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  • 10-Q (Aug 6, 2014)
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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-070211.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 July 2, 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 August 9, 2011:
298.5 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 Consolidated Interim Financial Statements
 
4
CONSOLIDATED INCOME STATEMENTS
 
5
CONSOLIDATED BALANCE SHEETS
 
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
7
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
29
FORWARD LOOKING STATEMENTS
 
30
OVERVIEW
 
30
CONSOLIDATED RESULTS – A Year Over Year Comparative Analysis
 
33
BUSINESS SEGMENT RESULTS – A Year Over Year Comparative Analysis
 
37
LIQUIDITY AND CAPITAL RESOURCES
 
39
RECENTLY ISSUED ACCOUNTING STANDARDS
 
42
CRITICAL ACCOUNTING ESTIMATES
 
42
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
43
Item 4.
Controls and Procedures
 
43
PART II – OTHER INFORMATION
 
43
Item 1.
Legal Proceedings
 
43
Item 1A.
Risk Factors
 
43
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
49
Item 3.
Defaults Upon Senior Securities
 
49
Item 4.
(Removed and Reserved)
 
50
Item 5.
Other Information
 
50
Item 6.
Exhibits
 
50
 
 
2

 
GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
 
Fiscal dates--as presented:
Fiscal dates--actual:
 
 
June 30, 2011
July 2, 2011
 
June 30, 2010
July 3, 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
 
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
 
IFRS
International Financial Reporting Standards
 
IP
intellectual property
 
IRS
Internal Revenue Service
 
LIBOR
London inter-bank offering rate
 
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 Consolidated Interim Financial Statements
 
CONSOLIDATED INCOME STATEMENTS
 
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
14
7.
GOODWILL AND OTHER INTANGIBLES
14
8.
FAIR VALUE MEASUREMENTS
15
9.
FINANCIAL DERIVATIVES
16
10.
CREDIT FACILITIES AND INDEBTEDNESS
18
11.
CONTINGENCIES
19
12.
INCOME TAXES
24
13.
EMPLOYEE BENEFIT PLANS
25
14.
EARNINGS PER SHARE
26
15.
OTHER COMPREHENSIVE INCOME
26
16.
BUSINESS SEGMENTS
27
17.
BUSINESS ACQUISITION
28
18.
DISCONTINUED OPERATIONS
28
 
 
4

 
 
CONSOLIDATED INCOME STATEMENTS
 
   
Quarters Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
(In millions, except per share amounts)
                       
                         
Revenues
                       
Gaming operations
  $ 267.4     $ 268.9     $ 790.1     $ 813.3  
Product sales
    221.6       206.0       627.1       629.7  
Total revenues
    489.0       474.9       1,417.2       1,443.0  
                                 
Costs and operating expenses
                               
Cost of gaming operations
    102.8       113.4       299.2       321.2  
Cost of product sales
    97.6       93.5       277.4       301.6  
Selling, general and administrative
    82.5       81.5       253.8       245.4  
Research and development
    48.5       48.4       146.1       139.4  
Depreciation and amortization
    16.8       18.0       51.6       55.8  
Impairment
    -       -       -       53.1  
Total costs and operating expenses
    348.2       354.8       1,028.1       1,116.5  
                                 
Operating income
    140.8       120.1       389.1       326.5  
Other income (expense)
                               
Interest income
    13.3       15.1       40.0       46.5  
Interest expense
    (30.5 )     (42.7 )     (101.5 )     (124.9 )
Other
    (1.9 )     3.7       1.4       3.3  
Total other income (expense)
    (19.1 )     (23.9 )     (60.1 )     (75.1 )
                                 
Income from continuing operations before tax
    121.7       96.2       329.0       251.4  
Income tax provision (benefit)
    29.9       (0.1 )     96.7       54.9  
Income from continuing operations
    91.8       96.3       232.3       196.5  
Loss from discontinued operations, net of tax
    (4.9 )     (4.2 )     (2.1 )     (30.4 )
Net income
  $ 86.9     $ 92.1     $ 230.2     $ 166.1  
                                 
Basic earnings (loss) per share
                               
Continuing operations
  $ 0.31     $ 0.32     $ 0.78     $ 0.66  
Discontinued operations
    (0.02 )     (0.01 )     (0.01 )     (0.10 )
Net income
  $ 0.29     $ 0.31     $ 0.77     $ 0.56  
                                 
