20-F 1 a16-7442_120f.htm 20-F

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015

 

 

OR

 

 

o

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

 

 

OR

 

 

o

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

 

Commission file number 001-36906

 

INTERNATIONAL GAME TECHNOLOGY PLC

(Exact name of Registrant as specified in its charter)

 

England and Wales

(Jurisdiction of incorporation or organization)

 

66 Seymour Street, 2nd Floor
London W1H 5BT
United Kingdom

(Address of principal executive offices)

 

Neil Abrams

General Counsel

10 Memorial Boulevard

Providence, RI  02903

Telephone:  (401) 392-1000

Fax:  (401) 392-4812

E-mail:  Neil.Abrams@IGT.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

 

 

 

Ordinary Shares, nominal value $0.10

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

200,244,239 ordinary shares, nominal value $0.10 per share.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

x Yes   o No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934. 

o Yes   x No

 

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.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x

 

 International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other o

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow:

o Item 17   or o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

o Yes   o No

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

Presentation of Financial and Certain Other Information

3

 

 

 

Glossary of Terms and Abbreviations

4

 

 

 

PART I

 

6

Item 1.

Identity of Directors, Senior Management and Advisers

6

Item 2.

Offer Statistics and Expected Timetable

6

Item 3.

Key Information

6

Item 4.

Information on the Company

29

Item 4A.

Unresolved Staff Comments

58

Item 5.

Operating and Financial Review and Prospects

58

Item 6.

Directors, Senior Management and Employees

126

Item 7.

Major Shareholders and Related Party Transactions

151

Item 8.

Financial Information

155

Item 9.

The Offer and Listing

156

Item 10.

Additional Information

158

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

178

Item 12.

Description of Securities Other than Equity Securities

181

 

 

 

PART II

 

 

 

 

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

181

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

181

Item 15.

Controls and Procedures

181

Item 16A.

Audit Committee Financial Expert

182

Item 16B.

Code of Ethics

182

Item 16C.

Principal Accountant Fees and Services.

183

Item 16D.

Exemptions from the Listing Standards for Audit Committees

183

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

184

Item 16F.

Changes in Registrant’s Certifying Accountant

184

Item 16G.

Corporate Governance

185

Item 16H.

Mine Safety Disclosure

186

 

 

 

PART III

 

 

 

 

Item 17.

Financial Statements

186

Item 18.

Financial Statements

186

Item 19.

Exhibits

186

 

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PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION

 

International Game Technology PLC, a public limited company organized under the laws of, England and Wales (“IGT PLC”), has its corporate headquarters in London, England, and operating headquarters in Rome, Italy; Providence, Rhode Island; and Las Vegas, Nevada. IGT PLC is the successor to GTECH S.p.A., a società per azioni incorporated under the laws of Italy (“GTECH”), and the sole stockholder of International Game Technology, a Nevada corporation (“IGT”).

 

On April 7, 2015, GTECH acquired IGT through:

 

·                  the merger of GTECH with and into IGT PLC (the “Holdco Merger”), and

·                  the merger of Georgia Worldwide Corporation, a Nevada corporation and a wholly owned subsidiary of IGT PLC (“Sub”) with and into IGT (the “Subsidiary Merger” and, together with the Holdco Merger, the “Mergers”).

 

For additional information on the Mergers, see “Item 4. Information on the Company-A. History and Development of the Company-Acquisition of International Game Technology.”

 

In this annual report on Form 20-F, unless otherwise specified, the terms “we,” “us” and “our,” and the “Company” refer to IGT PLC together with its consolidated subsidiaries or, for periods of or points in time prior to the completion of the Holdco Merger, to GTECH together with its consolidated subsidiaries, or any or more of them, as the context may require.

 

The historical results of operations for IGT PLC reflect the operations of GTECH prior to the completion of the Holdco Merger.

 

This annual report on Form 20-F includes the Consolidated Financial Statements of IGT PLC for the years ended December 31, 2015, 2014 and 2013 (the “Consolidated Financial Statements”) prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) as issued by the Financial Accounting Standards Board (“FASB”).

 

The financial information is presented in US dollars. All references to “U.S. dollars,” “U.S. dollar,” “U.S. $” and “$” refer to the currency of the United States of America (or “U.S.”). All references to “euro” and “€” refer to the currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant to the Treaty on the Functioning of the European Union, as amended.

 

The language of this annual report on Form 20-F is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.

 

Certain totals in the tables included in this annual report on Form 20-F may not add due to rounding.

 

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Glossary of Terms and Abbreviations (as used in this annual report on Form 20-F)

 

Abbreviation/Term

 

Definition

ADM

 

Agenzia delle Dogane e Dei Monopoli

AWPs

 

Amusement with prize machines

B2B

 

Business-to-business

B2C

 

Business-to-consumer

CA 2006

 

Companies Act 2006, as amended

CEO

 

Chief Executive Officer

CFO

 

Chief Financial Officer

Code

 

Internal Revenue Code of 1986, as amended

CONSOB

 

The Italian Stock Exchange Regulatory Agency

COSO

 

Committee of Sponsoring Organizations of the Treadway Commission

CTA

 

Italian Consolidated Tax Act

DoubleDown

 

Double Down Interactive LLC

DTC

 

The Depository Trust Company

DTR

 

Disclosure and Transparency Rules

EBITDA

 

Earnings before interest, taxes, depreciation and amortization

EPS

 

Earnings per share

Exchange Act

 

Securities Exchange Act of 1934, as amended

EY

 

Reconta Ernst & Young S.p.A

FASB

 

Financial Accounting Standards Board

FCPA

 

U.S. Foreign Corrupt Practices Act of 1977, as amended

FMC

 

Facilities Management Contracts

SARs

 

Stock appreciation rights which are not granted in conjunction with a share option

GAAP

 

United States Generally Accepted Accounting Principles

GMS

 

Gaming Management Systems

GTECH

 

GTECH S.p.A

HMRC

 

Her Majesty’s Revenue & Customs of the United Kingdom

IAS

 

International accounting standards

IFRS

 

International financial reporting standards

iGaming

 

Interactive gaming

IGT

 

International Game Technology, a Nevada corporation

IGT PLC

 

International Game Technology PLC or the Company

ITVMs

 

Instant ticket vending machines

LMA

 

Lottery Management Agreements

LN

 

Lotterie Nazionali S.r.l.

LTI

 

Long-term incentive compensation

Mergers

 

The Subsidiary Merger together with the Holdco Merger

Moody’s

 

Moody’s Investor Service

 

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NAGI

 

North America Gaming and Interactive

NYSE

 

New York Stock Exchange

PCAOB

 

Public Company Accounting Oversight Board (United States)

PFICs

 

Passive Foreign Investment Companies

PMA

 

Private management agreement

PSC

 

Product Sales Contracts

PwC Entities

 

PricewaterhouseCoopers LLP, as well as all of the foreign entities belonging to its network

PwC Italy

 

PricewaterhouseCoopers S.p.A.

PwC US

 

PricewaterhouseCoopers LLP

R&D

 

Research and development

RFP

 

Request for proposal

S&P

 

Standard & Poor’s Ratings Services

SARs

 

Share appreciation rights

SEC

 

United States Securities and Exchange Commission

SOG

 

Stock Ownership Guidelines

SSTs

 

Self-Service Terminals

STI

 

Short-term incentive compensation

Subsidiary Merger

 

The merger of Georgia Worldwide Corporation, a wholly owned subsidiary of IGT PLC, with and into IGT

Tandem SARs

 

SARs which are granted in conjunction with a share option

10eLotto

 

A game of chance in Italy

TITO

 

Ticket-In-Ticket-Out

U.K.

 

United Kingdom

U.S.

 

United States of America

VLTs

 

Video lottery terminals

VSOE

 

Vendor specific objective evidence

WAP

 

Wide area progressive

WLA

 

North America World Lottery Association

 

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PART I

 

Item 1.         Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.         Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.         Key Information

 

A.            Selected Financial Data

 

The following tables set forth summary historical consolidated financial and other information of IGT PLC for the periods indicated, and have been derived from the Consolidated Financial Statements of the Company for the years ended December 31, 2015, 2014 and 2013, included in “Item 18. Financial Statements.”

 

The following information should be read in conjunction with:

 

·                  “Presentation of Financial and Certain Other Information,”

·                  “Item 3.D. Risk Factors,”

·                  “Item 5 - Operating and Financial Review,” and the Consolidated Financial Statements included in “Item 18. Financial Statements.”

 

Consolidated Income Statement Data

 

 

 

For the years ended December 31,

 

($ thousands, except share amounts)

 

2015

 

2014

 

2013

 

Total revenue

 

4,689,056

 

3,812,311

 

3,829,634

 

Operating income

 

539,956

 

715,051

 

683,976

 

(Loss) income before provision for income taxes

 

(17,031

)

340,217

 

459,437

 

Net (loss) income

 

(55,927

)

99,804

 

233,482

 

Attributable to:

 

 

 

 

 

 

 

IGT PLC

 

(75,574

)

86,162

 

201,605

 

Non-controlling interests

 

19,647

 

13,642

 

31,877

 

(Loss) income attributable to IGT PLC per common share - basic

 

(0.39

)

0.50

 

1.16

 

(Loss) income attributable to IGT PLC per common share - diluted

 

(0.39

)

0.49

 

1.16

 

Dividends declared per common share ($)

 

0.40

 

1.97

 

0.95

 

 

·                  During the historical periods presented there were no discontinued operations.

·                  Dividends declared in euro in 2014 and 2013 were translated into U.S. dollar at the exchange rates in effect on the dates the dividends were declared.

 

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Consolidated Balance Sheet Data

 

 

 

December 31,

 

($ thousands, except share amounts)

 

2015

 

2014

 

2013

 

Cash and cash equivalents

 

627,484

 

317,106

 

578,008

 

Total assets

 

15,114,692

 

8,435,297

 

9,616,622

 

Debt (a)

 

8,334,173

 

2,959,471

 

3,817,055

 

Total equity

 

3,366,142

 

2,947,720

 

3,367,307

 

Attributable to IGT PLC

 

3,017,648

 

2,569,837

 

2,815,381

 

Attributable to Non-controlling interests

 

348,494

 

377,883

 

551,926

 

Common stock

 

20,024

 

217,171

 

215,836

 

Common shares issued

 

200,244,239

 

174,976,029

 

173,992,168

 

 


(a) Debt is comprised of long-term debt, including current portion and short-term borrowings.

 

Selected financial data for the earliest two years of the five-year period has been omitted as such information cannot be provided without unreasonable effort and expense as the Company converted from International Financial Reporting Standards to US GAAP in 2015.

 

B.                                    Capitalization and Indebtedness

 

Not applicable.

 

C.                                    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.                                    Risk Factors

 

The following risks should be considered in conjunction with “Item 5. Operating and Financial Review and Prospects” and the other risks described in the Safe Harbor Statement. These risks may affect our operating results and, individually or in the aggregate, could cause our actual results to differ materially from past and anticipated future results. The following discussion of risks may contain forward-looking statements which are intended to be covered by the Safe Harbor Statement. Except as may be required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. We invite you to consult any further related disclosures we make from time to time in materials filed with or furnished to the United States Securities and Exchange Commission (“SEC”).

 

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IGT PLC is exposed to risks associated with the performance of the global economy, the Eurozone debt crisis and the prevailing economic conditions in the markets in which it operates, including Italy.

 

IGT PLC is exposed to risks associated with the performance of the global economy and the markets in which it operates. IGT PLC’s income and results of operations have been influenced, and will continue to be influenced, to a certain degree, by the general state and performance of the global economy. The volatility of the financial markets shows that there can be no assurance that any recovery is sustainable or that there will be no recurrence of the global financial and economic crisis or similar adverse market conditions.

 

IGT PLC’s business is particularly sensitive to reductions in discretionary consumer spending in the markets in which it operates, which may be affected by general economic conditions in these markets. Economic contraction, economic uncertainty and the perception by IGT PLC’s customers of weak or weakening economic conditions may cause a decline in demand for entertainment in the forms of the gaming services that IGT PLC offers. In addition, changes in discretionary consumer spending or consumer preferences could be driven by factors such as an unstable job market, perceived or actual disposable consumer income and wealth, or fears of war and future acts of terrorism.

 

In particular, the lack of resolution of the sovereign debt crisis of several countries of the Eurozone, including Greece, Italy, Cyprus, Ireland, Spain and Portugal, together with the risk of contagion to other—more stable—countries, particularly France and Germany, has raised a number of uncertainties regarding the stability and overall standing of the European Monetary Union. Concerns that the Eurozone sovereign debt crisis could worsen may lead to the reintroduction of national currencies in one or more Eurozone countries or, in particularly dire circumstances, the abandonment of the euro. The departure or risk of departure from the euro by one or more Eurozone countries and/or the abandonment of the euro as a currency could have major negative effects on both existing contractual relations and the fulfillment of obligations by IGT PLC and/or its customers, which could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

A decline in the relative health of the gaming industry and any difficulty or inability of our customers to obtain adequate levels of capital to finance their ongoing operations may reduce their resources available to purchase our products and services or affect our ability to collect outstanding receivables, which adversely affects our revenues. If we experience a significant unexpected decrease in demand for our products, we could also be required to increase our inventory obsolescence and other asset impairment charges.

 

Furthermore, an extended economic downturn could impact the ability of our customers to make timely payments to us which could adversely affect our results of operations. We may incur additional provisions for bad debt related to credit concerns on certain receivables, including in connection with customer financing we provide.

 

A significant portion of IGT PLC’s total consolidated revenues is derived from government concessions in Italy including the Lotto and instant lottery concessions.

 

A substantial portion of IGT PLC’s revenues, equal to approximately 33.6% of its total consolidated revenues for the year ended December 31, 2015, is derived from exclusive and non-exclusive concessions awarded to IGT PLC by Agenzia delle Dogane e Dei Monopoli (“ADM”), the governmental authority responsible for regulating and supervising gaming in Italy. In particular, a substantial portion of IGT PLC’s revenues is derived from two exclusive concessions, one for the operation of the Lotto game (the “Lotto Concession”) and one for instant tickets (equal to approximately 10.5% and 6.2%, respectively, of its total consolidated revenues for the year ended December 31, 2015). The Lotto Concession and the instant ticket majority-owned concession have been, respectively, awarded by ADM to IGT PLC and its subsidiary, Lotterie Nazionali S.r.l. IGT PLC expects that the Lotto Concession will expire on June 8, 2016, while the instant ticket concession will expire on September 30, 2019.

 

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We expect that a significant portion of our business and profitability will continue to depend upon the concessions awarded to us by ADM and other Italian governmental entities. Therefore, a material reduction in IGT PLC’s revenues from these concessions, including as a result of an early termination or non-renewal of these concessions following their expiration, could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

One specific case of non-renewal might be triggered as a result of the impediment for IGT PLC to participate in future tenders, in the event that (i) the UK as its home member state left the European Union without maintaining parity rights for its resident companies vs. the EU resident companies, (ii) the relevant RFPs require candidates and the relevant holding companies to be EU resident, and (iii) the Italian-based controlling shareholder De Agostini were to dismiss control of IGT PLC or not qualify as a holding company for purposes of the RFP.

 

The expected termination of the Lotto Concession on June 7, 2016 was determined by an arbitral ruling in favor of IGT PLC on August 1, 2005 and confirmed by the Supreme Court of Cassation on February 3, 2014. The final expiration date of the Lotto Concession is subject to dispute by ADM, which argues that the Lotto Concession should have expired on April 17, 2012, and an appeal lodged by Stanley International Betting Limited (“Stanley”) is still pending. The outcome of the aforementioned dispute and appeal could have a material adverse effect on IGT PLC’s business, results of operations and financial condition.

 

Despite several prior arbitral awards and judicial decisions in IGT PLC’s favor, ADM or other governmental or judicial authorities nonetheless may continue to seek monetary or other relief from IGT PLC in respect of these four disputed years of concession, potentially through additional legal, administrative or criminal action, investigations or proceedings. An adverse finding or settlement could result in significant damages or other payments or sanctions (including, under certain circumstances, revocation of existing concessions or sanctions under Italian Legislative Decree No. 231 of June 8, 2001). It is uncertain what effect, if any, the ongoing dispute regarding the expiration of the Lotto Concession will have on IGT PLC’s ability to reacquire the Lotto Concession.

 

IGT PLC relies on time-limited government concessions to conduct a significant portion of its business activities, particularly in Italy. Termination or non-renewal of the Lotto Concession, instant lottery or machine gaming concessions in Italy, or renewal on different terms, could have a material adverse effect on IGT PLC’s revenues.

 

IGT PLC is required to obtain and maintain licenses from various jurisdictions in order to operate its business, including the Lotto Concession, instant lottery concession, and machine gaming concession in Italy. Upon the expiration of IGT PLC’s concessions, new concessions may be awarded to one or more parties through a competitive bidding process open to parties other than IGT PLC or its subsidiaries. In addition, concessions may be terminated prior to their expiration dates upon the occurrence of certain events of default affecting IGT PLC or its subsidiaries or if their continuation is determined under applicable principles of law to be against the public interest.

 

Our current Lotto Concession in Italy is scheduled to expire on June 7, 2016. In December 2015, the Italian government issued a request for proposal (“RFP”) to award a new Lotto Concession. In March 2016, IGT PLC, as leader of a consortium of strategic and financial partners, submitted a bid on the new Lotto Concession. In April 2016, the ADM announced that the consortium has been provisionally awarded the new Lotto Concession. Although the consortium is the sole bidder, IGT PLC cannot be certain of the results of the tender, including whether the consortium, of which IGT PLC is the principal operating partner, will be finally awarded the new concession.

 

The instant ticket concession in Italy is scheduled to expire on September 30, 2019. The instant ticket concession is, in theory, renewable; however, we believe that an RFP may be issued under a different law, with new rules, for a new concession. Under the new rules, the RFP may result in a non-exclusive concession (i.e., more than one bidder may be awarded the concession), and award of the concession may entail payment of a lump sum.

 

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As with the above concessions, the non-exclusive concession for the operation of video lottery terminals (“VLTs”) and amusement with prize machines (“AWPs”) in Italy held by our subsidiary Lottomatica Videolot Rete S.p.A., as well as the betting concessions that expire in June 2016 held by our subsidiary Lottomatica Scommesse S.r.l., may also be subject to the same possibilities. Finally, the conditions for any new concession will be established by law and included in the rules of the new concession.

 

There can be no assurance that IGT PLC will be able to renew any of its existing concessions, and the loss, denial, non-renewal or renewal on different terms of any of its concessions could have a material adverse effect on its results of operations, business, financial condition or prospects.

 

There may be risks associated with the consortium arrangement for the new Lotto Concession

 

In March 2016, IGT PLC, through its subsidiary Lottomatica S.p.A. (“Lottomatica”), entered into a consortium of strategic and financial partners to bid on the new Lotto Concession. Under the terms of the consortium agreement, Lottomatica will serve as the principal operating partner to fulfill the requirements of the Lotto license. The consortium submitted its bid for the new Lotto Concession in March 2016. In April 2016, the ADM announced that the consortium has been provisionally awarded the new Lotto Concession, and the final award is expected to be made during the second quarter of 2016. According to the bid procedure and consortium agreement, a joint venture company will be established. Lottomatica will have 61.5% equity ownership, with the remainder of the equity ownership shared among the other three consortium members. Lottomatica will appoint a majority of the joint venture board and will enter into a contract with the joint venture to provide technology products and services for the new Lotto Concession.

 

Unlike the current Lotto Concession for which we are the sole licensee without a consortium, as a result of the consortium arrangement for the new Lotto Concession we will be required to share any profits from the new Lotto Concession with the consortium members. As part of the joint venture arrangement, in the event that the joint venture is profitable in a given year, Lottomatica as principal operating partner will be required to make distributions to the other joint venture members, which will reduce the amount of profits and cash flows we receive from the new Lotto Concession. Consequently, IGT PLC may not achieve the same levels of profitability and cash flows under the new Lotto Concession as IGT PLC has achieved under the current Lotto Concession.

 

Furthermore, if the joint venture members are unable to reach agreement upon certain specified matters or if the joint venture’s cash flows generated in the first year of operation falls below a pre-determined level, one of the joint venture partners, Italian Gaming Holding (“IGH”), may put its entire joint venture interest to Lottomatica and, in certain cases, Lottomatica may exercise a call option to acquire IGH’s entire joint venture interest. In the event IGH exercises the put right (including under the circumstances in which the joint venture’s cash flow falls below a pre-determined level), IGT PLC, through Lottomatica, will take on a greater percentage of the ownership of the joint venture and accordingly a greater amount of the risk related to the joint venture, including in the event that the joint venture does not achieve expected levels of profitability and cash flows under the new Lotto Concession.

 

IGT PLC’s obligation to transfer assets upon the termination of the Lotto Concession and other concessions could have a material adverse effect on IGT PLC’s financial position and results of operations.

 

Upon the termination or non-renewal of the Lotto Concession, the instant lottery or machine gaming concessions, IGT PLC will be required at the request of ADM to transfer to ADM, free of charge, ownership of certain assets that are part of its central system used to operate Lotto, the instant lottery or machine gaming and equipment such as terminals at the points of sale, facilities, software, data files, and any other related assets that may be necessary for the full functioning, operation, and operability of the system itself. As of December 31, 2015, the value of such assets was $35.6 million or approximately 0.24% of IGT PLC’s consolidated total assets and approximately 0.43% without goodwill. The obligation to transfer the Lotto Concession assets may also have detrimental effects on certain other businesses

 

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operated by IGT PLC because IGT PLC uses terminals, central system hardware and software used in the operation of Lotto in connection with certain of its other businesses.

 

IGT PLC’s operations in its North America Lottery and International segments are dependent upon its continued ability to retain and extend its existing contracts and win new contracts.

 

IGT PLC derives a substantial portion of its revenues and cash flow from its portfolio of long-term contracts in the North America Lottery and International segments (equal to approximately 32.1% of its total consolidated revenues for the year ended December 31, 2015), awarded through competitive procurement processes. In addition, IGT PLC’s U.S. lottery contracts typically permit a lottery authority to terminate the contract at any time for failure to perform and for other specified reasons, and many of these contracts in the U.S. permit the lottery authority to terminate the contract at will with limited notice and do not specify the compensation, if any, to which IGT PLC would be entitled were such termination to occur.

 

Further, in the event that IGT PLC is unable or unwilling to perform, some of its lottery contracts permit the lottery authority to acquire title to its system-related equipment and software during the term of the contract or upon the expiration or earlier termination of the contract, in some cases without paying IGT PLC any compensation related to the transfer of that equipment and software to the lottery authority.

 

The termination of or failure to renew or extend one or more of IGT PLC’s lottery contracts, or the renewal or extension of one or more of IGT PLC’s lottery contracts on materially altered terms or the transfer of its assets without compensation could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

IGT PLC is subject to substantial penalties for failure to perform under its concessions and contracts.

 

IGT PLC’s Italian concessions, lottery contracts in the United States and in other jurisdictions and other service contracts often require substantial performance bonds to secure its performance under such contracts and require IGT PLC to pay substantial monetary liquidated damages in the event of non-performance by IGT PLC.

 

As of December 31, 2015, IGT PLC had outstanding performance bonds and letters of credit in an aggregate amount of approximately $1.241 billion. These instruments present a potential for expense for IGT PLC and divert financial resources from other uses.

 

Claims on performance bonds, drawings on letters of credit and payment of liquidated damages could individually or in the aggregate have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

Slow growth or declines in sales of lottery goods and services could lead to lower revenues and cash flows for IGT PLC.

