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  • 10-K (Nov 28, 2012)
  • 10-K (Nov 30, 2011)
  • 10-K (Dec 29, 2010)
  • 10-K (Dec 1, 2010)
  • 10-K (Dec 2, 2009)

 
Quarterly Reports

 
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International Game Technology 10-K 2008
International Game Technology 10-K

United States Securities and Exchange Commission

Washington, D.C. 20549


FORM 10-K


[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended September 30, 2008


OR


[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ___ to ___


Commission File Number 001-10684

[igt10k2001.jpg]

International Game Technology


 

Nevada

88-0173041

 

 

(State of Incorporation)

(I.R.S. Employer Identification No.)

 


9295 Prototype Drive, Reno, Nevada 89521

(Address of principal executive offices)


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 the registrant is not required to file reports pursuant to Section 13 or 15(d) of the 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 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” and 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 March 31, 2008 was approximately $12.5 billion.

The number of shares outstanding of each of the registrant’s classes of common stock, as of November 24, 2008:

294.7 million shares of common stock at $.00015625 par value.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of our Proxy Statement relating to the 2009 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 September 30, 2008.






INTERNATIONAL GAME TECHNOLOGY

TABLE OF CONTENTS

 

 

Page

PART I

Item 1.

Business

2

Item 1A.

Risk Factors

14

Item 1B.

Unresolved Staff Comments

17

Item 2.

Properties

17

Item 3.

Legal Proceedings

17

Item 4.

Submission of Matters to a Vote of Security Holders

17

PART II

Item 5.

Market for Registrant’s Common Equity

18

Item 6.

Selected Financial Data

20

Item 7.

Management’s Discussion and Analysis

21

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 8.

Financial Statements and Supplementary Data

37

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

37

 

CONSOLIDATED INCOME STATEMENTS

38

 

CONSOLIDATED BALANCE SHEETS

39

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

40

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME

42

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

43

Item 9.

Changes in and Disagreements with Accountants

72

Item 9A.

Controls and Procedures

72

Item 9B.

Other Information

72

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

73

Item 11.

Executive Compensation

73

Item 12.

Security Ownership of Certain Beneficial Owners and Management

73

Item 13.

Certain Relationships and Related Transactions, and Director Independence

73

Item 14.

Principal Accountant Fees and Services

73

PART IV

Item 15.

Exhibits and Financial Statement Schedules

74

Power of Attorney Signatures

76



i




GLOSSARY OF TERMS AND ABBREVIATIONS, as used in this Form 10-K


Acronym

 

Terminology

Acres

 

Acres Gaming, Inc.

AICPA

 

American Institute of Certified Public Accountants

Anchor

 

Anchor Gaming

APB

 

Accounting Principles Board Opinion

APIC

 

additional paid-in capital

ARS

 

auction rate securities

ASR

 

accelerated share repurchase

AVP®

 

Advanced Video Platform®

AWP

 

Amusement with Prize

bps

 

basis points

CAD

 

Canadian dollars

CCSC

 

Colorado Central Station Casino

CDS

 

central determination system

CEO

 

Chief Executive Officer

CLS

 

China LotSynergy Holdings, Ltd.

CMB

 

configurable max bet

CRM

 

customer relationship management

Cyberview

 

Cyberview Technology, Inc.

DCF

 

discounted cash flow

DigiDeal

 

DigiDeal Corporation

1.75% Debentures

 

1.75% Zero-coupon Senior Convertible Debentures

2.6% Debentures

 

2.6% Senior Convertible Debentures

EBITDA

 

earnings before interest, tax, depreciation, and amortization

EITF

 

Emerging Issues Task Force

ESPP

 

Employee Stock Purchase Plan

EPA

 

Environmental Protection Agency

EPS

 

earnings per share

FAS

 

Financial Accounting Standard

FASB

 

Financial Accounting Standards Board

FIN

 

FASB Interpretation

FSP

 

FASB Staff Position

G2S

 

Game-to-System

GCB

 

Gaming Control Board

GSA

 

Gaming Standards Association

IGT

 

International Game Technology

IP

 

intellectual property

LIBOR

 

London Inter-Bank Offering Rate

M-2-1

 

Million-2-1

Mariposa

 

Mariposa Software, Inc.

MDA

 

management’s discussion and analysis

MLD®

 

Multi-Layer Display

MLP

 

multi level progressive

M-P

 

multi-player

NJ

 

New Jersey



ii




NYSE

 

New York Stock Exchange

OSHA

 

Occupational Safety & Health Administration

pp

 

percentage points

PFO

 

Principal Financial Officer

PGIC

 

Progressive Gaming International Corporation

R&D

 

research and development

RG

 

responsible gaming

S2S

 

System-to-System

SEC

 

Securities and Exchange Commission

SFAS

 

Statement of Financial Accounting Standards

SG&A

 

selling, general and administrative

SIP

 

Stock Incentive Plan

SOP

 

Statement of Position

SSR

 

structured share repurchase

TCA

 

Technical Cooperation Agreement

UK

 

United Kingdom

US

 

United States

VCAT

 

Venture Catalyst Incorporated

VIE

 

variable interest entity

VLT

 

video lottery terminal

VSOE

 

vender-specific objective evidence

WAP

 

wide area progressive

WDG

 

Walker Digital Gaming, LLC

*

 

not meaningful (in table)





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Table of Contents


FORWARD LOOKING STATEMENTS

This report contains statements that do not relate to historical or current facts, but are “forward looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to future events or trends, our future prospects and proposed new products, services, developments, or business strategies, among other things. These statements can generally (although not always) be identified by their use of terms and phrases such as anticipate, believe, could, would, estimate, expect, intend, may, plan, predict, project, pursue, will, continue, and other similar terms and phrases, as well as the use of the future tense.


Examples of forward looking statements in this report include, but are not limited to, the following categories of expectations about:

ª

our ability to introduce new products and stimulate replacement demand

ª

the timing, features, benefits, and expected success of new product introductions

ª

the timing of the introduction of and revenues from server-based systems

ª

a growing portion of our product sales coming from non-machine products

ª

benefits from research and development efforts

ª

results of our collaboration with the Gaming Standards Association

ª

our ability to acquire, develop, or protect intellectual property

ª

our market share, competitive advantage, and leadership position

ª

the advantages offered to customers by our products and product features

ª

the timing and estimated costs related to our company-wide strategic review and workforce reduction

ª

gaming growth, expansion, and new market opportunities

ª

our ability to benefit from and effectively integrate and utilize acquired businesses and assets

ª

investments in other entities, expanding our product lines, and improving our position in related markets

ª

factors impacting future gross margins and tax rates

ª

increasing growth or contributions from certain non-machine products and services

ª

increasing machine sales or placements

ª

legislative or regulatory developments and related market opportunities

ª

available capital resources to fund future operating requirements, capital expenditures, payment obligations, and share repurchases

ª

timing and amount of future share or debenture repurchases and dividends

ª

expectations regarding losses from off-balance sheet arrangements


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.



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Table of Contents


PART I

Item 1.

Business


GENERAL

International Game Technology is a global gaming company specializing in the design, manufacture, and marketing of electronic gaming equipment and network systems, as well as licensing and services. 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. We are committed to providing quality gaming products at competitive prices, designed to increase the potential for operator profits 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 a third-party manufacturer in Japan.

We currently maintain sales offices in various gaming jurisdictions around the world. In addition to our operations in the US and Canada, we have significant international operating centers located in the following areas:

ª

Argentina

ª

Mexico

ª

Australia

ª

The Netherlands

ª

China

ª

New Zealand

ª

Japan

ª

South Africa

ª

Macau

ª

The United Kingdom


BUSINESS SEGMENTS

We derive our revenues from the distribution of electronic gaming equipment and network systems, as well as licensing and services. 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.

ª

North America consists of our operations in the US and Canada, comprising 76% of consolidated revenues in fiscal 2008, 77% in 2007, and 79% in 2006.

ª

International encompasses our efforts in all other jurisdictions worldwide, comprising 24% of consolidated revenues in fiscal 2008, 23% in 2007, and 21% in 2006.

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 18 of our Consolidated Financial Statements is incorporated here by this reference.

REVENUE STREAMS

We have two revenue streams within each business segment -- gaming operations and product sales.

Gaming operations generate recurring revenues by providing customers with our proprietary gaming equipment and network systems, as well as licensing, services, and component parts. Gaming operations comprised 53% of consolidated revenues in fiscal 2008, 52% in 2007, and 50% in 2006.

Our pricing arrangements are largely variable fees whereby casinos pay service fees to IGT based on a percentage of the game’s coin-in (amounts wagered) where the arrangement includes linkage to an IGT sponsored WAP jackpot system, and are otherwise based on a percentage of the game’s net win. Fixed fee pricing arrangements are typically based on a daily or monthly fee. We incur and accrue related jackpot liabilities with every wager on a WAP connected device. A portion of the casino fee paid to IGT is used for the funding and administration of WAP jackpot payments. The cost of funding WAP jackpot payments to winners is subject to interest rate volatility. See Note 1 of our Consolidated Financial Statements and MDA—CRITICAL




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Table of Contents


ACCOUNTING ESTIMATES for additional information about gaming operations revenues and jackpot liability accounting.

A number of factors influence gaming operations revenues and gross margins, including the number and type of machines in service, levels of play (i.e. amounts wagered), and variations in pricing arrangements. Levels of play are dependent on game popularity, casino seasonality trends, economic conditions, and other player preferences. We monitor the productive life cycle 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. Based on a change in management’s installed base criteria, the IGT installed base has been revised to reflect additional international units previously excluded, increasing 2008 and 2007 by 900 units and 2006 by 1,600 units. Casino owned units are machines sold that also provide a recurring royalty fee. In addition to the units reflected in the table below, gaming operations revenues also include recurring fees for internet gaming, content, and other gaming equipment rentals and leasing.


GAMING OPERATIONS MACHINES at September 30,

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Product sales include the sale of gaming equipment and network systems, as well as licensing, services, and component parts. Product sales comprised 47% of consolidated revenues in 2008, 48% in 2007, and 50% in 2006. 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 network systems with licensing fees, parts, and conversions, as well as other miscellaneous royalty fees and services) collectively comprised 33% of product sales in fiscal 2008, 30% in 2007, and 29% in 2006.


PRODUCT SALES COMPOSITION

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STRATEGIC BUSINESS ARRANGEMENTS

As part of our ongoing efforts to create shareholder value, we complement our internal resources through strategic alliances, investments, and business acquisitions that:

ª

offer opportunities to diversify our geographic reach

ª

expand our product lines and customer base

ª

leverage our technological and manufacturing infrastructure to increase our rates of return

Our most significant acquisition was the purchase of Anchor in December 2001. This acquisition significantly increased the size of our business and enabled us to consolidate all activities of the Spin For Cash Joint Venture and afforded us opportunities to further integrate complementary resources, primarily the Wheel of Fortune® brand and patents.


