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 March 30, 2013
 
OR
 
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number 001-10684

 
International Game Technology
 
 
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 May 3, 2013:
260.4  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
28
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
45
     
Item 4.
Controls and Procedures
45
     
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
46
     
Item 1A.
Risk Factors
46
     
Item 2.
 Unregistered Sales of Equity Securities and Use of Proceeds
54
     
Item 3.
 Defaults Upon Senior Securities
54
     
Item 4.
 Mine Safety Disclosures
54
     
Item 5.
 Other Information
54
     
Item 6.
 Exhibits
55
 
 
2

 
 
GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
 
Fiscal dates—actual:
Fiscal dates—as presented:
March 30, 2013
March 31, 2013
March 31, 2012
March 31, 2012
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)
 
 
3

 
 
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
 11
     
3.
RECEIVABLES
 11
     
4.
CONCENTRATIONS OF CREDIT RISK
 13
     
5.
INVENTORIES
 13
     
6.
PROPERTY, PLANT AND EQUIPMENT
 13
     
7.
GOODWILL AND OTHER INTANGIBLES
 14
     
8.
FAIR VALUE MEASUREMENTS
 14
     
9.
FINANCIAL DERIVATIVES
 17
     
10.
CREDIT FACILITIES AND INDEBTEDNESS
 18
     
11.
CONTINGENCIES
 19
     
12.
INCOME TAXES
 24
     
13.
EMPLOYEE BENEFIT PLANS
 25
     
14.
EARNINGS PER SHARE
 26
     
15.
BUSINESS SEGMENTS
 26
     
16.
DISCONTINUED OPERATIONS
 27
 
 
4

 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
   
Periods Ended March 31,
 
   
Second Quarters
   
Six Months
 
   
2013
   
2012
   
2013
   
2012
 
(In millions, except per share amounts)
                       
Revenues
                       
Gaming operations
  $ 254.3     $ 266.1     $ 496.9     $ 518.1  
Product sales
    279.0       240.8       513.7       421.8  
Interactive
    66.7       34.3       119.6       46.9  
Total revenues
    600.0       541.2       1,130.2       986.8  
Costs and operating expenses
                               
Cost of gaming operations
    97.6       103.0       187.1       201.0  
Cost of product sales
    135.0       108.8       244.2       198.2  
Cost of interactive
    26.1       15.8       48.2       22.0  
Selling, general and administrative
    110.7       109.3       210.9       199.1  
Research and development
    58.1       55.3       112.5       102.2  
Depreciation and amortization
    19.7       19.3       38.7       34.7  
Contingent acquisition-related costs
    21.9       11.7       39.3       11.7  
Impairment
    1.6       -       1.6       -  
Total costs and operating expenses
    470.7       423.2       882.5       768.9  
Operating income
    129.3       118.0       247.7       217.9  
Other income (expense)
                               
Interest income
    11.1       10.8       22.4       22.9  
Interest expense
    (30.3 )     (30.0 )     (62.0 )     (60.1 )
Other
    (2.5 )     (2.0 )     (2.7 )     (4.8 )
Total other income (expense)
    (21.7 )     (21.2 )     (42.3 )     (42.0 )
Income from continuing operations before tax
    107.6       96.8       205.4       175.9  
Income tax provision
    29.4       34.4       61.9       63.2  
Income from continuing operations
    78.2       62.4       143.5       112.7  
Loss from discontinued operations, net of tax
    -       (0.5 )     -       (1.5 )
Net income
  $ 78.2     $ 61.9     $ 143.5     $ 111.2  
Other comprehensive income (loss), net of $0 tax
                               
Foreign currency translation adjustment
    (8.5 )     13.3       (5.1 )     19.4  
Unrealized loss on available-for-sale securities
    -       (0.1 )     -       (0.3 )
Comprehensive income
  $ 69.7     $ 75.1     $ 138.4     $ 130.3  
Basic earnings (loss) per share
                               
Continuing operations
  $ 0.30     $ 0.21     $ 0.54     $ 0.38  
Discontinued operations
    -       -       -       (0.01 )
Net income
  $ 0.30     $ 0.21     $ 0.54     $ 0.37  
Diluted earnings (loss) per share
                               
Continuing operations
  $ 0.29     $ 0.21     $ 0.54     $ 0.38  
Discontinued operations
    -       -       -       (0.01 )
Net income
  $ 0.29     $ 0.21     $ 0.54     $ 0.37  
Cash dividends declared per share
  $ 0.08     $ 0.06     $ 0.15     $ 0.12  
Weighted average shares outstanding
                               