 

In recent years, as the lottery industry has matured in the primary markets where IGT PLC operates, the rate of lottery sales growth has moderated and some of IGT PLC’s customers have from time to time experienced a downward trend in sales. IGT PLC’s dependence on large jackpot games and, specifically, the decline in aggregate sales at similar jackpot levels (“jackpot fatigue”) has had a negative impact on revenue from this game category. These developments may in part reflect increased competition for consumers’ discretionary spending, including from a proliferation of destination gaming venues and an increased availability of Internet gaming opportunities. IGT PLC’s future success will depend, in part, on the success of the lottery industry, as a whole, in attracting and retaining new players in the face of such increased competition in the entertainment and gaming markets (which competition may continue to increase), as well as its own success in developing innovative services, products and distribution methods/systems to achieve this goal. In addition, there is a risk that new products and services may replace existing products and services. The replacement of old products and services with new products

 

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and services may offset the overall growth of sales of IGT PLC. A failure by IGT PLC to achieve these goals could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

IGT PLC faces risks related to the extensive and complex governmental regulation applicable to its operations.

 

IGT PLC’s activities are subject to extensive and complex governmental regulation which varies from time to time and from jurisdiction to jurisdiction where IGT PLC operates, which includes restrictions on advertising, increases in or differing interpretations by authorities on taxation, limitations on the use of cash and anti-money laundering compliance procedures. Any failure by IGT PLC to so comply or its inability to obtain required suitability findings could lead regulatory authorities to seek to restrict IGT PLC’s business in their jurisdictions.

 

In addition, IGT PLC is subject to extensive background investigations in its lottery and gaming businesses. Authorities generally conduct such investigations prior to and after the award of a lottery contract or issuance of a gaming license. Such investigations frequently include individual suitability standards for officers, directors, major shareholders and key employees. Authorities are generally empowered to disqualify IGT PLC from receiving a lottery contract or operating a lottery system as a result of any such investigation. IGT PLC’s failure, or the failure of any of its personnel, systems or machines, in obtaining or retaining a required license or approval in one jurisdiction could negatively impact its ability to obtain or retain required licenses and approvals in other jurisdictions. Any such failure would decrease the geographic areas where IGT PLC may operate and as a result could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

Further, from time to time investigations of various types are conducted by governmental authorities into possible improprieties and wrongdoing in connection with IGT PLC’s efforts to obtain or the awarding of lottery contracts and related matters. Because such investigations frequently are conducted in secret, IGT PLC may not necessarily know of the existence of an investigation in which it might be involved. Because IGT PLC’s reputation for integrity is an important factor in its business dealings with lottery and other governmental agencies, a governmental allegation or a finding of improper conduct by or attributable to IGT PLC in any manner or the prolonged investigation of these matters by governmental or regulatory authorities could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects, including its ability to retain existing contracts or to obtain new or renewed contracts, both in the subject jurisdiction and elsewhere. In addition, adverse publicity resulting from any such proceedings could have a material adverse effect on IGT PLC’s reputation, results of operations, business, financial condition or prospects.

 

IGT PLC is exposed to significant risks in relation to compliance with anti-corruption and corporate criminal laws and regulations and economic sanction programs.

 

Doing business on a worldwide basis requires us to comply with the laws and regulations of various jurisdictions. In particular, our international operations are subject to anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”), the United Kingdom Bribery Act of 2010 (the “Bribery Act”), the Italian Legislative Decree No. 231 of June 8, 2001 and economic sanctions programs, including those administered by the UN, EU and OFAC and regulations set forth under the Comprehensive Iran Accountability Divestment Act. The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. We may deal with both government and state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. The provisions of the Bribery Act extend beyond bribery of foreign public officials and are more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Under the Italian Legislative Decree No. 231 of June 8, 2001, we may be held responsible for certain crimes committed in Italy or abroad (including corruption, fraud against the state, corporate offenses and market abuse) in our interest or for our benefit, by individuals having a functional relationship with us at the time the relevant crime was committed, including third party agents or intermediaries. In such circumstances, we could be

 

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subject to fines, confiscation of profits or legal sanctions, such as termination of authorizations, licenses, concessions and financing agreements, suspension of our operations, or prohibitions on contracting with public authorities.

 

The duration of these disqualifications ranges from a minimum of three months to a maximum of two years, although in very serious cases, some of these disqualifications can be applied permanently. Certain of the above-mentioned legal sanctions may also be applied as interim measures during investigations. As an alternative to the legal sanctions, the court may appoint a judicial custodian to run the company, with the consequence that the profits gained during the receivership period are automatically confiscated. Economic sanctions programs restrict our business dealings with certain sanctioned countries.

 

We are exposed to a risk of violating anti-corruption laws and sanctions regulations applicable in those countries where we, our partners or agents operate. Some of the international locations in which we operate lack a developed legal system and have high levels of corruption. Our continued expansion and worldwide operations, including in developing countries, the development of joint venture relationships worldwide and the employment of local agents in the countries in which we operate increases the risk of violations of anti-corruption laws, OFAC or similar laws.

 

From time to time we may be subject to proceedings and investigations relating to such laws and regulations. Violations of anti-corruption laws and sanctions regulations are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. In addition, any major violations could have a significant impact on our reputation and consequently on our ability to win future business.

 

There can be no assurance that the policies and procedures we have implemented have been or will be followed at all times or will effectively detect and prevent violations of the applicable laws by one or more of our directors, officers, employees, consultants, agents or partners and, as a result, we could be subject to penalties and sanctions, which in turn could have a material adverse effect on our business, results of operations and financial condition.

 

IGT PLC may be subject to an unfavorable outcome with respect to pending regulatory or tax matters or other legal proceedings, which could result in substantial monetary damages or other harm to IGT PLC.

 

IGT PLC is involved in a number of legal, regulatory, tax and arbitration proceedings regarding, among other matters, claims by and against it as well as injunctions by third parties arising out of the ordinary course of its business and is subject to investigations and compliance inquiries related to its ongoing operations. The outcome of these proceedings and similar future proceedings cannot be predicted with certainty. As of December 31, 2015, our total provision for litigation risks was $17.7 million. However, it is difficult to accurately estimate the outcome of any proceeding. As such, the amounts of IGT PLC’s provision for litigation risk could vary significantly from the amounts IGT PLC may be asked to pay and from the amounts IGT PLC would ultimately pay in any such proceeding. In addition, unfavorable resolution of or significant delay in adjudicating such proceedings could require IGT PLC to pay substantial monetary damages or penalties and/or incur costs which may exceed any provision for litigation risks or, under certain circumstances, cause the termination or revocation of the relevant concession, license or authorization and thereby have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

Two of our senior executives (Marco Sala and Renato Ascoli) and one member of our board of directors (Lorenzo Pellicioli) are the subject of an ongoing investigation in Italy by the Rome Public Prosecutor’s office as a result of a 2012 tax audit performed by the Italian tax agency as settled by our predecessor entity GTECH in December 2013. The investigation involves the structuring of the leveraged buyout transaction of GTECH Holdings Corporation in 2006 and subsequent acquisition debt refinancing and whether GTECH’s income was under-reported in Italy for any of the tax years from 2006 to 2013. As required under Italian law, the Company’s legal representative and the signatories of the relevant corporate tax returns are subject to investigation. The relevant tax returns were signed by the three individuals named above. If the Rome Public Prosecutor determines that GTECH’s income was under-reported in one or more tax years, the prosecutor may choose to bring criminal charges in Italy against one or more of these individuals.

 

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Within the context of this investigation, in June 2015 a further tax audit in Italy was initiated that is also focused on the leveraged buyout transaction of GTECH Holdings Corporation in 2006 and subsequent acquisition debt refinancing. In July 2015, the Italian Tax Police issued a tax audit report covering the years 2006 to 2010, alleging that GTECH did not recharge to GTECH Holdings Corporation all interest expenses and other costs incurred in connection with the 2006 transaction and subsequent refinancing. Based on this tax report, in December 2015 the Italian tax agency issued a number of tax assessment notices to the Company covering the years 2006 to 2010 and alleging that additional taxes, penalties and interest for these years totaling €200 million are due. Under Italian law, the Company has 60 days in which to appeal the tax assessment notices. On February 26, 2016 GTECH submitted a voluntary settlement request, which entitles the Company to an automatic 90 day extension. The extension will allow the Tax Agency to re-examine the preliminary conclusions of the Tax Police.  At the end of the 90 day extension period, if the parties do not reach a settlement, GTECH retains its right to appeal the tax assessment before the first degree Tax Court.

 

In April 2016, the Company received a tax audit report from the Italian Tax Police covering the years 2011 to 2014. Based on this report, the additional taxes, penalties and interest associated with the transfer price challenge could be estimated to be approximately €275.0 million for those years. Furthermore, this report contains two additional claims regarding (i) the alleged improper deduction of €140.0 million in value added tax and (ii) under-reported taxable income pursuant to Italy’s controlled foreign corporation regime with specific reference to the Company’s fully controlled subsidiary incorporated in Cyprus. Such Tax Audit Report was delivered to the Public Prosecutor and the Italian Tax Agency for their independent evaluation.

 

An unfavorable outcome to either the tax investigation or the tax audit could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

IGT PLC faces risks in connection with its global operations and operations outside of traditional U.S. jurisdictions.

 

IGT PLC is a global business and derives a substantial portion of its revenues from operations outside of Italy and the United States (20.2% of its total consolidated revenues for the year ended December 31, 2015). IGT PLC also operates in tribal jurisdictions with sovereign immunity which subjects it to certain inherent risks. In addition, certain aspects of IGT PLC’s U.S. business, such as its supply chain, may be impacted by events and conditions internationally. Risks associated with IGT PLC’s global operations include increased governmental regulation of the online lottery and commercial gaming industries in the markets where it operates, exchange controls or other currency restrictions and significant political instability.

 

Other economic risks of doing business globally include:

 

·                  Additional costs of compliance with the laws of international jurisdictions,

·                  Inflation or currency devaluation,

·                  Illiquid or restricted foreign exchange markets,

·                  High interest rates, debt default, or unstable capital markets, and

·                  Restrictions on foreign direct investment.

 

Political risks include:

 

·                  Political instability or change of leadership in government,

·                  Change of governmental policies, laws or regulations,

·                  New foreign exchange controls regulating the flow of money into or out of a country,

·                  Failure of a government to honor existing contracts,

·                  Governmental corruption, and

·                  Political unrest, war or acts of terrorism.

 

Finally, social instability risks include high crime in certain of the countries in which IGT PLC operates due to poor economic and political conditions, riots, unemployment and poor health conditions. These factors may affect IGT PLC’s workforce as well as the general business environment in a country. The materialization of such risks could have a negative impact on IGT PLC’s results of operations, business,

 

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financial condition or prospects.

 

If IGT PLC is unable to protect its intellectual property or prevent its use by third parties, its ability to compete in the market may be harmed.

 

IGT PLC protects its proprietary technology and intellectual property to ensure that its competitors do not use such technology and intellectual property. However, intellectual property laws in Italy, the United States and in other jurisdictions may afford differing and limited protection, may not permit IGT PLC to gain or maintain a competitive advantage, and may not prevent IGT PLC’s competitors from duplicating its products, designing around its patented products, or gaining access to its proprietary information and technology.

 

Although IGT PLC takes measures intended to prevent disclosure of its trade secrets and proprietary know-how through non-disclosure and confidentiality agreements and other contractual restrictions, IGT PLC may not be able to prevent the unauthorized disclosure or use of its technical knowledge or trade secrets. For example, there can be no assurance that consultants, vendors, partners, former employees or current employees will not breach their obligations regarding non-disclosure and restrictions on use. In addition, anyone could seek to challenge, invalidate, circumvent or render unenforceable any IGT PLC patent. IGT PLC cannot provide assurance that any pending or future patent applications it holds will result in an issued patent, or that, if patents are issued, they would necessarily provide meaningful protection against competitors and competitive technologies and/or adequately protect IGT PLC’s then-current products and technologies. IGT PLC may not be able to detect the unauthorized use, or access from breaches of IGT PLC’s cybersecurity efforts, of its intellectual property or take appropriate steps to enforce its intellectual property rights effectively, and certain contractual provisions, including restrictions on use, copying, transfer and disclosure of licensed programs, may be unenforceable under the laws of certain jurisdictions.

 

IGT PLC licenses intellectual property rights from third parties. If such third parties do not properly maintain or enforce the intellectual property rights underlying such licenses, or if such licenses are terminated or expire without being renewed, IGT PLC could lose the right to use the licensed intellectual property, which could adversely affect its competitive position or its ability to commercialize certain of its technologies, products or services.

 

In addition, some of IGT PLC’s most popular games and features are based on trademarks, patents, and other intellectual property licensed from third parties. IGT PLC’s future success may depend upon its ability to obtain, retain and/or expand licenses for popular intellectual property rights with reasonable terms in a competitive market. In the event that IGT PLC cannot renew and/or expand existing licenses, it may be required to discontinue or limit IGT PLC’s use of the games or gaming machines that use the licensed technology or bear the licensed marks.

 

IGT PLC’s success may depend in part on its ability to obtain trademark protection for the names or symbols under which IGT PLC markets its products and to obtain copyright protection and patent protection of IGT PLC’s proprietary technologies, intellectual property and other game innovations. IGT PLC may not be able to build and maintain goodwill in IGT PLC’s trademarks or obtain trademark or patent protection, and there can be no assurance that any trademark, copyright or issued patent will provide competitive advantages for IGT PLC or that IGT PLC’s intellectual properties will not be successfully challenged or circumvented by competitors.

 

IGT PLC intends to enforce its intellectual property rights, and from time to time it may initiate claims against third parties that it believes are infringing its intellectual property rights if it is unable to resolve matters satisfactorily through negotiation. Litigation brought to protect and enforce IGT PLC’s intellectual property rights could be costly, time-consuming and distracting to management and could fail to obtain the results sought and could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

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Third party intellectual property infringement claims against IGT PLC could limit or affect its ability to compete effectively.

 

IGT PLC cannot provide assurance that its products or methods do not infringe the patents or other intellectual property rights of third parties. Infringement and other intellectual property claims and proceedings brought against IGT PLC, whether successful or not, are costly, time-consuming and distracting to management, and could harm IGT PLC’s reputation. In addition, intellectual property litigation or claims could require IGT PLC to do one or more of the following: (1) cease selling or using any of its products that allegedly incorporate the infringed intellectual property, (2) pay substantial damages, (3) obtain a license from the third party owner, which license may not be available on reasonable terms, if at all, (4) rebrand or rename its products, and (5) redesign its products to avoid infringing the intellectual property rights of third parties, which may not be possible and, if possible, could be costly, time-consuming or result in a less effective product. The loss of proprietary technology or a successful claim against IGT PLC could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

Failure to attract, retain and motivate key management and employees may adversely affect our ability to compete.

 

Our success depends largely on recruiting and retaining talented executives and employees.  Our ability to attract and retain key management, product development, finance, marketing, and research and development personnel is directly linked to our continued success. 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 could cause delays in getting new products to market.

 

IGT PLC’s business prospects and future success rely heavily upon the integrity of its employees, directors and agents and the security of its systems.

 

The real and perceived integrity and security of a lottery are critical to its ability to attract players. IGT PLC strives to set exacting standards of personal integrity for its employees and directors, as well as system security for the systems that it provides to its customers, and its reputation in this regard is an important factor in its business dealings with lottery and other governmental agencies. For this reason, an allegation or a finding of improper conduct on IGT PLC’s part, or on the part of one or more of its current or former employees, directors or agents that is attributable to IGT PLC, or an actual or alleged system security defect or failure attributable to IGT PLC, could have a material adverse effect upon IGT PLC’s results of operations, business, financial condition or prospects, including its ability to retain or renew existing contracts or obtain new contracts.

 

IGT PLC may not be able to respond to technological changes or to satisfy future technology demands of its customers, in which case it could fall behind its competitors.

 

Many of IGT PLC’s software and hardware products are based on proprietary technologies. While management believes that certain of IGT PLC’s technologies, such as the IGT PLC Aurora open-architecture software platform, provide an industry standard, if IGT PLC were to fail to enhance its product and service offerings to take advantage of technological developments, it may fall behind its competitors and IGT PLC’s results of operations, business, financial condition or prospects could suffer.

 

IGT PLC has a concentrated customer base in certain business segments and the loss of any of its larger customers (or lower sales from any of these customers) could lead to significantly lower revenue.

 

Revenues from IGT PLC’s top ten customers in its North America Lottery and International segments accounted for approximately 16.8% of its total consolidated revenues for the year ended December 31, 2015. If IGT PLC were to lose any of these larger customers, or if these larger customers experience slow lottery ticket sales and consequently reduced lottery revenue, there could be a material adverse effect on

 

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IGT PLC’s results of operations, business, financial condition or prospects.

 

We face supply chain risks that, if not properly managed, could adversely affect our financial results.

 

IGT PLC purchases most of the parts, components and subassemblies necessary for its lottery and machine gaming terminals and other system components from outside sources. IGT PLC outsources all of the manufacturing and assembly of certain lottery products to a single vendor while other products have portions outsourced to multiple qualified vendors. Although IGT PLC works closely with its manufacturing outsourcing vendor and IGT PLC is likely to be able to realign its manufacturing facilities to manufacture its products itself, IGT PLC’s operating results could be adversely affected if one or more of its manufacturing outsourcing vendors fails to meet production schedules. IGT PLC’s management believes that if a supply contract with one of these vendors were to be terminated or breached, IGT PLC would be able to replace the vendor. However, it may take time to replace the vendor under some circumstances and any replacement parts, components or subassemblies may be more expensive, which could reduce IGT PLC’s margins. Depending on a number of factors, including the level of the related part, component or subassembly in IGT PLC’s inventory, the time it takes to replace a vendor may result in a delay in its implementation for a customer. Generally, if IGT PLC fails to meet its delivery schedules under its contracts, it may be subject to substantial penalties or liquidated damages, or even contract termination, which in turn could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

In addition, the SEC’s conflict minerals rule requires disclosure by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. We may incur significant costs associated with complying with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities.

 

New arrangements with state lotteries in the United States, such as lottery management contracts, may increase the risks to IGT PLC in its dealings with state lotteries, including requiring the guarantee of income, upfront payments or similar arrangements.

 

In the United States, state lotteries are exploring lottery management contracts as a means of maximizing lottery profits. Under certain of these contracts (currently in Indiana and New Jersey), IGT PLC is required to guarantee income levels to the state. In addition, in other states, agreements may require upfront payments for concessions. Arrangements such as the guarantee of income when not achieved, large upfront payments or other similar arrangements may have a material adverse effect on IGT PLC’s results of operation, business, financial condition or prospects.

 

IGT PLC’s business may be adversely affected by competition.

 

The gaming business is highly competitive. IGT PLC faces competition from a number of companies in Italy, the United States and worldwide. Although IGT PLC is making investments, including the acquisition of International Game Technology in April 2015, intended to position it to exploit the opportunities in the machine gaming, interactive gaming and sports betting markets, it expects significant competition in these markets from other companies. Competition could cause IGT PLC to lose players or customers and could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects. The online lottery industry has faced increased competition from the entertainment and gaming industries in recent years, including from a proliferation of destination gaming venues, and an increased availability of gaming opportunities including gaming opportunities on the Internet. In recent years there has been increased competition in the gaming industry and, in some instances, IGT PLC observed extremely aggressive pricing from these competitors in an effort to gain market share. Increased competition and aggressive pricing practices from competitors could adversely affect IGT PLC’s ability to retain business, to win new business and may impact the margin of profitability on

 

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contracts that IGT PLC is successful in retaining or winning. Also, awards of contracts to IGT PLC are, from time to time, challenged by its competitors. Increased competition also may have a material adverse effect on the profitability of contracts which IGT PLC does obtain. Over the past several years, IGT PLC has experienced and may continue to experience a reduction in the percentage of lottery ticket sales that it receives from certain customers resulting from contract rebids, extensions and renewals due to a number of factors, including the substantial growth of lottery sales, reductions in the cost of technology and telecommunications services and general and competitive dynamics.

 

IGT PLC may also be affected by increased competition as a result of consolidation among gaming equipment and technology companies. IGT PLC expects the trend toward consolidation in its global industry to continue as gaming equipment and technology companies attempt to strengthen or expand their market positions in the gaming industry through mergers and acquisitions. Several acquisitions of slot machine and other gaming equipment makers by gaming technology companies have occurred recently, such as the acquisition of Bally Technologies, Inc. by Scientific Games Corporation and the acquisition of Multimedia Games Holding Co. Inc. by Global Cash Access Holdings Inc. IGT PLC believes that industry consolidation such as these acquisitions may result in stronger competitors that are better able to compete by increasing their scale and operating efficiencies. Consolidation may also result in competitors with greater resources which may be directed toward accelerating innovation and product development, resulting in a broader service and product offering. Such changes in the competitive landscape could potentially reduce IGT PLC’s market share and lead to declining sales volumes and prices for its products and services. If any of these risks are realized, IGT PLC’s competitive position and therefore its business, results of operations and financial condition may be materially adversely affected.

 

Competition is intense among gaming and systems providers, including manufacturers of electronic gaming equipment and systems products. Competition is primarily based on the amount of profit IGT PLC’s products generate for its customers, together with cost savings, convenience, and other benefits. Additionally, IGT PLC competes on the basis of price, pricing models, and financing terms made available to customers, the appeal of game content and features to the end player, and the features and functionality of IGT PLC’s hardware and software products. IGT PLC’s competitors range from small, localized companies to large, multi-national corporations, several of which have substantial resources.

 

Competition in the gaming industry has accelerated due to the increasing number of providers, combined with the limited number of operators and jurisdictions in which they operate. In particular, IGT PLC has observed an influx of small gaming equipment manufacturers entering the market over the last few years. In addition, several casinos have recently ceased operations due to unfavorable economic conditions. This combination of a growing number of providers and a limited number of operators has resulted in an increased focus on price to value. To compete effectively, providers must offer innovative products, with increasing features and functionality benefiting the operators along with game content appealing to the end player, at prices and, in certain cases, financing terms that are attractive to operators.

 

Obtaining space and favorable placement on casino gaming floors is also a competitive factor. In addition, the level of competition among equipment providers has increased significantly due to consolidation among casino operators and cutbacks in capital spending by casino operators resulting from the economic downturn and resulting decreased player spend.

 

IGT PLC’s online social gaming and online real-money gaming operations are also subject to intense competition. In particular, the online social casino industry is relatively new and has lower barriers to entry than the land-based casino industry. Several companies have launched social casino offerings, and new competitors are likely to continue to emerge, some of which may be operated by social gaming companies with a larger base of existing users, or by casino operators with more experience in operating a casino. If the products offered through IGT PLC’s online businesses do not maintain their popularity, or fail to grow in a manner that meets IGT PLC’s expectations, IGT PLC’s results of operations and financial condition could be harmed.

 

The gaming and betting industry is highly regulated.

 

The gaming and betting industry is highly regulated. In Italy, this regulation determines, among others, (1) games that may be operated and amounts that may be charged by operators, (2) the prizes for the players, (3) the compensation paid to concessionaires, including IGT PLC, (4) the kinds of points of sale and (5) the applicable tax regulations. Renewing existing and applying for new licenses, concessions, permits and approvals can be costly and time-consuming and there is no assurance of success. Any failure to renew or obtain any such license, concession, permit or approval could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects. Any changes in the legal or regulatory framework or other changes, such as increases in the taxation of gaming or betting, changes in the compensation paid to concessionaires or increases in the number of licenses, authorizations or concessions awarded to competitors of IGT PLC could materially and adversely affect its profitability. For instance, the profitability of the video lottery terminal (“VLT”) sector has declined since 2012, after ADM increased taxation on VLTs from 2% to 4% in January 2012, and then to 5% during 2013 through 2015, and then to 5.5% effective January 1, 2016.

 

In the United States and in many international jurisdictions where IGT PLC currently operates or seeks to do business, lotteries are not permitted unless expressly authorized by law. The successful implementation of IGT PLC’s growth strategy and its business could be materially adversely affected if jurisdictions that do not currently authorize lotteries do not approve new lotteries or if those jurisdictions that currently authorize lotteries do not continue to permit such activities.

