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
|
- | |||||||||||||||||||||||||||||
|
Gaming
operations installed base
|
15,800 | 13,200 | 11,100 | 2,600 | 20 | % | 2,100 | 19 | % | |||||||||||||||||||||
|
Fixed
|
2,800 | 8,900 | 8,000 | (6,100 | ) | -69 | % | 900 | 11 | % | ||||||||||||||||||||
|
Variable
|
13,000 | 4,300 | 3,100 | 8,700 | 202 | % | 1,200 | 39 | % | |||||||||||||||||||||
|
Equivalent
units recognized
|
27,700 | 37,700 | 62,900 | (10,000 | ) | -27 | % | (25,200 | ) | -40 | % | |||||||||||||||||||
|
Operating
income
|
$ | 104.9 | $ | 158.9 | $ | 159.8 | $ | (54.0 | ) | -34 | % | $ | (0.9 | ) | -1 | % | ||||||||||||||
|
Operating
margin
|
22 | % | 26 | % | 27 | % | (4 | ) | pp | -15 | % | (1 | ) | pp | -4 | % | ||||||||||||||
|
Fiscal
2009 vs Fiscal 2008
|
International
operating results declined for fiscal 2009 primarily due to lower sales volumes,
partially offset by gaming operations growth. International revenue decreases
were most notable in Europe, Japan, and South America, in large part due to the
effects of the global economic downturn. Changes in foreign exchange rates
were unfavorable to international revenues by approximately $66.2 million in
fiscal 2009. International operating results were also negatively impacted by
increased workforce restructuring charges during the current year.
|
International
Gaming Operations
|
Improved
gaming operations revenues and gross profit for the current year were driven by
installed base growth, most significant in the UK, partially offset by
unfavorable foreign exchange rate changes. The current year included increased
Japan rentals and significant conversions from fixed to variable pricing
arrangements. The extra week during fiscal 2009 contributed approximately $3.3
million in revenues and $1.7 million in gross profit. Current year gross profit
and margin also improved with lower depreciation and obsolescence.
|
International
Product Sales
|
Product
sales revenues, gross profit and gross margin decreased in fiscal 2009 primarily
due to lower unit volume across most regions, unfavorable changes in foreign
exchange rates, and reduced volume efficiencies, partially offset by higher
non-machine contributions.
|
Fiscal
2008 vs Fiscal 2007
|
International
operating results were relatively flat during fiscal 2008. Favorable
foreign currency exchange, continued growth in gaming operations and a favorable
mix of product sales offset declines in Japan and the UK. Fiscal 2008 revenues
benefited $34.4 million from favorable foreign currency exchange rates. Total
gross margin increased as improvements in product sales outweighed gaming
operations declines. Operating income for fiscal 2008 included higher operating
expenses, primarily bad debt provisions.
|
International
Gaming Operations
|
Improvements
in gaming operations revenues and gross profit during fiscal 2008 were mainly
due to increased internet gaming and other non-installed base revenues,
including leased equipment, casino-owned units and Japan rentals. Improved
performance in Latin America and a higher average installed base also
contributed to increased revenues. Installed base growth was mainly from the UK
and included 800 units from the fiscal 2008 acquisition of
Cyberview.
Fiscal
2008 gaming operations gross profit and margins were negatively impacted by $5.1
million in technological obsolescence charges. Gross margin was also down due to
the additional contribution from new, lower-margin internet gaming products,
Japan rentals, and a shift to lower-margin units in the UK.
|
International
Product Sales
|
Product
sales revenues were down during fiscal 2008 due to fewer units, primarily in
Japan. Product sales gross profit improvements were realized in fiscal 2008 as
our higher-priced, higher-margin jurisdictions more than offset declines from
the lower-priced, lower-margin markets of Japan and the UK. Additionally,
non-machine sales increased compared to fiscal 2007, with improved parts and
systems sales. Margin improvement was attributed mainly to a favorable mix of
non-machine sales, as well as fewer low margin units sold in Japan.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
|
Sources
of Liquidity
|
At
September 30, 2009, our principal sources of liquidity were cash and equivalents
(including restricted cash), cash from operations, and $1.7 billion available on
our credit facilities worldwide. During fiscal 2009, we refinanced
our debt as discussed below under “Credit Facilities and
Indebtedness.” Other potential sources of capital include, but are
not limited to, the issuance of public or private placement debt, bank credit
facilities and the issuance of equity or convertible debt
securities. Based on past performance and current expectations, we
believe the combination of these resources will satisfy our needs for working
capital, jackpot liabilities, capital expenditures, debt service, and other
liquidity requirements associated with our existing operations into the
foreseeable future.
Restricted
cash and investments, as well as jackpot annuity investments, are available only
for funding jackpot winner payments. Unrestricted cash and equivalents decreased
$119.7 million to $146.7 million at September 30, 2009. Working
capital decreased to $609.2 million at September 30, 2009 from $733.4 million at
September 30, 2008, primarily due to reduced inventory and
receivables.
Additionally,
we held ARS of $21.6 million par at September 30, 2009 that have no active
market. We also held ARS put rights entitling us to sell our ARS at par plus
accrued interest during the exercise period from June 30, 2010 through July 2,
2012. There has been no interruption in ARS interest receipts and we expect to
fully realize the par value without significant loss. See Note 8 and Note 20 of
our Consolidated Financial Statements for additional information about our
ARS.
|
Cash
Flows Summary
|
|
Favorable
(Unfavorable)
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Operations
|
$ | 547.9 | $ | 486.5 | $ | 821.5 | $ | 61.4 | $ | (335.0 | ) | |||||||||
|
Investing
|
(288.4 | ) | (365.7 | ) | (296.7 | ) | 77.3 | (69.0 | ) | |||||||||||
|
Financing
|
(381.2 | ) | (115.2 | ) | (556.5 | ) | (266.0 | ) | 441.3 | |||||||||||
|
Effects
of exchange rates
|
2.0 | (0.5 | ) | (1.6 | ) | 2.5 | 1.1 | |||||||||||||
|
Net
Change
|
$ | (119.7 | ) | $ | 5.1 | $ | (33.3 | ) | $ | (124.8 | ) | $ | 38.4 | |||||||
|
Operating
Cash Flows
|
Despite
lower earnings operating cash flows increased during fiscal 2009 compared to
fiscal 2008, primarily due to prior year additional prepayments to secure
long-term licensing rights, as well as additional cash provided from net changes
in operating assets and liabilities. Additional cash provided from inventories
and receivables was partially offset by increased cash used in jackpot
liabilities and taxes. Added payments for restructuring of $33.3 million were
offset by savings from cost rationalization efforts.
The net
change in operating receivables resulted in operating cash flows of $8.1 million
since the end of fiscal 2008. Excluding notes and contracts, average days sales
outstanding for the trailing twelve months at September 30, 2009 decreased to 58
days from 63 days in fiscal 2008 on lower revenues and receivables. The decrease
in inventory resulted in $55.6 million of operating cash flows during fiscal
2009. Inventory turns for the trailing twelve months at September 30, 2009
improved to 3.0 versus 2.5 at September 30, 2008 due to reduced inventory
levels.
Fiscal
2008 operating cash flows declined from fiscal 2007 primarily due to lower
earnings, increased inventories, additional prepayments of $80.0 million to
secure long-term licensing rights, and increased receivables.
Cash
flows related to jackpot liabilities fluctuate based on the timing of jackpots
and winner payments, volume of play, and market variations in applicable
interest rates as described in Note 1 of our Consolidated Financial
Statements.
|
Investing
Cash Flows
|
The
decrease in cash used for investing during fiscal 2009 versus 2008 was primarily
due to decreased restricted cash requirements, lower business acquisitions and
affiliate investments, and reduced capital expenditures, partially offset by
increased net development financing.
Higher
cash used for investing activities during fiscal 2008 compared to 2007 was due
to increased restricted cash, and lower proceeds from the sale of investment
securities, partially offset by lower capital expenditures. Investments in
unconsolidated affiliates and business acquisitions totaled $110.3 million in
fiscal 2008, including Cyberview and M-2-1 in the UK, PGIC and WDG, versus
$142.8 million in fiscal 2007, including CLS, Digideal, and VCAT. See Note 3 and
Note 7 or our Consolidated Financial Statements for additional information about
affiliate investments and acquisitions.
|
Capital
Expenditures
|
|
Increase
(Decrease)
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
09
vs 08
|
08
vs 07
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Property,
plant and equipment
|
$ | 37.7 | $ | 92.5 | $ | 134.1 | $ | (54.8 | ) | $ | (41.6 | ) | ||||||||
|
Gaming
operations equipment
|
180.8 | 190.6 | 194.4 | (9.8 | ) | (3.8 | ) | |||||||||||||
|
Intellectual
property
|
38.9 | 15.1 | 15.8 | 23.8 | (0.7 | ) | ||||||||||||||
|
Total
capital expenditures
|
$ | 257.4 | $ | 298.2 | $ | 344.3 | $ | (40.8 | ) | $ | (46.1 | ) | ||||||||
Higher
capital expenditures for property, plant and equipment during fiscal 2008 and
2007 was attributed to our Las Vegas campus construction and fiscal 2007 also
included the purchase of a corporate airplane. Increased intellectual property
expenditures in the current year included $20.0 million associated with
restructuring our WDG IP rights.
|
Financing
Cash Flows
|
The
increase in cash used for financing in fiscal 2009 was primarily due to
refinancing activities, partially offset by the absence of share repurchases.
The reduction in cash used for financing during fiscal 2008 compared to fiscal
2007 was primarily due to less cash used for share repurchases, as well as
greater net debt proceeds with increased line of credit borrowings on our senior
credit facility.
|
Credit
Facilities and Indebtedness
|
In May
and June 2009, we refinanced our debt to extend maturities and diversify
financing sources. We amended and restated our domestic credit facility and
issued convertible and fixed rate securities discussed in more detail below and
in Note 13 of our Consolidated Financial Statements. We were in
compliance with all debt covenants at September 30, 2009.
|
Revolving
Credit Facilities
|
At
September 30, 2009, $1.7 billion was available on our credit facilities
worldwide. In June 2009, we amended and restated our domestic credit facility,
reducing the total commitment to $1.8 billion and extending the maturity on $1.5
billion to June 2012, with $0.3 billion remaining due in December
2010. The extended commitments bear interest at LIBOR plus 260 bps
with a facility fee of 65 bps versus LIBOR plus 37.5 bps with a facility fee of
12.5 bps on the non-extended portion. Rates and fees are based on our public
debt ratings or debt to capitalization ratio. Half of amounts outstanding in
December 2010 will convert to term loans due in six quarterly
installments.
Our
amended domestic credit facility subjects us to a number of financial covenants,
and our ability to comply with these covenants may be adversely impacted by an
extended economic downturn. The financial covenants include a minimum interest
coverage ratio (ICR) of 3.00 and a maximum total leverage ratio (TLR) of 3.75,
which reduces to 3.5 on April 1, 2010 and 3.25 on April 1, 2011. At
September 30, 2009, our ICR was 8.2 and our TLR was 3.0.
The
amended facility includes the following covenants (all terms as defined per the
amended facility):
|
ª
|
a
minimum ratio of adjusted EBITDA to interest expense (interest coverage
ratio)
|
|
ª
|
a
maximum ratio of Total Debt to adjusted EBITDA (total leverage
ratio)
|
|
ª
|
certain
restrictions on our ability to:
|
|
§
|
incur
or guaranty additional debt, or enter into swap
agreements
|
|
§
|
incur
liens
|
|
§
|
merge
with or acquire other companies, liquidate or
dissolve
|
|
§
|
sell,
transfer, lease or dispose of substantially all
assets
|
|
§
|
change
the nature of our business
|
|
§
|
declare
or make cash dividends or distributions or pay cash for the purchase,
redemption, retirement, defeasance, acquisition, cancellation or
termination of our capital stock or equity interests or any return of
capital to shareholders, provided that we may, as long as no continuing
default has occurred, pay dividends of up to the lesser of $0.06 per
common share per fiscal quarter or $25 million in any fiscal
quarter.
|
|
2.6%
Convertible Debentures
|
Our
outstanding Debentures pay interest semiannually in June and December. The
Debentures are general unsecured obligations of IGT, ranking equal with all
existing and future unsecured and unsubordinated obligations. The
Debentures rank junior to all existing and future subsidiary liabilities,
including trade payables. Holders have the right to require IGT to redeem the
Debentures for cash at 100% of their principal amount plus accrued and unpaid
interest, if any, on December 15, 2009, 2011, 2016, 2021, 2026, and
2031.
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 common stock, we expect outstanding Debenture
holders will exercise this put right. At September 30, 2009, $707.0
million par of Debentures were outstanding after repurchases of $193.0 million
during fiscal 2009.
The
Debentures were not classified as current liabilities at September 30, 2009,
because we had the intent and ability to refinance with our noncurrent domestic
credit facility. We expect to incur incremental interest costs on additional
credit facility borrowings used to fund Debentures redeemed in December 2009.
However, the rates were not significantly different as of September 30,
2009.
|
3.25%
Convertible Notes
|
On May
11, 2009, we issued $850.0 million aggregate principal amount of Notes, in a
private placement for net proceeds of $822.5 million, after deferred offering
costs of approximately $27.5 million which will be amortized to interest expense
over the Note term. We will pay interest at 3.25% on the Notes, semiannually on
May 1 and November 1 of each year, beginning November 1,
2009. Proceeds from the Notes (net of amounts used for the separate
note hedge transactions and funds provided by the separate warrant transactions
described below) were used to reduce outstanding borrowings under our revolving
domestic credit facility.
The Notes
are general unsecured obligations of IGT, ranking equal with all existing and
future unsecured and non-subordinated obligations of IGT. The Notes
rank junior to all existing and future liabilities, including trade payables, of
our subsidiaries. The Notes mature on May 1, 2014, unless repurchased earlier by
IGT or converted. The Notes are not redeemable at IGT's option before maturity,
except in certain circumstances relating to applicable gaming authority
regulations. The terms of the Notes may, in certain circumstances, require us to
grant a lien on equity interests if certain downgrades by rating agencies
occur.
Each
$1,000 Note is initially convertible into 50.0808 shares of IGT common stock,
representing a conversion price of $19.97 per share. Upon conversion, for each
$1,000 Note, a holder will receive cash up to the aggregate principal amount of
each Note and shares of our common stock for any conversion value in excess of
the principal amount as determined per the indenture. The conversion rate is
adjustable upon the occurrence of certain events as defined in the
indenture.
|
Note
Hedges
|
In
connection with the Notes, we paid an aggregate amount of $177.3 million to
certain initial Note purchasers or their affiliates (counterparties) for
separate convertible note hedges. The hedges reduce the potential dilution
related to conversion of the Notes if the market value of our common stock, as
measured under the Notes, at the time of the hedge exercise is greater than the
Note conversion price. The note hedges were separate transactions apart from the
Notes or warrants described below and were recorded as an adjustment to
stockholders’ equity, net of deferred tax assets of $65.5
million. Note holders have no rights with respect to the note
hedges.
The note
hedges cover, subject to anti-dilution and certain other customary adjustments
substantially identical to those in the Notes, approximately 42.6 million shares
of common stock at a strike price of $19.97, which corresponds to the initial
conversion price of the Notes. The note hedges are exercisable at
each conversion date of the Notes and expire upon the earlier of the last day
the Notes remain outstanding or the second scheduled trading day immediately
preceding May 1, 2014.
|
Warrants
|
Additionally,
we sold warrants to acquire approximately 42.6 million shares of common stock,
subject to anti-dilution and certain other customary adjustments, at a strike
price of $30.14 per share, to the counterparties for an aggregate amount of
$66.8 million. The warrants were separate transactions apart from the
Notes or note hedges and accounted for as an adjustment to stockholders’
equity. Note holders have no rights with respect to the
warrants.
If the
volume weighted average share price of our common stock, as measured under the
warrants, exceeds the strike price of the warrants, the warrants will have a
dilutive effect on our earnings per share. The warrants expire over a
series of dates with the final expiration date set to occur in November
2014.
|
7.5%
Bonds
|
On June
15, 2009, we issued $500.0 million aggregate principal amount of 7.5% Bonds due
2019, for net proceeds of $493.3 million after a discount of $2.7 million and
deferred offering costs of approximately $4.0 million. Interest
is payable semiannually on June 15 and December 15, beginning December 15,
2009. We intend to use the net proceeds from the Bonds to fund the
redemption of a portion of our Debentures expected to be put to us in December
2009. Until the Debentures can be redeemed, we temporarily repaid
outstanding credit facility amounts and intend to re-borrow to fund the
redemptions.
The Bonds
are general unsecured obligations of IGT, ranking equal with all existing and
future unsecured and non-subordinated obligations. The Bonds rank
junior to all existing and future liabilities, including trade payables, of our
subsidiaries. The Bonds mature June 15, 2019, unless IGT redeems them
earlier by paying the holders 100% of the principal amount plus a make-whole
redemption premium as described further in the indenture.
In
conjunction with issuing the Bonds in June 2009, we entered into $250.0 million
notional value of interest rate swaps maturing on June 15, 2019, which
effectively exchange 7.5% fixed interest payments for variable rate interest
payments at one-month LIBOR plus 342 bps reset on the 15th of each
month. Amounts receivable/payable under the swaps will be net settled
semiannually on June 15 and December 15. The interest rate swaps are designated
fair value hedges against changes in the fair value of a portion of the
Bonds.
The Bonds
contain covenants which may, in certain circumstances:
|
ª
|
restrict
our ability to incur additional
debt
|
|
ª
|
limit
our ability to enter into sale and leaseback
transactions
|
|
ª
|
restrict
our ability to sell, transfer, lease or dispose of substantially all
assets
|
|
ª
|
require
us to grant a lien on equity interests if certain downgrades by rating
agencies occur
|
|
Shelf
Registration
|
In March
2009, we filed a shelf registration statement with the SEC that allows us to
issue debt securities, in one or more series, from time to time in amounts, at
prices and on terms determined at the time of offering. The Bonds
were issued under this registration statement.
|
Share
Repurchases
|
We have
repurchased IGT common stock to return value to shareholders and reduce
outstanding share dilution. We used open market or privately negotiated
transactions, such as accelerated share repurchases and structured share
repurchases, or Rule 10b5-1 trading plans, depending on market conditions and
other factors to achieve timing, cost, and volume objectives.
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Shares
|
- | 25.5 | 28.2 | |||||||||
|
Aggregate
cost
|
$ | - | $ | 779.7 | $ | 1,118.5 | ||||||
Our
remaining repurchase authorization totaled 7.7 million shares and we have no
current plans to make additional share repurchases. Our amended
credit facility restricts us from repurchasing shares except within certain
specified formulas set forth in the amended facility.
|
Financial
Condition
|
|
Increase
|
||||||||||||
|
September
30,
|
2009
|
2008
|
(Decrease)
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Assets
|
$ | 4,388.2 | $ | 4,557.4 | $ | (169.2 | ) | |||||
|
Liabilities
|
3,420.9 | 3,648.4 | (227.5 | ) | ||||||||
|
Stockholders'
equity
|
967.3 | 909.0 | 58.3 | |||||||||
The
decrease in total assets was primarily due to reduced cash, inventories and
affiliate investments, partially offset by increased deferred offering costs
related to debt refinancing. Liabilities decreased with lower accrued
liabilities and debt. Stockholders’ equity increased with earnings, partially
offset by note hedge and warrant transactions.
|
Contractual
Obligations and Commercial
Commitments
|
The
following table summarizes expected effects on future liquidity and cash flows
from our minimum contractual obligations and commercial commitments as of
September 30, 2009.
|
Payments
due by fiscal years
|
||||||||||||||||||||
|
Total
|
2010
|
2011
to 2012
|
2013
to 2014
|
2015
and thereafter
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Debt
(1)
|
$ | 2,162.3 | $ | 712.3 | $ | 100.0 | $ | 850.0 | $ | 500.0 | ||||||||||
|
Interest
and fees on debt (1)
|
536.5 | 82.8 | 155.3 | 123.4 | 175.0 | |||||||||||||||
|
Letters
of credit (1)
|
3.6 | 3.6 | - | - | - | |||||||||||||||
|
Jackpot
winner payments (2)
|
754.6 | 155.5 | 142.7 | 117.2 | 339.2 | |||||||||||||||
|
Licenses,
royalties & IP rights (3)
|
14.0 | 9.2 | 3.6 | 0.6 | 0.6 | |||||||||||||||
|
Operating
leases (4)
|
40.2 | 14.9 | 18.8 | 5.7 | 0.8 | |||||||||||||||
|
Open
purchase orders
|
86.3 | 86.3 | - | - | - | |||||||||||||||
|
CLS
Joint Ventures
(5)
|
13.3 | 4.9 | 8.4 | - | - | |||||||||||||||
|
Acquisition
commitments (6)
|
5.0 | 4.4 | 0.6 | - | - | |||||||||||||||
|
Unfunded
loans (7)
|
17.7 | 17.7 | - | - | - | |||||||||||||||
|
Totals
|
$ | 3,633.5 | $ | 1,091.6 | $ | 429.4 | $ | 1,096.9 | $ | 1,015.6 | ||||||||||
|
(1)
|
Domestic
credit facility interest resets periodically and was estimated using
current rates. Letters of credit were issued under our credit facility to
insure our payment to certain vendors and governmental agencies. Given
current market conditions and recent trading prices for our common stock,
we expect Debenture holders to exercise their put right in December 2009.
See the MDA—Credit Facilities discussion earlier and Note 13 of our
Consolidated Financial Statements for additional debt
information.
|
|
(2)
|
Winner
payments represent amounts due previous and future WAP jackpot winners.
The timing and amount of future winner payments were estimated based on
historical patterns of winners’ lump sum payment elections and discount
rates effective at September 30, 2009. We maintain cash and investments at
sufficient levels to fund jackpot liabilities for winner payments. See
Notes 1 and 14 of our Consolidated Financial Statements for additional
information about jackpot
liabilities.
|
|
(3)
|
Unconditional
amounts were recorded as liabilities at September 30, 2009. Amounts
contingent on future game sales or placements are
excluded.
|
|
(4)
|
See
Note 15 of our Consolidated Financial Statements for additional
information regarding operating
leases.
|
|
(5)
|
See
Note 3 of our Consolidated Financial Statements for additional information
about our unconditional commitment to contribute capital to CLS joint
ventures.
|
|
(6)
|
See
Note 7 of our Consolidated Financial Statements for additional information
about contingent earn-out consideration related to the acquisition of
M-2-1.
|
|
(7)
|
See
Note 1 of our Consolidated Financial Statements for additional information
regarding loans yet to fund under development financing
arrangements.
|
Liabilities
related to unrecognized tax benefits of $114.3 million were excluded from the
table above, as we cannot reasonably estimate the timing of cash settlements
with taxing authorities. We do not expect the total amount of our unrecognized
tax benefits to change significantly during the next twelve months. See Note 17
of our Consolidated Financial Statements related to unrecognized tax
benefits.