Basic
    263.6       296.7       264.7       297.0  
Diluted
    265.6       298.1       266.7       298.6  
 
See Accompanying Notes
 
 
5

 
 
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
2013
   
September 30,
2012
 
(In millions, except par value)
           
Assets
           
Current assets
           
Cash and equivalents
  $ 236.5     $ 206.3  
Restricted cash and investment securities
    73.9       79.7  
Restricted cash and investment securities of VIEs
    1.9       2.2  
Jackpot annuity investments
    45.4       46.9  
Jackpot annuity investments of VIEs
    13.1       13.3  
Accounts receivable, net
    361.7       346.6  
Current maturities of contracts and notes receivable, net
    216.6       218.2  
Inventories
    89.4       92.9  
Deferred income taxes
    116.3       96.7  
Other assets and deferred costs
    132.8       160.5  
Total current assets
    1,287.6       1,263.3  
Property, plant and equipment, net
    511.5       555.7  
Jackpot annuity investments
    239.9       252.3  
Jackpot annuity investments of VIEs
    39.7       43.4  
Contracts and notes receivable, net
    115.2       139.3  
Goodwill
    1,467.5       1,469.7  
Other intangible assets, net
    161.6       193.4  
Deferred income taxes
    118.4       106.5  
Other assets and deferred costs
    258.3       261.5  
Total Assets
  $ 4,199.7     $ 4,285.1  
Liabilities and Shareholders' Equity
               
Liabilities
               
Current liabilities
               
Accounts payable
  $ 86.4     $ 87.5  
Jackpot liabilities, current portion
    140.2       152.4  
Accrued employee benefits
    22.8       43.7  
Accrued income taxes
    7.6       8.1  
Dividends payable
    20.8       16.0  
Other accrued liabilities
    345.9       322.6  
Total current liabilities
    623.7       630.3  
Long-term debt
    1,829.3       1,846.4  
Jackpot liabilities
    308.9       328.6  
Other liabilities
    195.3       282.0  
Total Liabilities
    2,957.2       3,087.3  
Commitments and Contingencies
               
Shareholders' Equity
               
Common stock: $.00015625 par value; 1,280.0 shares authorized; 270.1 and 343.5 issued; 260.6 and 266.1 outstanding
    -       0.1  
Additional paid-in capital
    1,394.5       1,585.1  
Treasury stock at cost: 9.5 and 77.4 shares
    (159.3 )     (1,332.9 )
Retained earnings
    7.9       941.0  
Accumulated other comprehensive income
    (0.6 )     4.5  
Total Equity
    1,242.5       1,197.8  
Total Liabilities and Shareholders' Equity
  $ 4,199.7     $ 4,285.1  
 
See Accompanying Notes
 
 
6

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended March 31,
 
2013
   
2012
 
(In millions)
           
Operating
 
 
   
 
 
Net income
  $ 143.5     $ 111.2  
Adjustments:
               
Depreciation and amortization
    117.8       115.2  
Acquisition-related contingent earn-out costs
    16.2       -  
Discounts and deferred issuance costs
    22.1       20.1  
Share-based compensation
    18.6       16.7  
Bad debt provisions
    10.0       (1.9 )
Net loss on disposal and impairment
    1.6       1.5  
Excess tax benefits from employee stock plans
    (0.9 )     (2.3 )
Other non-cash items
    2.4       5.7  
Changes in operating assets and liabilities, excluding acquisitions:
 
Receivables
    (21.1 )     (28.5 )
Inventories
    9.4       (14.6 )
Accounts payable and accrued liabilities
    (78.0 )     3.8  
Jackpot liabilities
    (40.7 )     (21.9 )
Income taxes, net of employee stock plans
    (21.0 )     (11.5 )
Other assets and deferred costs
    2.6       (16.8 )
Net operating cash flows
    182.5       176.7  
Investing
               
Capital expenditures
    (56.4 )     (123.6 )
Proceeds from assets sold
    8.3       19.8  
Jackpot annuity investments, net
    27.1       23.6  
Changes in restricted cash
    5.8       3.2  
Loans receivable payments received
    15.1       14.9  
Business acquisitions, net of cash acquired
    -       (233.0 )
Net investing cash flows
    (0.1 )     (295.1 )
Financing
               