Over the last five years, we also completed a number of smaller acquisitions, including Acres, WagerWorks and Cyberview. Acres further positioned us as a leading global provider of casino gaming systems, while WagerWorks and Cyberview provided additional opportunities to expand the distribution of content across new channels and mediums.


In addition to acquisitions, we have invested in several companies which we anticipate will further expand our international footprint and/or product lines. Our investments over the last five years included: CLS to use our gaming technology to assist or participate in the development and marketing of products and services to the market in China for lottery related products and services; WDG for access to an expansive portfolio of gaming application concepts; and DigiDeal to expedite access to the market for electronic table games.


PRODUCTS

We provide a broad range of electronic gaming equipment and network 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:

ª

Stand-alone casino-style slot machines which determine the game play outcome at the machine, known as Class III in tribal jurisdictions

ª

WAP jackpot systems with linked machines across several casinos

ª

CDS machines connected to a central server which determines the game outcome, encompassing VLT’s used primarily in government-sponsored applications, and electronic aids to the play of bingo machines known as Class II in tribal jurisdictions (also commonly referred to as electronic bingo)

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.


Network Systems

IGT network systems 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 which 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 lower operating costs.




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Table of Contents




PRODUCT DEVELOPMENT

The vision behind IGT product development is to serve players better by utilizing 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 nearly 1,700 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 $223.0 million in fiscal 2008, $202.2 million in 2007, and $188.5 million in 2006.


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. Our UK facility designs and configures AWP and casino games. Our Japan team designs IGT pachisuro games in conjunction with a third-party manufacturer. Our Australia team designs club and casino products. Our corporate R&D group, IGT Labs, is also dedicated to establishing strategic partnerships with key technology providers.


During fiscal 2008, we continued our World Game Platform initiative to unify and standardize our technology, design, and development across all global markets. We anticipate reducing time and cost to market by having standardized development worldwide, enabling content delivery through uniform technologies. We believe this initiative will facilitate development and deployment of games into any combination of gaming markets, including both thick (processing at the machine) and thin (processing at the server) client-server environments.


Our fiscal 2008 R&D activities are described under the following sub-categories:  Games, Network Systems, Platforms and Intellectual Property.

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Table of Contents


Games

We combine elements of math, play mechanics, sound, art, and technological advancements with our library of entertainment licenses and patented intellectual properties to provide gaming products with a high degree of player appeal. We continue to expand our game libraries, emphasizing development of game content to address changing consumer preferences and other market trends. Our objective is to develop games that incorporate exciting winning combinations and appealing graphics and sound.


Our games are created primarily by employee designers and artists, as well as 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.


Fiscal 2008 highlights


We installed the first games from our new family of MLD® video slots in the fourth quarter, featuring the visual effect of true depth animation sequences without 3-D glasses. Our REELdepth™ video slot games are designed with MLD®  technology, pioneered by PureDepth™ Inc., an ingenious layering of two liquid crystal displays. MLD®  video slots additionally 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 the operators.


Our new S AVP®  Upright developed a new look and feel for video spinning reels, providing fresh slot themes, crisper graphics packages, enhanced lighting schemes and sounds, and innovative bonus rounds. New game themes include new features, such as high hit frequency, instant progressive capabilities with CMB option, 50-payline action, Free Games, Easy Bet restricted betting ranges, buy-a-pay bonus wagering, two-for-one wagering, two-level progressive jackpots, and configurable progressive increments and hold percentages.


We tested sixteen new AVP® games successfully for 26 weeks against all other leading manufacturers at selected Power Score™ performance testing locations across North America. IGT’s Power Score™ program is designed to verify the strength of new game themes and, by doing so, supports operator confidence in newly released titles. This comprehensive testing program compares the overall “real world” market for up to six months, identifying the potential for slot floor success and assisting in identifying features that contribute to game longevity.


Group play introductions in fiscal 2008 included eBayä, Wheel of Fortune® Super Spinä Five-Stationä , and The Price is Right® Multi-Stationä. Group play products provide a variety of community game play features, such as the eBayä  feature where multiple players can participate in the same bonus for added player interaction and high-stakes player attraction. MLP and Mystery Bonus MegaJackpots® releases included Wheel of Fortune® MLP, Star Warsä MLP, and Indiana Jonesä MLP with MLD®. MLP and Mystery Bonus format games offer players free spin bonuses and frequent mid-level wins, as well as a chance to randomly win a higher value jackpot while playing low-denomination themes. In fiscal 2009, we plan to release Wheel of Fortune® MLD and Megabucks® MLD® MLP, as well as Scavenger Huntä MLP, the first server-based bank-to-bank concept.


Our M-P Series™ interactive, multi-player suite of electronic table games arranged in virtual pits continues moving forward with the introduction of roulette and baccarat during fiscal 2008. With virtual cards and virtual chips, these products provide floor-layout flexibility, increased game security, limited staffing requirements, increased hands-per-hour, and decreased operating costs, along with the addition of table game options for slot-only jurisdictions.


We continue to develop our popular game titles for deployment through online and mobile gaming applications. During fiscal 2008, we released the online version of Megabucks® on the internet casino platform and other online versions of our popular MegaJackpots® themes are expected to follow. Other games migrated to these platforms include Cleopatra®, WolfRun®, Elvis-A Little More Action™ , Texas Tea®, Hi-5™, and Elvis Top 20™.

Network Systems

Games and network systems continue to converge, as operators increasingly require this synergy for regulatory purposes and to manage game performance and player preferences. As we develop and integrate gaming systems, we recognize networks have the power to dramatically change the appearance and improve the usefulness of gaming systems.





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Table of Contents


Our ongoing server-based gaming development continues to focus on a more comprehensive enterprise-wide network systems solution designed to provide operators with:

ª

tools for more effective casino floor management

ª

new ways to engage and interact with players


During fiscal 2008, IGT’s sbä product line became sbXä , the Experience Management solution. Our first evolution of sbä centered on server-based game management; sbXä is being developed into a new integrated modular solution, incorporating input from real-life operators. With sbXä , an operator can create, manage, and deliver customized player experiences that drive player loyalty. Coupled with our AVP® technology, sbXä provides the flexibility and connectivity needed by operators to keep up with changing player demands and enhance their competitive edge. All this functionality is designed to optimize an operator’s return and lower operating costs.


During 2008, we opened the IGT Global Technology and Interoperability Center to facilitate third-party manufacturers and strategic partners in the testing of GSA protocol products’ 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 new casino player marketing features this technology can provide.


We are preparing to move beyond the development and testing phase in 2008 into the commercialization and sales phase in 2009. During fiscal 2009, we expect to introduce both operational and player components of sbXä  for smaller scale, bank-by-bank installations, allowing operators to test operational and player features prior to floor-wide investments. We anticipate the first casino-wide deployment of our sbXä gaming management systems at the new CityCenter’s Aria Casino Resort in Las Vegas scheduled to open in late 2009.


Our five field trials are in the process of upgrading to the latest version of sbXä, a milestone step that will incorporate G2S and S2S GSA protocols and enable sbXä integration with various other casino management systems. This new version of sbXä will allow operators to download multiple games on slot machine drives and configure player menus with our award-winning Service Window interface that will overlay all future sbXä applications.


We will continue combining the power of the open network with other server-based applications, including casino transactional systems, business intelligence software, and other unique new gaming products. The integration of sbXä with our CRM, business intelligence, and predictive modeling applications will provide the tools designed to help operators better understand and predict player behavior patterns, increase marketing productivity, and analyze customer preferences and game performance. We also continue to support and enhance our legacy gaming systems for casino management (such as Advantage®), CRM, Ticket-in/Ticket-out, CDS, and WAP.


Platforms

Platforms are the means by which players interact with the games, and we support several in order to maximize our game distribution reach. The challenge of platform development is in determining how to effectively use a wide range of technologies to satisfy evolving global markets with the best features, cost points, and delivery dates. The goal is to ensure that our content can be deployed through a number of different channels, including traditional gaming platforms, as well as wireless networks and the internet.


During fiscal 2008, 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 expanded our Remote Game Server™ to facilitate further deployment of our game content to internet platforms.





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Table of Contents


We incorporated customer feedback in the design of several new cabinet models released in fiscal 2008. The new models were also designed with input from ergonomic and industrial design experts to create a product that is flexible, functional and holds the greatest player appeal. These models diversify our AVP® cabinet styles and are all sbXä  ready with supporting GSA open communication standards and video capabilities for the service window.


Our AVP® is designed to support the next generation of video games and provide improved graphic capabilities such as:

ª

MLD®  virtual 3-D spinning reels

ª

liquid crystal wide- or full- screen live streaming videos

ª

animations with vivid colors

ª

enhanced stereo and surround sound

ª

expanded storage capacity, allowing for complex bonus features

As we transition to AVP® as our standard development platform, we also continue development support for the following platforms:

ª

Game KingÒ video platform using the 80960 processor

ª

S2000Ò and Reel Touch® 80960 spinning reel platform

ª

VLC 8800™ platform widely used in government-sponsored jurisdictions, with the ability to connect with most major North America video lottery control systems

ª

Blue Chip platform used in Australia and New Zealand

ª

Barcrest MPU5 (soon to be replaced by MPU6) AWP platform produced in the UK

ª

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 1,900 patents and over 2,100 trademarks.  Our capitalized patents have a weighted average remaining useful life of 8 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 unique, distinctive 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, 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.




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Table of Contents


SALES AND MARKETING REGIONS

We market our products and services in legalized gaming jurisdictions around the world. While our most significant jurisdictions are in North America, we anticipate international jurisdictions will continue to grow in significance to our business. We promote our products through a worldwide network of sales associates. We use third-party distributors and agents in certain markets under arrangements that generally specify no minimum purchase and require specified performance standards be maintained. We also offer equipment contract financing for qualified customers and development financing loans to select customers for new or expanding gaming facilities.


Customer service is an important aspect of our overall marketing strategy. We have over 50 customer service centers worldwide to respond effectively to customer needs. In addition, we provide access to 24-hour customer service and product information through our website and a fully staffed Global Support Center telephone hotline, including a full range of field support engineering resources to resolve technical issues. We also offer customers a variety of training to ensure their employees can successfully use our products to their full potential.

North America

Customer service locations and estimated market bases are reflected below.

[igt10k2006.jpg]


Gaming in the US and Canada continues to grow in popularity with the spread of tribal casinos and other gambling venues such as racetracks (also known as racinos) and bingo parlors, resulting from legalization of gaming in jurisdictions where governments are looking for ways to support public operations. We estimate the base of gaming devices installed in North America increased nearly 5% in 2008 to over 930,000 machines.


