Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
IGT > SEC Filings for IGT > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for INTERNATIONAL GAME TECHNOLOGY

Form 10-Q for INTERNATIONAL GAME TECHNOLOGY


7-May-2014

Quarterly Report


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, 2013, as well as the accompanying Consolidated Interim Financial Statements and Notes included in Item 1 of this Form 10-Q. Information posted on our website is not incorporated into this Form 10-Q.

Our MDA is organized into the following sections:
? FORWARD LOOKING STATEMENTS
? 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 ? 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 ? references to years relate to our fiscal years ending September 30 ? current refers to our fiscal first quarter ended March 31, 2014 ? 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 the current fiscal periods as compared with the prior year fiscal periods

We sometimes refer to the impact of changes in foreign currency exchange rates, which results from the translation of foreign functional currencies into US dollars and foreign currency transactions remeasurement. 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 continued or future success of new product introductions and ongoing product, marketing, and strategic initiatives
? our future financial and operational performance ? our strategic and operational plans, including our ability to manage and leverage cost reduction initiatives
? 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 ? future 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 anticipated benefits of completed acquisitions and 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 ? future 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, dividends, 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. Further information on potential factors that could affect our financial condition, results of operations and business are included in this report and our other filings with the SEC. 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-style gaming equipment, systems technology, and game content across multiple platforms-land-based, online real-money and online social. 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 gaming player experience.

We derive our revenues from the distribution of casino games, gaming equipment and systems technology for land-based, online real-money, and online social markets. Operating results reviewed by our CEO encompass all revenue sources within each geographical region. We currently view our business in two operating segments, North America and International, each incorporating all revenue categories-Gaming Operations, Product Sales, and Interactive.

We measure segment profit on the basis of operating income. Certain income and expenses are managed at the corporate level and not allocated to an operating segment. Other segment and financial information is contained in our BUSINESS SEGMENT RESULTS below and Note 16.

SUMMARY RESULTS
                                        Second Quarters                                     Six Months
Periods Ended March 31,    2014        2013           C h a n g e           2014          2013            C h a n g e
Revenues                  $ 512.8     $ 600.0     $  (87.2 )      -15 %   $ 1,054.0     $ 1,130.2     $  (76.2 )       -7 %
Operating income             72.1       129.3        (57.2 )      -44 %       175.7         247.7        (72.0 )      -29 %
Net Income                   25.7        78.2        (52.5 )      -67 %       105.0         143.5        (38.5 )      -27 %
EPS                       $  0.10     $  0.29     $  (0.19 )      -66 %   $    0.42     $    0.54     $  (0.12 )      -22 %

Quarters ended March 31, 2014 and 2013 compared Revenue decline for our second quarter ended March 31, 2014 was due to a decrease of $61.5 million or 13% in North America and $25.7 million or 21% in International. Product sales decreased $76.4 million or 27% due to lower machine units recognized and gaming operations decreased $23.9 million or 9% due to declines in yield and installed base. These decreases were partially offset by an increase of $13.1 million or 20% in interactive revenues due to growing contributions from social gaming.

Operating income, net income, and EPS decreased primarily due to lower revenues, as well as higher expenses attributable to business realignment charges. Net income and EPS also decreased due to a higher effective income tax rate of 39.5% versus 27.3% in the prior year quarter, which benefited from certain discrete tax items. EPS benefitted from fewer shares outstanding due to share repurchases.

To address the challenges facing the gaming industry as described below and their impact on IGT, we enacted a plan to realign our operating structure. Under this business realignment, we reduced our global workforce by 7% and expect to realize cost savings of $30.0 million in the 2014 second half and an estimated $50.0 million on an annualized basis going forward. During our 2014 second quarter, we incurred charges of $16.5 million related to the business realignment, including $7.7 million for the impairment of abandoned software.

Six Months ended March 31, 2014 and 2013 compared Revenue decline for the six months ended March 31, 2014 was due to a decrease of $43.4 million or 5% in North America and $32.8 million or 13% in International. Product sales decreased $67.5 million or 13% due to lower machine units and gaming operations decreased $43.5 million or 9% due to declines in yield and installed base. These decreases were partially offset by an increase of $34.8 million or 29% in interactive revenues due to growing contributions from social gaming.

Operating income, net income, and EPS decreased for the reasons cited above. The decrease in net income and EPS was partially offset by a lower effective income tax rate of 11.0% versus 30.1% in the prior year period, primarily due to audit closures that reduced our provision for income taxes by $29.6 million. As in the quarter, EPS benefitted from fewer shares outstanding due to share repurchases.