Debt proceeds
    65.0       -  
Debt repayments
    (85.0 )     -  
Employee stock plan proceeds
    7.4       12.0  
Excess tax benefits from employee stock plans
    0.9       2.3  
Share repurchases
    (75.1 )     (50.1 )
Noncontrolling interest acquired
    -       (2.5 )
Dividends paid
    (34.7 )     (35.7 )
Acquisition-related contingent consideration
    (27.9 )     -  
Net financing cash flows
    (149.4 )     (74.0 )
Foreign exchange rates effect on cash and equivalents
    (2.8 )     3.5  
Net change in cash and equivalents
    30.2       (188.9 )
Beginning cash and equivalents
    206.3       460.0  
Ending cash and equivalents
  $ 236.5     $ 271.1  
 
See Accompanying Notes
 
 
7

 

SUPPLEMENTAL CASH FLOWS INFORMATION
 
Six Months Ended March 31,
 
2013
   
2012
 
(In millions)
           
Jackpot funding
 
 
   
 
 
Change in jackpot liabilities
  $ (40.7 )   $ (21.9 )
Jackpot annuity purchases
    (1.7 )     (6.2 )
Jackpot annuity proceeds
    28.8       29.8  
Net change in jackpot annuity investments
    27.1       23.6  
Net jackpot funding
  $ (13.6 )   $ 1.7  
Capital expenditures
               
Property, plant and equipment
  $ (8.1 )   $ (34.5 )
Gaming operations equipment
    (48.1 )     (87.1 )
Intellectual property
    (0.2 )     (2.0 )
Total
  $ (56.4 )   $ (123.6 )
Payments
               
Interest
  $ 28.9     $ 29.6  
Income taxes
    82.8       72.5  
Acquisition-related retention bonuses
    29.7       -  
Acquisition-related contingent earn-out consideration
               
Operating cashflows
    17.2       -  
Financing cashflows
    27.9       -  
Total
  $ 45.1     $ -  
Non-cash investing and financing items:
               
Accrued capital asset additions
  $ 2.6     $ 0.7  
Interest accretion for jackpot annuity investments
    9.2       10.2  
Business acquisitions/purchase price adjustments
               
Fair value of assets
  $ -     $ 352.3  
Fair value of liabilities
    -       2.7  

 
Payments for acquisition-related contingent earn-out consideration
 
Amounts accrued as of the acquisition date are reflected in financing cash flows. Payments for amounts accrued subsequent to the acquisition date, in excess of amounts accrued as part of the purchase price allocation, are reflected in operating cash flows within changes in accounts payable and accrued liabilities.
 
Depreciation and amortization
 
Amounts reflected in operating cash flows are comprised of operating expenses shown separately on the income statements, plus those amounts included within cost of product sales, cost of gaming operations, cost of interactive, and discontinued operations.
 
See Accompanying Notes
 
 
8

 

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
1.             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation and Consolidation
 
Our fiscal year is reported on a 52/53-week period ending on the Saturday nearest to September 30. Similarly, our quarters end on the Saturday nearest to the last day of the quarter end month. For simplicity, fiscal periods in this report are presented using the calendar month end as outlined in the table below.
 
   
Period End
   
Actual
 
Presented as
Current quarter
 
March 30, 2013
 
March 31, 2013
Prior year quarter
 
March 31, 2012
 
March 31, 2012
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 March 31, 2013 were prepared without audit on a basis consistent with the comparative quarter ended March 31, 2012, 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 March 31, 2013
 
·
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.
 
 
9

 
 
Accumulated Other Comprehensive Income (AOCI)
 
At March 31, 2013 AOCI was comprised of foreign currency translation adjustment (not tax effected).
 
   
Periods Ended March 31, 2013
 
Foreign currency translation
 
Second Quarter
   
Six Months
 
Beginning balance
  $ 7.9     $ 4.5  
Other comprehensive income before reclassifications
    (8.5 )     (5.1 )
Amounts reclassified from accumulated other comprehensive income
    -       -  
Net current-period other comprehensive income
    (8.5 )     (5.1 )
Ending balance
  $ (0.6 )   $ (0.6 )
 
 
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.
 
Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI)
 
In our 2013 second quarter, we adopted an ASU issued in February 2013 requiring disclosure about the reclassifications out of AOCI. For significant reclassifications out of AOCI to earnings in their entirety in the same reporting period, disclosure is required about the effect of the reclassifications on the respective line items on the income statement. This ASU is effective prospectively beginning with our second quarter ended March 31, 2013 and did not have a material impact on our financial statements.
 