Opportunities for additional sales or placements of IGT products in North America are significantly impacted by the machine replacement cycle, legalization of gaming in new jurisdictions, and new property openings or expansions. Legislative actions and the passage of voter referendums are providing new and expanding opportunities in jurisdictions across the US including California, Florida, Indiana, Kansas, Maryland, Pennsylvania, and Washington. We monitor ongoing legislative developments contemplated in several other states including Illinois, Kentucky, Massachusetts, and Texas.





9



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International

IGT offices are located internationally to better serve customer needs and address local regulatory issues.


[igt10k2007.jpg]


Our international strategy capitalizes on our North America experience, while customizing products for unique local preferences and regulatory requirements. Our International operations service:

ª

casinos in Asia, Europe, Latin America, Russia, and South Africa

ª

clubs and casinos in Australia and New Zealand

ª

AWP facilities in the UK and continental Europe

ª

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 believe further international opportunities will develop as support grows for legalized gambling as a means of promoting tourism revenues.




10



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OPERATIONAL OVERVIEW

Manufacturing and Suppliers

In addition to our main production facility in Reno, Nevada, we manufacture AWP and UK casino products in the UK and pachisuro machines through a third-party manufacturer in Japan. 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.


Our Reno facility currently devotes more than 800,000 square feet to product development, manufacturing, warehousing, shipping, and receiving. During the current year, we consolidated several Las Vegas leased facilities into our newly constructed 37-acre central campus, which was completed in fiscal 2008. Maintaining our commitment to quality during fiscal 2008, we renewed our ISO 9001.2000 Quality Management System certification at all of our manufacturing facilities. 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, totaling approximately $351.2 million at October 31, 2008 and $327.6 million at October 31, 2007.


Regulatory Compliance

IGT is dedicated to regulatory compliance worldwide in order to ensure that our products meet requirements in each gaming jurisdiction and that we obtain the necessary approvals and licenses. We conduct business in most jurisdictions where gaming is legal and hold licenses where required.


Employees

As of September 30, 2008, we employed 5,800 individuals worldwide, consisting of 4,800 in North America and 1,000 internationally. In the fourth quarter of fiscal 2008, we began a comprehensive companywide review of our costs and organizational structure to maximize efficiency and align our operating expenses with the current and forecasted business environment. As a part of this effort, in November 2008, we announced a workforce reduction of approximately 8% or 460 positions. For additional discussion concerning cost estimates surrounding our realignment, see MDA—OVERVIEW and MDA—CONSOLIDATED OPERATING RESULTS.


COMPETITION AND PRODUCT DEMAND

A number of factors drive demand for both our and our competitors’ gaming products.


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 network systems is highly competitive, constantly evolving, and subject to rapid technological change. We compete in both domestic and international markets and endeavor to create products that are superior in functionality and features, architecture and technological innovations, and customer acceptance and player preference. In addition to creating desirable products, we also strive to maintain an edge in our quality of support and efficient product implementation.




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We believe IGT has a competitive advantage as a result of our broad alliances and long history with customers, continued development of systems that enhance operator profitability, financial strength to aggressively invest in R&D, and extensive collection of intellectual properties.


Further, the breadth of our gaming products and the 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.


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.


AVAILABLE INFORMATION

IGT’s principal corporate executive offices are located at:

9295 Prototype Drive

Reno, Nevada 89521

Telephone: (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. 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.




12



Table of Contents


GOVERNMENT GAMING REGULATION

We operate in most legal casino gaming jurisdictions worldwide, as well as in a significant number of legalized lottery jurisdictions. The manufacture and distribution of gaming equipment, systems, and services, as well as the operation of casinos, is subject to regulation by a variety of local and federal agencies, with the majority of oversight provided by individual state gaming control boards. While the regulatory requirements vary from jurisdiction to jurisdiction, most require:

ª

licenses and/or permits

ª

findings of suitability for the company, as well as individual officers, directors, major stockholders, and key employees

ª

documentation of qualification, including evidence of financial stability

ª

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 2008 marked the 11th anniversary of the IGT 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 our markets expand internationally, so must our 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 over the long term.


As a technology provider to the gaming industry, our approach to responsible gaming differs only slightly from that of the gaming operator, but the objectives are the same:

ª

raise awareness of RG as a positive approach to problem gambling

ª

collaborate with the problem gambling community, others in the industry, our customers, and public policy makers in developing RG practices and programs

ª

educate our employees

ª

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:


ª

National Center for Responsible Gaming

ª

Problem Gambling Center

ª

National Council on Problem Gambling

ª

Responsible Gaming Education Week

ª

National Problem Gambling Helpline

ª

Problem Gambling Awareness Week



13



Table of Contents


Item 1A.

Risk Factors

New products require regulatory approval and may be subject to complex 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 them and to recognize revenues in accordance with generally accepted accounting principles. Transactions may include multiple element arrangements and/or software components. As our products and transactions change, 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. For example, our deferred revenue increased approximately $38.1 million during the quarter ended September 30, 2008 to a total of $62.1 million. This increase reflected our continued shift toward more multiple element contracts that included systems and software.

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:

ª

licenses and/or permits

ª

findings of suitability

ª

documentation of qualifications, including evidence of financial stability

ª

other required approvals for companies who manufacture or distribute gaming equipment and services

ª

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.

Slow growth in the establishment of new gaming jurisdictions or the number of new casinos and declines in the rate of replacement for 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.




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Table of Contents


Our business is vulnerable to changing economic conditions and current unfavorable economic conditions have 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 domestic and international general economic conditions and higher fuel or other transportation costs 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 would reduce their resources available to purchase our products and services, which would adversely affect 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, current unfavorable economic conditions could impact the ability of our customers to make timely payments to us. If that were to occur, we may incur additional provisions for bad debt. For example, during fiscal 2008, our bad debt provisions increased $15.0 million compared to fiscal 2007 related to credit concerns on certain receivables.

A decline in 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 the value of the liability (and related jackpot expense) increases because the cost to fund the liability increases. For example, our results were materially affected by the 200 bps decline in the prime rate during the second quarter of fiscal 2008. 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 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 our sbX™ gaming management systems, or if we do not gain market acceptance of these systems.

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.

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




15



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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 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.

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.

Our outstanding Senior Convertible Debentures subject us to additional risks.

Our 2.6% Debentures issued in December 2006 contain a net settlement feature. This feature entitles holders of Debentures to receive cash up to $1,000 and shares for any excess conversion value determined in a manner in the indenture governing the Debentures. Consequently, if a significant number of Debentures are converted or redeemed, we would be required to make significant cash payments to the holders who convert their Debentures. Given current market conditions and the recent trading price of our stock, it is likely that Debenture holders will exercise their right to require IGT to redeem the Debentures on December 15, 2009. Our liquidity, financial position, results of operations, and cash flows may be negatively impacted if we are unable to satisfy this obligation with existing capital resources as we may be required to obtain funding with terms that include higher interest rates or additional restrictions.

Our outstanding credit facility subjects us to financial covenants which may limit our flexibility.

Our Senior 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 the Senior Credit Facility to become immediately due and payable. In addition, our interest rate under the Senior 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 current unfavorable economic conditions. The Senior Credit Facility also includes restrictions that may limit our flexibility in planning for, or reacting to, changes in our business and the industry. Additionally, the facility expires in December 2010; if credit markets do not improve prior to that time we may have difficulty refinancing these borrowings or it may be necessary to refinance under less favorable terms. If this occurs, our liquidity, financial position, results of operations and cash flows may be negatively affected.

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. For example, we have investments in CLS, a portion of which have declined in value and resulted in a non-cash write down as described in Note 2 of our Consolidated Financial Statements. Although we have not to date realized any losses associated with our CLS investments, we are monitoring them and will reassess impairment on a quarterly basis. We have in the past and may in the future incur losses on these types of investments and loans. Our results of operations, liquidity or financial position may be negatively impacted if we are unable to collect on loans or benefit from investments we make.




16



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Current environmental laws and regulations, or those enacted in the future, could result in additional liabilities and costs.

The manufacturing of our products may require the use of materials that are subject to a variety of environmental, health and safety laws and regulations. Compliance with these laws could increase our costs and impact the availability of components required to manufacture our products. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position or cash flows.

The risks related to operations outside of traditional US law could negatively affect our results.

We operate in many countries outside of the US and in tribal jurisdictions with sovereign immunity which subjects us to certain inherent risks including:

ª

political or economic instability

ª

additional costs of compliance

ª

tariffs and other trade barriers

ª

fluctuations in foreign exchange rates outside the US

ª

adverse changes in the creditworthiness of parties with whom we have significant receivables or forward currency exchange contracts


Item 1B.

Unresolved Staff Comments

None


Item 2.

Properties

We expect our current properties will be adequate for our near-term business needs.

North America

Our largest manufacturing facility and corporate offices are located in Reno, Nevada, where we own a 1.2 million square foot facility that houses our manufacturing, cabinet production, silkscreen, engineering, sales, and corporate administrative functions. This facility supports production for all of North America and all 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 fiscal 2008, we completed construction of our new 618,000 square foot Las Vegas campus. This new facility houses our largest sales and service force, as well as warehousing and administrative functions, and its completion allowed us to consolidate several leased facilities. At September 30, 2008, we leased approximately 25,000 square feet of additional administration facilities in Las Vegas under agreements expiring between October 2009 and January 2013. Additionally, we leased approximately 396,000 square feet of warehousing, sales, and service facilities throughout the US and Canada to support local market needs under leases expiring between December 2008 and January 2016.

International

In the UK, we own a 149,000 square foot facility and lease 51,000 square feet under leases expiring through June 2015 to support local manufacturing, sales, and administrative functions. In Australia and New Zealand, we own two facilities with 15,000 square feet and lease 122,000 square feet under agreements expiring through December 2011 used for subassembly, sales, and administration. All other international facilities total 213,000 square feet under leases expiring through February 2013.


Item 3.

Legal Proceedings

IGT has been named in and has brought lawsuits in the normal course of business. We do not expect the outcome of these suits to have a material adverse effect on our financial position or results of operations. A description of certain of these matters is contained in Note 16 of our Consolidated Financial Statements and is incorporated herein by this reference.


Item 4.

Submission of Matters to a Vote of Security Holders

None



17



Table of Contents


PART II


Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NYSE under the symbol “IGT.”  The following table presents the high and low prices of our common stock as traded on the NYSE and quarterly cash dividends declared for the last two fiscal years.

