igt_10q-010210.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 2, 2010
 
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 of Incorporation)
(I.R.S. Employer Identification No.)

9295 Prototype Drive
Reno, Nevada 89521
(Address of principal executive offices)

(775) 448-7777
(Registrant’s telephone number, including area code)

www.IGT.com
(Registrant’s website)


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 [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes [   ] No [X]

At February 8, 2010, there were 296.7 million shares of our $.00015625 par value common stock outstanding.
 

TABLE OF CONTENTS
 
 
GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
iii
PART I – FINANCIAL INFORMATION
1
Item 1.    Unaudited Condensed Consolidated Financial Statements
1
CONSOLIDATED INCOME STATEMENTS
1
CONSOLIDATED BALANCE SHEETS
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
FORWARD LOOKING STATEMENTS
26
OVERVIEW
26
RECENTLY ISSUED ACCOUNTING STANDARDS
28
CRITICAL ACCOUNTING ESTIMATES
29
CONSOLIDATED OPERATING 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
37
Item 4.    Controls and Procedures
37
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
43
Item 3. Defaults Upon Senior Securities
43
Item 4. Submission of Matters to a Vote of Security Holders
43
Item 5. Other Information
43
Item 6. Exhibits
44

ii

GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
 
Fiscal dates as presented:
Fiscal dates -- actual:
December 31, 2009
January 2, 2010
December 31, 2008
January 3, 2009
September 30, 2009
October 3, 2009
   
Abbreviation/term as presented
Definition
Anchor
Anchor Gaming
ARS
auction rate securities
AVP®
Advanced Video Platform®
Bonds
7.5% Notes due 2019
bps
basis points
CAD
Canadian dollars
CCSC
Colorado Central Station Casino
CEO
Chief Executive Officer
CFO
Chief Financial Officer
CLS
China LotSynergy Holdings, Ltd.
DCF
Discounted cash flow
Debentures
2.6% Convertible Debentures
EBITDA
earnings before interest, tax, depreciation, and amortization
EPA
Environmental Protection Agency
EPS
earnings per share
ESP
estimated selling price
FASB
Financial Accounting Standards Board
GAAP
generally accepted accounting principles
GSA
Gaming Standards Association
ICR
Interest coverage ratio
IGT
International Game Technology
IP
intellectual property
IRS
Internal Revenue Service
LIBOR
London Inter-Bank Offering Rate
MDA
management’s discussion and analysis
MLD®
3-D Multi-Layer Display
Notes
3.25% Convertible Notes due 2014
OSHA
Occupational Safety & Health Administration
pp
percentage points
SEC
Securities and Exchange Commission
SIP
Stock Incentive Plan
TLR
Total leverage ratio
TPE
Third-party evidence
UK
United Kingdom
US
United States
VIE
variable interest entity
VSOE
vendor specific other evidence
WAP
wide area progressive
*
not meaningful (in table)
 
iii

PART I – FINANCIAL INFORMATION
 
Item 1.
Unaudited Condensed Consolidated Financial Statements
 
CONSOLIDATED INCOME STATEMENTS
 
   
Quarters Ended
 
   
December 31,
 
   
2009
   
2008
 
(In millions, except per share amounts)
 
Revenues
           
Gaming operations
  $ 277.3     $ 313.3  
Product sales
    238.4       288.3  
Total revenues
    515.7       601.6  
Costs and operating expenses
               
Cost of gaming operations
    104.1       151.9  
Cost of product sales
    115.0       143.8  
Selling, general and administrative
    90.0       114.9  
Research and development
    46.7       53.5  
Depreciation and amortization
    19.6       20.0  
Restructuring charges
    0       17.4  
Total costs and operating expenses
    375.4       501.5  
Operating income
    140.3       100.1  
Other income (expense)
               
Interest income
    16.0       16.5  
Interest expense
    (43.2 )     (35.5 )
Other
    (1.0 )     (8.0 )
Total other income (expense)
    (28.2 )     (27.0 )
Income before tax
    112.1       73.1  
Income tax provision
    38.8       11.9  
Net income
  $ 73.3     $ 61.2  
                 
Basic earnings per share
  $ 0.25     $ 0.21  
                 
Diluted earnings per share
  $ 0.25     $ 0.21  
                 
Cash dividends declared per share
  $ 0.06     $ 0.15  
                 
Weighted average shares outstanding
               
Basic
    295.1       293.3  
Diluted
    297.4       293.4  
 
See accompanying notes
1

CONSOLIDATED BALANCE SHEETS
 
   
December 31,
   
September 30,
 
   
2009
   
2009
 
(In millions, except par value)
           
Assets
           
Current assets
           
Cash and equivalents
  $ 173.0     $ 146.7  
Investment securities
    19.6       21.3  
Restricted cash and investments
    84.4       79.4  
Jackpot annuity investments
    67.0       67.2  
Accounts receivable, net
    301.1       334.3  
Current maturities of notes and contracts receivable, net
    170.0       154.8  
Inventories
    150.8       157.8  
Deferred income taxes
    87.0       82.8  
Other assets and deferred costs
    158.3       189.4  
Total current assets
    1,211.2       1,233.7  
Property, plant and equipment, net
    558.0       558.8  
Jackpot annuity investments
    392.7       396.9  
Notes and contracts receivable, net
    258.8       249.4  
Goodwill
    1,152.3       1,151.5  
Other intangible assets, net
    247.2       259.2  
Deferred income taxes
    161.2       172.2  
Other assets and deferred costs
    292.4       306.4  
            Total Assets   $ 4,273.8     $ 4,328.1  
Liabilities and Stockholders' Equity
               
