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International Game Technology 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
igt_10q-010111.htm
United States
 Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

[X] 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended January 1, 2011
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.)

9295 Prototype Drive, Reno, Nevada 89521
(Address of Principal Executive Offices)(Zip Code)

Registrant’s Telephone Number, Including Area code:(775) 448-7777

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 [   ]     Smaller reporting company [   ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [   ] No [X]
 
The number of shares outstanding of each of the registrant’s classes of common stock, as of February 4, 2011:
298.8 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 4
     
Item 1.
Unaudited Condensed Consolidated Financial Statements
4
    CONSOLIDATED INCOME STATEMENTS 4
    CONSOLIDATED BALANCE SHEETS 5
    CONSOLIDATED STATEMENTS OF CASH FLOWS 6
    NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
    FORWARD LOOKING STATEMENTS 27
    OVERVIEW 28
    RECENTLY ISSUED ACCOUNTING STANDARDS 29
    CRITICAL ACCOUNTING ESTIMATES 29
    CONSOLIDATED RESULTS – A Year Over Year Comparative Analysis 30
    BUSINESS SEGMENT RESULTS – A Year Over Year Comparative Analysis 33
    LIQUIDITY AND CAPITAL RESOURCES 35
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
38
Item 4.
Controls and Procedures
38
   
PART II – OTHER INFORMATION 38
     
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
Item 3.
Defaults Upon Senior Securities
45
Item 4.
(Removed and Reserved)
45
Item 5.
Other Information
45
Item 6.
Exhibits 45
 
 
2

 
 
GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
 
Fiscal dates as presented:
Fiscal dates -- actual:
 
December 31, 2010
January 1, 2011
 
December 31, 2009
January 2, 2010
 
September 30, 2010
October 2, 2010
 
 
Abbreviation/term
 
Definition
Anchor
 
Anchor Gaming
ARS
 
auction rate securities
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
CCSC
 
Colorado Central Station Casino
CEO
 
chief executive officer
CFO
 
chief financial officer
CLS
 
China LotSynergy Holdings, Ltd.
DCF
 
discounted cash flow
DigiDeal
 
DigiDeal Corporation
EBIT
 
earnings before interest and taxes
EBITDA
 
earnings before interest, taxes, depreciation, and amortization
EPA
 
Environmental Protection Agency
EPS
 
earnings per share
ERISA
 
Employee Retirement Income Security Act
FASB
 
Financial Accounting Standards Board
GAAP
 
generally accepted accounting principles
IGT, we, our, the Company
 
International Game Technology and its consolidated entities
IP
 
intellectual property
IRS
 
Internal Revenue Service
LIBOR
 
London inter-bank offering rate
JV
 
joint venture
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
sbX™
 
IGT’s complete server-based player experience management solution
SEC
 
Securities and Exchange Commission
SIP
 
2002 Stock Incentive Plan
UK
 
United Kingdom
US
 
United States
UTBs
 
unrecognized tax benefits
VIE
 
variable interest entity
WAP
 
wide area progressive
*
 
not meaningful (in tables)
 
 
3

 
 
PART I – FINANCIAL INFORMATION
 
 
Item 1. 
Unaudited Condensed Consolidated Financial Statements
 
CONSOLIDATED INCOME STATEMENTS
 
   
Quarters Ended
 
   
December 31,
 
   
2010
   
2009
 
(In millions, except per share amounts)
           
Revenues
           
Gaming operations
  $ 260.6     $ 276.7  
Product sales
    204.2       238.4  
Total revenues
    464.8       515.1  
Costs and operating expenses
               
Cost of gaming operations
    95.9       104.0  
Cost of product sales
    92.7       115.3  
Selling, general and administrative
    84.9       87.3  
Research and development
    51.7       45.4  
Depreciation and amortization
    18.2       19.4  
Total costs and operating expenses
    343.4       371.4  
Operating income
    121.4       143.7  
Other income (expense)
               
Interest income
    13.4       16.0  
Interest expense
    (35.4 )     (43.2 )
Other
    4.0       (1.3 )
Total other income (expense)
    (18.0 )     (28.5 )
Income from continuing operations before tax
    103.4       115.2  
Income tax provision
    30.0       39.8  
Income from continuing operations
    73.4       75.4  
Income (loss) from discontinued operations, net of tax
    0.3       (2.1 )
Net income
  $ 73.7     $ 73.3  
                 
Basic earnings (loss) per share
               
Continuing operations
  $ 0.25     $ 0.26  
Discontinued operations
    -       (0.01 )
Net income
  $ 0.25     $ 0.25  
                 
Diluted earnings (loss) per share
               
Continuing operations
  $ 0.25     $ 0.26  
Discontinued operations
    -       (0.01 )
Net income
  $ 0.25     $ 0.25  
                 
Cash dividends declared per share
  $ 0.06     $ 0.06  
                 
Weighted average shares outstanding
               
Basic
    297.6       295.1  
Diluted
    298.8       297.4  
 
See accompanying notes
 
4

 
 
CONSOLIDATED BALANCE SHEETS
 
   
December 31,
   
September 30,
 
   
2010
   
2010
 
(In millions, except par value)
           
Assets
           
Current assets
           
Cash and equivalents
  $ 168.7     $ 158.4  
Restricted cash and investment securities
    83.6       88.1  
Restricted cash and investment securities of VIEs
    1.3       2.4  
Jackpot annuity investments
    49.4       49.5  
Jackpot annuity investments of VIEs
    15.5       15.6  
Accounts receivable, net
    297.0       290.3  
Current maturities of contracts and notes receivable, net
    175.5       184.1  
Inventories
    113.0       97.6  
Deferred income taxes
    93.2       84.3  
Other assets and deferred costs
    177.9       232.1  
Total current assets
    1,175.1       1,202.4  
Property, plant and equipment, net
    584.3       586.7  
Jackpot annuity investments
    295.2       299.1  
Jackpot annuity investments of VIEs
    61.3       61.7  
Contracts and notes receivable, net
    147.5       171.9  
Goodwill
    1,150.5       1,151.6  
Other intangible assets, net
    190.0       202.1  
Deferred income taxes
    129.6       136.8  
Other assets and deferred costs
    179.1       194.7  
Total Assets
  $ 3,912.6     $ 4,007.0  
Liabilities and Shareholders' Equity
               