Recently Issued Accounting Standards or Updates—Not Yet Adopted
 
Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries
 
In March 2013, the FASB issued an ASU requiring the release of cumulative translation adjustment into net income when an entity either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a foreign subsidiary. This ASU will be effective prospectively for our 2015 first quarter and is not expected to have a material impact on our financial statements.
 
Obligations Resulting from Joint and Several Liability Arrangements
 
In February 2013, the FASB issued an ASU to require new disclosures for an entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of a co-obligor. This ASU will be effective for our 2015 first quarter and is not expected to have a material impact on our financial statements.
 
Offsetting Assets and Liabilities
 
In December 2011, the FASB issued an ASU to require new disclosures associated with offsetting financial instruments and derivative instruments on the balance sheet that will enable users to evaluate the effect on an entity’s financial position.  In January 2013, the FASB issued an ASU to clarify the scope of disclosures about offsetting assets and liabilities. The scope of the new disclosures was narrowed to include derivatives, repurchase agreements and securities borrowing and lending that are offset or subject to an enforceable master netting arrangement or similar agreement. Both ASUs will be effective for our 2014 first quarter and are not expected to have a material impact on our financial statements.
 
 
10

 
 
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 $54.7 million at March 31, 2013 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 at March 31, 2013 consisted of $0.6 million in note financing provided for operating costs and contract financing under a revolving line of credit of $13.0 million for IGT product purchases. Revenues recognized related to this distributor totaled $2.1 million for the 2013 second quarter and $7.7 million for the six months ended March 31, 2013. Contracts and notes receivable due from this distributor totaled $12.0 million at March 31, 2013 ($7.0 million current and $5.0 million non-current).
 
 
 
3.            RECEIVABLES
 
Accounts Receivable
 
Allowances for Credit Losses
 
March 31,
 2013
   
September 30,
 2012
 
Total
  $ 21.3     $ 19.1  
 
Customer Financing (Contracts and Notes)
 
   
March 31,
 2013
   
September 30,
 2012
 
Recorded Investment (principal and interest due, net of deferred interest and fees)
       
Individually evaluated for impairment
  $ 117.6     $ 123.2  
Collectively evaluated for impairment
    294.8       307.1  
Total
  $ 412.4     $ 430.3  
                 
Allowances for Credit Losses
               
Individually evaluated for impairment
  $ 67.4     $ 59.9  
Collectively evaluated for impairment
    13.2       12.9  
Total
  $ 80.6     $ 72.8  
 
 
11

 

Reconciliation of Allowances for Credit Losses
 
Periods Ended March 31,
 
   
Second Quarters
   
Six Months
 
   
2013
   
2012
   
2013
   
2012
 
Beginning balance
  $ 76.6     $ 70.1     $ 72.8     $ 71.4  
Charge-offs
    -       -       -       -  
Recoveries
    -       -       -       -  
Provisions (1)
    4.0       0.4       7.8       (0.9 )
Ending balance
  $ 80.6     $ 70.5     $ 80.6     $ 70.5  
Current
  $ 63.3     $ 46.8     $ 63.3     $ 46.8  
Non-current
  $ 17.3     $ 23.7     $ 17.3     $ 23.7  

(1)  Included $1.6 million additional Alabama note impairment recorded during the quarter ended March 31, 2013, primarily related to accrued unpaid property taxes on the associated property collateral. The remaining net carrying amount of the note totaled $14.9 million at March 31, 2013.

 
Age Analysis of Recorded Investment
 
March 31, 2013
   
September 30, 2012
 
   
Contracts
   
Notes
   
Total
   
Contracts
   
Notes
   
Total
 
Past Due:
                                   
1-29 days
  $ 6.6     $ 1.4     $ 8.0     $ 6.6     $ -     $ 6.6  
30-59 days
    5.5       1.4       6.9       6.0       1.4       7.4  
60-89 days
    3.8       1.4       5.2       1.4       1.4       2.8  
Over 90 days
    10.9       46.6       57.5       6.3       40.0       46.3  
Total past due
  $ 26.8     $ 50.8     $ 77.6     $ 20.3     $ 42.8     $ 63.1  
Total current (2)
    278.6       56.2       334.8       288.1       79.1       367.2  
Grand total
  $ 305.4     $ 107.0     $ 412.4     $ 308.4     $ 121.9     $ 430.3  
                                                 