Contingent severance
payment obligations to certain executives were also excluded from the table
above.
|
Arrangements
with Off-Balance Sheet Risks
|
In the
normal course of business, we are a party to financial instruments with
off-balance sheet risk, such as performance bonds, guarantees and product
warranties not reflected in our balance sheet. We may provide indemnifications
of varying scope and terms to customers, vendors, lessors, business partners and
other parties with respect to certain matters, including but not limited to,
losses arising:
|
ª
|
out
of our breach of agreements with those
parties
|
|
ª
|
from
services to be provided by us
|
|
ª
|
from
IP infringement claims made by third
parties
|
Additionally,
we have agreements with our directors and certain officers that require us,
among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers. We have also
agreed to indemnify certain former officers and directors of acquired companies.
We maintain director and officer insurance, which may cover our liabilities
arising from these indemnification obligations in certain
circumstances.
It is not
possible to determine the maximum potential obligations under these
indemnification undertakings due to the unique facts and circumstances involved
in each particular agreement. Such indemnification undertakings may not be
subject to maximum loss clauses. Historically, we have not incurred material
costs related to indemnification obligations.
We do not
expect any material losses to result from these arrangements, and we are not
dependent on off-balance sheet financing arrangements to fund our operations.
See Note 16 of our Consolidated Financial Statements for additional information
about our off-balance sheet arrangements.
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
We use
derivative financial instruments to manage certain foreign currency exchange and
interest rate risk. The primary business objective of our hedging program, as
defined in our corporate risk management policy, is to minimize the impact of
transaction, remeasurement, and specified economic exposures to our net income
and earnings per share. We enter into derivative financial instruments with
high-credit quality counterparties and diversify our positions among such
counterparties to reduce our exposure to credit losses. We are not party to
leveraged derivatives and do not hold or issue financial instruments for
speculative purposes.
|
Foreign
Currency Risk
|
We
routinely use forward exchange contracts to minimize our market risk exposure
related to our monetary assets and liabilities denominated in nonfunctional
foreign currencies. The primary business objective of our economic hedging
program is to minimize the impact to earnings from changes in foreign exchange
rates. These hedging instruments are subject to fluctuations in value that are
generally offset by the value of the underlying exposures being hedged.
Counterparties to our agreements are major commercial banks.
We also
hedge significant investments denominated in foreign currency with forward
exchange contracts to protect the US dollar value of our investment. In
addition, from time to time, we may enter into forward exchange contracts to
establish with certainty the US dollar amount of future firm commitments
denominated in a foreign currency.
|
Hedging
|
The
notional amount of forward contracts hedging our net foreign currency exposure
related to our monetary assets and liabilities denominated in nonfunctional
currency totaled $74.8 million at September 30, 2009 and $93.3 million at
September 30, 2008. A 10% adverse change in foreign exchange rates upon which
these foreign exchange contracts are based would result in exchange gains and
losses. Generally, contract gain or loss should be offset by gain or loss on the
underlying monetary exposures.
|
Translation
|
As
currency rates change, translation of our foreign currency functional operations
into US dollars affects year-over-year equity comparability. We do not generally
hedge translation risk because cash flows from our international operations are
typically reinvested locally. Currency exchange rates with the most significant
impact to our translation include the British pound, Australian dollar, Japanese
yen, Euro, South African rand, and Canadian dollar. Disregarding that rates can
move in opposite directions resulting in offsetting gains and losses, we
estimate a 10% change in exchange rates overall would have impacted our reported
equity by approximately $24.7 million at September 30, 2009 and $24.4 million at
September 30, 2008.
|
Interest
Rate Risk
|
|
Costs
to fund jackpot liabilities
|
Fluctuations
in prime, treasury and agency rates due to changes in market and other economic
conditions directly impact our cost to fund jackpots and corresponding gaming
operations gross profit. If interest rates decline, jackpot cost increases and
gross profit decreases. We estimate a hypothetical decline of 100 bps in
applicable interest rates would have reduced our gross profit by approximately
$14.5 million in fiscal 2009 and $14.4 million in 2008. We do not manage this
exposure with derivative financial instruments.
|
Domestic
Credit Facility
|
Fluctuations
in LIBOR directly impact interest costs related to our domestic credit facility.
We estimate a hypothetical increase of 100 bps in LIBOR would have increased our
interest expense for fiscal 2009 by approximately $11.2 million and $8.0 million
in fiscal 2008. We do not manage this exposure with derivative financial
instruments. See Note 13 of our Consolidated Financial Statements for additional
information about our domestic credit facility.
|
Debentures
and Notes
|
The fair
value of our Debentures and Notes are affected by changes in the price of IGT
stock and changes in interest rates. The fair value of convertible instruments
generally increases and decreases directionally with like movements in stock
price and increases with stock price volatility. The fair value of fixed rate
instruments increase as interest rates fall and decreases as interest rates
rise. As we do not record our debt at fair value, changes in interest or stock
price have no material effect on our financial position, cash flows or results
of operations.
Our
Debentures carrying value totaled $707.0 million with an estimated fair value of
$706.2 million at September 30, 2009 and $900.0 million with a fair value of
$846.0 million at September 30, 2008. Our Notes carrying value totaled $850.0
million with a fair value of $1.1 billion at September 30, 2009. See Note 13 of
our Consolidated Financial Statements for additional information about our
Debentures and Notes.
|
Bonds
and Related Swaps
|
We use
interest rate swap derivatives to diversify our debt portfolio between fixed and
variable rate instruments. The amount and term of each swap is matched with all
or a portion of outstanding principal and remaining term of a specific
obligation. Our swaps exchange fixed rates for variable rates without an
exchange of the notional amount upon which they are based.
At
September 30, 2009, the carrying value of our Bonds totaled $512.5 million with
a fair value of $553.3 million, and the fair value of the interest rate swaps
totaled $14.8 million. The swaps reduced our effective interest rate on the
portion of the bonds hedged during the year ended September 30, 2009. See Notes
13 and 19 of our Consolidated Financial Statements for additional information
about our Bonds and related swaps.
|
Investments
in CLS
|
The value
of our CLS investments is affected by changes in the Hong Kong dollar exchange
rate and the trading price of CLS stock. The carrying value and fair value of
our equity investment in CLS stock was $15.7 million at September 30, 2009
versus $12.2 million at September 30, 2008.
Our CLS
convertible note investment is subject to interest rate risk and CLS stock price
volatility. The CLS note carrying value and fair value was $78.4 million at
September 30, 2009 versus $72.4 million at September 30, 2008. We are using
5-year forward contracts to mitigate foreign currency risk on approximately 70%
of the note. See Note 3 of our Consolidated Financial Statements for additional
information about our CLS investments.
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
Stockholders
and Board of Directors
International
Game Technology
Reno,
Nevada:
We have
audited the accompanying consolidated balance sheets of International Game
Technology and subsidiaries (the “Company”) as of September 30, 2009 and
2008, and the related consolidated statements of income, stockholders’ equity
and comprehensive income, and cash flows for each of the three years in the
period ended September 30, 2009. We have also audited the Company’s
internal control over financial reporting as of September 30, 2009, based
on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the Company's internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audit of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
September 30, 2009 and 2008, and the results of their operations and their
cash flows for each of the three years in the period ended September 30,
2009, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
September 30, 2009, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
As
discussed in Note 17 to the financial statements, the Company adopted accounting
guidance relating to accounting for uncertainty in income taxes during the first
quarter of fiscal 2008.
/s/ DELOITTE & TOUCHE
LLP
Costa
Mesa, California
December
1, 2009
|
CONSOLIDATED INCOME
STATEMENTS
|
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions, except per share amounts)
|
||||||||||||
|
Revenues
|
||||||||||||
|
Gaming
operations
|
$ | 1,178.9 | $ | 1,337.9 | $ | 1,361.2 | ||||||
|
Product
sales
|
935.1 | 1,190.7 | 1,260.2 | |||||||||
|
Total
revenues
|
2,114.0 | 2,528.6 | 2,621.4 | |||||||||
|
Costs
and operating expenses
|
||||||||||||
|
Cost
of gaming operations
|
495.1 | 559.8 | 538.2 | |||||||||
|
Cost
of product sales
|
467.3 | 549.7 | 602.4 | |||||||||
|
Selling,
general and administrative
|
425.1 | 458.5 | 397.9 | |||||||||
|
Research
and development
|
211.8 | 223.0 | 202.2 | |||||||||
|
Depreciation
and amortization
|
80.4 | 76.7 | 80.4 | |||||||||
|
Restructuring
charges
|
35.0 | 1.6 | - | |||||||||
|
Loss
on other assets
|
78.0 | - | - | |||||||||
|
Total
costs and operating expenses
|
1,792.7 | 1,869.3 | 1,821.1 | |||||||||
|
Operating
income
|
321.3 | 659.3 | 800.3 | |||||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
62.0 | 67.4 | 82.0 | |||||||||
|
Interest
expense
|
(129.4 | ) | (100.1 | ) | (77.6 | ) | ||||||
|
Other
|
(15.9 | ) | (35.8 | ) | 0.1 | |||||||
|
Total
other income (expense)
|
(83.3 | ) | (68.5 | ) | 4.5 | |||||||
|
Income
before tax
|
238.0 | 590.8 | 804.8 | |||||||||
|
Income
tax provision
|
89.0 | 248.3 | 296.6 | |||||||||
|
Net
income
|
$ | 149.0 | $ | 342.5 | $ | 508.2 | ||||||
|
Basic
earnings per share
|
$ | 0.51 | $ | 1.11 | $ | 1.54 | ||||||
|
Diluted
earnings per share
|
$ | 0.51 | $ | 1.10 | $ | 1.51 | ||||||
|
Cash
dividends declared per share
|
$ | 0.33 | $ | 0.57 | $ | 0.53 | ||||||
|
Weighted
average shares outstanding
|
||||||||||||
|
Basic
|
293.8 | 308.0 | 330.1 | |||||||||
|
Diluted
|
294.5 | 310.4 | 336.1 | |||||||||
See
accompanying notes
|
CONSOLIDATED BALANCE
SHEETS
|
|
September
30,
|
2009
|
2008
|
||||||
|
(In
millions, except par value)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and equivalents
|
$ | 146.7 | $ | 266.4 | ||||
|
Investment
securities
|
21.3 | - | ||||||
|
Restricted
cash and investments
|
79.4 | 108.0 | ||||||
|
Jackpot
annuity investments
|
67.2 | 67.5 | ||||||
|
Accounts
receivable, net
|
334.3 | 436.8 | ||||||
|
Current
maturities of notes and contracts receivable, net
|
154.8 | 93.5 | ||||||
|
Inventories
|
157.8 | 218.3 | ||||||
|
Deferred
income taxes
|
82.8 | 115.8 | ||||||
|
Other
assets and deferred costs
|
189.4 | 163.8 | ||||||
|
Total
current assets
|
1,233.7 | 1,470.1 | ||||||
|
Property,
plant and equipment, net
|
558.8 | 590.9 | ||||||
|
Jackpot
annuity investments
|
396.9 | 423.4 | ||||||
|
Notes
and contracts receivable, net
|
249.4 | 148.2 | ||||||
|
Goodwill
|
1,151.5 | 1,158.5 | ||||||
|
Other
intangible assets, net
|
259.2 | 248.9 | ||||||
|
Deferred
income taxes
|
227.3 | 136.9 | ||||||
|
Other
assets and deferred costs
|
311.4 | 380.5 | ||||||
| $ | 4,388.2 | $ | 4,557.4 | |||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
maturities of notes payable
|
$ | 5.3 | $ | 16.0 | ||||
|
Accounts
payable
|
90.5 | 105.7 | ||||||
|
Jackpot
liabilities
|
155.5 | 189.7 | ||||||
|
Accrued
employee benefits
|
32.8 | 64.7 | ||||||
|
Accrued
income taxes
|
9.4 | 15.3 | ||||||
|
Dividends
payable
|
17.8 | 42.9 | ||||||
|
Other
accrued liabilities
|
313.2 | 302.4 | ||||||
|
Total
current liabilities
|
624.5 | 736.7 | ||||||
|
Notes
payable, net of current maturities
|
2,169.5 | 2,247.1 | ||||||
|
Non-current
jackpot liabilities
|
432.6 | 461.0 | ||||||
|
Other
liabilities
|
194.3 | 203.6 | ||||||
|
|
3,420.9 | 3,648.4 | ||||||
|
Stockholders'
Equity
|
||||||||
|
Common
stock: $.00015625 par value; 1,280.0 shares authorized;
|
||||||||
|
337.2
and 334.9 issued; 296.6 and 294.7 outstanding
|
0.1 | 0.1 | ||||||
|
Additional
paid-in capital
|
1,264.1 | 1,262.0 | ||||||
|
Treasury
stock at cost: 40.6 and 40.2 shares
|
(799.3 | ) | (798.5 | ) | ||||
|
Retained
earnings
|
496.3 | 443.5 | ||||||
|
Accumulated
other comprehensive income
|
6.1 | 1.9 | ||||||
| 967.3 | 909.0 | |||||||
| $ | 4,388.2 | $ | 4,557.4 | |||||
See
accompanying notes
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Years
Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Operations
|
|
|
|
|||||||||
|
Net
income
|
$ | 149.0 | $ | 342.5 | $ | 508.2 | ||||||
|
Adjustments:
|
||||||||||||
|
Depreciation,
amortization, and asset charges
|
276.8 | 286.0 | 265.5 | |||||||||
|
Discounts
and deferred issuance costs
|
11.0 | 5.3 | 10.5 | |||||||||
|
Inventory
obsolescence
|
13.0 | 22.6 | 10.1 | |||||||||
|
Bad
debt provisions
|
33.9 | 9.0 | (6.0 | ) | ||||||||
|
Share-based
compensation
|
39.0 | 38.4 | 35.7 | |||||||||
|
(Gain)
loss on assets sold
|
(8.2 | ) | (21.0 | ) | (6.5 | ) | ||||||
|
Loss
on investments
|
15.7 | 28.6 | - | |||||||||
|
Gain
on redemption of debt
|
(6.5 | ) | - | - | ||||||||
|
Excess
tax benefits from employee stock plans
|
(0.2 | ) | (15.1 | ) | (17.2 | ) | ||||||
|
Property
insurance gains
|
- | - | (5.0 | ) | ||||||||
|
Loss
on other assets
|
78.0 | - | - | |||||||||
|
Changes
in operating assets and liabilities, excluding
acquisitions:
|
||||||||||||
|
Receivables
|
8.1 | (76.8 | ) | (22.8 | ) | |||||||
|
Inventories
|
55.6 | (83.0 | ) | 23.2 | ||||||||
|
Other
assets and deferred costs
|
1.0 | (48.4 | ) | 25.6 | ||||||||
|
Income
taxes, net of employee stock plans
|
(35.2 | ) | 23.7 | 10.8 | ||||||||
|
Accounts
payable and accrued liabilities
|
6.3 | (3.0 | ) | 36.6 | ||||||||
|
Jackpot
liabilities
|
(89.4 | ) | (22.3 | ) | (47.2 | ) | ||||||
|
Cash
from operations
|
547.9 | 486.5 | 821.5 | |||||||||
|
Investing
|
||||||||||||
|
Capital
expenditures
|
(257.4 | ) | (298.2 | ) | (344.3 | ) | ||||||
|
Proceeds
from assets sold
|
13.8 | 34.1 | 13.7 | |||||||||
|
Proceeds
from property insurance
|
- | - | 6.0 | |||||||||
|
Investment
securities, net
|
- | 87.4 | 147.6 | |||||||||
|
Jackpot
annuity investments, net
|
54.3 | 45.7 | 29.4 | |||||||||
|
Changes
in restricted cash
|
29.0 | (77.3 | ) | 12.4 | ||||||||
|
Loans
receivable cash advanced
|
(108.5 | ) | (63.6 | ) | (37.5 | ) | ||||||
|
Loans
receivable payments received
|
8.2 | 20.5 | 18.8 | |||||||||
|
Investments
in unconsolidated affiliates
|
(12.0 | ) | (30.0 | ) | (105.6 | ) | ||||||
|
Business
acquisitions, net of cash acquired
|
(15.8 | ) | (84.3 | ) | (37.2 | ) | ||||||
|
Cash
from investing
|
(288.4 | ) | (365.7 | ) | (296.7 | ) | ||||||
|
Financing
|
||||||||||||
|
Debt
proceeds
|
2,986.2 | 1,082.4 | 1,463.1 | |||||||||
|
Debt
repayments
|
(3,083.8 | ) | (328.3 | ) | (792.7 | ) | ||||||
|
Debt
issuance costs
|
(65.4 | ) | - | (17.5 | ) | |||||||
|
Warrant
proceeds
|
66.8 | - | - | |||||||||
|
Convertible
note hedge purchases
|
(177.3 | ) | - | - | ||||||||
|
Employee
stock plan proceeds
|
13.4 | 70.9 | 65.5 | |||||||||
|
Share
repurchases
|
- | (779.7 | ) | (1,118.3 | ) | |||||||
|
Excess
tax benefits from employee stock plans
|
0.2 | 15.1 | 17.2 | |||||||||
|
Dividends
paid
|
(121.3 | ) | (175.6 | ) | (173.8 | ) | ||||||
|
Cash
from financing
|
(381.2 | ) | (115.2 | ) | (556.5 | ) | ||||||
|
Foreign
exchange rates effect on cash
|
2.0 | (0.5 | ) | (1.6 | ) | |||||||
|
Net
change in cash and equivalents
|
(119.7 | ) | 5.1 | (33.3 | ) | |||||||
|
Beginning
cash and equivalents
|
266.4 | 261.3 | 294.6 | |||||||||
|
Ending
cash and equivalents
|
$ | 146.7 | $ | 266.4 | $ | 261.3 | ||||||
See
accompanying notes
|
Supplemental
Cash Flows Information
|
“Depreciation,
amortization, and asset charges” reflected in the cash flows statements are
comprised of amounts presented separately on the income statements, plus
“depreciation, amortization, and asset charges” included in cost of gaming
operations and cost of product sales.
|
Years
Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Investment
securities
|
||||||||||||
|
Purchases
|
$ | - | $ | (30.1 | ) | $ | (838.5 | ) | ||||
|
Proceeds
from sales
|
- | 117.5 | 986.1 | |||||||||
|
Net
|
$ | - | $ | 87.4 | $ | 147.6 | ||||||
|
Jackpot
funding
|
||||||||||||
|
Change
in jackpot liabilities
|
$ | (89.4 | ) | $ | (22.3 | ) | $ | (47.2 | ) | |||
|
Jackpot
annuity purchases
|
(13.6 | ) | (21.4 | ) | (35.6 | ) | ||||||
|
Jackpot
annuity proceeds
|
67.9 | 67.1 | 65.0 | |||||||||
|
Net
change in jackpot annuity investments
|
54.3 | 45.7 | 29.4 | |||||||||
|
Net
jackpot funding
|
$ | (35.1 | ) | $ | 23.4 | $ | (17.8 | ) | ||||
|
Capital
expenditures
|
||||||||||||
|
Property,
plant and equipment
|
$ | (37.7 | ) | $ | (92.5 | ) | $ | (134.1 | ) | |||
|
Gaming
operations equipment
|
(180.8 | ) | (190.6 | ) | (194.4 | ) | ||||||
|
Intellectual
property
|
(38.9 | ) | (15.1 | ) | (15.8 | ) | ||||||
|
Total
|
$ | (257.4 | ) | $ | (298.2 | ) | $ | (344.3 | ) | |||
|
Payments
|
||||||||||||
|
Interest
|
$ | 75.5 | $ | 61.3 | $ | 26.7 | ||||||
|
Income
taxes
|
126.1 | 222.5 | 287.6 | |||||||||
|
Non-cash
investing and financing items:
|
||||||||||||
|
Accrued
capital asset additions
|
$ | 4.2 | $ | 8.4 | $ | 9.0 | ||||||
|
Business
acquisitions/purchase price adjustments
|
||||||||||||
|
Fair
value of assets
|
$ | 21.8 | $ | 116.9 | $ | 45.8 | ||||||
|
Fair
value of liabilities
|
6.0 | 32.6 | 8.6 | |||||||||
See
accompanying notes
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
|
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Common
stock
|
|
|
|
|||||||||
|
Shares
issued
|
|
|
|
|||||||||
|
Beginning
shares
|
334.9 | 731.4 | 720.5 | |||||||||
|
Employee
stock plans
|
2.3 | 3.5 | 3.6 | |||||||||
|
Debentures
converted
|
- | - | 7.3 | |||||||||
|
Treasury
share retirement
|
- | (400.0 | ) | - | ||||||||
|
Ending
shares
|
337.2 | 334.9 | 731.4 | |||||||||
|
Ending
balance
|
$ | 0.1 | $ | 0.1 | $ | 0.1 | ||||||
|
Additional
paid-in capital
|
||||||||||||
|
Beginning
balance
|
$ | 1,262.0 | $ | 2,040.3 | $ | 1,864.2 | ||||||
|
Employee
stock plans
|
||||||||||||
|
Proceeds
|
13.4 | 70.9 | 65.5 | |||||||||
|
Share-based
compensation
|
39.0 | 38.4 | 35.7 | |||||||||
|
Tax
benefit
|
(5.0 | ) | 18.0 | 26.2 | ||||||||
|
Debentures
converted
|
- | - | 48.7 | |||||||||
|
Purchase
of note hedges
|
(177.3 | ) | - | - | ||||||||
|
Tax
benefit on note hedges
|
65.2 | - | - | |||||||||
|
Proceeds
from sale of warrants
|
66.8 | - | - | |||||||||
|
Treasury
share retirement
|
- | (905.6 | ) | - | ||||||||
|
Ending
balance
|
$ | 1,264.1 | $ | 1,262.0 | $ | 2,040.3 | ||||||
|
|
||||||||||||
|
Treasury
stock
|
||||||||||||
|
Beginning
balance
|
$ | (798.5 | ) | $ | (3,722.1 | ) | $ | (2,603.6 | ) | |||
|
Treasury
shares acquired
|
- | (779.7 | ) | (1,118.5 | ) | |||||||
|
RSA
forfeitures
|
(0.8 | ) | (1.0 | ) | - | |||||||
|
Treasury
share retirement
|
- | 3,704.3 | - | |||||||||
|
Ending
balance
|
$ | (799.3 | ) | $ | (798.5 | ) | $ | (3,722.1 | ) | |||
|
Retained
earnings
|
||||||||||||
|
Beginning
balance
|
$ | 443.5 | $ | 3,108.4 | $ | 2,774.9 | ||||||
|
Dividends
declared
|
(96.2 | ) | (174.2 | ) | (174.7 | ) | ||||||
|
Net
income
|
149.0 | 342.5 | 508.2 | |||||||||
|
Adoption
of guidance for uncertainty in income taxes
|
- | (34.5 | ) | - | ||||||||
|
Treasury
share retirement
|
- | (2,798.7 | ) | - | ||||||||
|
Ending
balance
|
$ | 496.3 | $ | 443.5 | $ | 3,108.4 | ||||||
|
Accumulated
other comprehensive income (loss)
|
||||||||||||
|
Beginning
balance
|
$ | 1.9 | $ | 26.0 | $ | 6.4 | ||||||
|
Other
comprehensive income (loss)
|
4.2 | (24.1 | ) | 19.6 | ||||||||
|
Ending
balance
|
$ | 6.1 | $ | 1.9 | $ | 26.0 | ||||||
|
Unrealized
gains (losses) on securities
|
$ | 4.2 | $ | (3.3 | ) | $ | 3.9 | |||||
|
Foreign
currency translation
|
1.9 | 5.2 | 22.1 | |||||||||
|
Comprehensive
income (loss)
|
||||||||||||
|
Net
income
|
$ | 149.0 | $ | 342.5 | $ | 508.2 | ||||||
|
Other
comprehensive income (loss)
|
||||||||||||
|
Unrealized
holding gain (loss)
|
8.1 | (10.2 | ) | 6.3 | ||||||||
|
Income
tax (provision) benefit
|
(0.6 | ) | 3.0 | (2.4 | ) | |||||||
|
Foreign
currency translation
|
(3.3 | ) | (16.9 | ) | 15.7 | |||||||
|
Total
comprehensive income
|
$ | 153.2 | $ | 318.4 | $ | 527.8 | ||||||
See
accompanying notes
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
1.
|
Summary
of Significant Accounting Policies
|
|
Basis
of Presentation and Consolidation
|
Our
consolidated financial statements include the accounts of International Game
Technology, including all majority-owned or controlled subsidiaries and VIEs for
which we are the primary beneficiary. All appropriate inter-company accounts and
transactions are eliminated. We prepare our consolidated financial statements in
accordance with SEC and US GAAP requirements and include all adjustments of a
normal recurring nature that are necessary to fairly present our consolidated
results of operations, financial position, and cash flows for all periods
presented. This annual report on Form 10-K includes subsequent events evaluated
for potential recognition and disclosure through the date of financial statement
issuance on December 2, 2009.