Diluted earnings (loss) per share
                               
Continuing operations
  $ 0.30     $ 0.32     $ 0.77     $ 0.66  
Discontinued operations
    (0.01 )     (0.01 )     -       (0.11 )
Net income
  $ 0.29     $ 0.31     $ 0.77     $ 0.55  
                                 
Cash dividends declared per share
  $ 0.06     $ 0.06     $ 0.18     $ 0.18  
                                 
Weighted average shares outstanding
                               
Basic
    299.2       297.0       298.4       296.0  
Diluted
    300.7       298.9       299.9       298.1  
 
See accompanying notes
 
 
5

 
 
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
September 30,
 
   
2011
   
2010
 
(In millions, except par value)
           
Assets
           
Current assets
           
Cash and equivalents
  $ 316.3     $ 158.4  
Restricted cash and investment securities
    83.2       88.1  
Restricted cash and investment securities of VIEs
    1.9       2.4  
Jackpot annuity investments
    48.9       49.5  
Jackpot annuity investments of VIEs
    14.8       15.6  
Accounts receivable, net
    291.1       290.3  
Current maturities of contracts and notes receivable, net
    169.5       184.1  
Inventories
    91.3       97.6  
Deferred income taxes
    86.9       84.3  
Assets of discontinued operations
    58.4       0.3  
Other assets and deferred costs
    146.8       231.8  
Total current assets
    1,309.1       1,202.4  
Property, plant and equipment, net
    584.3       586.7  
Jackpot annuity investments
    280.3       299.1  
Jackpot annuity investments of VIEs
    56.3       61.7  
Contracts and notes receivable, net
    123.8       171.9  
Goodwill
    1,239.3       1,151.6  
Other intangible assets, net
    188.8       202.1  
Deferred income taxes
    116.8       136.8  
Other assets and deferred costs
    177.7       194.7  
                 
Total Assets
  $ 4,076.4     $ 4,007.0  
                 
Liabilities and Shareholders' Equity
               
Liabilities
               
Current liabilities
               
Accounts payable
  $ 106.0     $ 84.6  
Jackpot liabilities, current portion
    138.5       179.1  
Accrued employee benefits
    27.0       23.9  
Accrued income taxes
    3.8       1.8  
Dividends payable
    18.0       17.9  
Liabilities of discontinued operations
    19.3       5.5  
Other accrued liabilities
    215.1       269.5  
Total current liabilities
    527.7       582.3  
Long-term debt
    1,571.3       1,674.3  
Jackpot liabilities
    368.4       391.8  
Other liabilities
    155.6       124.3  
Total Liabilities
    2,623.0       2,772.7  
                 
Commitments and Contingencies
               
                 
Shareholders' Equity
               
Common stock: $.00015625 par value; 1,280.0 shares authorized; 341.6 and 339.1 issued; 298.8 and 298.1 outstanding
    0.1       0.1  
Additional paid-in capital
    1,532.1       1,473.7  
Treasury stock at cost: 42.8 and 41.0 shares
    (829.6 )     (802.0 )
Retained earnings
    728.2       551.8  
Accumulated other comprehensive income
    19.9       10.7  
Total IGT Shareholders' Equity
    1,450.7       1,234.3  
Noncontrolling Interests
    2.7       -  
Total Equity
    1,453.4       1,234.3  
                 
Total Liabilities and Shareholders' Equity
  $ 4,076.4     $ 4,007.0  
 
See accompanying notes
 
 
6

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended June 30,
 
2011
   
2010
 
(In millions)
           
             
Operating
 
 
   
 
 
Net income
  $ 230.2     $ 166.1  
Adjustments:
               
Depreciation and amortization
    167.3       179.4  
Discounts and deferred issuance costs
    33.6       36.8  
Share-based compensation
    32.0       31.3  
Loss on other assets and impairment
    10.7       59.8  
Excess tax benefits from employee stock plans
    (2.9 )     (8.3 )
Gain on assets sold
    (15.2 )     (0.7 )
Other, net
    7.0       18.5  
Changes in operating assets and liabilities, excluding acquisitions:
               