For a more in-depth analysis of our results, see CONSOLIDATED RESULTS directly following this OVERVIEW.


BUSINESS TRENDS

Industry declines in gross gaming revenues during the first six months of 2014 have adversely impacted our financial results. These declines have negatively affected our gaming operations yields and are inhibiting casino operators' willingness to purchase gaming machines. Furthermore, the absence of a replacement opportunity in size similar to the replacement units sold under Canadian government lottery contracts in 2013 will result in lower machine sales in 2014. Our results have also been impacted by increasing competition.

Our international operations have also been impacted by worsening regulatory compliance delays and import restrictions, which continue to impede our ability to satisfy market demand for products in certain foreign jurisdictions. Notwithstanding these current market conditions, we continue to believe that long-term growth opportunities exist internationally, particularly in Asian markets.

We expect that our interactive business, particularly social gaming, will continue to provide growth opportunities. The dynamic growth of social networking and entertainment consumption on mobile devices, such as smart phones and tablets, continues to fuel growth in online social gaming. We believe that online gaming appeals to a broader consumer demographic than land-based gaming.

STRATEGIC OBJECTIVES

We continue to partner with our customers to build stronger relationships and deliver innovative gaming products and services. We remain focused on the following strategic objectives for 2014, designed to improve our business and increase shareholder value, with adjustments as new opportunities arise and the industry evolves:
? Assembling the most compelling and highest performing game library available-serving both operators and players ? Expanding and managing the broadest distribution network globally

? Maximizing shareholder value through the efficient operation of our business, the optimal generation of cash flow, and the responsible, dependable return of capital through dividends and share repurchases


CONSOLIDATED RESULTS
                                        Second Quarters                                     Six Months
Periods Ended March 31,    2014        2013           C h a n g e           2014          2013            C h a n g e
Revenues                  $ 512.8     $ 600.0     $  (87.2 )      -15 %   $ 1,054.0     $ 1,130.2     $  (76.2 )       -7 %
Gross margin                   57 %        57 %          -     pp                57 %          58 %         (1 )   pp
Operating income          $  72.1     $ 129.3     $  (57.2 )      -44 %   $   175.7     $   247.7     $  (72.0 )      -29 %
Margin                         14 %        22 %         (8 )   pp                17 %          22 %         (5 )   pp
Net income                $  25.7     $  78.2     $  (52.5 )      -67 %   $   105.0     $   143.5     $  (38.5 )      -27 %
EPS                       $  0.10     $  0.29     $  (0.19 )      -66 %   $    0.42     $    0.54     $  (0.12 )      -22 %

Quarters ended March 31, 2014 and 2013 compared Total revenues declined due to decreases of $61.5 million in North America and $25.7 million in International. Decreases of $76.4 million in product sales revenue and $23.9 million in gaming operations revenues were partially offset by an increase of $14.5 million in social gaming revenue.

Operating income, margin, net income and EPS declined due to lower revenues, as well as higher operating expenses, including business realignment and litigation charges. See OPERATING EXPENSES below for additional information. Net income and EPS also decreased due to a higher effective income tax rate compared to the prior year quarter, which benefited from certain discrete tax items as discussed below under INCOME TAX PROVISIONS. EPS benefitted from fewer shares outstanding due to share repurchases.

Six months ended March 31, 2014 and 2013 compared Similar to the quarterly comparison, total revenues declined due to decreases of $43.4 million in North America and $32.8 million in International. Decreases of $67.5 million in product sales revenues and $43.5 million in gaming operations revenues were partially offset by an increase of $38.0 million in social gaming revenues. Total gross margin decreased due to margin decline in gaming operations, partially offset by interactive margin improvement. Operating income, margin, net income and EPS declined due to the same factors described in the quarterly comparison.

GAMING OPERATIONS
                                       Second Quarters                                   Six Months
Periods Ended March       2014        2013           C h a n g e          2014        2013           C h a n g e
31,
Revenues                 $ 230.4     $ 254.3     $  (23.9 )       -9 %   $ 453.4     $ 496.9     $  (43.5 )       -9 %
Gross margin                  61 %        62 %         (1 )   pp              61 %        62 %         (1 )   pp
Installed base units
('000)                      53.4        56.7         (3.3 )       -6 %      53.4        56.7         (3.3 )       -6 %
MegaJackpots® (premium
brand)                      24.0        26.0         (2.0 )       -8 %      24.0        26.0         (2.0 )       -8 %
Lease (CDS, Racino,
other)                      29.4        30.7         (1.3 )       -4 %      29.4        30.7         (1.3 )       -4 %
Yield ($0.00)            $ 47.00     $ 49.26     $  (2.26 )       -5 %   $ 46.11     $ 47.99     $  (1.88 )       -4 %

Quarters ended March 31, 2014 and 2013 compared Gaming operations revenues decreased, driven by lower yields, most significantly in MegaJackpots®, along with installed base declines. Gross margin declined slightly due to lower yield, partially offset by lower depreciation. Lower yield was attributable to industry decline in gross gaming revenues.