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.
|
Fiscal
Year End
|
||
|
Actual
|
Presented as
|
|
|
October
3, 2009
|
September
30, 2009
|
|
|
September
27, 2008
|
September
30, 2008
|
|
|
September
29, 2007
|
September
30, 2007
|
|
|
Use
of Estimates
|
Our
consolidated financial statements are prepared in conformity with US GAAP.
Accordingly, we are required to make estimates, judgments, and assumptions that
we believe are reasonable based on our historical experience, contract terms,
observance of known trends in our company and the industry as a whole, and
information available from other outside sources. Our estimates affect reported
amounts of assets, liabilities, revenues, expenses, and related disclosure of
contingent assets and liabilities. Our most significant estimates include
revenue recognition, goodwill, other intangible assets, prepaid and deferred
royalties, jackpot liabilities, inventory obsolescence, income taxes,
share-based compensation, and bad debt. We evaluate our estimates on
a regular basis and actual results may differ from initial
estimates.
|
Revenue
Recognition
|
We
recognize revenues 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
|
Revenues
are reported net of incentive rebates, discounts, sales taxes, and other taxes
of a similar nature. Amounts billed prior to completing the earnings process are
deferred until revenue recognition criteria are met.
|
Gaming
Operations
|
Gaming
operations revenues are generated from providing customers with our proprietary
electronic gaming equipment and related network systems, licensing, and services
under a variety of recurring revenue arrangements, including WAP, CDS,
stand-alone participation and flat fee, equipment leasing and rental, and online
gaming solutions.
WAP
systems consist of linked slot machines located in multiple casino properties,
connecting to an IGT central computer system. WAP games differ from stand-alone
units in that a progressive jackpot increases with every wager until a player
wins the top award combination. Casinos with IGT WAP machines pay a percentage
of the coin-in (amounts wagered) for IGT services related to the design,
assembly, installation, operation, maintenance, and marketing of the WAP
systems, as well as funding and administration of the progressive
jackpot.
Revenues
from CDS, stand-alone and other equipment leasing or rentals are recognized
based on a percentage of the net win or on a fixed daily/monthly fee or rental
basis. Online gaming solutions encompass online casino gaming software and
content licensing, as well as back office operational support services. All
online gaming solutions are provided under revenue sharing arrangements based on
net gaming revenues.
|
Product
Sales
|
Our
product sales revenues are generated from the sale of electronic gaming
equipment and network systems, as well as licensing, services, and component
parts. Certain of our products are deemed software-related for accounting
purposes and revenue is recognized in accordance with software accounting
guidance. Time-based licensing and maintenance fees are typically recognized
ratably over the term of the agreement.
Our
credit sales terms are predominately 90 days or less. We also grant extended
payment terms under contracts of sale secured by the related equipment sold, and
these contracts are typically paid within their terms.
|
Multiple
Element Arrangements
|
The
majority of our multiple element contracts are for some combination of machines,
network systems, license fees, maintenance, training, and other services. The
contracts separately state pricing for each deliverable based on our standard
price list and VSOE is determined by the price charged for each deliverable when
it is sold separately. VSOE for maintenance agreements is determined based on
the annual renewal rates. The terms of performance, cancellation, termination,
or refunds in our multiple element contracts are similar to those for an
individual stand-alone deliverable.
Revenues
for each deliverable are recognized when the revenue recognition criteria for
that element has been met. If we are unable to establish VSOE for any
undelivered element, revenue is generally deferred until all elements have been
delivered or until VSOE can be determined. If we do not have VSOE for a
delivered element, the VSOE of the undelivered elements is deferred, and the
remaining portion is allocated to the delivered elements and recognized as
revenue under the residual method. When machines are sold in combination with a
leased system on which the machines depend for essential functionality, machine
revenues are recognized ratably over the system lease contract
term.
|
Deferred
Revenue
|
Deferred
revenue consists of amounts received or billed after product is delivered or
services are rendered, but prior to meeting all of the requirements for revenue
recognition. Complex systems and/or multiple element contracts may take several
months to complete and our deferred revenues may increase as our products evolve
toward a more systems-centric environment. Deferred revenue balances below were
primarily related to product sales and included in other
liabilities.
|
September
30,
|
2009
|
2008
|
||||||
|
Current
|
$ | 101.7 | $ | 60.9 | ||||
|
Non-current
|
20.3 | 1.2 | ||||||
|
Total
|
$ | 122.0 | $ | 62.1 | ||||
|
Jackpot
Accounting
|
|
Jackpot
Liabilities and Expense
|
We incur
and accrue jackpot liabilities with every wager on a device connected to an IGT
WAP system. A portion of the casino fees paid to IGT is used for the funding and
administration of WAP jackpot payments. Jackpot expense (included in Cost of
Gaming Operations) represents the estimated cost to fund jackpots and is subject
to changes in the discount or interest rates used to present value WAP jackpot
liabilities due future winners.
Our WAP
jackpots are generally payable in equal annual installments over 20 to 26 years
or immediately in the case of instant win systems. Winners may elect to receive
a lump sum payment for the present value of the jackpot discounted at applicable
interest rates in lieu of periodic annual installments. Discount rates eligible
for use in the lump sum payment calculation vary by jurisdiction and are
impacted by market forces and other economic conditions.
Jackpot
liabilities are comprised of payments due previous winners, as well as amounts
due future winners of WAP jackpots not yet won. Previous winner liabilities for
periodic payments are carried at the accreted cost of jackpot annuity
investments in qualifying US government or agency securities used to fund future
periodic payments. Liabilities due future winners are revalued and recorded at
the present value of the amount carried on WAP meters for jackpots not yet
won.
We
estimate the present value of jackpot liabilities due future winners using
current market prime, treasury, or agency rates weighted with historical lump
sum payout election ratios. The most recent historical patterns indicate that
approximately 85% of winners will elect the lump sum payment option.
Additionally, we estimate current liabilities for jackpots not yet won based on
historical experience with winner payment elections, in conjunction with the
theoretical projected number of jackpots.
|
Restricted
Cash and Investments
|
We are
required by gaming regulations to maintain sufficient reserves in restricted
accounts to be used for the purpose of funding payments to progressive jackpot
winners. Restricted amounts are based primarily on the jackpot meters displayed
to slot players and vary by jurisdiction. Compliance with restricted cash and
investments requirements is reported to the gaming authorities in various
jurisdictions.
|
Jackpot
Annuity Investments
|
These
investments represent discounted qualifying US treasury or agency securities
purchased and held to maturity to fund annual jackpot payments due previous
winners. We have both the intent and ability to hold these investments to
maturity. Accordingly, these investments are stated at cost, plus interest
accreted over the term of the security. Certain jurisdictions require regulatory
approval for liquidation of these annuity investments.
|
WAP
Systems Interest (included in Other
Income/Expense)
|
Interest
income accretion on jackpot annuity investments used to fund periodic payments
is offset by interest expense accretion on related jackpot liabilities for
payments due previous winners. The interest income and expense accrete at
approximately the same rate and vary depending on the amount of jackpots won and
the number of winners electing periodic payments. WAP systems annuity interest
accretion totaled $27.5 million in fiscal 2009, $28.6 million in 2008, and $31.3
million in 2007.
We also
hold a significant amount of cash and short-term investments related to our WAP
operations on which we earn interest income.
|
Share-based
Compensation
|
We
adopted fair value recognition of all share-based compensation at the beginning
of fiscal 2006, using the modified prospective transition. Prior to fiscal 2006,
share-based compensation was recognized under the intrinsic value method, which
resulted in compensation expense recorded only for restricted stock awards and
modified or acquired unvested options. See Note 6.
Share-based
compensation is measured at fair value on the grant date reduced for estimated
forfeitures. We use historical data and projections to estimate expected
employee behaviors related to option exercises and forfeitures. We expense
share-based compensation over the applicable vesting period using the
straight-line method for service-based awards and the accelerated method for
performance-based awards. Compensation for share-based awards granted prior to
the beginning of fiscal 2006 was recognized under the accelerated
method.
The fair
value of restricted share awards is based on the market price of IGT stock on
the grant date. We estimate the fair value of each stock option award on the
grant date using the Black-Scholes valuation model. Option valuation models
require the input of highly subjective assumptions, and changes in assumptions
used can materially affect the fair value estimate. Expected volatility and
dividends are based on implied and historical IGT stock factors. Expected term
represents the estimated weighted average time between grant and employee
exercise. Risk free rate is based on US Treasury rates appropriate for the
expected term.
|
Advertising
Costs
|
Advertising
costs are expensed as incurred and totaled $16.1 million in fiscal 2009, $22.3
million in 2008, and $19.9 million in 2007.
|
Research
and Development
|
Our
products reach technological feasibility shortly before the products are
released and therefore R&D costs are generally expensed as incurred.
Employee related costs associated with product development are included in
R&D costs. Certain R&D performed for specific customers is charged to
cost of product sales when the related sale is recorded.
|
Income
Taxes
|
Our
provision for income taxes is based on estimated effective annual income tax
rates. The provision differs from income taxes currently payable because certain
items of income and expense are recognized in different periods for financial
statement purposes than for tax return purposes. We reduce deferred tax assets
by a valuation allowance when it is more likely than not that some or all of the
deferred tax assets will not be realized. Net current and non-current deferred
tax assets or liabilities are determined separately for federal, state, and
foreign jurisdictions.
Accrued
income taxes are reduced by the tax benefits from employee stock options
exercised. We receive an income tax benefit on the difference between the market
price of the stock issued at the time of exercise and the option price. Our
provision for income taxes includes interest, penalties and reserves for
uncertain tax positions.
At the
beginning of fiscal 2008, we adopted new accounting guidance related to
accounting for uncertainty in income taxes 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.
A
recognized tax position is recorded in the financial statements at the largest
amount of benefit that has a greater than 50% likelihood of being realized upon
settlement. Changes in judgment resulting in subsequent recognition,
de-recognition, or adjusted measurement of a tax position taken in a prior
annual period, including any related interest and penalties, are recognized as
discrete items during the period in which the change occurs. See Note
17.
|
Earnings
Per Share
|
We
compute EPS using the weighted average number of common and potential shares
outstanding. See Note 18.
|
Cash
and Equivalents
|
Cash and
equivalents consist primarily of deposits held at major banks and other
marketable securities with original maturities of 90 days or less. The majority
of our cash equivalents are in 100% US Treasury-backed money market
funds.
|
Investment
Securities
|
Available-for-sale
securities are reported at fair value, with unrealized gains and losses recorded
in accumulated other comprehensive income (loss). Trading securities are
reported at fair value, with unrealized gains or losses recognized in earnings.
See Notes 8 and 20.
|
Receivables
|
|
Equipment
Financing Contracts
|
We grant
extended payment terms to qualifying customers under contracts of sale. These
contracts are generally for terms of one to five years, secured by the related
equipment sold, with interest recognized at prevailing rates.
|
Facility
Notes
|
We
provide development financing loans to select customers for new or expanding
gaming facilities, generally under terms of one to seven years with interest
recognized at prevailing rates. Certain agreements may also include provisions
for the facility to reserve a percentage of its floor space for the placement of
IGT proprietary games, which may be reduced if the machines do not meet certain
performance standards. These agreements may call for IGT to receive a portion of
the net win on these proprietary games as repayment for some or all of the
amounts financed.
|
Allowance
for Doubtful Accounts
|
We
maintain an allowance for doubtful accounts related to trade receivables, as
well as notes and contracts receivable, where collection has been deemed a high
risk. We analyze historical customer collection trends, concentrations,
creditworthiness, and changes in terms, as well as current economic trends when
evaluating the adequacy of our allowance for doubtful accounts.
|
Inventories
|
Inventories
are stated at the lower of cost (first-in, first-out method) or market value. We
regularly assess inventory quantities for excess and obsolescence primarily
based on forecasted product demand.
|
Property,
Plant and Equipment
|
We
depreciate property, plant and equipment down to salvage value using the
straight-line method. Maintenance and repairs are expensed as incurred and
improvements are capitalized. Depreciation and asset charges related to gaming
operations equipment are recorded to cost of gaming operations. Proceeds from
gaming operations equipment sold are reflected in investing cash
flows.
|
Goodwill
and Other Intangible Assets
|
We
amortize our finite lived intangible assets to reflect the pattern in which the
economic benefits of the assets will be consumed based on projected usage and
revenues over one to 18 years. When the pattern of economic benefit is
undeterminable, we amortize using the straight-line method. We consider certain
factors when assigning useful lives such as legal, regulatory, and contractual
provisions, as well as the effects of obsolescence, demand, competition, and
other economic factors.
We
measure and test goodwill and other intangible assets not subject to
amortization for impairment at least annually or more often if there are
indicators of impairment. We regularly evaluate our portfolio of finite-lived
intangibles to determine if changes or circumstances indicate the carrying
values may not be recoverable or a change in remaining useful life is needed.
Indicators that could trigger an impairment review include changes in legal and
regulatory factors, market conditions, and operational performance. Impairment
is measured as the difference between the carrying amount and the fair value of
the assets and recognized as a component of income from operations.
|
Other
Assets
|
Other
assets are comprised of deferred licensing rights and other expenses,
investments in unconsolidated affiliates, uncertain tax positions, and
refundable deposits.
|
Deferred
Licensing Rights
|
We pay
royalty and license fees for the use of third-party trade names, celebrity
likenesses, content, and other IP rights. We classify licensing rights and
deferred fees as current and non-current assets and amortize costs based on the
estimated period of expected consumption related to forecasted distribution
schedules. If a pattern cannot be reliably determined, we use the straight-line
method over the contract life. We also contract with certain parties for IP
rights where future payments are contingent upon revenues
generated.
Prepaid
fees deemed unrealizable after the related product is released for distribution
are charged to cost of product sales or gaming operations. Prepaid fees deemed
unlikely to be realized before the related product is released are charged to
R&D.
|
Investments
in Unconsolidated Affiliates
|
We apply
the equity method of accounting for investments in unconsolidated affiliates
when we exercise significant influence, but do not control the financial and
operating decisions. Equity earnings of our unconsolidated affiliates are
included in operating income because they are integral to our business
operations. Equity method earnings not material to our financial statements are
presented as a component of SG&A.
Strategic
investments in unconsolidated affiliates are presented in other non-current
assets, separate from investment securities held for a return. Equity
investments in unconsolidated affiliates not accounted for under the equity
method and restricted for more than one year are recorded under the cost method.
All other investments in unconsolidated affiliates not accounted for under the
equity method are available-for-sale securities carried at fair value.
Unrealized holding gains or losses are recorded in other comprehensive income,
except those hedged with designated fair value foreign currency derivatives are
recognized in other income (expense). See Note 3.
|
Derivatives
|
We use
derivative financial instruments to manage certain foreign currency exchange and
interest rate risk. We enter into derivative financial instruments with
high-credit quality counterparties and diversify our positions among such
counterparties to reduce our exposure to credit losses.
We
recognize derivative financial instruments as either assets or liabilities at
fair value. Accounting for changes in the fair value of derivatives depends on
the intended use and resulting designation. We are not party to leveraged
derivatives and do not hold or issue financial instruments for speculative
purposes. We record derivative financial instruments on a net basis with
counterparties for which a master netting arrangement has been executed.
Derivative gains and losses are generally recognized in other income (expense).
See Note 19.
|
Foreign
Currency Hedging
|
We
routinely use derivative financial instruments to minimize our market risk
exposure related to our monetary assets and liabilities denominated in
nonfunctional foreign currencies. The primary business objective of our hedging
program is to minimize the impact to earnings from changes in foreign exchange
rates. These hedging instruments are subject to fluctuations in value that are
generally offset by the value of the underlying exposures being hedged.
Counterparties to our agreements are major commercial banks. These forward
exchange contracts are not designated hedges and gains or losses are recognized
in other income (expense).
We hedge
significant investments denominated in foreign currency with forward exchange
contracts to protect the US dollar value of our investment. These forward
exchange contracts are designated fair value hedges. These derivative gains or
losses are recorded in other income (expense) together with the offsetting gains
or losses on the change in the investment’s fair value attributable to the
changes in foreign currency rates. Time value is excluded from effectiveness
testing.
|
Interest
Rate Management
|
We use
interest rate swap derivatives to diversify our debt portfolio between fixed and
variable rate instruments. The amount and term of each swap is matched with all
or a portion of outstanding principal and remaining term of a specific
obligation. Our swaps exchange fixed rates for variable rates without an
exchange of the notional amount upon which they are based.
These
swaps are designated fair value hedges because they protect us against changes
in the fair value of a portion of our fixed rate borrowings due to interest rate
movements. We recognize the gains or losses from the changes in fair value of
the swaps, as well as the offsetting change in the fair value of the hedged
designated portion of long-term debt, in other income (expense).
Ineffectiveness, if any, is also recorded in other income (expense). Amounts
receivable or payable under the swaps are net settled and recorded as a net
receivable or payable with corresponding adjustments to interest
expense.
|
Negotiated
Share Repurchase Transactions
|
As part
of our capital deployment activities, we have used share repurchases to return
capital to our shareholders and to reduce outstanding share count dilution. We
may use open market and negotiated share repurchase transactions to achieve our
timing, cost, and volume objectives.
Our ASR
(accelerated share repurchase) transactions allowed us to purchase a targeted
number of shares immediately with the final purchase price of those shares
determined by their average market price over a fixed measurement period. The
ASR intends to combine the immediate share retirement benefits of a tender offer
with the market impact and pricing benefits of a disciplined daily open market
share repurchase program. The ASR also guaranteed repurchase of a large number
of shares while limiting our price risk through the use of a floor and cap
feature. The result of this transaction was reflected in the treasury stock
component of shareholders equity.
In
accordance with accounting guidance for an accelerated share repurchase
program, we
accounted for the ASR transactions as an
immediate reduction of outstanding shares for basic and diluted earnings per
share. Additionally, our ASR contracts qualified for equity classification in
accordance with accounting guidance for derivative financial instruments indexed
to, and potentially settled in, a company’s own stock, because settlement was
based on our stock price and we were not required to deliver additional shares
or pay additional cash upon settlement.
|
Other
Liabilities
|
Other
liabilities are primarily comprised of uncertain tax positions, deferred
revenue, customer deposits, accrued expenses, deferred compensation, and
minority interest.
|
Foreign
Currency Translation
|
The
functional currency of certain IGT international subsidiaries is the local
currency. For those subsidiaries, we translate assets and liabilities at
exchange rates in effect at the balance sheet date, and income and expense
accounts at average exchange rates during the year. Resulting currency
translation adjustments are recorded directly to accumulated other comprehensive
income within stockholders’ equity. Gains and losses resulting from transactions
in non-functional currencies are recorded in income. For subsidiaries whose
functional currency is the US dollar, gains and losses on non-US dollar
denominated assets and liabilities are recorded in income.
|
Fair
Value Measurements
|
At the
beginning of fiscal 2009, we adopted new fair value accounting guidance which
refined the definition of fair value, established a framework for measuring fair
value, and permitted the election of fair value measurement with unrealized
gains and losses on designated items recognized in earnings at each subsequent
period for certain financial assets and liabilities. We elected to apply the new
fair value definition and framework for non-financial assets and liabilities at
the beginning of fiscal 2010.
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (exit price), in the principal or most advantageous market,
in an orderly transaction between market participants, on the measurement date.
Assets and liabilities carried at fair value are classified and disclosed in one
of the following three categories:
|
ª
|
Level
1 - Quoted market prices in active markets for identical
instruments
|
|
ª
|
Level
2 - Quoted market prices for similar instruments, using observable market
based inputs or unobservable inputs corroborated by market
data
|
|
ª
|
Level
3 - Unobservable inputs using our own assumptions when observable inputs
are unavailable
|
Certain
financial instruments recorded at fair value are described in more detail in
Note 20, along with valuation methods and assumptions used to estimate fair
value when quoted market prices are not available. Changes in assumptions or
valuation methods could affect fair value estimates.
|
Hurricane
Damage Insurance Recoveries
|
In March
2007, we negotiated a final insurance settlement of $18.0 million related to
2005 US Gulf Coast hurricane damages which destroyed or temporarily shut down
our gaming operations machines. As a result, we received a $13.0 million final
payment, net of $5.0 million previously advanced, and recorded insurance gains
of $5.0 million, net of $1.0 million previously accrued, for property damages in
cost of gaming operations, and $12.0 million for business interruption in
SG&A.
|
Recently
Issued Accounting Standards
|
|
Revenue
Arrangements With Multiple Deliverables and Software
Elements
|
In
October 2009, the FASB issued two ASUs providing new revenue recognition
guidance with respect to revenue arrangements that include software elements and
multiple deliverables. Under the new guidance, tangible products, containing
both software and nonsoftware components that function together to deliver a
tangible product’s essential functionality, will not be subject to software
revenue accounting. This new guidance also establishes a new hierarchy for
allocating revenues among multiple deliverables in a multi-element arrangement.
In order of preference, revenues will be allocated based on VSOE, third-party
evidence, or estimated selling price.