Receivables
    15.1       35.6  
Inventories
    (2.3 )     35.3  
Other assets and deferred costs
    27.0       49.5  
Income taxes, net of employee stock plans
    73.2       (54.2 )
Accounts payable and accrued liabilities
    (46.0 )     (90.4 )
Jackpot liabilities
    (81.0 )     (34.9 )
Net operating cash flows
    448.7       423.8  
                 
Investing
               
Capital expenditures
    (155.1 )     (178.2 )
Proceeds from assets sold
    14.7       7.2  
Investment securities, net
    -       21.6  
Jackpot annuity investments, net
    42.8       44.9  
Changes in restricted cash
    22.9       (7.9 )
Loans receivable cash advanced
    (0.5 )     (17.7 )
Loans receivable payments received
    24.4       10.4  
Unconsolidated affiliates, net
    16.5       (4.9 )
Business/VIE acquisition/deconsolidation
    (105.9 )     (1.4 )
Net investing cash flows
    (140.2 )     (126.0 )
                 
Financing
               
Debt proceeds
    95.0       1,350.3  
Debt repayments
    (195.0 )     (1,593.4 )
Debt issuance costs
    (4.4 )     (0.1 )
Employee stock plan proceeds
    30.5       15.2  
Excess tax benefits from employee stock plans
    2.9       8.3  
Share repurchases
    (25.0 )     -  
Dividends paid
    (53.8 )     (53.5 )
Net financing cash flows
    (149.8 )     (273.2 )
                 
Foreign exchange rates effect on cash and equivalents
    (0.8 )     (6.4 )
                 
Net change in cash and equivalents
    157.9       18.2  
                 
Beginning cash and equivalents
    158.4       146.7  
                 
Ending cash and equivalents
  $ 316.3     $ 164.9  
 
See accompanying notes
 
 
7

 
 
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.
 
Nine Months Ended June 30,
 
2011
   
2010
 
(In millions)
           
             
Jackpot funding
 
 
   
 
 
Change in jackpot liabilities
  $ (81.0 )   $ (34.9 )
                 
Jackpot annuity purchases
    (3.9 )     (3.8 )
Jackpot annuity proceeds
    46.7       48.7  
Net change in jackpot annuity investments
    42.8       44.9  
Net jackpot funding
  $ (38.2 )   $ 10.0  
                 
Capital expenditures
               
Property, plant and equipment
  $ (10.8 )   $ (15.9 )
Gaming operations equipment
    (143.2 )     (159.9 )
Intellectual property
    (1.1 )     (2.4 )
Total
  $ (155.1 )   $ (178.2 )
                 
Payments
               
Interest
  $ 74.1     $ 83.3  
Income taxes
    18.3       109.3  
                 
Non-cash investing and financing items:
               
Accrued capital asset additions
  $ 2.0     $ 2.1  
Interest accretion for jackpot annuity investments
    17.0       18.7  
                 
Business acquisitions/purchase price adjustments and VIE deconsolidations
               
Fair value of assets
  $ 131.1     $ (0.8 )
Fair value of liabilities and noncontrolling interests
    25.2       (2.2 )
 
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 each year. Similarly, our quarters end on the Saturday nearest to the last day of the quarter end month. For simplicity, fiscal periods in this report were presented using the calendar month end as outlined in the table below.
 
   
Period End
   
Actual
 
Presented as
Current quarter
 
July 2, 2011
 
June 30, 2011
Prior year quarter
 
July 3, 2010
 
June 30, 2010
Prior year end
 
October 2, 2010
 
September 30, 2010
 
Our consolidated interim 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 have been eliminated.
 
Our consolidated interim financial statements for the current quarter and nine months ended June 30, 2011 have been prepared without audit and certain information and footnote disclosures have been condensed or omitted in conformity with SEC and US GAAP requirements on a basis consistent with the corresponding quarter and nine months ended June 30, 2010, and as appropriate, with the audited financial statements for the year ended September 30, 2010.
 
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, 2010. Unless otherwise noted, references to years in this report relate to our fiscal years ending September 30.
 
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.
 
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.
 
 
9

 
 
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.
 
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 all reasonable collection efforts have been exhausted and 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 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 were effective for our 2011 first quarter, except for allowance roll-forward disclosures effective for our 2011 second quarter and troubled debt restructuring disclosures effective for our year ending September 30, 2011. The adoption of this ASU did not and will not have a material impact on our financial statements. See Note 1 above and Note 3.
 