Liabilities
               
Current liabilities
               
Accounts payable
  $ 84.8     $ 84.6  
Jackpot liabilities, current portion
    170.0       179.1  
Accrued employee benefits
    11.0       23.9  
Accrued income taxes
    1.9       1.8  
Dividends payable
    17.9       17.9  
Other accrued liabilities
    235.7       275.0  
Total current liabilities
    521.3       582.3  
Long-term debt
    1,568.1       1,674.3  
Jackpot liabilities
    383.7       391.8  
Other liabilities
    137.9       124.3  
Total Liabilities
    2,611.0       2,772.7  
Commitments and Contingencies
               
Shareholders' Equity
               
Common stock: $.00015625 par value; 1,280.0 shares authorized; 339.8 and 339.1 issued; 298.7 and 298.1 outstanding
    0.1       0.1  
Additional paid-in capital
    1,487.7       1,473.7  
Treasury stock at cost: 41.1 and 41.0 shares
    (804.2 )     (802.0 )
Retained earnings
    607.6       551.8  
Accumulated other comprehensive income
    10.4       10.7  
Total Equity
    1,301.6       1,234.3  
Total Liabilities and Shareholders' Equity
  $ 3,912.6     $ 4,007.0  
 
See accompanying notes
 
5

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended December 31,
 
2010
   
2009
 
(In millions)
           
Operating
 
 
   
 
 
Net income
  $ 73.7     $ 73.3  
Adjustments:
               
Depreciation and amortization
    55.1       62.7  
Discounts and deferred issuance costs
    11.0       13.8  
Share-based compensation
    11.7       9.0  
Excess tax benefits from employee stock plans
    (1.7 )     (2.7 )
(Gain) loss on assets sold
    (6.2 )     (0.6 )
Other, net
    0.7       5.1  
Changes in operating assets and liabilities, excluding acquisitions:
 
Receivables
    18.6       23.3  
Inventories
    (13.9 )     8.8  
Other assets and deferred costs
    7.4       15.7  
Income taxes, net of employee stock plans
    23.7       27.4  
Accounts payable and accrued liabilities
    (54.8 )     (58.3 )
Jackpot liabilities
    (22.9 )     (8.8 )
Net operating cash flows
    102.4       168.7  
Investing
               
Capital expenditures
    (42.3 )     (53.3 )
Proceeds from assets sold
    2.2       0.8  
Investment securities, net
    -       1.9  
Jackpot annuity investments, net
    10.3       10.8  
Changes in restricted cash
    5.5       (5.0 )
Loans receivable cash advanced
    (0.5 )     (17.7 )
Loans receivable payments received
    7.4       2.1  
Unconsolidated affiliates, net
    16.5       (4.9 )
Business/VIE acquisition/deconsolidation
    -       (1.4 )
Net investing cash flows
    (0.9 )     (66.7 )
Financing
               
Debt proceeds
    50.0       946.6  
Debt repayments
    (130.0 )     (1,009.2 )
Employee stock plan proceeds
    3.8       2.4  
Excess tax benefits from employee stock plans
    1.7       2.7  
Dividends paid
    (17.9 )     (17.8 )
Net financing cash flows
    (92.4 )     (75.3 )
Foreign exchange rates effect on cash and equivalents
    1.2       (0.4 )
Net change in cash and equivalents
    10.3       26.3  
Beginning cash and equivalents
    158.4       146.7  
Ending cash and equivalents
  $ 168.7     $ 173.0  
 
See accompanying notes
 
6

 
 
SUPPLEMENTAL CASH FLOWS INFORMATION
 
“Depreciation and amortization” reflected in the cash flows statements are comprised of amounts presented separately on the income statements, plus “depreciation and amortization” included in cost of gaming operations, cost of product sales and discontinued operations.
 
Three Months Ended December 31,
 
2010
   
2009
 
(In millions)
           
Unconsolidated affiliates
           
Investment in
  $ -     $ (4.9 )
Sales proceeds
    16.5       -  
Net
  $ 16.5     $ (4.9 )
Jackpot funding
               
Change in jackpot liabilities
  $ (22.9 )   $ (8.8 )
                 
Jackpot annuity purchases
    (2.4 )     (2.4 )
Jackpot annuity proceeds
    12.7       13.2  
Net change in jackpot annuity investments
    10.3       10.8  
Net jackpot funding
  $ (12.6 )   $ 2.0  
Capital expenditures
               
Property, plant and equipment
  $ (1.4 )   $ (5.5 )
Gaming operations equipment
    (40.6 )     (46.3 )
Intellectual property
    (0.3 )     (1.5 )
Total
  $ (42.3 )   $ (53.3 )
Payments
               
Interest
  $ 35.1     $ 41.1  
Income taxes
    4.3       11.7  
Non-cash investing and financing items:
               
Accrued capital asset additions
  $ 2.3     $ 2.7  
Interest accretion for jackpot annuity investments
    5.7       6.3  
                 
Business acquisitions/purchase price adjustments and VIE deconsolidations
               
Fair value of assets
  $ -     $ (0.8 )
Fair value of liabilities
    -       (2.2 )
 
See accompanying notes
 
7

 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.      BASIS OF PRESENTATION AND CONSOLIDATION
 
Our consolidated financial statements include the accounts of International Game Technology (IGT, we, our, or the Company), including all majority-owned or controlled subsidiaries and VIEs for which we are the primary beneficiary. All appropriate inter-company accounts and transactions are eliminated.
 
