International Game Technology is a global gaming company specializing in the design, manufacture, and marketing of electronic gaming equipment and systems products. As a leading supplier of gaming products to the world, we maintain a wide array of entertainment-inspired gaming product lines and target gaming markets in all legal jurisdictions worldwide. IGT is committed to providing quality gaming products at competitive prices, designed to help the operator realize superior value and performance by serving players better.
International Game Technology was incorporated in Nevada in December 1980 to acquire the gaming licensee and operating entity, IGT, and to facilitate our initial public offering. Principally serving the US gaming markets when founded, we expanded into jurisdictions outside the US in 1986. In addition to our main US production facilities in Nevada, we manufacture gaming products in the UK and through third-party manufacturers in Japan and China.
We currently maintain sales offices in various gaming jurisdictions around the world. In addition to our operations in the US and Canada, we have operating centers in the following international locations:
Our fiscal year is reported on a 52/53-week period that ends on the Saturday nearest to September 30 each year. Similarly, our quarters end on the Saturday nearest to the last day of the quarter end month. For simplicity, this report presents all fiscal periods using the calendar month end as outlined in the table below. The results of operations for fiscal 2009 include 53 weeks versus 52 weeks in fiscal 2008 and 2007.
We derive our revenues from the distribution of electronic gaming equipment, systems, services and licensing. Operating results reviewed by our chief decision maker encompass all revenue sources within each geographical customer region. We currently view our business in two operating segments, each incorporating all types of revenues.
ªNorth America consists of our operations in the US and Canada, comprising 77% of consolidated revenues in fiscal 2009, 76% in 2008, and 77% in 2007.
ªInternational encompasses our efforts in all other jurisdictions worldwide, comprising 23% of consolidated revenues in fiscal 2009, 24% in 2008, and 23% in 2007.
We measure segment profit on the basis of operating income. Certain income and expenses related to company-wide initiatives are managed at the corporate level and not allocated to an operating segment.
Management’s Discussion and Analysis of Financial Condition and Results of Operations: OVERVIEW
The following MDA is intended to enhance the reader’s understanding of our operations and current business environment. MDA is provided as a supplement to, and should be read in conjunction with, our Item 1, Business, and Item 8, Financial Statements and Supplementary Data.
International Game Technology is a global company specializing in the design, manufacture, and marketing of electronic gaming equipment and systems products. We are a leading supplier of gaming products to the world with annual revenues exceeding $2.1 billion. We provide a diverse offering of quality products and services at competitive prices, designed to increase the potential for operator profits by enhancing the gaming player experience.
We manage operations in two geographic segments, North America and International, with certain unallocated company-wide income and expenses managed at the corporate level.
We are currently operating in a challenging global business environment. The combination of economic uncertainty, lower replacement demand, limited opportunities from new or expanding markets, and improved competition has negatively impacted our results. Our customers continue to report subdued casino play levels largely attributed to the extended economic slowdown that has driven lower casino visitation trends over the last eighteen months. This not only adversely affects our gaming operations revenues, with nearly 85% dependent on play levels, but it also constrains casino capital spending which affects our for-sale product demand.
Our gaming operations revenue yields stabilized during the second half of fiscal 2009, which we view as a positive leading indicator for economic recovery and improved play levels. Our installed base continues to provide steady recurring cash flows and we anticipate increased revenue yields as economic conditions improve.
Our new AVP® sbX™-enabled models, released in late fiscal 2008, continue to receive broad acceptance and comprised 86% of our North America sales in fiscal 2009. Customer appeal has also been positive on our innovative MLD® machines that provide flexibility between video slots and 3-D reel replication, with over 4,000 MLD® units shipped in fiscal 2009. While we are encouraged by incremental improvement in operator sentiment, we remain cautious about the overall market environment, as well as predicting the timing and scale of a rebound in the replacement cycle.
Strategically, we are renewing our focus on what we believe we do well. For many years, IGT has been an industry leader in gaming content across a global footprint and content is what has traditionally distinguished us from the competition. In today’s gaming market we face highly capable competitors, demanding gaming patrons, and increasing game complexity. Such a market requires constant enhancements, innovations, and improvements to the quality of game content across all product platforms, particularly in video slots. Excellent content drives product sales, increases our opportunities in the replacement cycle, and grows our installed base.
During the latter half of fiscal 2009 we implemented specific efforts to enhance our content offerings, expedite delivery to market, and improve the effectiveness of our R&D efforts. We restructured our strategic product efforts into a more focused vertical product management structure dedicated to developing and deploying game content using our pool of game design resources and IP portfolio. We believe this new vertical structure will allow us to better manage the economic contribution from the various product types and drive accountability to those tasked with delivering product to the market. Additionally, during fiscal 2009, we implemented a consumer research group designed to aggregate and analyze patron level data in order to provide the R&D process with real time market information, making the patron the focus of our development efforts.