Liabilities
               
Current liabilities
               
Short-term debt
  $ 12.5     $ 5.3  
Accounts payable
    99.8       90.5  
Jackpot liabilities, current portion
    159.8       155.5  
Accrued employee benefits
    11.7       32.8  
Accrued income taxes
    7.4       9.4  
Dividends payable
    17.8       17.8  
Other accrued liabilities
    259.3       313.2  
Total current liabilities
    568.3       624.5  
Long-term debt
    1,943.3       2,014.7  
Jackpot liabilities
    425.8       432.6  
Other liabilities
    201.0       192.7  
Total Liabilities
    3,138.4       3,264.5  
Commitments and Contingencies
               
Stockholders' Equity
               
Common stock: $.00015625 par value; 1,280.0 shares authorized; 337.4 and 337.2 issued; 296.6 outstanding
    0.1       0.1  
Additional paid-in capital
    1,418.2       1,407.5  
Treasury stock at cost: 40.8 and 40.6 shares
    (801.0 )     (799.3 )
Retained earnings
    503.1       447.6  
Accumulated other comprehensive income
    15.2       6.1  
Total IGT Stockholders' Equity
    1,135.6       1,062.0  
Non-Controlling Interests
    (0.2 )     1.6  
Total Equity
    1,135.4       1,063.6  
Total Liabilities and Stockholders' Equity   $ 4,273.8     $ 4,328.1  
 
See accompanying notes
2

CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended December 31,
 
2009
   
2008
 
(In millions)
           
Operations
 
 
   
 
 
Net income
  $ 73.3     $ 61.2  
Adjustments:
               
Depreciation, amortization, and asset charges
    62.7       79.1  
Discounts and deferred issuance costs
    13.8       5.9  
Inventory obsolescence
    2.3       3.4  
Bad debt provisions
    2.7       11.3  
Share-based compensation
    9.0       10.8  
Loss on investments
    (0.1 )     5.3  
Gain on redemption of debt
    0       (2.3 )
Other non-cash items
    (0.4 )     (2.6 )
Excess tax benefits from employee stock plans
    (2.7 )     0  
Changes in operating assets and liabilities, excluding acquisitions:
               
Receivables
    23.3       47.3  
Inventories
    8.8       3.4  
Other assets and deferred costs
    15.7       20.6  
Income taxes, net of employee stock plans
    27.4       (3.6 )
Accounts payable and accrued liabilities
    (58.3 )     (103.3 )
Jackpot liabilities
    (8.8 )     13.0  
Cash from operations
    168.7       149.5  
Investing
               
Capital expenditures
    (53.3 )     (76.0 )
Proceeds from assets sold
    0.8       1.3  
Proceeds from investment securities
    1.9       0  
Jackpot annuity investments, net
    10.8       7.2  
Changes in restricted cash
    (5.0 )     (11.6 )
Loans receivable cash advanced
    (17.7 )     (41.5 )
Loans receivable payments received
    2.1       2.0  
Investments in unconsolidated affiliates
    (4.9 )     (10.3 )
Business acquisitions/VIE deconsolidation
    (1.4 )     (0.2 )
Cash from investing
    (66.7 )     (129.1 )
Financing
               
Debt proceeds
    946.6       440.0  
Debt repayments
    (1,009.2 )     (417.8 )
Employee stock plan proceeds
    2.4       0.1  
Excess tax benefits from employee stock plans
    2.7       0  
Dividends paid
    (17.8 )     (42.9 )
Cash from financing
    (75.3 )     (20.6 )
Foreign exchange rates effect on cash
    (0.4 )     (5.1 )
Net change in cash and equivalents
    26.3       (5.3 )
Beginning cash and equivalents
    146.7       266.4  
Ending cash and equivalents
  $ 173.0     $ 261.1  

See accompanying notes
3

Supplemental Cash Flows Information
 
“Depreciation, amortization, and asset charges” reflected in the cash flows statements are comprised of amounts presented separately on the income statements, plus “depreciation, amortization, and asset charges” included in cost of gaming operations and cost of product sales.
 
Three Months Ended December 31,
 
2009
   
2008
 
(In millions)
           
Jackpot funding
 
 
   
 
 
Change in jackpot liabilities
  $ (8.8 )   $ 13.0  
                 
Jackpot annuity purchases
    (2.4 )     (5.8 )
Jackpot annuity proceeds
    13.2       13.0  
Net change in jackpot annuity investments
    10.8       7.2  
Net jackpot funding
  $ 2.0     $ 20.2  
Capital expenditures
               
Property, plant and equipment
  $ (5.5 )   $ (17.1 )
Gaming operations equipment
    (46.3 )     (57.3 )
Intellectual property
    (1.5 )     (1.6 )
Total
  $ (53.3 )   $ (76.0 )
Payments
               
Interest
  $ 41.1     $ 28.0  
Income taxes
    11.7       25.1  
Non-cash investing and financing items:
               
Accrued capital asset additions
  $ 2.7     $ 5.0  
Interest accretion for jackpot annuity investments
    6.3       7.3  
                 
Business acquisitions/purchase price adjustments and
               
VIE deconsolidations
               
Fair value of assets
  $ (0.8 )   $ 0.2  
Fair value of liabilities
    (2.2 )     0  
 
See accompanying notes
4

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 present 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 includes subsequent events evaluated through the date of financial statement issuance on February 11, 2010 and should be read in conjunction with our most recent Annual Report on Form 10-K.
 
Our fiscal year is reported on a 52/53-week period that ends 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.  Fiscal 2010 will contain 52 weeks and our results for the current first quarter contained 13 weeks versus 14 weeks in the prior year quarter.
 
 
Period End
 
Presented as
 
Actual
Current quarter
December 31, 2009
 
January 2, 2010
Prior year quarter
December 31, 2008
 
January 3, 2009
Prior fiscal year end
September 30, 2009
 
October 3, 2009
 
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.
 
