United
States Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-K
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Fiscal Year Ended October 3, 2009
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
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Nevada
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88-0173041
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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9295
Prototype Drive, Reno, Nevada 89521
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (775) 448-7777
Registrant’s
website: www.IGT.com
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, Par Value $.00015625
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New
York Stock
Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well known seasoned issuer (as defined in
Rule 405 of the Securities Act).
Yes [X]
No [ ]
Indicate
by check mark if registrant is not required to file reports pursuant to Section
13 or 15(d) of Securities Exchange Act of 1934
Yes
[ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]
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]
The
aggregate market value of voting stock held by non-affiliates of the registrant
on April 3, 2009: $3.4 billion.
The
number of shares outstanding of each of the registrant’s classes of common
stock, as of November 30, 2009:
297.0
million shares of common stock at $.00015625 par value.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of our Proxy Statement relating to the 2010 annual shareholders meeting are
incorporated by reference in Part III. Such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the
conclusion of the registrant’s fiscal year ended October 3,
2009.
TABLE OF CONTENTS
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ii
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1
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PART
I
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2
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14
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19
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19
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19
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19
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PART
II
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20
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21
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22
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43
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46
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46
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47
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48
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49
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51
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52
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92
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92
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92
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PART
III
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93
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93
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93
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93
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93
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PART
IV
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94
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Acronym
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Terminology
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Acres
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Acres
Gaming, Inc.
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Anchor
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Anchor
Gaming
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ARS
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auction
rate securities
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ASC
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Accounting
Standards Codification
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ASU
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Accounting
Standards Update
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AVP®
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Advanced
Video Platform®
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AWP
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Amusement
with Prize
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Bonds
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7.5%
Notes due 2019
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bps
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basis
points
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CAD
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Canadian
dollars
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CCSC
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Colorado
Central Station Casino
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CDS
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Central
determination system
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CEO
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Chief
Executive Officer
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CFO
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Chief
Financial Officer
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CLS
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China
LotSynergy Holdings, Ltd.
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CRM
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Customer
relationship marketing
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Cyberview
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Cyberview
Technology, Inc.
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DCF
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discounted
cash flow
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Debentures
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2.6%
Convertible Debentures
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DigiDeal
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DigiDeal
Corporation
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EBIT
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earnings
before interest, tax
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EBITDA
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earnings
before interest, tax, depreciation, and amortization
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EPA
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Environmental
Protection Agency
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EPS
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earnings
per share
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GAAP
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generally
accepted accounting principles
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G2S
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Game-to-System
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GSA
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Gaming
Standards Association
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IGT
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International
Game Technology
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IP
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intellectual
property
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IRS
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Internal
Revenue Service
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LIBOR
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London
Inter-Bank Offering Rate
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LVGI
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Las
Vegas Gaming International
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M-2-1
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Million-2-1
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MDA
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management’s
discussion and analysis
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MLD®
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Multi-Layer
Display
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MLP
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multi
level progressive
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M-P
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multi-player
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MPU
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micro
processor unit
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Notes
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3.25%
Convertible Notes due 2014
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NYSE
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New
York Stock Exchange
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OSHA
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Occupational
Safety & Health Administration
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pp
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percentage
points
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PGIC
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Progressive
Gaming International Corporation
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R&D
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research
and development
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RG
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responsible
gaming
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sbX™
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IGT’s
complete server-based player experience management
solution
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SEC
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Securities
and Exchange Commission
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SIP
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Stock
Incentive Plan
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UK
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United
Kingdom
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US
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United
States
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VIE
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variable
interest entity
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VLT
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video
lottery terminal
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VSOE
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vendor
specific other evidence
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WAP
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wide
area progressive
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WDG
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Walker
Digital Gaming, LLC
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*
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not
meaningful (in
tables)
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FORWARD LOOKING STATEMENTS
This
report contains statements that do not relate to historical or current facts,
but are “forward looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to analyses
and other information based on forecasts of future results and estimates of
amounts not yet determinable. These statements may also relate to future events
or trends, our future prospects and proposed new products, services,
developments, or business strategies, among other things. These statements can
generally (although not always) be identified by their use of terms and phrases
such as anticipate, believe, could, would, estimate, expect, intend, may, plan,
predict, project, pursue, will, continue, and other similar terms and phrases,
as well as the use of the future tense.
Examples
of forward looking statements in this report include, but are not limited to,
the following categories of expectations about:
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ª
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our
ability to introduce new products and their impact on replacement
demand
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ª
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the
timing, features, benefits, and expected success of new product
introductions
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ª
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growth
of our business through technology and intellectual property (IP)
acquisition
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ª
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our
leadership position in the market
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ª
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the
advantages offered to customers by our anticipated products and product
features
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ª
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gaming
growth, expansion, and new market
opportunities
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ª
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fluctuations
in future gross margins and tax
rates
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ª
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increasing
product sales or machine placements
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ª
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legislative
or regulatory developments and related market
opportunities
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ª
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available
capital resources to fund future operating requirements, capital
expenditures, payment obligations, and share
repurchases
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ª
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the
timing and amount of future share repurchases and
dividends
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ª
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losses
from off-balance sheet arrangements
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ª
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financial
returns to shareholders related to management of our
costs
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Actual
results could differ materially from those expressed or implied in our forward
looking statements. Our future financial condition and results of operations, as
well as any forward looking statements, are subject to change and to inherent
known and unknown risks and uncertainties. See Item 1A, Risk Factors, in this
report for a discussion of these and other risks and uncertainties. You should
not assume at any point in the future that the forward looking statements in
this report are still valid. We do not intend, and undertake no obligation, to
update our forward looking statements to reflect future events or
circumstances.
PART
I
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Item 1.
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Business
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GENERAL
International
Game Technology is a global gaming company specializing in the design,
manufacture, and marketing of electronic gaming equipment and systems products.
As a leading supplier of gaming products to the world, we maintain a wide array
of entertainment-inspired gaming product lines and target gaming markets in all
legal jurisdictions worldwide. IGT is committed to providing quality gaming
products at competitive prices, designed to help the operator realize superior
value and performance by serving players better.
Unless
the context indicates otherwise, International Game Technology, IGT, we, our, or
the Company refers to International Game Technology and its consolidated
entities. Italicized text in this document with an attached superscript
trademark or copyright notation indicates trademarks of IGT or its licensors.
For more information about our trademark and copyright ownership, please visit
our website at www.IGT.com.
International
Game Technology was incorporated in Nevada in December 1980 to acquire the
gaming licensee and operating entity, IGT, and to facilitate our initial public
offering. Principally serving the US gaming markets when founded, we expanded
into jurisdictions outside the US in 1986. In addition to our main US production
facilities in Nevada, we manufacture gaming products in the UK and through
third-party manufacturers in Japan and China.
We
currently maintain sales offices in various gaming jurisdictions around the
world. In addition to our operations in the US and Canada, we have operating
centers in the following international locations:
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ª
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Argentina
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Mexico
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ª
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Australia/New
Zealand
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Netherlands
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ª
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China
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ª
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Singapore
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ª
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Japan
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South
Africa
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ª
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Macau
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ª
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United
Kingdom
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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.
The results of operations for fiscal 2009 include 53 weeks versus 52 weeks in
fiscal 2008 and 2007.
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Fiscal
Year End
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Actual
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Presented as
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October
3, 2009
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September
30, 2009
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September
27, 2008
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September
30, 2008
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September
29, 2007
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September
30, 2007
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BUSINESS
SEGMENTS
We derive
our revenues from the distribution of electronic gaming equipment, systems,
services and licensing. Operating results reviewed by our chief decision maker
encompass all revenue sources within each geographical customer region. We
currently view our business in two operating segments, each incorporating all
types of revenues.
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ª
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North
America consists of our operations in the US and Canada, comprising 77% of
consolidated revenues in fiscal 2009, 76% in 2008, and 77% in
2007.
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ª
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International
encompasses our efforts in all other jurisdictions worldwide, comprising
23% of consolidated revenues in fiscal 2009, 24% in 2008, and 23% in
2007.
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We
measure segment profit on the basis of operating income. Certain income and
expenses related to company-wide initiatives are managed at the corporate level
and not allocated to an operating segment. Other segment and financial
information contained in BUSINESS SEGMENT RESULTS of our MDA and Note 21 of our
Consolidated Financial Statements is incorporated here by this
reference.
REVENUE
STREAMS
We have
two revenue streams within each business segment -- gaming operations and
product sales.
Gaming
Operations
Recurring
revenues are generated in Gaming Operations by providing our customers with
proprietary gaming equipment, systems and services, and comprised 56% of
consolidated revenues in fiscal 2009, 53% in 2008, and 52% in 2007.
Our
pricing arrangements are largely variable where casinos pay service fees to IGT
based on a percentage of amounts wagered or net win. Fixed fee pricing
arrangements are typically based on a daily or monthly fee. A portion of the WAP
service fees paid to IGT are used for the funding and administration of
progressive jackpots. The cost of funding progressive jackpots is subject to
interest rate volatility as further described in Note 1 of our Consolidated
Financial Statements and the MDA—CRITICAL ACCOUNTING ESTIMATES.
Gaming
operations revenues are affected by variations in the number and type of
machines in service, levels of player wagers, and pricing arrangement terms.
Levels of play are dependent on game popularity, casino seasonality trends,
economic conditions, and other player preferences. Seasonal trends generally
show higher play levels in the spring and summer months and lower in the fall
and winter months. We monitor the productive life cycles of our gaming
operations machines and systematically replace units experiencing declining play
levels with newer games.
The IGT
installed base of gaming devices recorded on our balance sheet as part of our
property, plant and equipment includes both variable fee and fixed fee machines.
Casino owned units are machines we have sold that also provide a recurring
royalty fee. In addition to the units reflected in the table below, gaming
operations revenues include recurring fees for internet gaming, content, and
other gaming equipment rentals and leasing.
Gaming
Operations Machines at September 30,
Product
Sales
We
include the sales of gaming equipment, systems, services, licensing, and
component parts in Product Sales, which comprised 44% of consolidated revenues
in 2009, 47% in 2008, and 48% in 2007. As our gaming products become more
systems-centric in nature, we anticipate a growing portion of sales from
non-machine products. Non-machine revenues (including systems, licensing fees,
parts, and conversions, as well as other miscellaneous royalty fees and
services) collectively comprised 37% of product sales in fiscal 2009, 33% in
2008, and 30% in 2007.
Product
Sales Composition
STRATEGIC
BUSINESS ARRANGEMENTS
As part
of our ongoing efforts to create shareholder value, we complement our internal
resources through strategic alliances, investments, and business acquisitions
that:
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ª
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offer
opportunities to diversify our geographic
reach
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ª
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expand
our product lines and customer base
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ª
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leverage
our technological and manufacturing infrastructure to increase our rates
of return
|
During
the last five years, we completed a number of small business acquisitions,
including Cyberview in fiscal 2008 and WagerWorks in fiscal 2005, which provided
additional opportunities to expand the distribution of our content across new
channels and mediums. Strategic investments over the last five years included:
CLS to participate in the development of gaming products for the China lottery
market; WDG for access to a portfolio of gaming application concepts; and
DigiDeal to expedite access to electronic table games markets.
During
the fourth quarter of fiscal 2009, we evaluated many aspects of our business in
conjunction with an assessment of the company’s long-term strategic goals. The
process included an appraisal of certain strategic investments to determine
management’s intent and ability to utilize these assets in the execution of our
business strategy going forward. Additional information about our
most recent acquisitions and affiliate investments is contained in OVERVIEW and
CONSOLIDATED OPERATING RESULTS of our MDA and Notes 3 and 7 of our Consolidated
Financial Statements.
We
provide a broad range of electronic gaming equipment and systems, as well as
licensing, services, and component parts that may be sold or placed under
recurring revenue arrangements. Most of our electronic gaming
equipment is increasingly driven by its software components.
Gaming
Equipment
We offer
our customers a wide variety of video and physical reel slot machines that may
be tailored to meet specific needs. Customers can choose from an extensive
library of games combined with several new machine cabinet models designed to
maximize functionality, flexibility, and player comfort. Additionally, IGT’s
AVP® machines are
designed to support server-based gaming networks. Machine configurations vary by
jurisdiction and may include:
|
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ª
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Stand-alone
casino-style slot machines that determine the game play outcome at the
machine, known as Class III in tribal
jurisdictions
|
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ª
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WAP
jackpot systems with linked machines across several
casinos
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ª
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CDS
machines connected to a central server that determines the game outcome,
encompassing VLT’s used primarily in government-sponsored applications and
electronic or video bingo machines known as Class II in tribal
jurisdictions
|
We also
offer multi-player community-style configurations with a common display,
especially useful in jurisdictions where live table games are not allowed. Our
electronic table games include live dealer hosted configurations with digital
cards and live chips or virtual chips/electronic credits, as well as a fully
virtual platform that can be approved as a slot game, providing table-like
gaming for slot only or limited table jurisdictions.
Our
international gaming machines also include AWP games in Europe and pachisuro
machines in Japan. These games generally incorporate lower payouts with features
that allow players to exercise an element of skill and strategy.