Over 90 days and accruing interest
  $ 0.8     $ 0.1     $ 0.9     $ 1.4     $ 0.3     $ 1.7  
Nonaccrual status (not accruing interest)
    22.2       75.0       97.2       13.8       75.0       88.8  
 
(2) includes impaired Alabama note of $27.5 at March 31, 2013 and $35.0 at September 30, 2012
 
Recorded Investment by Credit Quality Indicator Using Credit Profile by Internally Assigned Risk Grade
 
   
March 31, 2013
   
September 30, 2012
 
   
Contracts
   
Notes
   
Total
   
Contracts
   
Notes
   
Total
 
Low
  $ 80.1     $ -     $ 80.1     $ 87.8     $ -     $ 87.8  
Medium
    66.2       0.1       66.3       68.3       0.2       68.5  
High (3)
    159.1       106.9       266.0       152.3       121.7       274.0  
Total recorded investment
  $ 305.4     $ 107.0     $ 412.4     $ 308.4     $ 121.9     $ 430.3  
 
(3) includes $75.0 of impaired Alabama note receivable
 
 
Impaired loans
 
March 31, 2013
   
September 30, 2012
 
   
Contracts
   
Notes
   
Total
   
Contracts
   
Notes
   
Total
 
Recorded investment
  $ 17.3     $ 75.0     $ 92.3     $ 2.5     $ 75.0     $ 77.5  
Unpaid principal face
    24.9       75.0       99.9       2.5       75.0       77.5  
Related allowance
    7.3       60.1       67.4       1.4       58.5       59.9  
Average recorded investment
    9.9       75.0       84.9       3.9       79.5       83.4  
 
Interest income recognized
on impaired loans
 
Periods Ended March 31,
 
   
2013
   
2012
 
   
Contracts
   
Notes
   
Total
   
Contracts
   
Notes
   
Total
 
Year-to-date
                                   
Total
  $ 0.4     $ -     $ 0.4     $ -     $ -     $ -  
Cash-basis
    -       -       -       -       -       -  
 
 
12

 
 
4.             CONCENTRATIONS OF CREDIT RISK
 
Receivables By Legal Gaming Region At March 31, 2013
       
Nevada
    11 %
Canada
    7  
California
    5  
Other (less than 4% individually)
    31  
North America
    54 %
         
Argentina     18  %
Europe     9  
Australia     5  
Mexico     5  
Other (less than 4% individually)     9  
International
    46  %
 
 
 
5.            INVENTORIES
 
   
March 31,
2013
   
September 30,
2012
 
Raw materials
  $ 54.1     $ 48.8  
Work-in-process
    2.2       2.4  
Finished goods
    33.1       41.7  
Total
  $ 89.4     $ 92.9  
 
 
 
6.             PROPERTY, PLANT AND EQUIPMENT
 
   
March 31,
2013
   
September 30,
2012
 
             
Land
  $ 61.2     $ 62.7  
Buildings
    231.2       236.7  
Leasehold improvements
    17.0       15.3  
Machinery, furniture and equipment
    297.3       287.9  
Gaming operations equipment
    802.4       813.5  
Total
    1,409.1       1,416.1  
                 
Less accumulated depreciation
    (897.6 )     (860.4 )
                 
Property, plant and equipment, net
  $ 511.5     $ 555.7  
 
 
13

 

7.            GOODWILL AND OTHER INTANGIBLES
 
Goodwill
 
Activity By Segment
For the Six Months Ended March 31, 2013
 
North
America
   
International
   
Total
 
Beginning balance
  $ 1,275.6     $ 194.1     $ 1,469.7  
Purchase price adjustment
    (0.2 )     -       (0.2 )
Foreign currency
    -       (2.0 )     (2.0 )
Ending balance
  $ 1,275.4     $ 192.1     $ 1,467.5  
 
Other Intangibles
 
During the six months ended March 31, 2013, $0.2 million of patent legal costs were capitalized with a weighted average life of 2.8 years.
 