 

Once authorized, the ongoing operations of lotteries and lottery operators are typically subject to extensive and evolving regulation. In the United States, in particular, lottery authorities generally conduct an investigation of the winning vendor and its employees prior to and after the award of a lottery contract. Further, lottery authorities may require the removal of any of the vendor’s employees deemed to be unsuitable and are generally empowered to disqualify IGT PLC from receiving a lottery contract or operating a lottery system as a result of any such investigation. Some jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically 5% or more) of IGT PLC’s securities. The failure of these beneficial owners to submit to such background checks and provide required disclosure could jeopardize the award of a lottery contract to IGT PLC or provide grounds for termination of an existing lottery contract. Additional restrictions are often imposed by international jurisdictions upon foreign corporations, such as IGT PLC,

 

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seeking to do business there.

 

Finally, sales generated by lottery games frequently are dependent upon decisions over which IGT PLC has no control made by lottery authorities with respect to the operation of these games, such as matters relating to the marketing and prize payout features of lottery games. Because IGT PLC is typically compensated in whole or in part based on a jurisdiction’s gross lottery sales, lower than anticipated sales due to these factors could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

The illegal gaming market could negatively affect IGT PLC’s business.

 

A significant threat for the entire gaming and betting industry arises from illegal activities. Such illegal activities may drain significant betting volumes away from the regulated industry. In particular, illegal gaming could take away a portion of the present players that are the focus of IGT PLC’s business. The loss of such players could have a material adverse effect on IGT PLC’s results of operations, business, financial condition or prospects.

 

The Company may not realize the cost savings, synergies and other benefits that the Company expects to achieve from the Mergers.

 

The combination of two independent companies is a complex, costly and time-consuming process. As a result, the Company is required to devote significant management attention and resources to integrating the business practices and operations of GTECH and IGT. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, could preclude realization of the full benefits expected by IGT PLC, including the achievement of expected cost savings and revenue synergies. The failure of the Company to meet the challenges involved in successfully integrating the operations of GTECH and IGT or otherwise to realize the anticipated benefits of the Mergers could cause an interruption of the activities of the Company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships, and diversion of management’s attention, and may cause the Company’s stock price to decline. The difficulties of combining the operations of the companies include, among others:

 

·                  managing a significantly larger company;

 

·                  coordinating geographically separate organizations;

 

·                  the potential diversion of management focus and resources from other strategic opportunities and from operational matters;

 

·                  retaining existing customers and attracting new customers;

 

·                  maintaining employee morale and retaining key management and other employees;

 

·                  integrating two unique business cultures, which may prove to be incompatible;

 

·                  the possibility of faulty assumptions underlying expectations regarding the integration process;

 

·                  consolidating corporate and administrative infrastructures and eliminating duplicative operations;

 

·                  issues in integrating information technology, communications and other systems;

 

·                  unanticipated changes in applicable laws and regulations;

 

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·                  managing tax costs or inefficiencies associated with integrating the operations of the Company; and

 

·                  unforeseen expenses or delays associated with the Mergers.

 

Many of these factors are outside of the Company’s control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and energy, which could materially impact the Company’s businesses, financial condition and results of operations. In addition, even if the operations of GTECH and IGT are fully integrated successfully, the Company may not realize the full benefits of the Mergers, including the synergies, cost savings or sales or growth opportunities that the Company expects. These benefits may not be achieved within the anticipated time frame, or at all.

 

Covenants in the Company’s debt agreements may limit its ability to operate its business, and the Company’s breach of such covenants could materially and adversely affect its business, financial condition and results of operations.

 

Certain of the Company’s debt agreements require it to comply with certain covenants, including covenants that limit the Company’s ability to:

 

·                  pay dividends and repurchase shares;

·                  acquire assets of other companies or acquire, merge or consolidate with other companies;

·                  dispose of assets;

·                  extend credit to other persons;

·                  incur indebtedness; and

·                  grant security interests in its assets.

 

The Company’s ability to comply with these covenants may be affected by events beyond its control, such as prevailing economic, financial, regulatory and industry conditions. These covenants may limit its ability to react to market conditions or take advantage of potential business opportunities. Further, a breach of such covenants could, if not cured or waived, result in acceleration of its indebtedness, result in the enforcement of security interests or force the Company into bankruptcy or liquidation, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company’s inability to successfully complete and integrate future acquisitions could limit its future growth or otherwise be disruptive to its ongoing business.

 

From time to time, the Company expects it will pursue acquisitions in support of its strategic goals. In connection with any such acquisitions, the Company could face significant challenges in managing and integrating its expanded or combined operations, including acquired assets, operations and personnel. There can be no assurance that acquisition opportunities will be available on acceptable terms or at all or that IGT PLC will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions. The Company’s ability to succeed in implementing its strategy will depend to some degree upon the ability of its management to identify, complete and successfully integrate commercially viable acquisitions. Acquisition transactions may disrupt the Company’s ongoing business and distract management from other responsibilities.

 

Slow growth in the establishment of new gaming jurisdictions or the number of new casinos, declines in the rate of replacement of existing gaming machines and ownership changes and consolidation in the casino industry could limit or reduce IGT PLC’s future profits.

 

Demand for IGT PLC’s products is driven substantially by the establishment of new land-based and/or online 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

 

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of gaming in any jurisdiction, whether land-based or online, 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. Slow growth in the establishment of new gaming jurisdictions, delays in the opening of new or expanded casinos and declines in, or low levels of demand for, machine replacements could reduce the demand for IGT PLC’s products and IGT PLC’s future profits. Because a substantial portion of IGT PLC’s sales come from repeat customers, its business could be affected if one or more of IGT PLC’s customers consolidates with another entity that utilizes more of the products and services of IGT PLC’s competitors or that reduces spending on IGT PLC’s products or causes downward pricing pressures. Such consolidations could lead to order cancellations, a slowing in the rate of gaming machine replacements, or require IGT PLC’s current customers to switch to IGT PLC’s competitors’ products, any of which could negatively impact IGT PLC’s results of operations.

 

Demand for IGT PLC’s products and the level of play of IGT PLC’s products could be adversely affected by changes in player and operator preferences.

 

As a supplier of gaming machines, IGT PLC must offer themes and products that appeal to gaming operators and players. There is constant pressure to develop and market new game content and technologically innovative products. IGT PLC’s revenues are dependent on the earning power and life span of IGT PLC’s games. IGT PLC therefore faces continuous pressure to design and deploy new and successful game themes to maintain IGT PLC’s revenue and remain competitive. If IGT PLC is unable to anticipate or react in a timely manner to any significant changes in player preferences, such as a negative change in the level of acceptance of IGT PLC’s newest systems innovations or jackpot fatigue (i.e. declining play levels on smaller jackpots), the demand for and level of play of IGT PLC’s gaming products could decline. Further, IGT PLC’s products could suffer a loss of floor space to table games or competitors’ products, or operators may reduce revenue sharing arrangements, each of which would harm IGT PLC’s sales and financial results. In addition, general changes in consumer behavior, such as reduced travel activity or redirection of entertainment spending to other venues, could result in reduced demand and reduced play levels for IGT PLC’s gaming products.

 

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IGT PLC’s success in the competitive gaming industry depends in large part on its ability to develop and manage frequent introductions of innovative products.

 

The gaming industry is characterized by dynamic customer demand and technological advances, both for land-based and online gaming products. As a result, IGT PLC must continually introduce and successfully market new themes and technologies in order to remain competitive and effectively stimulate customer demand. The process of developing new products and systems is inherently complex and uncertain. It requires accurate anticipation of changing customer needs and end-user preferences as well as emerging technological trends. If IGT PLC’s competitors develop new game content and technologically innovative products and IGT PLC fails to keep pace, IGT PLC’s business could be adversely affected. To remain competitive, IGT PLC invests resources towards its research and development efforts to introduce new and innovative games with dynamic features to attract new customers and retain existing customers. If IGT PLC fails to accurately anticipate customer needs and end-user preferences through the development of new products and technologies, IGT PLC could lose business to its competitors, which would adversely affect IGT PLC’s results of operations and financial position.

 

IGT PLC intends to continue investing resources toward its research and development efforts. There is no assurance that IGT PLC’s investments in research and development will lead to successful new technologies or timely new products. IGT PLC invests heavily in product development in various disciplines: platform hardware, platform software, online services, content (game) design and casino software systems. Because IGT PLC’s newer products are generally more technologically sophisticated than those IGT PLC has produced in the past, IGT PLC must continually refine its design, development and delivery capabilities across all channels to meet the needs of IGT PLC’s product innovation. If IGT PLC cannot efficiently adapt its processes and infrastructure to meet the needs of its product innovations, IGT PLC’s business could be negatively impacted.

 

IGT PLC’s customers will accept a new game product only if it is likely to increase operator profits more than competitors’ products. The amount of operator profits primarily depends on consumer play levels, which are influenced by player demand for IGT PLC’s product. There is no certainty that IGT PLC’s new products will attain this market acceptance or that IGT PLC’s competitors will not more effectively anticipate or respond to changing customer preferences. In addition, any delays by IGT PLC in introducing new products could negatively impact IGT PLC’s operating results by providing an opportunity for IGT PLC’s competitors to introduce new products and gain market share ahead of IGT PLC.

 

IGT PLC’s online social gaming casino offering is conducted largely through Facebook, Apple’s iOS platform and Google’s Android platform, and IGT PLC’s business and IGT PLC’s growth prospects would suffer if IGT PLC fails to maintain good relationships with these parties, or if any of these parties were to alter the terms of IGT PLC’s relationship.

 

DoubleDown Casino, which is IGT PLC’s online social gaming casino offering, operates largely through Facebook, Apple’s IOS platform and Google’s Android platform. Consequently, IGT PLC’s operating platform, growth prospects and future revenues from this online offering are dependent on IGT PLC’s continued relationships with Facebook, Apple and Google. While DoubleDown Casino has historically

 

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maintained good relationships with these parties, IGT PLC’s online social gaming casino offering would suffer if IGT PLC is unable to continue these relationships in the future.

 

In addition, IGT PLC’s relationships with Facebook, Apple and Google are not governed by a contract, but rather by each’s standard terms and conditions for application developers. Each of Facebook, Apple and Google modifies these terms and conditions as well as their respective privacy policies from time to time, and any future changes, including any changes required as a result of government regulation, could have a material adverse impact on IGT PLC’s business. For example, if Facebook, Apple or Google were to increase the fees they charge application developers, IGT PLC’s gross profit and operating income would suffer. Additionally, if users were to limit IGT PLC’s ability to use their personal information, if Facebook, Apple or Google were to develop competitive offerings, either on its own or in cooperation with another competitor, or if Facebook, Apple or Google were to alter its operating platform to IGT PLC’s detriment, IGT PLC’s growth prospects would be negatively impacted.

 

IGT PLC’s gaming machines and online gaming operations may experience losses due to technical problems or fraudulent activities.

 

IGT PLC’s success depends on IGT PLC’s ability to avoid, detect, replicate and correct software and hardware anomalies and fraudulent manipulation of its gaming machines, systems, and online offerings. IGT PLC incorporates security features into the design of its gaming machines and other systems, including those features responsible for IGT PLC’s online operations, which are designed to prevent it and its patrons from being defrauded. IGT PLC also monitors its software and hardware to avoid, detect and correct any technical errors. However, there can be no guarantee that IGT PLC’s security features or technical efforts will continue to be effective in the future. If IGT PLC’s security systems fail to prevent fraud or if IGT PLC experiences any significant technical difficulties, its operating results could be adversely affected. Additionally, if third parties breach IGT PLC’s security systems and defraud its patrons, or if IGT PLC’s hardware or software experiences any technical anomalies, the public may lose confidence in IGT PLC’s gaming products and online operations or it could become subject to legal claims by its customers or to investigation by gaming authorities.

 

IGT PLC’s gaming machines and online offerings have experienced anomalies and fraudulent manipulation in the past. Games and gaming machines may be replaced by casinos and other gaming machine operators if they do not perform according to expectations, or may be shut down by regulators. The occurrence of anomalies in, or fraudulent manipulation of, IGT PLC’s games, gaming machines, systems, or online games and systems may give rise to claims for lost revenues and related litigation by IGT PLC’s customers and may subject it to investigation or other action by gaming regulatory authorities, including suspension or revocation of IGT PLC’s gaming licenses, or other disciplinary action.

 

IGT PLC’s online casino offerings are part of a new and evolving industry, which presents significant uncertainty and business risks.

 

Online gaming, including social casino-style gaming, is a relatively new industry that continues to evolve. The success of this industry and IGT PLC’s online business will be affected by future developments in social networks, mobile platforms, legal or regulatory developments (such as the passage of new laws or regulations or the extension of existing laws or regulations to social casino-style gaming activities), taxation of gaming activities, data privacy and cybersecurity laws and regulations, and other factors that IGT PLC is unable to predict, and are beyond IGT PLC’s control. This environment can make it difficult to plan strategically and can provide opportunities for competitors to grow revenues at IGT PLC’s expense. Consequently, IGT PLC’s future operating results relating to its online offerings may be difficult to predict and IGT PLC cannot provide assurance that its online offerings will grow at the rates IGT PLC expects, or be successful in the long term.

 

In addition, IGT PLC uses social media platforms, such as Facebook, YouTube and Twitter, as marketing tools. These platforms allow individuals access to a broad audience of consumers and other interested persons. Negative commentary regarding IGT PLC or the products it sells may be posted on social media platforms and similar devices at any time and may be adverse to IGT PLC’s reputation or business. As

 

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laws and regulations rapidly evolve to govern the use of these platforms and mobile devices, the failure by IGT PLC, its employees or third parties acting at its direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact IGT PLC’s business, financial condition and results of operations or subject it to fines or other penalties.

 

Systems, network or telecommunications failures or cyber-attacks may disrupt IGT PLC’s business and have an adverse effect on its results of operations.

 

Any disruption in IGT PLC’s network or telecommunications services, or those of third parties that IGT PLC utilizes in its operations, could affect IGT PLC’s ability to operate its games or financial systems, which would result in reduced revenues and customer downtime. IGT PLC’s network and databases of business and customer information, including intellectual property, trade secrets, and other proprietary business information and those of third parties IGT PLC utilizes, are susceptible to outages due to fire, floods, power loss, break-ins, cyber-attacks, network penetration, data privacy or security breaches, denial of service attacks, and similar events, including inadvertent dissemination of information due to increased use of social media. Despite the implementation of network security measures and data protection safeguards by IGT PLC and third parties IGT PLC utilizes, including a disaster recovery strategy for back office systems, IGT PLC’s servers and computer resources, and those of third parties IGT PLC utilizes, are vulnerable to viruses, malicious software, hacking, break-ins or theft, third party security breaches, employee error or malfeasance, and other potential compromises. Disruptions from unauthorized access to or tampering with IGT PLC’s computer systems, or those of third parties IGT PLC utilizes, in any such event could result in a wide range of negative outcomes, including devaluation of IGT PLC’s intellectual property, increased expenditures on data security, and costly litigation, each of which could have a material adverse effect on IGT PLC’s business, reputation, operating results and financial condition.

 

A decline in and/or sustained low interest rates causes an increase in IGT PLC’s jackpot expense which could limit or reduce its 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. IGT PLC’s results may continue to be negatively impacted by a continued low interest rate environment or any or further decline in interest rates, resulting in increased jackpot expense and a reduction of IGT PLC’s investment income, which could limit or reduce IGT PLC’s future profits.

 

IGT PLC’s results of operations could be affected by natural events in the locations in which IGT PLC or its customers or suppliers operate.

 

IGT PLC, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and other geological events, including hurricanes, earthquakes, floods, or tsunamis that could disrupt operations. Any serious disruption at any of IGT PLC’s facilities or the facilities of its customers or suppliers due to a natural disaster could have a material adverse effect on IGT PLC’s revenues and increase IGT PLC’s costs and expenses. If there is a natural disaster or other serious disruption at any of IGT PLC’s facilities, it could impair IGT PLC’s ability to adequately supply its customers, cause a significant disruption to its operations, cause it to incur significant costs to relocate or reestablish these functions and negatively impact IGT PLC’s operating results. While IGT PLC insures against certain business interruption risks, such insurance may not adequately compensate IGT PLC for any losses incurred as a result of natural or other disasters. In addition, any natural disaster that results in a prolonged disruption to the operations of IGT PLC’s customers or suppliers may adversely affect IGT PLC’s business, results of operations or financial condition.

 

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Changes in consumer preferences and behavior could affect the popularity of the gaming industry.

 

The popularity and acceptance of gaming is influenced by the prevailing social mores, and changes in social mores could result in reduced acceptance of gaming as a leisure activity. The Company’s future financial success will depend on the appeal of its gaming offerings to its customers and players and the acceptance of gaming generally. If IGT PLC is not able to anticipate and react to changes in consumer preferences and social mores, its competitive and financial position may be adversely affected. In addition, the Company’s future success will also depend on the success of the gaming industry as a whole in attracting and retaining players in the face of increased competition for players’ entertainment spend. Gaming may lose popularity as new leisure activities arise or as other leisure activities become more popular. If the popularity of gaming declines for any reason, IGT PLC’s business, financial condition and results of operations may be adversely affected.

 

Negative perceptions and publicity surrounding the gaming industry could lead to increased gaming regulation.

 

From time to time, the gaming industry is exposed to negative publicity related to gaming behavior, gaming by minors, the presence of gaming machines in too many shops, risks related to online gaming and alleged association with money laundering. Publicity regarding problem gaming and other concerns with the gaming industry, even if not directly connected to IGT PLC, could adversely impact its business, results of operations and financial condition. For example, if the perception develops that the gaming industry is failing to address such concerns adequately, the resulting political pressure may result in the industry becoming subject to increased regulation. Such an increase in regulation could adversely impact our business, results of operations and financial condition.

 

Any decisions to reduce or discontinue paying cash dividends to our shareholders could cause the market price for our ordinary shares to decline.

 

We may modify, suspend or cancel our cash dividend in any manner and at any time. Any reduction or discontinuance by us of the payment of quarterly cash dividends could cause the market price of our ordinary shares to decline. Moreover, in the event our payment of quarterly cash dividends are reduced or discontinued, our failure or inability to resume paying cash dividends at historical levels could cause the market price of our ordinary shares to decline.

 

Recent and future changes to U.S. and foreign tax laws could adversely affect IGT PLC.

 

IGT PLC believes that, under current law, it is treated as a foreign corporation for U.S. federal tax purposes. However, Section 7874 of the Internal Revenue Code provides that a non-U.S. incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes. The U.S. Treasury recently issued temporary regulations that increase the possibility that non-U.S. incorporated entities are treated as U.S. corporations for U.S. federal income tax purposes under Section 7874 of the Internal Revenue Code. These U.S. Treasury Regulations in substantial part implement rules set forth in an I.R.S. notice issued on September 22, 2014, which IGT took into account when considering whether Section 7874 applied to the April 2015 IGT acquisition. Although such U.S. Treasury Regulations have been issued in temporary form, they are effective as issued, and those portions of such regulations that implement the rules set forth in the September 2014 Notice apply in full to transactions, such as the Mergers, completed on or after September 22, 2014. As anticipated by IGT, such U.S. Treasury Regulations likely have the effect of increasing the percentage of IGT PLC shares considered held (for purposes of Section 7874 of the Internal Revenue Code) by former IGT shareholders immediately after the Mergers by reason of holding IGT stock (the “Section 7874 Percentage”), compared to the percentage of IGT PLC shares actually held by the former IGT shareholders immediately after the Mergers by reason of holding IGT stock. Even taking into account these new regulations, IGT believes the Section 7874 Percentage remains less than 60%, and based on IGT’s calculation less than 50%. Therefore, under current law, IGT believes that IGT PLC should not be treated as a U.S. corporation for U.S. federal income tax purposes.

 

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In addition to the recently-issued temporary U.S. Treasury Regulations described above, future changes to the inversion rules in Section 7874 of the Internal Revenue Code or the U.S. Treasury Regulations promulgated thereunder or other guidance from the U.S. IRS could adversely affect IGT PLC’s status as a foreign corporation for U.S. federal tax purposes or otherwise adversely affect IGT PLC for U.S. federal income tax purposes, and any such changes could have prospective or retroactive application to IGT PLC, its shareholders and affiliates. Recent legislative proposals have aimed to expand the scope of U.S. corporate tax residence, and such legislation, if passed, could have an adverse effect on IGT PLC. Other recent legislative proposals would cause IGT PLC and its affiliates to be subject to certain intercompany financing limitations, including with respect to their ability to use certain interest expense deductions.

 

The U.S. Treasury recently issued proposed regulations that would treat certain debt between related parties, generally limited to cross-border debt, as stock for U.S. federal income tax purposes. It is uncertain whether the proposed regulations will be adopted and, if so, in what form. If such proposed regulations are finalized in their current form, they could have an adverse U.S. tax effect on IGT and its affiliates with regard to debts incurred after the date these regulations are finalized. Although the potential future impact on IGT PLC and its affiliates cannot be determined at this time, IGT believes that no currently issued debt between its members will be subject to these new rules.

 

Moreover, the U.S. Congress, the Organization for Economic Co-operation and Development and other government agencies in jurisdictions where IGT PLC and its affiliates do business are focusing on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the United States and other countries in which IGT PLC and its affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect IGT PLC and its affiliates

 

IGT PLC is a company incorporated in the U.K. Current United Kingdom (“U.K.”) law, the decisions of the U.K. courts and the published practice of Her Majesty’s Revenue & Customs, or HMRC, suggest that IGT PLC, a group holding company, is likely to be regarded as being a U.K. resident from incorporation and remaining so if, as IGT PLC intends that, (i) all major meetings of its board of directors and most routine meetings are held in the U.K. with a majority of directors present in the U.K. for those meetings; (ii) at those meetings there are full discussions of, and decisions are made regarding, the key strategic issues affecting IGT PLC and its subsidiaries; (iii) those meetings are properly minuted; (iv) at least some of the most senior employees of IGT PLC, together with supporting staff, are based in the U.K.; and (v) IGT PLC has permanent staffed office premises in the U.K. sufficient to discharge its functions as a holding company.

 

IGT PLC owns subsidiaries incorporated and doing business in Italy. Should Italian withholding taxes be imposed on dividends or distributions with respect to IGT PLC ordinary shares, whether such withholding taxes are creditable against a tax liability to which a shareholder is otherwise subject depends on the laws of such shareholder’s jurisdiction and such shareholder’s particular circumstances. Shareholders are urged to consult their tax advisors in respect of the consequences of the potential imposition of Italian withholding taxes.

 

Voting power with respect to our shares is concentrated in a small number of IGT PLC shareholders, and the loyalty voting structure, when it becomes effective in 2018, may further concentrate and/or sustain voting power in a small number of IGT PLC shareholders and such concentration may increase over time.

 

A relatively large proportion of the voting power of IGT PLC is concentrated in a relatively small number of shareholders who have the ability to exert significant influence over the Company.  As of April 21, 2016, De Agostini S.p.A. and DeA Partecipazioni S.p.A. (collectively, “De Agostini”) had a voting interest in IGT PLC of approximately 51.45%. See “Item 7. Major Shareholders and Related Party Transactions” for additional information.  These holders have the ability to exert significant influence over our business and may make decisions with which other shareholders may disagree, including, among other things,

 

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delaying, discouraging or preventing a change of control of our Company or a potential merger, consolidation, tender offer, takeover or other business combination.

 

The loyalty voting structure set forth in the IGT PLC Articles, when it becomes effective in 2018, may further concentrate and/or sustain voting power in a small number of shareholders.  Under the loyalty voting structure, IGT PLC shareholders that maintain their ownership of IGT PLC ordinary shares continuously for at least three years will be entitled, upon election, to direct the voting rights in respect of one special voting share per ordinary share held for such period, provided that such shareholders meet certain conditions.  If IGT PLC shareholders maintaining ownership of a significant number of IGT PLC ordinary shares for an uninterrupted period of at least three years elect to receive the right to direct the exercise of the voting rights attaching to special voting shares, it is possible that a relatively large proportion of the voting power of IGT PLC could be further concentrated in a relatively small number of shareholders who would have or increase their significant influence over IGT PLC.