Systems
IGT
systems products include applications for casino management, CRM, and
server-based player management. Our casino management solutions include
integrated modules for machine accounting, patron management, cage and table
accounting, ticket-in/ticket-out, bonusing (jackpots and promotions), and table
game automation. Our CRM solution features integrated marketing and business
intelligence modules that provide analytical, predictive, and management tools
for maximizing casino operational effectiveness. Our server-based solutions are
designed to enable casino operators to increase profits by enhancing the
players’ experience and lowering operating costs.
|
PRODUCT
DEVELOPMENT
The
vision behind IGT product development is to serve players better by using
the power of networked gaming, information technology, game design, and
services to maximize the potential for operator profitability. The
foundation of our business model is built on the creation and delivery of
game content through integrated casino systems solutions to machine
platforms. Our product innovation reflects the anticipation of consumer
needs, as well as customer feedback and market trends.
We
support our product development efforts through a considerable emphasis
and investment in R&D of future technology, which we believe enables
IGT to maintain a leadership position in the industry. We dedicate more
than 1,600 employees worldwide to product development in various
disciplines from hardware, software, and firmware engineering to game
design, video, multimedia, graphics, and sound. Our investment in R&D
totaled $211.8 million in fiscal 2009, $223.0 million in 2008, and $202.2
million in 2007.
Our
primary development facilities are located in Nevada, and we have several
design centers strategically located worldwide, allowing us to respond to
unique market needs and local player preferences. IGT global design
centers provide local community presence, customized products, and
regional production where beneficial or required. During fiscal 2009, we
opened additional development facilities in Beijing, China.
During
fiscal 2009, we completed a re-evaluation of our thick (processing at the
machine) and thin (processing at the server) game development processes in
an effort to reduce time and cost to market. These efforts will include
rationalizing and improving our development platforms and processes
worldwide, in order to enable higher quality content delivery through more
efficient and uniform technologies.
Our
fiscal 2009 R&D activities are described below under the following
categories:
ª Games
ª Systems
ª Platforms
ª Intellectual
Property
|
 |
Games
We
combine elements of math, play mechanics, sound, art, and technological
advancements with our library of entertainment licenses and patented
intellectual properties to provide gaming products with a high degree of player
appeal. We continue to expand our game libraries, emphasizing development of
game content to address changing consumer preferences and other market trends.
Strategically, we are renewing our focus on what we believe we do well. For many
years, IGT has been an industry leader in gaming content across a truly global
footprint and content is what has traditionally distinguished us from the
competition.
Our games
are created primarily by employee designers, engineers, and artists, augmented
by third-party developers. We develop video reel and poker games, as well as
enhancements for our classic spinning reel games, such as multi-line, multi-coin
configurations. We build on our traditional game development with unique
customization for video lottery, CDS, Class II, and international markets. We
also continuously upgrade and optimize our proprietary flagship themes, such as
Wheel of Fortune® and
Megabucks®, with game
refreshers and innovative features to enhance play.
In
today’s gaming market we face highly capable competitors, demanding gaming
patrons, and increasing game complexity. Such a market requires constant
enhancements, innovations, and improvements to the quality of our game content
across all of our product platforms, particularly in video slots. Excellent
content drives sales, increases replacement cycle opportunities, and grows our
installed base.
To that
end, during fiscal 2009, we implemented specific efforts to enhance our content
offerings. We restructured our strategic product efforts into a more focused
vertical product management structure, dedicated to developing and deploying
game content, along with the most effective use of our pool of game design
resources and IP portfolio. We also implemented a consumer research group
designed to aggregate and analyze patron level data in order to provide the
R&D process with real time market information, making the patron the focus
of our development efforts.
Fiscal
2009 highlights
Our new
family of MLD® (REELdepth® Multi-Layer Display®)
machines, featuring the visual effect of true depth animation sequences
without 3-D glasses, grew steadily and was deployed at nearly 500 properties at
September 30, 2009. MLD® machines enable players
to choose spinning reel, video slots or video poker all in one machine, as well
as allowing server-based game download and configuration functionality for
operators. We released three of the world’s first MLD® exclusive games, with
game play only possible through MLD® technology; Magic Butterfly™, 7’s Storm™, and Glitter and Gold™. At the end
of fiscal 2009, we rebranded the innovative technologies of MLD®, AVP® and Multi-Game into a
complete solution now known as IGT DynamiX™.
IGT’s
innovative MultiPLAY video slot, featuring innovation exclusive to IGT, was
approved in more than 38 jurisdictions including Nevada, California, and
Oklahoma. MultiPLAY allows
players to choose to play up to four video slot games on the same machine, at
the same time, and each game spins independently allowing a clear understanding
of the game outcome. Four MultiPLAY games were released and our market tests
indicate appeal to a wide range of players, with performance two to three times
house/zone averages across North America.
Winner’s
choice Multi-Game capability was launched on our IGT DynamiX™
machines. This technology enables operators to select their
own video or spinning slot multi-games, ranging from any math model and
experience. Our game performance testing indicated well above
house/zone averages across North America for these
units.
In our
MegaJackpots® gaming
operations line, we continued game releases with highly popular brands,
including Wheel of Fortune®
MLP™, Star Warsä MLP™, Indiana Jonesä MLD®, Jokers Wild™ MLP™ with MLD® and Jeopardy!®
MLP™. We prepared for
the expected Spring 2010 launch of our MegaJackpot® Center Stage
series, providing a strong line up of game content utilizing a wide variety of
brands and game play, including the innovative MultiPLAY format. Sex and the City™ MultiPLAY
was released in October 2009. Upcoming releases include Amazing Race™ MLP™ Group Play and Quest for the Lost City™ with
Discovery Play game features, which offer players new episodes or advancement to
different play levels creating anticipation for what will come
next.
Our M-P Series™ interactive,
multi-player suite of electronic table games arranged in virtual pits continued
moving forward with increased placements in domestic markets. With virtual cards
and chips, these products provide floor layout flexibility, increased game
security, very little staffing requirements, increased hands-per-hour, and
decreased operating costs, along with the addition of table game options for
slot-only jurisdictions.
Systems
Gaming
continues to become increasingly systems based, as operators increasingly expect
network functionality to manage game performance and adapt to player
preferences. As we develop and integrate gaming systems, we recognize networks
have the power to dramatically change the delivery of game content and improve
the usefulness of our products to the casino operators and players
alike.
Our
ongoing server-based gaming development continues to focus on a comprehensive
enterprise-wide network systems solution designed to provide operators with
tools for more effective casino floor management and new ways to engage and
interact with players. In addition our sbX™ system has been packaged
for smaller scale implementations in “hybrid” floor environments, consisting of
a combination of new G2S GSA protocol and legacy Advantage®
networks.
During
fiscal 2009, we moved beyond development and testing into the commercialization
and sales phase, with the introduction of slot bank level applications and
solutions. Our sbX™
Tier One package is a
smaller scale bank level solution designed with the flexibility of server-based
technology that can accommodate up to 100 AVP® games. Tier One offers operator
access to available IGT themes via a standard game library with applications for
AVP® Video, Video Poker and
MLD®. Tier One is designed for easy
implementation providing operators with an incremental step towards full
enterprise-wide sbX™.
The IGT
Global Technology and Interoperability Center continued to facilitate testing by
third-party manufacturers and strategic partners of GSA protocol product
interface integration, compatibility, and performance. The center is actively
testing our sbXä system
and its interaction with other vendor systems, as we continue to engineer new
applications and demonstrate the security, efficiency, and innovative casino
player marketing features this technology can provide. This
collaborative approach ensures rigorous testing is conducted in a true-to-life
environment with full-scale systems.
Progress
continued with our Nevada field trial of sbX™ at Monte Carlo Resort
& Casino. This hybrid floor is putting interoperability to the
test with a network combining G2S and classic Advantage® working together
seamlessly. At September 30, 2009, this field trial connected 120
machines from IGT, Bally, Konami, WMS and Aristocrat. These important milestones
reflect our vision as innovators in gaming systems.
With PGIC assets acquired
in January 2009, we added IGT
Casinolink® to our suite of systems
products. IGT
Casinolink® offers a
casino management solution ideal for international markets and multi-site
operations. The system links together multiple gaming sites and
centrally manages the daily casino operating procedures. This gives
our customers the flexibility to achieve company-wide goals while enabling
individual properties to maintain operational independence.
We
continue developing products that integrate the power of the open network with
server-based gaming applications, such as dynamic remote game management, casino
transactional systems, business intelligence, and other interactive CRM
capabilities. We believe the integration of sbXä
with Advantage®, Casinolink® and our customer
relationship and business intelligence applications will provide the tools
necessary to help operators optimize their gaming operations, increase marketing
productivity, and analyze customer preferences. We will also maintain
development efforts to support and enhance our legacy gaming systems for casino
management, such as Advantage®, CRM,
Ticket-in/Ticket-out, CDS, and WAP.
Platforms
Platforms
are the means by which players interact with the games, and we support several
in order to maximize our game distribution reach. The challenge of platform
development is in determining how to effectively use a wide range of
technologies to satisfy evolving global markets with the best features, cost
points, and delivery dates. The goal is to ensure that our content can be
deployed through a number of different channels, including traditional gaming
platforms, as well as wireless networks and the internet.
During
fiscal 2009, we continued development for delivery through third-party
platforms, interactive digital TV, cell phones, the internet, and other mobile
gaming outlets, as well as through network technology for remote game management
and downloading. We also further expanded our Remote Game Server to facilitate further
deployment of our game content to internet platforms. In online applications
development, we deployed IGT’s Cleopatra® slot game in
non-wagering format for the iPhone™ and iPod® touch.
We
continued successful deployment of several new diversified cabinet models
initially released in fiscal 2008. The new models were designed with input from
ergonomic and industrial design experts to create a product that is flexible,
functional and holds the greatest player appeal. All new AVP® cabinets are sbXä ready
with supporting GSA open communication standards and video capabilities for the
service window. Designed to support the next generation of video games, our
AVP® models provide
improved graphic capabilities, such as MLD® virtual 3-D animation
with vivid colors, MultiPLAY, enhanced stereo and surround sound, and expanded
storage capacity allowing for complex bonus features.
As we
transition to AVP® as
our standard development platform worldwide, we also continue support for the
following platforms:
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Game KingÒ
video platform using the 80960
processor
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S2000Ò and Reel Touch® 80960
spinning reel platform
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Blue Chip platform used
in Australia and New Zealand
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Barcrest
Triple 7, Horizon, Horizon Plus, and MPU AWP platforms sold in the
UK
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Pachisuro
platform used in Japan
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Intellectual
Property
We
consider our intellectual property portfolio of patents, trademarks, copyrights,
and other licensed rights to be a significant asset to our business. We
currently own or license over 2,700 patents and hold over 3,100 filed and
registered trademarks worldwide. Our capitalized patents have a
weighted average remaining useful life of 7 years and our licensed arrangements
have various expiration dates through 2020, frequently with options to
extend.
We seek
to protect our investment in R&D and the distinct features of our products
by perfecting and maintaining our IP rights. We obtain patent protection
covering many of our products and have a significant number of US and foreign
patent applications pending. Our portfolio is widely diversified, comprised of
both domestic and foreign patents related to a variety of gaming equipment and
systems products, including game designs, bonus and secondary game features, and
device components.
We market
most of our products under trademarks and copyrights that provide product
recognition and promote widespread acceptance. We seek protection for our
copyrights and trademarks in the US and various foreign countries, where
applicable. Certain intellectual property litigation is described in Note 16 of
our Consolidated Financial Statements.
SALES
AND MARKETING REGIONS
We market
our products and services in legalized gaming jurisdictions around the world.
While our most significant jurisdictions are in North America, we anticipate
international jurisdictions will continue to grow in significance to our
business. We promote our products through a worldwide network of sales
associates. We use third-party distributors and agents in certain markets under
arrangements that generally specify no minimum purchase and require specified
performance standards be maintained. We also offer equipment contract financing
for qualified customers and development financing loans to select customers for
new or expanding gaming facilities.
Our
overall marketing strategy places the “Customer First”. We have over 50 customer
service centers worldwide to respond effectively to customer needs. In addition,
we maintain a Global Support Hotline Center staffed by experienced engineering
personnel to resolve technical issues. We also provide access to product
information and 24-hour customer service through our website, and offer
customers a variety of training to ensure success using our products to their
full potential.
North
America
Gaming in
the US and Canada continues to grow in popularity with the opening of new tribal
and traditional casinos and the introduction of gaming machines into new gaming
venues such as racetracks (also known as racinos) and bingo parlors. The
legalization and growth of gaming in new jurisdictions is being driven by state
and local governments seeking to generate new revenue to support public programs
and services. We estimate the installed base of legal gaming devices in North
America increased to over 943,000 machines during fiscal 2009.
Opportunities
for additional sales or placements of IGT products in North America are directly
impacted by the machine replacement cycle, legalization of gaming in new
jurisdictions, and the opening or expansion of new properties. Legislative
action and the passage of voter referendums have provided new opportunities for
growth in jurisdictions throughout the country, including Illinois, Ohio,
Kansas, Maryland, Pennsylvania, Florida and Washington. We continually monitor
ongoing political developments as they relate to potential gaming legalization
or further expansion in states such as Kentucky, Massachusetts, New Hampshire,
Alabama, North Carolina and Texas.
