Table of Contents
United States Securities and Exchange Commission
Washington, D.C. 20549



For the Fiscal Year Ended October 3, 2009


For the transition period from ____ to ____
Commission File Number 001-10684

International Game Technology
(State of Incorporation)
(I.R.S. Employer Identification No.)
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:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, Par Value $.00015625
New York Stock Exchange
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.
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.


GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
Acres Gaming, Inc.
Anchor Gaming
auction rate securities
Accounting Standards Codification
Accounting Standards Update
Advanced Video Platform®
Amusement with Prize
7.5% Notes due 2019
basis points
Canadian dollars
Colorado Central Station Casino
Central determination system
Chief Executive Officer
Chief Financial Officer
China LotSynergy Holdings, Ltd.
Customer relationship marketing
Cyberview Technology, Inc.
discounted cash flow
2.6% Convertible Debentures
DigiDeal Corporation
earnings before interest, tax
earnings before interest, tax, depreciation, and amortization
Environmental Protection Agency
earnings per share
generally accepted accounting principles
Gaming Standards Association
International Game Technology
intellectual property
Internal Revenue Service
London Inter-Bank Offering Rate
Las Vegas Gaming International
management’s discussion and analysis
Multi-Layer Display
multi level progressive
micro processor unit
3.25% Convertible Notes due 2014
New York Stock Exchange
Occupational Safety & Health Administration
percentage points
Progressive Gaming International Corporation
research and development
responsible gaming
IGT’s complete server-based player experience management solution
Securities and Exchange Commission
Stock Incentive Plan
United Kingdom
United States
variable interest entity
video lottery terminal
vendor specific other evidence
wide area progressive
Walker Digital Gaming, LLC
not meaningful (in tables)

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:
our ability to introduce new products and their impact on replacement demand
the timing, features, benefits, and expected success of new product introductions
growth of our business through technology and intellectual property (IP) acquisition
our leadership position in the market
the advantages offered to customers by our anticipated products and product features
gaming growth, expansion, and new market opportunities
fluctuations in future gross margins and tax rates
increasing product sales or machine placements
legislative or regulatory developments and related market opportunities
available capital resources to fund future operating requirements, capital expenditures, payment  obligations, and share repurchases
the timing and amount of future share repurchases and dividends
losses from off-balance sheet arrangements
financial returns to shareholders related to management of our costs
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.

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:
Australia/New Zealand
South Africa
United Kingdom
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
Presented as
October 3, 2009
September 30, 2009
September 27, 2008
September 30, 2008
September 29, 2007
September 30, 2007

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.
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.
International encompasses our efforts in all other jurisdictions worldwide, comprising 23% of consolidated revenues in fiscal 2009, 24% in 2008, and 23% in 2007.
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.

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
As part of our ongoing efforts to create shareholder value, we complement our internal resources through strategic alliances, investments, and business acquisitions that:
offer opportunities to diversify our geographic reach
expand our product lines and customer base
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:
Stand-alone casino-style slot machines that determine the game play outcome at the machine, known as Class III in tribal jurisdictions
WAP jackpot systems with linked machines across several casinos
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.
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.