5

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Recently Issued Accounting Standards That Have Been Adopted
 
Fair Value Measurements
 
In September 2006, new accounting guidance was issued which refined the definition of fair value, established a framework for measuring fair value, and expanded disclosures about fair value measurements. The adoption of this guidance for non-financial assets and liabilities beginning October 1, 2009 did not have a material impact on our results of operations, financial position or cash flows.
 
Revenue Recognition For Software-enabled Products and Multi-element Arrangements
 
In October 2009, the FASB issued new revenue recognition accounting standards with respect to certain software-enabled products and multi-element arrangements. We elected to early adopt this new guidance prospectively for new or materially modified arrangements entered into on or after the beginning of our first quarter of fiscal 2010. For transactions entered into prior to the first quarter of fiscal 2010, revenues will continue to be recognized based on prior revenue recognition guidance.
 
Under the new guidance, tangible products, containing both software and nonsoftware components that function together to deliver a tangible product’s essential functionality, will no longer be subject to software revenue accounting. The new guidance also established a more economically aligned model for allocating revenues among multiple deliverables in a multi-element arrangement, based on relative selling prices. In order of preference, relative selling prices will be estimated based on VSOE, TPE, or management’s ESP, and the residual method is no longer allowed.
 
Most of our products and services qualify as separate units of accounting, and the new guidance does not change this premise. When VSOE or TPE is not available, generally for new or highly customized offerings and solutions, estimated selling price is the amount we would sell the product or service for individually. The determination of ESP is made based on our normal pricing and discounting practices, which consider multiple factors, such as market conditions, competitive landscape, internal costs, and profit objectives.
 
Under the new guidance, revenues for machines and other software-enabled equipment in certain bundled arrangements will no longer be deferred because VSOE is not available for an undelivered element. Generally, revenues allocated to non-software elements will be recognized upon delivery and customer acceptance, and only revenues allocated to software elements will require deferral and recognition over the lease or license term.
 
Although this new accounting guidance is not currently expected to have a significant effect on the timing or amount of revenues in periods after the initial adoption, the impact is dependent upon the prevalence of future multi-element arrangements and the evolution of new sales strategies. Adoption of the new revenue recognition guidance for the first quarter of fiscal 2010 resulted in $10.4 million of revenues which would have been recognized in later periods under the prior guidance. Pro forma revenues that would have been reported under the prior accounting guidance are reflected in the following table:
 
    Quarter Ended  
    December 31, 2009  
   
As
Reported
 
Pro
Forma
 
(In millions)
           
Revenues:
           
Gaming operations
  $ 277.3     $ 270.4  
Product Sales
    238.4       234.9  
Total
  $ 515.7     $ 505.3  
 
6

Participating Securities in Share-Based Payment Transactions
 
At the beginning of fiscal 2010, we adopted new accounting guidance issued in June 2008 for determining whether instruments granted in share-based payment transactions are participating securities which should be included in the computation of EPS using the two-class method (see Note 13). Certain restricted stock granted under our employee SIP (see Note 6) is considered a participating security because it carries non-forfeitable rights to dividends. The adoption of this guidance was insignificant to our financial statements and the effect of the required retrospective application for prior periods presented is outlined in the table below at the end of this section.
 
Business Combinations and Noncontrolling Interests
 
At the beginning of fiscal 2010, we adopted new accounting guidance issued in December 2007 revising the method of accounting for a number of aspects of business combinations and noncontrolling interests (i.e. minority interests), such that more assets and liabilities will be measured at fair value as of the acquisition date. Certain contingent consideration liabilities will require remeasurement at fair value in each subsequent reporting period. Noncontrolling interests will initially be measured at fair value and classified as a separate component of equity.
 
Acquisition related costs, such as fees for attorneys, accountants, and investment bankers, will be expensed as incurred and no longer be capitalized as part of the business purchase price. For all acquisitions, regardless of the consummation date, deferred tax assets and uncertain tax position adjustments occurring after the measurement period will be recorded as a component of income tax expense, rather than adjusted through goodwill. For business combinations and asset purchases, the impact of this guidance on our results of operations or financial position will vary depending on the specifics of each transaction.
 
This adoption did not have a material impact on our consolidated financial position, results of operations or cash flows. Income attributable to the noncontrolling interests is presented as a component of other income (expense) as it was not significant to our consolidated operating results. The required retrospective presentation of noncontrolling interests as a separate component of stockholders’ equity, rather than liabilities, is outlined in the table below at the end of this section.
 
Convertible Debt Instruments
 
At the beginning of fiscal 2010, we adopted new accounting standards issued in May 2008 requiring the separation of liability (debt) and equity (conversion option) components for convertible debt instruments that may settle in cash upon conversion. This guidance requires separation of the liability and equity components to reflect an effective nonconvertible borrowing rate when the debt was issued.
 
We estimated fair value of our Debentures and Notes using similar debt instruments at issuance that did not have a conversion feature and allocated an equity component included in paid-in capital that represents the estimated fair value of the conversion feature at issuance.
 
The adoption of this new accounting guidance increased first quarter noncash interest expense $9.3 million for fiscal 2010 and $5.1 million for fiscal 2009. On an annual basis for fiscal 2010 and 2009, noncash interest expense will increase approximately $30.0 million and fiscal 2009 Debenture repurchase gains decrease approximately $5.0 million, reducing diluted EPS approximately $0.06 for fiscal 2010 and $0.08 for 2009.
 
Additionally, the new guidance decreased long-term debt, deferred tax assets and deferred offer costs and increased stockholders’ equity. The effects of the required retrospective application for prior periods presented are outlined in the table below at the end of this section as it relates to our Debentures and Notes (see Note 10). The adjustment to long-term debt represents the unamortized balance of the revised discount.
 