International
Our
international strategy capitalizes on our North America experience, while
customizing products for unique local preferences and regulatory requirements.
Our international operations service:
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casinos
in Asia, Europe, Latin America, and
Africa
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clubs
and casinos in Australia and New
Zealand
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AWP
facilities in the UK and continental
Europe
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pachisuro
parlors in Japan
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Our
international gaming operations installed base has grown substantially since we
expanded into Mexico in fiscal 2005. Our online gaming provided from Alderney in
the British Channel Islands continues to provide additional growth
opportunities. We anticipate expansion into Italy in the second half of fiscal
2010 and believe further international opportunities will develop as support
grows for legalized gambling as a means of promoting tourism
revenues.
OPERATIONAL
OVERVIEW
Manufacturing
and Suppliers
In
addition to our main production facility in Reno, Nevada, we manufacture in the
UK and through third-party manufacturers in Japan and China. International
casino and club gaming devices are fabricated, whole or in kit form, at our Reno
facility. Our manufacturing operations primarily involve the configuration and
assembly of electronic components, cables, harnesses, video monitors, and
prefabricated parts purchased from outside sources. We also operate facilities
for cabinet manufacturing, silkscreen, and digital design.
We use a
variety of raw materials to manufacture our gaming devices including metals,
wood, plastics, glass, electronic components, and LCD screens. We have a broad
base of material suppliers and utilize multi-sourcing practices to ensure
component availability. We believe the availability of materials used to
manufacture our products is adequate and we are not substantially dependent on
any single supplier.
We
currently devote more than 800,000 square feet in our Reno facility and more
than 290,000 square feet in Las Vegas to product development, manufacturing,
warehousing, shipping, and receiving. Maintaining our commitment to
quality, we renewed our ISO 9001.2000 Quality Management System certification at
all of our manufacturing facilities during fiscal 2009. ISO standards represent
an international consensus with respect to the design, manufacture, and use of
practices intended to ensure ongoing customer satisfaction with consistent
delivery of products and services.
We
generally carry a significant amount of inventory related to the breadth of our
product lines. We reasonably expect to fill our order backlog within the next
fiscal year. Backlog totaled approximately $331.2 million at October 31, 2009
and $351.2 million at October 31, 2008.
Regulatory
Compliance
IGT is
dedicated to regulatory compliance worldwide in order to ensure that our
products meet requirements in each gaming jurisdiction and that we obtain the
necessary approvals and licenses. We conduct business in most jurisdictions
where gaming is legal and hold licenses where required.
Employees
As of
September 30, 2009, we employed 5,100 individuals worldwide, consisting of 4,000
in North America and 1,100 internationally. In response to reduced demand, we
have been conducting an ongoing company-wide strategic review of our costs and
organizational structure for opportunities to maximize efficiency and align our
expenses with our current and long-term business outlook. As a result
of restructuring efforts during fiscal 2009, we reduced our global workforce by
approximately 16% from September 30, 2008 levels through a combination of
voluntary and involuntary separation arrangements. For discussion of related
restructuring costs, see MDA—OVERVIEW and MDA—CONSOLIDATED OPERATING
RESULTS.
COMPETITION
AND PRODUCT DEMAND
A number
of factors drive demand for both our and our competitors’ gaming products. Our
competitors range from small, localized companies to large, multi-national
corporations in every jurisdiction in which we conduct business. Our most
significant competitors include Aristocrat Leisure Limited, Bally Technologies,
Inc., and WMS Industries, Inc.
We
believe replacement sales are driven by customer strategies to upgrade casino
floors with newer games and technologies that combine higher yields with cost
savings, convenience, and other benefits. New or emerging technology that
provides operators with a favorable return on investment has the ability to
accelerate a machine replacement cycle. This technology may come in the form of
new machine cabinets with more processing power or new game features that
increase player appeal and/or operator profits.
New or
expanding casinos generate new product demand and stimulate replacement demand
at neighboring casinos that upgrade their games and machines in order to remain
competitive. New jurisdictions establishing legalized gaming also create product
demand and have contributed to significant growth in the overall installed base
of gaming devices during the past few decades.
The
market for gaming devices and systems is highly competitive, constantly
evolving, and subject to rapid technological change. We compete in both domestic
and international markets, endeavoring to create products with superior
functionality and features, using innovative architecture and technologies,
resulting in a high degree of customer acceptance and player preference. We also
strive to maintain an edge in our quality of support and efficient product
implementation.
We
believe IGT has competitive advantage resulting from broad alliances and a long
history with customers, financial strength to aggressively invest in R&D,
and an extensive collection of intellectual properties. Further, the breadth of
our gaming products and diversity of our innovative game library contribute to
our competitive advantage. Our historically high levels of customer service and
support, extensive and well-established infrastructure of sales and
manufacturing, worldwide recognition, and geographic diversity are competitive
assets. We believe our reputation for consistently delivering and supporting
quality products will encourage operators to select our products and enable us
to maintain our market position.
AVAILABLE
INFORMATION
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IGT’s
principal corporate executive offices are located at:
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9295
Prototype Drive
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Reno,
Nevada 89521
(775)
IGT-7777
All
reporting information filed with or furnished to the SEC is available free of
charge through the Investor Relations link on our website at www.IGT.com as soon
as reasonably practicable after we electronically file or furnish such
information to the SEC. Our corporate governance guidelines and charters for our
Audit, Compensation, and Nominating and Corporate Governance Committees are also
available on our website. This information will be mailed in print form free of
charge to any shareholder upon request.
GOVERNMENT
GAMING REGULATION
We
operate in most legal casino gaming jurisdictions worldwide, as well as in a
significant number of legalized lottery jurisdictions. The manufacture and
distribution of gaming equipment, systems, and services, as well as the
operation of casinos, is subject to regulation by a variety of local and federal
agencies, with the majority of oversight provided by individual state gaming
control boards.
While the
regulatory requirements vary from jurisdiction to jurisdiction, most
require:
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licenses
and/or permits
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findings
of suitability for the company, as well as individual officers, directors,
major stockholders, and key
employees
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documentation
of qualification, including evidence of financial
stability
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specific
approvals for gaming equipment manufacturers and
distributors
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Our
operating entities and key personnel have obtained or applied for all required
government licenses, permits, registrations, findings of suitability, and
approvals necessary to manufacture and distribute gaming products in all
jurisdictions where we do business. Although many regulations at each level are
similar or overlapping, we must satisfy all conditions individually for each
jurisdiction.
Laws of
the various gaming regulatory agencies serve to protect the public and ensure
that gaming related activity is conducted honestly, competitively, and free of
corruption. Regulatory oversight additionally ensures that the local authorities
receive the appropriate amount of gaming tax revenues. As such, our financial
systems and reporting functions must demonstrate high levels of detail and
integrity.
Certain
regulators not only govern the activities within their jurisdiction, but also
oversee activities that occur in other jurisdictions to ensure that we comply
with local standards on a worldwide basis. As a Nevada corporation, state
regulatory authorities require us to maintain Nevada standards for all
operations worldwide. Violations of laws in one jurisdiction could result in
disciplinary action in other jurisdictions. A more detailed description of the
regulations to which we are subject is provided in Exhibit 99 of this Annual
Report on Form 10-K, incorporated herein by reference.
The
nature of the industry and our worldwide operations make this process very time
consuming and require extensive resources. We employ additional community staff
members and legal resources familiar with local customs in certain jurisdictions
to assist in keeping us compliant with applicable regulations worldwide. Through
this process, we seek to assure both regulators and investors that all our
operations maintain the highest levels of integrity and avoid any appearance of
impropriety. We have never been denied a gaming related license, nor have our
licenses ever been suspended or revoked.
Responsible
Gaming
RG is the
industry’s response to problem gambling, and fiscal 2009 marked the 12th year of
IGT’s Responsible Gaming Program. Corporate social responsibility has taken on a
new dimension since the inception of our program. Gaming jurisdictions can
suffer negative consequences due to lack of attention to the issue of problem
gambling. As markets expand internationally, so must understanding of social
protections and responsible gaming in different cultures. IGT works closely with
new gaming jurisdictions to develop sound responsible gaming policies and
guidelines to help ensure programs remain viable for the long term.
As a
technology provider to the gaming industry, our approach to RG differs only
slightly from that of the gaming operator, but the objectives are the
same:
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raise
awareness of RG as a positive approach to problem
gambling
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collaborate
with the problem gambling community, others in the industry, our
customers, and public policy makers in developing RG practices and
programs
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educate
our employees
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support
research and treatment
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Our
experience has taught us that corporate social responsibility must be a
cornerstone of any sound gaming program and is vital to sustaining our industry.
We support our commitment to RG with funding for numerous federal, state, and
local organizations, conferences, and events, including:
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National
Center for Responsible Gaming
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National
Council on Problem Gambling
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National
Problem Gambling Helpline
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Problem
Gambling Center
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Responsible
Gaming Education Week
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Problem
Gambling Awareness Week
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Item 1A.
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Risk
Factors
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Our business is vulnerable
to changing economic conditions and current unfavorable economic conditions have
negatively impacted and could continue to negatively impact the play
levels of our participation games, our product sales, and our ability to collect
outstanding receivables from our customers.
Existing
unfavorable general economic conditions reduce disposable income of casino
patrons and result in fewer patrons visiting casinos. This decline in disposable
income likely results in reduced play levels on our participation games, causing
our cash flows and revenues from a large share of our recurring revenue products
to decline. Current unfavorable economic conditions have also resulted in a
tightening in the credit markets, decreased liquidity in many financial markets,
and resulted in significant volatility in the credit and equity
markets.
A decline
in the relative health of the gaming industry and the difficulty or inability of
our customers to obtain adequate levels of capital to finance their ongoing
operations reduces their resources available to purchase our products and
services, which adversely affects our revenues. If we experience a significant
unexpected decrease in demand for our products, we could also be required to
increase our inventory obsolescence charges.
Furthermore,
the extended economic downturn has impacted and could continue to impact the
ability of our customers to make timely payments to us. We have, and may
continue, to incur additional provisions for bad debt related to credit concerns
on certain receivables.
A decline in and/or
sustained low interest rates causes an increase in our jackpot expense which
could limit or reduce our future profits.
Changes
in prime and/or treasury and agency interest rates during a given period cause
fluctuations in jackpot expense largely due to the revaluation of future winner
liabilities. When rates increase, jackpot liabilities are reduced as it costs
less to fund the liability. However, when interest rates decline or remain low
the value of the liability (and related jackpot expense) increases because the
cost to fund the liability increases. Our results may continue to be negatively
impacted by continuing low interest rates or further declines in interest rates,
resulting in increased jackpot expense and a reduction of our investment income,
which could limit or reduce our future profits.
Our outstanding Debentures
and Notes subject us to additional risks.
Our
Debentures issued in December 2006 and our Notes issued in May 2009 contain a
net settlement feature, which entitles holders to receive cash up to $1,000 per
Debenture or Note and shares for any excess conversion value as determined by
the respective governing indentures. Consequently, if a significant number of
Debentures or Notes are converted or redeemed, we would be required to make
significant cash payments to the holders who convert or redeem the Debentures or
Notes.
In
connection with the offering of the Notes, we entered into additional separate
transactions for note hedges and warrant transactions. In connection with these
transactions, the hedge counterparties and/or their respective affiliates may
enter into various derivative transactions with respect to our common stock and
may enter into or unwind various derivative transactions and/or purchase or sell
our common stock in secondary market transactions prior to maturity of the
Notes. These activities could have the effect of increasing or preventing a
decline in, or having a negative effect on, the value of our common stock and
could have the effect of increasing or preventing a decline in the value of our
common stock during any conversion reference period related to a conversion of
the Notes. The warrant transactions could separately have a dilutive effect from
the issuance of our common stock pursuant to the warrants.
On
November 12, 2009, we gave holders of the Debentures notice of this put right,
which will terminate on December 14, 2009. Given current market conditions and
the recent trading price of our stock, we expect Debenture holders will exercise
their right to require IGT to redeem the Debentures on December 15, 2009. We
plan to incur additional borrowings under our credit facility to pay the
Debentures put to us in December 2009.
Our outstanding domestic
credit facility subjects us to financial covenants which may limit our
flexibility.
Our
Domestic Credit Facility subjects us to a number of financial covenants,
including a minimum ratio of EBITDA to interest expense minus interest on
jackpot liabilities and a maximum ratio of debt to EBITDA. Our failure or
inability to comply with these covenants will cause an event of default that, if
not cured, could cause the entire outstanding borrowings under our Domestic
Credit Facility and bonds to become immediately due and payable. In addition,
our interest rate under the Domestic Credit Facility can vary based on our
public credit rating or our debt to capitalization ratio. Each of these measures
may be adversely impacted by unfavorable economic conditions. The
Domestic Credit Facility also includes restrictions that may limit our
flexibility in planning for, or reacting to, changes in our business and the
industry.
Slow growth in the
establishment of new gaming jurisdictions or the number of new casinos and
declines in the rate of replacement of existing gaming machines could limit or
reduce our future profits.