Additional
disclosures will be required to describe the effects of adoption, including
changes in how arrangement consideration is allocated or in the pattern and
timing of revenue recognition. This new guidance is effective for fiscal years
beginning on or after June 15, 2010, and we have elected to early adopt
prospectively for new or materially modified arrangements entered into on or
after the beginning of our first quarter in 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’s products, such as machines, will no longer be accounted for
as software, allowing for revenue recognition earlier in certain bundled
arrangements.
|
Consolidation
of Variable Interest Entities
|
In June
2009, the FASB issued new guidance which requires us to reassess our primary
beneficiary position for all VIE arrangements based on qualitative factors on an
on-going basis. This guidance is effective for our first quarter of fiscal 2011
and must be adopted through a cumulative-effect adjustment (with a retrospective
option). We continue to evaluate the extent to which this will impact our
results of operations, financial position, or cash flows.
|
Accounting
Standards Codification
|
In June
2009, new accounting guidance was issued which established the FASB Accounting
Standards Codification as the single source of authoritative US GAAP. Adoption
of this guidance during our quarter ended September 30, 2009 changed the way we
reference accounting standards and did not have a material impact on our
financial statements.
|
Subsequent
Events
|
In May
2009, new accounting guidance was issued which established principles and
requirements for reporting events or transactions occurring after the balance
sheet date. The guidance requires us to disclose the date through which
subsequent events have been evaluated and whether it is the date the financial
statements were issued. It also requires an entity to consider pro forma
financial information disclosures if an unrecognized subsequent event is
significant and to reissue financial statements filed with the SEC or other
regulatory agencies if failure to do so could make the financial statements
misleading. Adoption of this new guidance for our quarter ended June 30, 2009
did not have a material impact on our financial statements.
|
Other-Than-Temporary
Impairments
|
In June
2009, we adopted new accounting guidance issued in April 2009 requiring us to
determine and recognize impairment on a debt security if we intend to sell or it
is more likely than not that we will be required to sell the security before
recovery. If we do not expect to recover the entire amortized cost of the
security, impairment related to credit loss is recognized in earnings and
impairment related to other factors is recognized in other comprehensive
income.
This
guidance also requires interim and annual disclosures by major security types of
the amortized cost basis, as well as methods and significant inputs used to
measure credit losses, along with a tabular roll forward schedule if a portion
of the impairment is recognized in earnings. Adoption of this new guidance did
not have a material impact on our financial statements
|
Participating
Securities in Share-Based Payment
Transactions
|
In June
2008, new guidance was issued for determining whether instruments granted in
share-based payment transactions are participating securities, mandating that
unvested share-based payment awards containing non-forfeitable rights
to dividends or dividend equivalents are participating securities and should be
included in our computation of EPS using the two-class method. This change is
effective for our first quarter of fiscal 2010 and requires retrospective
application for all periods presented. We estimate our revised computation will
incorporate unvested restricted stock awards as participating securities and
reduce our annual diluted EPS up to $0.01 per share.
|
Convertible
Debt Instruments
|
In May
2008, new 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. The implied value of the debt component equals
that of a similar liability reflecting a borrowing rate for nonconvertible debt.
The equity component is the residual difference between the proceeds and the
implied value of the debt component.
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.
Derivative
Instruments and Hedging Activities
In
January 2009, we adopted new accounting guidance issued in March 2008 to require
additional qualitative and quantitative disclosures about how and why we use
derivative instruments and hedging activities, including the accounting methods
used and the impact on our financial statements. See Note 19.
|
Business
Combinations and Noncontrolling
Interests
|
In
December 2007, new accounting guidance was issued revising the method of
accounting for a number of aspects of business combinations and noncontrolling
interests (i.e. minority interests), such that more assets and liabilities will
be measured at fair value as of the acquisition date. Certain contingent
consideration liabilities will require remeasurement at fair value in each
subsequent reporting period. Noncontrolling interests will initially be measured
at fair value and classified as a separate component of equity.
Acquisition
related costs, such as fees for attorneys, accountants, and investment bankers,
will be expensed as incurred and no longer be capitalized as part of the
business purchase price. For all acquisitions, regardless of the consummation
date, deferred tax assets and uncertain tax position adjustments occurring after
the measurement period will be recorded as a component of income tax expense,
rather than adjusted through goodwill. This change is effective for our first
quarter in fiscal 2010 and requires retrospective application for all prior
comparative financial statements presented (e.g. reclassification of
noncontrolling interests to appear in equity).
|
Fair
Value Measurements
|
In
September 2006, new accounting guidance was issued which refined the definition
of fair value, established a framework for measuring fair value, and expanded
disclosures about fair value measurements. We adopted this guidance for
financial assets and liabilities effective October 1, 2008 and will apply this
guidance for non-financial assets and liabilities beginning October 1,
2009.
In
February 2007, additional accounting guidance was issued permitting the election
of fair value measurement for many financial instruments and certain other
items, with unrealized gains and losses on designated items recognized in
earnings at each subsequent period. This guidance also established presentation
and disclosure requirements for similar types of assets and liabilities measured
at fair value. We adopted this new guidance effective October 1, 2008 and
elected the fair value option for our ARS put rights obtained in November 2008.
See Note 8.
In June
2009, we adopted new accounting guidance issued in April 2009 to require
quarterly fair value disclosures of financial instruments (previously required
only annually) and further expanded disclosures about the methods and
significant assumptions used to estimate fair value.
Adoption
of this new guidance did not have a material impact on our financial statements.
See Note 20 for additional information regarding our fair value
measurements.
|
2.
|
Restructuring
|
In
response to reduced demand, we have been conducting an ongoing company-wide
strategic review of our costs and organizational structure to maximize
efficiency and align expenses with the current and long-term business
outlook. 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.
Resulting
restructuring charges for the year ended September 30, 2009 totaled $35.0
million, net of $3.4 million in forfeited stock compensation. The remaining
accrued costs are expected to be paid over the next several
quarters.
|
Accrued
restructuring costs as of and for the year ended September 30,
2009
|
|
(In
millions)
|
||||
|
Severance
and benefits
|
$ | 35.0 | ||
|
Lease
termination costs
|
2.2 | |||
|
Other
costs
|
1.2 | |||
|
Total
accrued costs
|
38.4 | |||
|
Cash
paid
|
(33.3 | ) | ||
|
Remaining
accrued costs
|
$ | 5.1 | ||
|
3.
|
Variable
Interest Entities and Investments in Unconsolidated
Affiliates
|
|
Variable
Interest Entities
|
As the
primary beneficiary, we consolidate our VIE WAP trusts in Iowa and New Jersey.
The trusts are primarily responsible for administering jackpot payments to
winners. The consolidation of these VIE trusts primarily increases jackpot
liabilities and related assets, as well as interest income and equivalent
offsetting interest expense. In conjunction with regulatory changes, the Iowa
Trust was dissolved with its remaining assets and liabilities transferred to IGT
in December 2008. Consolidated VIE trust assets and equivalent liabilities
totaled $91.3 million at September 30, 2009 and $108.2 million at September 30,
2008.
|
Investments
in Unconsolidated Affiliates
|
|
Las
Vegas Gaming International
|
In
October 2008, we entered into a strategic business arrangement with LVGI, an
innovator in gaming software applications and hardware, whereby LVGI agreed to
create applications for IGT’s server-based gaming systems, and IGT agreed to
purchase certain shares in LVGI. We advanced $1.5 million in July 2008 and paid
$10.3 million in October 2008 to LVGI for a total investment of $11.8 million to
receive 4.7 million shares of LVGI convertible perpetual cumulative preferred
stock and warrants to purchase an additional 1.5 million common shares. In
February 2009, we advanced $1.5 million with LVGI as a refundable deposit
against a second potential investment.
As LVGI
is not a publicly traded company and the preferred stock did not meet all the
characteristics of in-substance common stock, this investment was accounted for
under the cost method. The warrants were not accounted for separately as they
did not qualify as freestanding derivatives. In late August 2009, LVGI publicly
stated that it lacked the funding to satisfy its current obligations or sustain
expected working capital requirements for its current fiscal year and further,
is unable to make cash flow forecasts based on reasonably objective assumptions.
As a result of significant adverse changes in the expected financial performance
of LVGI, together with an evaluation of our long-term gaming systems strategy,
we determined our investment was fully impaired at September 30, 2009 and
recorded $13.3 million of other-than-temporary impairment.
|
Progressive
Gaming International Corp.
|
In August
2008, we invested $15.0 million in a Note and Warrant Purchase Agreement with
PGIC, a casino management systems provider focused on smaller casinos. The
initial investment of $15.0 million was allocated to three components of the
agreement based on their respective fair values: convertible notes of $6.6
million, embedded derivatives of $7.5 million and stock warrants of $0.9
million.
The fair
value of our investment in PGIC's senior subordinated convertible notes,
including accrued interest, was $6.3 million in January 2009 when it was
attributed to consideration paid for certain PGIC assets acquired. See Note 7.
PGIC subsequently filed a petition for relief under Chapter 7 of the US
Bankruptcy Code. The investment carrying value was reduced to zero concurrent
with the asset acquisition.
Previous
to the asset acquisition, the notes were accounted for as available-for-sale
securities with the discount amortized to interest income. The notes’ conversion
option, contingent interest feature, and change of control put, were accounted
for separately as a single, bundled, compound embedded derivative. The warrants
were also accounted for separately as freestanding derivatives.
We
recorded a loss of $0.9 million on the notes investment during fiscal 2009. The
embedded derivatives and warrants had a combined fair value of zero at September
30, 2009, after recording losses of $1.2 million during fiscal 2009 and $7.2
million in 2008.
|
China
LotSynergy Holdings, Ltd.
|
|
Stock
|
In May
2007, we entered into strategic business arrangements with CLS, a company
involved in the development of the China lottery market and other related
activities. As part of this arrangement, we invested $33.6 million, including
transaction costs, for approximately 5% of the outstanding ordinary shares of
CLS, a public company listed on the Growth Enterprise Market of the Hong Kong
Exchange.
At
September 30, 2009, our CLS stock investment was accounted for as an
available-for-sale security with adjusted cost basis, fair value, and unrealized
gain/loss reflected in the aggregate available-for-sale table below. We changed
from the previous accounting for this investment under the cost method during
the third quarter of fiscal 2009 as the selling restriction was within one year
of expiration.
At
September 30, 2008, the fair value of the stock investment was $12.2 million,
and we recorded an other-than-temporary loss of $21.4 million because it had
been in a loss position for several months and local business conditions
surrounding new regulations were uncertain.
|
Convertible
Notes Receivable
|
Additionally
in May 2007, we invested $72.0 million, including transaction costs, in a 4%
zero-coupon unsecured convertible note of CLS due May 31, 2015, which becomes
partially or wholly convertible after three years at a split-adjusted initial
conversion price of HK$0.96 per share. CLS may call the note for redemption in
full at accreted value under certain circumstances on or after May 31, 2012. IGT
may require CLS to repay a portion of or the entire note at accreted value on
May 31, 2012.
This note
is accounted for as an available-for-sale security with adjusted cost basis,
fair value, and unrealized gain/loss reflected in the aggregate
available-for-sale table below. The unrealized loss recorded in other
comprehensive income at September 30, 2008 was considered temporary because CLS
had sufficient cash to satisfy the obligation. We determined that no feature met
the definition of a derivative requiring bifurcation at September 30, 2009. See
Note 19 about related foreign currency derivatives.
IGT
simultaneously entered into a cooperative agreement to provide technical
support, assistance, and consulting services to CLS and exclusively explore
opportunities for providing products and services in connection with the China
Welfare Lottery. IGT is restricted from selling or transferring any of its
shares in CLS or the convertible note for three years, after which either party
may terminate exclusivity provisions and IGT may sell or transfer its shares in
CLS or the convertible note.
|
Joint
Ventures
|
In
September 2007, we established a 50/50 joint venture, IGT Synergy Holding Ltd.,
to explore opportunities in connection with the China Welfare Lottery; and in
September 2009, we formed Asiatic Group Ltd. for Bingo and Electronic Lottery
Games, also a 50/50 joint venture. As of September 30, 2009, we had funded $1.2
million of a $14.5 million unconditional commitment to contribute capital to CLS
joint ventures over the next two years. We account for these joint ventures
under the equity method and recognized losses of $0.3 million in fiscal 2009 and
$0.1 million in 2008.
|
Walker
Digital Gaming, LLC
|
In
February 2006, IGT paid $56.0 million for a 10% equity interest in WDG, formerly
known as Casino IP Holdings, LLC, a VIE formed with our involvement to hold,
develop, and license WDG IP identified for gambling use. In January 2008, we
invested $14.0 million in WDG for an additional 2% equity interest and committed
to fund a $60.0 million royalty advance in annual $15.0 million installments.
This relationship was designed to facilitate development, introduction, and
integration of WDG gaming application concepts into IGT product
lines.
We
determined IGT was not the primary beneficiary of the WDG VIE because IGT did
not provide more than half of the total equity or financial support and
accounted for this investment under the equity method. There were no other terms
of the arrangement, explicit or implicit, that could have required IGT to
provide additional financial support. We recognized losses from this
unconsolidated affiliate, largely comprised of intangible asset amortization, of
$5.2 million in fiscal 2009, $5.8 million in 2008, and $5.3 million
2007.
In August
2009, we paid $20.0 million to WDG in connection with an agreement to extinguish
the royalty commitment, eliminate future IGT royalty obligations, relinquish our
WDG equity ownership, and restructure IP rights and ownership. This new
agreement supersedes and terminates all other previous IP license agreements
between WDG and IGT. We paid an additional $5.0 million in October 2009 upon the
finalization of certain third-party IP license arrangements. This new agreement
triggered a VIE reconsideration event and we determined that IGT no longer holds
any variable interest in WDG.
As a
result of this exchange and related evaluation of the future business outlook
pertaining to the use of these IP rights, in the fourth quarter of fiscal 2009
we recorded a loss of $78.0 million. The equity investment, deferred royalties
and related accrued commitment were eliminated and we recorded patent additions
in intangible assets of $24.8 million of patents ($20.0 million in cash and $4.8
million of other assets). See Note 12.
|
Aggregate
Available-for-sale Investments in Unconsolidated
Affiliates
|
|
Adjusted
|
Unrealized
|
Fair
|
|||||||||||
|
September
30,
|
Cost
|
gain
(loss)
|
Value*
|
||||||||||
|
(In
millions)
|
|||||||||||||
|
2009
|
CLS
Stock
|
$ | 12.2 | $ | 3.5 | $ | 15.7 | ||||||
|
CLS
Convertible Note
|
77.9 | 0.5 | 78.4 | ||||||||||
|
Total
|
$ | 90.1 | $ | 4.0 | $ | 94.1 | |||||||
|
2008
|
PGIC
Convertible Note
|
$ | 6.7 | $ | 0.1 | $ | 6.8 | ||||||
|
CLS
Convertible Note
|
74.5 | (2.1 | ) | 72.4 | |||||||||
|
Total
|
$ | 81.2 | $ | (2.0 | ) | $ | 79.2 | ||||||
|
*
See Note 20 for factors related to fair values.
|
|||||||||||||
|
4.
|
Inventories
|
|
September
30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Raw
materials
|
$ | 74.9 | $ | 99.8 | ||||
|
Work-in-process
|
6.7 | 9.5 | ||||||
|
Finished
goods
|
76.2 | 109.0 | ||||||
|
Total
|
$ | 157.8 | $ | 218.3 | ||||
|
5.
|
Property,
Plant and Equipment
|
|
September
30,
|
2009
|
2008
|
Useful
lives
|
|||||||||
|
(In
millions)
|
(years)
|
|||||||||||
|
Land
|
$ | 62.7 | $ | 62.9 | ||||||||
|
Buildings
|
230.0 | 225.6 | 40 | |||||||||
|
Leasehold
improvements
|
14.5 | 12.8 | 1-5 | |||||||||
|
Machinery,
furniture and equipment
|
300.2 | 300.6 | 3-10 | |||||||||
|
Gaming
operations equipment
|
832.4 | 816.6 | 1-5 | |||||||||
|
Total
|
1,439.8 | 1,418.5 | ||||||||||
|
Less
accumulated depreciation
|
(881.0 | ) | (827.6 | ) | ||||||||
|
Property,
plant and equipment, net
|
$ | 558.8 | $ | 590.9 | ||||||||
Interest
of $1.9 million was capitalized during fiscal 2008 related to the completion of
our Las Vegas facility construction.
|
6.
|
Employee
Benefit Plans
|
We have
established a variety of employee benefit programs to attract, retain and
motivate employees.
|
Cash
Incentives
|
Our
profit sharing and 401(k) plan was adopted for US employees. IGT matches 100% of
an employee’s contributions up to $750 per year. Participants immediately vest
in their contributions and IGT’s matching contributions. Additionally, IGT may
contribute a portion of profits to eligible employees, which vest over a
six-year period. Cash sharing is distributed semi-annually to all eligible
employees and management bonuses are paid annually to selected
employees.
Our
non-qualified deferred compensation plan, implemented in September 1999,
provides an unfunded incentive compensation arrangement for eligible management
and highly compensated employees. Participants may elect to defer up to 50% of
their annual earnings with a minimum deferral of $2,000. Distributions can be
paid out as short-term payments or at retirement. Retirement benefits can be
paid out as a lump sum or in annual installments over a term of up to 15
years.
Benefits
accrued for these plans totaled $38.8 million in fiscal 2009, $75.1 million in
2008, and $93.6 million in 2007.
|
Share-based
Compensation
|
The
amount, frequency, and terms of share-based awards may vary based on competitive
practices, company operating results, and government regulations. New IGT shares
are issued upon option exercises or restricted share grants.
IGT
restricted share awards are earned over the employee’s service (vesting) period,
and hold no further restrictions upon vesting. Performance-based awards vest
based on achievement of specific financial and operational goals as established
in advance by the Compensation Committee. Unrecognized costs related to all
share-based awards outstanding at September 30, 2009 totaled $63.1 million and
are expected to be recognized over a weighted average period of 1.7
years.
|
Stock
Incentive Plan (SIP)
|
Under the
IGT SIP, eligible employees and non-employee directors may be granted
non-qualified and incentive stock options, restricted shares or stock
appreciation rights. SIP grants may vest based on time of service or
performance. Stock options are generally granted at an exercise price equal to
the market price on the date of grant, with a 10-year contractual term. SIP
grants generally vest over 3-5 years in ratable annual increments. At September
30, 2009, 24.0 million shares were available for grant under the IGT SIP and
restricted shares granted count as four shares against this
allowance.
|
Stock
Options Exchanged
|
On
November 4, 2009, IGT granted 2.7 million employee stock options with an
exercise price of $18.60 per share in exchange for the 5.3 million underwater
employee stock options surrendered in a share holder approved exchange offer
that expired on November 3, 2009. The newly granted options have a six-year
contractual term and will vest ratably over two years.
|
Stock
options activity as of and for the year ended September 30,
2009
|
|
Weighted
Average
|
||||||||||||||||
|
Remaining
|
Aggregate
|
|||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
|
Shares
|
Price
|
Term
|
Value
|
|||||||||||||
|
(thousands)
|
(per
share)
|
(years)
|
(millions)
|
|||||||||||||
|
Outstanding
at beginning of year
|
16,780 | $ | 32.06 | |||||||||||||
|
Granted
|
4,921 | 10.70 | ||||||||||||||
|
Exercised
|
(512 | ) | 16.38 | |||||||||||||
|
Forfeited
|
(1,466 | ) | 28.03 | |||||||||||||
|
Expired
|
(1,701 | ) | 33.38 | |||||||||||||
|
Outstanding
at end of period
|
18,022 | $ | 26.88 | 6.4 | $ | 48.0 | ||||||||||
|
Vested
and expected to vest
|
17,902 | $ | 26.94 | 6.4 | $ | 47.2 | ||||||||||
|
Exercisable
at end of period
|
9,988 | $ | 30.58 | 4.7 | $ | 6.6 | ||||||||||
|
Restricted
shares activity as of and for the year ended September 30,
2009
|
|
Weighted
Average
|
||||||||||||||||
|
Grant
|
Remaining
|
Aggregate
|
||||||||||||||
|
Date
|
Vesting
|
Intrinsic
|
||||||||||||||
|
Shares
|
Fair
Value
|
Period
|
Value
|
|||||||||||||
|
(thousands)
|
(per
share)
|
(years)
|
(millions)
|
|||||||||||||
|
Outstanding
at beginning of year
|
1,663 | $ | 35.72 | |||||||||||||
|
Granted
|
1,171 | 10.71 | ||||||||||||||
|
Vested
|
(524 | ) | 34.58 | |||||||||||||
|
Forfeited
|
(310 | ) | 27.45 | |||||||||||||
|
Outstanding
at end of period
|
2,000 | $ | 22.60 | 2.4 | $ | 39.9 | ||||||||||
|
Expected
to vest
|
1,890 | $ | 21.74 | 2.4 | $ | 37.7 | ||||||||||
|
Employee
Stock Purchase Plan
|
Under the
IGT qualified employee stock purchase plan, eligible employees are granted an
option with a 12-month term to purchase a limited number of shares, exercisable
the last day in February each year. Eligible employees may participate in this
plan through payroll deductions up to certain limits. The option price is equal
to 85% of the market price of our stock on the grant date or exercise date,
whichever is less. Approximately 671,000 shares were issued in February 2009
under this plan. Based on enrollment through September 30, 2009, we expect to
issue approximately 1.2 million shares in February 2010 under this plan. At
September 30, 2009, 1.9 million shares were available for future
grants.
Additionally,
eligible UK employees may enroll annually in the Barcrest Savings Related Share
Option Scheme established in January 1999. Employees must elect to vest over
three, five, or seven years and the option price is equal to 80% of the market
price of our stock on the grant date. No shares were issued during fiscal 2009
under this plan and approximately 600,000 shares were available for grant at
September 30, 2009. Based on enrollment through September 30, 2009, we expect to
issue approximately 207,000 shares under this plan over the next seven
years.
|
Option
Valuation Assumptions
|
|
Years
Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
Expected
volatility
|
0.60 | 0.31 | 0.26 | |||||||||
|
Expected
dividends
|
4.84% | 1.32% | 1.26% | |||||||||
|
Expected
term (in years)
|
4.4 | 4.4 | 4.2 | |||||||||
|
Risk
free rate
|
1.83% | 2.61% | 4.57% | |||||||||
|
Reported
Share-based Compensation
|
|
Years
Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Pre-tax
|
$ | 39.2 | $ | 38.4 | $ | 35.7 | ||||||
|
Tax
benefit
|
(11.9 | ) | (11.6 | ) | (10.3 | ) | ||||||
|
After-tax
|
$ | 27.3 | $ | 26.8 | $ | 25.4 | ||||||
|
Other
Share-based Compensation
Information
|
|
Years
Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions, except per share amounts)
|
||||||||||||
|
Weighted
average grant date fair value per share:
|
||||||||||||
|
Options
granted
|
$ | 3.71 | $ | 8.72 | $ | 9.50 | ||||||
|
Restricted
shares granted
|
$ | 10.71 | $ | 35.56 | $ | 42.56 | ||||||
|
Total
intrinsic value of options exercised
|
$ | 1.9 | $ | 57.3 | $ | 66.3 | ||||||
|
Total
fair value of restricted shares vested
|
5.7 | 16.5 | 13.1 | |||||||||
|
Tax
benefit realized for tax return deductions
|
2.7 | 26.2 | 26.9 | |||||||||
|
7.
|
Business
Acquisitions
|
|
Progressive
Gaming International Corp.
|
In
January 2009, we acquired certain operating assets of PGIC. The purchase
consideration totaled $23.6 million, including $17.3 million in cash and $6.3
million of fair value from our note investment with accrued interest. See Note
3. Certain global assets and operations of PGIC were integrated with respective
IGT offices serving Europe, Asia, Australia, Latin America, Canada, and the US.
We believe this purchase will provide IGT with additional market opportunities
using the PGIC technology to augment our current systems product offerings and
increase our systems installed base.