7

Retrospective Application of New Accounting Standards Adopted at the Beginning of Fiscal 2010
 
         
Adjustments
       
   
As
Previously
Reported
   
Convertible
Debt
   
Non-
controlling
Interests
   
Partici-
pating
 Securities
   
As
Currently
Presented
 
(In millions, except per share amounts)
                             
                               
INCOME STATEMENT
                             
For the Three Months Ended December 31, 2008
                             
Interest expense
  $ (30.4 )   $ (5.1 )   $ -     $ -     $ (35.5 )
Other income (expense), net
    (5.9 )     (2.1 )     -       -       (8.0 )
Income before tax
    80.3       (7.2 )     -       -       73.1  
Income tax provision
    14.6       (2.7 )     -       -       11.9  
Net income
    65.7       (4.5 )     -       -       61.2  
                                         
Basic EPS
  $ 0.22     $ (0.01 )     -       -     $ 0.21  
Diluted EPS
    0.22       (0.01 )     -       -       0.21  
                                         
Diluted weighted average shares outstanding
    293.7       -       -       (0.3 )     293.4  
                                         
BALANCE SHEET
                                       
At September 30, 2009
                                       
Deferred income taxes (noncurrent)
  $ 227.3     $ (55.1 )   $ -     $ -     $ 172.2  
Other assets and deferred costs (noncurrent)
    311.4       (5.0 )     -       -       306.4  
Total assets
    4,388.2       (60.1 )     -       -       4,328.1  
                                         
Long-term debt
    2,169.5       (154.8 )     -       -       2,014.7  
Other liabilities
    194.3       -       (1.6 )     -       192.7  
Total liabilities
    3,420.9       (154.8 )     (1.6 )     -       3,264.5  
                                         
Paid-in capital
    1,264.1       143.4       -       -       1,407.5  
Retained earnings
    496.3       (48.7 )     -       -       447.6  
Total equity
    967.3       94.7       1.6       -       1,063.6  
                                         
STATEMENT OF CASH FLOWS
                                       
For the Three Months Ended December 31, 2008
                                       
Operations
                                       
Net income
  $ 65.7     $ (4.5 )   $ -     $ -     $ 61.2  
Adjustments:
                                       
Other non-cash items
    (0.8 )     -       (1.8 )     -       (2.6 )
Discounts and deferred issuance costs
    0.8       5.1       -       -       5.9  
Gain on redemption of debt
    (4.4 )     2.1       -       -       (2.3 )
Changes in operating assets and liabilities:
                                       
Accounts payable and accrued liabilities
    (105.1 )     -       1.8       -       (103.3 )
Income taxes, net of employee stock plans
    (0.9 )     (2.7 )     -       -       (3.6 )
 
Recently Issued Accounting Standards Not Yet Adopted
 
Consolidation of Variable Interest Entities
 
In June 2009, the FASB issued new guidance which requires us to reassess our primary beneficiary position for all VIE arrangements based on qualitative factors on an on-going basis. This guidance is effective beginning with our first quarter of fiscal 2011 and must be adopted through a cumulative-effect adjustment (with a retrospective option). We continue to evaluate the extent to which this guidance will impact our results of operations, financial position, or cash flows.
 
Fair Value Measurements
 
In January 2010, the FASB issued new guidance which will require added disclosures related to assets and liabilities carried at fair value to identify significant transfers between Level 1 and Level 2, as well as provide purchases, sales, issuances, and settlements within the Level 3 reconciliation. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009 or IGT’s second quarter of fiscal 2010.
 
8

3.   VARIABLE INTEREST ENTITIES AND AFFILIATES
 
Variable Interest Entities

As the primary beneficiary, we consolidate our VIE WAP trusts in New Jersey that are responsible for administering jackpot payments to winners. The VIE trust consolidations increase jackpot liabilities and related assets, as well as interest income and equivalent offsetting interest expense. Consolidated VIE trust assets and equivalent liabilities totaled $88.3 million at December 31, 2009 and $91.3 million at September 30, 2009.
 
Investments in Unconsolidated Affiliates
 
China LotSynergy Holdings, Ltd.
 
At December 31, 2009, our investments in CLS stock and convertible notes were accounted for as available-for-sale securities reflected in the aggregate table below. We determined that no features of the convertible notes met the definition of a derivative requiring bifurcation at December 31, 2009. See Note 15 about related foreign currency derivatives and Note 16 for factors related to fair value measurements.
 
For our equity method joint ventures with CLS, IGT Synergy Holding Ltd. and Asiatic Group Ltd., as of and for the three months ended December 31, 2009, we recognized a loss of $0.1 million and $8.4 million remains to be funded on our capital commitment.
 
Aggregate Available-for-sale Investments in Unconsolidated Affiliates
 
December 31, 2009
 
Adjusted
Cost
   
Unrealized
gain (loss)
   
Fair
Value
 
(In millions)
                 
CLS Stock
  $ 12.2     $ 4.4     $ 16.6  
CLS Convertible Note
    78.6       5.6       84.2  
Total
  $ 90.8     $ 10.0     $ 100.8  
 
4.   INVENTORIES
 
   
December 31,
   
September 30,
 
   
2009
   
2009
 
(In millions)
           
Raw materials
  $ 80.1     $ 74.9  
Work-in-process
    7.4       6.7  
Finished goods
    63.3       76.2  
Total
  $ 150.8     $ 157.8  
 
9

5.   PROPERTY, PLANT AND EQUIPMENT
 
   
December 31,
   
September 30,
 
   
2009
   
2009
 
(In millions)
           
Land
  $ 62.7     $ 62.7  
Buildings
    230.4       230.0  
Leasehold improvements
    15.0       14.5  
Machinery, furniture and equipment
    295.1       300.2  
Gaming operations equipment
    847.9       832.4  
Total
    1,451.1       1,439.8  
Less accumulated depreciation
    (893.1 )     (881.0 )
Property, plant and equipment, net
  $ 558.0     $ 558.8  
 
 
6.   SHARE-BASED COMPENSATION
 
The amount, frequency, and terms of share-based awards may vary based on competitive practices, operating results, and government regulations. New IGT common shares are issued upon option exercises or restricted share grants. Our current practice is generally to grant restricted share awards in the form of units without dividends. Forfeitures are typically due to employee terminations.
 