Demand
for our products is driven substantially by the establishment of new gaming
jurisdictions, the addition of new casinos or expansion of existing casinos
within existing gaming jurisdictions and the replacement of existing gaming
machines. The establishment or expansion of gaming in any jurisdiction typically
requires a public referendum or other legislative action. As a result, gaming
continues to be the subject of public debate, and there are numerous active
organizations that oppose gaming. Opposition to gaming could result in
restrictions on or even prohibitions of gaming operations or the expansion of
operations in any jurisdiction.
In
addition, the construction of new casinos or expansion of existing casinos
fluctuates with demand, general economic conditions and the availability of
financing. The rate of gaming growth in North America has diminished and machine
replacements are at historically low levels. Slow growth in the establishment of
new gaming jurisdictions or delays in the opening of new or expanded casinos and
continued declines in, or low levels of demand for, machine replacements could
reduce the demand for our products and our future profits.
Demand for our products and
the level of play of our products could be adversely affected by changes in
player and operator preferences.
As a
supplier of gaming machines, we must offer themes and products that appeal to
gaming operators and players. If we are unable to anticipate or react timely to
any significant changes in player preferences, such as a negative change in the
trend of acceptance of our newest systems innovations or jackpot fatigue
(declining play levels on smaller jackpots), the demand for our gaming products
and the level of play of our gaming products could decline. Further, our
products could suffer a loss of floor space to table games and operators may
reduce revenue sharing arrangements, each of which would harm our sales and
financial results. In addition, general changes in consumer behavior, such as
reduced travel activity or redirection of entertainment dollars to other venues,
could result in reduced demand and reduced play levels for our gaming
products.
Our ability to operate in
our existing markets or expand into new jurisdictions could be adversely
affected by changing regulations or problems with obtaining or maintaining
needed licenses or approvals.
We
operate only in jurisdictions where gaming is legal. The gaming industry is
subject to extensive governmental regulation by US federal, state and local
governments, as well as tribal officials or organizations and foreign
governments. While the regulatory requirements vary by jurisdiction, most
require:
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licenses
and/or permits
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findings
of suitability
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documentation
of qualifications, including evidence of financial
stability
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other
required approvals for companies who manufacture or distribute gaming
equipment and services
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individual
suitability of officers, directors, major stockholders and key
employees
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Any
delays in obtaining or difficulty in maintaining regulatory approvals needed for
expansion within existing markets or into new jurisdictions can negatively
affect our opportunities for growth. Further, changes in existing gaming
regulations may hinder or prevent us from continuing to operate in those
jurisdictions where we currently do business, which would harm our operating
results. In particular, the enactment of unfavorable legislation or government
efforts affecting or directed at manufacturers or gaming operators, such as
referendums to increase gaming taxes or requirements to use local distributors,
would likely have a negative impact on our operations.
Our success in the
competitive gaming industry depends in large part on our ability to develop and
manage frequent introductions of innovative products.
The
gaming industry is intensely competitive, and many of our competitors have
substantial resources and specialize in the development and marketing of their
products. Increased competition has negatively impacted, and may continue to
negatively impact, our results. Because the gaming industry is characterized by
dynamic customer demand and rapid technological advances, we must continually
introduce and successfully market new themes and technologies in order to remain
competitive and effectively stimulate customer demand. Our customers will accept
a new product only if it is likely to increase operator profits more than
competitors’ products. There is no certainty that our new products will attain
this market acceptance or that our competitors will not more effectively
anticipate or respond to changing customer preferences. In addition, any delays
by us in introducing new products on schedule could negatively impact our
operating results by providing an opportunity for our competitors to introduce
new products and gain market share ahead of us. For example, our business and
results could be adversely affected if we experience delays or problems in our
planned introduction of sbX™ gaming management
systems, or if we do not gain market acceptance for these systems.
New products require
regulatory approval and may be subject to complex and dynamic revenue
recognition standards, which could materially affect our financial
results.
As we
introduce new products and transactions become increasingly complex, additional
analysis and judgment is required to account for and recognize revenues in
accordance with generally accepted accounting principles. Transactions may
include multiple element arrangements and/or software components and applicable
accounting principles or regulatory product approval delays could change the
timing of revenue recognition and could adversely affect our financial results
for any given period. Fluctuations may occur in our deferred revenues and
reflect our continued shift toward more multiple element contracts that include
systems and software.
Investments and development
financing loans could adversely impact liquidity or cause us to incur loan
losses or record a charge to earnings if our investments become
impaired.
We invest
in and/or provide financing for expansion or construction of gaming locations
and other business purposes, including locations abroad. Such investment and
financing activities subject us to increased credit risk in certain regions,
which could be exacerbated by current unfavorable economic conditions or other
political or economic instability in those regions. We monitor our investments
and financing activities to assess impairment on a quarterly basis.
We have
in the past and may in the future incur losses on these types of investments and
loans. For example, as a result of significant adverse changes in the expected
financial performance of LVGI, we recorded impairment of $13.3 million during
the fourth quarter of fiscal 2009 related to our investment in LVGI. Our results
of operations, liquidity or financial position may be negatively impacted if we
are unable to collect on loans or derive benefit from our
investments.
Our gaming machines and
online operations may experience losses due to fraudulent
activities.
We
incorporate security features into the design of our gaming machines and other
systems, including those responsible for our online operations, which are
designed to prevent us and our patrons from being defrauded. However, there can
be no guarantee that such security features will continue to be effective in the
future. If our security systems fail to prevent fraud, our operating results
could be adversely affected. Additionally, if third parties breach our security
systems and defraud our patrons, the public may lose confidence in our gaming
machines and operations.
We may be unable to protect
our IP.
A
significant portion of our revenues is generated from products using certain IP
rights and our operating results would be negatively impacted if we are
unsuccessful in protecting these rights from infringement. In addition, some of
our most popular games and features are based on trademarks, patents and other
IP licensed from third parties. The continued success of these games may depend
upon our ability to retain or expand these licenses with reasonable terms. We
also depend on trade secret law to protect certain proprietary knowledge and
have entered into confidentiality agreements with those of our employees who
have access to this information. However, there can be no guarantees that our
employees will not breach these agreements, and if these agreements are breached
it is unlikely that the remedies available to us will be sufficient to
compensate us for the damages suffered.
We may be subject to claims
of IP infringement or invalidity and adverse outcomes of litigation could
unfavorably affect our operating results.
Periodically,
we receive notification from others claiming that we are infringing upon their
patent, trademark or other IP rights. Regardless of their merit, such claims may
cause us to incur significant costs. Responding to these claims could also
require us to stop selling or to redesign our products, to pay significant
amounts in damages or to enter into agreements to pay significant licensing fees
or royalties. Additionally, if any of these claims prove successful, it could
limit our ability to bring new products to market in the future. Our assessment
of current IP litigation could change in light of the discovery of facts not
presently known to us or determinations by judges, juries or others that do not
accord with our evaluation of the possible liability or outcome of such
litigation.
Business combinations and
investments in intellectual properties or affiliates present risk, and we may
not be able to realize the financial and strategic goals that were contemplated
at the time of the transaction, which could materially affect our financial
results.
We have
invested in strategic business combinations and acquisitions of important
technologies and IP that we believe will expand our geographic reach, product
lines, and/or customer base. We may encounter difficulties in the
assimilation of acquired operations, technologies and/or products, or an
acquisition may prove to be less valuable than the price we paid. Any of these
events or circumstances may require us to record substantial impairment charges
on goodwill and other intangible assets, resulting in a negative impact on our
operating results.
Moreover,
as we continue the process of evaluating our business in conjunction with an
assessment of the company’s long-term strategic goals, we will also further
evaluate past and potential investments to determine if and how they will fit
into our organizational structure going forward. If an event or change occurs in
affiliate relationships or agreements associated with business combinations, we
may be required to reassess cash flows, recoverability, useful lives, and fair
value measurements, which may result in material impairment
charges.
Failure to attract, retain
and motivate key employees may adversely affect our ability to
compete.
Our
success depends largely on recruiting and retaining talented employees. The
market for qualified executives and highly skilled, technical workers is
intensely competitive. The loss of key employees or an inability to hire a
sufficient number of technical staff could limit our ability to develop
successful products and cause delays in getting new products to
market.
Current environmental laws
and regulations, or those enacted in the future, could result in additional
liabilities and costs.
The
manufacturing of our products may require the use of materials that are subject
to a variety of environmental, health and safety laws and regulations.
Compliance with these laws could increase our costs and impact the availability
of components required to manufacture our products. Violation of these laws may
subject us to significant fines, penalties or disposal costs, which could
negatively impact our results of operations, financial position or cash
flows.
The risks related to
operations outside of traditional US law could negatively affect our
results.
We
operate in many countries outside of the US and in tribal jurisdictions with
sovereign immunity which subjects us to certain inherent risks
including:
|
ª
|
political
or economic instability
|
|
ª
|
additional
costs of compliance
|
|
ª
|
tariffs
and other trade barriers
|
|
ª
|
fluctuations
in foreign exchange rates outside the
US
|
|
ª
|
adverse
changes in the creditworthiness of parties with whom we have significant
receivables or forward currency exchange
contracts
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
|
Item 2.
|
Properties
|
We expect
our current properties will be adequate for our near-term business
needs.
North
America
Our
corporate offices are located in Reno, Nevada, where we own a 1.2 million square
foot facility, which houses our largest manufacturing warehouse, along with
cabinet production, silkscreen, engineering, sales, and corporate administrative
functions. This facility supports production for all North America and
International markets, except Japan and the UK. We also lease 147,000 square
feet of additional warehousing facilities in Reno under agreements expiring
through June 2013.
In Las
Vegas, Nevada, we own a 618,000 square foot facility that houses our largest
sales and service force, as well as warehousing and administrative functions. We
also lease approximately 25,000 square feet of additional administration
facilities in Las Vegas under agreements expiring through January 2013.
Additionally, we leased approximately 369,000 square feet of warehousing, sales,
and service facilities throughout the US and Canada under leases expiring
through January 2016.
International
In the
UK, we own a 149,000 square foot facility and lease 49,000 square feet under
agreements expiring through June 2016, which support manufacturing, sales, and
administrative functions. In Australia and New Zealand, we own two facilities
with an aggregate of 15,000 square feet and lease 125,000 square feet under
agreements expiring through December 2011, used for subassembly, sales, and
administration. All other international facilities total 284,000 square feet
under leases expiring through June 2013.
|
Item 3.
|
Legal
Proceedings
|
IGT has
been named in and has brought lawsuits in the normal course of business. We do
not expect the outcome of these suits to have a material adverse effect on our
financial position or results of operations. A description of certain of these
matters is contained in Note 16 of our Consolidated Financial Statements and is
incorporated herein by this reference.
|
Item 4.
|
Submission
of Matters to a Vote of Security
Holders
|
|
(a)
|
IGT
held a special meeting of stockholders on September 30,
2009.
|
|
(b)
|
The
stockholders approved a stock option exchange program allowing eligible
employees to elect to exchange outstanding stock options for a lesser
number of stock options with a lower exercise price. The eligible
participants excluded, among others, our board members, executive
officers, other senior officers designated by our compensation committee,
and employees based outside of the US. Options held by eligible
employees with exercise prices greater than the approximate 52-week
intraday-high price of our common stock, as reported on the New York Stock
Exchange, measured as of the start of the exchange program, were eligible
to be surrendered for replacement
options.
|
A total
of 216,146,202 shares voted on the stock option exchange program, with
186,611,839 shares for, 29,312,809 shares against, 221,554 shares abstained, and
no broker non-votes.
PART
II
|
Item 5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
|
Quarters
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Fiscal
2009
|
||||||||||||||||
|
Stock
price - high
|
$ | 18.18 | $ | 14.24 | $ | 18.15 | $ | 23.30 | ||||||||
|
Stock
price - low
|
7.03 | 6.81 | 10.01 | 13.58 | ||||||||||||
|
Dividends
declared
|
0.15 | 0.06 | 0.06 | 0.06 | ||||||||||||
|
Fiscal
2008
|
||||||||||||||||
|
Stock
price - high
|
$ | 45.72 | $ | 49.41 | $ | 41.87 | $ | 25.90 | ||||||||
|
Stock
price - low
|
40.34 | 35.80 | 24.38 | 15.22 | ||||||||||||
|
Dividends
declared
|
0.14 | 0.14 | 0.14 | 0.15 | ||||||||||||
Our
common stock is listed and traded on the NYSE under the symbol “IGT.” We did not
repurchase any shares of our common stock during the quarter ended September 30,
2009. As of November 30, 2009, there were approximately 3,133 record holders of
IGT’s common stock and the closing price was $18.89. IGT’s transfer agent and
registrar is:
Wells
Fargo Shareowner Services
Manager of Account
Administration
161 North Concord
Exchange
South St. Paul,
MN 55075-1139
(800) 468-9716
The
following graph reflects the cumulative total return (change in stock price plus
reinvested dividends) of a $100 investment in our common stock for five fiscal
years ended September 30, 2009 in comparison to the Standard and Poor’s 500
Composite Index and our peer group. Our peer group consists of Bally
Technologies, Inc., Progressive Gaming International Corporation, Scientific
Games Corp., Shuffle Master, Inc., and WMS Industries, Inc. The comparisons are
not intended to be indicative of future performance of our common
stock.