We
allocated the purchase consideration to:
|
ª
|
tangible
assets of $13.5 million, including cash of $1.8
million
|
|
ª
|
identifiable
intangible assets of $15.3 million
|
|
ª
|
in-process
R&D of $0.8 million with no future alternative use, immediately
charged to R&D
|
|
ª
|
liabilities
of $6.0 million
|
|
Cyberview
Technology, Inc.
|
In July
2008, we paid approximately $88.6 million for substantially all of the assets of
Cyberview, a group of companies, that develop, produce, and implement
innovative, integrated gaming systems solutions. The purchase price included a
separate license agreement providing rights to certain additional Cyberview
patents. We anticipate this purchase will enable more immediate access to
licensed betting office and video lottery markets in Europe, as well as further
strengthen our IP portfolio and enhance our server-based
initiatives.
We
allocated the purchase price to:
|
ª
|
tangible
assets of $30.8 million, including cash of $16.5
million
|
|
ª
|
identifiable
intangible assets of $31.5 million
|
|
ª
|
goodwill
of $35.8 million, which may be deductible for tax
purposes
|
|
ª
|
liabilities
of $9.5 million
|
|
Million-2-1
|
In June
2008, we completed the acquisition of M-2-1, a mobile gaming company based in
Manchester, UK, for approximately $10.3 million. Additionally, we committed to
pay earn-out consideration up to a maximum of £7.5 million, payable through
fiscal 2011 contingent upon M-2-1 meeting certain financial targets. If paid, a
portion will be recorded as additional purchase consideration and a portion as
compensation expense ratably over the service period through June 2011. At
September 30, 2009, financial targets were thus far not met and the remaining
commitment totaled approximately $5.0 million. In addition to gaining access to
M-2-1's IP, we anticipate this business combination will enable us to establish
new markets and channels for IGT's game content.
We allocated the purchase price
to:
|
ª
|
tangible
assets of $1.6 million, including cash of $0.8
million
|
|
ª
|
identifiable
intangible assets of $7.2 million
|
|
ª
|
goodwill
of $6.4 million, which is not deductible for tax
purposes
|
|
ª
|
liabilities
of $4.9 million
|
|
DigiDeal
Corporation
|
In June
2007, we invested $31.2 million in voting convertible preferred and common stock
of DigiDeal, a Spokane, Washington gaming technology firm. We acquired a 58%
controlling interest and DigiDeal’s results were consolidated in our financial
statements beginning June 22, 2007. In addition to gaining access to DigiDeal’s
IP portfolio, we plan to work jointly in expanding game content and electronic
table game products. Additional five-year agreements provide IGT exclusive
manufacturing and distribution rights, as well as a fixed-price option to
purchase all remaining outstanding shares.
We allocated the aggregate purchase
price to:
|
ª
|
tangible
assets of $14.9 million, including cash of $12.4
million
|
|
ª
|
identifiable
intangible assets of $9.0 million
|
|
ª
|
in-process
R&D of $0.5 million with no future alternative use, immediately
charged to R&D expense
|
|
ª
|
goodwill
of $11.1 million, not deductible for tax
purposes
|
|
ª
|
liabilities
of $4.3 million
|
During
the second quarter of fiscal 2008, we increased our investment in DigiDeal by
approximately 5% for $3.0 million, with an allocation of $2.2 million to
goodwill and $0.4 million to identifiable intangible assets.
|
8.
|
Investment
Securities
|
Our
portfolio of investment securities was comprised entirely of $21.6 million (par)
of ARS and related put rights held at September 30, 2009 and 2008. ARS are fixed
rate debt securities with underlying long-term maturities, designed to reset to
market rates when traded through a modified Dutch auction process at
predetermined short-term intervals, typically 7, 28, or 35 days. These debt
securities actively traded at par previous to auctions failures which began in
February 2008.
Our ARS
consist of AAA rated issuances, collateralized by student loans guaranteed by
the US government under the Federal Family Education Loan Program. The issuers
additionally provide certain credit enhancements, such as
over-collateralization, reserve accounts, insurance, and excess spread, to
further secure the value of the debt. The issuers provide a third-party
guarantee, such that if a student loan defaults, the guarantor is obligated to
pay the issuer 100% of the outstanding principal and interest. The guarantor is
then able to submit a claim to the Federal Department of Education which
guarantees payment of 97-100% of the outstanding amounts to the
guarantor.
With
global credit and capital market uncertainties, investment banks and brokers
were unwilling to purchase ARS when investor demand fell short and auctions for
student loan ARS began failing in February 2008. The effect of a failed auction
is that holders cannot sell the securities at auction and the interest rates
generally reset to a maximum auction interest rate. Our ARS lack liquidity
because of the failed auctions, but we continue to receive interest payments and
have no reason to believe the underlying assets are at risk of
default.
In
November 2008, we accepted ARS put rights offered by our broker, UBS Securities
LLC, entitling us to sell our ARS through appropriate UBS entities at par plus
accrued interest during the exercise period from June 30, 2010 through July 2,
2012. The put rights are a separate freestanding instrument accounted for
separately from the ARS. Upon acceptance of the put rights, we reclassified our
ARS from “available-for-sale” to “trading” and elected to carry the put at fair
value. We believe this election more accurately reflects the economic
relationship between the put and the underlying ARS and future changes in the
respective fair values will largely offset.
At
September 30, 2009, the ARS and put were classified as trading and presented in
current assets as our ability to exercise the put right was within one year. At
September 30, 2008, the ARS were classified as available-for-sale in non-current
assets. See Note 20 for fair value information. In addition to gains of $0.2
million on other investment securities sold in fiscal 2008, we recorded the
following changes in fair value related to the ARS and put:
|
ª
|
net
loss of $0.3 million ($3.9 million ARS loss and $3.6 million put gain)
during fiscal 2009
|
|
ª
|
temporary
ARS impairment of $2.0 million during fiscal 2008 (in other comprehensive
income)
|
|
9.
|
Jackpot
Annuity Investments
|
Information
about the carrying value, fair value and unrealized gains and losses of our
jackpot investments are presented in Note 20. As of September 30,2009, these
securities mature through 2034, with accreted interest, as follows:
|
Within
1 year
|
2-5
years
|
6-10
years
|
Thereafter
|
Total
|
||||||||||||||
|
(In
millions)
|
||||||||||||||||||
| $ | 67.4 | $ | 240.8 | $ | 195.2 | $ | 128.2 | $ | 631.6 | |||||||||
|
10.
|
Receivables
|
Our notes
and contracts receivable are presented net of unearned interest income and
deferred loan fees totaling $13.2 million at September 30, 2009 and $6.6 million
at September 30, 2008, and net of allowances for doubtful accounts
below.
|
September
30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||
|
Beginning
balance
|
$ | 19.1 | $ | 20.9 | $ | 18.2 | ||||||
|
Provisions
|
17.0 | 5.2 | 4.0 | |||||||||
|
Write-offs,
net of recoveries
|
(12.7 | ) | (7.0 | ) | (1.3 | ) | ||||||
|
Ending
balance
|
$ | 23.4 | $ | 19.1 | $ | 20.9 | ||||||
|
Allowance
for doubtful notes and contracts:
|
||||||||||||
|
Beginning
balance
|
$ | 16.3 | $ | 25.1 | $ | 39.0 | ||||||
|
Provisions
|
16.9 | 3.8 | (10.0 | ) | ||||||||
|
Write-offs,
net of recoveries
|
- | (12.6 | ) | (3.9 | ) | |||||||
|
Ending
balance
|
$ | 33.2 | $ | 16.3 | $ | 25.1 | ||||||
|
Current
|
$ | 22.6 | $ | 10.1 | $ | 12.5 | ||||||
|
Non-current
|
$ | 10.6 | $ | 6.2 | $ | 12.6 | ||||||
Estimated
future collections below, as of September 30, 2009, are net of allowances for
notes of $19.0 million and contracts of $14.2 million:
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||||||||||
|
Notes
|
$ | 38.3 | $ | 29.6 | $ | 21.0 | $ | 20.3 | $ | 18.0 | $ | 64.3 | $ | 191.5 | ||||||||||||||
|
Contracts
|
116.5 | 72.2 | 12.3 | 5.6 | 5.5 | 0.6 | 212.7 | |||||||||||||||||||||
| $ | 154.8 | $ | 101.8 | $ | 33.3 | $ | 25.9 | $ | 23.5 | $ | 64.9 | $ | 404.2 | |||||||||||||||
|
11.
|
Concentrations
of Credit Risk
|
Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of cash and equivalents, investments, and receivables. We place
short-term investments in high credit quality financial institutions and in
short-duration high-quality securities. With the exception of US Government and
Agency securities, our short-term investment policy limits the amount of credit
exposure in any one financial institution, industry group, or type of
investment. Cash on deposit may be in excess of Federal Deposit Insurance
Corporation limits.
Our
receivables are concentrated in the following legalized gaming regions at
September 30, 2009:
|
North
America
|
International
|
|||||
|
Nevada
|
10
|
%
|
Argentina
|
22
|
%
|
|
|
Alabama
|
9
|
Other
Latin America
|
7
|
|||
|
Oklahoma
|
6
|
Europe
|
6
|
|||
|
Pennsylvania
|
5
|
Other
(less than 5% individually)
|
8
|
|||
|
Other
(less than 5% individually)
|
27
|
43
|
%
|
|||
|
57
|
%
|
Our
unfunded development financing loans totaled $17.7 million at September 30,
2009.
|
12.
|
Goodwill
and Other Intangibles
|
|
Goodwill
|
|
Activity
by Segment for the year
|
North
|
|||||||||||
|
ended
September 30,
|
America
|
International
|
Total
|
|||||||||
|
(In
millions)
|
||||||||||||
|
2008
|
||||||||||||
|
Beginning
balance
|
$ | 1,009.2 | $ | 107.4 | $ | 1,116.6 | ||||||
|
Acquisitions/purchase
price adjustments
|
34.3 | 14.3 | 48.6 | |||||||||
|
Foreign
currency and tax benefit adjustments
|
(0.9 | ) | (5.8 | ) | (6.7 | ) | ||||||
|
Ending
balance
|
1,042.6 | 115.9 | 1,158.5 | |||||||||
|
2009
|
||||||||||||
|
Acquisitions/purchase
price adjustments
|
0.2 | 0.2 | 0.4 | |||||||||
|
Foreign
currency
|
- | (7.4 | ) | (7.4 | ) | |||||||
|
Ending
balance
|
$ | 1,042.8 | $ | 108.7 | $ | 1,151.5 | ||||||
|
Other
Intangibles
|
Patent
additions in the following tables include capitalized legal costs, as well as
$24.8 million related to our WDG exchange (see Note 3). Purchase consideration
for the reacquired rights was comprised of $10.6 million cash and $2.8 million
of receivables settled in connection with an Atlantic City distributorship.
Business combination additions include purchase price valuation adjustments
during the first year subsequent to acquisition.
|
Additions
for the year
|
Business
|
Other
|
Weighted
|
|||||||||
|
ended
September 30, 2009
|
Combinations
|
Additions
|
Average
Life
|
|||||||||
|
(In
millions, except life)
|
(Years)
|
|||||||||||
|
Finite
lived intangibles
|
||||||||||||
|
Patents
|
$ | - | $ | 33.8 | 9 | |||||||
|
Developed
technology
|
9.0 | - | 6 | |||||||||
|
Contracts
|
4.6 | - | 7 | |||||||||
|
Reacquired
rights
|
- | 13.4 | 13 | |||||||||
|
Customer
relationships
|
1.1 | - | 9 | |||||||||
|
Trademarks
|
0.5 | - | 7 | |||||||||
|
Total
|
$ | 15.2 | $ | 47.2 | ||||||||
|
September
30, 2009
|
September
30, 2008
|
|||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
|
Balances
|
Cost
|
Amortization
|
Net
|
Cost
|
Amortization
|
Net
|
||||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||||||
|
Finite
lived intangible assets
|
||||||||||||||||||||||||
|
Patents
|
$ | 396.3 | $ | 205.7 | $ | 190.6 | $ | 376.7 | $ | 184.0 | $ | 192.7 | ||||||||||||
|
Developed
technology
|
76.7 | 37.3 | 39.4 | 68.4 | 27.1 | 41.3 | ||||||||||||||||||
|
Contracts
|
26.4 | 15.7 | 10.7 | 25.1 | 15.5 | 9.6 | ||||||||||||||||||
|
Reacquired
rights
|
13.4 | 0.1 | 13.3 | - | - | - | ||||||||||||||||||
|
Customer
relationships
|
8.8 | 4.8 | 4.0 | 7.9 | 4.0 | 3.9 | ||||||||||||||||||
|
Trademarks
|
3.6 | 2.4 | 1.2 | 3.3 | 1.9 | 1.4 | ||||||||||||||||||
|
Total
|
$ | 525.2 | $ | 266.0 | $ | 259.2 | $ | 481.4 | $ | 232.5 | $ | 248.9 | ||||||||||||
Aggregate
amortization expense totaled $51.2 million in fiscal 2009, $45.1 million in
2008, and $49.1 million in 2007.
|
2010
|
2011
|
2012
|
2013
|
2014
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Estimated
future annual amortization
|
$ | 47.3 | $ | 43.1 | $ | 37.3 | $ | 34.2 | $ | 30.7 | ||||||||||
|
13.
|
Credit
Facilities and Indebtedness
|
|
Outstanding
balance September 30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Domestic
revolving credit facility
|
$ | 100.0 | $ | 1,345.0 | ||||
|
Foreign
revolving credit facilities
|
5.3 | 15.0 | ||||||
|
Debentures
|
707.0 | 900.0 | ||||||
|
Notes
|
850.0 | - | ||||||
|
Installment
purchase contract
|
- | 3.1 | ||||||
|
Bonds
|
500.0 | - | ||||||
|
Total
notes payable
|
2,162.3 | 2,263.1 | ||||||
|
Discount
|
(2.6 | ) | - | |||||
|
Swap
fair value adjustment
|
15.1 | - | ||||||
|
Total
notes payable, net
|
$ | 2,174.8 | $ | 2,263.1 | ||||
The table
below reflects our expected future principal payments as of September 30, 2009.
The Debentures were included with 2010 payments as we expect holders will
exercise the December 2009 put right.
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
(in
millions)
|
||||||||||||||||||||||||||||
|
Principal
payments
|
$ | 712.3 | $ | 15.6 | $ | 84.4 | $ | - | $ | 850.0 | $ | 500.0 | $ | 2,162.3 | ||||||||||||||
We were
in compliance with all applicable debt covenants at September 30,
2009.
|
Domestic
Revolving Credit Facility
|
In June
2009, our $2.5 billion credit facility was amended and restated providing for a
reduced revolving credit line of $2.1 billion, extending the maturity on $1.7
billion to June 8, 2012 and leaving $0.4 billion with the non-extended maturity
of December 19, 2010. Upon the subsequent issuance of Bonds described below, the
amended facility was further reduced by $0.3 billion to a total commitment of
$1.8 billion, with $1.5 billion extended and $0.3 billion
non-extended.
Interest
under the amended facility is paid at least quarterly with rates and facility
fees based on our public debt ratings or debt to capitalization ratio.
Initially, extended commitments bear interest at LIBOR plus 260 bps with a
facility fee of 65 bps and non-extended commitments bear interest at LIBOR plus
37.5 bps with a facility fee of 12.5 bps. At September 30, 2009, $100.0 million
was drawn on the amended facility ($84.4 million extended and $15.6 million
non-extended), $1.7 billion was available, and $3.6 million was reserved for
letters of credit. The outstanding amount carried a 2.74% weighted average
interest rate.
Half of
amounts outstanding at December 19, 2010 will convert to term loans due in six
installments. The first five installments, equal to 1.25% of the converted
principal, are due March 31, June 30, September 30, December 31, 2011 and March
31, 2012, and the final installment for the remaining outstanding principal is
due on June 8, 2012.
IGT was
required to repay $780.0 million outstanding under the original facility and
immediately re-borrow it under the terms of the amended facility. Non-recurring
charges of $4.4 million for associated breakage fees on the early repayments and
deferred offering costs related to the commitment reduction were recorded in
third quarter interest expense. Capitalized debt issuance costs of approximately
$35.4 million will be amortized to interest expense over the amended facility
term.
Obligations
under the amended facility are generally unsecured, except that in the event of
certain declines in our debt ratings (as described in the amended facility), we
will grant a lien on 100% and 66% of the equity interests of our direct and
wholly-owned domestic and foreign subsidiaries, respectively, pursuant to the
terms of a Pledge and Security Agreement. The Notes, Bonds or similar securities
issued by IGT and certain interest rate hedges provided by lenders or their
affiliates under the amended facility are permitted to share in any collateral
granted. Any lien granted will be released if we satisfy the minimum
debt rating requirements (as described in the amended facility) for at least
three consecutive calendar months.
The
amended facility includes the following covenants (all terms as defined per the
amended facility):
|
ª
|
a
minimum ratio of adjusted EBITDA to interest expense (interest coverage
ratio)
|
|
ª
|
a
maximum ratio of Total Debt to adjusted EBITDA (total leverage
ratio)
|
|
ª
|
certain
restrictions on our ability to:
|
|
§
|
incur
or guaranty additional debt, or enter into swap
agreements
|
|
§
|
incur
liens
|
|
§
|
merge
with or acquire other companies, liquidate or
dissolve
|
|
§
|
sell,
transfer, lease or dispose of substantially all
assets
|
|
§
|
change
the nature of our business
|
|
§
|
declare
or make cash dividends or distributions or pay cash for the purchase,
redemption, retirement, defeasance, acquisition, cancellation or
termination of our capital stock or equity interests or any return of
capital to shareholders, provided that we may, as long as no continuing
default has occurred, pay dividends of up to the lesser of $0.06 per
common share per fiscal quarter or $25 million in any fiscal
quarter.
|
The
amended facility specifies a number of events of default (some of which are
subject to applicable grace or cure periods), including failure to make timely
principal and interest payments or satisfy the covenants. Upon the occurrence of
an event of default under the credit facility, the lenders may cease making
loans, terminate the commitments, and declare all amounts outstanding to be
immediately due and payable.
All features of the amended facility
were evaluated for embedded derivatives and we determined no embedded features
require bifurcation.
|
Foreign
Revolving Credit Facilities
|
Our
foreign credit facilities at September 30, 2009 totaled $58.6 million, of which
$5.3 million was outstanding with a weighted average interest rate of 1.38%.
These subsidiary credit facilities renew annually and are guaranteed by the
parent company, International Game Technology.
|
2.6%
Convertible Debentures
|
We issued $900.0 million principal
amount of 2.6% Senior Convertible Debentures due December 15, 2036 in a private
placement on December 20, 2006. Interest is due semiannually on June 15 and
December 15. The Debentures are general unsecured obligations of IGT, ranking
equal with all existing and future unsecured and unsubordinated obligations. The
Debentures rank junior to all existing and future subsidiary liabilities,
including trade payables.
At
September 30, 2009, $707.0 million par of Debentures were outstanding after
repurchases of $193.0 million for gains of $6.5 million during fiscal 2009. No
Debentures were repurchased subsequent to September 30, 2009 through November
30, 2009.
IGT may
redeem some or all of the Debentures for cash on or after December 20, 2009, at
100% of their principal amount plus accrued and unpaid interest, if any, up to
the redemption date. If IGT redeems the Debentures, holders will be notified at
least 15 days, but not more than 60 days, prior to the redemption date. Holders
have the right to require IGT to redeem the Debentures for cash at 100% of their
principal amount plus accrued and unpaid interest, if any, on December 15, 2009,
2011, 2016, 2021, 2026 and 2031.
On
November 12, 2009, we gave Debenture holders notice of the December 2009 put
right, which we expect holders to exercise given current maker conditions and
the recent trading prices of our common stock. At September 30, 2009, the
Debentures were not classified as current liabilities because we had the intent
and ability to refinance with our noncurrent domestic credit
facility.
We may
also pay contingent interest for the period commencing December 20, 2009 through
June 14, 2010 and any six-month period thereafter, if the average trading price
(as defined in the indenture) per $1,000 Debenture for the five trading day
measurement period ending on the third trading day immediately preceding the
first day of the interest period equals 120% or more of an equal principal
amount of Debentures. The amount of contingent interest will equal 0.25% per
annum of the average trading price per $1,000 Debenture during the five trading
day measurement period used to determine whether contingent interest must be
paid.
Under
certain circumstances, each $1,000 Debenture may be converted at an initial
conversion rate of 16.1875 shares of IGT Common Stock, representing a stock
price of $61.78 or a 35% conversion premium over the market price at issuance.
Upon conversion, for each $1,000 Debenture, a holder will receive cash up to
$1,000, plus accrued and unpaid interest, if any, and shares for any conversion
value determined in a manner set forth in the indenture. The conversion rate is
adjustable upon the occurrence of certain events as defined in the
indenture.
The Debentures are convertible under
any of the following circumstances:
|
ª
|
during
any fiscal quarter ending after March 31, 2007 if the closing price of our
common stock is more than 130% of the conversion price during the
measurement period of the preceding fiscal
quarter
|
|
ª
|
if
the Debentures are called for
redemption
|
|
ª
|
if
specified corporate transactions
occur
|
|
ª
|
during
the last three months prior to
maturity
|
The market price condition for
convertibility has not yet been met.
We
evaluated all features of the Debentures for embedded derivatives and determined
the contingent interest feature represents an embedded derivative requiring
bifurcation. No derivative liability was recorded at September 30, 2009 and
September 30, 2008 because the fair value was nominal. Changes in fair value are
adjusted through interest expense.
|
3.25%
Convertible Notes
|
On May 11, 2009, we issued $850.0
million aggregate principal amount of Notes, in a private placement for net
proceeds of $822.5 million, after deferred offering costs of approximately $27.5
million, which will be amortized to interest expense over the Note term. We will
pay interest at 3.25% on the Notes, semiannually on May 1 and November 1,
beginning November 1, 2009. Proceeds from the Notes (net of amounts used for the
separate note hedge transactions and funds provided by the separate warrant
transactions described below) were used to reduce outstanding borrowings under
our revolving domestic credit facility.
The Notes
are general unsecured obligations of IGT, ranking equal with all existing and
future unsecured and unsubordinated obligations. The Notes rank junior to all
existing and future subsidiary liabilities, including trade payables. The Notes
mature on May 1, 2014, unless repurchased earlier by IGT or converted. The Notes
are not redeemable at IGT's option before maturity, except in certain
circumstances relating to applicable gaming authority regulations. The terms of
the Notes may, in certain circumstances, require us to grant a lien on equity
interests if certain downgrades by rating agencies occur.
Each
$1,000 Note is initially convertible into 50.0808 shares of IGT Common Stock,
representing a conversion price of $19.97 per share. Upon conversion, a holder
will receive cash up to the aggregate principal amount of each Note and shares
of our common stock for any conversion value in excess of the principal amount
as determined per the indenture. The conversion rate is adjustable upon the
occurrence of certain events as defined in the indenture.