Six months ended March 31, 2014 and 2013 compared Gaming operations decreases in revenue, yield and gross margin were driven by the same factors as described in the quarterly comparison.


PRODUCT SALES
                                                           Second Quarters                                                    Six Months
Periods Ended March 31,               2014              2013                   C h a n g e                  2014             2013             C h a n g e
Revenues                           $     202.6       $     279.0       $     (76.4 )           -27 %     $     446.2       $   513.7     $  (67.5 )        -13 %
Machines                                 116.0             202.4             (86.4 )           -43 %           282.9           359.8        (76.9 )        -21 %
Non-machine*                              86.6              76.6              10.0              13 %           163.3           153.9          9.4            6 %
Gross margin                                51 %              52 %              (1 )     pp                       52 %            52 %          -     pp
Machine units recognized
('000)**                                   7.9              14.3              (6.4 )           -45 %            20.7            25.0         (4.3 )        -17 %
Machine ASP ('000)                 $      14.7       $      14.1       $       0.6               4 %     $      13.7       $    14.4     $   (0.7 )         -5 %

Machine units shipped ('000)***            7.6              14.3              (6.7 )           -47 %            20.6            23.7         (3.1 )        -13 %
New/expansion                              2.7               3.7              (1.0 )           -27 %             7.0             6.3          0.7           11 %
Replacement                                4.9              10.6              (5.7 )           -54 %            13.6            17.4         (3.8 )        -22 %

*systems, licensing and parts/other; **correlates with revenues recognized; ***includes deferred revenue units

Quarters ended March 31, 2014 and 2013 compared Product sales revenue decreased on lower machine units, most significantly in North America replacement units, largely due to 3,500 VLT replacement units in the prior year quarter under large government contracts in Canada, as well as lower machine demand overall. Non-machine revenues increased primarily due to an increase of $8.0 million in parts. ASP increased primarily due to a greater mix of higher-priced units, mostly resulting from a greater mix of lower-priced Canadian VLT units in the prior year quarter, partially offset by unfavorable changes in foreign exchange rates. Slight decline in gross margin was attributable to increased obsolescence charges, partially offset by favorable product mix.

Six months ended March 31, 2014 and 2013 compared Similar to the quarterly comparison, product sales revenue decreased on lower replacement machine unit volume, most significantly in North America. The prior year period included 5,100 VLT replacement units under large government contracts in Canada. Non-machine revenues increased due to an increase of $7.5 million in parts and $7.2 million in systems, partially offset by lower license fees primarily due to a $5.0 million royalty settlement in the prior year period. ASP declined primarily due to a greater mix of lower-priced units under a multi-property contract, as well as unfavorable changes in foreign exchange rates. Gross margin was flat, as favorable product mix was offset by increased obsolescence charges.

INTERACTIVE
                                                                 Second Quarters                                                     Six Months
Periods Ended March 31,                  2014                    2013                      C h a n g e               2014         2013            C h a n g e
Revenues                            $          79.8         $          66.7         $        13.1           20 %   $  154.4     $  119.6     $   34.8           29 %
Social gaming                                  68.8                    54.3                  14.5           27 %      133.6         95.6         38.0           40 %
IGTi                                           11.0                    12.4                  (1.4 )        -11 %       20.8         24.0         (3.2 )        -13 %
Gross margin                                     61 %                    61 %                   -     pp                 62 %         60 %          2     pp
DoubleDown average user
metrics*
DAU ('000)                                    1,775                   1,690                    85            5 %      1,745        1,575          170           11 %
MAU ('000)                                    6,218                   6,276                   (58 )         -1 %      6,208        5,596          612           11 %
Bookings per DAU ($0.00)            $          0.43         $          0.37         $        0.06           16 %   $   0.42     $   0.34     $   0.08           24 %


* as a single application with multiple games, active users equal unique users

Quarters ended March 31, 2014 and 2013 compared Interactive revenue increased due to growth in our DoubleDown Casino®. Social gaming revenue continued to build with increases in both bookings per DAU and DAU. Mobile applications comprised 32% of social bookings compared to 20% in the prior year quarter. These increases were driven primarily by the ongoing roll-out of IGT content to the DoubleDown Casino® and effective player marketing strategies. IGTi revenues declined primarily due to discontinued lower-performing product offerings. Mobile generated 32% of IGTi online casino revenues compared to 23% in the prior year quarter.