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
|
International
Game Technology
|
100.00
|
76.29
|
119.14
|
125.30
|
51.00
|
65.39
|
|
S&P
500
|
100.00
|
112.25
|
124.37
|
144.81
|
112.99
|
105.18
|
|
Peer
Group
|
100.00
|
126.32
|
134.35
|
169.84
|
120.09
|
135.26
|
|
Item 6.
|
Selected
Financial Data
|
The
following selected financial highlights should be read in conjunction with Item
7, MDA, and Item 8, Financial Statements and Supplementary Data.
|
As
of and for Years ended September 30,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
(In
millions, except per share amounts)
|
||||||||||||||||||||
|
Revenues
|
$ | 2,114.0 | $ | 2,528.6 | $ | 2,621.4 | $ | 2,511.7 | $ | 2,379.4 | ||||||||||
|
Gross
profit
|
1,151.6 | 1,419.1 | 1,480.8 | 1,371.7 | 1,190.7 | |||||||||||||||
|
Operating
income (1)
|
321.3 | 659.3 | 800.3 | 725.1 | 663.7 | |||||||||||||||
|
Net
income
(1)
|
149.0 | 342.5 | 508.2 | 473.6 | 436.5 | |||||||||||||||
|
Basic
earnings per share (1)
|
$ | 0.51 | $ | 1.11 | $ | 1.54 | $ | 1.41 | $ | 1.27 | ||||||||||
|
Diluted
earnings per share (1)
|
$ | 0.51 | $ | 1.10 | $ | 1.51 | $ | 1.34 | $ | 1.20 | ||||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||||||
|
Basic
|
293.8 | 308.0 | 330.1 | 336.8 | 343.7 | |||||||||||||||
|
Diluted
|
294.5 | 310.4 | 336.1 | 355.8 | 370.2 | |||||||||||||||
|
Cash
dividends declared per share
|
$ | 0.33 | $ | 0.57 | $ | 0.53 | $ | 0.51 | $ | 0.49 | ||||||||||
|
Cash
from operations
|
$ | 547.9 | $ | 486.5 | $ | 821.5 | $ | 624.1 | $ | 726.4 | ||||||||||
|
Cash
from investing
|
(288.4 | ) | (365.7 | ) | (296.7 | ) | (234.0 | ) | (215.8 | ) | ||||||||||
|
Cash
from financing (2)
|
(381.2 | ) | (115.2 | ) | (556.5 | ) | (386.9 | ) | (525.6 | ) | ||||||||||
|
Capital
expenditures (3)
|
257.4 | 298.2 | 344.3 | 310.5 | 238.6 | |||||||||||||||
|
Cash
used for share repurchases
|
- | 779.7 | 1,118.3 | 426.7 | 354.7 | |||||||||||||||
|
Cash
and short-term investment securities (4)
|
$ | 247.4 | $ | 374.4 | $ | 400.7 | $ | 589.1 | $ | 688.1 | ||||||||||
|
Working
capital (6)
|
609.2 | 733.4 | 595.5 | 129.1 | 219.6 | |||||||||||||||
|
Total
assets
|
4,388.2 | 4,557.4 | 4,167.5 | 3,902.7 | 3,864.4 | |||||||||||||||
|
Credit
facilities and indebtedness (5)
|
2,174.8 | 2,263.1 | 1,508.6 | 832.4 | 811.0 | |||||||||||||||
|
Total
jackpot liabilities
|
588.1 | 650.7 | 643.1 | 546.7 | 705.8 | |||||||||||||||
|
Non-current
liabilities
|
2,796.4 | 2,911.7 | 2,023.3 | 614.1 | 741.1 | |||||||||||||||
|
Stockholders'
equity (6)
|
967.3 | 909.0 | 1,452.7 | 2,042.0 | 1,905.7 | |||||||||||||||
|
(1)
|
Fiscal
2009 included a loss of $78.0 million ($49.2 million after tax or $0.17
per diluted share) associated with our WDG IP restructuring and $35.0
million of employee restructuring charges ($22.0 million after tax or
$0.07 per diluted share).
|
|
(2)
|
Fiscal
2009 included $273.5 million net cash provided from new debt
refinancing.
|
|
(3)
|
Capital
spending increases relate to additional investments in gaming operations
equipment, as well as spending for our new Las Vegas campus construction
and Reno facilities expansion in fiscal 2005, 2006 and
2007.
|
|
(4)
|
Cash
and investment securities include restricted
amounts.
|
|
(5)
|
Fiscal
2006 and 2005 included $611.1 million and $602.2 million, respectively, of
convertible debentures classified in current liabilities due to holders’
conversion rights.
|
|
(6)
|
Reduced
shareholders’ equity in fiscal 2008 and 2007 were primarily due to
treasury share repurchases.
|
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
The
following MDA is intended to enhance the reader’s understanding of our
operations and current business environment. MDA is provided as a supplement to,
and should be read in conjunction with, our Item 1, Business, and Item 8,
Financial Statements and Supplementary Data.
International
Game Technology is a global company specializing in the design, manufacture, and
marketing of electronic gaming equipment and systems products. We are a leading
supplier of gaming products to the world with annual revenues exceeding $2.1
billion. We provide a diverse offering of quality products and services at
competitive prices, designed to increase the potential for operator profits by
enhancing the gaming player experience.
We manage
operations in two geographic segments, North America and International, with
certain unallocated company-wide income and expenses managed at the corporate
level. See BUSINESS SEGMENT RESULTS below and Note 21 of our Consolidated
Financial Statements for additional segment information and financial
results.
We are
currently operating in a challenging global business environment. The
combination of economic uncertainty, lower replacement demand, limited
opportunities from new or expanding markets, and improved competition has
negatively impacted our results. Our customers continue to report subdued casino
play levels largely attributed to the extended economic slowdown that has driven
lower casino visitation trends over the last eighteen months. This not only
adversely affects our gaming operations revenues, with nearly 85% dependent on
play levels, but it also constrains casino capital spending which affects our
for-sale product demand.
Our
gaming operations revenue yields stabilized during the second half of fiscal
2009, which we view as a positive leading indicator for economic recovery and
improved play levels. Our installed base continues to provide steady recurring
cash flows and we anticipate increased revenue yields as economic conditions
improve.
Our new
AVP® sbX™-enabled models, released
in late fiscal 2008, continue to receive broad acceptance and comprised 86% of
our North America sales in fiscal 2009. Customer appeal has also been positive
on our innovative MLD® machines that provide
flexibility between video slots and 3-D reel replication, with over 4,000 MLD® units shipped in fiscal
2009. While we are encouraged by incremental improvement in operator sentiment,
we remain cautious about the overall market environment, as well as predicting
the timing and scale of a rebound in the replacement cycle.
Strategically,
we are renewing our focus on what we believe we do well. For many years, IGT has
been an industry leader in gaming content across a global footprint and content
is what has traditionally distinguished us from the competition. In today’s
gaming market we face highly capable competitors, demanding gaming patrons, and
increasing game complexity. Such a market requires constant enhancements,
innovations, and improvements to the quality of game content across all product
platforms, particularly in video slots. Excellent content drives product sales,
increases our opportunities in the replacement cycle, and grows our installed
base.
During
the latter half of fiscal 2009 we implemented specific efforts to enhance our
content offerings, expedite delivery to market, and improve the effectiveness of
our R&D efforts. We restructured our strategic product efforts into a more
focused vertical product management structure dedicated to developing and
deploying game content using our pool of game design resources and IP portfolio.
We believe this new vertical structure will allow us to better manage the
economic contribution from the various product types and drive accountability to
those tasked with delivering product to the market. Additionally, during fiscal
2009, we implemented a consumer research group designed to aggregate and analyze
patron level data in order to provide the R&D process with real time market
information, making the patron the focus of our development
efforts.
We remain
focused on strategic long-term initiatives that we believe will maintain our
status as a leading provider of innovative gaming products and provide multiple
platforms for delivery of our content. We released our sbX™ Tier One package for sale
with several customer installations in the latter part of fiscal 2009. Tier One provides slot
operators with an incremental step towards full enterprise-wide sbX™. It is designed for easy
implementation on a smaller-scale slot-bank level basis, accommodating up to 100
games and providing operators with access to a standard library of available IGT
game themes for AVP® Video,
Video Poker and MLD®.
Additionally,
in July 2009, we began a first-of-its-kind sbX™ field trial installation
with sbX™ Media
Manager and
introducing the sbX™
Service Window. The Service Window represents a shift away from secondary
displays and provides a more powerful mechanism for delivering compelling
applications to the game screen that will enhance the player experience. We
remain on target to begin venue wide installation in the first half of fiscal
2010 and expect to realize a growing benefit from sbX™ technology as we
differentiate IGT gaming products with new ways to engage and interact with
players.
We are
dependent, in part, on new market opportunities to generate growth. Legislative
actions and the passage of voter referendums are providing new and expanding
opportunities in Illinois, Ohio, Kansas, Maryland, Pennsylvania, Florida and
Washington. The market potential is estimated at up to 40,000 machines in
Illinois and up to 17,500 machines in Ohio. Development projects in Maryland,
Kansas, and Pennsylvania received approval and licensing in fiscal 2009, and
openings are planned over the next two years. State legislatures in Kentucky,
Massachusetts, New Hampshire, Alabama, North Carolina and Texas continue to
consider gaming as a way to provide tax revenues in support of public programs.
Future gaming expansion is also anticipated in international markets, especially
Southeast Asia and Italy. Although the extent and timing is uncertain, we
believe new market opportunities will grow as the economy improves and new
jurisdictions consider gaming tax revenues as a means to address budget
shortfalls.
We
continue to take a prudent and cautious approach to our capital deployment in
order to preserve maximum flexibility. During fiscal 2009, we successfully
refinanced our debt to maintain sufficient liquidity with extended and staggered
maturities. See further discussion about our debt refinancing contained in
LIQUIDITY AND CAPITAL RESOURCES later in this MDA and in Note 13 of our
Consolidated Financial Statements. We continue to focus on reinvesting in our
business through our gaming operations installed base, as well as strategic
investments in affiliates and alliances to expand our geographic reach, product
lines, and customer base.
In
response to reduced demand, in fiscal 2009 we initiated an ongoing company-wide
strategic review of our costs and organizational structure to identify
opportunities to maximize efficiency and realign expenses with the current and
long-term business outlook. Through September 30, 2009, we reduced our global
workforce by approximately 16% from September 30, 2008 levels, through a
combination of voluntary and involuntary separation arrangements. Fiscal 2009
restructuring charges of $35.0 million included severance and one-time
termination costs, reduced by stock compensation forfeitures.
Our
fiscal 2009 cost rationalization efforts were executed through workforce
reductions and other non-wage cost controls. We estimate the full benefit of
these initiatives will be realized throughout fiscal 2010, resulting in
approximately $135.0 million of annual cost savings compared to fiscal 2008
fourth quarter spending levels. A portion of the savings is offset by costs
added from our PGIC acquisition completed in January 2009.
As we
continue the process of evaluating our business in conjunction with assessment
of the company’s long-term strategic goals, we may also further evaluate past
and potential investments to determine if and how they fit into our
organizational structure going forward. Changes in our intended relationship, as
well as changes in market conditions or operating results, related to our
affiliates or subsidiaries may cause us to reassess cash flows, recoverability,
useful lives, and fair value measurements that may result in material losses or
impairment charges.
RECENTLY
ISSUED ACCOUNTING STANDARDS
Revenue
Arrangements With Multiple Deliverables and Software Elements
In
October 2009, the FASB issued new revenue recognition guidance for software and
multi-element arrangements. 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. This new guidance also changes the methods for allocating revenues
among multiple deliverables to allow for the use of estimated selling prices. We
elected to early adopt this new guidance prospectively for new or materially
modified arrangements as of the beginning of fiscal 2010. We continue to
evaluate the extent to which this new guidance will impact the timing of our
revenues and expect many of IGT products, such as machines, will no longer be
accounted for as software, allowing for revenue recognition earlier in certain
bundled arrangements.
Convertible
Debt Instruments
In May
2008, new accounting guidance was issued requiring the separation of liability
(debt) and equity (conversion option) components for convertible debt
instruments that may settle in cash upon conversion. This change is effective
for our first quarter of fiscal 2010 and requires retrospective application for
all periods presented. We estimate the impact of this new accounting for fiscal
years 2009 and 2010 will increase annual non-cash interest expense approximately
$30.0 million, reducing diluted EPS approximately $0.07, related to our
Debentures and Notes. See Note 13 of our Consolidated Financial Statements for
additional information about our Debentures and Notes.
See Note
1 of our Consolidated Financial Statements for additional information about
recently issued accounting standards that may impact our financial statements
upon adoption.