 

The loyalty voting structure may prevent or frustrate attempts by IGT PLC shareholders to change IGT PLC’s management and hinder efforts to acquire a controlling interest in IGT PLC, and the IGT PLC ordinary share price may be lower as a result.

 

The provisions of the IGT PLC Articles establishing the loyalty voting structure may make it more difficult for a third party to acquire, or attempt to acquire, control of IGT PLC, even if a change of control were considered favorably by shareholders holding a majority of IGT PLC ordinary shares. As a result of the loyalty voting structure, it is possible that a relatively large proportion of the voting power of IGT PLC could be concentrated in a relatively small number of holders who would have significant influence over IGT PLC. Such shareholders participating in the loyalty voting structure could reduce the likelihood of change of control transactions that may otherwise benefit holders of IGT PLC ordinary shares.

 

The loyalty voting structure may also prevent or discourage shareholders’ initiatives aimed at changes in IGT PLC’s management.

 

Tax consequences of the loyalty voting structure are uncertain.

 

No statutory, judicial or administrative authority has provided public guidance on how the receipt, ownership, or loss of the entitlement to instruct the nominee appointed by IGT PLC (the “Nominee”), which is currently Computershare Company Nominees Limited, on how to vote in respect of special voting shares and, as a result, the tax consequences are uncertain.

 

The fair market value of the IGT PLC special voting shares, which may be relevant to the tax consequences, is a factual determination and is not governed by any guidance that directly addresses such a situation. Because, among other things, (i) the special voting shares are not transferrable (other than in very limited circumstances as provided for in the loyalty voting structure), (ii) on a return of capital of IGT PLC on a winding up or otherwise, the holders of the special voting shares will only be entitled to receive out of IGT PLC assets available for distribution to its shareholders, in aggregate, $1, and (iii) loss of the entitlement to instruct the Nominee on how to vote in respect of special voting shares will occur for nil consideration, IGT PLC believes and intends to take the position that the value of each special voting share is minimal. However, the relevant tax authorities could assert that the value of the special voting shares as determined by IGT PLC is incorrect. The tax treatment of the loyalty voting structure is unclear and shareholders are urged to consult their tax advisors as to the tax consequences of receipt, ownership and loss of the entitlement to instruct the Nominee on how to vote in respect of special voting shares. See “Material United States Federal Income Tax Considerations,” “Material U.K. Tax Considerations” and “Material Italian Tax Considerations” for a further discussion.

 

The Company is exposed to foreign currency exchange risk.

 

The Company transacts business in numerous countries around the world and expects that a significant portion of its business will continue to take place in international markets. IGT PLC prepares its consolidated financial statements in its functional currency (U.S. dollars), while the financial statements of

 

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each of its subsidiaries are prepared in the functional currency of that entity. Accordingly, fluctuations in the exchange rate of the functional currencies of the Company’s foreign currency entities against the functional currency of IGT PLC will impact its results of operations and financial condition. Therefore, it is expected that the Company’s revenues and earnings will continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates, which could have a material adverse effect on IGT PLC’s business, results of operation or financial condition.

 

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Item 4.         Information on the Company

 

A.            History and Development of the Company

 

IGT PLC is incorporated in, and organized as a public limited company under, the laws of England and Wales. IGT PLC’s principal office is located at 66 Seymour Street, 2nd Floor, London W1H 5BT, United Kingdom, telephone number +44 (0) 207 535 3200. The Company’s agent for service in the United States is CSC Services Of Nevada, Inc., 2215-B Renaissance Drive, Las Vegas, NV 89119 (telephone number: +1 518 433 4740) and the company’s registered agent in the U.K. is Elian Corporate Services (UK) Limited (formerly Ogier Corporate Services (UK) Ltd.), whose address is 11 Old Jewry, 6th Floor, London, EC2R 8DU, United Kingdom, and its telephone number is +44 (0) 207 160 5000.

 

IGT PLC was formed as a business combination shell company on July 11, 2014 under the name “Georgia Worldwide Limited.” On September 16, 2014, it changed its legal name to “Georgia Worldwide PLC,” and on February 26, 2015, it changed its legal name to “International Game Technology PLC.” Prior to the Mergers, IGT PLC did not conduct any material activities other than those incident to its formation and the matters contemplated by the Merger Agreement, such as the formation of Georgia Worldwide Corporation, the making of certain required securities law filings and the preparation of the proxy statement/prospectus filed in connection with the Mergers.

 

Acquisition of International Game Technology

 

The Mergers

 

IGT PLC is the successor of GTECH, an Italian corporation (società per azioni), and the parent of IGT, a Nevada corporation.

 

On July 15, 2014, the Company, GTECH, GTECH Corporation (now IGT Global Solutions Corporation) (solely with respect to Section 5.02(a) and Article VIII of the Merger Agreement), Sub and IGT signed the Merger Agreement, which was subsequently amended. On November 4, 2014, the Holdco Merger was approved at an extraordinary general shareholders’ meeting of GTECH, and on February 10, 2015, the Subsidiary Merger was approved at a special shareholders’ meeting of International Game Technology. On April 7, 2015, GTECH merged with and into the Company, and IGT merged with and into Sub, with IGT surviving the Subsidiary Merger, all pursuant to the Merger Agreement. The objective of the Mergers was to combine GTECH’s and IGT’s businesses.

 

In connection with the Holdco Merger, GTECH shareholders received one newly issued ordinary share in IGT PLC (having a nominal value of $0.10 each) for each ordinary share held in GTECH (having a nominal value of €1.00 each). In connection with the Subsidiary Merger, each IGT common share (having a par value of $0.00015625 each) was converted into the right to receive (1) $14.3396 in cash without interest and (2) 0.1819 ordinary shares, nominal value $0.10 per share, of IGT PLC (the “Exchange Ratio”). The final per share merger consideration payable to IGT shareholders was determined pursuant to the process outlined in the Merger Agreement, which included the calculation of the “Gold Share Trading Price” of $20.2379, wherein an average U.S. dollar converted volume-weighted average price for GTECH shares was calculated from ten trading days selected randomly from a 20-trading day window. The total share merger consideration payable to IGT shareholders amounted to €3.3 billion ($3.6 billion) and 45 million IGT PLC shares.

 

In connection with the closing of the Mergers, IGT PLC issued 198,526,804 ordinary shares to GTECH and IGT shareholders on the basis of the established exchange ratios described above. On April 7, 2015, IGT PLC ordinary shares began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “IGT.” For information on our share capital, see “Item 10. Additional Information—B. Memorandum and Articles of Association.”

 

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Settlement of Cash Exit Rights

 

Under Italian law, GTECH shareholders who did not approve the Holdco Merger were entitled to exercise cash exit rights (“diritto di recesso”). On April 2, 2015, the 19,796,852 GTECH shares for which entitled GTECH shareholders exercised cash exit rights in relation to the Holdco Merger were settled at the cash exit price of €19.174 per share. Holders of the 62,607 GTECH cash exit shares that had been purchased in a pre-emptive offer pursuant to Article 2437- quater of the Italian Civil Code received ordinary shares of IGT PLC on the basis of the Exchange Ratio, and an interim dividend equal to €0.75. The residual 19,734,245 cash exit shares were purchased by GTECH pursuant to Article 2437- quater , para. 5, of the Italian Civil Code for a total cash consideration of $407.8 million and cancelled in the Holdco Merger, together with the 2,183,503 treasury shares held at that time by GTECH.

 

Dividend Payments

 

The Company paid interim cash dividends on its ordinary shares during 2015 as follows:

 

 

 

 

 

 

 

 

 

Aggregate

 

Declaration

 

Payment

 

Per Share Amount

 

Payment

 

Date

 

Date

 

$

 

 

(thousands)

 

November 10, 2015

 

December 11, 2015

 

0.20

 

 

39,956

 

August 10, 2015

 

September 10, 2015

 

0.20

 

 

39,913

 

December 17, 2014

 

January 21, 2015

 

0.93

 

0.75

 

129,720

 

 

 

 

 

 

 

 

 

209,589

 

 

Dividends paid in euro in the first quarter of 2015 were translated into U.S. dollars at the exchange rate in effect on the date of payment

 

Other Transactions

 

Effective April 1, 2015, GTECH contributed in-kind its ongoing business related to the Lotto concession to its wholly owned subsidiary Lottomatica S.p.A., by way of increasing Lottomatica S.p.A.’s capital by €378 million. Thereafter, effective April 3, 2015, GTECH contributed in-kind its wholly owned subsidiary Lottomatica S.p.A. to its wholly owned subsidiary Lottomatica Holding S.r.l. by increasing Lottomatica Holding S.r.l.’s capital by €811 million.

 

In April 2015, Invest Games S.A., a wholly owned subsidiary of IGT PLC organized under the laws of the Grand Duchy of Luxembourg, was converted to Invest Games S.á.r.l, a private limited liability company (“Invest Games”). IGT then purchased all of the shares of Invest Games by way of an intercompany loan agreement and promissory note. In September 2015, Invest Games was liquidated.

 

On September 22, 2015 a joint venture agreement was entered into between IGT PLC’s wholly owned subsidiary Lottomatica Videolot S.p.A. and Ancona Time S.r.l., whereby the former would be entitled to 50.35% of the profits of the latter subject to making given cash contributions to the development of its business,

 

Effective October 1, 2015, to further the global branding of IGT PLC and its subsidiaries as “IGT,” GTECH Corporation changed its name to IGT Global Solutions Corporation.

 

Effective November 2, 2015, GTECH USA, LLC merged with and into IGT, with IGT being the surviving entity.

 

Effective January 1, 2016, GTECH Holdings Corporation merged with and into IGT Global Solutions Corporation (formerly known as GTECH Corporation), with IGT Global Solutions Corporation being the surviving entity.

 

Other than as described above, including in relation to the Mergers (see “—Acquisition of International Game Technology”), there have not been any public takeover offers by third parties in respect of IGT PLC’s shares or by IGT PLC in respect of other companies’ shares which have occurred during the last and current financial years.

 

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Capital Expenditures

 

Capital expenditures are defined as investments for the period in systems, equipment and other assets related to contracts, property, plant and equipment, intangible assets and investments in associates as shown in our cash flow statement. For a description, including the amount invested, of the Company’s principal capital expenditures and divestitures (including interests in other companies) for the years ended December 31, 2015, 2014 and 2013, see “Item 5—B. Liquidity and Capital Resources—Capital Expenditures.”

 

The Company did not make any capital expenditures in the first quarter of calendar 2016 that were not in the ordinary course of business.

 

In March 2016, IGT PLC, through its subsidiary Lottomatica, entered into a consortium of strategic and financial partners to bid on the new Lotto Concession. Under the terms of the consortium agreement, Lottomatica will serve as the principal operating partner to fulfill the requirements of the Lotto license. The consortium submitted its bid for the new Lotto Concession in March 2016. In April 2016, the ADM announced that the consortium has been provisionally awarded the new Lotto Concession. The final award of the concession is expected to be made during the second quarter of 2016. The consortium’s bid was comprised of euro 770 million in upfront concession payments that will be paid in three installments between the time of the award and April 2017. IGT PLC currently expects the first two installments of €350 million and €250 million to be made in 2016, with the balance made in April 2017. In addition, €140 million will be invested by the consortium to upgrade the technological infrastructure supporting the Lotto game. Members of the consortium will contribute to the upfront concession payments on a pro rata basis, based on each party’s equity ownership interest.

 

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B. Business Overview

 

The following description refers to the combined business and operations of the following legacy companies: GTECH and IGT. The merger was completed on April 7, 2015.

 

International Game Technology PLC is the world’s leading end-to-end gaming company, operating and providing an integrated portfolio of leading-edge technology products and services across all gaming markets, including: lottery management services, online and instants lotteries, electronic gaming machines, sports betting, interactive gaming, and commercial services. IGT PLC provides business-to-consumer (“B2C”) and business-to-business (“B2B”) products and services to customers in approximately 100 countries.

 

IGT PLC’s integrated portfolio of technology, products, and services, including its best-in-class content, is shaping the future of the gaming industry by delivering the innovation that players want. IGT enables players to experience their favorite games across all channels and regulated segments, from gaming machines and lotteries to interactive and social gaming. Leveraging a wealth of premium content, substantial investment in innovation, in-depth customer intelligence, operational expertise, and leading-edge technology, our gaming solutions anticipate the demands of consumers wherever they decide to play, providing our customers with leading edge solutions.

 

The Company strives to create shareholder value by adhering to the highest levels of service, integrity, responsibility, and innovation. Social responsibility is vital and we are committed to responsible gaming, giving back to our communities, and doing our part to protect the environment.

 

IGT PLC is headquartered in London, with operating centers located in Providence, Rhode Island; Las Vegas, Nevada; and Rome, Italy. The Company is organized into four business segments, which are supported by corporate shared services: North America Gaming and Interactive, North America Lottery, International, and Italy. Each one of these segments operates and provides the full range of gaming products and services described above. Hardware and software development, and manufacturing are centralized in North America. The Company had over 12,000 employees as of December 31, 2015.

 

Products and Services

 

Lottery

 

IGT PLC’s lottery services are provided through concession or operator contracts (also referred to as lottery management services arrangements), facilities management contracts, and product sales contracts. In the majority of jurisdictions, lottery authorities generally award contracts through a competitive bidding process. After the expiration of the initial or extended contract term, a lottery authority generally may either seek to negotiate further extensions or commence a new competitive bidding process.

 

IGT PLC supplies a unique set of solutions for online, draw-based, and instant ticket lotteries to more than 100 customers worldwide. IGT PLC designs, sells and operates a complete suite of lottery-enabled point-of-sale terminals that are electronically linked with a centralized transaction processing system that reconciles lottery funds between the retailer, where a transaction is enabled, and the lottery authority. Among those solutions, IGT PLC provides and operates highly secure, online lottery transaction processing systems which are capable of processing over 500,000 transactions per minute. IGT PLC provides more than 500,000 point-of-sale devices to lottery customers and lotteries that IGT PLC supports worldwide.

 

IGT PLC is also a major instant ticket game supplier. As an end-to-end provider of instant tickets and related services, IGT PLC specializes in the fast delivery of high-quality instant ticket games and provides printing services, instant ticket marketing plans and graphic design, programming, production, packaging, shipping and delivery services. Instant tickets are sold at numerous types of retail outlets but most successfully in grocery and convenience stores. IGT PLC is the global leader in terms of deployments and sales for Lottery Vending Machines (LVMs) that sell instant tickets as well as draw-based games.

 

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Instant ticket contracts are priced based on a percentage of ticket sales revenues or on a price per unit basis and generally range from two to five years with extension opportunities

 

IGT PLC has developed and continues to develop new lottery games, licenses new game brands from third parties and installs a range of new lottery distribution devices, all of which are designed to maintain a strong level of same store sales growth for IGT PLC customers. In connection with its delivery of lottery services, IGT PLC actively advises its customers on growth strategies.

 

IGT PLC also provides marketing services, in particular retail optimization and branding. IGT PLC employs marketing and sales staff who are directly responsible for developing and helping execute marketing programs that grow sales of lottery games. IGT PLC also works closely with lottery customers and retailers to help retailers sell lottery games more effectively. These programs include product merchandising and display recommendations, selection of appropriate lottery product mix for each location, and account reviews to plan lottery sales growth strategy.

 

IGT PLC operates or acts in a growing number of jurisdictions as the provider of lottery management services and is responsible for supporting the day-to-day operations of the lottery and its core functions. In this respect, IGT PLC leverages its years of experience accumulated from being the sole concessionaire for the Italian Lotto game, the world’s largest lottery, which includes management of all of the activities along the lottery value chain.

 

The lottery technology business is highly competitive and subject to strong price-based competition. IGT PLC’s primary competitors in the lottery technology business include Scientific Games Corporation and Intralot S.A. The instant tickets production business is also highly competitive and subject to strong price-based competition. IGT PLC’s competitors in the United States include Scientific Games Corporation and Pollard Banknote Limited.  Internationally, a number of instant ticket game vendors compete with us, including the competitors mentioned above, as well as diversified printing companies such as Eagle Press of India.

 

The private manager, operator and licensee sector continues to emerge globally.  Competitors in this market primarily consist of a handful of commercial lottery operators active mainly in their domestic markets, such as Tattersalls, Sisal S.p.A. (“Sisal”), Sazka, and OPAP, and also includes a few commercial lottery operators, such as IGT PLC and Camelot, which compete globally.  IGT PLC is the leading commercial operator in the United States and manages the day-to-day operations of the Illinois, Indiana, and New Jersey lotteries and their core functions, subject to the state’s control over all significant business decisions.  Camelot U.K.  Lotteries Ltd. operates the UK National Lottery and the Ireland National Lottery.

 

Facilities Management Contracts (or FMC). IGT PLC’s facilities management contracts typically require IGT PLC to construct, install and operate the lottery system for an initial term, which is typically five to ten years. IGT PLC’s facilities management contracts usually contain options permitting the lottery authority to extend the contract under the same terms and conditions, or similar or predetermined terms and conditions, for additional periods, generally ranging from one to five years. IGT PLC’s customers also occasionally renegotiate extensions on different terms and conditions. IGT PLC’s revenues under facilities management contracts are generally service fees which are paid to IGT PLC directly from the lottery authority based on a percentage of such lottery’s gross online and instant ticket sales. Under a number of IGT PLC’s facilities management contracts, in addition to constructing, installing and operating the lottery systems, IGT PLC provides a wide range of support services and equipment for the lottery’s instant ticket games, such as marketing, distribution and automation of validation, inventory and accounting systems, for which IGT PLC receives fees based upon a percentage of the sales of the instant ticket games. In limited instances, IGT PLC provides instant tickets and online lottery systems and services under the same facilities management contract. The majority of IGT PLC’s North American Lottery revenues are earned under FMCs.

 

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Concessions and Lottery Management Agreements (LMA). A portion of IGT PLC’s revenues, primarily from its Italy segment, is derived from operating contracts. Under certain operating contracts, IGT PLC manages all of the activities along the lottery value chain, including collecting wagers, paying out prizes, managing all accounting and other back-office functions, running advertising and promotions, operating data transmission networks and processing centers, training staff, providing retailers with assistance and supplying materials for the games. The service revenues IGT PLC earns in return for operating these concessions are based on a percentage of wagers. For certain concessions this percentage decreases as the total wagers increase during an annual period, while for others the fee is fixed based on the percentage of wagers. In the United States, IGT PLC is the lottery management services provider in three U.S. jurisdictions — Illinois, Indiana and New Jersey.  In each jurisdiction, IGT PLC manages the day-to-day operations of the lottery and its core functions subject to lottery oversight. In Illinois and New Jersey, IGT PLC provides lottery management services as part of a joint venture or consortium, respectively, and in Indiana through a wholly-owned subsidiary.

 

Illinois. IGT PLC provides lottery management services in Illinois through Northstar Lottery Group, LLC (“Northstar”), a consortium in which IGT PLC indirectly holds an 80% controlling interest.  IGT Global Solutions Corporation, an affiliate of IGT PLC provides certain hardware, equipment, software and support services to Northstar.  On December 9, 2014, the Illinois Department of Lottery (the “State of Illinois”) and Northstar entered into an agreement (the “Termination Agreement”) to terminate their relationship under the private management agreement (the “PMA”) between them. Over one month after its execution by the Governor of the State of Illinois, the Illinois Attorney General notified the State of Illinois that it “disapproved” of the “proposed” Termination Agreement.  Relying on the Attorney General’s “disapproval,” the Governor’s Office informed Northstar that it believed the Termination Agreement was invalid and unenforceable, and that therefore, the Illinois Contract remained in effect.  Both Northstar and IGT PLC believed that the Termination Agreement was valid and binding on the parties but entered into subsequent negotiations with the Illinois Lottery in an attempt to resolve the dispute.

 

Effective September 18, 2015, Northstar signed a Letter Agreement (the “Letter Agreement”) with the State of Illinois and the Illinois Lottery that superseded the Termination Agreement. The Letter Agreement sets forth the terms governing the termination of the PMA, the transition services to be provided by Northstar, and the amendment and expiration terms of the respective Supply Agreements between Northstar and each of its key vendors, IGT Global Solutions Corporation and Scientific Games.  Under the terms of the Letter Agreement, the PMA shall remain in effect until the earlier of (i) the date that a transition of Northstar’s responsibilities to a replacement private manager is complete, or (ii) January 1, 2017. The PMA may be extended for additional periods of between three and six months, upon the agreement of the Lottery and Northstar, provided that Northstar receives written notice from the Lottery of the desired length of extension at least ninety (90) days’ prior to the expiration of the then current term, and Northstar agrees in writing to such extension.  The Supply Agreement with IGT Global Solutions Corporation is set to expire on July 1, 2017.  If a replacement private manager is selected, the Letter Agreement provides IGT Global Solutions Corporation with the right to negotiate with the new replacement private manager to extend its Supply Agreement beyond such date.  If the parties do not come to an agreement to extend or modify the IGT Supply Agreement by July 1, 2017, as consideration for the shortened IGT Supply Agreement, IGT Global Solutions Corporation will be paid a fee.

 

Indiana.  In Indiana, IGT PLC manages the day-to-day sales and marketing operations and core functions of the Hoosier Lottery through IGT Indiana, LLC (“IGT Indiana”), a wholly owned indirect subsidiary of IGT PLC, which has a 15-year integrated services agreement (the “Indiana Agreement”) with the Hoosier Lottery expiring on June 30, 2028.  Under the terms of the Indiana Agreement, IGT Indiana was entitled to earn incentive compensation (“Incentive Compensation”) to the extent that actual net income in a given fiscal year exceeded the net income targets proposed by IGT Indiana in its original bid (“Bid Net Income”), with such Incentive Compensation capped at five percent (5%) of actual net income in such fiscal year.  To the extent that actual net income in a given fiscal year was less than Bid Net Income in such fiscal year, IGT Indiana was required to pay net income shortfall payments (“Net Income Shortfall Payments”) to the Hoosier Lottery, with such amounts capped at five percent (5%) of Bid Net Income in such fiscal year.

 

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In June 2015, the State of Indiana and IGT Indiana executed an amendment to the Indiana Contract which modified certain economics set forth therein.  IGT Indiana made a one-time payment of approximately $18.3 million to the State of Indiana in connection with the execution of such amendment.  In addition, at the conclusion of Fiscal Year 2015 (June 30, 2015), Bid Net Income was replaced with minimum net income (“Minimum Net Income”) and incentive net income (“Incentive Net Income”).  If during any given fiscal year, actual net income is:

 

·                        Less than Minimum Net Income, then IGT Indiana shall be required to make a Net Income Shortfall Payment to the State of Indiana and shall not be eligible to receive Incentive Compensation. Net Income Shortfall Payments are capped at five percent (5%) of Minimum Net Income.

 

·                        Equals or exceeds Minimum Net Income, but is less than or equal to Incentive Net Income, then IGT Indiana will not be required to make a Net Income Shortfall Payment to the State of Indiana and shall continue to not be eligible to receive Incentive Compensation.

 

·                        Exceeds Incentive Net Income, then IGT Indiana will receive Incentive Compensation, and the State of Indiana shall retain its share of such Incentive Compensation, capped at five percent (5%) of actual net income.  In any fiscal year where IGT Indiana is eligible to receive Incentive Compensation, the State of Indiana shall retain fifty percent (50%) of every dollar of actual net income that exceeds Incentive Net Income, up to the cap, over which the State of Indiana shall retain all actual net income.

 

New Jersey.  Northstar New Jersey is party to a lottery management agreement (the “Services Agreement”) with the State of New Jersey Department of the Treasury, Division of Purchase and Property and Division of Lottery (the “New Jersey Lottery”) which expires on June 30, 2029.  In New Jersey, IGT PLC manages the day-to-day sales and marketing operations and core functions of the New Jersey Lottery through Northstar New Jersey Lottery Group, LLC (“Northstar New Jersey”), a consolidated joint venture comprised of IGT Global Solutions Corporation, a wholly-owned subsidiary of IGT PLC, Scientific Games New Jersey, a subsidiary of Scientific Games International, Inc., and OSI LTT NJ Grantor Trust, an affiliated entity of Ontario Municipal Employees Retirement System, in which IGT PLC indirectly holds an approximate 41% interest. IGT Global Solutions Corporation provides certain hardware, equipment, software and support services and certain instant ticket goods and services to Northstar New Jersey for the benefit of the New Jersey Lottery.  Northstar New Jersey is responsible for payments to the New Jersey Lottery to the extent certain net income targets are not achieved by the New Jersey Lottery, subject to a cap of 2% of the applicable year’s net income and a $20.0 million shortfall payment credit that was fully utilized by the end of the fourth quarter of 2015.