We prepare our consolidated financial statements in accordance with SEC and US GAAP requirements and include all adjustments of a normal recurring nature that are 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 should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2010.
 
Our fiscal year is reported on a 52/53-week period ending on the Saturday nearest to September 30 each year.  Similarly, our quarters end on the Saturday nearest to the last day of the quarter end month. For simplicity, this report presents all fiscal periods using the calendar month end as outlined in the table below.
 
   
Period End
   
   
Actual
 
Presented as
Current quarter
 
January 1, 2011
 
December 31, 2010
Prior year quarter
 
January 2, 2010
 
December 31, 2009
Prior fiscal year end
 
October 2, 2010
 
September 30, 2010
 
Use of Estimates
 
Our consolidated 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.
 
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Receivables
 
Allowances for Credit Losses
 
We maintain allowances for credit losses related to accounts receivable and customer financing where collectability is uncertain. We evaluate the adequacy of our allowances for credit losses on a quarterly basis and consider a number of factors applicable to all of our customer receivables and financing, including customers’ financial condition, historical customer collection experience, receivable aging, economic conditions, legal environment, and regulatory landscape.
 
Customer Financing
 
Our customer financing portfolio is comprised of two classes, contracts and notes. Our contracts include extended payment terms granted to qualifying customers for periods from one to five years and are secured by the related products sold. Our notes consist of development financing loans granted to select customers to assist in the funding of new or expanding gaming facilities, generally under terms of one to seven years and are secured by the developed property and/or other assets. Interest income on contracts and notes is recognized at prevailing market rates.
 
We place an internally assigned risk grade on each contract and note in our customer financing portfolio.  Internally assigned risk grades fall into three categories (low, medium, high), based 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. The high risk category includes most of our development financing loans in new markets and customers in regions with a history of currency or economic instability, such as South/Central America. Many of our high risk loans are performing according to contract and do not warrant an allowance. Internally assigned risk grades on each contract and note are evaluated on a quarterly basis.
 
 
8

 
 
Customer financing is classified as past due when a scheduled payment is not received within 30 days of a payment notice. Initially customer financing with past due payments are collectively evaluated for impairment. Contracts and notes are evaluated individually for impairment (specific reserves) when collectability becomes uncertain due to events and circumstances, such as bankruptcy and tax or legal issues, that cause an adverse change in a customer’s cash flows or financial condition. Accounts placed on specific reserve are simultaneously evaluated for probability of collection, which is used to determine the amount of the specific reserve. All changes in the net carrying amount of our contracts and notes are recorded as adjustments to bad debt expense or impairment.
 
When collection is deemed unlikely (typically reserved at 50% or greater) during our quarterly review as discussed above, the contract or note is placed on nonaccrual status and interest income is recognized on a cash basis. Uncollectible contracts or notes are written off when it is determined that there is minimal chance of any kind of recovery, such as a customer property closure, bankruptcy restructuring or finalization, or other conditions that severely impact a customer’s ability to repay amounts owed.
 
Recently Adopted Accounting Standards or Updates
 
Credit Quality of Financing Receivables and Allowances for Credit Losses
 
At the beginning of fiscal 2011, we adopted accounting standards issued in July 2010 to address the FASB concerns about the sufficiency, transparency, and robustness of credit risk disclosures for financing receivables and the related allowances for credit losses. The required information is designed to enable a better understanding of:
 
 
·
the nature of credit risk inherent in our portfolio of financing receivables
 
 
·
how credit risk is analyzed to determine the allowances for credit losses
 
 
·
changes in and reasons for changes in the allowances for credit losses
 
These ASU disclosures are effective for our first quarter of fiscal 2011, except for the allowance roll-forward disclosures effective with our second quarter of fiscal 2011 and certain disclosures temporarily deferred pending the issuance of revised criteria for the identification of troubled debt restructuring. The adoption of this ASU did not and will not have a material impact on our results of operations, financial position, or cash flow. See Note 7 and Note 2 above.
 
Consolidation of Variable Interest Entities
 
At the beginning of fiscal 2011, we adopted accounting standards issued in June 2009, which require reassessment of our primary beneficiary position in VIE arrangements on an on-going basis and adds further disclosures about our involvement in VIEs. The revised standard also replaces the quantitative-based risks and rewards approach with a qualitative approach focused on determining which enterprise has the power to direct VIE activities that most significantly impact its economic performance and is obligated to absorb losses or has the rights to receive the most significant benefit from the VIE. The adoption of this ASU did not have a material impact on our results of operations, financial position, or cash flows.
 
Recently Issued Accounting Standards or Updates—Not Yet Adopted
 
Fair Value Measurement Disclosures
 
In January 2010, the FASB issued an ASU which will require supplemental disclosures related to purchases, sales, issuances, and settlements of fair value instruments within the Level 3 reconciliation. This ASU will be effective for our first quarter of fiscal 2012 and is not expected to have a material impact on our financial statements.
 
 
9

 
 
Accruals for Casino Jackpot Liabilities
 
In April 2010, the FASB issued an ASU clarifying that jackpot liabilities should not be accrued before they are won if the payout can be avoided. The ASU will be applied prospectively with a cumulative-effect adjustment in retained earnings at the beginning of our first quarter of fiscal 2012. We continue to evaluate the extent to which this guidance will impact our results of operations, financial position, or cash flows.
 
3.      VARIABLE INTEREST ENTITIES AND AFFILIATES
 
Variable Interest Entities
 
New Jersey regulation requires that annuitized WAP jackpot payments to winners be administered through an individual trust set up for each WAP system. These trusts are VIEs. We determined that IGT was 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 $78.1 million at December 31, 2010 and $79.7 million at September 30, 2010.
 
Investments in Unconsolidated Affiliates
 
China LotSynergy Holdings, Ltd.
 
During the quarter ended December 31, 2010, we sold our CLS stock investment for net proceeds of $16.5 million and recognized a gain of $4.3 million.
 
