the Company’s and individual defendants’ motions to dismiss the action.

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 was filed. On March 14, 2012, defendants’ motion to dismiss the action was granted. On April 3, 2012, the plaintiff appealed to the US Court of Appeals for the Ninth Circuit.

ERISA Actions

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. On December 21, 2012, the parties submitted a stipulation to settle the litigation for a payment of $500,000 and up to $25,000 towards settlement administrative expenses, which was accrued for in our 2013 first quarter. On January 22, 2013, the Court granted preliminary approval of the settlement.

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 December 31, 2012 totaled $14.4 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. The parties’ cross appeals have been fully briefed.

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

Performance bonds outstanding related to certain gaming operations equipment totaled $14.1 million at December 31, 2012. We are liable to reimburse the bond issuer in the event of exercise due to our nonperformance.

Letters of Credit

Outstanding letters of credit issued under our domestic credit facility to ensure payment to certain vendors and governmental agencies totaled $9.0 million at December 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.

Self-Insurance

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.

State and Federal Taxes

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.

Product Warranties

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.

Three Months Endeds ended December 31,	2012			2011
Beginning balance	$	4.2		$	6.2
Reduction for payments made		(2.5	)		(1.6	)
Accrual for new warranties issued		3.9			2.5
Adjustments for pre-existing warranties		(1.4	)		(2.0	)
Ending balance	$	4.2		$	5.1

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 three months ended December 31, 2012 decreased to 33.2% from 36.4% for the same prior year period. The prior year effective tax rate was negatively impacted by $2.2 million of losses in foreign jurisdictions for which there were no associated tax benefits. The current year effective tax rate was positively impacted by an increase in the manufacturing deduction.

At December 31, 2012, our gross UTBs totaled $111.4 million, excluding related accrued interest and penalties of $24.5 million. At December 31, 2012, $80.0 million of our UTBs, including related accrued interest and penalties, would affect our effective tax rate if recognized. During the three months ended December 31, 2012, our UTBs decreased $0.1 million and related interest and penalties increased $1.1 million. We do not believe our total UTBs will change significantly during the next twelve months.

We are currently under audit by the IRS for amended returns filed for 1999, 2006 and 2007 as well as both the originally filed and amended 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

Share-based Compensation

SIP As Of And For The Three Months Ended December 31, 2012

				Weighted Average
Options	Shares			Exercise Price		Remaining Contractual Term		Aggregate Intrinsic Value
	(thousands)			(per share)		(years)		(millions)
Outstanding at beginning of fiscal year		12,117		$	18.12
Granted		-			-
Exercised		(136	)		10.63
Forfeited		(125	)		16.84
Expired		(105	)		19.63
Outstanding at end of period		11,751		$	18.21		5.7	$	6.0

Vested and expected to vest		11,575		$	18.24		5.7	$	6.0

Exercisable at end of period		8,910		$	18.86		5.1	$	5.2

				Weighted Average
Restricted Shares/Units	Shares			Grant Date Fair Value		Remaining Vesting Period		Aggregate Intrinsic Value
	(thousands)			(per share)		(years)		(millions)
Outstanding at beginning of fiscal year		4,833		$	14.93
Granted*		3,069			14.03
Vested		(1,043	)		15.42
Forfeited		(225	)		14.57

Outstanding at end of period		6,634		$	14.42		1.8	$	90.6

Expected to vest		6,157		$	14.43		1.8	$	84.0

* certain awards require satisfaction of a combination of performance and market conditions

Other Information
Shares available for future grant		23.2	million
Unrecognized costs for outstanding awards	$	96.8	million
Weighted average future recognition period		1.9	years

14. EARNINGS PER SHARE

	First Quarter Ended December 31,
	2012			2011
Income from continuing operations available to common shares	$	65.3		$	50.3
Basic weighted average shares outstanding		265.9			297.3
Dilutive effect of non-participating share-based awards		2.0			1.7
Diluted weighted average common shares outstanding		267.9			299.0

Basic EPS from continuing operations	$	0.25		$	0.17
Diluted EPS from continuing operations	$	0.24		$	0.17

Weighted average shares excluded from diluted EPS because the effect would be anti-dilutive:
Share-based awards		12.7			12.6
Debentures
Notes		42.6			42.6
Note hedges		(42.6	)		(42.6	)
Warrants		42.6			42.6

Accelerated Share Repurchase

On December 18, 2012, we received the final delivery of 2.5 million shares of IGT common stock under a $400.0 million ASR transaction executed with Goldman, Sachs, & Co in June 2012. We received 30.3 million total shares based on VWAP over the six-month period for an average price of $13.22 per share.