Consolidation of Variable Interest Entities
 
At the beginning of 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 financial statements.
 
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 2012 first quarter and is not expected to have a material impact on our financial statements.
 
 
10

 
 
Additionally, in May 2011, the FASB issued an ASU to amend fair value measurement to achieve convergence between US GAAP and IFRS. The ASU changes some fair value measurement principles and disclosure requirements and is effective for our 2012 second quarter and not expected to have a material impact on our financial statements.
 
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 2012. This ASU is not expected to have a material impact on our financial statements.  
 
Presentation of Comprehensive Income
 
In June 2011, the FASB issued an ASU to require other comprehensive income, including reclassification adjustments, to be presented with net income in one continuous statement or in a separate statement consecutively following net income. The ASU will be effective for our 2013 first quarter and is not expected to have a material impact on our financial statements.
 
2.          VARIABLE INTERESTS AND AFFILIATES
 
Variable Interest Entities
 
New Jersey regulation requires that annuitized WAP jackpot payments to winners be administered through an individual trust set up for each WAP system. These trusts are VIEs. 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 $73.0 million at June 30, 2011 and $79.7 million at September 30, 2010.
 
Investments in Unconsolidated Affiliates
 
China LotSynergy Holdings, Ltd.
 
During the 2011 first quarter, we sold our CLS stock investment for net proceeds of $16.5 million and recognized a gain of $4.3 million.
 
At June 30, 2011, the fair value of our CLS convertible note and default put derivative together totaled $21.5 million. The adjusted cost basis of the note, including the conversion option, totaled $20.4 million. We determined that the conversion option did not qualify as a freestanding derivative requiring bifurcation at June 30, 2011. See Note 8 and Note 9 for additional information about CLS fair value assumptions and derivatives.
 
3.          RECEIVABLES
 
See Note 1 regarding our accounting policies for accounts receivable, customer financing and allowances for credit losses. Our allowances for accounts receivable totaled $17.8 million at June 30, 2011 and $24.6 million at September 30, 2010.
 
 
11

 
 
Customer Financing (Contracts and Notes)
 
 
June 30, 2011
 
September 30, 2010
 
 
Recorded
Investment
   
Allowance
   
Net
 
Recorded
Investment
   
Allowance
   
Net
 
(In millions)
                                   
Current maturities
  $ 205.9     $ 36.4     $ 169.5     $ 223.9     $ 39.8     $ 184.1  
Non-current
    155.5       31.7       123.8       210.5       38.6       171.9  
Total
  $ 361.4     $ 68.1     $ 293.3     $ 434.4     $ 78.4     $ 356.0  
 
Customer Financing Information At June 30, 2011
 
Recorded Investment (principal and interest due, net of deferred interest and fees)
 
Total
 
(In millions)
     
Individually evaluated for impairment
  $ 106.3  
Collectively evaluated for impairment
    255.1  
Total recorded investment
  $ 361.4  
 
Allowances for Credit Losses
 
Total
 
(In millions)
     
       
Beginning balance
  $ 78.4  
Charge-offs
    (9.3 )
Recoveries
    0.4  
Provision
    (1.4 )
Ending balance
  $ 68.1  
         
Individually evaluated for impairment
  $ 55.7  
Collectively evaluated for impairment
    12.4  
Total allowances for credit losses
  $ 68.1  
 
Age Analysis of Recorded Investment
 
Contracts
   
Notes
   
Total
 
(In millions)
                 
Past Due:
                 
1-29 days
  $ 3.3     $ 1.9     $ 5.2  
30-59 days
    1.8       1.8       3.6  
60-89 days
    1.5       1.8       3.3  
Over 90 days
    5.6       25.6       31.2  
Total past due
  $ 12.2     $ 31.1     $ 43.3  
Current
    182.7       135.4       318.1  
Total recorded investment
  $ 194.9     $ 166.5     $ 361.4  
                         
Customer financing recorded investment:
                       
Over 90 days and accruing interest
  $ 1.7     $ 0.1     $ 1.8  
Nonaccrual status (not accruing interest)
    16.8       83.9       100.7  
 
Recorded Investment by Credit Quality Indicator
Credit Profile by Internally Assigned Risk Grade
 
Contracts
   
Notes
   
Total
 
(In millions)
                 
Low
  $ 41.9     $ -     $ 41.9  
Medium
    29.3       0.4       29.7  
High (1)
    123.7       166.1       289.8  
Total recorded investment
  $ 194.9     $ 166.5     $ 361.4  
                         
(1) See Alabama impairment discussion below.
 