 

In December 2015, Northstar New Jersey and the New Jersey Lottery executed an amendment to the Services Agreement.  Pursuant to the terms of such amendment, (i) the Net Income Levels, which determine the amounts of incentive compensation, if any, that Northstar New Jersey is entitled to receive, and (ii) the Net Income Targets, which determine the amount of net income shortfall payments, if any, that Northstar New Jersey, would be required to pay, were modified. As consideration in connection with the terms of the amendment, Northstar New Jersey made a $15.4 million payment to the State, of which IGT Global Solutions Corporation contributed its pro rata portion of $6.3 million.  In addition, pursuant to the terms of the amendment, the State will be entitled to receive from Northstar New Jersey additional amounts for each of the New Jersey Lottery’s 2016-2018 fiscal years to the extent total transfers to the New Jersey Lottery (which includes the sum of the New Jersey Lottery’s net income (less any incentive compensation payable to Northstar) and the net income shortfall payments paid to the State by Northstar New Jersey (if any) for the applicable year) fall below certain guaranteed revenue amounts. In addition, the incentive compensation that Northstar New Jersey is entitled to receive in any fiscal year was reduced, from five percent (5%) to three percent (3%) of actual net income.

 

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Product Sales Contracts (or PSC). Under product sales contracts, IGT PLC constructs, sells, delivers and installs turnkey lottery systems or lottery equipment and licenses the software for a fixed price, and the lottery authority subsequently operates the lottery system or equipment. IGT PLC also sells additional terminals and central computers to expand existing systems and/or replace existing equipment under product sales contracts and will also provide ancillary maintenance and support services related to the systems, equipment sold and software licensed.

 

The table below sets forth the lottery authorities and customers with which IGT PLC had facilities management contracts (“FMC”) for the installation and operation of lottery systems as of April 14, 2016, and as to which IGT PLC is the sole supplier of central computers and terminals and material services. The table below does not include FMCs in jurisdictions where IGT PLC also has contracts listed below under the heading “—Lottery Management Services Contracts.”

 

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Date of

 

Date of

 

 

 

 

 

 

Commencement

 

Expiration of

 

Current

 

 

 

 

of Current

 

Current

 

Extension

 

 

Jurisdiction

 

Contract*

 

Contract

 

Options**

 

Additional Commentary

 

 

 

 

 

 

 

 

 

United States:

 

 

 

 

 

 

 

 

Arizona

 

November 2005

 

August 2016

 

 

 

 

California

 

October 2003

 

October 2019

 

 

 

At the end of the final extension option period, the contract will remain in effect under the same terms and conditions until either party provides at least two years’ notice of termination.

Colorado

 

January 2014

 

June 2021

 

2 two-year

 

 

Florida 

 

January 2005

 

March 2017

 

 

 

Effective June 15, 2015, the contract was extended to the date that is the earlier of March 28, 2017 and the date upon which the Florida Lottery has approved of successful conversion to a new gaming system.

Georgia

 

September 2003

 

September 2018

 

 

 

 

Kansas

 

July 2008

 

June 2018

 

 

 

 

Kentucky

 

July 2011

 

July 2021

 

5 one-year

 

In December 2014, The Kentucky Lottery and IGT PLC executed a separate agreement for the provision of an iLottery Gaming System. The iLottery contract has a term of four (4) years from the commencement of sales, and may be extended by the Lottery for a period of up to six (6) years.

Michigan

 

January 2009

 

January 2021

 

 

 

In January 2016, the Michigan Lottery and IGT PLC agreed to extend the term of its contract four (4) years, through January 19, 2021.

Minnesota 

 

April 2015

 

November 2023

 

3 Up to 3 years

 

 

Missouri

 

October 2014

 

June 2022

 

Up to 3 years

 

 

Nebraska 

 

December 2010

 

June 2021

 

 

 

In September 2015, the Nebraska Lottery and IGT PLC agreed to extend the term of its contract four (4) years, through June 30, 2021

New York

 

September 2009

 

August 2017

 

Up to 3 years

 

 

North Carolina

 

March 2016

 

June 2027

 

Up to 5 years

 

In March 2016, the North Carolina Educational Lottery executed a contract with IGT PLC for an initial term of ten (10) years from “Go-Live,” with a five (5) year extension option.

Oregon 

 

October 2007

 

November 2020

 

 

 

 

Rhode Island

 

July 2003

 

June 2023

 

 

 

 

South Dakota

 

August 2009

 

August 2019

 

 

 

 

Tennessee

 

April 2015

 

June 2022

 

Up to 7 years

 

 

Texas

 

September 2011

 

August 2020

 

3 two-year

 

 

Virginia 

 

March 2016

 

June 2023

 

Up to 6 years

 

In March 2016, the Virginia Lottery executed a contract with IGT PLC for the provision of a Draw Game Lottery System and related services.

Washington 

 

October 2014

 

June 2026

 

Up to 10 years

 

 

West Virginia

 

June 2009

 

June 2017

 

 

 

In November 2015, the West Virginia Lottery and IGT PLC agreed to extend the term of its contract one (1) year, through June 27, 2017.

Wisconsin

 

February 2016

 

May 2024

 

Up to 3 one-year

 

In February 2016, the Wisconsin Lottery and IGT PLC executed a contract pursuant to which IGT PLC will provide bundled services, including a draw-based and instant ticket lottery system, terminals and insant ticket printing, warehousing and distribution.

 

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Date of

 

Date of

 

 

 

 

 

 

Commencement

 

Expiration of

 

Current

 

 

 

 

of Current

 

Current

 

Extension

 

 

Jurisdiction

 

Contract*

 

Contract Term

 

Options**

 

Additional Commentary

 

 

 

 

 

 

 

 

 

Caribbean and Latin America:

 

 

 

 

 

 

 

 

Argentina - Slot Machines S.A. (San Luis Province/Agencia Financiera de Loterías, Casinos y Juegos de Azar)

 

April 2012

 

October 2021

 

Sole discretion of Agencia, up to 10 years

 

 

 

 

 

 

 

 

 

 

 

Chile—Polla Chilena de Beneficencia

 

September 2008

 

August 2016

 

Up to 24 months

 

 

 

 

 

 

 

 

 

 

 

Jamaica—Supreme Ventures Limited

 

November 2000

 

January 2026

 

 

 

 

 

 

 

 

 

 

 

 

 

Mexico—Pronosticos Para La Asistencia Publica

 

December 2014

 

December 2020

 

 

 

 

 

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Date of

 

Date of

 

 

 

 

 

 

Commencement

 

Expiration of

 

Current

 

 

 

 

of Current

 

Current

 

Extension

 

 

Jurisdiction

 

Contract*

 

Contract Term

 

Options**

 

Additional Commentary

 

 

 

 

 

 

 

 

 

Europe, Africa, Asia

 

 

 

 

 

 

 

 

Belgium - Loterie Nationale de Belgique

 

June 2014

 

May 2024

 

 

 

 

China — Beijing Welfare Lottery

 

January 2012

 

December 2020

 

Automatic two one-year terms unless a party gives at least 180 days’ notice before the end of initial or extension term

 

 

China — Shenzhen Welfare Lottery

 

July 2010

 

April 2021

 

Automatic two eighteen-month terms unless a party gives at least 180 days’ notice before the end of the initial or extension term

 

 

Czech Republic—SAZKA a.s. (f/k/a Czech Republic—SAZKA sázková kancelář a.s.)

 

November 2011

 

December 2022

 

 

 

 

Ireland—An Post Nat’l Lottery Company

 

June 2002

 

June 2015

 

 

 

 

Luxembourg—Loterie Nationale

 

March 2013

 

March 2021

 

5 one-year terms

 

 

Nigeria—Secure Electronic Technology plc. (SET)

 

November 2008

 

December 2016

 

Contract expires on the date SET’s license expires - which is in December 2016, with an option to extend for ten (10) years.

 

 

Poland—Totalizator Sportowy

 

December 2011

 

November 2018

 

3 one-year or three-years

 

 

Slovak Republic—TIPOS, National Lottery Company, a.s.

 

January 2007

 

December 2018

 

 

 

 

Spain—Organizacion Nacional de Ciegos Españoles (ONCE)

 

May 2010

 

December 2020

 

5 years and subsequently for biannual periods unless either party elects to terminate with prior notice of two years

 

 

South Africa - Ithuba Holding (Pty.) Ltd.

 

June 2015

 

May 2020

 

Five years with possible three year extension

 

 

Turkey—Turkish National Lottery

 

February 1996

 

November 2016

 

The term of the contract renews for successive one-year periods unless either party gives timely notice of non-renewal.

 

 

United Kingdom—The National Lottery

 

February 2009

 

January 2023

 

 

 

Operated by Camelot U.K. Lotteries Limited on a facilities management basis.

 


*   Reflects the date upon which the contract became effective.

** Reflects extensions available to the lottery authority under the same terms as the current contract.  Lottery authorities occasionally negotiate extensions on different terms and conditions.

 

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The table below sets forth the lottery authorities with which IGT PLC had operator contracts or lottery management services arrangements as of December 31, 2015 for the day-to-day operation of core lottery functions, and management of lottery systems, and as to which IGT PLC is the supplier of central computers and terminals and material services.  The table also sets forth information regarding the term of each contract.

 

 

 

Date of

 

Date of

 

 

 

 

 

 

Commencement

 

Expiration of

 

Current

 

 

 

 

of Current

 

Current

 

Extension

 

 

Jurisdiction

 

Contract*

 

Contract

 

Options**

 

Additional Commentary

 

 

 

 

 

 

 

 

 

Italy:

 

 

 

 

 

 

 

 

Agenzia delle Dogane e dei Monopoli - Lotto

 

1998

 

June 2016

 

 

 

A consortium led by IGT PLC was selected provisionally for the Lotto Concession in April 2016 for a nine-year term

Agenzia delle Dogane e dei Monopoli - “Scratch & Win” Instant Lotteries

 

October 2010

 

September 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

United States:

 

 

 

 

 

 

 

 

Illinois

 

July 2011

 

January 2017

 

Option to extend for up to three periods of three (3) to six (6) months each

 

Reflects revised period under Letter Agreement between Northstar and the State of Illinois effective September 18, 2015.

Indiana

 

October 2012

 

June 2028

 

Ten one-year

 

In addition to the installation of its own lottery terminals, IGT PLC has contracted with Scientific Games International, Inc. for the provision of the hardware of Scientific Games’ WAVE™ lottery terminals. This contract expires in August 2016, at which time all terminals will be converted to IGT temrinals.

New Jersey

 

June 2013

 

June 2029

 

 

 

 

 

 

 

 

 

 

 

 

 

Caribbean and Latin America:

 

 

 

 

 

 

 

 

Colombia

 

 

 

 

 

 

 

 

ETESA/ COLJUEGOS

 

April 2012

 

April 2017

 

 

 

 

Grupo Empresarial En Linea, S.A.

 

September 2011

 

April 2017

 

 

 

 

Costa Rica

 

 

 

 

 

 

 

 

Junta de Protección Social

 

June 2013

 

June 2019

 

Automatic renewals for two-year periods up to a total of ten years unless the Junta gives notice of non-renewal

 

 

Trinidad & Tobago—National Lotteries Control Board

 

December 1993

 

March 2021

 

Automatic extension for one three-year period

 

 

Anguilla—LILHCo

 

May 2007

 

May 2017

 

 

 

 

Antigua/Barbuda—LILHCo

 

September 1996

 

September 2016

 

 

 

 

Barbados—LILHCo

 

June 2005

 

June 2023

 

 

 

 

Bermuda—LILHCo

 

 

 

 

 

Automatic annual renewal

 

 

St. Kitts/Nevis—LILHCo

 

October 2013

 

October 2016

 

Three years

 

 

St. Maarten—LILHCo

 

September 2007

 

September 2017

 

One ten-year

 

The extension option for this contract may be exercised on mutual agreement of the parties.

U.S. Virgin Islands—LILHCo

 

December 2001

 

December 2016

 

One five-year

 

 

 


*          Reflects the date upon which the contract became effective.

**   Reflects extensions available to the lottery authority under the same terms as the current contract.  Lottery authorities occasionally negotiate extensions on different terms and conditions.

 

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MACHINE GAMING

 

IGT PLC designs, develops, manufactures and provides cabinets, games, systems and software for customers in legal gaming markets throughout the world under fixed fee, participation and product sales contracts. IGT PLC holds more than 400 global gaming licenses, including from the Nevada Gaming Commission.

 

IGT PLC offers a diverse range of machine cabinets which land-based customers can choose from to maximize functionality, flexibility, and player comfort. In addition to cabinets, IGT PLC develops a wide range of Casino games taking into account local jurisdictional requirements, market dynamics and player preferences.  IGT PLC casino games typically fall into two categories:

 

·                  Core games, which include core video reel, core mechanical reel, and core video poker, are typically sold and in some situations leased to customers.

 

·                  Premium games includes:

 

·                  Wide Area Progressives which are games that are linked across several casinos and/or jurisdictions and share a large common jackpot.  An example of a WAP offered by IGT PLC is Megabucks.

 

·                  Multi-Level Progressives are games which are linked to a number of other games within the casino itself and offer players the opportunity to win different levels of jackpots.  An example of a Multi-level progressive game offered by IGT PLC is Party Time.

 

Premium games are typically not sold to customers but instead provided on a leased basis through revenue sharing or daily fee arrangements.

 

IGT PLC also produces other types of games including:

 

·                  Centrally Determined games which are games connected to a central server that determines the game outcome.

 

·                  Class 2 games which are electronic video bingo machines which can be typically found in North American Tribal Casinos and certain other jurisdictions like South Africa.

 

IGT PLC supports the widely used SAS protocol but also uses G2S open industry standards for server-based gaming machines.

 

Gaming service revenue is primarily generated through the leasing to customers of premium games and cabinets. These pricing arrangements are largely variable where the casino customer pays service fees to IGT PLC based on a percentage of amounts wagered (aka coin-in or play), net win, or a daily fee.

 

Machine Gaming product sales revenues are generated from the sales of land-based gaming machines (equipment and game content), systems, component parts (including game conversion sales), other equipment and services.

 

IGT PLC’s three largest gaming customers represent 3% of overall revenue.

 

Video Lottery Machines

 

IGT PLC provides video lottery terminals (“VLT”), VLT central systems and VLT games to government customers worldwide, and provides VLT and games to operators worldwide. IGT PLC also provides a dedicated client service team to each of its VLT and VLT systems customers. IGT PLC also provides video and traditional mechanical reel slot machines and casino systems to casino operators in Europe, Asia and the Americas and to Native American casinos in the United States. In addition, IGT PLC provides amusement with prize (“AWP”) machines and games to licensed operators in Europe.

 

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Game Content

 

IGT PLC combines elements of math, play mechanics, sound, art, and technological advancements with a library of entertainment licenses and a proprietary intellectual property portfolio to provide gaming products designed to provide a high degree of player appeal.  The game library is continuously expanded with new content, popular brands, and appealing bonuses to address player preferences and other market trends. A wide array of casino-style games is offered, in a variety of multi-line, multi-coin and multi-currency configurations. Examples of successful IGT PLC game content include: Kitty Glitter®, Wheel of Fortune®, and SPHINX 3D™.

 

Land-Based

Premium (MegaJackpots®)

Multi-Level Progressive

Wide-Area Progressive

Powerbucks Interstate Progressive

Other Premium Stand-Alone games

 

Core

Video Reel

Spinning or Mechanical Reel

Video Poker

Multi-Game

 

Central Determination System

Bingo (Class II)

VLT

 

Multi-Player

Electronic Table

 

Gaming Systems

 

IGT PLC offers a comprehensive range of system modules and applications for all areas of casino management. Gaming systems products include infrastructure and applications for casino management, customer relationship management, player management, and server-based gaming. IGT’s main Casino Management System (CMS) offering is the Advantage System.

 

The Advantage system offers solutions and modules for:

 

·

 

Machine Accounting

 

·

 

Bonusing (jackpots and promotions)

·

 

Patron Management

 

·

 

Table Game Automation

·

 

Cage Accounting

 

·

 

Payment Processing

·

 

Table Accounting

 

·

 

Reporting

·

 

Ticket-in/Ticket-out

 

·

 

Regulatory Compliance

 

Player management solutions feature customized player messaging, tournament management, and integrated marketing and business intelligence modules that provide analytical, predictive, and management tools for maximizing casino operational effectiveness. The server-based solutions enable electronic game delivery and configuration for slot machines, as well as providing casino operators with opportunities to increase profits by enhancing the players’ experience, connecting with players interactively, and creating operational efficiencies.

 

IGT’s primary competitors in Machine Gaming are Scientific Games, Aristocrat Leisure Limited and Konami.

 

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SPORTS BETTING

 

IGT PLC provides betting technology to lotteries and commercial operators in regulated markets, primarily in Italy and other countries in Europe. World Lottery Association customers of IGT PLC include: OPAP; Lottery National Belgium (LNB); Marca, the Spanish national daily sports newspaper owned by Unidad Editorial in Spain; and Szerencsejáték Zrt (National Lottery in Hungary).

 

IGT PLC also offers a sports betting platform comprised of a core engine and associated support modules which serves leading lotteries and commercial operators around the world. IGT PLC offers trading services, fully managed partnerships, or “software only” technical solutions to create a complete one-stop solution or to integrate new functionality to existing operations. IGT PLC also provides secure retail betting solutions, point-of-sale display systems, call center facilities, Internet betting technology, and fixed odds or pool betting options.

 

Through sports betting point-of-sale locations, IGT PLC offers directly to customers betting on sports events (including basketball, soccer, cycling, downhill skiing, cross country skiing, tennis, sailing and volleyball), motor sports (car and motorcycle racing), and non-sports events connected with the world of entertainment, music, culture, and current affairs of primary national and international importance.

 

IGT PLC operates an expansive land-based betting network in Italy through its “Better” and “Totosi” brands on either a pari-mutuel or fixed odds basis. For pari-mutuel betting the total pool of wagers placed, minus a specified percentage, is divided among the winning players according to a formula. In Italy, this formula is set by the Italian regulatory body “Agenzia delle dogane e dei Monopoli” or “ADM”. A winner will be paid an amount equal to his or her share of the prize pool. For fixed odds the payout amount is agreed upon in advance between the player and the bookmaker. In the case of a win, the bookmaker pays an amount equal to the bet multiplied by the odds fixed at the moment of the bet. The maximum prize for a ticket cannot exceed €10,000.

 

IGT’s primary competitors in Sports Betting are Bet365, SNAI, Eurobet, and Sisal.

 

INTERACTIVE & SOCIAL GAMING

 

Interactive gaming (or iGaming) enables game play via the Internet for real money or for fun (social).  IGT designs, manufactures, and distributes a full suite of award winning customizable products, systems, and services for Internet gaming, including: Internet poker, table games, slots, bingo, iLottery and Gaming Management Systems (“GMSs”). IGT PLC holds more than 24 interactive gaming licenses worldwide. IGT PLC also acts as a mobile casino operator through its subsidiary, Probability plc. IGT PLC’s diverse interactive customer base in iGaming includes Lottomatica (Italy), Veikkaus (Finland), LNB (Belgium), OLG (Canada), William Hill (UK), the Illinois Lottery, the Kentucky Lottery, and the Georgia Lottery.

 

Products

 

DoubleDown Casino.  IGT’s DoubleDown online casino-style social gaming operation provides a unique opportunity for casino entertainment to reach a broader audience, while complementing IGT’s other existing offerings and the core casino audience. Our North America based online social gaming casino generates revenues from the sale of virtual casino chips to players for use within the DoubleDown Casino for additional play or game enhancements. Unlike many other online casino-style social games where each game is a unique application, DoubleDown operates as a single casino application with multiple games where all games are available to the player within a single application. DoubleDown Casino is available online through Facebook and www.DoubleDownCasino.com on a variety of personal computer and mobile devices.

 

Poker. IGT PLC’s poker product is 100% compatible with all leading platforms and devices. Offering a player-friendly interface and sophisticated graphics, IGT PLC’s poker product is scalable and flexible, and

 

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tailored to the specific needs of customers and their player base. The platform is modern and able to address the changing dynamics of online poker.

 

Online Casino. IGT PLC’s online casino products include a wide selection of table and slot games with single, multiplayer and tournament play. IGT PLC casino content includes branded titles and select third party content. Available in download, instant, or mobile formats and as play-for-fun or real money solutions, casino games are available anytime, anywhere, and on any device

 

Bingo. IGT PLC’s bingo solution includes a social and interactive Bingo Live offering, available in four countries and in four languages, with the content adjusted to suit specific regions. IGT PLC Bingo is flexible and scalable to meet regulatory requirements and all levels of certification and testing, and is offered as play-for-fun (social) or a real-money solution across multiple channels and currencies.

 

iLottery. IGT PLC’s complete suite of iLottery solutions, services, and professional expertise allows lotteries to fully engage their players on any interactive channel in regulated markets. Existing lottery game portfolios are extended to the interactive channel to provide a spectrum of engaging content such as eInstant. IGT PLC offers a vast library of mobile content available on any device.

 

Platform. IGT PLC’s iGaming systems cover every channel (retail, mobile and web) and vertical from a 360-degree view of the player, web design and an engine to accelerate more game content to customers’ websites. IGT PLC’s Interactive Platforms offering includes Player Account Management, the master of player profiles and player accounts, which pulls all player, reward, and financial activity together in one place and provides a one-stop integrated CRM system that allows for advanced marketing and analytical capabilities. Include a highly reliable and secure payment system that allows for a wide range of different payment methods across continents and a dynamic web application framework providing cross-cutting functionalities such as authentication and authorization.

 

IGT Interactive also includes IGT Connect, which is the integration layer of the IGT PLC Player Account Management system and includes game integration and network layers. IGT Connect integrates with third party player account management systems, third party game engines, and regulatory systems.

 

Remote Games Server. IGT PLC also offers a Remote Games Server, which is a fast gateway to extensive content. For customers operating their own or third party systems, IGT PLC is able to provide a simple plug-and-play approach to all of IGT PLC’s and IGT PLC’s premium suppliers’ content.

 

Services

 

IGT PLC offers a complete range of services to support interactive customers. IGT PLC services are aimed at helping lower the cost of player acquisition and increasing lifetime player value. IGT PLC’s player service centers are located worldwide to serve players 24 hours a day, 365 days a year. IGT PLC Marketing Intelligence Services manages the player lifecycle to maximize player yield while ensuring the player is entertained and plays responsibly.

 

Additionally, IGT PLC provides player services, including marketing, portal, player acquisition, Customer Relationship Management (CRM), VIP, player support, payment solutions, fraud and collusion protection, responsible gaming, game management, migration, and trading services.

 

Competition

 

The interactive gaming B2B competitive landscape has evolved to mirror industry-wide trends of product and channel (online and mobile) convergence and vertical integration. IGT PLC faces competition from operators, such as 888 Holdings and bwin.party, which have developed broad, crosschannel product offerings and solutions for internal use and as a supplier to third parties. IGT PLC also competes with broad-based traditional B2B providers, such as Playtech plc and Microgaming Software Systems, which have developed extensive interactive casino content and broad cross-channel product offerings. IGT PLC also faces competition from traditional machine gaming suppliers, such as Scientific Games Corporation and Amaya Gaming. In social gaming, our main competitors include Caesars and Zynga.