At December 31, 2010, our CLS convertible note and default put derivative had an adjusted cost and fair value of $21.3 million.  We determined that the conversion option did not qualify as a freestanding derivative requiring bifurcation at December 31, 2010. See Note 15 and Note 16 for additional information about CLS derivatives and fair value assumptions.
 
We recorded IGT Synergy JV losses of $0.1 million for the three months ended December 31, 2010 and 2009.  $0.1
 
4.      INVENTORIES
 
   
December 31,
   
September 30,
 
   
2010
   
2010
 
(In millions)
           
Raw materials
  $ 58.7     $ 54.5  
Work-in-process
    5.5       3.9  
Finished goods
    48.8       39.2  
Total
  $ 113.0     $ 97.6  
 
 
 
10

 
 
5.      PROPERTY, PLANT AND EQUIPMENT
 
   
December 31,
   
September 30,
 
   
2010
   
2010
 
(In millions)
           
Land
  $ 62.6     $ 62.7  
Buildings
    231.0       230.9  
Leasehold improvements
    15.1       14.6  
Machinery, furniture and equipment
    288.0       286.0  
Gaming operations equipment
    808.5       804.9  
Total
    1,405.2       1,399.1  
Less accumulated depreciation
    (820.9 )     (812.4 )
Property, plant and equipment, net
  $ 584.3     $ 586.7  
 
 
6.      SHARE-BASED COMPENSATION
 
The amount, frequency, and terms of share-based awards may vary based on competitive practices, operating results, and government regulations.  SIP grants generally vest over three to five years, either in ratable annual increments or 100% at the end of the vesting period. New shares of IGT common stock are issued upon exercises of stock options, vesting of restricted share units, or restricted share grants. Our current practice is generally to grant restricted share awards in the form of units without dividends. Forfeitures occur primarily when employment is terminated prior to vesting.
 
At December 31, 2010, 3.7 million shares were available for grant under the IGT SIP. Each restricted share or unit counts as four shares against this allowance.  Unrecognized costs related to share-based awards outstanding at December 31, 2010 totaled $112.5 million and are expected to be recognized over a weighted average period of 2.0 years.
 
SIP Activity As Of And For The Three Months Ended December 31, 2010
 
Options
       
Weighted Average
       
               
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
   
(thousands)
   
(per share)
   
(years)
   
(millions)
 
Outstanding at beginning of fiscal year
    16,843     $ 21.38              
Granted
    4,404       15.60              
Exercised
    (353 )     10.84              
Forfeited
    (171 )     16.96              
Expired
    (403 )     31.36              
Outstanding at end of period
    20,320     $ 20.15       6.8     $ 34.6  
                                 
Vested and expected to vest
    19,674     $ 20.28       6.7     $ 33.1  
                                 
Exercisable at end of period
    9,550     $ 24.40       4.7     $ 10.1  
 
 

 
11

 
 
         
Weighted Average
       
         
Grant
   
Remaining
   
Aggregate
 
         
Date
   
Vesting
   
Intrinsic
 
Restricted Shares/Units
 
Shares
   
Fair Value
   
Period
   
Value
 
   
(thousands)
   
(per share)
   
(years)
   
(millions)
 
Outstanding at beginning of fiscal year
    2,368     $ 18.88              
Granted
    2,555       14.16              
Vested
    (668 )     21.25              
Forfeited
    (53 )     19.50              
Outstanding at end of period
    4,202     $ 15.65       2.2     $ 74.3  
                                 
Expected to vest
    3,905     $ 15.69       2.4     $ 69.1  
 
7.      RECEIVABLES
 
See Note 2 regarding our accounting policies for accounts receivable, customer financing and allowances for credit losses.
 
Allowances for Credit Losses
 
   
December 31, 2010
   
September 30, 2010
 
   
Recorded Investment
   
Allowance
   
Net
   
Recorded Investment
   
Allowance
   
Net
 
(In millions)
                                   
Accounts receivable
  $ 320.6     $ 23.6     $ 297.0     $ 314.9     $ 24.6     $ 290.3  
                                                 
Contracts and notes
                                               
Current maturities
  $ 215.7     $ 40.2     $ 175.5     $ 223.9     $ 39.8     $ 184.1  
Non-current
    185.0       37.5       147.5       210.5       38.6       171.9  
Total
  $ 400.7     $ 77.7     $ 323.0     $ 434.4     $ 78.4     $ 356.0  
 
Customer Financing (Contracts and Notes) at December 31, 2010
 
Recorded Investment (principal and interest due, net of deferred interest and fees)
 
Total
 
(In millions)
     
Individually evaluated for impairment
  $ 128.0  
Collectively evaluated for impairment
    272.7  
Total recorded investment
  $ 400.7  
 
Allowances for Credit Losses
 
Total
 
(In millions)
       
Individually evaluated for impairment
  $ 65.4  
Collectively evaluated for impairment
    12.3  
Total allowances for credit losses
  $ 77.7  
 
 
 
12

 
 
                   
Age Analysis of Recorded Investment
 
Contracts
   
Notes
   
Total
 
(In millions)
                 
Past Due:
                 
1-29 days
  $ 5.3     $ 2.0     $ 7.3  
30-59 days
    2.3       1.7       4.0  
60-89 days
    2.0       1.2       3.2  
Over 90 days
    5.3       20.7       26.0  
Total past due
  $ 14.9     $ 25.6     $ 40.5  
Current
    193.3       166.9       360.2  
Total recorded investment
  $ 208.2     $ 192.5     $ 400.7  
                         
Customer financing recorded investment:
                       
Over 90 days and accruing interest
  $ 2.1     $ 0.1     $ 2.2  
Nonaccrual status (not accruing interest)
    8.9       91.2       100.1  
 
Recorded Investment by Credit Quality Indicator
Credit Profile by Internally Assigned Risk Grade
 
Contracts
   
Notes
   
Total
 
(In millions)
                 
Low
  $ 70.1     $ 0.2     $ 70.3  
Medium
    32.1       0.5       32.6  
High (1)
    106.0       191.8       297.8  
Total recorded investment
  $ 208.2     $ 192.5     $ 400.7  
                         
(1) Excluding development financing notes to the Alabama charitable bingo market (see additional information below), approximately 80% of the remaining contracts and notes are performing according to agreed upon terms. All contracts and notes maintain a security interest in the underlying assets that were financed.
 