On November 4, 2009, IGT granted 2.7 million employee stock options with an exercise price of $18.60 per share in exchange for the 5.3 million underwater employee stock options surrendered in a shareholder approved exchange offer that expired on November 3, 2009. The newly granted options have a six-year contractual term and will vest ratably over two years. The exchange ratio was calculated based on the fair values of the options surrendered and issued under a value-for-value exchange and incremental compensation expense recognized was not material. In connection with the exchange, we recorded $1.4 million of deferred tax benefits.
 
At December 31, 2009, shares available for grant under the IGT SIP totaled 16.0 million and we have $102.4 million of unrecognized share-based compensation expected to be recognized over a weighted average period of 2.0 years. SIP activity is reflected below as of and for the three months ended December 31, 2009.
 
 
       
Weighted Average
       
               
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
Options  
Shares
   
Price
   
Term
   
Value
 
   
(thousands)
   
(per share)
   
(years)
   
(millions)
 
Outstanding at beginning of fiscal year
    18,022     $ 26.88              
Granted
    3,570       18.97              
Exercised
    (202 )     12.03              
Forfeited
    (217 )     35.53              
Expired
    (177 )     19.51              
Stock options exchange:
                           
Granted
    2,653       18.60              
Cancelled
    (5,306 )     36.35              
Outstanding at end of period
    18,343     $ 21.53       6.7     $ 39.0  
                                 
Vested and expected to vest
    18,077     $ 21.59       6.7     $ 38.4  
                                 
Exercisable at end of period
    7,585     $ 26.72       4.5     $ 9.8  
 
10

 
       
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
    2,000     $ 22.60              
Granted
    1,332       18.38              
Vested
    (464 )     25.12              
Forfeited
    (123 )     36.85              
Outstanding at end of period
    2,745     $ 19.57       1.9     $ 51.5  
                                 
Expected to vest
    2,691     $ 19.60       2.0     $ 50.5  
 
 
7.   ALLOWANCE FOR RECEIVABLES
 
   
December 31,
   
September 30,
 
   
2009
   
2009
 
(In millions)
           
Allowance for doubtful accounts
  $ 24.0     $ 23.4  
                 
Allowance for doubtful notes and contracts
               
Current
  $ 23.8     $ 22.6  
Non-current
    10.8       10.6  
    $ 34.6     $ 33.2  
 
 
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 are concentrated in the following legalized gaming regions at December 31, 2009:
 
North America
     
International
   
Alabama
12
%
 
Argentina
22
%
Nevada
9
   
Europe
7
 
Oklahoma
6
   
Other Latin America
6
 
Pennsylvania
5
   
Other (less than 5% individually)
8
 
Other (less than 5% individually)
25
     
43
%
 
57
%
       
 
Our net carrying amount for development financing and accounts receivable extended in Alabama to charitable bingo properties was approximately $83.0 million at December 31, 2009. The legality of the operations of these properties has been challenged by the Governor’s Task Force on Illegal Gambling.
 
11

Auction Rate Securities
 
After $1.9 million par were called during the first quarter just ended, we held $19.7 million par of trading ARS along with corresponding put rights at December 31, 2009. The carrying fair values totaled $16.3 million for ARS and $3.3 million for put rights at December 31, 2009. See Note 16 for our valuation techniques and assumptions. The following changes in fair value were included in other income (expense):
 
 
ª
$0.1 million net gain ($0.4 million ARS gain and $0.3 million put loss) for the quarter ended December 31, 2009
 
 
ª
$1.5 million net loss ($6.2 million ARS loss and $4.7 million put gain) for the quarter ended December 31, 2008
 
9.   GOODWILL AND OTHER INTANGIBLES
 
Goodwill
 
Activity by Segment
 
North
             
Three Months Ended December 31, 2009
 
America
   
International
   
Total
 
(In millions)
                 
Beginning balance
  $ 1,042.8     $ 108.7     $ 1,151.5  
Foreign currency adjustments
    -       0.8       0.8  
Ending balance
  $ 1,042.8     $ 109.5     $ 1,152.3  
 
 
Other Intangibles
 
During the quarter ended December 31, 2009, we added $0.7 million for capitalized patent legal costs with a weighted average life of 6 years.
 
   
December 31, 2009
   
September 30, 2009
 
    Accumulated     Accumulated  
Balances
 
Cost
   
Amortization
   
Net
   
Cost
   
Amortization
   
Net
 
(In millions)
                                   
Finite lived intangible assets
                               
Patents
  $ 396.4     $ 214.3     $ 182.1     $ 396.3     $ 205.7     $ 190.6  
Developed technology
    76.7       39.7       37.0       76.7       37.3       39.4  
Contracts
    26.5       16.3       10.2       26.4       15.7       10.7  
Reacquired rights
    13.4       0.3       13.1       13.4       0.1       13.3  
Customer relationships
    8.8       5.0       3.8       8.8       4.8       4.0  
Trademarks
    3.6       2.6       1.0       3.6       2.4       1.2  
Total
  $ 525.4     $ 278.2     $ 247.2     $ 525.2     $ 266.0     $ 259.2  
 
Aggregate amortization expense totaled $12.8 million in the current quarter versus $11.5 million in the prior year quarter.
 