The Notes are convertible under any of
the following circumstances:
|
ª
|
during
any fiscal quarter ending after September 30, 2009 (and only during such
fiscal quarter), if the closing price of our common stock for at least 20
trading days in the last 30 trading day period of the immediately
preceding fiscal quarter is more than 130% of the conversion price on the
last trading day of the preceding fiscal
quarter
|
|
ª
|
if
specified corporate transactions occur as described further in the
indenture
|
|
ª
|
at
any time on or after February 1, 2014 until the close of business on the
second scheduled trading day immediately preceding May 1,
2014
|
Holders
who convert their Notes in connection with a make-whole adjustment event, as
defined in the indenture, may be entitled to a premium increase in the
conversion rate. Upon the occurrence of a fundamental change, as defined in the
indenture, such as certain mergers and acquisitions of our common stock or
liquidation, holders have the option to require IGT to repurchase their Notes at
a purchase price equal to 100% of the principal, plus accrued and unpaid
interest.
|
Note
Hedges
|
In
connection with the Notes, we paid an aggregate amount of $177.3 million to
certain initial Note purchasers or their affiliates (counterparties) for
separate convertible note hedges. The hedges reduce the potential dilution
related to conversion of the Notes if the market value of our common stock, as
measured under the Notes, at the time of the hedge exercise is greater than the
Note conversion price. The note hedges were separate transactions apart from the
Notes or warrants described below and were recorded as an adjustment to
stockholders' equity, net of deferred tax assets of $65.5 million. Note holders
have no rights with respect to the note hedges.
The note
hedges cover, subject to anti-dilution and certain other customary adjustments
substantially identical to those in the Notes, approximately 42.6 million shares
of our common stock at a strike price of $19.97, which corresponds to the
initial conversion price of the Notes. The note hedges are exercisable at each
conversion date of the Notes and expire upon the earlier of the last day the
Notes remain outstanding or the second scheduled trading day immediately
preceding May 1, 2014.
|
Warrants
|
Additionally, we sold warrants to
acquire approximately 42.6 million shares of common stock, subject to
anti-dilution and certain other customary adjustments, at a strike price of
$30.14 per share, to the counterparties for an aggregate amount of $66.8
million. The warrants were separate transactions apart from the Notes or note
hedges and accounted for as an adjustment to stockholders' equity. Note holders
have no rights with respect to the warrants.
If the volume weighted average share
price of our common stock, as measured under the warrants, exceeds the strike
price of the warrants, the warrants will have a dilutive effect on our earnings
per share. The warrants expire over a series of dates with the final expiration
date set to occur in November 2014.
|
7.5%
Bonds
|
On June
15, 2009, we issued $500.0 million aggregate principal amount of 7.5% Bonds due
2019, under our March 2009 shelf registration statement and June 11, 2009
prospectus supplement, to certain underwriters pursuant to an underwriting
agreement dated June 10, 2009. We received net proceeds of $493.3 million after
a discount of $2.7 million and deferred offering costs of approximately $4.0
million, both of which will be amortized to interest expense over the Bond
term.
Interest
is payable semiannually on June 15 and December 15, beginning December 15, 2009.
We intend to use the net proceeds from the Bonds to fund the redemption of a
portion of our Debentures expected to be put to us in December 2009. Until the
Debentures can be redeemed, we temporarily repaid outstanding credit facility
amounts and intend to re-borrow to fund the redemptions.
The Bonds
are general unsecured obligations of IGT, ranking equal with all existing and
future unsecured and unsubordinated obligations. The Bonds rank junior to all
existing and future liabilities, including trade payables, of our subsidiaries.
The Bonds mature on June 15, 2019, unless IGT redeems them earlier by paying the
holders 100% of the principal amount plus a make-whole redemption premium as
described further in the indenture.
The Bonds
contain covenants which may, in certain circumstances:
|
ª
|
restrict
our ability to incur additional
debt
|
|
ª
|
limit
our ability to enter into sale and leaseback
transactions
|
|
ª
|
restrict
our ability to sell, transfer, lease or dispose of substantially all
assets
|
|
ª
|
require
us to grant a lien on equity interests if certain downgrades by rating
agencies occur
|
The Bonds
specify a number of events of default (some of which are subject to applicable
grace or cure periods), including the failure to make timely principal and
interest payments or satisfy the covenants. Upon the occurrence of an event of
default under the Bonds, the outstanding amounts may become immediately due and
payable.
We
evaluated all features of the Bonds and determined the Change of
Control/Downgrade Put (described further in the indenture) represents an
embedded derivative requiring bifurcation. The value of this derivative was
nominal at September 30, 2009 and no related derivative asset or liability was
recorded. Any future derivative value will be adjusted through other income
(expense) for changes in fair value.
|
Interest
Rate Swap
|
In
conjunction with our Bonds issued in June 2009, we entered into $250.0 million
notional value of interest rate swaps maturing on June 15, 2019, which
effectively exchange 7.5% fixed interest payments for variable rate interest
payments at one-month LIBOR plus 342 bps reset on the 15th of each month. Net
amounts receivable or payable under the swaps will be settled semiannually on
June 15 and December 15. See Note 19 for derivative values.
|
Shelf
Registration
|
In March
2009, we filed a shelf registration statement with the SEC which allows us to
issue debt securities, in one or more series, from time to time in amounts, at
prices and on terms determined at the time of offering. The Bonds were issued
under this registration statement.
|
Redeemed
1.75% Zero-Coupon Senior Convertible
Debentures
|
On
December 26, 2006, we called all of our outstanding 1.75% Debentures for
redemption, giving holders the right to convert before January 10, 2007 for
aggregate consideration comprised of shares and cash under the terms of the
applicable indentures. The call resulted in payments to holders of $612.7
million, as well as non-cash increases to additional paid-in-capital of $1.2
million for 7.3 million shares issued and $47.5 million for related deferred tax
liabilities during fiscal 2007.
|
14.
|
Jackpot
Liabilities
|
|
September
30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Payments
due previous winners
|
$ | 636.6 | $ | 682.8 | ||||
|
Payments
due future winners
|
118.0 | 153.6 | ||||||
|
Unamortized
discounts
|
(166.5 | ) | (185.7 | ) | ||||
|
Total
jackpot liabilities
|
$ | 588.1 | $ | 650.7 | ||||
|
Future
jackpot payments due
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||||||||||
|
Previous
winners
|
$ | 72.2 | $ | 64.9 | $ | 62.6 | $ | 58.9 | $ | 54.4 | $ | 323.6 | $ | 636.6 | ||||||||||||||
|
Future
winners
|
83.3 | 14.1 | 1.1 | 2.8 | 1.1 | 15.6 | 118.0 | |||||||||||||||||||||
See Note
20 for fair value information.
|
15.
|
Operating
Lease Commitments
|
We lease
certain of our facilities and equipment under various agreements with expiration
dates through January 2016. Certain facility leases provide that we pay certain
other operating expenses applicable to the leased property, including utilities,
maintenance, property taxes, and liability and property damage insurance. For
leased properties no longer in use, we have accrued lease payments, net of
anticipated sublease receipts. Rent and lease expense totaled $13.6 million for
fiscal 2009, $16.2 million for fiscal 2008, and $14.7 million for fiscal
2007.
|
Future
minimum payments due under non-cancelable operating leases at September
30, 2009
|
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||||||||||
|
Operating
leases
|
$ | 14.9 | $ | 11.8 | $ | 7.0 | $ | 3.8 | $ | 1.9 | $ | 0.8 | $ | 40.2 | ||||||||||||||
|
16.
|
Contingencies
|
|
Litigation
|
IGT has
been named in and has brought lawsuits in the normal course of business. We do
not expect the outcome of these suits, including the lawsuits described below,
to have a material adverse effect on our financial position or results of
operations.
|
Bally
|
|
2004
Federal District Court of Nevada
|
On
December 7, 2004, IGT filed a complaint in US District Court for the District of
Nevada, alleging that defendants Alliance Gaming Corp., Bally Gaming Int'l,
Inc., and Bally Gaming, Inc. infringed six US patents held by IGT: US Patent
Nos. 6,827,646; 5,848,932; 5,788,573; 5,722,891; 6,712,698; and 6,722,985. On
January 21, 2005, defendants filed an answer denying the allegations in the
complaint and raising various affirmative defenses to IGT's asserted claims.
Defendants also asserted fourteen counterclaims against IGT, including
counterclaims for a declaratory judgment of non-infringement, invalidity, and
unenforceability of the asserted patents, and for antitrust violations and
intentional interference with prospective business advantage. IGT has
successfully moved for partial summary judgment on defendants’ counterclaims for
intentional interference with prospective business advantage and defendants’
antitrust allegations related to the gaming machine market. IGT denies the
remaining allegations. On May 9, 2007, the Court issued an order construing
disputed terms of the asserted patent claims. On October 16, 2008, the Court
issued summary judgment rulings finding certain of IGT’s patents, including
patents that IGT believes cover bonus wheel gaming machines, invalid as obvious.
The rulings also found that Bally was not infringing certain patents asserted by
IGT. Bally’s antitrust and unfair competition counterclaims remain pending. On
November 7, 2008, the Court issued an order staying the proceedings and
certifying the summary judgment and claim construction rulings for immediate
appeal. On December 1, 2008, IGT appealed the rulings to the US Court of Appeals
for the Federal Circuit. On January 8, 2009, Bally moved to dismiss the appeal
on jurisdictional grounds. On February 2, 2009, the Federal Circuit denied the
Bally motion without prejudice to the parties raising jurisdictional issues in
their merits briefs. On October 22, 2009, the Federal Circuit affirmed the
District Court’s summary judgment rulings. A trial on Bally’s antitrust and
unfair competition counterclaims has not yet been scheduled.
Certain
of the patents and associated technology subject to this ruling are intangible
assets which had a net carrying value of $54.6 million at September 30, 2009. As
this court ruling triggered us to evaluate these intangible assets for
recoverability, we evaluated undiscounted cash flows from product lines directly
attributable to the applicable asset group. We determined that the carrying
value is fully recoverable and the remaining useful life of seven years is
appropriate.
|
2006
Federal District Court of Delaware
|
On April
28, 2006, IGT filed a complaint in US District Court for the District of
Delaware, alleging that defendants Bally Technologies, Inc., Bally Gaming Int'l,
Inc., and Bally Gaming, Inc. infringed nine US patents held by IGT: US Patent
Nos. RE 38,812; RE 37,885; 6,832,958; 6,319,125; 6,244,958; 6,431,983;
6,607,441; 6,565,434; and 6,620,046. The complaint alleges that the “BALLY POWER
BONUSING™” technology infringes one or more of the claims of the asserted IGT
patents. The lawsuit seeks monetary damages and an injunction. On June 30, 2006,
defendants filed an answer denying the allegations in the complaint and raising
various affirmative defenses to IGT’s asserted claims. Defendants also asserted
twelve counterclaims against IGT, including counterclaims for a declaratory
judgment of non-infringement, invalidity, and unenforceability of the asserted
patents, antitrust violations, unfair competition, and intentional interference
with prospective business advantage. IGT denies these allegations. Pursuant to
stipulation of the parties, all claims and counterclaims except those relating
to US Patent Nos. RE 37,885 ("the '885 patent"), RE 38,812 ("the '812 patent"),
and 6,431,983 have been dismissed. All proceedings relating to Bally’s
antitrust, unfair competition, and intentional interference counterclaims have
been stayed. On April 28, 2009, the court issued a summary judgment ruling
finding the '885 and '812 patents valid. The court also ruled that Bally's
"Power Rewards" and "ACSC Power Winners" products infringe certain claims of the
'885 and '812 patents. The court granted Bally's motion for summary judgment
that Bally's "SDS Power Winners" does not infringe the '885 patent and "Power
Bank" and "Power Promotions" do not infringe the '983 patent. The court denied
Bally's motion for summary judgment that the '983 patent is invalid. The parties
have agreed that Bally's counterclaim for a declaratory judgment on invalidity
of the '983 patent will be dismissed without prejudice. IGT’s motion for a
permanent injunction against Bally’s infringing products is pending. A trial to
determine the amount of damages incurred by IGT, and related matters, as a
result of Bally's infringement has not yet been scheduled.
|
2006
Federal District Court of Nevada
|
On
September 5, 2006, Bally Gaming, Inc. filed a complaint in US District Court for
the District of Nevada alleging that IGT is infringing US Patent No. 7,100,916,
entitled “Indicator Wheel System.” The products named in the
complaint are IGT’s gaming machines with “wheel” features, including, without
limitation, Wheel of Fortune®,
Wheel of Gold®, The Addams Family™, American Bandstand®, The
Apprentice™, Dilbert's™ Wheelbert™, Drew Carey Great Balls of Cash™,
Elvira®, I Dream of Jeannie®, I Love Lucy™, Indiana Jones™: Raiders of the Lost
Ark™, M*A*S*H*™, Megabucks® with Morgan Fairchild, Regis On the Town™,
Sinatra™ and The
Twilight Zone® gaming machines. The lawsuit seeks unspecified
monetary damages and an injunction. On October 6, 2006, IGT filed an answer and
counterclaims denying infringement and seeking a declaration that the patent is
invalid and non-infringed. On September 9, 2008, the Court granted IGT’s motion
for summary judgment of invalidity and final judgment in IGT’s favor was entered
on October 3, 2008. Bally appealed the decision to the US Court of Appeals for
the Federal Circuit. On October 22, 2009, the Federal Circuit affirmed the
District Court’s summary judgment ruling.
|
Aristocrat
|
|
2005
Federal District Court of Nevada
|
On June
30, 2005, Aristocrat Technologies Australia PTY Ltd. filed a patent infringement
lawsuit against IGT. The complaint was served on IGT on December 13, 2005.
Aristocrat alleged that IGT willfully infringed US Patent No. 6,093,102.
Aristocrat alleged that the patent covered its Reel Power® video slot
technology and IGT’s Multiway® video slot games.
The lawsuit sought unspecified damages and an injunction. On January 13, 2006,
Aristocrat filed a First Amended Complaint adding Aristocrat Technologies, Inc.
as a plaintiff. On April 20, 2007, the US District Court for the District of
Nevada issued an order granting summary judgment in favor of IGT declaring the
Aristocrat patent invalid. Summary judgment was entered in favor of IGT on April
23, 2007. Aristocrat appealed the decision to the US Court of Appeals for the
Federal Circuit. The Federal Circuit affirmed the judgment in IGT’s favor on
March 28, 2008. Aristocrat requested a rehearing en banc, which was denied.
Aristocrat filed a petition for certiorari in the United States Supreme Court,
which was denied. This case is now concluded.
|
2006
Northern Federal District Court of
California
|
On June
12, 2006, Aristocrat Technologies Australia PTY Ltd. and Aristocrat
Technologies, Inc. filed a patent infringement lawsuit against IGT. Aristocrat
alleged that IGT willfully infringed US Patent No. 7,056,215,
which issued on June 6, 2006. On December 15, 2006, Aristocrat filed
an amended complaint, adding allegations that IGT willfully infringed US Patent
No. 7,108,603, which issued on September 19, 2006. The IGT products named in the
original and amended complaints were the Fort Knox® mystery
progressive slot machines. On June 13, 2007, the US District Court for the
Northern District of California entered an order granting summary judgment in
favor of IGT declaring both patents invalid. The US Court of Appeals for the
Federal Circuit reversed this decision on September 22, 2008. IGT’s request for
a rehearing was denied on November 17, 2008. This case has recommenced in the
District Court. Discovery is ongoing.
|
Brochu
v. Loto Quebec
|
Loto
Quebec commenced an action in warranty against VLC, Inc., a wholly-owned
subsidiary of IGT, and another manufacturer of video lottery machines in October
2003, in the Superior Court of the Province of Quebec, District of Quebec,
seeking indemnification for any damages that may be awarded against Loto Quebec
in a class action suit, also filed in the Superior Court of the Province of
Quebec. The class action claim against Loto Quebec, to which neither IGT nor any
of its affiliates are parties, was filed by Jean Brochu on behalf of himself and
a class of other persons who allegedly developed pathological behaviors through
the play of video lottery machines made available by Loto Quebec in taverns and
other public locations. In this action, the plaintiff seeks to recover on behalf
of the class damages of approximately CAD$578.7 million, representing CAD$4,863
per class member, and CAD$119.0 million in punitive damages. Loto Quebec filed
its Plea in Defense in the main action in February 2006. On August 1, 2008, Loto
Quebec filed a discontinuance of the action in warranty against VLC.
Notwithstanding the discontinuance, Loto Quebec may still pursue the claims it
asserted, or could have asserted, in the action in warranty through arbitration
against VLC. The trial of the class action against Loto Quebec commenced on
September 15, 2008 and is ongoing.
|
Shareholder
Actions
|
|
Securities
Class Action
|
On July
30, 2009, International Brotherhood of Electrical Workers Local 697 filed a
putative securities fraud class action in the US District Court for the District
of Nevada, alleging causes of action under Sections 10(b) and 20(a) of the
Securities Exchange Act against IGT and certain of its officers, one of whom is
a director. The complaint alleges that between November 1, 2007 and October 30,
2008, the defendants inflated IGT's stock price through a series of materially
false and misleading statements or omissions regarding IGT's business,
operations, and prospects. Plaintiff's counsel issued a press release on July
30, 2009, announcing the lawsuit's pendency, the claims asserted, the purported
class period, and the right of any class member to seek lead plaintiff status.
This press release initiated the 60-day statutory period for shareholders to
file a motion to seek lead-plaintiff status.
|
Derivative
Actions
|
Between
August 20, 2009 and September 17, 2009, the Company was nominally sued in a
series of derivative lawsuits filed in the US District Court for the District of
Nevada, captioned Fosbre v. Matthews et al., Case No. 3:09-cv-00467; Calamore v.
Matthews et al., Case No. 3:09-cv-00489-ECR-VPC; Israni v. Bittman, et al., Case
No. 3:09-cv-00536; and Aronson v. Matthews et al., Case No.
3:09-cv-00542-RCJ-VPC. Plaintiffs purportedly brought their respective actions
on behalf of the Company. The complaints assert claims against various current
and former officers and directors of the Company, for breaches of fiduciary
duties, unjust enrichment, abuse of control, gross mismanagement, waste of
corporate assets, and contribution and indemnification. The complaints seek an
unspecified amount of damages and allege similar facts as the securities class
action lawsuit. The complaints additionally allege that certain individual
defendants engaged in insider trading and that the director defendants
improperly handled Thomas J. Matthews’ resignation as Chief Executive Officer of
the Company. The parties have filed a stipulation to consolidate the actions.
Defendants need not respond until a consolidated amended complaint is
filed.
On
September 30, 2009, the Company was nominally sued in a derivative lawsuit filed
in the Second Judicial District Court of the State of Nevada, County of Washoe.
Plaintiff purportedly filed the action on behalf of the Company. The lawsuit,
captioned Kurz et al. v. Hart et al., Case No. cv-0-9-02982, asserts claims
against various current and former officers and directors for breach of
fiduciary duties and unjust enrichment. The complaint generally makes the same
allegations as the federal derivative complaints and seeks an unspecified amount
of damages. The
parties have stipulated to stay this action pending the above-mentioned federal
derivative actions.
In a
letter dated October 7, 2009 to the Company’s Board of Directors, a shareholder
made factual allegations similar to those set forth in the above derivative and
securities class actions and demanded that the Board investigate, address and
remedy the harm allegedly inflicted on IGT. In particular, the letter alleges
that certain officers and directors grossly mismanaged the Company by
overspending in the area of research and development of server-based game
technology despite a looming recession to which the Company was particularly
vulnerable; by making or allowing false and misleading statements regarding the
Company’s growth prospects and earnings guidance; and by wasting corporate
assets by causing the Company to repurchase Company stock at inflated prices.
The letter asserts that this alleged conduct resulted in breaches of fiduciary
duties and violations of Section 10(b) of the Exchange Act and SEC Rule
10b-5.
|
ERISA
Actions
|
On
October 2, 2009, two putative class action lawsuits were filed on behalf of
participants in the Company’s employee pension plans, naming as defendants the
Company, the IGT Profit Sharing Plan Committee, and several current and former
officers and directors. The complaints (which seek unspecified damages) allege
breaches of fiduciary duty under the Employee Retirement Income Security Act, 29
U.S.C §§ 1109 and 1132. The complaints allege similar facts as the securities
class action lawsuit. The complaints further allege that the defendants breached
fiduciary duties to Plan Participants by failing to disclose material facts to
Plan Participants, failing to exercise their fiduciary duties solely in the
interest of the Participants, failing to properly manage Plan assets, failing to
diversify Plan assets, and permitting Participants to elect to invest in Company
stock. The actions, filed in the US District Court for the District of Nevada,
are captioned Carr et al. v. International Game Technology et al., Case No.
3:09-cv-00584, and Jordan et al. v. International Game Technology et al., Case
No. 3:09-cv-00585. On October 9, 2009, the Jordan plaintiffs moved for
consolidation of the two actions, which motion is currently pending. Defendants
have not yet been served in the action.
|
Environmental
Matters
|
CCSC, a
casino operation sold by IGT in April 2003, is located in an area that has been
designated by the EPA as an active Superfund site because of contamination from
historic mining activity in the area. In order for Anchor Coin, an entity IGT
acquired in December 2001, to develop the CCSC site, it voluntarily entered into
an administrative order of consent with the EPA to conduct soil removal and
analysis (a requirement imposed on similarly situated property developers within
the region) in conjunction with re-routing mine drainage. The work and
obligations contemplated by the agreement were completed by Anchor in June 1998,
and the EPA subsequently issued a termination of the order.
The EPA,
together with other property developers excluding CCSC, continues remediation
activities at the site. While we believe our remediation obligations are
complete, it is possible that additional contamination may be identified and we
could be obligated to participate in remediation efforts. Under accounting
guidance for environmental remediation liabilities, we determined the incurrence
of additional remediation costs is neither probable nor reasonably estimable and
no liability has been recorded.
|
OSHA
/ Wrongful Termination Matter
|
On July
8, 2004, two former employees filed a complaint with the US Department of Labor,
OSHA alleging retaliatory termination in violation of the Sarbanes-Oxley Act of
2002. The former employees allege that they were terminated in retaliation for
questioning whether Anchor and its executives failed to properly disclose
information allegedly affecting the value of Anchor's patents in connection with
IGT's acquisition of Anchor in December 2001. The former employees also allege
that the acquired patents were overvalued on the financial statements of IGT.
Outside counsel, retained by an independent committee of our Board of Directors,
reviewed the allegations and found them to be entirely without
merit.
On
November 10, 2004, the employees withdrew their complaint filed with OSHA and
filed a notice of intent to file a complaint in federal court. On December 1,
2004, a complaint was filed under seal in the US District Court for the District
of Nevada, based on the same facts set forth above regarding their OSHA
complaint. IGT filed a motion for summary judgment as to all claims in
plaintiffs’ complaint. On June 14, 2007, the US District Court for the District
of Nevada entered an order granting summary judgment in favor of IGT as to
plaintiffs’ Sarbanes-Oxley whistle-blower claims and dismissed their state law
claims without prejudice. Plaintiffs’ motion for reconsideration of the District
Court’s decision was denied. Plaintiffs appealed to the US Court of Appeals for
the Ninth Circuit. Oral argument was heard on March 12, 2009, and on August 3
2009, the Ninth Circuit reversed the District Court’s decision. IGT’s motion for
summary judgment on plaintiff’s state law claims was argued on October 22, 2009
and a decision is pending. Trial has been scheduled to begin on June 1,
2010.