 

 

Stock Price

High

 

 

Stock Price

Low

 

Dividends

Declared

 

Fiscal  2008

  

  

  

  

 

 

  

  

  

  

  

First Quarter

  

$

45.72

  

 

$

40.34

  

$

0.140

  

Second Quarter

  

  

49.41

  

 

 

35.80

  

  

0.140

  

Third Quarter

  

  

41.87

  

 

 

24.38

  

  

0.140

  

Fourth Quarter

  

  

25.90

  

 

 

15.22

  

  

0.145

  

  

  

  

  

  

 

 

  

  

  

  

  

Fiscal  2007

  

  

  

  

 

 

  

  

  

  

  

First Quarter

  

$

46.76

  

 

$

40.49

  

$

0.130

  

Second Quarter

  

  

48.79

  

 

 

37.89

  

  

0.130

  

Third Quarter

  

  

42.00

  

 

 

36.80

  

  

0.130

  

Fourth Quarter

  

  

43.34

  

 

 

33.57

  

  

0.140

  


There were approximately 3,250 record holders of IGT’s common stock and the closing price was $9.00 as of November 24, 2008.


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) 689-8788

Share Repurchases

The purpose of our 1990 common stock repurchase authorization, as amended, is to return value to our shareholders and reduce the number of shares outstanding. We use open market or privately negotiated transactions, as well as Rule 10b5-1 trading plans, depending on market conditions and other factors. The authorization does not specify an expiration date. Our share repurchases for the quarter ended September 30, 2008 are summarized below.


Periods

 

Total Number

of Shares

Purchased

 

Average

Price Paid

Per Share

 

Total Number

 Of  Shares Purchased

as part of a

Publicly

Announced Plan

 

Maximum Number of Shares Still Available for Purchase Under the Plan

(In millions, except per share amounts)

 

  

 

 

  

  

  

  

  

  

June 29 - July 26, 2008

 

7.9

 

$

23.9

  

  

7.9

  

11.4

July 27 - August 23, 2008

 

2.3

 

 

21.9

  

  

2.3

  

9.1

August 24 - September 27, 2008

 

1.4

 

 

20.2

  

  

1.4

  

7.7

Total

 

11.6

 

$

23.0

  

  

11.6

  

 






18



Table of Contents


Performance Graph

The following graph reflects the cumulative total return (change in stock price plus reinvested dividends) of a $100 investment in our common stock for the five-year period for our fiscal years ended September 30, 2003 through 2008 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.


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among International Game Technology, The S&P 500 Index, and A Peer Group

[igt10k2008.jpg]



 

2003

2004

2005

2006

2007

2008

International Game Technology

$100.00

$128.74

$98.22

$153.38

$161.31

$65.65

S&P 500

100.00

113.87

127.82

141.62

164.90

128.66

Peer Group

100.00

127.05

160.49

170.68

215.78

152.57




19



Table of Contents


Item 6.

Selected Financial Data

The following should be read in conjunction with Item 7, MDA, and Item 8, Financial Statements and Supplementary Data.


FINANCIAL HIGHLIGHTS

As of and for Years ended September 30,

 

2008

 

 

2007

 

 

2006

 

 

2005

 

 

2004

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,528.6

 

 

$

2,621.4

 

 

$

2,511.7

 

 

$

2,379.4

 

 

$

2,484.7

 

Gross profit

 

 

1,419.1

 

 

 

1,480.8

 

 

 

1,371.7

 

 

 

1,190.7

 

 

 

1,319.2

 

Operating income

 

 

659.3

 

 

 

800.3

 

 

 

725.1

 

 

 

663.7

 

 

 

814.3

 

Income from continuing operations, net of tax (1)

 

 

342.5

 

 

 

508.2

 

 

 

473.6

 

 

 

436.5

 

 

 

429.8

 

Discontinued operations, net of tax (2)

 

 

––

 

 

 

––

 

 

 

––

 

 

 

––

 

 

 

58.9

 

Net income (1, 2)

 

 

342.5

 

 

 

508.2

 

 

 

473.6

 

 

 

436.5

 

 

 

488.7

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.11

 

 

$

1.54

 

 

$

1.41

 

 

$

1.27

 

 

$

1.24

 

Discontinued operations (2)

 

 

––

 

 

 

––

 

 

 

––

 

 

 

––

 

 

 

0.17

 

Net income

 

 

1.11

 

 

 

1.54

 

 

 

1.41

 

 

 

1.27

 

 

 

1.41

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.10

 

 

$

1.51

 

 

$

1.34

 

 

$

1.20

 

 

$

1.17

 

Discontinued operations (2)

 

 

––

 

 

 

––

 

 

 

––

 

 

 

––

 

 

 

0.15

 

Net income

 

 

1.10

 

 

 

1.51

 

 

 

1.34

 

 

 

1.20

 

 

 

1.32

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

308.0

 

 

 

330.1

 

 

 

336.8

 

 

 

343.7

 

 

 

346.8

 

Diluted

 

 

310.4

 

 

 

336.1

 

 

 

355.8

 

 

 

370.2

 

 

 

376.3

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.565

 

 

$

0.530

 

 

$

0.505

 

 

$

0.485

 

 

$

0.420

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash from operations

 

$

486.5

 

 

$

821.5

 

 

$

624.1

 

 

$

726.4

 

 

$

623.6

 

Cash from investing

 

 

(365.7

)

 

 

(296.7

)

 

 

(234.0

)

 

 

(215.8

)

 

 

364.8

 

Cash from financing (3)

 

 

(115.2

)

 

 

(556.5

)

 

 

(386.9

)

 

 

(525.6

)

 

 

(1,121.7

)

Capital expenditures (4)

 

 

298.2

 

 

 

344.3

 

 

 

310.5

 

 

 

238.6

 

 

 

210.9

 

Cash used for share repurchases

 

 

779.7

 

 

 

1,118.3

 

 

 

426.7

 

 

 

354.7

 

 

 

129.8

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investment securities (6)

 

$

374.4

 

 

$

400.7

 

 

$

589.1

 

 

$

688.1

 

 

$

766.7

 

Working capital (7)

 

 

733.4

 

 

 

595.5

 

 

 

129.1

 

 

 

219.6

 

 

 

949.7

 

Total assets

 

 

4,557.4

 

 

 

4,167.5

 

 

 

3,902.7

 

 

 

3,864.4

 

 

 

3,873.0

 

Notes payable, net (current and non-current) (7, 8)

 

 

2,263.1

 

 

 

1,508.6

 

 

 

832.4

 

 

 

811.0

 

 

 

791.9

 

Jackpot liabilities (current and non-current) (5)

 

 

650.7

 

 

 

643.1

 

 

 

546.7

 

 

 

705.8

 

 

 

719.3

 

Non-current liabilities (8)

 

 

2,911.7

 

 

 

2,023.3

 

 

 

614.1

 

 

 

741.1

 

 

 

1,336.4

 

Stockholders' equity (9)

 

 

909.0

 

 

 

1,452.7

 

 

 

2,042.0

 

 

 

1,905.7

 

 

 

1,976.6

 

———————

(1)

Fiscal 2004 includes $127.9 million pretax ($81.4 million after tax or $0.22 per diluted share) for losses on early debt redemption.

(2)

Certain discontinued Anchor operations were reclassified and sold subsequent to acquisition. Fiscal 2004 includes related gain on sale of $56.7 million after tax.

(3)

Fiscal 2004 includes $969.6 million of principal debt reduction.

(4)

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.

(5)

Jackpot liabilities increased in fiscal 2007 and 2004 due to VIE consolidations and decreased in fiscal 2006 due to VIE deconsolidations.

(6)

Cash and investment securities include restricted amounts.

(7)

Fiscal 2006 includes $611.1 million of convertible debentures classified in current liabilities because our common stock met the conversion price threshold. Fiscal 2005 includes $602.2 million of debentures classified as current due to holders’ redemption rights.

(8)

Fiscal 2008 and 2007 include additional borrowings on our Senior Credit Facility.

(9)

Reductions in fiscal 2008 and 2007 are primarily attributable to treasury share repurchases.



20



Table of Contents


Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations


OVERVIEW

The following MDA is intended to enhance the reader’s understanding of our operations and current business environment. MDA is provided as a supplement to, and should be read in conjunction with, our Item 1, Business, and Item 8, Financial Statements and Supplementary Data.


International Game Technology is a global company specializing in the design, manufacture, and marketing of computerized gaming equipment, network systems, licensing, and services. We are a leading supplier of gaming products to the world, providing a diverse offering of quality products and services at competitive prices that are designed to increase the potential for operator profits by serving players better.


Our annual revenues totaled $2.5 billion in fiscal 2008. We operate in two segments, North America and International, with certain unallocated company-wide income and expenses managed at the corporate level. International continues to be a growing contributor at 25% of operating income in fiscal 2008. See BUSINESS SEGMENT RESULTS below and Note 18 of our Consolidated Financial Statements for additional segment information and financial results.


We are currently operating in a difficult domestic environment. The combination of economic uncertainty, lower replacement demand, limited opportunities from new or expanding properties, and improved competition has negatively impacted our North America results. Our gaming operations business has been negatively affected by lower casino play levels which operators have largely attributed to unfavorable economic conditions, as well as declining interest rates which increase jackpot funding costs. In the face of these challenges, we remain focused on strategic initiatives that we believe will maintain our status as a leading provider of innovative gaming products and services.


Our current product development efforts reflect our commitment to the future of gaming industry technology as our business model continues to evolve toward a more systems-centric, networked gaming environment. In support of the networked gaming environment, we released several new machine models during the current year. Initial customer feedback on these models has been positive, and we anticipate replacement demand in fiscal 2009 to exceed 2008 levels. However, the timing and amount of revenues from these releases remains dependent, in part, on our customers’ capital spending, which may continue to be adversely impacted by current economic conditions. We remain on track for initial deployment of our sbXä applications in 2009, and expect to realize a meaningful financial benefit from sbXä technology beginning in fiscal 2010 as we further differentiate IGT gaming products by offering operators new ways to engage and interact with players.


We are dependent, in part, on new market opportunities to generate growth. We expect to benefit from a number of new or expansion projects that are currently underway, but the extent and timing of such opportunities remains uncertain due to the difficult credit environment and risk of prolonged economic weakness. The uncertainty and lack of liquidity has led some gaming operators to delay or cancel construction projects; however, we believe market opportunities may develop as credit markets recover and governments consider gaming tax revenues as one means to address budget shortfalls.


In the current year, we saw new openings or expansions in a number of domestic jurisdictions including Indiana, Nevada, Oklahoma, and Pennsylvania. During the first half of the year, California voters approved new tribal compacts for 17,000 additional slot machines, and Florida voters approved 6,000 additional machines for three pari-mutuel facilities in Miami-Dade County. In November 2008, voters in Maryland voted to legalize up to 15,000 gaming machines at five locations in that state. We also expect to benefit from further gaming expansion in international markets, especially in Southeast Asia.