 
2010
2011
2012
2013
2014
(In millions)
         
Estimated annual amortization
$50.8
$44.5
$39.5
$36.0
$32.0

12

10.   CREDIT FACILITIES AND INDEBTEDNESS
 
 
Outstanding Debt
 
December 31,
2009
   
September 30,
2009
 
(In millions)
           
Domestic credit facility
  $ 737.0     $ 100.0  
Foreign credit facilities
    6.7       5.3  
Debentures
    5.8       707.0  
Notes
    850.0       850.0  
Bonds
    500.0       500.0  
Total principal
  $ 2,099.5     $ 2,162.3  
Debentures discount
    -       (2.7 )
Notes discount
    (145.2 )     (152.1 )
Bonds discount
    (2.6 )     (2.6 )
Swap fair value adjustment (see Note 15)
    4.1       15.1  
Total long-term debt, net
  $ 1,955.8     $ 2,020.0  
 
IGT was in compliance with all applicable debt covenants at December 31, 2009. Embedded features of all debt agreements were evaluated and did not require bifurcation or had only a nominal value at December 31, 2009.
 
At the beginning of fiscal 2010, we adopted new accounting standards requiring the separation of liability (debt) and equity (conversion option) components of our convertible debt instruments to reflect an effective nonconvertible borrowing rate when the debt was issued. See Note 2 for prior period amounts retrospectively recast under the new standards.
 
Domestic Credit Facility
 
At December 31, 2009, $0.7 billion was drawn ($0.6 billion extended and $0.1 billion non-extended), $1.1 billion was available, and $3.6 million was reserved for letters of credit on our domestic revolving credit facility. The outstanding amount carried a 2.54% weighted average interest rate.
 
Interest under the credit facility is paid at least quarterly with rates and facility fees based on our public debt ratings or debt to capitalization ratio. Currently, extended commitments bear interest at LIBOR plus 260 bps with a facility fee of 65 bps and non-extended commitments bear interest at LIBOR plus 37.5 bps with a facility fee of 12.5 bps.
 
Foreign Credit Facilities

At December 31, 2009, $6.7 million was drawn at a weighted average rate of 1.38% and $41.4 million was available under our three revolving credit facilities in Japan and $9.0 million was available under a revolving credit facility in Australia. These foreign credit facilities generally renew annually and are guaranteed by the parent company, International Game Technology, with maturities in January, April, and August for Japan and in March for Australia.
 
2.6% Convertible Debentures
 
On December 15, 2009, $701.2 million in aggregate principal of Debentures were validly tendered under the holders’ put option and accepted by IGT for payment. On December 21, 2009, IGT gave call notice to the remaining Debenture holders and completed final redemption of the remaining $5.8 million aggregate outstanding principal on February 4, 2010.
 
As recast, the equity component totaled $43.7 million and the effective interest rate on the debt component was 6.2%. As of December 31, 2009, the discount was fully amortized. For the three months ended December 31, 2009 and 2008, respectively, the contractual interest expense totaled $3.8 million and $5.8 million and the discount amortization totaled $2.7 million and $5.2 million. The first quarter of fiscal 2009 also included $2.3 million (as recast) in other income (expense) related to gains on Debentures repurchased.
 
13

3.25% Convertible Notes
 
As recast, the equity component totaled $99.7 million and the effective interest rate on the debt component was 8.7%. The contractual interest expense totaled $6.9 million and interest expense related to the discount amortization totaled $6.9 million for the first quarter of fiscal 2010. The remaining discount amortization period was 4.3 years at December 31, 2009.

The market price condition for convertibility of our Notes was not met and there were no related note hedges or warrants exercised at December 31, 2009.
 
7.5% Bonds
 
Interest rate swaps executed in conjunction with our 7.5% Bonds due 2019 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 financial position or results of future operations.
 
Bally
 
2004 Federal District Court of Nevada
 
On December 7, 2004, IGT filed a complaint in US District Court for the District of Nevada, alleging that defendants Alliance Gaming Corp., Bally Gaming Int'l, Inc., and Bally Gaming, Inc. infringed six US patents held by IGT: US Patent Nos. 6,827,646; 5,848,932; 5,788,573; 5,722,891; 6,712,698; and 6,722,985. On January 21, 2005, defendants filed an answer denying the allegations in the complaint and raising various affirmative defenses to IGT's asserted claims. Defendants also asserted fourteen counterclaims against IGT, including counterclaims for a declaratory judgment of non-infringement, invalidity, and unenforceability of the asserted patents, and for antitrust violations and intentional interference with prospective business advantage. IGT 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. Consequently, a trial on Bally’s antitrust and unfair competition counterclaims has not yet been scheduled.
 
14

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. 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.
 
2006 Federal District Court of Nevada
 
On September 5, 2006, Bally Gaming, Inc. filed a complaint in US District Court for the District of Nevada alleging that IGT is infringing US Patent No. 7,100,916, entitled “Indicator Wheel System.”  The products named in the complaint are IGT’s gaming machines with “wheel” features, including, without limitation, Wheel of Fortune®, Wheel of Gold®, The Addams Family™, American Bandstand®, The Apprentice™,  Dilbert's™ Wheelbert™, Drew Carey Great Balls of Cash™, Elvira®, I Dream of Jeannie®, I Love Lucy™, Indiana Jones™: Raiders of the Lost Ark™, M*A*S*H*™, Megabucks® with Morgan Fairchild, Regis On the Town™, Sinatra™ and The Twilight Zone®  gaming machines. The lawsuit seeks unspecified monetary damages and an injunction. On October 6, 2006, IGT filed an answer and counterclaims denying infringement and seeking a declaration that the patent is invalid and non-infringed. On September 9, 2008, the Court granted IGT’s motion for summary judgment of invalidity and final judgment in IGT’s favor was entered on October 3, 2008. Bally appealed the decision to the US Court of Appeals for the Federal Circuit. On October 22, 2009, the Federal Circuit affirmed the District Court’s summary judgment ruling.
 