15. BUSINESS SEGMENTS

We view our business in the following two operating segments:

North America includes our operations associated with land-based customers located in the US and Canada, as well as US-based interactive online social gaming operations

International includes our operations associated with customers located in all other jurisdictions

Certain income and expenses related to company-wide initiatives are managed at the corporate level and not allocated to an operating segment, primarily comprised of general and administrative costs and other income (expense). We do not recognize inter-company revenues or expenses upon the transfer of gaming products between operating segments. Segment accounting policies are consistent with those of our consolidated financial statements and segment profit is measured on the basis of operating income. Impairment and restructuring charges are reflected within the segment where actions occurred.

Our business segments are designed to allocate resources within a framework of management responsibility. Operating costs included in one segment may benefit other segments. Realignment of our business development and administrative functions may result in changes to operating cost allocations between operating segments.

Business Segments Financial Information

	December 31,
	2012			2011
NORTH AMERICA
Revenues	$	409.4		$	322.6
Gaming operations		208.6			219.5
Product sales		158.9			103.0
Interactive		41.9			0.1
Gross profit		244.2			184.2
Gaming operations		129.7			130.0
Product sales		89.2			54.1
Interactive		25.3			0.1
Operating income		112.4			92.4

INTERNATIONAL
Revenues	$	120.9		$	122.9
Gaming operations		34.0			32.5
Product sales		75.9			77.9
Interactive		11.0			12.5
Gross profit		65.3			67.7
Gaming operations		23.4			23.9
Product sales		36.4			37.4
Interactive		5.5			6.4
Operating income		28.4			32.2

CORPORATE (unallocated)
Operating expenses	$	(22.4	)	$	(24.7	)

CONSOLIDATED
Revenues	$	530.3		$	445.5
Gaming operations		242.6			252.0
Product sales		234.8			180.9
Interactive		52.9			12.6
Gross profit		309.5			251.9
Gaming operations		153.1			153.9
Product sales		125.6			91.5
Interactive		30.8			6.5
Operating income		118.4			99.9

16. DISCONTINUED OPERATIONS

UK Barcrest Group

As part of our strategic realignment of core objectives, we sold our UK Barcrest Group in September 2011 for approximately $47.0 million, which remains subject to contingent consideration related to certain customer arrangements and potential indemnification obligations. The quarter ended December 31, 2011 included loss on the sale of $1.6 million (or $1.0 million after-tax). Additional gain or loss on the sale may be recorded as the outstanding items are resolved over the next three years.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following MDA is intended to enhance the reader’s understanding of our operations and current business environment from the perspective of our company’s management. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2012, as well as the accompanying Consolidated Interim Financial Statements and Notes included in Item 1 of this Form 10-Q.

Our MDA is organized into the following sections:

OVERVIEW

CONSOLIDATED RESULTS

BUSINESS SEGMENT RESULTS

LIQUIDITY AND CAPITAL RESOURCES

RECENTLY ISSUED ACCOUNTING STANDARDS

CRITICAL ACCOUNTING ESTIMATES

Unless otherwise indicated in this report:

International Game Technology, IGT, we, our, or the Company refers to International Game Technology and its consolidated entities

references to years relate to our fiscal years ending September 30

current refers to our fiscal first quarter ended December 31, 2012

Note refers to the Notes of our Consolidated Interim Financial Statements in Item 1 of this report

references to EPS are on a diluted basis

table amounts are presented in millions, except units and EPS

discussion and analysis relates to results for continuing operations of the current first quarter as compared with the prior year first quarter

We sometimes refer to the impact of changes in foreign currency exchange rates, which results from translating foreign functional currencies into US dollars, as well as currency transaction remeasurement, for reporting purposes. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior period rates applied to current period activity.

FORWARD LOOKING STATEMENTS

This report contains statements that do not relate to historical or current facts, but are “forward looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed new products, services, developments, or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, appear, believe, could, would, estimate, expect, indicate, intend, may, plan, predict, project, pursue, will, continue, and other similar terms and phrases, as well as the use of the future tense.

Examples of forward looking statements in this report include, but are not limited to, the following categories of expectations about:

our ability to successfully introduce new products and their impact on replacement demand

the timing, features, benefits, and expected continued or future success of new product introductions and ongoing product, marketing, and strategic initiatives

our expected future financial and operational performance

our strategic and operational plans

our leadership position in the gaming industry or in online casino-style social gaming

the advantages offered to customers by our anticipated products and product features

economic conditions and other factors affecting the gaming industry

gaming growth, expansion, and new market opportunities

expected trends in the demand for our products

developments with respect to economic, political, regulatory and other conditions affecting our international operations

mergers, acquisitions and divestitures, including the expected benefits of completed acquisitions and expectations for, possible acquisitions of, or investments in, businesses, products, and technologies

research and development activities, including anticipated benefits from such activities