 
Impaired loans (all specific reserves)
 
Contracts
   
Notes
   
Total
 
(In millions)
                 
Recorded investment
  $ 11.3     $ 91.2     $ 102.5  
Unpaid principal face
    11.1       92.3       103.4  
Related allowance
    5.9       59.5       65.4  
Average recorded investment
    11.8       92.3       104.1  
                         
Interest income recognized:
                       
Quarter-to-date
                       
Total
  $ 0.3     $ 0.3     $ 0.6  
Cash-basis
    -       0.3       0.3  
 
Alabama Development Financing
 
Our impaired contracts and notes include $83.9 million related to Alabama charitable bingo markets with related allowances of $51.9 million at December 31, 2010.  The legality of electronic charitable bingo in Alabama was challenged during fiscal 2010 and the properties where IGT placed electronic bingo machines closed their operations. At December 31, 2010, these properties remain closed.  Any revenues and interest income related to these assets were recorded on the cash basis subsequent to the first quarter of fiscal 2010 as collectability was not reasonably assured.
 
 
13

 
 
8.      CONCENTRATIONS OF CREDIT RISK
 
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and equivalents, investments, and receivables. We place short-term investments in high credit quality financial institutions and in short-duration high-quality securities. With the exception of US Government and Agency securities, our short-term investment policy limits the amount of credit exposure in any one financial institution, industry group, or type of investment. Cash on deposit may be in excess of Federal Deposit Insurance Corporation limits.
 
Our receivables were concentrated in the following legalized gaming regions at December 31, 2010:
 
North America
   
Nevada
10
%
Oklahoma
6
 
Alabama
5
 
Other (less than 5% individually)
32
 
 
53
%
     
International
   
Argentina
23
%
Europe
10
 
Other Latin America
7
 
Other (less than 5% individually)
7
 
 
47
%
 
9.      GOODWILL AND OTHER INTANGIBLES
 
Goodwill
 
Activity by Segment
 
North
             
For The Three Months Ended December 31, 2010
 
America
   
International
   
Total
 
(In millions)
                 
Beginning balance
  $ 1,042.8     $ 108.8     $ 1,151.6  
Accumulated impairment charges
    -       -       -  
Adjusted goodwill
    1,042.8       108.8       1,151.6  
                         
Foreign currency adjustments
    -       (1.1 )     (1.1 )
Ending balance
  $ 1,042.8     $ 107.7     $ 1,150.5  
 
Other Intangibles
 
During the quarter ended December 31, 2010, we capitalized $0.2 million of patent legal costs with a weighted average life of 5 years.
 
   
December 31, 2010
   
September 30, 2010
 
         
Accumulated
               
Accumulated
       
   
Cost
   
Amortization
   
Net
   
Cost
   
Amortization
   
Net
 
(In millions)
                                   
Patents
  $ 385.0     $ 245.9     $ 139.1     $ 387.3     $ 238.8     $ 148.5  
Developed technology
    75.8       48.2       27.6       75.9       46.7       29.2  
Contracts
    26.2       18.4       7.8       26.2       17.9       8.3  
Reacquired rights
    13.4       1.3       12.1       13.4       1.0       12.4  
Customer relationships
    8.8       5.9       2.9       8.8       5.7       3.1  
Trademarks
    3.4       2.9       0.5       3.5       2.9       0.6  
Total
  $ 512.6     $ 322.6     $ 190.0     $ 515.1     $ 313.0     $ 202.1  
 
 
 
14

 
 
Aggregate amortization expense totaled $12.3 million in the current quarter versus $12.7 million in the prior year quarter.
 
   
2011
   
2012
   
2013
   
2014
   
2015
 
(In millions)
                             
Estimated annual amortization
  $ 44.7     $ 38.3     $ 34.9     $ 30.8     $ 22.0  
 
10.      CREDIT FACILITIES AND INDEBTEDNESS
 
Outstanding debt at
December 31,
September 30,
 
2010
2010
(In millions)
           
Domestic credit facility
$
 20.0
  $
100.0
 
3.25% Convertible Notes
 
        850.0
   
         850.0
 
7.5% Bonds
 
        500.0
   
         500.0
 
5.5% Bonds
 
        300.0
   
         300.0
 
Total principal
 
     1,670.0
   
      1,750.0
 
3.25% Convertible Notes discount
 
      (116.6)
   
       (124.1)
 
7.5% Bonds discount
 
          (2.4)
   
           (2.5)
 
5.5% Bonds discount
 
          (1.2)
   
           (1.2)
 
7.5% Swap fair value adjustment (see Note 19)
 
          19.2
   
           33.9
 
5.5% Swap fair value adjustment (see Note 19)
 
          (0.9)
   
           18.2
 
Total outstanding debt, net
$
1,568.1
  $
1,674.3
 
 
IGT was in compliance with all applicable debt covenants at December 31, 2010. Embedded features of all debt agreements were evaluated and did not require bifurcation at December 31, 2010.
 
Domestic Credit Facility
 
At December 31, 2010, $20.0 million was drawn on our domestic revolving credit facility, $1.21 billion was available, and $15.9 million was reserved for letters of credit and performance bonds.  As of December 31, 2010, the facility interest rate was LIBOR plus 260 bps with a facility fee of 65 bps. The amount drawn carried a 2.86% weighted average interest rate.
 