During fiscal 2008 we continued to deploy our capital for strategic business combinations and acquisitions of important technologies and IP. We believe the Cyberview asset purchase and license agreement enabled more immediate access to the fixed odds betting market in the UK, strengthened our IP portfolio and enhanced our sbXä initiatives. Additionally, we anticipate our acquisition of Million-2-1 will establish new markets and channels for our game content in the mobile gaming business.


We will take a prudent and conservative approach to maintaining our available liquidity while credit market conditions and economic conditions remain unfavorable. We continue to focus on reinvesting in our business through our installed base of gaming operations machines, as well as other strategic capital deployment objectives including investments and alliances to expand our geographic reach, product lines, and customer base. We will judiciously deploy our capital to preserve maximum flexibility.




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Table of Contents


Amid difficult operating conditions, we are conducting a company-wide strategic review of our costs and organizational structure to maximize efficiency and align our expenses with our current and forecasted business outlook. We anticipate that these efforts will result in quarterly cost reductions ranging from $20.0 million to $25.0 million beginning in the second quarter of fiscal 2009. A large part of our cost-cutting measures relates to workforce reductions that we expect to result in additional charges of $16.0 million to $21.0 million during the first quarter of fiscal 2009. As we move forward in this challenging economic and credit environment, we intend to continuously monitor our costs and make adjustments where necessary and feasible to improve our operating efficiency.


RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2008, the FASB issued FSP APB 14-1, Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). This FSP requires that convertible debt instruments that may be settled in cash upon conversion be separated into debt and equity components. Although we are still quantifying the impact, we expect the adoption of this FSP in the first quarter of fiscal 2010 to increase interest expense related to our convertible debentures with a corresponding decrease to diluted EPS.


See Note 1 of our Consolidated Financial Statements for additional information regarding recently issued accounting standards that may impact IGT upon adoption.


CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the US. Accordingly, we are required to make estimates incorporating judgments and assumptions we believe are reasonable based on our historical experience, contract terms, trends in our company and the industry as a whole, as well as information available from other outside sources. Our estimates affect amounts recorded in the financial statements and actual results may differ from initial estimates.


We consider the following accounting estimates to be the most critical to fully understand and evaluate our reported financial results. They require us to make subjective or complex judgments about matters that are inherently uncertain or variable. Senior management discussed the development, selection, and disclosure of the following accounting estimates, considered most sensitive to changes from external factors, with the Audit Committee of our Board of Directors.


Revenue Recognition

We receive revenues from the distribution of electronic gaming equipment and network systems, as well as licensing and services. Revenues are recognized when all of the following have been satisfied:

ª

persuasive evidence of an arrangement exists

ª

the price to the customer is fixed and determinable

ª

delivery has occurred and any acceptance terms have been fulfilled

ª

no significant contractual obligations remain

ª

collection is reasonably assured

Determining whether these requirements have been met may require us to make assumptions and exercise judgment that could significantly impact the timing and amount of revenue reported each period. In addition, we may enter into arrangements which include multiple elements or deliverables such as gaming devices, 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 proceeds 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, cost of gaming operations, and cost of product sales. We anticipate an increase in our deferred revenues as we enter into an increasing number of multiple element contracts that include software and more of our product becomes subject to software rules for revenue recognition. Deferred revenue increased to $62.1 million at September 30, 2008 from $28.7 million at September 30, 2007.


Goodwill, Other Intangible Assets, and Royalties

We measure and test goodwill for impairment using the two-step approach under SFAS 142, Goodwill and Other Intangible Assets, at least annually or more often if there are indicators of impairment. If the carrying




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Table of Contents


amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. Our goodwill totaled $1.2 billion at September 30, 2008 and $1.1 billion at September 30, 2007. The last three annual goodwill impairment tests indicate the fair value of each reporting unit is in excess of its carrying value.


In determining the fair value of our reporting units, we apply the income approach using the DCF method. We then compare the implied valuation multiples of a group of comparable competitor gaming companies under the market approach to test the reasonableness of our DCF results. The 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 are derived from the weighted average cost of capital of a group of comparable companies, considering the size and specific risks of each IGT reporting unit.


Our portfolio of other intangibles substantially consists of finite-lived patents, contracts, trademarks, developed technology, 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 in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Our other intangibles totaled $248.9 million at September 30, 2008 and $245.5 million at September 30, 2007.


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 $195.5 million at September 30, 2008 and $104.6 million at September 30, 2007.


Impairment testing for goodwill, other intangibles, 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.


Jackpot Liabilities and Expenses

A portion of our gaming operations recurring revenue arrangements incorporate IGT paid WAP jackpots for which we recognize corresponding jackpot liabilities and expense. Changes in our estimated amounts for jackpot liabilities and associated jackpot expense are attributable to regular analysis and evaluation of the following factors:

ª

variations in slot play (i.e. jackpot life cycles and slot play patterns)

ª

volume (i.e. number of WAP units in service and coin-in per unit)

ª

interest rate movements

ª

the size of base jackpots (i.e. initial amount of the progressive jackpots displayed to players)  

Interest rates applicable to jackpot funding vary by jurisdiction and are impacted by market forces, as well as winner elections to receive a lump sum payment in lieu of periodic annual payments. Current and non-current 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 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.




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Table of Contents



Our jackpot liabilities increased to $650.7 million at September 30, 2008 compared to $643.1 million at September 30, 2007. Jackpot expense totaled $160.0 million for fiscal 2008, $164.7 million for fiscal 2007, and $184.9 million in fiscal 2006. The decline in jackpot expense for fiscal 2008 resulted from lower volume and variations in slot play partially offset by unfavorable interest rate movements. Fluctuations between fiscal 2007 and 2006 resulted from variations in slot play, fewer WAP units in service, and interest rate movements.


BUSINESS SEGMENT RESULTS, later in this MDA, discusses 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 increase in inventories to $218.3 million at September 30, 2008 from $144.8 million at September 30, 2007 was primarily related to a build-up in support of the recent release of our 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.


Deferred income taxes reflect temporary differences between the book and tax basis of our assets and liabilities, measured at tax rates expected to apply when taxes are actually paid or recovered. This process involves estimating our current tax position in each jurisdiction, as well as making judgments as to whether our taxable income in future periods will be sufficient to fully realize any deferred tax assets. We reduce deferred tax assets by a valuation allowance when it is more likely than not that some or all of the deferred tax assets will not be realized. 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. Net deferred tax assets totaled $251.3 million at September 30, 2008 and $208.8 million at September 30, 2007.


In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, during the first quarter of fiscal 2008. This pronouncement provides guidance for recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. Under FIN 48, we may recognize a tax benefit from an uncertain position if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of 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. We consider many factors when evaluating and estimating our tax positions and related benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Our income tax provision may be impacted to the extent that the final outcome of these tax positions differs from amounts recorded. As of September 30, 2008, our net unrecognized tax benefits totaled $87.5 million, $53.4 million of which would impact the effective tax rate if recognized.


The implementation of FIN 48 as of the beginning of fiscal 2008 increased our unrecognized tax benefits and related interest and penalties by $89.9 million, increased deferred tax assets by $55.4 million, and decreased retained earnings by $34.5 million. See Notes 1 and 17 of our Consolidated Financial Statements for additional information about FIN 48 and the impact of adoption.




24



Table of Contents


CONSOLIDATED OPERATING RESULTS – A Year Over Year Comparative Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Favorable (Unfavorable)

 

 

 

2008

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions except units & EPS; pp = percentage point)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,528.6

 

 

$

2,621.4

 

 

$

2,511.7

 

 

$

(92.8

)

 

 

-4

%

 

$

109.7

 

 

4

%

Gaming operations

 

 

1,337.9

 

 

 

1,361.2

 

 

 

1,251.4

 

 

 

(23.3

)

 

 

-2

%

 

 

109.8

 

 

9

%

Product sales

 

 

1,190.7

 

 

 

1,260.2

 

 

 

1,260.3

 

 

 

(69.5

)

 

 

-6

%

 

 

(0.1

)

 

––

 

Machines

 

 

794.8

 

 

 

876.0

 

 

 

896.8

 

 

 

(81.2

)

 

 

-9

%

 

 

(20.8

)

 

-2

%

Non-machine

 

 

395.9

 

 

 

384.2

 

 

 

363.5

 

 

 

11.7

 

 

 

3

%

 

 

20.7

 

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

1,419.1

 

 

$

1,480.8

 

 

$

1,371.7

 

 

$

(61.7

)

 

 

-4

%

 

$

109.1

 

 

8

%

Gaming operations

 

 

778.1

 

 

 

823.0

 

 

 

730.0

 

 

 

(44.9

)

 

 

-5

%

 

 

93.0

 

 

13

%

Product sales

 

 

641.0

 

 

 

657.8

 

 

 

641.7

 

 

 

(16.8

)

 

 

-3

%

 

 

16.1

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

56

%

 

 

56

%

 

 

55

%

 

-

 pp

 

 

––

 

 

1

 pp

 

2

%

Gaming operations

 

 

58

%

 

 

60

%

 

 

58

%

 

(2

)pp

 

 

-3

%

 

2

 pp

 

3

%

Product sales

 

 

54

%

 

 

52

%

 

 

51

%

 

2

 pp

 

 

4

%

 

1

 pp

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming operations installed base (1)

 

 

60,500

 

 

 

60,100

 

 

 

51,200

 

 

 

400

 

 

 

1

%

 

 

8,900

 

 

17

%

Fixed

 

 

15,700

 

 

 

14,500

 

 

 

12,000

 

 

 

1,200

 

 

 

8

%

 

 

2,500

 

 

21

%

Variable

 

 

44,800

 

 

 

45,600

 

 

 

39,200

 

 

 

(800

)

 

 

-2

%

 

 

6,400

 

 

16

%

Machines sold

 

 

72,700

 

 

 

105,900

 

 

 

112,000

 

 

 

(33,200

)

 

 

-31

%

 

 

(6,100

)

 

-5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

659.3

 

 

$

800.3

 

 

$

725.1

 

 

$

(141.0

)

 

 

-18

%

 

$

75.2

 

 

10

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

 

26

%

 

 

31

%

 

 

29

%

 

(5

 )pp

 

 

-16

%

 

2

 pp

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

342.5

 

 

$

508.2

 

 

$

473.6

 

 

$

(165.7

)

 

 

-33

%

 

$

34.6

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

1.10

 

 

$

1.51

 

 

$

1.34

 

 

$

(0.41

)

 

 

-27

%

 

$

0.17

 

 

13

%


———————

(1) Installed base has been revised to reflect additional international units previously excluded based on a change in management's installed base criteria, increasing fiscal years 2008 and 2007 by 900 units and fiscal 2006 by 1,600 units. Gaming operations revenues and gross profit were not affected by this adjustment.