   
March 31, 2013
   
September 30, 2012
 
Ending Balances
 
Cost
   
Accumulated
 Amortization
   
Net
   
Cost
   
Accumulated
 Amortization
   
Net
 
Patents
  $ 377.1     $ 321.8     $ 55.3     $ 379.6     $ 310.7     $ 68.9  
Developed technology
    128.7       72.5       56.2       131.9       68.3       63.6  
Contracts
    23.8       21.8       2.0       23.9       21.1       2.8  
Reacquired rights
    14.7       4.4       10.3       14.7       3.5       11.2  
Customer relationships
    61.2       32.0       29.2       61.1       23.9       37.2  
Trademarks
    12.5       3.9       8.6       12.5       2.8       9.7  
Total
  $ 618.0     $ 456.4     $ 161.6     $ 623.7     $ 430.3     $ 193.4  

 
   
Periods Ended March 31,
                               
   
Second Quarters
   
Six Months
   
Future Annual Estimates
 
Aggregate Amortization
 
2013
   
2012
   
2013
   
2012
   
2013
   
2014
   
2015
   
2016
   
2017
 
    $ 16.3     $ 16.6     $ 31.9     $ 27.2     $ 62.6     $ 52.3     $ 36.2     $ 22.0     $ 10.2  
 
 
 
8.            FAIR VALUE MEASUREMENTS
 
Financial Assets (Liabilities) Carried at Fair Value
 
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
March 31, 2013
                       
Money market funds
  $ 164.5     $ 164.5     $ -     $ -  
Derivative assets
    102.5       -       102.5       -  
Derivative liabilities
    (104.5 )     -       (104.5 )     -  
Acquisition contingent consideration payable
    (87.6 )     -       -       (87.6 )
                                 
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 )
 
 
14

 
 
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 (11% - 77%) to each outstanding scenario, as well as a risk-adjusted discount rate of 18%, to derive the estimated fair value at March 31, 2013. 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, $51.7 million current and $35.9 million noncurrent at March 31, 2013 versus $42.8 million current and $73.6 million noncurrent at September 30, 2012. Earn-out consideration of $45.0 million (excluding payroll taxes) was paid during the second quarter for earnings targets met by DoubleDown for calendar 2012. An increase of $14.1 million to the payable fair value was recorded during the second quarter to contingent acquisition related costs on the income statement along with $7.8 million of accrued retention plan compensation. Changes in fair value were primarily due to an increase in forecasted earnings, updated probability-weighted internal earnings projections, and the time-value of money.
 
Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)
 
Six Months Ended March 31,
  2013    
2012
 
   
Acquisition
Contingent
Consideration
Payable
   
Investments
in
Unconsolidated
Affiliates
   
Acquisition
Contingent
Consideration
Payable
 
Beginning balance
  $ (116.4 )   $ 9.3     $ -  
Gain (loss) included in:
                       
Other income (expense) - other
    -       (0.4 )     -  
Other comprehensive income
    -       (0.2 )     -  
Issuances
    -       -       (90.7 )
Accretion (interest and fair value adjustment)
    (16.2 )     0.5       -  
Payments
    45.0       -       -  
Ending balance
  $ (87.6 )   $ 9.2     $ (90.7 )
Net change in unrealized gain (loss) included in earnings related to instruments still held
  $ -     $ (0.4 )   $ -  
 
 
Financial Assets (Liabilities) Not Carried at Fair Value
 
 
   
Carrying Value
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
   
Unrealized Gain (Loss)
 
March 31, 2013
                                   
Jackpot investments
  $ 338.1     $ 395.4     $ 395.4     $ -     $ -     $ 57.3  
Contracts & notes receivable
    331.8       322.6       -       -       322.6       (9.2 )
Jackpot liabilities
    (449.1 )     (453.7 )     -       -       (453.7 )     (4.6 )
Debt
    (1,725.1 )     (1,950.2 )     (1,829.3 )     (120.9 )     -       (225.1 )
                                                 
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 )
 
 
15

 
 
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 (1.85%) for the estimated funding rate and the 10-year credit default swap rate (2.29%) for nonperformance risk. The present value (carrying value) of the expected lump sum payments were discounted using the 1-year treasury yield curve rate (.13%) with the 1-year credit default swap rate (.27%) for the current amounts and the 2-year treasury yield curve rate (.25%) with the 2-year credit default swap rate (.55%) 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.
 