Concurrent with the maturity of the non-extended portion on December 19, 2010, the size of our domestic credit facility was reduced by $238.0 million.  The size of the credit facility was further reduced on December 30, 2010, when we paid in full the term loan in the amount of $42.0 million issued upon the conversion of half of all amounts outstanding at December 19, 2010.  At December 31, 2010, the size of our domestic credit facility was $1.24 billion.
 
Foreign Credit Facilities
 
At December 31, 2010, $10.2 million was available and nothing was drawn under our revolving credit facility in Australia, which generally renews annually with maturity in March and is guaranteed by the parent company, International Game Technology.
 
 
15

 
  
Convertible Debt
 
Quarters ended December 31,
 
2010
   
2009
 
(In millions)
           
             
3.25% Convertible Notes
           
Contractual interest expense
  $ 6.9     $ 6.9  
Discount amortization
    7.4       6.9  
Remaining discount amortization period
   
3.3 years
         
                 
2.6% Convertible Debentures
               
Contractual interest expense
  $ -     $ 3.8  
Discount amortization
    -       2.7  
 
Bonds
 
Interest rate swaps executed in conjunction with our Bonds are described in Note 15.
 
11.      CONTINGENCIES
 
Litigation
 
IGT has been named in and has brought lawsuits in the normal course of business. We do not expect the outcome of these suits, including the lawsuits described below, to have a material adverse effect on our future results of operations, financial position, or cash flows.
 
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 has successfully moved for partial summary judgment on defendants’ counterclaims for intentional interference with prospective business advantage and defendants’ antitrust allegations related to the gaming machine market. IGT denies the remaining allegations. On May 9, 2007, the Court issued an order construing disputed terms of the asserted patent claims. On October 16, 2008, the Court issued summary judgment rulings finding certain of IGT’s patents, including patents that IGT believes cover bonus wheel gaming machines, invalid as obvious. The rulings also found that Bally was not infringing certain patents asserted by IGT. Bally’s antitrust and unfair competition counterclaims remain pending. On November 7, 2008, the Court issued an order staying the proceedings and certifying the summary judgment and claim construction rulings for immediate appeal. On December 1, 2008, IGT appealed the rulings to the US Court of Appeals for the Federal Circuit. On January 8, 2009, Bally moved to dismiss the appeal on jurisdictional grounds. On February 2, 2009, the Federal Circuit denied the Bally motion without prejudice to the parties raising jurisdictional issues in their merits briefs. On October 22, 2009, the Federal Circuit affirmed the District Court’s summary judgment rulings. On December 7, 2009, Bally filed a motion to lift the stay and schedule a trial on the remaining issues. A hearing on the motion was held on February 1, 2010, at which the Court indicated that it would revisit earlier motions for summary judgment on the issues not addressed on appeal, including IGT’s motions for summary judgment on Bally’s antitrust and unfair competition counterclaims.  On November 29, 2010, the Court granted summary judgment in favor of IGT on all antitrust and unfair competition counterclaims by Bally and dismissed all other remaining claims. Bally has appealed the grant of summary judgment.
 
 
16

 
 
2006 Federal District Court of Delaware
 
On April 28, 2006, IGT filed a complaint in US District Court for the District of Delaware, alleging that defendants Bally Technologies, Inc., Bally Gaming Int'l, Inc., and Bally Gaming, Inc. infringed nine US patents held by IGT: US Patent Nos. RE 38,812; RE 37,885; 6,832,958; 6,319,125; 6,244,958; 6,431,983; 6,607,441; 6,565,434; and 6,620,046. The complaint alleges that the “BALLY POWER BONUSING™” technology infringes one or more of the claims of the asserted IGT patents. The lawsuit seeks monetary damages and an injunction. On June 30, 2006, defendants filed an answer denying the allegations in the complaint and raising various affirmative defenses to IGT’s asserted claims. Defendants also asserted twelve counterclaims against IGT, including counterclaims for a declaratory judgment of non-infringement, invalidity, and unenforceability of the asserted patents, antitrust violations, unfair competition, and intentional interference with prospective business advantage. IGT denies these allegations. Pursuant to stipulation of the parties, all claims and counterclaims except those relating to US Patent Nos. RE 37,885 ("the '885 patent"), RE 38,812 ("the '812 patent"), and 6,431,983 have been dismissed. All proceedings relating to Bally’s antitrust, unfair competition, and intentional interference counterclaims have been stayed. On April 28, 2009, the court issued a summary judgment ruling finding the '885 and '812 patents valid. The court also ruled that Bally's "Power Rewards" and "ACSC Power Winners" products infringe certain claims of the '885 and '812 patents. The court granted Bally's motion for summary judgment that Bally's "SDS Power Winners" does not infringe the '885 patent and "Power Bank" and "Power Promotions" do not infringe the '983 patent. The court denied Bally's motion for summary judgment that the '983 patent is invalid. The parties have agreed that Bally's counterclaim for a declaratory judgment on invalidity of the '983 patent will be dismissed without prejudice. IGT’s motion for a permanent injunction against Bally’s infringing products was denied. On April 28, 2010, the court entered an order dismissing without prejudice Bally’s remaining counterclaims (antitrust, unfair competition and intentional interference with business relationships) and entered final judgment in favor of IGT and against the Bally defendants. An appeal from the liability judgment is proceeding.  A trial to determine the amount of damages incurred by IGT, and related matters, as a result of Bally's infringement has not yet been scheduled.
 
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, 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 has recommenced in the District Court.  On May 13, 2010, the District Court entered an Order granting IGT’s motion for summary judgment of non-infringement.  Aristocrat is appealing this judgment.  Proceedings on IGT’s claim that Aristocrat committed inequitable conduct in reviving a related patent application are continuing in the District Court.  A trial is set on this issue for April 4, 2011.
 