Fiscal 2008 vs Fiscal 2007

Consolidated net income decreased during the current year compared to fiscal 2007 on lower gaming operations play levels amid unfavorable economic conditions and continued weakness in North America replacement sales demand. Comparability was also significantly affected by:

ª

favorable foreign currency exchange rates’ impact on revenues of $43.9 million

ª

write-downs of investments in unconsolidated affiliates totaling $28.6 million

ª

interest rate declines unfavorably impacting jackpot expense by $25.3 million

ª

prior year gains totaling $22.8 million from hurricane insurance settlements and an airplane sale


Consolidated Gaming Operations

Revenues were down compared to the prior year primarily due to lower play levels in North America. Additionally, our installed base growth is increasingly from stand-alone lease and CDS units which generally provide lower revenues and gross profit per unit compared to WAP units. International revenue and gross profit improvements partially offset declines in North America reflecting the increasing geographic footprint of our gaming operations.


In addition, gross profit and margin were adversely affected by unfavorable interest rate impacts on jackpot expense totaling $25.3 million and technological obsolescence charges of $10.4 million related to the transition toward new products, as well as the prior year hurricane property insurance gain of $5.0 million.


Consolidated Product Sales

Total product sales revenues and gross profit were down from the prior year 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. IGT increased systems installations from the prior year by 100, with over 820 systems installed worldwide as of September 30, 2008. Product sales margins are expected to continue to fluctuate depending on the geographic mix and types of products sold.




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Table of Contents


Fiscal 2007 vs Fiscal 2006

Consolidated total revenue and gross profit improvements for fiscal 2007 were predominantly due to growth in gaming operations. Fiscal 2007 revenues included a favorable foreign currency exchange rate impact of $23.0 million. Total gross profit also benefited from a more favorable product sales mix. Total gross margin increases were the combined result of a greater mix of gaming operations, as well as margin improvements in gaming operations and product sales discussed below.


Significant items affecting comparability included:

ª

fiscal 2007 gains of $17.0 million from our Gulf Coast hurricane insurance settlement and $5.8 million from the sale of a company airplane

ª

fiscal 2006 R&D charges of $11.3 million related to the buyout of a third-party development contract


Consolidated Gaming Operations

Improved revenues and gross profit were primarily the result of growth in our installed base of recurring revenue machines. The most significant year-over-year unit growth was in Mexico, Oklahoma, Florida, and New York.


Gross margin improvements were mainly due to shifts in the composition of our installed base toward a lesser share of WAP units, reduced jackpot expense due to variations in slot play, and a growing population of stand-alone lease and CDS units. Due to the absence of jackpot expense, stand-alone and CDS units contributed to higher margins despite generally lower revenues and gross profit per unit.


Consolidated Product Sales

Total product sales revenues were comparable to fiscal 2006 with North America declines offset by international sales growth, primarily in Japan. Gross profit and margin improvement was due to a greater mix of higher margin non-machine revenues, mostly from machine systems sales which increased 14% over the prior year.

Operating Expenses

  

 

 

 

 

 

 

 

 

 

 

Favorable (Unfavorable)

 

  

 

2008

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

$

460.1

 

 

$

397.9

 

 

$

375.5

 

 

$

(62.2

)

 

 

-16

%

 

$

(22.4

)

 

 

-6

%

Research and development

 

 

223.0

 

 

 

202.2

 

 

 

188.5

 

 

 

(20.8

)

 

 

-10

%

 

 

(13.7

)

 

 

-7

%

Depreciation and amortization

 

 

76.7

 

 

 

80.4

 

 

 

82.6

 

 

 

3.7

 

 

 

5

%

 

 

2.2

 

 

 

3

%

Total

 

$

759.8

 

 

$

680.5

 

 

$

646.6

 

 

$

(79.3

)

 

 

-12

%

 

$

(33.9

)

 

 

-5

%

Percent of revenues

 

 

30

%

 

 

26

%

 

 

26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Fiscal 2008 vs Fiscal 2007

Fiscal 2008 SG&A increases were attributable to current year increases in:

ª

bad debt provisions of $15.0 million related to credit concerns on certain receivables

ª

staffing cost increases of $10.1 million

ª

higher legal and compliance fees of $9.9 million


In addition, comparability of current year SG&A was negatively affected by the fiscal 2007 gains of $12.0 million from Gulf Coast hurricane business interruption insurance settlement and $5.8 million from the sale of a company airplane. Our investment in R&D increased in fiscal 2008 primarily due to additional staffing costs of $17.0 million related to our continuing development of new technology and products, especially recent networked gaming initiatives.


We are conducting a company-wide strategic review to maximize efficiency and align our operating expenses with our current and forecasted business outlook. As part of this effort, we expect to reduce our workforce and begin to realize lower operating expenses in the second quarter of fiscal 2009. As a result of the staffing reductions we expect to incur additional charges ranging from $16.0 million to $21.0 million during the first quarter of fiscal 2009.




26



Table of Contents



Fiscal 2007 vs Fiscal 2006

Fiscal 2007 SG&A increases over fiscal 2006 were attributable to additional staffing costs of $32.8 million in support of business growth initiatives and higher professional fees of $15.0 million, largely related to IP protection and regulatory compliance.


These increases in SG&A were offset by:

ª

Gulf Coast hurricane business interruption insurance gains of $12.0 million

ª

favorable bad debt provisions of $6.0 million due to improving trends in receivables quality and collections

ª

a $5.8 million gain on the sale of a company airplane


R&D increased in fiscal 2007 primarily due to additional staffing costs of $19.0 million and higher costs for licensing and parts related to our continuing development of new technology and products. Fiscal 2006 included a charge of $11.3 million related to the buyout of a development contract, which partially offset the 2007 increases.


Other Income (Expense) and Taxes

  

 

 

 

 

 

 

 

 

 

 

 

Favorable (Unfavorable) 

 

  

 

2008

 

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions; * = not meaningful) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

67.4

 

 

 

$

82.0

 

 

$

65.4

 

 

$

(14.6

)

 

 

-18

%

 

$

16.6

 

 

 

25

%

WAP

 

 

32.2

 

 

 

 

37.1

 

 

 

28.8

 

 

 

(4.9

)

 

 

-13

%

 

 

8.3

 

 

 

29

%

Other

 

 

35.2

 

 

 

 

44.9

 

 

 

36.6

 

 

 

(9.7

)

 

 

-22

%

 

 

8.3

 

 

 

23

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

(100.1

)

 

 

 

(77.6

)

 

 

(50.8

)

 

 

(22.5

)

 

 

-29

%

 

 

(26.8

)

 

 

-53

%

WAP

 

 

(28.6

)

 

 

 

(31.3

)

 

 

(23.2

)

 

 

2.7

 

 

 

9

%

 

 

(8.1

)

 

 

-35

%

Other

 

 

(71.5

)

 

 

 

(46.3

)

 

 

(27.6

)

 

 

(25.2

)

 

 

-54

%

 

 

(18.7

)

 

 

-68

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

(35.8

)

 

 

 

0.1

 

 

 

7.2

 

 

 

(35.9

)

 

 

*

 

 

 

(7.1

)

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

$

(68.5

)

 

 

$

4.5

 

 

$

21.8

 

 

$

(73.0

)

 

 

*

 

 

$

(17.3

)

 

 

*

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

$

248.3

 

 

 

$

296.6

 

 

$

273.3

 

 

$

48.3

 

 

 

 

 

 

$

(23.3

)

 

 

 

 

Tax rate

 

 

42.0

%

 

 

 

36.9

%

 

 

36.6

%

 

 

(5.2

)

 

pp

 

 

 

(0.3

)

 

pp

 


WAP interest income and expense related to previous jackpot winners accrete at approximately the same rate. WAP interest income also includes earnings on restricted cash and investments held for future winners.


The fluctuation in total other income (expense) for the current year was primarily attributable to:

ª

$28.6 million related to write-downs of our investments in CLS and PGIC

ª

higher interest expense resulting from increased borrowings under our credit facility

ª

reduced interest income due to lower investment balances and interest rates


Fluctuations in our tax rate were partially due to changes in the geographical mix of annual taxable income. The increase in our 2008 tax rate was also impacted by the adoption of FIN 48 and the inability to report a tax benefit for the write-downs on our CLS and PGIC investments. While our future effective tax rates may continue to be volatile due to changes in uncertain tax positions, we anticipate our 2009 tax rate will be lower than the 2008 rate primarily due to the closure of the 2000 and 2001 IRS audits in the first quarter of fiscal 2009, as well as the retroactive extension of the R&D tax credit. See Note 17 of our Consolidated Financial Statements for additional information about FIN 48 and Note 2 of our Consolidated Financial Statements for additional information about the CLS and PGIC investments.


The fiscal 2007 decrease in other income was primarily attributable to higher interest costs on our 2.6% Debentures issued in December 2006 and increased line of credit borrowings, partially offset by higher interest income on receivables and investments. Our NJ WAP VIE trusts also contributed to fluctuations in interest income and interest expense, causing increases in fiscal 2007 due to reconsolidation following the deconsolidation in fiscal 2006. Note 2 of our Consolidated Financial Statements provides further information on these trusts.




27



Table of Contents


BUSINESS SEGMENT RESULTS – A Year Over Year Comparative Analysis

Operating income for each division reflects applicable operating expenses. See Note 18 of our Consolidated Financial Statements for additional business segment information.