 

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COMMERCIAL SERVICES

 

IGT PLC develops innovative technology to enable lotteries to offer commercial services over their existing lottery infrastructure or over standalone networks separate from the lottery. Leveraging its distribution network and secure transaction processing experience, IGT PLC offers high-volume transaction processing of commercial transactions including: prepaid cellular telephone recharges, prepaid mobile data, collection and payment services for the payment of utility bills, money transfer services, ticketing for sporting and musical events, credit card transactions, social security contributions and payments, and prepaid cards.

 

In addition, IGT PLC provides collection services and processing and network services on behalf of third parties, and issues electronic money through immediate conversion of funds received, as well as other related activities. These services are primarily offered outside of North America.

 

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Business Segments

 

Revenues for IGT PLC by segment are as follows:

 

 

 

Year Ended December 31,

 

($ thousands)

 

2015

 

2014

 

2013

 

North America Gaming and Interactive

 

1,101,807

 

132,501

 

192,142

 

Service Revenue

 

780,189

 

45,575

 

37,425

 

Product Sales

 

321,618

 

86,926

 

154,717

 

North America Lottery

 

1,045,670

 

940,097

 

882,542

 

Service Revenue

 

992,684

 

865,023

 

826,936

 

Product Sales

 

52,986

 

75,074

 

55,606

 

International

 

853,074

 

630,629

 

636,197

 

Service Revenue

 

512,004

 

473,653

 

481,176

 

Product Sales

 

341,070

 

156,976

 

155,021

 

Italy

 

1,704,046

 

2,108,362

 

2,118,031

 

Service Revenue

 

1,702,174

 

2,104,996

 

2,114,257

 

Product Sales

 

1,872

 

3,366

 

3,774

 

Purchase Accounting (1)

 

(15,541

)

722

 

722

 

Total Revenues

 

4,689,056

 

3,812,311

 

3,829,634

 

 


(1) Purchase accounting represents the amortization of certain intangible assets in connection with acquired companies.

 

North America Gaming and Interactive

 

The North America Gaming and Interactive (NAGI) segment develops and delivers leading games, systems and solutions for land-based casinos, Interactive for-wager online play, and the DoubleDown Casino free-to-play social casino app.  The segment is responsible for R&D for commercial gaming products that are distributed to casinos throughout the world.  NAGI is headquartered in Las Vegas, Nevada, and has sales offices throughout North America.  NAGI provides a full suite of casino-related products and solutions to its commercial, government and tribal customers in the U.S. and Canada.

 

For land-based casino customers, NAGI provides Company leadership in the development and distribution of Global Premium Product, including licensed content such as Wheel of Fortune® slots.  In addition the Global Core Product organization within NAGI develops slot themes and video poker themes such as Game King®.

 

The NAGI segment includes revenue from the sale or lease of commercial gaming machines and software to casinos and government entities in the U.S. and Canada.  NAGI also develops, sells and licenses Casino Management Systems. These systems help casino customers to increase operational efficiencies and enhance player engagement by delivering personalized player amenities and promotional offers.  Additionally, service revenue is generated for commercial gaming from the maintenance of machines and systems.  NAGI also generates revenue from its DoubleDown Casino social casino app, where customers purchase virtual currency for use in non-wagering interactive games (“play for fun”) played over the Internet including desktop and mobile devices.

 

IGT’s advanced cross-platform content delivery system, IGT Casino rgs (remote game server), enables iGaming operators of for-wager online Interactive properties to access the Company’s vast content library to provide players with their favorite casino content on desktop and mobile devices.  The Company’s content powers the leading selection of iGaming sites for regulated Betting markets around the world.

 

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IGT’s Global Operations organization, including Global Manufacturing Operations, is based in Reno, Nevada, and is the primary manufacturer of all NAGI products in addition to a number of other products for other IGT business segments such as Lottery.

 

North America Lottery

 

The North America Lottery segment develops and delivers innovative and future-focused Lottery solutions, further enhancing the global leadership of IGT PLC in the Lottery segment. This business segment is headquartered in Providence, Rhode Island and provides North America World Lottery Association (WLA) customers with a single point of contact, leveraging IGT PLC’s full lottery product suite. IGT PLC supports 40 of the 45 U.S. lotteries. North America Lottery performs R&D for all Lottery-related products globally.

 

North America Lottery includes revenue related to the sale or lease of lottery central system hardware and software, and the sale or lease of lottery and gaming terminals to government entities. The majority of the revenue we earn in the North America Lottery segment is derived from facilities management contracts. IGT PLC also has lottery management agreements in three U.S. jurisdictions—Illinois, Indiana, and New Jersey.

 

The North America Lottery segment also includes revenue generated from the sale of physical instant tickets to government entities. Government-sponsored lotteries grant printing contracts on both an exclusive and non-exclusive basis where there is typically one primary vendor and one or more secondary vendors. A primary contract permits the vendor to supply the majority of the lottery’s ticket printing needs and includes the complete production process from concept development through production and shipment. It also typically includes marketing and research support. A primary printing contract can also include any or all of the following services: warehousing, distribution, telemarketing, and sales/field support. A secondary printing contract includes providing backup printing services and alternate product sources. It may or may not include a guarantee of a minimum or maximum number of games.

 

In the United States, lottery revenues are frequently designated for particular purposes, such as education, economic development, conservation, transportation and aid to the elderly. Many states have become increasingly dependent on their lotteries as revenues from lottery ticket sales are often a significant source of funding for these programs.

 

International

 

The International segment is a global leader in delivering innovative end-to-end solutions across all channels and regulated gaming segments. This segment is responsible for the strategic development and operation management for all markets in Europe, the Middle East, Central and Latin America (including Mexico), the Caribbean, Asia Pacific, and Oceania, across IGT PLC’s entire product portfolio. Our global strategy capitalizes on our North America experience, while customizing products for foreign languages, unique local preferences, and regulatory requirements.

 

International includes revenue from the sale or lease of commercial gaming machines and software to casinos and government entities, and from the sale or hosting or real-money interactive wagering games played over the internet. This segment also includes revenue from the sale or lease of lottery central system hardware and software, and the sale or lease of lottery terminals to government entities. Additionally, international includes revenue from the sale of physical instant tickets to government entities, and professional services in the form of lottery facility management and lottery operation fees. Legalized online real-money gaming in certain regulated international markets also continues to make a contribution. IGT PLC offers a variety of interactive gaming products within the International segment, including poker, casino, bingo and mobile systems.

 

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Italy

 

The majority of the revenue we earn in the Italy segment is derived from Lottery and Machine Gaming concessions. The Italy segment operates and provides a full range of business-to-consumer (“B2C”) gaming products including all five product lines of IGT PLC:

 

·                  Lottery — operation of instant and traditional lotteries;

·                  Machine Gaming — operates in the machine gaming concession in Italy;

·                  Sports Betting — Sports events and non-sports events connected with current affairs are the subjects of legal betting in Italy;

·                  Commercial Services — offers high-volume transaction processing of commercial transactions, collection and payment services, money transfer services, fidelity card services, and stamp duty services; and

·                  Interactive Gaming — provides all of the games currently authorized in the Italian market, including skill games and other board and soft games.

 

Lottery

 

Since 1993, IGT PLC has been the sole concessionaire for the Italian Lotto game. IGT PLC has gained substantial experience in managing all of the activities along the lottery value chain, such as collecting wagers through its network, paying out prizes, managing all accounting and other back-office functions, running advertising and promotion, operating data transmission networks and processing centers, training staff, providing retailers with assistance and supplying materials including play slips, tickets and receipts, and marketing and point-of-sale materials for the game. Since 2004, IGT PLC also has been the sole concessionaire for instant ticket lotteries, which are games involving pre-printed paper tickets (called Gratta & Vinci).

 

Machine Gaming

 

In IGT PLC’s machine gaming concessions in Italy, IGT PLC directly manages stand-alone amusement with prize (AWP) machines, in addition to video lottery terminals (VLTs) that are installed in various retail outlets linked to a central system. IGT PLC collects the wagers, deducts the applicable gaming taxes, and pays out prizes to winners and fees to retailers. The service revenue earned is generally based on a percentage of wagers, net of applicable gaming taxes. We also provide systems and machines to other machine gaming concessionaires, either as a product sale or with long term fee-based contracts.

 

Sports Betting

 

IGT PLC, as concessionaire, offers a sports betting platform comprised of a core engine and associated support modules which serves leading lotteries and commercial operators around the world. IGT PLC also provides secure retail betting solutions, point-of-sale display systems, call center facilities, Internet betting technology, and fixed odds or pool betting options.

 

Interactive

 

IGT PLC provides all of the Internet games currently authorized in the Italian market, including skill games such as poker and other board and skill games; bingo; casino games such as roulette and blackjack and reel games; live dealer roulette, blackjack, baccarat, and poker; horse and sports betting (fixed odds); pool games, such as a local game based on soccer events (pari-mutuel); virtual betting on events such as car, motorcycle, horse, and dog races and tennis or soccer matches; lottery including Lotto and “10 and Lotto” and Superenalotto with “Win for Life,” “Eurojackpot”; and instant lottery (iGratta eVinci on Line).

 

Commercial Services

 

IGT PLC provides collection and processing services in Italy which include bill payments, electronic tax payments, utility payments, prepaid cellular telephone recharges, prepaid cards and retail-based programs. IGT PLC’s commercial services network comprises about 70,000 points of sale divided among tobacconists, bars, petrol stations, newspaper stands and motorway restaurants.

 

Seasonality

 

In general, IGT PLC’s business is not materially affected by seasonal variation. However, in the sports

 

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betting business, the volume of bets that IGT PLC collects over the year can be affected by the schedules of sporting events and the particular season of such sports. The volume of bets IGT PLC collects can also be affected by schedules of significant sporting events that occur at regular, but infrequent, intervals, such as the FIFA Football World Cup. In the lottery business, lottery consumption and gaming may decrease over the summer months due to the tendency of consumers to be on vacation during that time. Gaming operations revenues are affected by variations in the number and type of machines in service, levels and frequency of player wagers, and pricing arrangement terms. Seasonal trends generally show higher play levels in the spring and summer months and lower in the fall and winter months.

 

Source of Materials

 

We use a variety of raw materials to manufacture our gaming devices (e.g. metals, wood, plastics, glass, electronic components, and LCD screens). We mainly use paper for office work and for the production of tickets in our two printing facilities, where there is also a significant consumption of toner and ink. A significant part of the materials used involve packaging, which is mainly based on cardboard and paper.

 

Management believes that adequate supplies and alternate sources of IGT PLC’s principal raw materials are available, and does not believe that the prices of these raw materials are especially volatile. IGT PLC has global material suppliers and utilizes multi-sourcing practices to promote component availability, and is not substantially dependent on any single supplier.

 

Product Development

 

We devote substantial resources on research and development and incurred $277.4 million, $108.2 million and $104.8 million of related expenses in 2015, 2014 and 2013, respectively.

 

Our R&D efforts covering multiple engineering disciplines, including hardware, electrical, systems and software for lottery, land-based, online social, and online real-money applications. IGT PLC specializes in progressive creative game development including design, math, graphics and audio. The gaming products are created primarily by employee designers, engineers, and artists, as well as third-party content creators. Third-party technologies are used to improve the yield from development investment and concentrate increased resources on product differentiation engineering.

 

IGT PLC’s main manufacturing and production facility is located in Reno, Nevada, with approximately 594,000 square feet dedicated to product development, warehousing, shipping, and receiving. Other facilities located in California (San Francisco), Washington (Seattle), and China (Beijing) provide local community presence, customized products, and regional production where beneficial or required. Manufacturing operations primarily involve the configuration and assembly of electronic components, cables, harnesses, video monitors, and prefabricated parts purchased from outside sources.

 

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Intellectual Property

 

IGT PLC’s Intellectual Property (IP) portfolio of patents, trademarks, copyrights, and other licensed rights in commercial gaming are significant. As of December 31, 2015, IGT PLC held approximately 5,400 patents or patent applications and approximately 4,400 trademarks filed and registered worldwide. The brand licensing arrangements have various expiration dates through 2024 and commonly contain options to extend.

 

We seek to protect our investment in research and development and the new and original 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 U.S. and foreign patent applications pending. Our portfolio is widely diversified with patents related to a variety of gaming products, including game designs, bonus and secondary imbedded game features, device components, and online or mobile functionality.

 

Most of IGT PLC’s products are marketed under trademarks and copyrights that provide product recognition and promote widespread acceptance. IGT PLC seeks protection for our copyrights and trademarks in the U.S. and various foreign countries, where applicable, and uses IP assets offensively and defensively to protect our innovation and license it to others under terms designed to promote standardization in the gaming industry.

 

Software Development

 

IGT PLC has developed certain software for use in the management of a range of lottery, betting, and gaming functions and products, including leveraging integration with other software components. The intellectual property of the software is managed according to concession requirements. Software developed by IGT PLC is used: (1) in the central system for the centralized management of (a) functions connected to the services provided by IGT PLC through the points of sale of Lotto, of the lotteries, machine gaming and betting, and to other commercial services not connected to games, such as telephonic top up services or utilities payment services, (b) functions connected to the services provided through websites for online gaming and (c) back office functions for the centralized management of data relating to the points of sale and machine gaming, for the connection of the central system with terminals located at the points of sale, for IGT PLC’s online payments, for trouble ticketing of the terminals, for management of the points of sale, for updating of the terminals through the network, for updating of content for machine gaming, for management of the network and data exchange and for management of the data archive of IGT PLC; and (2) in the terminals for the management of Lotto, of the lotteries, machine gaming, betting and online payments, for the provision of gaming and non-gaming content, as well as in the integration with other devices such as mobile phones. Historically, IGT PLC generally has sought to obtain patents on its products, but also relied heavily on trade secret protection, believing that its technical “know-how” and the creative skills of its personnel would be of substantial importance to its success. As IGT PLC continues to advance the development of new technological solutions and expand its presence in other market segments, it continues to pursue comprehensive intellectual property protection, including patents where appropriate, for these solutions. IGT PLC is currently pursuing protection of some of its newest advances in technology and gaming. IGT PLC has obtained patent protection in certain of its key business methods in the areas of infrastructure systems, terminal improvements and creative game design. Many of IGT PLC’s products bear recognizable brand names that it either owns or has the right to use pursuant to license agreements. IGT PLC owns trademark registrations in the United States and in foreign countries and uses other marks that have not been registered. IGT PLC also licenses certain trademarks from third parties such as Wheel of Fortune™, Jeopardy!™, Life is Good™, Circuit of the Americas™, Ghostbusters™, Gas Monkey Garage™, The Three Stooges™, Plants v. Zombies™, Bejeweled™, Zuma™ Caesars™, Harrah’s™, Rio™, Paris™ Las Vegas, and Horseshoe™.

 

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Regulatory Framework

 

IGT PLC currently does business in approximately 100 countries worldwide. In most countries, the gaming market is heavily regulated. Each country governs the gaming sector, from a regulatory and administrative point of view, with its own solutions. Lotteries and other gaming activities are typically regulated by a specialized governing body. The organizational model varies from country to country, although, more frequently, the operation of games is conducted by one or more dedicated public or private entities. In certain countries, the operation of games is conducted by several operators. In the United States, there is a lottery authority or a commission for gaming activities in each state. On a worldwide basis, the supply of gaming products is varied and can be broken down by game lines, such as gaming (casino, VLT and other games), lotteries (online, instant and traditional lotteries) and betting. The development of these game lines among different countries is highly diversified. This is attributable, in particular, to macroeconomic factors, but also to player preferences and local legislation.

 

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.  State lottery authorities generally conduct intensive investigations of vendors and their employees prior to and after awarding a vendor a contract with the lottery. State lottery authorities may require the removal of any of the vendor’s employees deemed to be unsuitable and are generally empowered to disqualify a vendor from receiving a lottery contract or operating a lottery system as a result of any such investigation. Some states also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically 5% or more) of a company.

 

Gaming laws and regulations 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 monitor our activities in other jurisdictions to ensure that we comply with local standards on a worldwide basis. As a Nevada licensee, 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.

 

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.

 

US Gaming Regulation

 

The gaming industry is subject to extensive governmental regulation by U.S. federal, state and local governments, as well as tribal officials or organizations and foreign governments. Lotteries are regulated by state law in the United States, which typically prohibits gaming except as authorized and regulated by the particular state. There are currently 45 jurisdictions that authorize the operation of online lotteries in the United States. The ongoing operations of lotteries and lottery operators are typically subject to extensive and evolving regulation, which vary state-by-state.  While the regulatory requirements vary by jurisdiction, most require:

 

·                  Licenses and/or permits

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

·                  documentation of qualifications, including evidence of financial stability

·                  specific approvals for gaming equipment manufacturers and distributors

 

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Italian Gaming and Betting Regulations

 

IGT PLC operates in Italy in the gaming and betting sectors. The Italian gaming and betting regulatory authority is ADM.

 

As of December 31, 2015, IGT PLC held concessions for (1) the activation and operation of the network for the Lotto game, (2) the operation of instant and traditional lotteries, (3) the activation and operation of the network for the telematic operation of legalized AWP machine (new slot), and (4) the collection of pari-mutuel and fixed odds betting through physical points of sale and interactive channels.

 

Gaming in Italy is an activity reserved to the State. Any game that is carried out without proper authorization is illegal and subject to criminal penalties. Italian law grants the Ministry of Economy and Finance the power to introduce games and to manage gaming and betting activities directly or by granting concessions to third parties. The process of creating and granting gaming and betting concessions in Italy is heavily regulated.

 

Gaming and betting concessions are granted pursuant to a public tender procurement process. The concession provides for all of the concessionaire’s activities and duties, including collection of the game’s revenues, the payment of winnings, the payment of the point of sale, the drawings and the management of all of the technological assets to operate gaming. However, pursuant to Article 24, paragraph 11-26 of Law no. 88/2009, the exercise and remote collection of bets and games is not based on a tender process but rather the authorization of applicants meeting certain qualifications. Concessions are for a determined time period and are not renewable unless indicated in the concession agreement; in such event, the renewal is not on the same terms. In certain cases, the concession may be extended at the option of the governmental authority. Under certain circumstances, which are typically defined in the concession agreement, the concession may be revoked or terminated. Most cases of early termination are related to the breach of the terms of the concession agreement or the non-fulfillment of conditions of that agreement. In some cases, the early termination of the concession allows the State to draw upon the entire amount of the performance bond presented by the concessionaire. Upon governmental request, the concessionaire has an obligation to transfer, free of charge, the assets subject of the concession to the State at the end of the term of the concession or in the event of its revocation or early termination. Each single concession contains specific provisions enacting such general obligation.

 

The ongoing operations of Italian gaming and betting operators are typically subject to extensive and evolving regulation. In general, the regulatory requirements include:

 

·                  licenses and/or permits;

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

·                  documentation of qualification, including evidence of financial stability;

·                  the provision of financial guarantees (bid bond and performance bond);

·                  information on shareholders owning more than 2% with regard to bidding processes;

·                  specific approvals for gaming equipment manufacturers and distributors;

·                  good standing of directors, manager and shareholders owning more than 2% of the concessionaire;

·                  certain economic and financial requirements;

·                  taxation and financial requirements;

·                  taxation on the wagers coming from illegal gaming;

·                  permission of the State in case of change of control of the concessionaires;

·                  registration of all operators in the gaming machine industry; and

·                  anti-money laundering compliance.

 

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EU Proposed Gaming Regulation

 

The European Union is considering setting out a harmonizing regulation on online gambling. The European Commission is unveiling a recommendation, with a series of initiatives aimed at clarifying the regulation of online gambling and encouraging cooperation between Member States. While Member States are, in principle, free to set the objectives of their policies on online gambling, the purpose of the European Commission is to develop a well-regulated, safer online gambling sector in the European Union. The European Commission will adopt three recommendations addressed to the Member States, namely on (1) common protection of consumers; (2) responsible gambling advertising; and (3) the prevention of betting-related match-fixing.

 

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C.                         Organizational Structure

 

A listing of IGT PLC’s directly and indirectly owned subsidiaries as of April 21, 2016 is set forth in Exhibit 8.1 to this annual report on Form 20-F.

 

On April 7, 2015, GTECH merged with and into the Company, and IGT merged with and into Sub, with IGT surviving the Subsidiary Merger, all pursuant to the conditions set forth in the Merger Agreement. As a result, the Company is the successor of GTECH and the parent of IGT. For detailed information, see “—A. History and Development of the Company”.

 

The following is a diagram of the Company and certain of its subsidiaries and associated companies, including all U.S. regulated entities, following the completion of the Mergers and certain reorganization transactions which are described under “—A. History and Development of the Company—Other Transactions”:

 

GRAPHIC

 


* Accumulated shareholdings of De Agostini S.p.A., which holds 46.43%, and DeA Partecipazioni S.p.A., which holds 5.01% of the IGT PLC ordinary shares.

 

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D.                         Property, Plant and Equipment

 

IGT PLC’s principal office is located at Marble Arch House, 66 Seymour Street, 2nd Floor, London W1H 5BT, United Kingdom, telephone number +44 (0) 207 535 3200. As of December 31, 2015, IGT PLC and subsidiaries leased approximately 141 properties in the United States and 136 properties outside of the United States, and owned a number of facilities and properties, including:

 

·                  an approximately 140,000 square foot manufacturing and central storage facility in Coventry, Rhode Island;

 

·                  an approximately 13,000 square foot enterprise data center in West Greenwich, Rhode Island;

 

·                  an approximately 113,000 square foot manufacturing, research and development and office building in Moncton, New Brunswick, Canada;

 

·                  an approximately 51,000 square foot manufacturing and office facility in Gross St. Florian, Austria;

 

·                  an approximately 1.2 million square foot office/warehouse/game studio/engineering/global manufacturing/global data center in Reno, Nevada.