CRITICAL
ACCOUNTING ESTIMATES
Our
consolidated financial statements were prepared in conformity with accounting
principles generally accepted in the US. Accordingly, we are required to make
estimates incorporating judgments and assumptions we believe are reasonable
based on our historical experience, contract terms, trends in our company and
the industry as a whole, as well as information available from other outside
sources. Our estimates affect amounts recorded in the financial statements and
actual results may differ from initial estimates.
We
consider the following accounting estimates to be the most critical to fully
understand and evaluate our reported financial results. They require us to make
subjective or complex judgments about matters that are inherently uncertain or
variable. Senior management discussed the development, selection and disclosure
of the following accounting estimates, considered most sensitive to changes from
external factors, with the Audit Committee of our Board of
Directors.
Revenue
Recognition
We
receive revenues from the distribution of electronic gaming equipment and
network systems, as well as licensing and services. Revenues are recognized when
all of the following have been satisfied:
|
ª
|
persuasive
evidence of an arrangement exists
|
|
ª
|
the
price to the customer is fixed and
determinable
|
|
ª
|
delivery
has occurred and any acceptance terms have been
fulfilled
|
|
ª
|
no
significant contractual obligations
remain
|
|
ª
|
collection
is reasonably assured
|
Determining
whether these requirements have been met may require us to make assumptions and
exercise judgment that could significantly impact the timing and amount of
revenue reported each period. In addition, we may enter into arrangements which
include multiple elements or deliverables, such as gaming devices bundled with
software systems and services. In such cases additional judgments and estimates
are necessary to ensure the appropriate amounts of revenue are recorded in a
given period. These judgments relate primarily to the allocation of revenues
based on VSOE or third-party evidence of each element’s fair value, and may
affect the amounts and timing of revenue recorded. If we are unable to establish
VSOE for undelivered elements, we may be required to defer all or a portion of
the revenues from certain arrangements.
The
application of our revenue recognition policies and changes in our assumptions
or judgments affect the timing and amounts of our revenues and costs. Deferred
revenue increased to $122.0 million at September 30, 2009 from $62.1 million at
September 30, 2008, primarily due to an increasing number of multiple element
contracts with bundled machines and software. Complex systems and/or multiple
element contracts may take several months to complete and deferred revenue may
increase as our products evolve toward a more software systems-centric
environment. Additionally, see discussion above under RECENTLY ISSUED ACCOUNTNG
STANDARDS—Revenue Arrangements With Multiple Deliverables and Software Elements
for information about how our revenue accounting will change in the first
quarter of fiscal 2010.
Goodwill,
Other Intangible Assets, Royalties, and Affiliate Investments
Impairment
testing for goodwill, other intangibles, affiliate investments and royalties
requires judgment, including the identification of reporting units, allocation
of related goodwill, assignment of corporate shared assets and liabilities to
reporting units, estimated cash flows, and determinations of fair value. While
we believe our estimates of future revenues and cash flows are reasonable,
different assumptions could materially affect the assessment of useful lives,
recoverability and fair value. If actual cash flows fall below initial
forecasts, we may need to record additional amortization and/or impairment
charges.
Goodwill
We
measure and test goodwill for impairment at least annually, or more often if
there are indicators of impairment. The fair value of the reporting unit is
first compared to its carrying amount including goodwill. If the fair value of
the reporting unit is greater than its carrying amount, goodwill is not
considered impaired. In the event that the fair value of the reporting unit is
less than its carrying value, the amount of the impairment loss will be measured
by comparing the implied fair value of goodwill to its carrying amount. If the
carrying amount of goodwill exceeds its implied fair value, an impairment loss
is recognized equal to that excess.
Our two
reporting units, North America and International, were determined on the basis
of customer regions and in accordance with accounting guidance on reporting
units. Components below our North America and International business segments
were evaluated to have similar economic characteristics and therefore
aggregated. In determining the fair value of our reporting units, we apply the
income approach using the DCF (discounted cash flows) method. We then compare
the implied valuation multiples (such as enterprise value to revenue, EBITDA and
EBIT) of comparable gaming companies under the market approach to validate the
reasonableness of our DCF results.
Our DCF
analysis is based on the present value of two components: the sum of our
five-year projected cash flows and a terminal value assuming a long-term growth
rate. The cash flow estimates are prepared based on our business plans for each
reporting unit, considering historical results and anticipated future
performance based on our expectations regarding product introductions and market
opportunities. The discount rates used to determine the present value of future
cash flows were derived from the weighted average cost of capital of a group of
comparable companies with consideration for the size and specific risks of each
IGT reporting unit. The discount rates used for each reporting unit were 11% for
our fiscal 2008 test and ranged from 12% to 13% for our 2009 test.
Our
goodwill totaled $1.2 billion at September 30, 2009 and 2008. Our fiscal 2009
annual goodwill impairment test indicated the fair value of each reporting unit
was significantly in excess of its carrying value. Inherent in such fair value
determinations are significant judgments and estimates, including assumptions
about our future revenues, profitability, cash flows, and long-term growth
rates, as well as our operational plans and interpretation of current economic
indicators and market valuations.
Changes
in our assumptions used from the fiscal 2008 test to the fiscal 2009 test
included updated five-year forecasts with reduced and delayed growth, lower
long-term growth rates, and higher discount rates. Fair value for each
reporting unit decreased from fiscal 2008, 53% for North America and 47% for
International. The excess of fair value over carrying value for each reporting
unit at the 2009 testing date ranged from $3.1 billion for North America to $1.2
billion for International. We believe our long-term growth projections remain
fundamentally sound and expect the fair value of each reporting unit will remain
significantly in excess of its carrying value.
If our
assumptions do not prove correct or economic conditions affecting future
operations change, our goodwill could become impaired and result in a material
adverse effect on our results of operations and financial position. To
illustrate the sensitivity of the fair value calculations on our goodwill
impairment test, we modified our 2009 test assumptions to create a hypothetical
50% decrease to the fair values of each reporting unit. The resulting
hypothetical excess of fair value over carrying value would range from
approximately $1.3 billion for North America to $0.3 billion for International,
and we would therefore have no impairment.
Other
Intangibles
Our
portfolio of other intangibles substantially consists of finite-lived patents,
contracts, trademarks, developed technology, reacquired rights and customer
relationships. We regularly monitor events or changes in circumstances that
indicate the carrying value of these intangibles may not be recoverable or
require a revision to the estimated remaining useful life. Our other intangibles
totaled $259.2 million at September 30, 2009 and $248.9 million at September 30,
2008.
If an
event or change occurs, we estimate cash flows directly associated with the use
of the intangible to test recoverability and remaining useful lives based on the
forecasted utilization of the asset and expected product revenues. In developing
estimated cash flows, we incorporate assumptions regarding changes in legal
factors, related industry climate, regulatory actions, contractual factors,
operational performance and the company’s strategic business plans, as well as
the effects of obsolescence, demand, competition, and other market conditions.
When the carrying amount exceeds the undiscounted cash flows expected to result
from the use and eventual disposition of a finite-lived intangible asset or
asset group, we then compare the carrying amount to its current fair value. We
estimate the fair value using prices for similar assets, if available, or more
typically using a DCF model. We recognize an impairment loss if the carrying
amount is not recoverable and exceeds its fair value.
Royalties
We also
regularly evaluate the estimated future benefit of prepaid and deferred
royalties to determine amounts unlikely to be realized from forecasted sales or
placements of our games. The carrying value of our prepaid and deferred
royalties totaled $101.5 million at September 30, 2009 and $195.5 million at
September 30, 2008.
Affiliate
investments
Our
affiliate investments consist of strategic alliances with other gaming
technology companies. We regularly monitor events or changes in circumstances
that indicate the carrying value of these affiliate investments may be impaired.
Future adverse changes in market conditions or operating results of these
affiliates could result in losses or an inability to recover part or all of our
investment, requiring us to record impairment.
In the
fourth quarter of fiscal 2009, we restructured our relationship with WDG and
based on our future business outlook pertaining to the use of WDG IP rights we
recorded a loss of $78.0 million. Additionally, we recorded a loss of
$13.3 million related to our affiliate investment in LVGI resulting from
significant adverse changes in LVGI’s expected financial performance together
with an evaluation of our long term gaming systems strategy. See Note 3 of our
Consolidated Financial Statements for additional information about our affiliate
investments.
Jackpot
Liabilities and Expenses
A portion
of our gaming operations recurring revenue arrangements incorporates IGT paid
WAP jackpots for which we recognize corresponding jackpot liabilities and
expense. Changes in our estimated amounts for jackpot liabilities and associated
jackpot expense are attributable to regular analysis and evaluation of the
following factors:
|
ª
|
variations
in slot play (i.e. jackpot life cycles and slot play
patterns)
|
|
ª
|
volume
(i.e. number of WAP units in service and coin-in per
unit)
|
|
ª
|
interest
rate movements
|
|
ª
|
the
size of base jackpots (i.e. initial amount of the progressive jackpots
displayed to players)
|
Interest
rates applicable to jackpot funding vary by jurisdiction and are impacted by
market forces, as well as winner elections to receive a lump sum payment in lieu
of periodic annual payments. Current and noncurrent portions of jackpot
liabilities, as well as jackpot expense, may also be impacted by changes in our
estimates and assumptions regarding the expected number of future winners who
may elect a lump sum payout.
Changes
in prime and/or treasury and agency interest rates during a given period cause
fluctuations in our jackpot expense largely due to the revaluation of future
winner liabilities. The value of the liability (and related jackpot expense)
increases when rates decline because it increases the cost to fund the
liability. Conversely, when rates increase, jackpot liabilities are reduced as
it costs less to fund the liability. Our results may be materially affected by
significant changes in interest rates such as the 200 bps decline in the prime
rate during the second quarter of fiscal 2008.
Our
jackpot liabilities decreased to $588.1 million at September 30, 2009 compared
to $650.7 million at September 30, 2008. Consolidated jackpot expense totaled
$129.3 million for fiscal 2009, $160.0 for fiscal 2008, and $164.7 million in
fiscal 2007. The decline in jackpot expense for fiscal 2009 resulted from
decreased WAP units in our installed base, lower play levels, and variations in
slot play, partially offset by unfavorable interest rate movements.
BUSINESS
SEGMENT RESULTS, later in this MDA, provides additional details regarding the
fluctuation in jackpot expense. Note 1 of our Consolidated Financial Statements
summarizes our accounting policies related to jackpot liabilities and
expense.
Inventory
and Gaming Operations Equipment
The
determination of obsolete or excess inventory requires us to estimate the future
demand for our products within specific time horizons, generally one year or
less. If we experience a significant unexpected decrease in demand for our
products or a higher occurrence of inventory obsolescence because of changes in
technology or customer requirements, we would recognize additional obsolescence
charges. Inventory management remains an area of focus as we balance the need to
maintain strategic inventory levels to ensure competitive lead times versus the
risk of inventory obsolescence because of rapidly changing technology and
customer requirements. The decrease in inventories to $157.8 million at
September 30, 2009 from $218.3 million at September 30, 2008, was primarily
related to the prior year build-up in support of the release of newer platforms
and cabinets.
We are
also required to estimate salvage values and useful lives for our gaming
operations equipment. Trends in market demand and technological obsolescence may
require us to record additional asset charges which would negatively impact
gross profit.
Income
Taxes
We
conduct business globally and are subject to income taxes in US federal, state,
local, and foreign jurisdictions. Determination of the appropriate amount and
classification of income taxes depends on several factors, including estimates
of the timing and probability of realization of deferred income taxes, reserves
for uncertain tax positions, and income tax payment timing.
We record
deferred tax assets and liabilities based on temporary differences between the
financial reporting and tax bases of assets and liabilities, applying enacted
tax rates expected to be in effect for the year in which the differences are
expected to reverse. The ability to realize the deferred tax assets is evaluated
through the forecasting of taxable income in each jurisdiction, using historical
and projected future operating results, the reversal of existing temporary
differences, and the availability of tax planning strategies. Net deferred tax
assets totaled $310.1 million at September 30, 2009 and $251.3 million at
September 30, 2008.
Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. Changes in tax laws, enacted
tax rates, geographic mix, or estimated annual taxable income could change our
valuation of deferred tax assets and liabilities, which in turn impacts our tax
provision. We carefully monitor many factors, including the impact of current
economic conditions, in our valuation of deferred tax assets. During fiscal
2009, we recorded additional valuation allowances of $19.5 million, primarily
related to foreign deferred tax assets and investment write-downs. At September
30, 2009, our total valuation allowance of $37.1 million related to investment
write-downs, acquisition related net operating losses, and foreign deferred
assets not expected to be fully realized because we cannot conclude that it is
more likely than not that we will earn income of the specific character required
to utilize these assets before they expire.
In the
ordinary course of business, there are many transactions and calculations for
which the ultimate tax determination is uncertain. At the beginning of fiscal
2008, we adopted new accounting guidance which required the recognition of
uncertain tax positions taken or expected to be taken in a tax return, when it
is “more likely than not” to be sustained upon examination. This assessment
further presumes that tax authorities evaluate the technical merits of
transactions individually with full knowledge of all facts and circumstances
surrounding the issue. The amount recognized in the financial statements is the
largest benefit that we believe is more than 50% likely of being realized upon
settlement. Changes in facts or information as well as the expiration of
statutes of limitations and/or settlements with tax jurisdictions may result in
material adjustments to these estimates in the future.