North America

  

 

 

 

 

 

 

 

 

 

 

Favorable (Unfavorable)

 

 

 

 

  

 

2008

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions except units)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,912.4

 

 

$

2,021.7

 

 

$

1,978.2

 

 

$

(109.3

)

 

 

-5

%

 

$

43.5

 

 

 

2

%

Gaming operations

 

 

1,180.8

 

 

 

1,235.0

 

 

 

1,173.8

 

 

 

(54.2

)

 

 

-4

%

 

 

61.2

 

 

 

5

%

Product sales

 

 

731.6

 

 

 

786.7

 

 

 

804.4

 

 

 

(55.1

)

 

 

-7

%

 

 

(17.7

)

 

 

-2

%

Machines

 

 

432.2

 

 

 

491.6

 

 

 

521.2

 

 

 

(59.4

)

 

 

-12

%

 

 

(29.6

)

 

 

-6

%

Non-machine

 

 

299.4

 

 

 

295.1

 

 

 

283.2

 

 

 

4.3

 

 

 

1

%

 

 

11.9

 

 

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

1,083.4

 

 

$

1,172.5

 

 

$

1,122.3

 

 

$

(89.1

)

 

 

-8

%

 

$

50.2

 

 

 

4

%

Gaming operations

 

 

688.7

 

 

 

740.7

 

 

 

681.1

 

 

 

(52.0

)

 

 

-7

%

 

 

59.6

 

 

 

9

%

Product sales

 

 

394.7

 

 

 

431.8

 

 

 

441.2

 

 

 

(37.1

)

 

 

-9

%

 

 

(9.4

)

 

 

-2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

57

%

 

 

58

%

 

 

57

%

 

(1) pp

 

 

 

-2

%

 

1 pp

 

 

 

2

%

Gaming operations

 

 

58

%

 

 

60

%

 

 

58

%

 

(2) pp

 

 

 

-3

%

 

2 pp

 

 

 

3

%

Product sales

 

 

54

%

 

 

55

%

 

 

55

%

 

(1) pp

 

 

 

-2

%

 

- pp

 

 

 

––

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming operations installed base

 

 

47,300

 

 

 

49,000

 

 

 

42,600

 

 

 

(1,700

)

 

 

-3

%

 

 

6,400

 

 

 

15

%

Fixed

 

 

6,800

 

 

 

6,500

 

 

 

5,400

 

 

 

300

 

 

 

5

%

 

 

1,100

 

 

 

20

%

Variable

 

 

40,500

 

 

 

42,500

 

 

 

37,200

 

 

 

(2,000

)

 

 

-5

%

 

 

5,300

 

 

 

14

%

Machines sold

 

 

35,000

 

 

 

43,000

 

 

 

51,100

 

 

 

(8,000

)

 

 

-19

%

 

 

(8,100

)

 

 

-16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

614.5

 

 

$

769.7

 

 

$

744.3

 

 

$

(155.2

)

 

 

-20

%

 

$

25.4

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating margin

 

 

32

%

 

 

38

%

 

 

38

%

 

(6) pp

 

 

 

-16

%

 

- pp

 

 

 

––

 


Fiscal 2008 vs Fiscal 2007

North America operating results during the current year were unfavorably affected by lower gaming operations play levels and interest rate declines in the midst of the current economic downturn, as well as continued softness in replacement demand. Operating income was also down compared to the prior year periods due to higher operating expenses as previously discussed.


North America Gaming Operations

Gaming operations revenues and gross profit declined from the prior year periods due to lower play levels, as well as the continued shift in our installed base. Declines in our installed base related to reductions in the Florida and California Class II markets as they transitioned to Class III for-sale games were partially offset by increases in Alabama.


With approximately 85% of our installed base made up of variable fee units, a significant portion of our revenues fluctuate directly with casino play levels. Thus, the declines in gaming revenue reported for most US jurisdictions adversely affected our gaming operations during the year. In addition, our increasing mix of stand-alone lease and CDS units compared to WAP units also contributed to the decline in revenues. These non-WAP units generally provide lower revenues and gross profit mainly because they carry no IGT sponsored jackpots.


Gaming operations gross profit and margin also declined due to the impact of lower interest rates on jackpot expense, technological obsolescence charges of $5.3 million, and the prior year gain of $5.0 million from hurricane property insurance.


Jackpot expense was negatively impacted compared to fiscal 2007 by $25.3 million due to declining interest rates. Interest rates declined throughout fiscal 2008, 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




28



Table of Contents


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 last year.


See MDA—CRITICAL ACCOUNTING ESTIMATES—Jackpot Liabilities and Expenses for additional details regarding the factors affecting jackpot expense.

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 reflect an increase in the mix of our premium-priced AVP®, which partially offset the effect of fewer units sold compared to the prior year. The decline in gross margin is primarily attributable to the increased share of AVP® machines which provide higher gross profit, but lower margins.


The continued decline in unit shipments is mainly attributable to low replacement demand. The current economic conditions in North America have exacerbated the slump in demand as declining gaming revenues have caused gaming operators to defer capital spending on replacement machines, as well as new or expanded properties. New unit shipments were 19,000 during fiscal 2008 compared to 20,500 in the prior year. Replacement sales consisted of 16,000 units during the current year compared to 22,500 in fiscal 2007.


Fiscal 2007 vs Fiscal 2006

North America operating results improved in fiscal 2007 mainly due to growth in the installed base of recurring revenue games, offsetting fewer machine sales.


North America Gaming Operations

Improvements in North America gaming operations revenues and gross profit were primarily the result of installed base growth. The most significant incremental placements occurred in Oklahoma, Florida, and New York.


Gaming operations gross margins in North America also improved during fiscal 2007 due to lower WAP jackpot expense and changes in the installed base mix toward more non-WAP units. Although these non-WAP units typically provide lower revenues and gross profit per unit, they provided higher margins due to the absence of jackpot expense. Jackpot expense decreased $20.2 million due to a decline of $23.9 million in slot play variations and to a lesser extent fewer WAP units. These decreases were partially offset by interest rate movements. Gross profit and margin during fiscal 2007 also benefited from the $5.0 million hurricane property insurance gain.


North America Product Sales

Product sales declined in fiscal 2007 as a result of fewer unit sales, partially offset by higher pricing, including AVP® machines, and a greater mix of higher margin non-machine sales. The product mix included higher contributions from our AVP® models, as well as increased gaming systems and license fees. Lower unit sales resulted mainly from reduced demand following the cashless replacement cycle coupled with the anticipation of new technology offerings related to server-based gaming. Shipments included replacement units of 22,500 in fiscal 2007 versus 36,200 units in fiscal 2006, and 20,500 new units in fiscal 2007 compared to 14,900 in the prior year.




29



Table of Contents


International

  

 

 

 

 

 

 

 

 

 

 

Favorable (Unfavorable)

 

  

 

2008

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions except units) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

616.2

 

 

$

599.7

 

 

$

533.5

 

 

$

16.5

 

 

 

3

%

 

$

66.2

 

 

 

12

%

Gaming operations

 

 

157.1

 

 

 

126.2

 

 

 

77.6

 

 

 

30.9

 

 

 

24

%

 

 

48.6

 

 

 

63

%

Product sales

 

 

459.1

 

 

 

473.5

 

 

 

455.9

 

 

 

(14.4

)

 

 

-3

%

 

 

17.6

 

 

 

4

%

Machines

 

 

362.6

 

 

 

384.4

 

 

 

375.6

 

 

 

(21.8

)

 

 

-6

%

 

 

8.8

 

 

 

2

%

Non-machine

 

 

96.5

 

 

 

89.1

 

 

 

80.3

 

 

 

7.4

 

 

 

8

%

 

 

8.8

 

 

 

11

%

Gross profit

 

$

335.7

 

 

$

308.3

 

 

$

249.4

 

 

$

27.4

 

 

 

9

%

 

$

58.9

 

 

 

24

%

Gaming operations

 

 

89.4

 

 

 

82.3

 

 

 

48.9

 

 

 

7.1

 

 

 

9

%

 

 

33.4

 

 

 

68

%

Product sales

 

 

246.3

 

 

 

226.0

 

 

 

200.5

 

 

 

20.3

 

 

 

9

%

 

 

25.5

 

 

 

13

%

Gross margin

 

 

54

%

 

 

51

%

 

 

47

%

 

3 pp

 

 

 

6

%

 

4 pp

 

 

 

9

%

Gaming operations

 

 

57

%

 

 

65

%

 

 

63

%

 

(8) pp

 

 

 

-12

%

 

2 pp

 

 

 

3

%

Product sales

 

 

54

%

 

 

48

%

 

 

44

%

 

6 pp

 

 

 

13

%

 

4 pp

 

 

 

9

%

Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gaming operations installed base (1)

 

 

13,200

 

 

 

11,100

 

 

 

8,600

 

 

 

2,100

 

 

 

19

%

 

 

2,500

 

 

 

29

%

Fixed

 

 

8,900

 

 

 

8,000

 

 

 

6,600

 

 

 

900

 

 

 

11

%

 

 

1,400

 

 

 

21

%

Variable

 

 

4,300

 

 

 

3,100

 

 

 

2,000

 

 

 

1,200

 

 

 

39

%

 

 

1,100

 

 

 

55

%

Machines sold

 

 

37,700

 

 

 

62,900

 

 

 

60,900

 

 

 

(25,200

)

 

 

-40

%

 

 

2,000

 

 

 

3

%

Operating income

 

$

167.6

 

 

$

159.8

 

 

$

111.2

 

 

$

7.8

 

 

 

5

%

 

$

48.6

 

 

 

44

%

Operating margin

 

 

27

%

 

 

27

%

 

 

21

%

 

- pp

 

 

 

––

 

 

6 pp

 

 

 

29

%

———————

(1) Installed base has been revised to reflect additional units previously excluded based on a change in management's installed base criteria, increasing fiscal years 2008 and 2007 by 900 units and fiscal 2006 by 1,600 units. Gaming operations revenues and gross profit were not affected by this adjustment.


Fiscal 2008 vs Fiscal 2007

International operating results improved during fiscal 2008 as favorable foreign currency rates, continued growth in gaming operations and a favorable mix of product sales offset declines in sales to Japan and the UK. Current year revenues benefited $34.4 million from favorable foreign currency exchange rates. Total gross margin increased as improvements in product sales outweighed gaming operations declines. Operating income for the current year also included higher operating expenses, primarily bad debt provisions.


Improvements in gaming operations revenues and gross profit during the current year were mainly due to increased internet gaming and other non-installed base revenues, including leased equipment, casino-owned units and Japan rentals. Improved performance in Latin America and a higher average installed base also contributed to increased revenues. Installed base growth was mainly in the UK and included 800 units from the fourth quarter acquisition of Cyberview. Fiscal 2008 gaming operations gross profit and margins were negatively impacted by $5.1 million in technological obsolescence charges; gross margin was also down due to the additional contribution from new, lower-margin internet gaming products, Japan rentals and a shift to lower-margin units in the UK.


Product sales revenues were down during the current year due to fewer unit shipments, primarily in Japan. During fiscal 2008, we realized improvements in product sales gross profit compared to the prior year as our higher-priced, higher-margin jurisdictions more than offset declines from the lower-priced, lower-margin markets of Japan and the UK. Additionally, non-machine sales increased compared to fiscal 2007 with increased sales of parts and systems. Margin improvement was attributable mainly to the favorable mix of non-machine sales, as well as fewer low margin units sold in Japan.


Fiscal 2007 vs Fiscal 2006

International division improvements during fiscal 2007 were due to growth in gaming operations, as well as product sales. Fiscal 2007 revenues included a favorable foreign currency exchange rate impact of $21.1 million.