 

·                  an approximately 52,500 square foot research and development lab and engineering office in Reno, Nevada

 

The following table shows IGT PLC’s material owned and leased properties as of December 31, 2015:

 

U.S. Properties

 

Location

 

Square
Feet

 

Use and Productive Capacity

 

Extent of
Utilization

 

Holding
Status

 

Products
Produced

 

9295 Prototype Dr.,

Reno, NV

 

1,180,418

 

Office, Warehouse, Game Studios, Hardware/Software Engineering; Global Manufacturing Center

 

100

%

Owned

 

EGM’s

 

6355 S. Buffalo Dr.,

Las Vegas, NV

 

222,268

 

Office, Game Studio, Systems Software, Showroom

 

100

%

Leased

 

N/A

 

55 Technology Way,

West Greenwich, RI

 

170,000

 

WG Technology Center: Office; research and testing; storage and distribution

 

100

%

Leased

 

N/A

 

1372 Main Street,

Coventry, RI

 

140,000

 

Storage

 

100

%

Owned

 

N/A

 

10 Memorial Blvd.,

Providence, RI

 

124,769

 

IGT PLC US Headquarters: Office

 

100

%

Leased

 

N/A

 

4000 South Frontage Road, Suite 101

Lakeland, FL

 

98,280

 

IGT PLC Printing Plant: Printing facility; storage and distribution; office

 

100

%

Leased

 

Printed tickets

 

 

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Location

 

Square
Feet

 

Use and Productive Capacity

 

Extent of
Utilization

 

Holding
Status

 

Products
Produced

 

8520 Tuscany Way,

Bldg. 6,
Suite 100,
Austin, TX

 

81,933

 

Texas Warehouse and National Response Center: Contact center; storage and distribution; office

 

95

%

Leased

 

N/A

 

1000 Sandhill Rd.,

Reno, NV

 

52,500

 

Office, Warehouse, Global Test & Interoperability Center

 

60

%

Owned

 

N/A

 

605 Fifth Avenue
South, Suite
300 Seattle, WA

 

49,375

 

DoubleDown Interactive Offices and Game Studio

 

95

%

Leased

 

N/A

 

5300 Riata Park Court,

Bldg. E,
Suite 100,
Austin, TX

 

42,537

 

Austin Tech Campus: Research and test; office

 

90

%

Leased

 

N/A

 

403 Westcoat Road,

Egg Harbor
Township, NJ

 

30,698

 

Service Office, Warehouse, Game Studio, MJP Monitoring

 

75

%

Leased

 

N/A

 

405 Howard Street,
Floor 6,
San Francisco, CA

 

28,921

 

Office, Interactive

 

100

%

Leased

 

N/A

 

8200 Cameron Road,
Suite E120,
Austin, TX

 

24,320

 

Data Center of the Americas: Data center; network operations; office

 

80

%

Leased

 

N/A

 

47 Technology Way,
West Greenwich, RI

 

13,050

 

Enterprise Data Center: Data center; network operations

 

75

%

Owned

 

N/A

 

75 Baker Street,

Providence, RI

 

10,640

 

RI National Response Center: Office; contact center

 

100

%

Leased

 

N/A

 

 

Non-U.S. Properties

 

Location

 

Square
Feet

 

Use and Productive Capacity

 

Extent of
Utilization

 

Holding
Status

 

Products
Produced

 

Viale del Campo Boario 56/D 00154
Roma, Italy

 

123,740

 

IGT PLC Headquarters in Italy: Office Italy Data Center: Data center; network operations

 

100

%

Leased

 

N/A

 

328 Urquhart Ave,
Moncton, New Brunswick,
Canada

 

113,000

 

Canada HQ: Manufacturing; office; research and test

 

100

%

Owned

 

VLTs

 

Viale del Campo Boario 19 00154

Roma, Italy

 

96,840

 

Office for administration, software development

 

95

%

Leased

 

N/A

 

 

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Location

 

Square
Feet

 

Use and Productive Capacity

 

Extent of
Utilization

 

Holding
Status

 

Products
Produced

 

Seering 13-14,

Unterpremstatten,
Austria

 

73,776

 

Austria Gaming HQ: Office; research and test

 

90

%

Leased

 

N/A

 

Building 2, Reserve
Industrial Estate, 6
Hope Street,
Ermington, Australia

 

62,277

 

Office, Warehouse, Game Studio, Systems Software, Sales, AUS Final Assembly

 

100

%

Leased

 

N/A

 

29, Suzhoujie Street,
Viva Plaza,
Haidian District,
Room No. 1-20,
11
th and 18th Floors,
Beijing
100080, China

 

56,898

 

Game Studio, Systems Software, Office

 

85

%

Leased

 

N/A

 

Al. Jerozolimskie, 92

Brama Building,
Warsaw, Poland

 

51,072

 

International Tech Hub: Office; research and test

 

95

%

Leased

 

N/A

 

Lasnitzstrasse 19,
Gross St.
Florian, Austria

 

50,808

 

Austria Manufacturing: Manufacturing; storage and distribution

 

75

%

Owned

 

VLTs

 

48 Indianapolis Street, Kyalami Business Park, Midrand, South Africa

 

44,001

 

Office, Warehouse, Systems Software, Sales, SA Final Assembly

 

90

%

Leased

 

EGMs

 

Bijlmermeerstraat
30, Hoofddorp,
2131,
Netherlands

 

35,306

 

Office, EMEA Final Assembly, Warehouse

 

90

%

Leased

 

EGMs

 

Emilio Frers 2154,
Martinez, Buenos Aires, Argentina

 

35,090

 

Office, LAC Final Assembly, Warehouse

 

90

%

Leased

 

EGMs

 

USCE Tower

Bulevar Mihajla
Pupina No. 6
Belgrade, Serbia

 

28,471

 

Software development office, Lottery and Gaming products

 

95

%

Leased

 

N/A

 

11 Talavera Rd.
Building  B,
Sydney, Australia

 

27,432

 

Office, sales & Marketing, Financial support

 

100

%

Leased

 

N/A

 

Marble Arch House,
66 Seymour Street, 2
nd Floor,
London W1H 5BT,
United Kingdom

 

11,495

 

IGT PLC Registered global headquarters

 

60

%

Leased

 

N/A

 

 

IGT PLC’s facilities are in good condition and are adequate for its present needs and there are no known environmental issues that may affect IGT PLC’s utilization of its real property assets.

 

IGT PLC does not have any plans to construct, expand or improve its facilities in any material manner other than general maintenance of facilities.  As such, no increase in productive capacity is anticipated.

 

None of IGT PLC’s properties is subject to mortgages or other security interests granted to secure indebtedness to certain financial institutions.

 

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Item 4A.                                                Unresolved Staff Comments

 

None.

 

Item 5.         Operating and Financial Review and Prospects

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, included in this annual report, as well as “Presentation of Financial and Certain Other Information,” “Item 3.A. Selected Financial Data,”  “Item 3.D. Risk Factors and “Item 4.B. Business Overview.”

 

The following discussion includes certain forward-looking statements. Actual results may differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, including in “Item 5.G. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” and “Item 3.D. Risk Factors.”

 

In the following discussion, unless otherwise specified or the context otherwise indicates, all references to “IGT PLC,” “we,” “us,” “our,” and the “Company” refer to the business and operations of International Game Technology PLC and consolidated subsidiaries.

 

A.            Operating Results

 

Overview

 

We are a leading commercial operator and provider of technology in the regulated worldwide gaming markets. We operate and provide a full range of services and leading-edge technology products across all gaming markets, including lotteries, machine gaming, sports betting and interactive gaming. We also provide high-volume processing of commercial transactions. Our state-of-the-art information technology platforms and software enable distribution through land-based systems, Internet and mobile devices. We provide business-to-consumer (B2C) and business-to-business (B2B) products and services to customers in over 100 countries worldwide on six continents and had 12,543 employees at December 31, 2015.

 

The structure of our internal organization is customer-facing aligned around four business units operating in three regions as follows:

 

·                  North America Gaming and Interactive

·                  North America Lottery

·                  International

·                  Italy

 

Each of these segments operate and provide a full range of gaming services including lottery management services, online and instant lotteries, sports betting, machine gaming and interactive gaming.

 

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Key Factors Affecting Operations and Financial Condition

 

The following are a description of the principal factors which have affected our results of operations and financial condition for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 and/or which may affect results of operations and financial condition for future periods.

 

The IGT Acquisition and Related Financing Transactions: On April 7, 2015, we acquired International Game Technology (“IGT”), a global leader in casino and social gaming entertainment, headquartered in Las Vegas, Nevada. We recorded $49.4 million and $44.0 million of professional fees and expenses related to the acquisition of IGT in 2015 and 2014, respectively, which are recorded in Transaction expense, net in our consolidated income statements.

 

Effects of Foreign Exchange Rates: We are affected by fluctuations in foreign exchange rates (i) through translation of foreign currency financial statements into U.S.$ for consolidation, which we refer to as the translation impact, and to a lesser extent (ii) through transactions by subsidiaries in currencies other than their own functional currencies, which we refer to as the transaction impact. Translation impacts arise in the preparation of the consolidated financial statements; in particular, we prepare our consolidated financial statements in U.S. $ while the financial statements of each of our subsidiaries are prepared in the functional currency of that subsidiary. In preparing consolidated financial statements, we translate assets and liabilities measured in the functional currency of the subsidiaries into U.S.$ using the exchange rate prevailing at the balance sheet date, while we translate income and expenses using the average exchange rates for the period covered. Accordingly, fluctuations in the exchange rate of the functional currencies of our subsidiaries against the U.S. dollar impacts our results of operations. We are particularly exposed to movements in the euro/US dollar exchange rate. For example, our service revenues in the Italy segment decreased by $402.8 million, or 19.1% in 2015 compared to 2014, however, on a constant currency basis (as described below under “Constant currency information”), our revenues in the Italy segment would have decreased by $71.8 million, or 3.4%. Although the fluctuations in foreign exchange rates has had a material impact on our revenues, the impact on our operating income and our cash flows is less significant in that revenues are mostly matched by costs denominated in the same currency.

 

Regulation: We operate on an international basis in regulated gaming markets, where the regulatory markets are subject to continuous evolution. Our ability to enter new markets or to offer new products in existing markets depends on decisions made by the market regulator, which often follow a period of political debate. For example, in November 2011 a bill was signed into law that permits the establishment of casinos in Massachusetts and, in September 2014, a developer was awarded a license that permits the construction of a casino resort in the greater Boston area. Accordingly, we are not in control of the timing of new opportunities, including the outsourcing of gaming operations, the award of new contracts, the introduction of new instant ticket price points and the launch of new games.

 

The Italian betting and gaming market is regulated by the Italian government through Agenzia delle Dogane e dei Monopoli (“ADM”), the national regulator and other bodies responsible for the control and regulation of this market. From time to time, regulatory changes could be introduced which might affect our existing business in certain jurisdictions, including opening hours for points of sale, restrictions on the sale of certain products, the awarding, monitoring and renewal of gaming concessions, the minimum payout ratios on certain games, gaming tax increases and other legislation designed to encourage responsible gaming. For example, the tax on VLT’s in Italy increased from 4% of wagers in 2012 to 5% of wagers during 2013, 2014 and 2015 and then 5.5% of wagers effective January 1, 2016. Our Gaming machine revenues are recorded net of tax, and therefore any changes in taxation can impact our revenues and results of operations. Moreover, the Italian budget law for 2015 introduced a number of new laws, effective from January 1, 2015, that impacted the public tender procurement process for the award of the Lotto concession (including by introducing a starting price for the tender of €700 million ($762.1 million at the December 31, 2015 exchange rate), to be paid by the winning bidder in three installments) and the fees and commissions regime applicable to the operation of VLT’s and AWP’s (including by reducing the fees due to concessionaires and operators in aggregate by €500 million ($544.4 million at the December 31, 2015 exchange rate) per year, starting from 2015).

 

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The profitability of our gaming products is affected by taxes imposed and the minimum payout ratios. Some of our gaming products have payout ratios greater than the minimum payout ratios allowed by the regulators and, for these products we may be able to decrease the payout ratio in order to mitigate the effect of any tax increases applied on them. However, in order to minimize any negative impact on prizes and volumes, we would generally seek to decrease such payout ratios gradually over time. Accordingly, there can be a time delay between increases in taxes and decreases in payout ratios which would result in a temporary reduction in our profitability.

 

Macroeconomic Factors and Demographics: Gaming is a form of entertainment and, as such, competes with other forms of entertainment for the discretionary spending of the local population. In general, countries and regions with higher GDPs will tend to have higher levels of discretionary spending that can be directed to gaming and other forms of entertainment. Similarly, although we believe gaming tends to be more resilient than other forms of entertainment, when a country or region experiences a decline in GDP or a rise in inflation, spending on gaming may also decline. Demographic changes may also affect results of operations. In addition, changing social habits, such as longer working hours that result in a decrease in time spent on entertainment, may adversely affect results of operations.

 

Existing Contracts, New Contracts and Contractual Rates: Our revenue is significantly impacted by the renewal or loss of existing contracts, as well as our ability to secure new contracts. Service revenue represented 84.8% of our total revenue for the year ended December 31, 2015, with the majority of such revenue being derived from contracts with a duration (including extension options) at December 31, 2015 of five or more years. Revenue from our top ten customers in the North America Lottery and International segments represented 16.8% of our total revenue for the year ended December 31, 2015. Accordingly, the retention, loss or addition of a significant contract or customer can have a material effect on our results of operations. Further, our Lotto concession in Italy, which represented 10.5% of our total revenue for the year ended December 31, 2015, expires in June 2016 and is currently subject to a public tender process. In March 2016, IGT PLC, as leader of a consortium of strategic and financial partners, submitted a bid on the new Lotto Concession. In April 2016, the ADM announced that the consortium has been provisionally awarded the new Lotto Concession. Although the consortium is the sole bidder, IGT PLC cannot be certain of the results of the tender, including whether the consortium, of which IGT PLC is the principal operating partner, will be finally awarded the new concession. In addition, our results of operations are significantly impacted by the level of fees we receive under our contracts. For the Lotto concession, we receive from ADM a fee equal to a percentage of ticket sales, which decreases as the total wagers increases during an annual period. Under the Italian budget law for 2015, the fee received by the concessionaire from ADM will be equal to 6% of wagers (the annual average fee rates we received from ADM was approximately 6.24% and 6.42% for the years ended December 31, 2015 and 2014, respectively).

 

Jackpots and Late Numbers: We believe that the performance of lottery products is influenced by the size of available jackpots in jurisdictions that offer such jackpots. In general, when jackpots increase, sales of lottery tickets also increase, further increasing the jackpot. We also believe that consumers in Italy monitor “late numbers” (numbers which have not been drawn for more than 100 draws) and when there is a good pipeline of late numbers, wagers in Italy increase. Under both of these circumstances, our service revenues are positively impacted.

 

Seasonality: Our business is not materially affected by seasonal variation. However, in our sports betting business, the volume of bets which we collect over the year can be affected by the schedules of sporting events and the particular season of such sports. The volume of bets which we collect can also be affected by schedules of significant sporting events that occur at regular, but infrequent intervals, such as the FIFA Football World Cup. In our lottery business, lottery consumption and gaming may decrease over the summer months due to the tendency of consumers to be on vacation during that time. Gaming operations revenues are affected by variations in the number and type of machines in service, levels and frequency of player wagers, and pricing arrangement terms. Seasonal trends generally show higher play levels in the spring and summer months and lower in the fall and winter months.

 

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Product Sales: Our product sales fluctuate from year to year due to the mix, volume and timing of the product sales transactions. In general, our product sales contracts are dependent on the timing of replacement cycles. Product sales amounted to $711.4 million, $322.3 million and $369.1 million, or approximately 15.2%, 8.5% and 9.6% of total revenues, in 2015, 2014 and 2013, respectively. The $389.1 million increase in product sales in 2015 compared to 2014 was due principally to the IGT acquisition.

 

Restructuring Costs: During the historical periods presented we have undertaken restructuring plans and initiatives principally related to the streamlining of our interactive gaming operations, optimization projects for Lottery and costs associated with the overall management reorganization announced in 2013. In addition, with respect to the IGT acquisition we have undertaken various restructuring plans to eliminate redundant costs across the business. We recorded restructuring costs associated with these plans of $76.9 million, $23.7 million and $27.9 million, in 2015, 2014 and 2013, respectively.

 

Penalties under Minimum Profit Contracts: We have three contracts where we have provided customers with minimum profit level guarantees (the Illinois Contract, Indiana Contract and New Jersey Contract). In relation to the Illinois Contract, we guaranteed a minimum profit level to the State of Illinois for each fiscal year of the agreement, commencing with the State of Illinois’s fiscal year ended June 30, 2012. The amounts guaranteed and therefore amounts owed by the Company as shortfall payments under the Illinois Contract were under dispute. In December 2014, the Company and the State of Illinois entered into a termination agreement which settled the amounts of shortfall payments for fiscal years 2012, 2013 and 2014, in the amounts of $21.8 million, $38.6 million and $37.1 million, respectively. In 2015, the Attorney General of the State of Illinois questioned the validity of the termination agreement between the Company and the State of Illinois which resulted in the Company and the State of Illinois entering into a new termination agreement and the Company paid the State of Illinois an additional $10 million representing the shortfall payment for the State of Illinois’s fiscal year ending June 30, 2015. The Company will not be responsible for the payment of any other shortfall payment, nor will it be entitled to receive any incentive compensation, for all or any portion of fiscal year 2015, or any subsequent fiscal year. The Company recorded reductions of service revenue of $10 million, $55.5 million and $42.0 million in 2015, 2014 and 2013, respectively.

 

In relation to the Indiana Contract, we guaranteed a minimum profit level to the State of Indiana commencing with the contract year starting July 1, 2013. We recorded reductions of service revenue of $8.0 million, $8.8 million and $0.8 million in 2015, 2014 and 2013, respectively related to this guarantee. In 2015, the Company and the State of Indiana renegotiated the Indiana Contract which resulted in revised guarantee levels and in consideration the Company paid the State of Indiana $18.3 million which the Company capitalized to Other Assets in its consolidated balance sheet and which the Company is amortizing to service revenue over the remaining contract term.

 

In relation to the New Jersey Contract, we guaranteed a minimum profit level to the State of New Jersey commencing with the contract year starting July 1, 2014. In 2015, the Company and the State of New Jersey renegotiated the New Jersey Contract which resulted in revised guarantee levels and in consideration the Company paid the State of New Jersey $15.4 million which the Company capitalized to Other Assets in its consolidated balance sheet and which the Company is amortizing to service revenue over the remaining contract term.

 

For more information on these lottery management contracts, see Item 4.B — Information on the Company — Business Overview.

 

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Settlement of Litigation related to Machine Gaming and Certain Italian Tax Matters: In December 2014, the Company reached agreement with the Italian Tax Agency for the settlement of certain tax matters. The settlement payment was €15.1 million (or approximately $18.3 million at the December 31, 2014 exchange rate) which includes €13.0 million of tax, €2.0 million of interest and €0.1 million of penalties.

 

In our Italy segment, we recorded €30.0 million (or approximately $40.5 million at the September 30, 2013 exchange rate) of expense in our income statement for 2013 in relation to the settlement of litigation between the Italian machine gaming regulator and all machine gaming operators in Italy. We paid the settlement in the fourth quarter of 2013.

 

In December 2013, we paid €34.7 million (or approximately $47.9 million at the December 31, 2013 exchange rate) to the Italian Tax Agency (Agenzia delle Entrate) in settlement of certain tax matters of which €28.0 million involved the corporate reorganization and subsequent restructuring of certain intercompany financing transactions during the years 2007, 2008 and 2009 related to the acquisition of GTECH Holdings Corporation in August 2006. Of the €34.7 million settlement, €6.3 million had already been recorded as a provision in previous periods.

 

Research and Development Activities: We devote substantial resources on research and development and incurred $277.4 million, $108.2 million and $104.8 million of related expenses in 2015, 2014 and 2013, respectively. As anticipated, investments in research and development increased following the April 2015 acquisition of IGT.

 

Critical Accounting Estimates

 

Our consolidated financial statements are prepared in conformity with GAAP which require the use of estimates, judgments and assumptions that affect the carrying amount of assets and liabilities and the amounts of income and expenses recognized. The estimates and underlying assumptions are based on information available at the date that the financial statements are prepared, on historical experience, judgments and assumptions considered to be reasonable and realistic.

 

We periodically and continuously review the estimates and assumptions. Actual results for those areas requiring management judgment or estimates may differ from those recorded in the consolidated financial statements due to the occurrence of events and the uncertainties which characterize the assumptions and conditions on which the estimates are based.

 

The areas which require greater subjectivity of management in making estimates and judgments and where a change in such underlying assumptions could have a significant impact on our consolidated financial statements are discussed below.

 

Revenue Recognition

 

The Company has two categories of revenue: Service revenue and Product sales.

 

Service revenue is derived from the following sources:

 

·                  Operating contracts predominately related to Italian contracts;

·                  Gaming operations arrangements where the Company provides customers with proprietary gaming equipment, systems, content licensing, and services;

·                  Facility Management Contracts (Hosting arrangements);

·                  Interactive contracts; and

·                  Post-contract customer support (“PCS”).

 

Product sales are derived from the following sources:

 

·                  Sale of lottery terminals and sale of gaming machines, including game content; and

·                  Sale of lottery and gaming systems, including the licensing of proprietary software, and implementation services.

 

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Revenue is recognized when all of the following conditions are met:

 

(i)             Persuasive evidence of an arrangement exists;

(ii)          Delivery has occurred;

(iii)       The fee is fixed or determinable; and

(iv)      Collectability is probable.

 

Revenues are reported net of incentives, rebates, and discounts. Sales taxes, gaming taxes and other taxes of a similar nature are presented on a net basis (excluded from revenue). Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria is met.

 

Service revenue

 

Service revenue is derived from the following types of arrangements:

 

Operating contracts

 

Certain of the Company’s revenue, primarily revenue from the Italy segment, is derived from operating contracts. Under operating contracts, the Company manages all the activities along the lottery value chain including collecting wagers, paying out prizes, managing all accounting and other back-office functions, running advertising and promotions, operating data transmission networks and processing centers, training staff, providing retailers with assistance and supplying materials for the game. In Italian arrangements whereby the Company is performing services on behalf of the government and the government is considered the Company’s customer, revenue is recognized net of prize payments, taxes, retailer commissions and remittances to state authorities, because the Company is acting as an agent to the authorities. In arrangements where the Company’s customers are the end players and/or retailers, the Company records revenue net of prizes and taxes only, and records the retailer commissions as a cost of service, because the Company is acting as the principal.

 

The Company also provides sports pools and sports betting services. Under sports pools arrangements, the Company manages the sports pool whereby the sports pool prizes are divided among those players who select the correct outcome. There are no odds involved in sports pools and each winner’s payoff depends on the number of players and the size of the pool. Under sports pools arrangements, the Company collects the wagers, pays prizes, pays a percentage fee to retailers, withholds its fee, and remits the balance to the respective regulatory agency. The Company assumes no risk associated with sports pool wagering. The Company records revenue net of prize payouts, gaming taxes, retailer commissions and remittances to state authorities, because the Company is acting as an agent to the authorities.

 

In sports betting contracts, the Company establishes and assumes the risks related to the odds. Under fixed odds betting, the potential payout is fixed at the time bets are placed and the Company bears the risk of odds setting. The Company is responsible for collecting the wagers, paying prizes, and paying fees to retailers. The Company retains the remaining cash as profits. Under these arrangements, the Company records revenue net, calculated as total wagers less the estimated payout for prizes, because the betting contract is considered a derivative and is required to be recorded at fair value. Taxes are recorded as contra revenue and retailer commissions are shown as expenses.

 

Fees earned under operating contracts are recognized as revenue in the period earned and are classified as service revenue in the consolidated statement of operations when all of the criteria outlined above are met.

 

Under operating contracts, the Company is generally required to pay upfront concession payments. When such upfront payments are paid to the Company’s customers, the payment is recorded as a non-current asset and amortized as a reduction of service revenue over the concession term.

 

Gaming Operations

 

Gaming operations revenues are generated by providing customers with proprietary land-based gaming equipment, systems, content licensing, and services under a variety of recurring revenue arrangements, including a percentage of coin-in (amounts wagered), a percentage of net win, or a fixed daily/monthly fee.  Included in gaming operations are Wide Area Progressive (“WAP”) systems. WAP systems consist of linked slot machines located in multiple casino properties, connecting to a central computer system. WAP games differ from

 

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all other games in that a Company-sponsored progressive jackpot increases with every wager until a player wins the top award combination. Casinos with WAP machines pay a percentage of the coin-in (amounts wagered) for services related to the design, assembly, installation, operation, maintenance, and marketing of the WAP systems, as well as funding and administration of Company-sponsored progressive jackpots. Fees earned under operating contracts are recognized as revenue in the period earned and are classified as service revenue in the consolidated statement of operations when all of the criteria outlined above are met.

 

Facility management contracts

 

Under facilities management contracts, the Company constructs, installs, operates and retains ownership of the online system. These contracts, principally in the North America Lottery segment, generally provide for a variable amount of monthly or weekly service fees paid to the Company directly from the customer based on a percentage of sales.

 

Fees earned under facilities management contracts are recognized as revenue in the period earned, throughout the service period, and are classified as service revenue in the consolidated statement of operations when all of the criteria outlined above are met.

 

Interactive Contracts

 

Interactive revenues are principally generated from online social gaming and online real-money products and services (“IGTi”).

 

Social gaming revenues are generated from the sale of virtual casino chips to players in the online DoubleDown Casino that can be used for additional play or game enhancements. Revenues from player purchases are recognized ratably over the estimated average service period in which the chips are consumed based on historical data analysis. Because DoubleDown is the principal, responsible for substantially all aspects of the casino services and sale of virtual goods to the player, revenues are recorded on a gross basis. Payment processing fees paid to Facebook, Apple and Google on a revenue participation basis are recorded within cost of services. This determination is subject to judgment and material changes in the substance or nature of arrangements with customers and payment processors may result in a change in presentation.

 

IGTi revenues are generated from online real-money gaming solutions offerings, which encompass gaming systems infrastructure, applications, content licensing, and back office operational support services, including WAP jackpot funding and administration. IGTi solutions are generally provided under revenue sharing arrangements based on a percentage of net win similar to gaming operations discussed above.