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. Pursuant to agreement of the parties, this matter has been stayed.
 
Brochu v. Loto Quebec
 
Loto Quebec commenced an action in warranty against VLC, Inc., a wholly-owned subsidiary of IGT, and another manufacturer of video lottery machines in October 2003, in the Superior Court of the Province of Quebec, District of Quebec, seeking indemnification for any damages that may be awarded against Loto Quebec in a class action suit, also filed in the Superior Court of the Province of Quebec. The class action claim against Loto Quebec, to which neither IGT nor any of its affiliates are parties, was filed by Jean Brochu on behalf of himself and a class of other persons who allegedly developed pathological behaviors through the play of video lottery machines made available by Loto Quebec in taverns and other public locations. In this action, the plaintiff seeks to recover on behalf of the class damages of approximately CAD$578.7 million, representing CAD$4,863 per class member, and CAD$119.0 million in punitive damages. Loto Quebec filed its Plea in Defense in the main action in February 2006. On August 1, 2008, Loto Quebec filed a discontinuance of the action in warranty against VLC. Notwithstanding the discontinuance, Loto Quebec may still pursue the claims it asserted, or could have asserted, in the action in warranty through arbitration against VLC. The trial of the class action against Loto Quebec commenced on September 15, 2008.
 
15

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 not yet appointed a lead plaintiff pursuant to the Private Securities Litigation Reform Act.
 
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 assert 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 seek an unspecified amount of damages and allege similar facts as the securities class action lawsuit. The complaints additionally allege 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 have moved to dismiss that complaint.
 
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, asserts claims against various current and former officers and directors for breach of fiduciary duties and unjust enrichment. The complaint generally makes the same allegations as the federal derivative complaints and seeks an unspecified amount of damages. The parties have stipulated to stay this action pending the motions to dismiss in the above-mentioned consolidated federal derivative action.
 
In a letter dated October 7, 2009 to the Company’s Board of Directors, a shareholder made factual allegations similar to those set forth in the above derivative and securities class actions and demanded that the Board investigate, address and remedy the harm allegedly inflicted on IGT. In particular, the letter 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.
 
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 is currently pending. Defendants need not respond until the Court rules on the consolidation motion.
 
16

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. Plaintiffs currently have a motion pending seeking reconsideration of the dismissal of their state law claims, and IGT has a motion pending seeking to strike plaintiffs’ demand for a jury trial. Trial has been scheduled to begin on June 1, 2010.
 
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, 2009 totaled $51.1 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 and guarantees not reflected in our balance sheet. We do not expect any material losses to result from these arrangements and are not dependent on off-balance sheet financing arrangements to fund our operations.
 
Performance Bonds
 
Performance bonds outstanding related to gaming operations totaled $5.8 million at December 31, 2009. We are liable to reimburse the bond issuer in the event of exercise due to nonperformance.
 
17

Letters of Credit
 
Outstanding letters of credit issued under our line of credit to ensure payment to certain vendors and governmental agencies totaled $3.6 million at December 31, 2009.
 
IGT Licensor Arrangements
 
Our sales agreements that include software and IP licensing arrangements may provide a clause whereby IGT indemnifies 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 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,
 
2009
   
2008
 
(In millions)
           
Balance at beginning of year
  $ 7.9     $ 8.4  
Reduction for payments made
    (2.1 )     (2.2 )
Accrual for new warranties issued
    3.1       3.0  
Adjustments for pre-existing warranties
    (1.8 )     (0.9 )
Balance at end of period
  $ 7.1     $ 8.3  
 
 
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. The provision differs from income taxes currently payable because certain items of income and expense are recognized in different periods for financial statement purposes than for tax return purposes. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized.
 
Our effective tax rate was 34.6% and 16.3% for the quarters ended December 31, 2009 and 2008, respectively. The prior year quarter tax rate was lower because of nonrecurring tax benefits, including significant settlements with the IRS, the reversal of accrued interest related to a tax accounting method change application and other discrete items in fiscal 2009.
 
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We file income tax returns in the US federal, and various state, local and foreign jurisdictions. The IRS began an audit of our US federal income tax returns for fiscal years 2002 through 2005 in 2009. We are also subject to examination in state and foreign jurisdictions for the same years. Based on the outcome of taxing authority examinations and statute of limitations expiring in specific jurisdictions, it is reasonably possible that unrecognized tax benefits could significantly change within the next 12 months.  However, an estimate of the amount of possible change cannot be made at this time. 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.
 
At December 31, 2009, we had $69.0 million of gross unrecognized tax benefits excluding related accrued interest and penalties of $47.8 million. As of December 31, 2009, $83.7 million of our unrecognized tax benefits, including related accrued interest and penalties, would affect our effective tax rate, if recognized. During the three months ended December 31, 2009, our unrecognized tax benefits increased $1.2 million, and related interest and penalties increased $1.3 million.
 