Our
income tax provision will be impacted to the extent the final outcome of these
tax positions differs from the amount recorded. At September 30, 2009, our net
unrecognized tax benefits totaled $67.8 million, of which $46.5 million would
impact the effective tax rate if recognized. At September 30, 2008, our net
unrecognized tax benefits totaled $87.5 million, of which $53.4 million would
impact the effective tax rate if recognized.
Our tax
provision for fiscal 2009 was reduced by significant non-recurring discrete
items, partially offset by investment write-downs and foreign deferred tax
assets not expected to be fully realized. Our effective tax rate is
dependent upon forecasts of future taxable income, the geographic composition of
worldwide earnings, and the tax regulations governing each
jurisdiction. We carefully monitor many factors including the impact
of current economic conditions, as discussed above under “Goodwill, Other
Intangible Assets, Royalties, and Affiliate Investments” and adjust the
effective tax rate as required. Although our effective tax rate may continue to
be volatile due to changes in uncertain tax positions, we anticipate our fiscal
2010 effective tax rate will trend towards a more historical range of 39% to
40%. See Notes 1 and 17 for additional information about our income
taxes.
CONSOLIDATED
OPERATING RESULTS – A Year Over Year Comparative Analysis
|
Favorable
(Unfavorable)
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||||||||||||
|
(In
millions except units & EPS)
|
||||||||||||||||||||||||||||||
|
Revenues
|
$ | 2,114.0 | $ | 2,528.6 | $ | 2,621.4 | $ | (414.6 | ) | -16 | % | $ | (92.8 | ) | -4 | % | ||||||||||||||
|
Gaming
operations
|
1,178.9 | 1,337.9 | 1,361.2 | (159.0 | ) | -12 | % | (23.3 | ) | -2 | % | |||||||||||||||||||
|
Product
sales
|
935.1 | 1,190.7 | 1,260.2 | (255.6 | ) | -21 | % | (69.5 | ) | -6 | % | |||||||||||||||||||
|
Machines
|
589.3 | 794.8 | 876.0 | (205.5 | ) | -26 | % | (81.2 | ) | -9 | % | |||||||||||||||||||
|
Non-machine
|
345.8 | 395.9 | 384.2 | (50.1 | ) | -13 | % | 11.7 | 3 | % | ||||||||||||||||||||
|
Gross
profit
|
$ | 1,151.6 | $ | 1,419.1 | $ | 1,480.8 | $ | (267.5 | ) | -19 | % | $ | (61.7 | ) | -4 | % | ||||||||||||||
|
Gaming
operations
|
683.8 | 778.1 | 823.0 | (94.3 | ) | -12 | % | (44.9 | ) | -5 | % | |||||||||||||||||||
|
Product
sales
|
467.8 | 641.0 | 657.8 | (173.2 | ) | -27 | % | (16.8 | ) | -3 | % | |||||||||||||||||||
|
Gross
margin
|
54 | % | 56 | % | 56 | % | (2 | )pp | -4 | % | - | pp | - | |||||||||||||||||
|
Gaming
operations
|
58 | % | 58 | % | 60 | % | - | pp | - | (2 | )pp | -3 | % | |||||||||||||||||
|
Product
sales
|
50 | % | 54 | % | 52 | % | (4 | )pp | -7 | % | 2 | pp | 4 | % | ||||||||||||||||
|
Units
|
||||||||||||||||||||||||||||||
|
Gaming
operations installed base
|
61,400 | 60,500 | 60,100 | 900 | 1 | % | 400 | 1 | % | |||||||||||||||||||||
|
Fixed
|
9,300 | 15,700 | 14,500 | (6,400 | ) | -41 | % | 1,200 | 8 | % | ||||||||||||||||||||
|
Variable
|
52,100 | 44,800 | 45,600 | 7,300 | 16 | % | (800 | ) | -2 | % | ||||||||||||||||||||
|
Equivalent
units recognized
|
53,600 | 72,700 | 105,900 | (19,100 | ) | -26 | % | (33,200 | ) | -31 | % | |||||||||||||||||||
|
Operating
income
|
$ | 321.3 | $ | 659.3 | $ | 800.3 | $ | (338.0 | ) | -51 | % | $ | (141.0 | ) | -18 | % | ||||||||||||||
|
Operating
margin
|
15 | % | 26 | % | 31 | % | (11 | )pp | -42 | % | (5 | )pp | -16 | % | ||||||||||||||||
|
Net
income
|
$ | 149.0 | $ | 342.5 | $ | 508.2 | $ | (193.5 | ) | -56 | % | $ | (165.7 | ) | -33 | % | ||||||||||||||
|
Diluted
EPS
|
$ | 0.51 | $ | 1.10 | $ | 1.51 | $ | (0.59 | ) | -54 | % | $ | (0.41 | ) | -27 | % | ||||||||||||||
Fiscal
2009 vs Fiscal 2008
Consolidated
net income declined in fiscal 2009 primarily due to reduced volumes, largely
attributable to the impact of the extended economic downturn on casino play
levels and capital spending, as well as more intense competition. Additionally,
fiscal 2009 results were adversely impacted by charges resulting from
management’s reassessment of long-term goals and other cost rationalization
efforts, including a non-cash loss of $78.0 million ($49.2 million after tax or
$0.17 per diluted share) associated with our WDG IP transaction and workforce
restructuring costs of $35.0 million ($22.0 million after tax or $0.7 per
diluted share). Fiscal 2008 also included a number of significant items
affecting comparability noted below under the subheading “Fiscal 2008 vs Fiscal
2007.”
Increased
interest expense related to debt refinancing, additional bad debt provisions,
and unfavorable changes in foreign exchange rates further burdened fiscal 2009
earnings. Unfavorable changes in foreign exchange rates accounted for
approximately $73.8 million of the decrease in fiscal 2009
revenues.
Although
fiscal 2009 included an extra week due to our 52/53-week accounting year, the
benefit to gaming operations was more than offset by increased operating
expenses.
Consolidated
Gaming Operations
Revenues
and gross profit from gaming operations declined primarily due to lower play
levels and continued shifts in our installed base mix toward lower-yielding
non-WAP machines. Non-WAP units generally provide lower revenues and gross
profit because they carry a lower pricing structure and generate lower average
play levels. At the same time, non-WAP units provide higher gross margin because
there is no associated jackpot expense. Growth in our International installed
base partially offset declines in North America, reflecting strength in our
geographic diversity.
Jackpot
expense decreased $35.0 million in fiscal 2009 primarily due to fewer WAP units
and decreased play levels, partially offset by unfavorable interest rate
changes. Interest rate movement increased jackpot expense by $2.2 million in
fiscal 2009 compared to the prior year. See MDA—CRITICAL ACCOUNTING
ESTIMATES—Jackpot Liabilities and Expenses for additional information about
factors affecting jackpot expense.
The extra
week during fiscal 2009 contributed approximately $22.4 million in gaming
operations revenues and $11.5 million in gross profit.
Consolidated
Product Sales
Revenues
and gross profit for product sales declined from the prior year primarily due to
lower unit volume across most markets, largely attributed to fewer new openings
and weakness in replacement demand. International markets were further impacted
by unfavorable changes in foreign exchange rates. Gross margin was
negatively impacted by reduced volume efficiencies, as well as higher systems
upgrade costs and fewer new systems installations. Consolidated product sales
margins fluctuate depending on the geographic mix and types of products
sold.
Deferred
revenue increased $59.9 million during fiscal 2009 to $122.0 million at
September 30, 2009, primarily as a result of multi-element contracts with
systems software and machines bundled together. We expect to recognize most of
the deferred revenue balance during fiscal 2010. During fiscal 2009, we shipped
5,000 units for which revenues were deferred and recognized revenues for 2,400
units previously shipped, for a net growth of 2,600 units in our deferred
revenue balance.
“Equivalent
units recognized” (as presented in the table above) include units previously
shipped for which revenues were recognized during the period and exclude units
shipped during the period for which revenue was deferred. When machine revenues
are prorated over the life of an associated systems lease, equivalent units
recognized was determined based on the proportionate revenues recognized for the
period. “Units shipped” represent all units shipped to customers during the
period and include units shipped for which revenues were deferred.
Fiscal
2008 vs Fiscal 2007
Net
income decreased in fiscal 2008, predominately due to lower gaming operations
play levels amid unfavorable economic conditions and weakness in North America
replacement sales demand. Comparability was also significantly affected
by:
|
ª
|
write-downs
of investments in unconsolidated affiliates totaling $28.6 million ($0.10
per diluted share)
|
|
ª
|
interest
rate declines which increased jackpot expense $25.3 million ($15.4 million
after tax or $0.05 per diluted
share)
|
|
ª
|
fiscal
2007 gains totaling $22.8 million from hurricane insurance settlements and
an airplane sale ($14.3 million after tax or $0.04 per diluted
share)
|
Favorable
foreign currency exchange increased revenue by approximately $43.9 million
during fiscal 2008 compared to fiscal 2007.
Consolidated
Gaming Operations
Revenues
declined primarily due to lower play levels in North America and a growing mix
of lower-yielding non-WAP units in our installed base. International revenue and
gross profit improvements partially offset declines in North America reflecting
the geographic expansion of our gaming operations.
Fiscal
2008 gross profit and margin comparability was adversely affected by unfavorable
interest rate impacts on jackpot expense and technological obsolescence charges
of $10.4 million related to the transition toward new products, as well as a
prior year gain of $5.0 million from hurricane property insurance.
Fiscal
2008 jackpot expense was negatively impacted by $25.3 million due to declining
interest rates, with the most significant impact resulting from the 200 bps
decline in the prime rate during the second quarter. The additional cost due to
interest rates was more than offset by reduced play levels, fewer WAP units, and
variations in slot play, for a net decrease to jackpot expense of $4.7 million
compared to fiscal 2007. See MDA—CRITICAL ACCOUNTING ESTIMATES—Jackpot
Liabilities and Expenses for additional details regarding the factors affecting
jackpot expense.
Consolidated
Product Sales
Fiscal
2008 product sales revenues and gross profit declined primarily due to fewer
machine shipments across most markets. Gross margin improvements were due to a
favorable product and jurisdictional mix, including a greater contribution from
non-machine sales. During fiscal 2008, we shipped 2,100 additional units for
which revenues were deferred.
Operating
Expenses
|
Favorable
(Unfavorable)
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||||||||||||
|
Selling,
general and administrative
|
$ | 425.1 | $ | 458.5 | $ | 397.9 | $ | 33.4 | 7 | % | $ | (60.6 | ) | -15 | % | |||||||||||||||
|
Research
and development
|
211.8 | 223.0 | 202.2 | 11.2 | 5 | % | (20.8 | ) | -10 | % | ||||||||||||||||||||
|
Depreciation
and amortization
|
80.4 | 76.7 | 80.4 | (3.7 | ) | -5 | % | 3.7 | 5 | % | ||||||||||||||||||||
|
Restructuring
charges
|
35.0 | 1.6 | - | (33.4 | ) | * | (1.6 | ) | * | |||||||||||||||||||||
|
Loss
on other assets
|
78.0 | - | - | (78.0 | ) | * | - | * | ||||||||||||||||||||||
|
Total
|
$ | 830.3 | $ | 759.8 | $ | 680.5 | $ | (70.5 | ) | -9 | % | $ | (79.3 | ) | -12 | % | ||||||||||||||
|
Percent
of revenues
|
39 | % | 30 | % | 26 | % | ||||||||||||||||||||||||
Fiscal
2009 vs Fiscal 2008
The
positive impact of our cost reduction initiatives is becoming more evident in
reduced operating expenses. Excluding restructuring charges and loss on other
assets associated with our WDG IP, operating expenses decreased $42.5 million or
6% in fiscal 2009 from fiscal 2008. See Note 2 and 3 of our Consolidated
Financial Statements for additional information about restructuring and WDG
IP.
Our
fiscal 2009 cost rationalization efforts were executed through workforce
reduction and other non-wage cost controls. We reduced our global workforce by
approximately 16% during fiscal 2009 from September 30, 2008 levels, through a
combination of voluntary and involuntary separation arrangements. Restructuring
charges included cash severance and one-time termination costs, reduced by stock
compensation forfeitures. See Note 2 of our Consolidated Financial Statements
for additional information about our remaining restructuring plan
liability.
Decreases
in staffing costs, professional fees, advertising, supplies, and travel were
partially offset by higher bad debt provisions, up $24.9 million during fiscal
2009 due to certain specific customer credit concerns amidst the economic
downturn. Additionally, the extra week of operations added $12.6 million and the
impact of foreign currency exchange reduced operating costs by approximately
$22.8 million during fiscal 2009 compared to fiscal 2008.
Fiscal
2008 vs Fiscal 2007
SG&A
and R&D increased in fiscal 2008 attributable to:
|
ª
|
additional
bad debt provisions of $15.0 million related to credit concerns on certain
receivables
|
|
ª
|
increased
staffing cost of $27.1 million
|
|
ª
|
higher
legal and compliance fees of $9.9
million
|
|
ª
|
changes
in foreign currency exchange of approximately $8.4
million
|
|
ª
|
prior
year gains of $12.0 million from Gulf Coast hurricane business
interruption insurance settlement and $5.8 million from the sale of a
company airplane
|
R&D
increased in fiscal 2008 primarily due to added focus on technologies,
especially server-based gaming initiatives.