 
12

 
 
Impaired loans
 
Contracts
   
Notes
   
Total
 
(In millions)
                 
Recorded investment
  $ 6.3     $ 83.9     $ 90.2  
Unpaid principal face
    6.2       85.2       91.4  
Related allowance
    3.5       52.2       55.7  
Average recorded investment
    9.4       87.5       96.9  
                         
Interest income recognized:
                       
Quarter-to-date
                       
Total
  $ 0.2     $ -     $ 0.2  
Cash-basis
    -       -       -  
Year-to-date
                       
Total
  $ 0.6     $ 0.3     $ 0.9  
Cash-basis
    -       0.3       0.3  
 
Alabama Impairment
 
The legality of electronic charitable bingo in Alabama was challenged during 2010 and IGT machines ceased to be operated at the VictoryLand Country Crossing and Greenetrack facilities. In our 2010 second quarter, $53.1 million of impairment was recognized related to Alabama charitable bingo market closures, which included note allowances of $47.6 million, accounts receivable allowances of $2.8 million, and gaming operations equipment impairment of $2.7 million. Further Alabama impairment of $8.2 million was recognized in our 2010 fourth quarter, including note allowances of $4.3 million and equipment impairment of $3.9 million.
 
At June 30, 2011, the recorded investment of impaired Alabama development financing loans totaled $83.9 million and related allowances totaled $51.9 million. Revenues or interest income related to these assets were recorded on a cash basis since our 2010 second quarter as collectability was not reasonably assured.
 
4.          CONCENTRATIONS OF CREDIT RISK
 
Our receivables were concentrated in the following legalized gaming regions at June 30, 2011:
 
North America
     
Nevada
    10 %
Oklahoma
    6  
Alabama
    5  
Other (less than 5% individually)
    28  
      49 %
         
International
       
Argentina
    26 %
Europe
    9  
Australia
    6  
Other (less than 5% individually)
    10  
      51 %
 
5.          INVENTORIES
 
   
June 30,
   
September 30,
 
   
2011
   
2010
 
(In millions)
           
Raw materials
  $ 50.7     $ 54.5  
Work-in-process
    3.4       3.9  
Finished goods
    37.2       39.2  
Total
  $ 91.3     $ 97.6  
 
 
13

 
 
6.          PROPERTY, PLANT AND EQUIPMENT
 
   
June 30,
   
September 30,
 
   
2011
   
2010
 
(In millions)
           
Land
  $ 62.7     $ 62.7  
Buildings
    233.2       230.9  
Leasehold improvements
    16.6       14.6  
Machinery, furniture and equipment
    280.2       286.0  
Gaming operations equipment
    817.1       804.9  
Total
    1,409.8       1,399.1  
                 
Less accumulated depreciation
    (825.5 )     (812.4 )
                 
Property, plant and equipment, net
  $ 584.3     $ 586.7  
 
7.          GOODWILL AND OTHER INTANGIBLES
 
Goodwill
 
Activity by Segment
 
North
             
For The Nine Months Ended June 30, 2011
 
America
   
International
   
Total
 
(In millions)
                 
Beginning balance
  $ 1,042.8     $ 108.8     $ 1,151.6  
Acquisition (See Note 17)
    -       87.9       87.9  
Disposition (See Note 18)
    -       (2.3 )     (2.3 )
Foreign currency/purchase price adjustments
    -       2.1       2.1  
Ending balance
  $ 1,042.8     $ 196.5     $ 1,239.3  
 
Other Intangibles
 
Patent additions in the following table include capitalized legal costs.
 