2010 Central Federal District Court of California
 
On November 15, 2010, IGT filed a complaint in the US District Court for the Central District of California against Aristocrat Leisure Limited of Australia and its US affiliate Aristocrat Technologies, Inc. (collectively “Aristocrat”) seeking a preliminary and permanent injunction and damages for the infringement of US Patent No. 6,620,047 (the “’047 patent”) and US Patent No. RE 39,370 (the “’370 patent”) in violation of 35 U.S.C. § 271.  We assert that Aristocrat infringes on the ‘047 and the ‘370 patents in connection with the sale and distribution of gaming devices, including the Viridian WS slot machine, without authorization or license from IGT.
 
Rice (formerly Piercey) v Atlantic Lotteries
 
In May 2010, Atlantic Lotteries commenced an action against International Game Technology, VLC, Inc. and IGT-Canada, wholly-owned subsidiaries of International Game Technology, and other manufacturers of video lottery machines in the Supreme Court of New Foundland and Labrador seeking indemnification for any damages that may be awarded against Atlantic Lotteries in a class action suit also filed in the Supreme Court of New Foundland and Labrador.  A motion for class certification has been filed by plaintiff but has not yet scheduled for argument. In the interim, plaintiff has filed a motion to preclude the third party defendants from participating on the motion to certify; plaintiff’s motion to preclude is scheduled to be heard on February 23, 2011.
 
 
17

 
 
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 Securities Exchange Act against IGT and certain of its officers, one of whom is a director. 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. The Court has appointed a lead plaintiff. The plaintiffs filed an amended complaint on April 26, 2010 and the defendants moved to dismiss that complaint on June 17, 2010.
 
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-ECR-VPC; Israni v. Bittman, et al., Case No. 3:09-cv-00536; and Aronson v. Matthews et al., Case No. 3:09-cv-00542-RCJ-VPC. 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 allege 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.  The plaintiff in Israni v. Bittman, et al. has appealed the order of dismissal.
 
On September 30, 2009, the Company was nominally sued in a derivative lawsuit filed in the Second Judicial District Court of the State of Nevada, County of Washoe. Plaintiff purportedly filed the action on behalf of the Company. The lawsuit, captioned Kurz et al. v. Hart et al., Case No. cv-0-9-02982, asserted claims against various current and former officers and directors for breach of fiduciary duties and unjust enrichment. The complaint generally made the same allegations as the federal derivative complaints and seeks an unspecified amount of damages. The action has been dismissed by stipulation of the parties.
 
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 alleges 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 Company was nominally sued in a derivative lawsuit filed in the US District Court for the District of Nevada, captioned Sprando v. Hart, et al., Case No. 3:10-cv-00415-RCJ-VPC and asserting claims similar to those described above. Motions to dismiss have filed.
 
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 complaints (which seek unspecified damages) allege breaches of fiduciary duty under the Employee Retirement Income Security Act, 29 U.S.C §§ 1109 and 1132. The complaints allege similar facts as the securities class action lawsuit. The complaints further allege 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, failing to diversify Plan assets, and permitting Participants to elect to invest in Company stock. 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. In October 2009, plaintiffs moved for consolidation of the two actions which motion was granted. On April 9, 2010, defendants moved to dismiss the consolidated complaint.
 
 
18

 
 
Environmental Matters
 
CCSC, a casino operation sold by IGT in April 2003, is located in an area that has been designated by the EPA as an active Superfund site because of contamination from historic mining activity in the area. In order for Anchor Coin, an entity IGT acquired in December 2001, to develop the CCSC site, it voluntarily entered into an administrative order of consent with the EPA to conduct soil removal and analysis (a requirement imposed on similarly situated property developers within the region) in conjunction with re-routing mine drainage. The work and obligations contemplated by the agreement were completed by Anchor in June 1998, and the EPA subsequently issued a termination of the order.
 
The EPA, together with other property developers excluding CCSC, continues remediation activities at the site. While we believe our remediation obligations are complete, it is possible that additional contamination may be identified and we could be obligated to participate in remediation efforts. Under accounting guidance for environmental remediation liabilities, we determined the incurrence of additional remediation costs is neither probable nor reasonably estimable and no liability has been recorded.
 
OSHA / Wrongful Termination Matter
 
On July 8, 2004, two former employees filed a complaint with the US Department of Labor, OSHA alleging retaliatory termination in violation of the Sarbanes-Oxley Act of 2002. The former employees allege that they were terminated in retaliation for questioning whether Anchor and its executives failed to properly disclose information allegedly affecting the value of Anchor's patents in connection with IGT's acquisition of Anchor in December 2001. The former employees also allege that the acquired patents were overvalued on the financial statements of IGT. Outside counsel, retained by an independent committee of our Board of Directors, reviewed the allegations and found them to be entirely without merit.
 
On November 10, 2004, the employees withdrew their complaint filed with OSHA and filed a notice of intent to file a complaint in federal court. On December 1, 2004, a complaint was filed under seal in the US District Court for the District of Nevada, based on the same facts set forth above regarding their OSHA complaint. IGT filed a motion for summary judgment as to all claims in plaintiffs’ complaint. On June 14, 2007, the US District Court for the District of Nevada entered an order granting summary judgment in favor of IGT as to plaintiffs’ Sarbanes-Oxley whistle-blower claims and dismissed their state law claims without prejudice. Plaintiffs’ motion for reconsideration of the District Court’s decision was denied. Plaintiffs appealed to the US Court of Appeals for the Ninth Circuit. Oral argument was heard on March 12, 2009, and on August 3, 2009, the Ninth Circuit reversed the District Court’s decision. IGT’s motion for summary judgment on plaintiffs’ state law claims was argued on October 22, 2009 and granted in IGT’s favor on December 8, 2009. On April 13, 2010, the District Court granted IGT’s motion to strike the plaintiffs’ jury demand and granted IGT’s motion to retax costs and fees. It denied plaintiffs’ motion for certification and/or reconsideration. On February 8, 2011, a jury verdict was entered in favor of the plaintiffs as to their Sarbanes-Oxley claims and awarded damages in an amount equal to approximately $2.2 million. IGT is evaluating its options in response to this jury verdict.
 