 
13.   EARNINGS PER SHARE RECONCILIATION
 
   
2009
   
2008
 
(In millions, except per share amounts)
           
Net income available to common shares (1)
  $ 73.3     $ 61.2  
                 
Basic weighted average shares outstanding
    295.1       293.3  
Dilutive effect of non-participating share-based awards
    2.3       0.1  
Diluted weighted average common shares outstanding
    297.4       293.4  
                 
Basic earnings per share
    $0.25       $0.21  
Diluted earnings per share
    $0.25       $0.21  
Weighted average antidilutive share-based awards
    shares excluded from diluted EPS
    9.8       19.3  
                 
(1) Net Income available to participating securities was not significant
 
 
 
14.   OTHER COMPREHENSIVE INCOME
 
   
Quarters Ended
 
   
December 31,
 
   
2009
   
2008
 
(In millions)
           
Net income
  $ 73.3     $ 61.2  
Currency translation adjustments
    3.1       (28.9 )
Investment unrealized gains (losses)
    6.0       (5.2 )
Comprehensive income
  $ 82.4     $ 27.1  
 
 
15.   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 $28.1 million at December 31, 2009 and $24.9 million at September 30, 2009.
 
In May 2007, we executed 5-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). The notional amount of foreign currency contracts hedging this exposure totaled $49.9 million for which there was no ineffectiveness during the quarter ended December 31, 2009. The component of gain/loss excluded from our assessment of hedge effectiveness was immaterial.
 
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Interest Rate Management
 
In June 2009, we executed $250.0 million notional value of interest rate swaps, which 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 Bonds. Our assessment determined that the interest rate swaps are highly effective.
 
Presentation of Derivative Amounts
 
 
Balance Sheet Location and Fair Value
December 31,
2009
 
September 30,
2009
(In millions)
         
Non-designated Hedges
         
Foreign currency contracts:  Other assets (current)
 $   0.3
   
$   0.2
 
Foreign currency contracts:  Other liabilities (current)
     0.5
   
     0.8
 
Designated Hedges
         
Foreign currency contracts:  Other liabilities (current)
 $   0.1
   
$   0.1
 
Interest rate swaps:  Other assets (noncurrent)
     3.3
   
   14.8
 
Interest rate swaps:  Long-term debt
     4.1
   
   15.1
 
 
 
Quarter Ended
Income Statement Location and Gain (loss)
December 31, 2009*
(In millions)
   
Non-designated Hedges
   
Foreign currency contracts:  Other income (expense)
 $  0.4
 
Designated Hedges
   
Foreign currency contracts:  Other income (expense)
 $  0.1
 
Interest rate swap - ineffectiveness:  Other income (expense)
     0.5
 
Interest rate swap - effectiveness:  Interest expense
     2.3
 
     
*The prior year quarter not presented was prior to our adoption of revised disclosure requirements.
 
 
16.   FAIR VALUE MEASUREMENTS
 
Financial Assets (Liabilities) Carried at Fair Value
 
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
(In millions)
                       
December 31, 2009
                       
Money market funds
  $ 82.8     $ 82.8     $ -     $ -  
Investments in unconsolidated affiliates
    100.8       16.6       -       84.2  
Investments in ARS and put rights
    19.6       -       -       19.6  
Derivative assets
    3.6       -       3.6       -  
Derivative liabilities
    (4.7 )     -       (4.7 )     -  
                                 
September 30, 2009
                               
Money market funds
  $ 82.6     $ 82.6     $ -     $ -  
Investments in unconsolidated affiliates
    94.1       15.7       -       78.4  
Investments in ARS and put rights
    21.3       -       -       21.3  
Derivative assets
    15.0       -       15.0       -  
Derivative liabilities
    (16.0 )     -       (16.0 )     -  
 
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Reconciliation of Items Carried at Fair Value Using Significant Unobservable Inputs (Level 3)
 
   
December 31, 2009
   
December 31, 2008
 
 
Quarter Ended
 
Investments in Unconsolidated
Affiliates
   
Investments
in
 ARS
   
Investments in Unconsolidated
Affiliates
   
Investments
in
 ARS
 
(In millions)
                       
Beginning balance
  $ 78.4     $ 21.3     $ 80.4     $ 19.6  
Total gain (loss):
                               
Included in other income (expense) - other
    -       0.1       (3.9 )     (1.5 )
Included in other comprehensive income
    5.0       -       (6.6 )     2.0  
Purchases, issuances, accretion, settlements
    0.8       (1.8 )     1.2       -  
Ending balance
  $ 84.2     $ 19.6     $ 71.1     $ 20.1  
                                 
Net change in unrealized gain (loss) included
                         
in earnings related to instruments still held
  $ -     $ 0.1     $ (3.9 )   $ (1.5 )
 
Valuation Techniques and Balance Sheet Presentation
 
Investments in unconsolidated affiliates carried at fair value are estimated using quoted market prices when available or DCF models incorporating market participant assumptions, including credit quality and market interest rates and/or a Black Scholes formula and lattice models with certain assumptions, such as stock price and volatility. These investments are presented as a component of other assets. See Note 3.
 
Investments in ARS are valued using DCF, with certain assumptions related to lack of liquidity and observable market transactions. Related put rights are 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. The ARS and related put rights are presented as a component of other assets. See Note 8.
 
Derivative assets and liabilities are valued using quoted forward pricing from bank counterparties and LIBOR credit default swap rates for non-performance risk, and approximate the net settlement amount if the contracts were settled at the reporting date. These are presented primarily as components of other assets, other liabilities, and notes payable. See Note 15.
 
Financial Assets (Liabilities) Not Carried at Fair Value
 
   
Carrying
         
Unrealized
 
December 31, 2009
 
Amount
   
Fair Value
 
Gain
   
Loss
 
(In millions)
                       
Jackpot investments
  $ 459.7     $ 501.9     $ 43.1     $ 0.9  
Notes & contracts receivable
    428.8       436.1       7.3       -  
Jackpot liabilities
    (585.6 )     (576.2 )     9.4          
Credit