In
conjunction with the Anchor acquisition purchase price allocation as of December
31, 2001, IGT used the relief of royalty valuation methodology to estimate the
fair value of the patents at $164.4 million. The carrying value of the patents
at September 30, 2009 totaled $54.6 million, with a remaining life of
approximately seven years.
|
Arrangements
with Off-Balance Sheet Risks
|
In the
normal course of business, we are party to financial instruments with
off-balance sheet risk, such as performance bonds and guarantees not reflected
in our balance sheet. We do not expect any material losses to result from these
arrangements and are not dependent on off-balance sheet financing arrangements
to fund our operations.
|
Performance
Bonds
|
Performance
bonds outstanding related to gaming operations totaled $5.7 million at September
30, 2009. We are liable to reimburse the bond issuer in the event of exercise
due to nonperformance.
|
Letters
of Credit
|
Outstanding
letters of credit issued under our line of credit to ensure payment to certain
vendors and governmental agencies totaled $3.6 million at September 30,
2009.
|
IGT
Licensor Arrangements
|
Our sales
agreements that include software and IP licensing arrangements may provide a
clause whereby IGT indemnifies the third-party licensee against liability and
damages (including legal defense costs) arising from any claims of patent,
copyright, trademark, or trade secret infringement. Should such a claim occur,
we could be required to make payments to the licensee for any liabilities or
damages incurred. Historically, we have not incurred any significant costs due
to infringement claims. As we consider the likelihood of incurring future costs
to be remote, no liability has been recorded.
|
Product
Warranties
|
The
majority of our products are generally covered by a warranty for periods ranging
from 90 days to one year. We estimate accrued warranty costs in the table below
based on historical trends in product failure rates and expected costs to
provide warranty services.
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 8.4 | $ | 8.7 | $ | 8.3 | ||||||
|
Reduction
for payments made
|
(7.5 | ) | (10.2 | ) | (8.9 | ) | ||||||
|
Accrual
for new warranties issued
|
9.8 | 11.1 | 10.6 | |||||||||
|
Adjustments
for pre-existing warranties
|
(2.8 | ) | (1.2 | ) | (1.3 | ) | ||||||
|
Balance
at end of period
|
$ | 7.9 | $ | 8.4 | $ | 8.7 | ||||||
|
Self-Insurance
|
We are
self-insured for various levels of workers’ compensation, directors’ and
officers’ liability, and electronic errors and omissions liability, as well as
employee medical, dental, prescription drug, and disability coverage. We
purchase stop loss coverage to protect against unexpected claims. Accrued
insurance claims and reserves include estimated settlements for known claims,
and actuarial estimates for claims incurred but not reported.
|
State
and Federal Taxes
|
We are
subject to sales, use, income, gaming and other tax audits and administrative
proceedings in various US federal, state, local, and foreign jurisdictions.
While we believe we have properly reported our tax liabilities in each
jurisdiction, we can give no assurance that taxing authorities will not propose
adjustments that increase our tax liabilities.
|
17.
|
Income
Taxes
|
|
Income
Tax Provision
|
|
Distribution
of income before tax
|
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
US
|
$ | 187.2 | $ | 505.2 | $ | 670.2 | ||||||
|
Non
– US
|
50.8 | 85.6 | 134.6 | |||||||||
|
Total
income before tax
|
$ | 238.0 | $ | 590.8 | $ | 804.8 | ||||||
|
Reconciliation
of statutory federal rate to effective
rate
|
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
statutory tax
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income tax, net
|
1.6 | % | 2.0 | % | 2.0 | % | ||||||
|
Foreign
subsidiaries tax, net
|
0.5 | % | -0.2 | % | -0.4 | % | ||||||
|
Investment
writedown
|
1.8 | % | 1.7 | % | - | |||||||
|
Interest
accrual
|
1.0 | % | 1.5 | % | - | |||||||
|
Domestic
production activities
|
-2.3 | % | -1.2 | % | - | |||||||
|
Changes
in valuation allowance
|
4.7 | % | - | - | ||||||||
|
Tax
settlements
|
-3.2 | % | - | - | ||||||||
|
Other,
net
|
-1.7 | % | 3.2 | % | 0.3 | % | ||||||
|
Effective
rate
|
37.4 | % | 42.0 | % | 36.9 | % | ||||||
Components
of income tax provision
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
Federal
|
$ | 51.5 | $ | 206.4 | $ | 251.8 | ||||||
|
State
|
9.6 | 16.1 | 28.1 | |||||||||
|
Foreign
|
23.2 | 33.7 | 44.3 | |||||||||
|
Total
current
|
84.3 | 256.2 | 324.2 | |||||||||
|
Federal
|
1.6 | (0.9 | ) | (20.6 | ) | |||||||
|
State
|
(3.7 | ) | 1.9 | (2.8 | ) | |||||||
|
Foreign
|
6.8 | (8.9 | ) | (4.2 | ) | |||||||
|
Total
deferred
|
4.7 | (7.9 | ) | (27.6 | ) | |||||||
|
Total
income tax provision
|
$ | 89.0 | $ | 248.3 | $ | 296.6 | ||||||
|
Deferred
Income Taxes
|
|
Significant
Components of Deferred Income Taxes
|
|
September
30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Deferred
Tax Assets
|
||||||||
|
Reserves
|
$ | 70.5 | $ | 62.7 | ||||
|
Jackpot
payment timing difference
|
142.3 | 153.4 | ||||||
|
Share-based
compensation
|
22.9 | 22.9 | ||||||
|
Net
operating loss carry forwards
|
32.5 | 19.2 | ||||||
|
State
income taxes, net
|
17.6 | 12.6 | ||||||
|
Foreign
|
27.5 | 18.6 | ||||||
|
Property,
plant and equipment
|
10.0 | 34.8 | ||||||
|
Goodwill
and intangibles
|
34.7 | 15.0 | ||||||
|
Interest
|
10.8 | 12.4 | ||||||
|
Call
premium on convertible debt
|
58.0 | - | ||||||
|
Other
|
19.7 | 13.8 | ||||||
|
Total
deferred income tax assets
|
446.5 | 365.4 | ||||||
|
Valuation
allowance
|
(37.1 | ) | (17.6 | ) | ||||
|
Total
deferred income tax assets, net
|
409.4 | 347.8 | ||||||
|
Deferred
Tax Liabilities
|
||||||||
|
Interest
expense on convertible debt
|
(28.0 | ) | (19.2 | ) | ||||
|
Foreign
|
(3.8 | ) | (3.1 | ) | ||||
|
Intangibles
|
(61.7 | ) | (70.6 | ) | ||||
|
Other
|
(5.8 | ) | (3.6 | ) | ||||
|
Total
deferred income tax liabilities
|
(99.3 | ) | (96.5 | ) | ||||
|
Net
deferred income tax assets
|
$ | 310.1 | $ | 251.3 | ||||
|
Balance
Sheet Classification of Net Deferred Income Tax
Assets
|
|
September
30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Current
deferred income tax assets
|
$ | 82.8 | $ | 115.8 | ||||
|
Non-current
deferred income tax assets
|
227.3 | 136.9 | ||||||
|
Non-current
deferred income tax liabilities (included in other
liabilities)
|
- | 1.4 | ||||||
Net
operating loss carry forwards totaled $38.7 million for the US and $54.2 million
for foreign countries at September 30, 2009 and expire in tax years 2012 through
2029.
Our
valuation allowance is based on our assessment that it is more likely than not
that certain deferred tax assets will not be realized in the foreseeable future.
The valuation allowance increased by $19.5 million in fiscal 2009, primarily due
to foreign deferred tax assets and investment write–downs not expected to be
fully realized. At September 30, 2008, our valuation allowance related to
investment write-downs and acquisition related net operating
losses.
At
September 30, 2009, we had not provided for US deferred income taxes or foreign
withholding taxes on $132.5 million in unrecognized temporary differences
related to the basis of our investments in foreign subsidiaries expected to be
permanently reinvested in operations outside the US. In calculating the
unrecognized temporary differences related to the basis in our investments in
foreign subsidiaries, we use tax earnings and profits because we believe that,
based on the information available, it represents the best approximation of the
unrecognized tax liability. Determination of the amount of any unrecognized
deferred income tax liability on these undistributed earnings is not
practicable.
|
Unrecognized
Tax Benefits
|
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 adoption of this new guidance, as of the beginning of
fiscal 2008, increased our unrecognized tax benefits and related interest and
penalties $89.9 million, increased deferred tax assets $55.4 million,
and decreased retained earnings $34.5 million.
|
Aggregate
changes in the balance of unrecognized tax
benefits
|
|
Years
ended September 30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Balance
at beginning of year
|
$ | 87.5 | $ | 92.2 | ||||
|
Increases
related to prior year tax positions
|
1.9 | 8.9 | ||||||
|
Decreases
related to prior year tax positions
|
(27.8 | ) | (0.1 | ) | ||||
|
Increases
related to current year tax positions
|
13.8 | 5.0 | ||||||
|
Decreases
related to current year tax positions
|
(4.2 | ) | (18.5 | ) | ||||
|
Reductions
for settlements with taxing authorities
|
(3.4 | ) | - | |||||
|
Balance
at year end
|
$ | 67.8 | $ | 87.5 | ||||
The
amount of unrecognized tax benefits which would impact our effective tax rate
totaled $46.5 million at September 30, 2009 and $53.4 million at September 30,
2008. Our unrecognized tax benefits decreased $19.7 million during fiscal 2009,
primarily due to an IRS settlement and a tax accounting method change approved
by the IRS, partially offset by current year additions. We do not believe our
total unrecognized tax benefits will change significantly during the next twelve
months.
Interest
and penalties related to unrecognized tax benefits are included in our income
tax provision. During fiscal 2009, we recognized a $2.9 million benefit for the
reversal of interest and penalties related to the IRS settlement and the
accounting method change described above. In fiscal 2008, we recognized $11.8
million of interest and penalties related to uncertain tax positions. Accrued
interest and penalties related to uncertain tax positions totaled $46.5 million
at September 30, 2009 and $51.3 million at September 30, 2008.
|
Balance
Sheet Classification of Unrecognized Tax Benefits, including accrued
interest and penalties
|
|
September
30,
|
2009
|
2008
|
||||||
|
(In
millions)
|
||||||||
|
Other
accrued liabilities
|
$ | - | $ | 27.8 | ||||
|
Other
liabilities (non-current)
|
138.8 | 134.4 | ||||||
|
Other
current assets
|
- | (2.0 | ) | |||||
|
Other
non-current assets
|
(24.5 | ) | (21.4 | ) | ||||
|
Net
liabilities for uncertain tax positions
|
$ | 114.3 | $ | 138.8 | ||||
We file
income tax returns in the US federal, various state, local and foreign
jurisdictions. During 2009, the IRS closed its examination of our tax returns
for fiscal 2000 and 2001. In connection with the settlement of our fiscal 2000
and 2001 examinations, we paid the IRS approximately $18.2 million, including
interest of $6.0 million. In general, we are no longer subject to any
significant US federal, state, local or foreign income tax examination by tax
authorities for years before fiscal 2002.
During
fiscal 2009, the IRS began an audit of our US federal income tax returns for
fiscal 2002 through 2005. We are also subject to examination in state and
foreign jurisdictions for the same years. We believe we have recorded all
appropriate provisions for outstanding issues for all jurisdictions and open
years. However, we can give no assurance that taxing authorities will not
propose adjustments that increase our tax liabilities.
|
18.
|
Earnings
Per Share
|
|
Years
Ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions, except per share amounts)
|
||||||||||||
|
Net
income
|
$ | 149.0 | $ | 342.5 | $ | 508.2 | ||||||
|
Basic
weighted average shares outstanding
|
293.8 | 308.0 | 330.1 | |||||||||
|
Dilutive
effect of stock awards
|
0.7 | 2.4 | 4.1 | |||||||||
|
Dilutive
effect of Debentures
|
- | - | 1.9 | |||||||||
|
Diluted
weighted average shares outstanding
|
294.5 | 310.4 | 336.1 | |||||||||
|
Basic
earnings per share
|
$ | 0.51 | $ | 1.11 | $ | 1.54 | ||||||
|
Diluted
earnings per share
|
$ | 0.51 | $ | 1.10 | $ | 1.51 | ||||||
|
Weighted
average antidilutive stock award
|
||||||||||||
|
shares
excluded from diluted EPS
|
15.9 | 5.7 | 3.2 | |||||||||
Our Notes
and warrants were excluded from diluted shares outstanding for the year ended
September 30, 2009, because the conversion price and exercise price exceeded the
average market price of our common stock. The convertible notes will result in
additional EPS dilution when our stock price exceeds the note conversion price
of $19.97 per share and further dilution when the stock price exceeds the
warrant strike price of $30.14 per share. The treasury stock method used to
calculate diluted weighted average shares outstanding excludes potential
reduction in shares related to the purchased note hedges because it is
anti-dilutive. See Note 13.
|
Stock
Options Exchanged
|
On
November 4, 2009, IGT granted 2.7 million employee stock options in exchange for
the 5.3 million underwater employee stock options surrendered in a share holder
approved exchange offer that expired on November 3, 2009.
|
Negotiated
Share Repurchase Transactions
|
On
September 6, 2007, we acquired 4.2 million shares through an ASR for an
aggregate cost of $175.0 million or $41.28 per share subject to a future
purchase price adjustment based on our weighted average stock price through
October 3, 2007, subject to a specified collar. On September 7, 2006, we
acquired 3.7 million shares through a similar ASR for an initial payment of
$150.0 million or $40.97 per share, subject to a future purchase price
adjustment based on our weighted average stock price through November 3, 2006,
subject to a specified collar. We settled both transactions with no additional
cash or shares delivered by either party because our weighted average stock
price was above the initial cap price.
|
19.
|
Derivatives
|
Our
derivative accounting policies are described in Note 1.
|
Foreign
Currency Hedging
|
We hedge
our net foreign currency exposure related to monetary assets and liabilities
denominated in nonfunctional currency. The notional amount of foreign currency
contracts hedging this exposure totaled $24.9 million at September 30, 2009 and
$43.4 million at September 30, 2008.
During
the third quarter of fiscal 2007, we executed 5-year forward contracts
designated as a fair value hedge to protect a portion of the US dollar value of
our Hong Kong dollar investment in the CLS convertible note (see Note 3). The
notional amount of foreign currency contracts hedging this exposure totaled
$49.9 million at September 30, 2009 and 2008. There was no ineffectiveness in
fiscal 2009.
|
Interest
Rate Management
|
In
conjunction with our Bonds issued in June 2009 (see Note 13), we entered into
$250.0 million notional value of interest rate swaps, which effectively exchange
7.5% fixed interest payments for variable rate interest payments at one-month
LIBOR plus 342 bps reset on the 15th of each month. Net amounts receivable or
payable under the swaps will be settled semiannually on June 15 and December 15.
The interest rate swaps are designated fair value hedges against changes in the
fair value of a portion of our Bonds. Our assessment determined that the
interest rate swap is highly effective.
|
Presentation
of Derivative Amounts
|
|
Balance
Sheet Fair Value and Location
at
September 30, 2009
|
Income
Statement Gain (loss) and Location
for
the year ended September 30, 2009
|
||||||||
|
(In
millions)
|
(In
millions)
|
||||||||
|
Non-designated
Hedges
|
Non-designated
Hedges
|
||||||||
|
Foreign
currency contracts:
|
Foreign
currency contracts:
|
||||||||
|
Other
assets and deferred costs (current)
|
$0.2
|
Other
income (expense)
|
$(0.9
|
) | |||||
|
Other
liabilities (current)
|
0.8
|
||||||||
|
Designated
Hedges
|
Designated
Hedges
|
||||||||
|
Foreign
currency contracts:
|
Foreign
currency contracts:
|
||||||||
|
Other
liabilities (non-current)
|
$0.1
|
Other
income (expense)
|
$
0.3
|
||||||
|
Interest
rate swap:
|
Interest
rate swap - ineffectiveness:
|
||||||||
|
Other
assets (non-current)
|
14.8
|
Other
income (expense)
|
(0.3
|
) | |||||
|
Notes
payable (non-current)
|
15.1
|
Interest
rate swap - effectiveness:
|
|||||||
|
Interest
expense
|
2.9
|
||||||||
|
20.
|
Fair
Value Measurements
|
|
Financial
Assets (Liabilities) Carried at Fair
Value
|
|
September
30, 2009
|
Fair
Value
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Investments
in unconsolidated affiliates
|
$ | 94.1 | $ | 15.7 | $ | - | $ | 78.4 | ||||||||
|
Investments
in ARS and put rights
|
21.3 | - | - | 21.3 | ||||||||||||
|
Derivative
assets
|
15.0 | - | 15.0 | - | ||||||||||||
|
Derivative
liabilities
|
(16.0 | ) | - | (16.0 | ) | - | ||||||||||
|
Reconciliation
of Items Carried at Fair Value Using Significant Unobservable Inputs
(Level 3)
|
|
Year
Ended September 30, 2009
|
Investments
in Unconsolidated Affiliates
|
Investments
in
ARS
and
Put Rights
|
||||||
|
(In
millions)
|
||||||||
|
Beginning
balance
|
$ | 80.4 | $ | 19.6 | ||||
|
Total
gain (loss):
|
||||||||
|
Included
in other income (expense) - other
|
(1.7 | ) | (0.3 | ) | ||||
|
Included
in other comprehensive income
|
2.8 | 2.0 | ||||||
|
Purchases,
issuances, accretion, settlements
|
(3.1 | ) | - | |||||
|
Ending
balance
|
$ | 78.4 | $ | 21.3 | ||||
|
Net
change in unrealized gain (loss) included
|
||||||||
|
in
earnings related to instruments still held
|
$ | - | $ | (0.3 | ) | |||
|
Valuation
Techniques and Balance Sheet
Presentation
|
Investments
in unconsolidated affiliates carried at fair value are estimated using quoted
market prices when available or discounted cash flow models incorporating market
participant assumptions, including credit quality and market interest rates
and/or a Black Scholes formula and lattice models with certain assumptions, such
as stock price and volatility. These investments are presented as a component of
other assets. See Note 3.
Investments
in ARS are valued using discounted cash flows, with certain assumptions related
to lack of liquidity and observable market transactions. The put rights are
valued based on the difference between the ARS par and fair value, discounted
for the broker’s non-performance risk and the time remaining until the exercise
period. The ARS and related put rights are presented as a component of other
assets. See Note 8.
Derivative
assets and liabilities are valued using quoted forward pricing from bank
counterparties and LIBOR credit default swap rates for non-performance risk, and
approximate the net settlement amount if the contracts were settled at the
reporting date. These are presented primarily as components of other assets,
other liabilities, and notes payable. See Note 19.
Financial
Assets (Liabilities) Not Carried at Fair Value
|
(In
millions)
|
||||||||||||||||
|
Carrying
|
Unrealized
|
|||||||||||||||
|
2009
|
Amount
|
Fair
Value
|
Gain
|
Loss
|
||||||||||||
|
Jackpot
investments
|
$ | 464.1 | $ | 518.0 | $ | 54.1 | $ | (0.2 | ) | |||||||
|
Notes
& contracts receivable
|
404.2 | 413.8 | 9.6 | - | ||||||||||||
|
Jackpot
liabilities
|
(588.1 | ) | (595.5 | ) | - | (7.4 | ) | |||||||||
|
Credit
facilities & indebtedness
|
(2,159.7 | ) | (2,435.0 | ) | - | (275.3 | ) | |||||||||
|
Carrying
|
Unrealized
|
|||||||||||||||
|
2008
|
Amount
|
Fair
Value
|
Gain
|
Loss
|
||||||||||||
|
Jackpot
investments
|
$ | 490.9 | $ | 537.0 | $ | 46.4 | $ | (0.3 | ) | |||||||
|
Notes
& contracts receivable
|
241.7 | 241.7 | - | - | ||||||||||||
|
Jackpot
liabilities
|
(650.7 | ) | (696.7 | ) | - | (46.0 | ) | |||||||||
|
Credit
facilities & indebtedness
|
(2,263.1 | ) | (2,209.1 | ) | 54.0 | - | ||||||||||
|
Valuation
Techniques and Balance Sheet
Presentation
|
Cash and equivalents, accounts
receivable, accounts payable, and other accrued liabilities are not presented in
the table above as the carrying value approximates fair
value.
Jackpot
investments are valued based on quoted market prices.
Notes and
contracts receivable are valued using discounted cash flows incorporating
expected payments and current market interest rates relative to the credit risk
of each customer.
Jackpot
liabilities are valued using discounted cash flow models incorporating estimated
funding rates, future payment timing, and IGT's nonperformance credit
risk.
Credit
facilities and indebtedness are valued at quoted market prices or dealer quotes
for the identical liability when traded as an asset in an active market when
available. Otherwise, the fair value is determined using discounted cash flow
models of expected payments on outstanding borrowings at current borrowing
rates. The swap fair value adjustment presented as a component of notes payable
is excluded from the credit facilities amounts not carried at fair value in the
table above.
|
21.
|
Business
Segments
|
We view
our business in the following two operating segments based on customer
regions:
|
ª
|
North
America includes our operations in the US and
Canada
|
|
ª
|
International
encompasses our efforts in all other jurisdictions
worldwide
|
Canada
revenues included in our North America segment totaled $44.3 million in fiscal
2009, $53.3 million in 2008, and $101.1 million in 2007.
Certain
income and expenses related to company-wide initiatives are managed at the
corporate level and not allocated to any operating segment. We do not recognize
inter-company revenues or expenses upon the transfer of gaming products between
operating segments. Segment accounting policies are consistent with those of our
consolidated financial statements and segment profit is measured on the basis of
operating income.
Our
business segments are designed to allocate resources within a framework of
management responsibility. Operating costs from one segment may benefit other
segments. Realignment of our business development and administrative functions
resulted in segment allocation changes and prior period operating income and
income before tax have been recast accordingly.