Other
Income (Expense) and Taxes
|
Favorable
(Unfavorable)
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||||||||||||
|
Interest
Income
|
$ | 62.0 | $ | 67.4 | $ | 82.0 | $ | (5.4 | ) | -8 | % | $ | (14.6 | ) | -18 | % | ||||||||||||||
|
WAP
|
27.9 | 32.2 | 37.1 | (4.3 | ) | -13 | % | (4.9 | ) | -13 | % | |||||||||||||||||||
|
Other
|
34.1 | 35.2 | 44.9 | (1.1 | ) | -3 | % | (9.7 | ) | -22 | % | |||||||||||||||||||
|
Interest
Expense
|
(129.4 | ) | (100.1 | ) | (77.6 | ) | (29.3 | ) | -29 | % | (22.5 | ) | -29 | % | ||||||||||||||||
|
WAP
|
(27.4 | ) | (28.6 | ) | (31.3 | ) | 1.2 | 4 | % | 2.7 | 9 | % | ||||||||||||||||||
|
Other
|
(102.0 | ) | (71.5 | ) | (46.3 | ) | (30.5 | ) | -43 | % | (25.2 | ) | -54 | % | ||||||||||||||||
|
Other
|
(15.9 | ) | (35.8 | ) | 0.1 | 19.9 | 56 | % | (35.9 | ) | * | |||||||||||||||||||
|
Total
other income (expense)
|
$ | (83.3 | ) | $ | (68.5 | ) | $ | 4.5 | $ | (14.8 | ) | -22 | % | $ | (73.0 | ) | * | |||||||||||||
|
Income
tax provision
|
$ | 89.0 | $ | 248.3 | $ | 296.6 | $ | 159.3 | $ | 48.3 | ||||||||||||||||||||
|
Effective
tax rate
|
37.4 | % | 42.0 | % | 36.9 | % | 4.6 | (5.1 | ) | |||||||||||||||||||||
Fiscal
2009 vs Fiscal 2008
The
unfavorable variance in fiscal 2009 total other income (expense) was primarily
due to higher interest expense, partially offset by reduced investment
write-downs. Higher interest costs were primarily due to higher rates on
refinancing completed in June 2009 and included non-recurring refinancing
charges of $4.4 million. The extra week in fiscal 2009 also contributed to
higher interest expense. See Note 13 of our Consolidated Financial Statements
for additional information about our outstanding debt.
Affiliate
investment write-downs included $13.3 million for LVGI and $2.1 million for PGIC
during fiscal 2009 and $21.4 million for CLS and $7.2 million for PGIC during
fiscal 2008. Affiliate write-downs were driven by the economic downturn, as well
as a reassessment of our future business outlook. See Note 3 of our Consolidated
Financial Statements for additional information about these investments and
related write-downs.
WAP
interest income and expense is related to annuity-based jackpot winner
liabilities and accretes at approximately the same rate. WAP interest income
also includes earnings on restricted cash and investments held for future
winners. WAP interest is declining primarily due to fewer winners electing
annuity based payments.
Our tax
rate for fiscal 2009 was reduced by significant favorable discrete items,
partially offset by the negative impact of a valuation allowance established
against foreign deferred tax assets not likely to be realized. These tax items
are further described in Note 17 of our Consolidated Financial Statements. While
changes in uncertain tax positions may continue to cause volatility in future
effective tax rates, our fiscal 2010 effective tax rate is expected to fall
between 39% and 40% (inclusive of discrete items).
Fiscal
2008 vs Fiscal 2007
The
unfavorable change in total other income (expense) in fiscal 2008 was primarily
attributable to:
|
ª
|
$28.6
million related to write-downs of our investments in CLS and
PGIC
|
|
ª
|
higher
interest expense resulting from increased borrowings under our revolving
credit facility
|
|
ª
|
reduced
interest income due to lower investment balances and interest
rates
|
Our tax
rate increased in fiscal 2008 largely due to the effect of non-deductible
investment write-downs, as well as increased accruals for uncertain tax
positions related to the adoption of new accounting rules. The fiscal 2008 tax
rate also increased due to changes in the geographical mix of taxable income.
See Note 17 of our Consolidated Financial Statements for additional information
about our income taxes.
|
BUSINESS
SEGMENT RESULTS – A Year Over Year Comparative
Analysis
|
Operating
income for each regional segment below reflects applicable operating expenses.
See Note 21 of our Consolidated Financial Statements for additional business
segment information.
|
North
America
|
|
Favorable
(Unfavorable)
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||||||||||||
|
(In
millions except units)
|
||||||||||||||||||||||||||||||
|
Revenues
|
$ | 1,631.4 | $ | 1,912.4 | $ | 2,021.7 | $ | (281.0 | ) | -15 | % | $ | (109.3 | ) | -5 | % | ||||||||||||||
|
Gaming
operations
|
1,013.9 | 1,180.8 | 1,235.0 | (166.9 | ) | -14 | % | (54.2 | ) | -4 | % | |||||||||||||||||||
|
Product
sales
|
617.5 | 731.6 | 786.7 | (114.1 | ) | -16 | % | (55.1 | ) | -7 | % | |||||||||||||||||||
|
Machines
|
376.9 | 432.2 | 491.6 | (55.3 | ) | -13 | % | (59.4 | ) | -12 | % | |||||||||||||||||||
|
Non-machine
|
240.6 | 299.4 | 295.1 | (58.8 | ) | -20 | % | 4.3 | 1 | % | ||||||||||||||||||||
|
Gross
profit
|
$ | 893.7 | $ | 1,083.4 | $ | 1,172.5 | $ | (189.7 | ) | -18 | % | $ | (89.1 | ) | -8 | % | ||||||||||||||
|
Gaming
operations
|
579.9 | 688.7 | 740.7 | (108.8 | ) | -16 | % | (52.0 | ) | -7 | % | |||||||||||||||||||
|
Product
sales
|
313.8 | 394.7 | 431.8 | (80.9 | ) | -20 | % | (37.1 | ) | -9 | % | |||||||||||||||||||
|
Gross
margin
|
55 | % | 57 | % | 58 | % | (2 | ) | pp | -4 | % | (1 | ) | pp | -2 | % | ||||||||||||||
|
Gaming
operations
|
57 | % | 58 | % | 60 | % | (1 | ) | pp | -2 | % | (2 | ) | pp | -3 | % | ||||||||||||||
|
Product
sales
|
51 | % | 54 | % | 55 | % | (3 | ) | pp | -6 | % | (1 | ) | pp | -2 | % | ||||||||||||||
|
Units
|
||||||||||||||||||||||||||||||
|
Gaming
operations installed base
|
45,600 | 47,300 | 49,000 | (1,700 | ) | -4 | % | (1,700 | ) | -3 | % | |||||||||||||||||||
|
Fixed
|
6,500 | 6,800 | 6,500 | (300 | ) | -4 | % | 300 | 5 | % | ||||||||||||||||||||
|
Variable
|
39,100 | 40,500 | 42,500 | (1,400 | ) | -3 | % | (2,000 | ) | -5 | % | |||||||||||||||||||
|
Equivalent
units recognized
|
25,900 | 35,000 | 43,000 | (9,100 | ) | -26 | % | (8,000 | ) | -19 | % | |||||||||||||||||||
|
Operating
income
|
$ | 321.8 | $ | 613.0 | $ | 769.7 | $ | (291.2 | ) | -48 | % | $ | (156.7 | ) | -20 | % | ||||||||||||||
|
Operating
margin
|
20 | % | 32 | % | 38 | % | (12 | ) | pp | -38 | % | (6 | ) | pp | -16 | % | ||||||||||||||
|
Fiscal
2009 vs Fiscal 2008
|
Reduced
fiscal 2009 operating results for North America reflected continued suppressed
demand from our customers and their patrons, partially offset by expense savings
achieved through recent cost rationalization initiatives. Fiscal 2009 operating
results were also negatively impacted by the $78.0 million loss on our WDG IP
transaction, restructuring charges, and increased bad debt provisions related to
increased customer credit risk associated with the economic
downturn.
|
North
America Gaming Operations
|
Gaming
operations revenues and gross profit declined from the prior year due to lower
play levels and a lower installed base increasingly comprised of fewer WAP
units. Depressed casino play levels continue to have a significant adverse
affect on gaming operations with 86% of our installed base composed of variable
fee units where pricing is based on a percentage of play. Lower play levels also
drove current fiscal year gross profit and margin decline, partially offset by
lower depreciation, service labor, and gaming taxes.
The extra
week of North America operations in fiscal 2009 contributed approximately $19.1
million in revenues and $9.8 million in gross profit.
|
North
America Product Sales
|
Fiscal
2009 product sales revenues and gross profit decreased on lower unit volume and
fewer non-machine sales, partially offset by a favorable mix of higher priced
MLD models. Gross margin declined in fiscal 2009 primarily due to reduced volume
efficiencies, as well as higher systems upgrade costs and fewer new systems
installations. Low replacement demand continued to adversely affect product
sales. We shipped 26,400 units in fiscal 2009, of which 41% were replacement
units, compared to 37,100 units shipped in fiscal 2008, of which 44% were
replacement units.
|
Fiscal
2008 vs Fiscal 2007
|
North
America operating results during fiscal 2008 were unfavorably affected by lower
gaming operations play levels and interest rate declines in the midst of the
economic downturn, as well as continued softness in replacement demand.
Operating income was also down compared to fiscal 2007 due to higher operating
expenses.
|
North
America Gaming Operations
|
Gaming
operations revenues and gross profit declined in fiscal 2008 due to lower play
levels, as well as the shift in our installed base toward lower-yielding non-WAP
units. Declines in our installed base from reductions in Florida and California
Class II markets, as they transitioned to Class III for-sale games, were
partially offset by increases in Alabama. As approximately 85% of our installed
base was comprised of variable fee units with pricing based on a percentage of
play, our gaming operations revenues were significantly impacted by the economic
downturn.
Gaming
operations gross profit and margin also declined due to the negative impact of
lower interest rates on our jackpot costs, technological obsolescence charges of
$5.3 million, and the prior year gain of $5.0 million from hurricane property
insurance.
|
North
America Product Sales
|
Product
sales revenues and gross profit were down compared to fiscal 2007 primarily due
to fewer units on low replacement demand, partially offset by higher IP
royalties. Machine revenues reflected an increase in the mix of our
premium-priced AVP®,
which partially offset lower unit volume. The decline in gross margin is
primarily attributable to the increased share of AVP® machines which provide
higher gross profit, but lower margins.
The
decline in unit shipments was mainly attributable to low replacement demand. The
economic conditions in North America exacerbated the slump in demand as
declining gaming revenues caused gaming operators to defer capital spending on
replacement machines, as well as new or expanded properties. We shipped 37,100
units in fiscal 2008, with 44% replacement units, versus 43,000 in fiscal 2007,
with 52% replacement units.
|
International
|
|
Favorable
(Unfavorable)
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||||||||||||
|
(In
millions except units)
|
||||||||||||||||||||||||||||||
|
Revenues
|
$ | 482.6 | $ | 616.2 | $ | 599.7 | $ | (133.6 | ) | -22 | % | $ | 16.5 | 3 | % | |||||||||||||||
|
Gaming
operations
|
165.0 | 157.1 | 126.2 | 7.9 | 5 | % | 30.9 | 24 | % | |||||||||||||||||||||
|
Product
sales
|
317.6 | 459.1 | 473.5 | (141.5 | ) | -31 | % | (14.4 | ) | -3 | % | |||||||||||||||||||
|
Machines
|
212.4 | 362.6 | 384.4 | (150.2 | ) | -41 | % | (21.8 | ) | -6 | % | |||||||||||||||||||
|
Non-machine
|
105.2 | 96.5 | 89.1 | 8.7 | 9 | % | 7.4 | 8 | % | |||||||||||||||||||||
|
Gross
profit
|
$ | 257.9 | $ | 335.7 | $ | 308.3 | $ | (77.8 | ) | -23 | % | $ | 27.4 | 9 | % | |||||||||||||||
|
Gaming
operations
|
103.9 | 89.4 | 82.3 | 14.5 | 16 | % | 7.1 | 9 | % | |||||||||||||||||||||
|
Product
sales
|
154.0 | 246.3 | 226.0 | (92.3 | ) | -37 | % | 20.3 | 9 | % | ||||||||||||||||||||
|
Gross
margin
|
53 | % | 54 | % | 51 | % | (1 | ) | pp | -2 | % | 3 | pp | 6 | % | |||||||||||||||
|
Gaming
operations
|
63 | % | 57 | % | 65 | % | 6 | pp | 11 | % | (8 | ) | pp | -12 | % | |||||||||||||||
|
Product
sales
|
48 | % | 54 | % | 48 | % | (6 | ) | pp | -11 | % | 6 | pp | 13 | % | |||||||||||||||
|
Units
|
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