 

Post-contract customer support (PCS)

 

Product sales contracts generally include PCS, which includes telephone support, software maintenance, software support, professional services, and in some scenarios the right to receive unspecified upgrades/enhancements on a when-and-if-available basis. Fees earned under PCS contracts are recognized as revenue in the period earned (i.e. over the support period) and are classified as service revenue in the consolidated statement of operations when all of the criteria outlined above are met.

 

Product Sales

 

Product sales are derived from the following types of arrangements:

 

Sale of lottery terminals and sale of gaming machines, including game content

 

These arrangements include the sale of lottery terminals and sale of gaming machines including game content, non-machine gaming related equipment, licensing and royalty fees, and component parts (including game themes and electronics conversion kits). The Company’s credit terms are predominately short term in nature. The Company also grants extended payment terms under contracts where the sale is secured by the related equipment sold. Revenue from the sale of lottery terminals and gaming machines is recognized based upon the contractual terms of each arrangement, but predominately upon delivery or acceptance. If the sale of lottery terminals and gaming machines include multiple elements, these arrangements are accounted for under Multiple Element Accounting, discussed below.

 

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System Sales (Lottery and Gaming)

 

System Sale arrangements typically include multiple elements, where the Company constructs, sells, delivers and installs a turnkey system (inclusive of point of sale terminals, if applicable) or delivers equipment and licenses the computer software for a fixed price, and the customer subsequently operates the system. System sale arrangements generally include customer acceptance provisions and general rights to terminate the contract if the Company is in breach of the contract. Such arrangements include non-software elements, software, professional services, and PCS in the form of maintenance and software support arrangements. Amounts due to the Company and costs incurred by the Company in implementing the system prior to customer acceptance are deferred. Revenue attributable to the system is classified as product sales in the consolidated statement of operations and is recognized upon customer acceptance as long as there are no substantial doubts regarding collectability. Revenues attributable to PCS provided subsequent to customer acceptance are classified as service revenue in the consolidated statement of operations in the period earned.

 

Multiple Element Arrangements

 

The Company uses multiple element guidance for both service arrangements and product sale arrangements. In some scenarios, all deliverables are considered one unit of accounting (i.e. facility management contracts where the Company provides software as a service), while other arrangements contain multiple elements that can be separated into distinct deliverables. When arrangements contain multiple elements, including software and non-software components, the Company allocates revenue to each category based on a selling price hierarchy. Allocation of revenue to software and non-software components is based on either vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, or best estimate of selling price (BESP) if neither VSOE nor TPE is available.

 

·                  VSOE of selling price is based on the net price charged when the element is sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services. VSOE for post-contract support is determined based on renewals rates, if available.

 

·                  TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similar customers. However, as the Company’s products contain a significant element of proprietary technology and the Company’s solutions offer different features and functionality, the comparable pricing of third-party products with similar functionality typically cannot be obtained.

 

·                  BESP is established considering multiple factors including, but not limited to market conditions, competitive landscape, internal costs, and gross profit objectives. In some scenarios, contractual pricing may serve as the best estimate given the variability among jurisdictions and customers, while in other scenarios cost for each deliverable plus the overall contract margin is used as management’s best estimate.

 

In scenarios where the Company’s products include hardware containing required software that function together to provide the essential functionality of the product, the Company considers both the hardware and required software as “non-software deliverables” and has therefore concluded that such arrangements are not subject to the industry-specific software revenue recognition guidance. The Company recognizes revenue for these arrangements based on ASC 605 and allocates the arrangement consideration based on the relative selling price of the deliverables. In scenarios where the Company’s products include hardware where the software is not considered essential to the functionality of the hardware, the hardware revenue is recognized based on when the revenue recognition criteria is met (i.e. shipment, delivery and/or acceptance) and the software revenue is recognized under the software revenue recognition guidance provided under ASC 985.

 

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If there are multiple deliverables within the software and non-software categories, revenue is first allocated between the software pool of deliverables and the non-software pool of deliverables on a relative fair value basis. Thereafter, revenue for each pool is further allocated as follows:

 

·                  Non-software components: Revenue is further allocated to each separate unit of accounting using the relative selling prices of each deliverable in the priority order described above. However, revenue is only recognized if the unit of accounting has stand-alone value. A deliverable is considered to have stand-alone value if (a) it has value to the customer on stand-alone basis, and (b) if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the Company’s control.

 

·                  Software components: If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software category as a group is then allocated to each software deliverable using VSOE, provided the deliverable has stand-alone value. If VSOE is not available for all deliverables, then the Company uses the residual method when VSOE of fair value of the undelivered items exists. If VSOE of one or more undelivered software items does not exist, then all the software deliverables are considered one unit of accounting. Revenue is deferred and recognized at the earlier of (i) delivery of those elements or (ii) when fair value can be established for the undelivered elements, unless PCS is the only undelivered element, in which case, the entire software category allocated consideration is recognized ratably over the service period.

 

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Goodwill, Intangible Assets and Long-lived Assets

 

Goodwill is tested for impairment annually, or more frequently if facts or circumstances indicate that it may be impaired. Goodwill is tested for impairment at the reporting unit level, which is one level below or the same level as an operating segment. We have four reporting units as follows:

 

·                  North America Gaming and Interactive;

·                  North America Lottery;

·                  International; and

·                  Italy.

 

The carrying amount of goodwill amounted to $6.8 billion and $4.0 billion at December 31, 2015 and December 31, 2014, respectively. There were no goodwill impairment losses recorded in 2015, 2014 or 2013.

 

When testing goodwill for impairment, we first perform a qualitative assessment to determine whether it is necessary to perform step one of a two-step annual goodwill impairment test for each reporting unit. We are required to perform step one only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying value. Should this be the case, the first step of the two-step process is to identify whether a potential impairment exists by comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired, and no additional steps are necessary. If the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its estimated fair value. The estimate of fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the estimated fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

 

In performing step one of the goodwill impairment test for the Company’s reporting units, the Company estimated the fair value of the reporting units using an income approach that analyzed projected discounted cash flows. The procedures the Company followed included, but were not limited to, the following:

 

·                  Analysis of the conditions in, and the economic outlook for, the reporting units;

·                  Analysis of general market data, including economic, governmental, and environmental factors;

·                  Review of the history, current state, and future operations of the reporting units;

·                  Analysis of financial and operating projections based on historical operating results, industry results and expectations;

·                  Analysis of financial, transactional and trading data for companies engaged in similar lines of business to develop appropriate valuation multiples and operating comparisons; and

·                  Calculation of market capitalization, total invested capital, the implied market participant acquisition premium, and supporting qualitative and quantitative analysis.

 

The results of step one of the Company’s impairment testing by reporting unit is as follows ($ thousands):

 

 

 

Estimated

 

Carrying

 

 

 

 

 

 

 

Fair Value

 

Amount

 

Excess

 

%

 

North America Gaming and Interactive

 

5,590,000

 

5,116,000

 

474,000

 

9%

 

North America Lottery

 

2,820,000

 

2,189,400

 

630,600

 

29%

 

International

 

2,920,000

 

2,585,600

 

334,400

 

13%

 

Italy

 

2,695,000

 

2,109,648

 

585,352

 

28%

 

 

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The key assumptions used in the goodwill impairment testing were as follows:

 

 

 

Normalized

 

 

 

 

 

Growth

 

Discount

 

 

 

Rate

 

Rate

 

North America Gaming and Interactive

 

3.00

%

8.25%

 

North America Lottery

 

2.25

%

6.60%

 

International

 

3.00

%

9.50%

 

Italy

 

0.50

%

9.40%

 

 

Where reporting unit fair values did not exceed the carrying amounts by a substantial amount, which the Company believes to be 20% or more, additional analysis was performed and additional disclosure is provided below.

 

North America Gaming and Interactive

 

In calculating the fair value of the North America Gaming and Interactive reporting unit using the income approach, the Company used projections of revenues, operating costs and capital expenditures. The projected cash flows considered historical and estimated future results and general economic and market conditions, as well as the impact of planned business and operational strategies. The following estimates and assumptions were also used in the discounted cash flow analysis:

 

·                  A normalized growth rate of 3.00% based on the estimated sustainable long-term growth rate for the reporting unit;

·                  A normalized operating EBITDA margin percentage was estimated based on a review of average margins within the projection period;

·                  Normalized capital expenditure requirements were estimated based on a review of historical and projected capital expenditures and typical replacement cycles; and

·                  A discount rate of 8.25% based on the weighted average cost of capital.

 

Although the fair value of the North America Gaming and Interactive reporting unit exceeded the carrying amount based on the results of step one of the Company’s goodwill impairment analysis, a decrease in the fair value of more than 8.5% could potentially result in an impairment of goodwill. The use of 8.76% for the discount rate or 2.35% for the growth rate would render the estimated fair value equal to the carrying amount.

 

International

 

The fair value of the International reporting unit was calculated using the income approach, in the same manner as described for the North America Gaming and Interactive reporting unit. The following estimates and assumptions were used in the discounted cash flow analysis:

 

·                  A normalized growth rate of 3.00% based on the estimated sustainable long-term growth rate for the reporting unit;

·                  A normalized operating EBITDA margin percentage was estimated based on a review of average margins within the projection period;

·                  Normalized capital expenditure requirements were estimated based on a review of historical and projected capital expenditures and typical replacement cycles; and

·                  A discount rate of 9.50% based on the weighted average cost of capital.

 

Although the fair value of the International reporting unit exceeded the carrying amount based on the results of step one of the Company’s goodwill impairment analysis, a decrease in the fair value of more than 11.5% could potentially result in an impairment of goodwill. The use of 10.37% for the discount rate or 1.82% for the growth rate would render the estimated fair value equal to the carrying amount.

 

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We also evaluate indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate impairment may exist. We first perform a qualitative assessment to determine whether it is more likely than not that the fair value of indefinite-lived intangible assets are less than their carrying amount and whether the quantitative analysis is necessary. The quantitative analysis compares the fair value of indefinite-lived intangible assets to their carrying amount and an impairment loss is recognized when the carrying amount exceeds the fair value.

 

The process of evaluating the potential impairment related to our goodwill and indefinite-lived intangible assets is highly subjective and requires the application of significant judgment. If an event occurs that would cause revisions to the estimates and assumptions used in analyzing the value of goodwill and other intangible assets with indefinite lives, the revision could result in a non-cash impairment loss that could have a material impact on our financial results. Our annual review of goodwill and indefinite-lived intangible assets for impairment is performed as of November 1 each year. The review in 2015 concluded that no impairment existed.

 

We evaluate long-lived assets, including identifiable intangible assets and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the overall business strategy and significant negative industry or economic trends. Impairment is recognized when the asset is not recoverable and the carrying amount of an asset exceeds its fair value as calculated on a discounted cash flow basis. If an event occurs necessitating revised estimates and assumptions previously used in analyzing the value of our property and equipment or our finite-lived intangibles and other assets that revision could result in a non-cash impairment loss that could have a material impact on our financial results. We recorded impairment losses related to long-lived assets of $12.5 million, $2.6 million and $13.6 million in 2015, 2014 and 2013, respectively. We recorded impairment losses of $9.7 million in 2015 and $3.6 million in 2013 for certain indefinite lived intangible assets.

 

Litigation Provisions

 

Due to the nature of our business, we are involved in a number of legal, regulatory and arbitration proceedings regarding, among other matters, claims by and against us, injunctions by third parties arising out of the ordinary course of our business and investigations and compliance inquiries related to our ongoing operations. The outcome of these proceedings and similar future proceedings cannot be predicted with certainty. It is difficult to accurately estimate the outcome of any proceeding. As such, the amounts of the provision for litigation risk, which has been accrued on the basis of assessments made by external counsel, could vary significantly from the amounts which we would ultimately be obligated or agree to pay to settle any such proceeding. In addition, unfavorable resolution of or significant delay in adjudicating such proceedings could require us to pay substantial monetary damages or penalties and/or incur costs which may exceed any provision for litigation risks or, under certain circumstances, cause the termination or revocation of the relevant concession, license or authorization and thereby have a material adverse effect on our consolidated results of operations, business, financial condition or prospects. At December 31, 2015 and December 31, 2014, provisions for litigation matters amounted to $17.7 million and $6.8 million, respectively.

 

Share-based payments

 

We measure the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments on the date they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant, and incorporates assumptions to the valuation model inputs, including the expected life of the option, volatility, dividend yield and risk-free interest rate. We recorded share-based payment expense of $36.1 million, $13.8 million and $11.3 million in 2015, 2014 and 2013, respectively.

 

Minimum profit level guarantees

 

We have three contracts where we have provided customers with minimum profit level guarantees as summarized above. Our estimates of liabilities for minimum profit level guarantees take into consideration contract terms and financial information provided by our customers, the availability and timing of which could significantly impact our estimates. We account for minimum profit level guarantees as a reduction of service

 

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revenue on an annual basis based on our best estimate of amounts due to the customer annually.

 

Further details of these guarantees, which require management to make estimates and assumptions concerning profit levels, are provided in our consolidated financial statements included herein.

 

Income taxes

 

The Company records a tax provision for the anticipated tax consequences of its reported operating results. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to the taxable income in effect for the years in which those assets and liabilities are expected to be realized and settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

 

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based upon the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

 

Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will record an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involve significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws.

 

Income Statement Overview

 

Revenue

 

Our revenue is comprised of service revenue and product sales. Our service revenue is principally derived from multi-year contracts under which we earn revenue over time as we provide the related services. Service revenue comprises the majority of our revenue, amounting to $3.98 billion, $3.49 billion and $3.46 billion, or approximately 84.8%, 91.5% and 90.4% of total revenues in 2015, 2014 and 2013, respectively. Product sales are derived principally from the installation of new and replacement systems, software and terminals. Product sales in our business fluctuate due to the mix, volume and timing of product sales contracts and therefore may not be comparable from period to period.

 

Summarized below by operating segment are the principal services and products we provide:

 

North America Gaming and Interactive segment

 

The majority of the revenue we earn in the North America Gaming and Interactive segment is derived from service revenue generated from commercial gaming and social gaming. Commercial gaming service revenue is derived from the lease of real money “commercial” gaming machines and software to casinos and government entities in the U.S. and Canada. Social gaming service revenue is derived from customer’s purchase of virtual currency for use in non-wagering interactive games (“play for fun”) played over the Internet. Product sales in the North America Gaming and Interactive segment are derived from the sale of real money “commercial” gaming machines and software to casinos and government entities in the U.S. and Canada. Revenues in the North America Gaming and Interactive segment amounted to $1.1 billion, $132.5 million and $192.1 million, or approximately 23.5%, 3.5% and 5.0% of our total revenues in 2015, 2014 and 2013, respectively.

 

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North America Lottery Segment

 

The majority of the revenue we earn in the North America Lottery segment is derived from Lottery contracts. Revenues in the North America Lottery segment amounted to $1.0 billion, $940.1 million and $882.5 million, or approximately 22.3%, 24.7% and 23.0% of our total revenues in 2015, 2014 and 2013, respectively.

 

Service revenue in the North America Lottery segment is derived from contracts, under which we design, install, operate and retain ownership of the gaming system. These contracts generally provide for a variable amount of monthly or weekly service fees paid to us directly from our customer based on a percentage of sales or net machine income. We recorded fees earned under these contracts as service revenue in the period earned. Expenses associated with providing services under these contracts principally consist of cost of personnel, telecommunications, equipment maintenance and repair, consumables for the games and depreciation of tangible assets.

 

Product sales in the North America Lottery segment are derived from contracts under which we construct, sell, deliver and install a turnkey system or deliver equipment, and license the computer software for a fixed price, and our customer subsequently operates the system or equipment. Revenue attributable to any ongoing services (such as post contract support) provided subsequent to customer acceptance, are recorded as service revenue in the period earned.

 

International segment

 

The majority of the revenue we earn in the International segment is derived from Lottery and Machine Gaming contracts. Revenues in the International segment amounted to $853.1 million, $630.6 million and $636.2 million, or approximately 18.2%, 16.5% and 16.6% of our total revenues in 2015, 2014 and 2013, respectively.

 

Service revenue in the International segment is derived from contracts, under which we design, install, operate and retain ownership of the gaming system. These contracts generally provide for a variable amount of monthly or weekly service fees paid to us directly from our customer based on a percentage of sales or net machine income. We recorded fees earned under these contracts as service revenue in the period earned. Expenses associated with providing services under these contracts principally consist of cost of personnel, telecommunications, equipment maintenance and repair, consumables for the games and depreciation of tangible assets.

 

Product sales in the International segment are derived from contracts under which we construct, sell, deliver and install a turnkey system or deliver equipment, and license the computer software for a fixed price, and our customer subsequently operates the system or equipment. Revenue attributable to any ongoing services (such as post-contract support) provided subsequent to customer acceptance, are recorded as service revenue in the period earned.

 

Italy segment

 

The majority of the revenue we earn in the Italy segment is derived from Lottery and Machine Gaming concessions. Revenues in the Italy segment amounted to $1.704 billion, $2.108 billion and $2.118 billion, or approximately 36.3%, 55.3% and 55.3% of our total revenues in 2015, 2014 and 2013, respectively. We also earn service revenue under Sports Betting, Commercial Services and Interactive Gaming concessions. Summarized below is an overview of the key services within the Italy segment:

 

Lottery

 

Under our Lotto and Gratta e Vinci (“Scratch and Win”) concessions we manage all of the activities along the value chain including collecting wagers, paying out prizes, managing all accounting and other back-office functions, running advertising and promotions, operating data transmission networks and processing centers, training staff, providing retailers with assistance and supplying materials for the games. The service revenues we earn in return for operating these concessions are based on a percentage of wagers. For the Lotto concession this percentage of wagers decreases as the total wagers increase during an annual period, while for the Scratch and Win concession our fee is a fixed percentage of wagers. ADM pays us our Lotto fee on a weekly basis and our Scratch and Win fee on a monthly basis. For Lotto, we deposit wagers, net of prizes paid and retailer commissions retained by the retailer at point of sale into bank accounts owned by ADM. We do not consolidate such accounts on our consolidated statement of financial position as they are the property of ADM. Scratch and

 

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Win sales to the retailers are recorded as a receivable on our consolidated statement of financial position with a corresponding payable to ADM. We collect Scratch and Win wagers from retailers, net of prizes paid directly by retailers and the retailers’ fee, on a weekly basis. On a monthly basis, we remit amounts due to ADM. Expenses associated with providing services under these concessions principally consist of consumable costs, postage and freight, network costs, marketing and advertising of the games, cost of personnel dedicated to these activities and depreciation and amortization of tangible and intangible assets.

 

Machine Gaming

 

Under our Machine Gaming concessions we directly manage stand-alone amusement with prize (“AWPs”) machines and video lottery terminals (“VLTs”) that are installed in various retail outlets linked to a central system. For Machine Gaming we collect the wagers, deduct the applicable gaming taxes, and pay prizes to winners and fees to retailers. The service revenue we earn in return for operating these concessions are generally based on a percentage of wagers net of applicable gaming taxes. We record service revenue net, equal to total wagers less the payout for prizes and applicable gaming taxes. Expenses associated with providing services under these concessions principally consist of point of sale fees, network costs, marketing and advertising of the games, cost of personnel dedicated to these activities, concession fees and depreciation and amortization of tangible and intangible assets. We also provide systems and machines to other machine gaming concessionaires, either as a product sale or with long-term fee-based contracts.

 

Sports Betting

 

We have a number of concessions to operate sports betting (including horse race competitions) and the right to operate sports betting over the internet. Sports betting concessions are principally comprised of arrangements under which we collect the wagers, pay prizes and pay a percentage fee to retailers. We record service revenue net, equal to wagers less prizes and taxes. Expenses associated with providing services under these concessions principally consist of point of sale commissions and depreciation and amortization of tangible and intangible assets.

 

Commercial Transaction Processing Services

 

We leverage our distribution networks and offer high-volume transaction processing services which include bill payments, electronic tax payments, utility payments, prepaid cellular telephone recharges, prepaid cards and retail-based programs. We earn a fee for processing such transactions that is transaction-based (a fixed fee per transaction or a fee based on a percentage of monetary volume processed). We recognize these fees as service revenue at the time a transaction is processed. Expenses associated with providing services under these concessions principally consist of point of sale commissions, network costs, banking fees and depreciation of tangible assets.

 

Interactive Gaming

 

We provide interactive skill games such as poker and other board and soft games through the Internet and mobile channels. For these services, we record service revenue net equal to wagers less prizes and taxes. Expenses associated with providing services under these concessions principally consist of marketing and advertising of the games.

 

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Key Performance Indicators and Terminology

 

We use certain key performance indicators and terminology, which in our view are useful in explaining the trends of our business, including:

 

Constant Currency Information: The “Consolidated Results” discussion below includes information calculated at constant currency. We calculate constant currency by applying the prior-year/period exchange rates to current financial data expressed in local currency in order to eliminate the impact of foreign exchange rate fluctuations originating from translating the income statement of our foreign entities into euro. These constant currency measures are non-GAAP measures. Although we do not believe that these measures are a substitute for GAAP measures, we do believe that such results excluding the impact of currency fluctuations period-on-period provide additional useful information to investors regarding our operating performance on a local currency basis.

 

For example, if an entity with euro functional currency recorded net revenues of €100 million for 2015 and 2014, we would report $111.0 million in net revenues for 2015 (using an average exchange rate of 1.11) compared to $133.0 million for 2014 (using an average exchange rate of 1.33). The constant currency presentation would translate the 2015 net revenue using the 2014 exchange rates, and indicate that the underlying net revenue on a constant currency basis were unchanged year-on-year. We present such information in order to assess how the underlying business has performed prior to the translation impact of fluctuations in foreign currency exchange rates.

 

Same Store Revenue: We refer to the growth in revenue from existing customers as same store revenue. Revenue generated from new customers are referred to as “new contracts” or “contract wins”.

 

Late Numbers: If one of the 90 numbers of the Lotto game in Italy has not been drawn for 100 drawings, it becomes a late number, or a “centenarian”. We believe that consumers in Italy monitor late numbers and wager more on them than on other numbers, although the probability for a number to be drawn is always the same, being it a centenarian or not. Our service revenue is favorably impacted by an increase in late number wagers as is the case when there is a good pipeline of late numbers.

 

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Comparison of the year ended December 31, 2015 and 2014

 

 

 

For the year ended

 

 

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

% of

 

 

 

% of

 

($ thousands)

 

$

 

Revenue

 

$

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

Service revenue

 

3,977,693

 

84.8

 

3,489,969

 

91.5

 

Product sales

 

711,363

 

15.2

 

322,342

 

8.5

 

Total revenue

 

4,689,056

 

100.0

 

3,812,311

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

2,417,315

 

51.6

 

2,324,043

 

61.0

 

Cost of sales

 

520,343

 

11.1

 

190,454

 

5.0

 

Selling, general and administrative

 

795,252

 

17.0

 

413,001

 

10.8

 

Research and development

 

277,401

 

5.9

 

108,175

 

2.8

 

Restructuring expense

 

76,896

 

1.6

 

23,654

 

0.6

 

Impairment loss

 

12,497

 

0.3

 

2,597

 

0.1

 

Transaction expense, net

 

49,396

 

1.1

 

35,336

 

0.9

 

Total operating expenses

 

4,149,100

 

88.5

 

3,097,260

 

81.2

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

539,956

 

11.5

 

715,051

 

18.8

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

17,681

 

0.4

 

4,765

 

0.1

 

Equity income (loss), net

 

207

 

0.0

 

(2,114

)

(0.1

)

Other income

 

6,939

 

0.1

 

7,650

 

0.2

 

Other expense

 

(129,441

)

(2.8

)

(119,129

)

(3.1

)

Foreign exchange gain (loss), net

 

5,611

 

0.1

 

(3,786

)

(0.1

)

Interest expense

 

(457,984

)

(9.8

)

(262,220

)

(6.9

)

Total non-operating expenses

 

(556,987

)

(11.9

)

(374,834