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

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.
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 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:
Game KingÒ video platform using the 80960 processor
S2000Ò and Reel Touch® 80960 spinning reel platform
Blue Chip platform used in Australia and New Zealand
Barcrest Triple 7, Horizon, Horizon Plus, and MPU AWP platforms sold in the UK
Pachisuro platform used in Japan
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.
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.
Our international strategy capitalizes on our North America experience, while customizing products for unique local preferences and regulatory requirements. Our international operations service:
casinos in Asia, Europe, Latin America, and Africa
clubs and casinos in Australia and New Zealand
AWP facilities in the UK and continental Europe
pachisuro parlors in Japan
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.
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.
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.
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.
IGT’s principal corporate executive offices are located at:
9295 Prototype Drive
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.
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:
licenses and/or permits
findings of suitability for the company, as well as individual officers, directors, major stockholders, and key employees
documentation of qualification, including evidence of financial stability
specific approvals for gaming equipment manufacturers and distributors
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:
raise awareness of RG as a positive approach to problem gambling
collaborate with the problem gambling community, others in the industry, our customers, and public policy makers in developing RG practices and programs
educate our employees
support research and treatment
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:
National Center for Responsible Gaming
National Council on Problem Gambling
National Problem Gambling Helpline
Problem Gambling Center
Responsible Gaming Education Week
Problem Gambling Awareness Week
Risk Factors
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:
licenses and/or permits
findings of suitability
documentation of qualifications, including evidence of financial stability
other required approvals for companies who manufacture or distribute gaming equipment and services
individual suitability of officers, directors, major stockholders and key employees
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:
political or economic instability
additional costs of compliance
tariffs and other trade barriers
fluctuations in foreign exchange rates outside the US
adverse changes in the creditworthiness of parties with whom we have significant receivables or forward currency exchange contracts
Unresolved Staff Comments
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.
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.
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.
Submission of Matters to a Vote of Security Holders
IGT held a special meeting of stockholders on September 30, 2009.
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.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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.
International Game Technology
S&P 500
Peer Group
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,
(In millions, except per share amounts)
  $ 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
    293.8       308.0       330.1       336.8       343.7  
    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  
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).
Fiscal 2009 included $273.5 million net cash provided from new debt refinancing.
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.
Cash and investment securities include restricted amounts.
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.
Reduced shareholders’ equity in fiscal 2008 and 2007 were primarily due to treasury share repurchases.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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.
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:
persuasive evidence of an arrangement exists
the price to the customer is fixed and determinable
delivery has occurred and any acceptance terms have been fulfilled
no significant contractual obligations remain
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.
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.
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:
variations in slot play (i.e. jackpot life cycles and slot play patterns)
volume (i.e. number of WAP units in service and coin-in per unit)
interest rate movements
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)
09 vs 08
08 vs 07
(In millions except units & EPS)
  $ 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 %  
    589.3       794.8       876.0       (205.5 )     -26 %       (81.2 )     -9 %  
    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 %  
Gaming operations installed base
    61,400       60,500       60,100       900       1 %       400       1 %  
    9,300       15,700       14,500       (6,400 )     -41 %       1,200       8 %  
    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:
write-downs of investments in unconsolidated affiliates totaling $28.6 million ($0.10 per diluted share)
interest rate declines which increased jackpot expense $25.3 million ($15.4 million after tax or $0.05 per diluted share)
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)
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 )     *         -       *    
  $ 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:
additional bad debt provisions of $15.0 million related to credit concerns on certain receivables
increased staffing cost of $27.1 million
higher legal and compliance fees of $9.9 million
changes in foreign currency exchange of approximately $8.4 million
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)
09 vs 08
08 vs 07
(In millions)
Interest Income
  $ 62.0     $ 67.4     $ 82.0     $ (5.4 )     -8 %     $ (14.6 )     -18 %  
    27.9       32.2       37.1       (4.3 )     -13 %       (4.9 )     -13 %  
    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 %  
    (27.4 )     (28.6 )     (31.3 )     1.2       4 %       2.7       9 %  
    (102.0 )     (71.5 )     (46.3 )     (30.5 )     -43 %       (25.2 )     -54 %  
    (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:
$28.6 million related to write-downs of our investments in CLS and PGIC
higher interest expense resulting from increased borrowings under our revolving credit facility
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)
09 vs 08
08 vs 07
(In millions except units)
  $ 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 %  
    376.9       432.2       491.6       (55.3 )     -13 %       (59.4 )     -12 %  
    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 %  
Gaming operations installed base
    45,600       47,300       49,000       (1,700 )     -4 %       (1,700 )     -3 %  
    6,500       6,800       6,500       (300 )     -4 %       300       5 %  
    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.
Favorable (Unfavorable)
09 vs 08
08 vs 07
(In millions except units)
  $ 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 %  
    212.4       362.6       384.4       (150.2 )     -41 %       (21.8 )     -6 %  
    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 %