In conjunction with the Anchor acquisition purchase price allocation as of December 31, 2001, IGT used the relief of royalty valuation methodology to estimate the fair value of the patents at $164.4 million. The carrying value of the patents at December 31, 2010 totaled $37.4 million.
 
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.
 
 
19

 
 
Performance Bonds
 
Performance bonds outstanding related to certain gaming operations equipment totaled $6.8 million at December 31, 2010. We are liable to reimburse the bond issuer in the event of exercise due to nonperformance.
 
Letters of Credit
 
Outstanding letters of credit issued under our domestic credit facility to ensure payment to certain vendors and governmental agencies totaled $9.1 million at December 31, 2010.
 
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.
 
Product Warranties
 
The majority of our products are generally covered by a warranty for periods ranging from 90 days to one year. We estimate accrued warranty costs in the table below based on historical trends in product failure rates and expected costs to provide warranty services.
 
Three Months Ended December 31,
 
2010
   
2009
 
(In millions)
           
Balance at beginning of year
  $ 9.3     $ 7.9  
Reduction for payments made
    (1.4 )     (2.1 )
Accrual for new warranties issued
    2.4       3.1  
Adjustments for pre-existing warranties
    (0.5 )     (1.8 )
Balance at end of period
  $ 9.8     $ 7.1  
 
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.
 
12.      INCOME TAXES
 
Our provision for income taxes is based on estimated effective annual income tax rates as well as the impact of discrete items, if any, occurring during the quarter. 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.
 
 
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Our effective tax rate for the three months ended December 31, 2010 decreased to 29.0% from 34.5% for the same prior year period as a result of the realization of benefits from an increase in the manufacturing deduction and the retroactive reinstatement of the R&D tax credit.
 
As of December 31, 2010, we had $99.5 million of gross UTBs excluding related accrued interest and penalties of $24.6 million. As of December 31, 2010, $65.9 million of our UTBs, including related accrued interest and penalties, would affect our effective tax rate, if recognized. During the three months ended December 31, 2010, our UTBs increased $15.7 million comprised of $7.7 million related to positions taken during a prior year and $8.0 million related to positions taken during the current year. Also during the three months ended December 31, 2010, related interest and penalties increased $1.9 million.
 
We are also subject to examination in state and foreign jurisdictions. We believe we have recorded all appropriate provisions for outstanding issues for all jurisdictions and open years. However, we can give no assurance that taxing authorities will not propose adjustments that increase our tax liabilities.
 
13.      EARNINGS PER SHARE
 
   
Quarters Ended
 
   
December 31,
 
   
2010
   
2009
 
(In millions, except per share amounts)
     
Income from continuing operations available to common shares (1)
  $ 73.4     $ 75.4  
Basic weighted average shares outstanding
    297.6       295.1  
Dilutive effect of non-participating share-based awards
    1.2       2.3  
Diluted weighted average common shares outstanding
    298.8       297.4  
                 
Basic earnings per share from continuing operations
  $ 0.25     $ 0.26  
Diluted earnings per share from continuing operations
  $ 0.25     $ 0.26  
                 
Weighted average shares excluded from diluted EPS because the effect would be anti-dilutive:
Share-based awards
    16.4       9.8  
Debentures
    -       0.1  
Notes
    42.6       42.6  
Note hedges
    (42.6 )     (42.6 )
Warrants
    42.6       42.6  
                 
(1) Income from continuing operations available to participating securities was not significant
 
14.      OTHER COMPREHENSIVE INCOME
 
   
Quarters Ended
 
   
December 31,
 
   
2010
   
2009
 
(In millions)
           
Net income
  $ 73.7     $ 73.3  
Currency translation adjustments
    0.2       3.1  
Investment unrealized gains (losses)
    (0.5 )     6.0  
Comprehensive income
  $ 73.4     $ 82.4  
 
 
 
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15.      FINANCIAL DERIVATIVES
 
Foreign Currency Hedging
 
We hedge our net foreign currency exposure related to monetary assets and liabilities denominated in nonfunctional currency. The notional amount of foreign currency contracts hedging this exposure totaled $27.3 million at December 31, 2010 and $26.7 million at September 30, 2010.
 
In May 2007, we executed five-year forward contracts designated as a fair value hedge to protect a portion of the US dollar value of our Hong Kong dollar investment in the CLS convertible note (See Note 3). In conjunction with the early redemption of our CLS investment negotiated in September 2010, we executed additional contracts which effectively reduced the cumulative amount of forward contracts. The notional amount of foreign currency contracts hedging this exposure totaled $15.0 million for which there was no ineffectiveness for the three months ended December 31, 2010.
 
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 terminate on June 15, 2019. These swaps effectively exchange 7.5% fixed interest payments for variable rate interest payments at one-month LIBOR plus 342 bps reset on the 15th of each month. Net amounts receivable or payable under the swaps settle semiannually on June 15 and December 15. The interest rate swaps are designated fair value hedges against changes in the fair value of a portion of our 7.5% Bonds. Our assessment determined that the interest rate swaps are highly effective.
 
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 set in arrears on June 13 and December 13 of each year. Net amounts receivable or payable under the swaps will be settled semiannually on June 15 and December 15. The interest rate swaps are designated fair value hedges against changes in the fair value of a portion of our 5.5% Bonds. Our assessment determined that the interest rate swaps are highly effective.
 
Presentation of Derivative Amounts
 
Balance Sheet Location and Fair Value
 
December 31
2010
   
September 30,
2010
 
(In millions)
           
Non-designated Hedges
           
Foreign currency contracts:  Other assets and deferred costs (current)
  $ 0.3     $ -  
Foreign currency contracts:  Other liabilities (current)
    1.7       2.2