fluctuations in future gross margins, tax rates, and liabilities

increasing product sales or machine placements

legislative, legal or regulatory developments and related market opportunities

available capital resources to fund future operating requirements, capital expenditures, payment obligations, acquisitions, and share repurchases

losses from off-balance sheet arrangements

financial returns to shareholders related to management of our costs

the impact of recently adopted accounting pronouncements

the outcome and expense of litigation

Actual results could differ materially from those expressed or implied in our forward looking statements. Our future financial condition and results of operations, as well as any forward looking statements, are subject to change and to inherent known and unknown risks and uncertainties. See Part II, Item 1A, Risk Factors, in this report for a discussion of these and other risks and uncertainties. You should not assume at any point in the future that the forward looking statements in this report are still valid. We do not intend, and undertake no obligation, to update our forward looking statements to reflect future events or circumstances.

OVERVIEW

International Game Technology is a global gaming company specializing in the design, development, manufacture, and marketing of casino games, gaming equipment and systems technology for land-based and online social gaming and wagering markets. We are a leading supplier of gaming entertainment products worldwide and provide a diverse offering of quality products and services at competitive prices, designed to enhance the player’s experience.

We manage our operations in two geographic business segments, North America and International, each incorporating all revenue categories—Gaming Operations, Product Sales, and Interactive. Gaming operations and interactive revenues are generated by providing our products and services under a variety of recurring revenue arrangements. Product Sales revenues are generated by the sale of our products or services. Certain unallocated income and expenses managed at the corporate level, comprised primarily of general and administrative costs and other income and expense, are not allocated to an operating segment. See BUSINESS SEGMENT RESULTS below and Note 15.

Summary Results

	First Quarter Ended December 31,
	2012		2011		C h a n g e
Revenues	$	530.3	$	445.5	$	84.8	19	%
Operating income		118.4		99.9		18.5	19	%
Income from continuing operations		65.3		50.3		15.0	30	%
EPS from continuing operations	$	0.24	$	0.17	$	0.07	41	%

All results reflected in the table above for our quarter ended December 31, 2012 improved due to an increase of $42.7 million or 72% in North America machine sales and an increase of $41.3 million in interactive primarily related to the addition of social gaming from our acquisition of DoubleDown in late January 2012. Income and EPS from continuing operations improved due to both increased revenues and a lower effective income tax rate of 33% versus 36% in the prior year quarter. EPS from continuing operations also benefitted from fewer shares outstanding due to share repurchases during 2012. See Note 14 for information about our share repurchases. For a more in-depth analysis of our 2013 first quarter results, see CONSOLIDATED RESULTS directly following this OVERVIEW.

Business Update

The gaming industry continues to be challenged by reduced discretionary outlays from players who remain reluctant to spend while enduring the global macroeconomic uncertainty. This is evidenced by the reduction in our gaming operations yields, which reflected lower play levels in our key markets. Increased competition and unforeseen events such as Super Storm Sandy in the eastern United States also negatively impacted yields. In product sales, these same global trends are inhibiting the willingness of our casino customers worldwide to order new gaming machines. However, increased VLT demand from various government lotteries in Canada and gaming expansion in Illinois contributed to improved machine sales during our 2013 first quarter. Outside of VLT unit demand from these markets, we expect our 2013 full year machine sales will be relatively flat to 2012.

With the acquisition of DoubleDown in January 2012, we have established a leadership position in interactive online casino-style social gaming and strengthened our core business with added distribution channels for IGT game content. Our DoubleDown Casino® revenues continue to increase each quarter and were up 15% in our 2013 first quarter over the 2012 fourth quarter. DoubleDown is presented as a component of North America interactive operations. As regulated markets legalize interactive online gaming, our strategic intent is to enter and do business in those markets that offer attractive return characteristics.

Strategic Objectives

We continue to partner with our customers in an effort to build stronger relationships and deliver innovative gaming products and services. We remain focused on strategic objectives designed to improve our business and increase shareholder value. For 2013, we remain focused on achieving the following strategic objectives:

Reinforcing our leadership position in our core business

Increasing revenues and profitability in international markets

Propelling our game content across the broadest possible global network

Returning capital to shareholders in a consistent, efficient manner

CONSOLIDATED RESULTS – A Year Over Year Comparative Analysis

	First Quarter Ended December 31,
	2012			2011			C h a n g e
Revenues	$	530.3		$	445.5		$	84.8		19	%
Gross margin		58	%		57	%		1	pp	2	%
Operating income	$	118.4		$	99.9		$	18.5		19	%
Margin		22	%		22	%		-	pp	-

Income from continuing operations	$	65.3		$	50.3		$	15.0		30	%
Discontinued operations		-			(1.0	)		1.0		*
Net income	$	65.3		$	49.3		$	16.0		32	%

EPS