We remain focused on strategic long-term initiatives that we believe will maintain our status as a leading provider of innovative gaming products and provide multiple platforms for delivery of our content. We released our sbX™ Tier One package for sale with several customer installations in the latter part of fiscal 2009. Tier One provides slot operators with an incremental step towards full enterprise-wide sbX™. It is designed for easy implementation on a smaller-scale slot-bank level basis, accommodating up to 100 games and providing operators with access to a standard library of available IGT game themes for AVP® Video, Video Poker and MLD®.
Additionally, in July 2009, we began a first-of-its-kind sbX™ field trial installation with sbX™ Media Manager and introducing the sbX™ Service Window. The Service Window represents a shift away from secondary displays and provides a more powerful mechanism for delivering compelling applications to the game screen that will enhance the player experience. We remain on target to begin venue wide installation in the first half of fiscal 2010 and expect to realize a growing benefit from sbX™ technology as we differentiate IGT gaming products with new ways to engage and interact with players.
We are dependent, in part, on new market opportunities to generate growth. Legislative actions and the passage of voter referendums are providing new and expanding opportunities in Illinois, Ohio, Kansas, Maryland, Pennsylvania, Florida and Washington. The market potential is estimated at up to 40,000 machines in Illinois and up to 17,500 machines in Ohio. Development projects in Maryland, Kansas, and Pennsylvania received approval and licensing in fiscal 2009, and openings are planned over the next two years. State legislatures in Kentucky, Massachusetts, New Hampshire, Alabama, North Carolina and Texas continue to consider gaming as a way to provide tax revenues in support of public programs. Future gaming expansion is also anticipated in international markets, especially Southeast Asia and Italy. Although the extent and timing is uncertain, we believe new market opportunities will grow as the economy improves and new jurisdictions consider gaming tax revenues as a means to address budget shortfalls.
We continue to take a prudent and cautious approach to our capital deployment in order to preserve maximum flexibility. During fiscal 2009, we successfully refinanced our debt to maintain sufficient liquidity with extended and staggered maturities. We continue to focus on reinvesting in our business through our gaming operations installed base, as well as strategic investments in affiliates and alliances to expand our geographic reach, product lines, and customer base.
In response to reduced demand, in fiscal 2009 we initiated an ongoing company-wide strategic review of our costs and organizational structure to identify opportunities to maximize efficiency and realign expenses with the current and long-term business outlook. Through September 30, 2009, we reduced our global workforce by approximately 16% from September 30, 2008 levels, through a combination of voluntary and involuntary separation arrangements. Fiscal 2009 restructuring charges of $35.0 million included severance and one-time termination costs, reduced by stock compensation forfeitures.
Our fiscal 2009 cost rationalization efforts were executed through workforce reductions and other non-wage cost controls. We estimate the full benefit of these initiatives will be realized throughout fiscal 2010, resulting in approximately $135.0 million of annual cost savings compared to fiscal 2008 fourth quarter spending levels. A portion of the savings is offset by costs added from our PGIC acquisition completed in January 2009.
As we continue the process of evaluating our business in conjunction with assessment of the company’s long-term strategic goals, we may also further evaluate past and potential investments to determine if and how they fit into our organizational structure going forward. Changes in our intended relationship, as well as changes in market conditions or operating results, related to our affiliates or subsidiaries may cause us to reassess cash flows, recoverability, useful lives, and fair value measurements that may result in material losses or impairment charges.
As of September 30, 2009, we employed 5,100 individuals worldwide, consisting of 4,000 in North America and 1,100 internationally. In response to reduced demand, we have been conducting an ongoing company-wide strategic review of our costs and organizational structure for opportunities to maximize efficiency and align our expenses with our current and long-term business outlook. As a result of restructuring efforts during fiscal 2009, we reduced our global workforce by approximately 16% from September 30, 2008 levels through a combination of voluntary and involuntary separation arrangements.
IGT’s principal corporate executive offices are located at:
9295 Prototype Drive
Reno, Nevada 89521
All reporting information filed with or furnished to the SEC is available free of charge through the Investor Relations link on our website at www.IGT.com as soon as reasonably practicable after we electronically file or furnish such information to the SEC. Our corporate governance guidelines and charters for our Audit, Compensation, and Nominating and Corporate Governance Committees are also available on our website. This information will be mailed in print form free of charge to any shareholder upon request.