 
16

 
 
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 $49.8 million at March 31, 2013 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
 
March 31,
2013
   
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)
  $ 102.3     $ 118.1  
Interest rate swaps:  Long-term debt
    104.2       119.5  
 
   
Periods Ended March 31,
 
   
Quarters
   
Six Months
 
Income Statement Location and Gain (loss)
 
2013
   
2012
   
2013
   
2012
 
Non-designated Hedges
                       
Foreign currency contracts:  Other income (expense)
  $ 0.2     $ 0.1     $ 0.1     $ 0.6  
Designated Hedges
                               
Interest rate swap - ineffectiveness:  Other income (expense)
  $ (1.9 )   $ 0.6     $ (0.5 )   $ 0.9  
Interest rate swap - effectiveness:  Interest expense
    6.6       6.3       11.6       12.2  
 
 
17

 
 
10.          CREDIT FACILITIES AND INDEBTEDNESS
 
Total Outstanding debt
 
   
March 31,
2013
   
September 30,
2012
 
Credit facilities
  $ 120.0     $ 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
    1,770.0       1,790.0  
Discounts:
               
3.25% Convertible Notes
    (42.0 )     (60.0 )
7.5% Bonds
    (1.9 )     (2.1 )
5.5% Bonds
    (1.0 )     (1.0 )
Swap fair value adjustments:
               
7.5% Bonds
    67.7       77.0  
5.5% Bonds
    36.5       42.5  
Total outstanding debt, net
  $ 1,829.3     $ 1,846.4  
 
IGT was compliant with all covenants and embedded features required no bifurcation at March 31, 2013.
 
At March 31, 2013, $120.0 million was outstanding under our $750.0 million revolving credit facility, $606.8 million was available, and $23.2 million was reserved for letters of credit and performance bonds.
 
On April 23, 2013, we entered into an amended and restated credit agreement, increasing the available revolving line of our credit facility from $750.0 million to $1.0 billion, of which up to $50.0 million is available for letters of credit and up to $50.0 million is available for swing line borrowing. The former facility was terminated in conjunction with the issuance of the new credit facility. Subject to lenders’ consent, the facility may be increased by $250.0 million at any time up to 60 days prior to maturity. At maturity on April 23, 2018, all amounts outstanding will be immediately due and payable. The maturity may be extended upon our request for one year on each of the first and second closing date anniversaries, presuming no default exists.
 
The new facility interest rates and facility fees are based on our public debt ratings or our net funded debt to EBITDA ratio, whichever is more favorable to IGT. Net funded debt is defined as debt minus any unrestricted cash and investments in excess of $150.0 million. At the initial pricing level of Baa2/BBB, the interest rate was LIBOR plus 100 bps and the facility fee was 17.5 bps.  Additional debt issuance costs of approximately $3.3 million were capitalized and together with $8.2 million of previously deferred offering costs remaining from the former facility will be amortized to interest expense over the new facility term.
 
Substantially the same as the former credit facility, the new credit facility carries no limitations on share repurchases or dividend payments provided no default exists and includes the following covenants (all terms as defined in the facility document):
 
·
a minimum ratio of 3.0 adjusted EBITDA to interest expense (interest coverage ratio)
 
·
a maximum ratio of 3.5 for net funded debt to adjusted EBITDA (net funded debt leverage ratio)
 
·
certain restrictions on our ability to:
 
§
pledge the securities of our subsidiaries
 
§
permit our subsidiaries to incur or guaranty additional debt, or enter into swap agreements
 
§
incur liens
 
§
merge with or acquire other companies, liquidate or dissolve
 
§
sell, transfer, lease or dispose of all or substantially all assets
 
§
change the nature of our business
 
The facility specifies a number of events of default (some of which are subject to applicable grace or cure periods), including failure to make timely principal and interest payments or satisfy the covenants. An event of default, if not cured, could cause the entire outstanding borrowings under the credit facility to become immediately due and payable, lenders may cease making loans and/or terminate commitments, and cross-default provisions may be triggered in other debt issuances.
 
 
18

 
 
3.25% Convertible Notes
 
   
Periods Ended March 31,
 
   
Quarters
   
Six Months
 
   
2013
   
2012
   
2013
   
2012
 
Contractual interest expense
  $ 6.9     $ 6.9     $ 13.8     $ 13.8  
Discount amortization
    9.1       8.3       18.0       16.4  
Remaining discount amortization period (years)
    1.1                          

 
 
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.
 
 
19

 
 
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 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.  On February 15, 2013, the Federal Circuit denied Bally’s petition for rehearing.
 