Additions for the Nine Months
ended June 30, 2011
Business
Combinations
(See Note 17)
Other
Additions
Weighted
Average Life
(In millions, except life)
         
(Years)
Patents
 $        -
  $
0.8
 
5
Developed technology
        12.5
   
          0.5
 
7
Customer relationships
          6.5
   
           -
 
6
Trademarks
          0.8
   
           -
 
3
Total
 $     19.8
  $
1.3
   
 
   
June 30, 2011
   
September 30, 2010
 
         
Accumulated
               
Accumulated
       
Ending Balances
 
Cost
   
Amortization
   
Net
   
Cost
   
Amortization
   
Net
 
(In millions)
                                   
Patents
  $ 382.7     $ 259.6     $ 123.1     $ 387.3     $ 238.8     $ 148.5  
Developed technology
    89.1       51.8       37.3       75.9       46.7       29.2  
Contracts
    25.5       19.0       6.5       26.2       17.9       8.3  
Reacquired rights
    13.4       1.8       11.6       13.4       1.0       12.4  
Customer relationships
    15.2       6.2       9.0       8.8       5.7       3.1  
Trademarks
    2.7       1.4       1.3       3.5       2.9       0.6  
Total
  $ 528.6     $ 339.8     $ 188.8     $ 515.1     $ 313.0     $ 202.1  
 
 
14

 
 
Aggregate amortization expense totaled $11.1 million in the current quarter versus $12.6 million in the prior year quarter, and $34.3 million in the nine months ended June 30, 2011 versus $37.9 million for the prior year period.
 
   
2011
   
2012
   
2013
   
2014
   
2015
 
(In millions)
                             
Estimated annual amortization
  $ 46.7     $ 43.2     $ 39.0     $ 33.9     $ 24.5  
 
8.          FAIR VALUE MEASUREMENTS
 
Financial Assets (Liabilities) Carried at Fair Value
 
   
Fair
                   
   
Value
   
Level 1
   
Level 2
   
Level 3
 
(In millions)
                       
June 30, 2011
                       
Money market funds
  $ 99.0     $ 99.0     $ -     $ -  
Investments in unconsolidated affiliates
    21.5       -       -       21.5  
Derivative assets
    24.7       -       24.7       -  
Derivative liabilities
    (26.7 )     -       (26.7 )     -  
                                 
September 30, 2010
                               
Money market funds
  $ 137.5     $ 137.5     $ -     $ -  
Investments in unconsolidated affiliates
    34.0       12.7       -       21.3  
Derivative assets
    52.1       -       52.1       -  
Derivative liabilities
    (54.3 )     -       (54.3 )     -  
 
Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)
 
    Nine Months Ended June 30,  
    2011     2010  
(In millions)
  Investments
in
Unconsolidated
Affiliates
    Investments
in
Unconsolidated
Affiliates
    Investments
in
 ARS and
Put Rights
 
Beginning balance
  $ 21.3     $ 78.4     $ 21.3  
Total gain (loss):
                       
Included in other income (expense) - other
    (2.1 )     -       0.3  
Included in other comprehensive income
    0.6       5.6       -  
Purchases, issuances, accretion, settlements
    1.7       1.9       (21.6 )
Ending balance
  $ 21.5     $ 85.9     $ -  
                         
Net change in unrealized gain (loss) included in earnings related to instruments still held
  $ (2.1 )   $ -     $ -  
 
Valuation Techniques and Balance Sheet Presentation
 
Money market funds were valued based on quoted market prices in active markets and are primarily money market securities.
 
Investments in unconsolidated affiliates were valued using quoted market prices when available or DCF models incorporating market participant assumptions for credit quality and market interest rates and a Black-Scholes or integrated lattice model with assumptions for stock price volatility and default recovery rates. These investments are presented as a component of other noncurrent assets. See Note 2.
 
Investments in ARS were valued using DCF, with certain assumptions related to lack of liquidity and observable market transactions. Related put rights were valued based on the difference between the ARS par and fair value, discounted for the broker’s non-performance risk and the time remaining until the exercise period.  Our entire portfolio of ARS was sold during fiscal 2010.
 
 
15

 
 
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.
 
Financial Assets (Liabilities) Not Carried at Fair Value
 
   
Carrying
   
Fair
   
Unrealized
 
   
Value
   
Value
   
Gain
   
Loss
 
(In millions)
                       
June 30, 2011
                       
Jackpot investments
  $ 400.3     $ 450.3     $ 50.2     $ 0.2  
Contracts & notes receivable
    293.3       295.7       2.4       -