Higher gaming operations revenues and gross profit resulted from a higher international installed base of recurring revenue games. Year-over-year placement increases were most significant in Mexico, with an installed base of 7,500 CDS units at September 30, 2007 compared to 5,100 at September 30, 2006.




30



Table of Contents


Growth in fiscal 2007 product sales revenues and gross profit was primarily due to additional machines sold in Japan and Asia, as well as increased systems sales and conversions, partially offset by fewer UK machine sales. We sold an additional 16,000 machines in Japan related to the market transition to Reg-5 gaming, which was required by September 30, 2007. Gross profit also improved due to reduced costs, most significantly in Europe.


Product sales gross margin during fiscal 2007 improved because of increased contributions from higher yielding markets, mostly Europe, offsetting lower margin sales in Japan.


LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

At September 30, 2008, our principal sources of liquidity were cash and equivalents (including restricted cash), cash from operations, and the $1.2 billion available on our Senior Credit Facility. Other sources of capital include, but are not limited to, the issuance of public or private placement debt, foreign credit facilities and the issuance of equity securities. However, due to current unfavorable conditions in the credit and capital markets, there can be no assurance that these additional sources of capital will be available to us on terms that are acceptable to us or at all. Based on past performance and current expectations, we believe the combination of these resources will satisfy our working capital needs, jackpot liabilities, capital expenditures, and other liquidity requirements associated with our existing operations for the foreseeable future.


Restricted cash and investments, as well as jackpot annuity investments, are amounts available only for funding jackpot winner payments.  As of September 30, 2008, we have sufficient cash and investments, inclusive of restricted amounts, to satisfy our jackpot liabilities. Unrestricted cash and equivalents and marketable securities are summarized below.

  

 

 

 

 

 

 

 

Increase

 

September 30,

 

2008

 

 

2007

 

 

(Decrease)

 

(In millions)

 

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

266.4

 

 

$

261.3

 

 

$

5.1

 

Short-term investment securities

 

 

––

 

 

 

51.3

 

 

 

(51.3

)

Total

 

$

266.4

 

 

$

312.6

 

 

$

(46.2

)


The decrease in total unrestricted cash and investments at September 30, 2008 was primarily related to increased restricted cash needs and the reclassification of our remaining ARS investments to non-current.


At September 30, 2008, we held long-term investment securities totaling $19.6 million which consisted of AAA rated ARS, collateralized by student loans guaranteed by the US government. As a result of auction failures in early 2008, these investments are not currently trading and have no readily determinable market value. There has been no interruption in interest receipts on these investments and we have the ability to hold them until the market recovers. Additionally, in November 2008, we accepted ARS Rights offered by our broker entitling us to sell our ARS at par plus accrued interest during the exercise period from June 30, 2010 through July 2, 2012. Based on our assessment of fair value, we have recorded a temporary impairment of $2.0 million to other comprehensive income. See Note 6 of our Consolidated Financial Statements for additional information about our ARS.


Working capital increased to $733.4 million at September 30, 2008 from $595.5 million at September 30, 2007, primarily due to an increase in inventory related to our newly released machine models and additional current deferred tax assets.


Cash Flows Summary

  

 

 

 

 

 

 

 

 

 

 

Favorable (Unfavorable)

 

  

 

2008

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

$

486.5

 

 

$

821.5

 

 

$

624.1

 

 

$

(335.0

)

 

$

197.4

 

Investing

 

 

(365.7

)

 

 

(296.7

)

 

 

(234.0

)

 

 

(69.0

)

 

 

(62.7

)

Financing

 

 

(115.2

)

 

 

(556.5

)

 

 

(386.9

)

 

 

441.3

 

 

 

(169.6

)

Effects of exchange rates

 

 

(0.5

)

 

 

(1.6

)

 

 

2.5

 

 

 

1.1

 

 

 

(4.1

)

Net Change

 

$

5.1

 

 

$

(33.3

)

 

$

5.7

 

 

$

38.4

 

 

$

(39.0

)




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Table of Contents


Operating Cash Flows

Reduced operating cash flows during fiscal 2008 compared to fiscal 2007 were primarily the result of lower net income, increased inventories, additional prepayments of $80.0 million to secure long-term licensing rights, and increases in receivables.


The increase in inventory resulted in a $83.0 million reduction to operating cash flows during fiscal 2008. Inventory turns for the trailing twelve months ended September 30, 2008 decreased to 2.5 versus 4.2 at September 30, 2007, impacted mostly by inventory build-up related to the release of newer and more costly platforms and cabinets.


The increase in operating receivables resulted in a reduction to fiscal 2008 operating cash flows of $76.8 million. Average days sales outstanding for the trailing twelve months at September 30, 2008 increased to 98 days from 79 days in fiscal 2007, primarily due to the issuance of additional long-term customer contracts and loan financing.


Fiscal 2007 operating cash flows improved over fiscal 2006 primarily due to lower pre-payments for licensing rights and reduced inventory levels, as well as improved net income.


Cash flows related to jackpot liabilities fluctuate based on the timing of jackpots and winner payments, volume of play, and market variations in applicable interest rates as described in Note 1 of our Consolidated Financial Statements.


Investing Cash Flows

During fiscal 2008, we liquidated our restricted ARS and converted the proceeds into restricted cash resulting in higher cash used for investing activities. Cash used for investing also increased during the current year due to lower proceeds from the sale of investment securities, partially offset by a decline in capital expenditures.


Reduced capital expenditures, summarized below, during fiscal 2008 were primarily attributable to the completion of our Las Vegas campus construction project and the purchase of a corporate airplane in fiscal 2007. Higher capital expenditures in fiscal 2007 compared to fiscal 2006 were related to the Las Vegas campus construction and the corporate airplane purchase.


  

 

 

 

 

 

 

 

 

 

 

Increase (Decrease)

 

Capital Expenditures

 

2008

 

 

2007

 

 

2006

 

 

08 vs 07

 

 

07 vs 06

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

$

92.5

 

 

$

134.1

 

 

$

83.1

 

 

$

(41.6

)

 

$

51.0

 

Gaming operations equipment

 

 

190.6

 

 

 

194.4

 

 

 

202.9

 

 

 

(3.8

)

 

 

(8.5

)

Intellectual property

 

 

15.1

 

 

 

15.8

 

 

 

24.5

 

 

 

(0.7

)

 

 

(8.7

)

Total capital expenditures

 

$

298.2

 

 

$

344.3

 

 

$

310.5

 

 

$

(46.1

)

 

$

33.8

 


During the year, we made significant investments in gaming technologies with payments of:

ª

$71.9 million, net of cash acquired, to purchase substantially all of the assets and licensing rights to certain IP of Cyberview, a UK based provider of server-based downloadable gaming systems

ª

$29.0 million for debt or equity interests in PGIC and WDG

ª

$9.4 million, net of cash acquired, to purchase the UK based mobile gaming firm Million-2-1


Investing cash used in fiscal 2007 included investments in CLS of $105.6 million, as well as the business acquisitions of DigiDeal for $18.8 million and VCAT for $18.4 million, net of cash acquired. Fiscal 2006 included an equity investment of $56.0 million in WDG.


Financing Cash Flows

The reduction in cash used for financing during the current year was primarily due to less cash used for share repurchases compared to fiscal 2007, as well as greater net debt proceeds with increased line of credit borrowings on our senior credit facility.


Increased net cash used for financing activities in fiscal 2007 was primarily due to additional share repurchases compared to fiscal 2006. Fiscal 2006 included proceeds from the cash settlement of a SSR prepaid in fiscal 2005. Net proceeds from our convertible debt refinancing and senior credit facility borrowings partially offset additional share repurchases in fiscal 2007.




32



Table of Contents


Share Repurchases

We repurchase IGT common stock to return value to shareholders and reduce outstanding share dilution. We use open market or privately negotiated transactions, such as accelerated share repurchases and structured share repurchases, or Rule 10b5-1 trading plans, depending on market conditions and other factors to achieve timing, cost, and volume objectives.


Common Stock Repurchases

 

2008

 

 

2007

 

 

2006

 

(In millions)

 

 

 

 

 

 

 

 

 

Shares

 

 

25.5

 

 

 

28.2

 

 

 

11.7

 

Aggregate cost

 

$

779.7

 

 

$

1,118.5

 

 

$

426.7

 


Due to the current instability of global credit markets, our future share repurchase levels will be balanced with maintaining sufficient liquidity to provide flexibility in this volatile environment. Our remaining repurchase authorization totaled 7.7 million shares as of November 24, 2008.


Credit Facilities and Indebtedness (See Note 11 of our Consolidated Financial Statements)

During fiscal 2008, we increased the outstanding balance on our revolving lines of credit by $754.8 million, largely for the purpose of repurchasing IGT common stock. Borrowings on our credit facilities totaled $1.4 billion at September 30, 2008 with additional availability of $1.2 billion on our senior credit facility, which expires in December 2010, and $63.8 million on foreign credit facilities.


On December 20, 2006, we issued $900.0 million principal amount of 2.6% Convertible Debentures due 2036. The debentures pay interest semi-annually in June and December. Due to the holders’ put right to require IGT to redeem the Debentures on December 15, 2009, they will be reclassified to current liabilities in the first quarter of fiscal 2009.


Given current market conditions and the recent trading price of our common stock, we believe it is likely that holders will exercise this put right and we may be required to redeem the outstanding Debentures during the first quarter of fiscal 2010. We believe our cash on hand, operating cash flows and remaining capacity on our senior credit facility will provide the necessary capital if we are required to redeem the Debentures. In addition, we believe our credit rating, balance sheet, and operations should facilitate our ability to access additional capital through the credit markets, if needed. Our ability to access, if needed, the credit markets on terms acceptable or at all will be subject to market conditions existing at that time.


We may use open market, privately negotiated, or structured transactions to repurchase our 2.6% Debentures depending on market conditions and other factors. Between September 30, 2008 and November 24, 2008, we repurchased 70,600 outstanding Debentures with a $1,000 par value.


On December 26, 2006, we called our outstanding 1.75% Debentures for redemption. The call gave holders the right to convert their Debentures before January 10, 2007 and receive aggregate consideration comprised of shares and cash under the terms of the applicable indentures. In conjunction with the redemption and related conversions, we paid holders $612.7 million and issued 7.3 million shares in fiscal 2007.


Financial Condition

  

 

 

 

 

 

 

 

Increase

 

September 30,

 

2008

 

 

2007

 

 

(Decrease)

 

(In millions)

 

 

 

 

 

 

 

 

 

Assets

 

$

4,557.4

 

 

$

4,167.5

 

 

$

389.9

 

Liabilities

 

 

3,648.4

 

 

 

2,714.8

 

 

 

933.6