International Game Technology has a market cap of $3.31 billion; its shares were traded at around $11.27 with a P/E ratio of 12.3 and P/S ratio of 1.7. The dividend yield of International Game Technology stocks is 2.1%. International Game Technology had an annual average earning growth of 2.7% over the past 10 years.
Highlight of Business Operations:Acquisition contingent consideration payable related to DoubleDown reaching certain earnings targets was valued with a DCF model applied to the expected payments determined based on probability-weighted internal earnings projections. We applied a rate of probability (10% - 79%) to each scenario, as well as a risk-adjusted discount rate of 19%, to derive the estimated fair value at June 30, 2012. Changes in the projections and/or the probabilities are the most significant assumptions and result in directionally similar changes in the fair value. Discount rate changes cause a directionally opposite change in the fair value. Acquisition contingent consideration payable was presented as a component of other liabilities, $32.0 million current and $68.0 million noncurrent. An increase of $11.1 million to the payable fair value was recorded during the third quarter to contingent acquisition related costs on the income statement along with $14.9 million of accrued retention plan compensation. Changes in fair value were primarily due to the time-value of money and updated probability-weighted internal earnings projections. See Note 17.
Our initial investment of $250.9 million, net of cash acquired, included $225.0 million paid through March 2012, $0.9 million paid in April 2012, and $25.0 million held back for 18 months to provide a source of recovery in the event of certain indemnification claims. Total potential consideration of $500.9 million, net of cash acquired, also provides for maximum earn-out payments of $165.0 million over the next three years dependent on financial performance targets and maximum employee retention payments of $85.0 million to certain DoubleDown employees over the two years following the acquisition.
Increased operating expenses were largely due to additional investment in emerging interactive markets and technology. Operating expenses related to interactive initiatives, including additions from Entraction and DoubleDown, increased $49.6 million, of which acquisition related charges (primarily from DoubleDown) totaled $30.8 million, comprised of contingent employee retention bonuses ($14.9 million) and earn-out valuation adjustment ($11.1 million), amortization of acquired intangibles ($4.7 million), and professional consulting fees. Other operating expenses increased 7% primarily due to bad debt provisions which increased $4.7 million in part because of a prior year credit, and incremental costs related to severance and additional employees.
Increased operating expenses were largely due to additional investment in emerging interactive markets and technology. Operating expenses related to interactive initiatives, including additions from Entraction and DoubleDown, increased $85.4 million, of which acquisition related charges (primarily from DoubleDown) totaled $52.2 million, comprised of contingent employee retention bonuses ($26.7 million) and earn-out valuation adjustment ($11.1 million), amortization of acquired intangibles ($8.6 million), and professional consulting fees ($5.8 million). Other operating expenses increased 4% primarily due to incremental costs related to severance and additional employees, as well as settlement charges of $3.1 million related to the early termination of a distributor arrangement.
Cash and equivalents decreased $218.7 million during the nine months ended June 30, 2012, primarily due to the use of cash for share repurchases of $475.1 million, acquisitions of $233.9 million, primarily DoubleDown, capital expenditures of $170.8 million, and dividends paid of $53.5 million. These decreases were partially offset by cash generated from operations of $327.0 million, debt proceeds of $280.0 million, net proceeds from investments and loans of $94.5 million and net employee stock plan proceeds of $15.1 million.
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