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 would 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. On March 13, 2013, the United States Court of Appeals for the Federal Circuit affirmed the District Court’s grant of summary judgment with regard to direct infringement and vacated and remanded the District Court’s judgment with respect to indirect infringement. In accordance with the settlement agreement, the parties have stipulated to dismissal of the case and moved for entry of an order dismissing all claims and counterclaims with prejudice.
 
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. The Court has decided to address the motion for certification in two phases. Under Phase 1, the Court will determine whether the Plaintiffs have pleaded a cause of action. Hearings on Phase 1 are scheduled to be heard on June 6 and 7, 2013. Should the Court conclude that Plaintiffs have pleaded a cause of action, then, under Phase 2, the Court would determine the appropriateness of certification of the putative class.
 
 
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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. Oral argument has been scheduled for May 15, 2013.
 
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. Plaintiff appealed, but withdrew his appeal of that order in exchange for the Defendants’ withdrawal of their request for costs and fees. The court entered the stipulation of dismissal on March 21, 2013.
 
 
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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. A hearing for final approval of the settlement has been set for June 3, 2013.
 
OSHA / Wrongful Termination Matter
 
On July 8, 2004, two former employees filed a complaint with the US Department of Labor, OSHA alleging retaliatory termination in violation of the Sarbanes-Oxley Act of 2002. The former employees allege that they were terminated in retaliation for questioning whether Anchor and its executives failed to properly disclose information allegedly affecting the value of Anchor's patents in connection with IGT's acquisition of Anchor in December 2001. The former employees also allege that the acquired patents were overvalued on the financial statements of IGT. Outside counsel, retained by an independent committee of our Board of Directors, reviewed the allegations and found them to be entirely without merit.
 
In conjunction with the Anchor acquisition purchase price allocation as of December 31, 2001, IGT used the relief of royalty valuation methodology to estimate the fair value of the patents at $164.4 million. The carrying value of the patents at March 31, 2013 totaled $12.0 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.
 
 
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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 $14.3 million at March 31, 2013. 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 $8.9 million at March 31, 2013.
 
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.
 
 
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Product Warranties
 
The majority of our products are generally covered by a warranty for periods ranging from 90 to 180 days. We estimated accrued warranty costs in the table below based on historical trends in product failure rates and expected costs to provide warranty services.

 
Six Months Ended March 31,
 
2013
   
2012
 
Beginning balance
  $ 4.2     $ 6.2  
Reduction for payments made
    (3.4 )     (2.8 )
Accrual for new warranties issued
    5.0       4.4  
Adjustments for pre-existing warranties
    (1.5 )     (2.9 )
Ending balance
  $ 4.3     $ 4.9  
 
 
 
12.           INCOME TAXES
 
Our provision for income taxes is based on an estimated effective annual income tax rate, as well as the impact of discrete items, if any, occurring during the period. The provision differs from income taxes currently payable because certain items of income and expense are recognized in different periods for financial statement purposes than for tax return purposes. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.
 
Our effective tax rate for the six months ended March 31, 2013 decreased to 30.1% from 35.9% for the same prior year period. The prior year effective tax rate was negatively impacted by losses in foreign jurisdictions for which there were no associated tax benefits and the expiration of the R&D tax credit. The current year effective tax rate was positively impacted by the expiration of the statute of limitations in foreign jurisdictions, the re-instatement of the R&D tax credit, and an increase in the manufacturing deduction.
 
At March 31, 2013, our gross UTBs totaled $112.7 million, excluding related accrued interest and penalties of $22.1 million. At March 31, 2013, $80.9 million of our UTBs, including related accrued interest and penalties, would affect our effective tax rate if recognized. During the six months ended March 31, 2013, our UTBs increased $1.2 million and related interest and penalties decreased $1.3 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.
 
 
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13.          EMPLOYEE BENEFIT PLANS
 
Share-based Compensation
 
SIP As Of And For The Six Months Ended March 31, 2013
 
         
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
    (423 )     11.89              
Forfeited
    (280 )     16.70              
Expired
    (627 )     19.79              
Outstanding at end of period
    10,787     $ 18.31       5.6     $ 12.8  
                                 
Vested and expected to vest
    10,553     $ 18.35       5.5     $ 12.7  
                                 
Exercisable at end of period
    8,317     $ 18.81       5.0     $ 11.4  
 
 
         
Weighted Average
       
Restricted Shares/Units
 
Shares
   
Grant
Date
Fair Value
   
Remaining
Vesting
Period