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
NORTH
AMERICA
|
||||||||||||
|
Revenues
|
$ | 1,631.4 | $ | 1,912.4 | $ | 2,021.7 | ||||||
|
Gaming
operations
|
1,013.9 | 1,180.8 | 1,235.0 | |||||||||
|
Product
sales
|
617.5 | 731.6 | 786.7 | |||||||||
|
Gross
profit
|
893.7 | 1,083.4 | 1,172.5 | |||||||||
|
Gaming
operations
|
579.9 | 688.7 | 740.7 | |||||||||
|
Product
sales
|
313.8 | 394.7 | 431.8 | |||||||||
|
Operating
income
|
321.8 | 613.0 | 769.7 | |||||||||
|
Income
before tax
|
327.1 | 639.3 | 793.0 | |||||||||
|
Interest
income
|
44.7 | 52.8 | 56.0 | |||||||||
|
Interest
expense
|
28.5 | 28.9 | 31.5 | |||||||||
|
Depreciation
and amortization
|
229.1 | 225.1 | 214.6 | |||||||||
|
Long-lived
assets
|
650.6 | 633.8 | 495.6 | |||||||||
|
Additions
to long-lived assets
|
232.8 | 255.9 | 213.1 | |||||||||
|
Total
assets
|
2,650.6 | 2,956.5 | 2,640.6 | |||||||||
|
INTERNATIONAL
|
||||||||||||
|
Revenues
|
$ | 482.6 | $ | 616.2 | $ | 599.7 | ||||||
|
Gaming
operations
|
165.0 | 157.1 | 126.2 | |||||||||
|
Product
sales
|
317.6 | 459.1 | 473.5 | |||||||||
|
Gross
profit
|
257.9 | 335.7 | 308.3 | |||||||||
|
Gaming
operations
|
103.9 | 89.4 | 82.3 | |||||||||
|
Product
sales
|
154.0 | 246.3 | 226.0 | |||||||||
|
Operating
income
|
104.9 | 158.9 | 159.8 | |||||||||
|
Income
before tax
|
114.2 | 146.0 | 175.8 | |||||||||
|
Interest
income
|
15.6 | 11.5 | 6.4 | |||||||||
|
Interest
expense
|
0.3 | 0.3 | 0.2 | |||||||||
|
Depreciation
and amortization
|
41.0 | 50.8 | 41.3 | |||||||||
|
Long-lived
assets
|
71.0 | 82.0 | 92.5 | |||||||||
|
Additions
to long-lived assets
|
34.2 | 34.6 | 45.5 | |||||||||
|
Total
assets
|
834.3 | 790.1 | 717.7 | |||||||||
90
|
Years
ended September 30,
|
2009
|
2008
|
2007
|
|||||||||
|
(In
millions)
|
||||||||||||
|
CORPORATE
(net unaollocated costs)
|
||||||||||||
|
Operating
loss
|
$ | (105.4 | ) | $ | (112.6 | ) | $ | (129.2 | ) | |||
|
Loss
before tax
|
(203.3 | ) | (194.5 | ) | (164.0 | ) | ||||||
|
Interest
income
|
1.7 | 3.1 | 19.6 | |||||||||
|
Interest
expense
|
100.6 | 70.9 | 45.9 | |||||||||
|
Depreciation
and amortization
|
6.7 | 10.1 | 9.6 | |||||||||
|
Long-lived
assets
|
96.4 | 124.0 | 224.8 | |||||||||
|
Additions
to long-lived assets
|
2.2 | 11.2 | 78.5 | |||||||||
|
Total
assets
|
903.3 | 810.8 | 809.2 | |||||||||
|
CONSOLIDATED
|
||||||||||||
|
Revenues
|
$ | 2,114.0 | $ | 2,528.6 | $ | 2,621.4 | ||||||
|
Gaming
operations
|
1,178.9 | 1,337.9 | 1,361.2 | |||||||||
|
Product
sales
|
935.1 | 1,190.7 | 1,260.2 | |||||||||
|
Gross
profit
|
1,151.6 | 1,419.1 | 1,480.8 | |||||||||
|
Gaming
operations
|
683.8 | 778.1 | 823.0 | |||||||||
|
Product
sales
|
467.8 | 641.0 | 657.8 | |||||||||
|
Operating
income
|
321.3 | 659.3 | 800.3 | |||||||||
|
Income
before tax
|
238.0 | 590.8 | 804.8 | |||||||||
|
Interest
income
|
62.0 | 67.4 | 82.0 | |||||||||
|
Interest
expense
|
129.4 | 100.1 | 77.6 | |||||||||
|
Depreciation
and amortization
|
276.8 | 286.0 | 265.5 | |||||||||
|
Long-lived
assets
|
818.0 | 839.8 | 812.9 | |||||||||
|
Additions
to long-lived assets
|
269.2 | 301.7 | 337.1 | |||||||||
|
Total
assets
|
4,388.2 | 4,557.4 | 4,167.5 | |||||||||
|
22.
|
Quarterly
Financial Data (Unaudited)
|
|
September
30,
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
|
(In
millions, except per share amounts)
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Total
revenues
|
$ | 601.6 | $ | 475.7 | $ | 522.1 | $ | 514.6 | ||||||||
|
Gross
profit
|
305.9 | 260.0 | 296.5 | 289.2 | ||||||||||||
|
Operating
income
|
100.1 | 70.2 | 123.7 | 27.3 | ||||||||||||
|
Net
income
|
65.7 | 38.3 | 66.3 | (21.3 | ) | |||||||||||
|
Diluted
EPS
|
0.22 | 0.13 | 0.22 | (0.07 | ) | |||||||||||
|
2008
|
||||||||||||||||
|
Total
revenues
|
$ | 645.8 | $ | 573.2 | $ | 677.4 | $ | 632.2 | ||||||||
|
Gross
profit
|
366.5 | 310.5 | 387.7 | 354.4 | ||||||||||||
|
Operating
income
|
195.7 | 126.6 | 187.0 | 150.0 | ||||||||||||
|
Net
income
|
113.7 | 68.4 | 108.3 | 52.1 | ||||||||||||
|
Diluted
EPS
|
0.36 | 0.22 | 0.35 | 0.18 | ||||||||||||
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None
|
Item 9A.
|
Controls
and Procedures
|
|
Evaluation
of Disclosure Controls and
Procedures
|
We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified by the SEC’s rules and forms, and
that such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow for timely decisions
regarding required disclosure. We recognize that any controls and procedures, no
matter how well designed and operated, can only provide reasonable assurance of
achieving desired control objectives. Judgment is required when designing and
evaluating the cost-benefit relationship of potential controls and
procedures.
As of the
end of the period covered by this report, with the supervision and participation
of management, including our CEO and CFO, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our CEO and CFO have concluded that, as of the end of such period,
our disclosure controls and procedures were effective at the reasonable
assurance level.
|
Internal
Control over Financial Reporting
|
Management’s
Report on Internal Control Over Financial Reporting
Internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) refers to the process designed by, or under the
supervision of, our CEO and CFO, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Management is responsible for establishing and maintaining adequate
internal control over our financial reporting.
We have
evaluated the effectiveness of our internal control over financial reporting as
of September 30, 2009.
This
evaluation was performed using the Internal Control - Integrated
Framework developed by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on such evaluation, management has concluded that, as
of such date, our internal control over financial reporting was effective. The
attestation report issued by Deloitte & Touche LLP on our internal control
over financial reporting is included in the audit opinion in Part II, Item 8 of
this report.
Changes
in Internal Control Over Financial Reporting
As a part
of our normal operations, we update our internal controls as necessary to
accommodate any modifications to our business processes or accounting
procedures. No change occurred during the most recent fiscal quarter that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
|
Item 9B.
|
Other
Information
|
None
PART
III
The
information required by Items 10, 11, 12, 13, and 14, except as provided below,
is incorporated by reference from the Proxy Statement to be filed with the SEC
within 120 days of the end of the fiscal year covered by this
report.
|
Item 10.
|
Directors,
Executive Officers and Corporate
Governance
|
We have
adopted the “Code of Ethics for Principal Executive Officer and Senior Financial
Officers of International Game Technology” (Finance Code of Ethics), a code of
ethics that applies to our Principal Executive Officer, Principal Financial
Officer, Principal Accounting Officer or Controller, or any persons performing
similar functions (together, the “Covered Officers”). The Finance Code of Ethics
is publicly available on our website. If we make any substantive amendments to
the Finance Code of Ethics or grant any waiver, including any implicit waiver,
from a provision of the code to any of the Covered Officers, we will disclose
the nature of such amendment or waiver on our website.
|
Item 11.
|
Executive
Compensation
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
Equity
compensation plans approved and not approved by shareholders as of September 30,
2009:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted
average exercise price of outstanding options warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
||||||||
|
(In
millions, except per share amounts)
|
|||||||||||
|
Equity
compensation plans
|
|||||||||||
|
approved
by shareholders (1)
|
20.0
|
$24.19
|
25.9
|
||||||||
|
Equity
compensation plans
|
0.2
|
$10.43
|
0.6
|
||||||||
|
not
approved by shareholders(2)
|
|||||||||||
|
Total
|
20.2
|
$24.05
|
26.5
|
||||||||
|
(1)
|
Includes
shares under the International Game Technology Stock Incentive Plan and
Qualified Employee Stock Purchase Plan. ESPP shares are not included in
securities to be issued until exercised each year in
February.
|
|
(2)
|
Includes
shares available under the Barcrest Savings Related Share Option Scheme, a
broad-based UK employee stock purchase program established in January 1999
to satisfy certain UK tax requirements. This program is generally intended
to provide UK employees the same benefits available under the US Employee
Stock Purchase Plan. Shareholder approval was not required for this
plan.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
PART
IV
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
(a)(1)
|
Consolidated
Financial Statements are included under Part II, Item
8.
|
|
(a)(2)
|
Consolidated
Financial Statement Schedules are either not required or included under
Part II, Item 8.
Parent
Company Financial Statements - Financial Statements of the Registrant only
are omitted under Rule 3-05 as modified by ASR
302.
|
|
(a)(3)
|
Exhibits:
|
|
3.1
|
Articles
of Incorporation of International Game Technology, as amended
(incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form
10-K for the year ended September 30,
2006)
|
|
3.2
|
Fourth
Restated Code of Bylaws of International Game Technology, dated December
10, 2007 (incorporated by reference to Exhibit 3.2 to Form 10-Q for the
quarter ended December 31, 2007)
|
|
4.1
|
Indenture,
dated as of December 20, 2006, between IGT and Wells Fargo Bank, National
Association, as Trustee, relating to the 2.60% Convertible Debentures due
December 15, 2036 (incorporated by reference to Exhibit 4.1 to
Registrant’s Report on Form 8-K filed December 20,
2006)
|
|
4.2
|
Form
of 2.60% Convertible Debenture due December 15, 2036 (incorporated by
reference to Exhibit 4.2 to Registrant’s Report on Form 8-K filed December
20, 2006)
|
|
4.3
|
Indenture,
dated May 11, 2009, between IGT and Wells Fargo Bank, National
Association, as Trustee, related to the 3.25% Convertible Notes due 2014
(incorporated by reference to Exhibit 4.1 to Registrant’s Report on Form
8-K filed May 11, 2009)
|
|
4.4
|
Form
of 3.25% Convertible Note due 2014 (incorporated by reference to Exhibit
4.2 to Registrant’s Report on Form 8-K filed May 11,
2009)
|
|
4.5
|
Indenture,
dated June 15, 2009, between IGT and Wells Fargo Bank, National
Association, as Trustee, related to the 7.5% Notes due 2019 (incorporated
by reference to Exhibit 4.1 to Registrant’s Report on Form 8-K filed June
15, 2009)
|
|
4.6
|
First
Supplemental Indenture, dated June 15, 2009, between IGT and Wells Fargo
Bank, National Association, as Trustee, related to the 7.5% Notes due 2019
(incorporated by reference to Exhibit 4.2 to Registrant’s Report on Form
8-K filed June 15, 2009)
|
|
4.7
|
Form
of 7.5% Notes due 2019 (incorporated by reference to Exhibit 4.3 to
Registrant’s Report on Form 8-K filed June 15,
2009)
|
|
10.1*
|
Form
of officers and directors indemnification agreement (incorporated by
reference to Exhibit 10.10 to Registrant’s Report on Form 10-K for the
year ended September 30, 1996)
|
|
10.2*
|
Barcrest
Savings Related Share Option Scheme (incorporated by reference to
Registration Statement No. 333-94349, Form S-8 filed by Registrant on
January 10, 2000)
|
|
10.3*
|
Amendment
to IGT Deferred Compensation Plan (Applicable to Post-2004 Deferrals)
dated December 15, 2008 (incorporated by reference to Exhibit 10.2 to
Registrant’s Report on Form 10-Q for the quarter ended December 31,
2008)
|
|
10.4*
|
International
Game Technology 1993 Stock Option Plan (Amended and Restated Effective as
of August 27, 1996) (Composite Plan Document Incorporating Amendments
1998-I, 1998-II and 2000-I) (incorporated by reference to Exhibit 10.15 to
Registrant’s Report on Form 10-Q/A for the quarter ended March 31,
2001)
|
|
10.5*
|
International
Game Technology 2002 Stock Incentive Plan, as amended June 4, 2009
(incorporated by reference to Exhibit 10.14 to Registrant’s Report on Form
10-Q for the quarter ended June 30,
2009)
|
|
10.6*
|
IGT
Profit Sharing Plan (as amended and restated as of April 1, 2002)
(incorporated by reference to Exhibit 10.01 to Registrant’s Report on Form
10-Q for the quarter ended December 28,
2002)
|
|
10.7*
|
Amendments
to IGT Profit Sharing Plan dated July 14, 2003 and November 15, 2005
(incorporated by reference to Exhibit 10.8 to Registrant’s Report on Form
10-K for the year ended September 30,
2006)
|
|
10.8*
|
Amendment
2006-I to IGT Profit Sharing Plan effective as of January 1, 2006
(incorporated by reference to Exhibit 10.8 Registrant’s Report on Form
10-K for the year ended September 30,
2007.)
|
|
10.9*
|
Amended
and Restated Employment Agreement, dated March 20, 2009, between
International Game Technology and Thomas J. Matthews (incorporated by
reference to Exhibit 10.2 to Registrant's Report on Form 8-K filed March
25, 2009)
|
|
10.10*
|
Restricted
Stock Award Agreement with Thomas J. Matthews, Chief Executive Officer,
President, and Chief Operating Officer dated September 29, 2006
(incorporated by reference to Exhibit 10.2 to Registrant’s Report on Form
8-K filed October 4, 2006)
|
|
10.11*
|
Performance
Share Award Agreement with Thomas J. Matthews, Chief Executive Officer,
President, and Chief Operating Officer dated September 29, 2006
(incorporated by reference to Exhibit 10.3 to Registrant’s Report on Form
8-K filed October 4, 2006)
|
|
10.12*
|
IGT
2002 Stock Incentive Plan Agreement Forms: Director Stock
Option Agreement; Incentive Stock Option Agreement; Nonqualified Stock
Option Agreement; Restricted Stock Award Agreement; UK Stock Option
Sub-Plan (“the UK Sub-Plan”) Option Agreement (incorporated by reference
to Exhibit 10.15 to Registrant’s Report on Form 10-K for the year ended
September 30, 2006)
|
|
10.13*
|
IGT
2002 Stock Incentive Plan Agreement Forms: Director Restricted Stock Award
Agreement (incorporated by reference to Exhibit 10.14 Registrant’s Report
on Form 10-K for the year ended September 30,
2008)
|
|
10.14*
|
International
Game Technology Employee Stock Purchase Plan, amended and restated
effective as of December 8, 2005, as subsequently amended (incorporated by
reference to Exhibit 10.16 Registrant’s Report on Form 10-K for the year
ended September 30, 2007)
|
|
10.15*
|
Summary
of IGT Management Bonus Plan (incorporated by reference to Exhibit 10.20
to Registrant’s Report on Form 10-K for the year ended September 30,
2004)
|
|
10.16*
|
Summary
of Named Executive Officer and Director Compensation Arrangements at June
30, 2009 (incorporated by reference to Exhibit 10.1 to Registrant’s Report
on Form 10-Q for the quarter ended June 30,
2009)
|
|
10.17
|
Second
Amended and Restated Credit Agreement, dated as of June 8, 2009, with
Wells Fargo Bank, N.A. as Administrative Agent, Bank of America, N.A., as
Syndication Agent, The Royal Bank of Scotland PLC, the Bank of
Tokyo-Mitsubishi UFJ, Ltd./Union Bank of California, N.A., and Mizuho
Corporate Bank, Ltd., as Co-Documentation Agents, and Banc of America
Securities LLC, Wells Fargo Bank, N.A. and RBS Securities, Inc., as Joint
Lead Arrangers and Joint Book Managers, and a syndicate of other lenders
(incorporated by reference to Exhibit 10.1 of Registrant’s Report on Form
8-K filed June 8, 2009)
|
|
10.18
|
Purchase
Agreement dated as of December 14, 2006, between IGT and the Initial
Purchasers, relating to the 2.6% Convertible Debentures due
December 15, 2036 (incorporated by reference to Exhibit 10.1 to
Registrant’s Report on Form 8-K filed December 20,
2006)
|
|
10.19*
|
Severance
and General Release Agreement with Stephen W. Morro dated January 8, 2009
(incorporated by reference to Exhibit 10.3 to Registrant’s Report on Form
10-Q for the quarter ended December 31,
2008)
|
|
10.20*
|
Employment
Agreement, dated March 20, 2009, between International Game Technology and
Patti S. Hart (incorporated by reference to Exhibit 10.1 to Registrant’s
Report on Form 8-K filed March 25,
2009)
|
|
10.21
|
Convertible
Bond Hedge Transaction, dated May 5, 2009, between IGT and Goldman, Sachs
& Co., relating to the 3.25% Convertible Notes due May 1, 2014
(incorporated by reference to Exhibit 10.2 to Registrant’s Report on Form
10-Q for the quarter ended June 30,
2009)
|
|
10.22
|
Convertible
Bond Hedge Transaction, dated May 5, 2009, between IGT and Morgan Stanley
& Co., Incorporated as Agent for Morgan Stanley & Co.
International plc, relating to the 3.25% Convertible Notes due May 1, 2014
(incorporated by reference to Exhibit 10.3 to Registrant’s Report on Form
10-Q for the quarter ended June 30,
2009)
|
|
10.23
|
Convertible
Bond Hedge Transaction, dated May 5, 2009, between IGT and Deutsche Bank
AG, London Branch, relating to the 3.25% Convertible Notes due May 1, 2014
(incorporated by reference to Exhibit 10.4 to Registrant’s Report on Form
10-Q for the quarter ended June 30,
2009)
|
|
10.24
|
Convertible
Bond Hedge Transaction, dated May 5, 2009, between IGT and BNP Paribas,
relating to the 3.25% Convertible Notes due May 1, 2014 (incorporated by
reference to Exhibit 10.5 to Registrant’s Report on Form 10-Q for the
quarter ended June 30, 2009)
|
|
10.25
|
Convertible
Bond Hedge Transaction, dated May 5, 2009, between IGT and Bank of
America, N.A., relating to the 3.25% Convertible Notes due May 1, 2014
(incorporated by reference to Exhibit 10.6 to Registrant’s Report on Form
10-Q for the quarter ended June 30,
2009)
|
|
10.26
|
Convertible
Bond Hedge Transaction, dated May 5, 2009, between IGT and The Royal Bank
of Scotland plc, relating to the 3.25% Convertible Notes due May 1, 2014
(incorporated by reference to Exhibit 10.7 to Registrant’s Report on Form
10-Q for the quarter ended June 30,
2009)
|
|
10.27†
|
Issuer
Warrant Transaction, dated May 5, 2009, between IGT and Goldman, Sachs
& Co., relating to the 3.25% Convertible Notes due May 1,
2014
|
|
10.28†
|
Issuer
Warrant Transaction, dated May 5, 2009, between IGT and Morgan Stanley
& Co. Incorporated as Agent for Morgan Stanley & Co. International
plc, relating to the 3.25% Convertible Notes due May 1,
2014
|
|
10.29†
|
Issuer
Warrant Transaction, dated May 5, 2009, between IGT and Deutsche Bank AG,
London Branch, relating to the 3.25% Convertible Notes due May 1,
2014
|
|
10.30†
|
Issuer
Warrant Transaction, dated May 5, 2009, between IGT and BNP Paribas,
relating to the 3.25% Convertible Notes due May 1,
2014
|
|
10.31†
|
Issuer
Warrant Transaction, dated May 5, 2009, between IGT and Bank of America,
N.A., relating to the 3.25% Convertible Notes due May 1,
2014
|
|
10.32†
|
Issuer
Warrant Transaction, dated May 5, 2009, between IGT and The Royal Bank of
Scotland plc, relating to the 3.25% Convertible Notes due May 1,
2014
|
|
10.33
|
Purchase
agreement dated as of May 5, 2009, between IGT and Goldman, Sachs &
Co., as representative for the initial purchasers of the 3.25% Convertible
Notes due May 1, 2014 (incorporated by reference to Exhibit 10.1 of
Registrant’s Report on Form 8-K filed May 11,
2009)
|
|
21
|
Subsidiaries
|
|
23
|
Independent
Auditors’ Consent
|
|
24
|
Power
of Attorney (see next page)
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a – 14(a) of the Exchange
Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a – 14(a) of the Exchange
Act, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a – 14(b) of the Exchange
Act and section 18 U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a – 14(b) of the Exchange
Act and section 18 U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
|
|
99
|
Government
Gaming Regulation
|
|
101.INS**
|
XBRL
Instance
|
|
101.SCH**
|
XBRL
Taxonomy Extension Schema
|
|
101.CAL**
|
XBRL
Taxonomy Extension Calculation
|
|
101.LAB**
|
XBRL
Taxonomy Extension Labels
|
|
101.PRE**
|
XBRL
Taxonomy Extension Presentation
|
|
*
|
Management
contract or compensatory plan or
arrangement
|
|
†
|
Initially
filed with Registrant’s Report on Form 10-Q for the quarter ended June 30,
2009 along with a request for confidential treatment for portions of the
exhibit. Exhibit is hereby re-filed in its
entirety.
|
|
**
|
XBRL
information is furnished and not filed or a part of a registration
statement or prospectus for purposes of sections 11 or 12 of the
Securities and Exchange Act of 1933, as amended, is deemed not filed for
purposes of section 18 of the Securities and Exchange Act of 1034, as
amended, and otherwise is not subject to liability under these
sections.
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this annual report on form 10-K to be signed on its behalf by the duly
authorized undersigned.
Date: December 2, 2009
INTERNATIONAL
GAME TECHNOLOGY
By: /s/ Patrick W.
Cavanaugh
Patrick
W. Cavanaugh
Executive
Vice President, Chief Financial Officer, and Treasurer
|
Power
of Attorney
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated. Each person whose signature appears below
hereby authorizes Patti Hart and Patrick Cavanaugh, or either of them, as
attorneys-in-fact to sign on their behalf, individually, and in each capacity
stated below, and to file all amendments and/or supplements to this Annual
Report on Form 10-K.
|
Signature
|
Title
|
Date
|
|
|
/s/ Patti S. Hart
|
Chief
Executive Officer and President
|
||
|
Patti
S. Hart
|
(Principal
Executive Officer)
|
December
2, 2009
|
|
|
/s/ Patrick W. Cavanaugh
|
Chief
Financial Officer, Executive Vice
|
||
|
Patrick
W. Cavanaugh
|
President
and Treasurer
|
December
2, 2009
|
|
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/ Philip G. Satre
|
|||
|
Philip
G. Satre
|
Chairman
of the Board of Directors
|
December
2, 2009
|
|
|
/s/ Robert A. Bittman
|
|||
|
Robert
A. Bittman
|
Director
|
December
2, 2009
|
|
|
/s/ Richard R. Burt
|
|||
|
Richard
R. Burt
|
Director
|
December
2, 2009
|
|
|
/s/ Robert A. Mathewson
|
|||
|
Robert
A. Mathewson
|
Director
|
December
2, 2009
|
|
|
/s/ Thomas J. Matthews
|
|||
|
Thomas
J. Matthews
|
Director
|
December
2, 2009
|
|
|
/s/ Robert Miller
|
|||
|
Robert
Miller
|
Director
|
December
2, 2009
|
|
|
/s/ Frederick B. Rentschler
|
|||
|
Frederick
B. Rentschler
|
Director
|
December
2, 2009
|
|
|
/s/ David E. Roberson
|
|||
|
David
E. Roberson
|
Director
|
December
2, 2009
|
97