Interactive gross margin was consistent with the prior year quarter. Amortization of acquired developed technology totaled $2.7 million, up from $2.3 million in the prior year quarter.

Six months ended March 31, 2014 and 2013 compared Interactive revenue growth was due to the same factors described in the quarterly comparison. Mobile applications comprised 30% of social bookings compared to 17% in the prior year period. IGTi mobile generated 31% of online casino revenues compared to 21% in the prior year period.

Interactive gross margin improvement was primarily due to an improving contribution from social gaming. Amortization of acquired developed technology totaled $5.4 million, up from $4.6 million in the prior year period.


OPERATING EXPENSES
                                      Second Quarters                                   Six Months
Periods Ended March       2014        2013          C h a n g e
31,                                                                      2014        2013          C h a n g e
Selling, general and
administrative           $ 124.1     $ 110.7     $ (13.4 )      -12 %   $ 242.1     $ 210.9     $ (31.2 )      -15 %
Research and
development                 58.5        58.1        (0.4 )       -1 %     118.8       112.5        (6.3 )       -6 %
Depreciation and
amortization                16.6        19.7         3.1         16 %      33.2        38.7         5.5         14 %
Subtotal                   199.2       188.5       (10.7 )       -6 %     394.1       362.1       (32.0 )       -9 %
Percent of revenue            39 %        31 %         -                     37 %        32 %         -

Contingent
acquisition-related
costs                        3.7        21.9        18.2         83 %      15.0        39.3        24.3         62 %
Impairment and
restructuring               17.8         1.6       (16.2 )        *        17.8         1.6       (16.2 )        *
Total operating
expenses                 $ 220.7     $ 212.0     $  (8.7 )       -4 %   $ 426.9     $ 403.0     $ (23.9 )       -6 %

Quarters ended March 31, 2014 and 2013 compared The increase in total operating expenses was primarily attributable to increased impairment and restructuring. Under cost-cutting measures enacted in March 2014 under a plan to realign our operating structure, we incurred charges of $16.5 million, which included $8.8 million of cash charges related to a 7% workforce reduction and $7.7 million of noncash impairment related to abandoned software. Impairment also included $1.3 million in the current quarter and $1.6 million in the prior year quarter for our Alabama note receivable related to property taxes assessed on the associated property collateral.

Operating expenses also included increases for accrued contingent litigation charges, $4.8 million for player marketing correlated with social gaming revenue growth, and $3.2 million for bad debt provisions primarily related to specific Latin America customer receivables. These increases were partially offset by lower acquisition-related costs (outlined in the table below) and $3.9 million of proxy contest fees in the prior year quarter.

Acquisition-related charges (mostly DoubleDown)        2014       2013          Second Quarter Variance
Earn-out (See Note 8 about valuation factors)         $  2.1     $ 14.1     $         12.0               85 %
Retention                                                1.6        7.8                6.2               79 %
Total contingent costs                                   3.7       21.9               18.2               83 %
Amortization of acquired intangibles                     3.4        4.5                1.1               24 %
Total acquisition-related charges                     $  7.1     $ 26.4     $         19.3               73 %

Six months ended March 31, 2014 and 2013 compared Similar to the quarter comparison, the increase in total operating expenses was primarily attributable to the increase in impairment and restructuring. Other significant increases in operating expenses included $9.7 million for player marketing correlated with revenue growth, $6.5 million for professional fees primarily due to an increase in commercial litigation, and accrued contingent litigation charges. These increases were partially offset by lower acquisition-related charges outlined below.

Acquisition-related charges (mostly DoubleDown)        2014       2013         Six Months Variance
Earn-out (See Note 8 about valuation factors)         $  6.6     $ 16.2     $       9.6            59 %
Retention                                                8.4       23.1            14.7            64 %
Total contingent costs                                  15.0       39.3            24.3            62 %
Amortization of acquired intangibles                     6.8        8.9             2.1            24 %
Total acquisition-related charges                     $ 21.8     $ 48.2     $      26.4            55 %


OTHER INCOME (EXPENSE)
                                                                   Second Quarters                                                             Six Months
Periods Ended March 31,                     2014                 2013                     C h a n g e                    2014                2013                C h a n g e
. . .
  Add IGT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for IGT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.