Business Context and Reporting Period
Company: International Game Technology PLC (IGT PLC)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2019
Business Overview: IGT is a leading commercial operator and technology provider in regulated worldwide gaming markets, including lotteries, machine gaming, sports betting, and interactive gaming. The company operates through four segments: North America Gaming and Interactive, North America Lottery, International, and Italy.
Key Financial Metrics
| Metric ($ thousands) | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Revenue | 1,144,916 | 1,206,956 |
| Operating Income | 178,152 | 196,995 |
| Net Income (Consolidated) | 80,495 | (64,504) |
| Net Income Attributable to IGT PLC | 40,254 | (103,146) |
| Diluted EPS (IGT PLC) | $0.20 | $(0.51) |
| Operating Cash Flow | 146,614 | 77,210 |
| Total Debt | 8,003,917 | 8,012,089 |
| Cash and Cash Equivalents | 290,359 | 250,669 |
| Total Liquidity (Cash + Revolver) | 1,851,734 | 1,852,637 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5.1% year-over-year to $1.14 billion. Service revenue fell 5.3% and product sales declined 3.8%.
- Profitability Turnaround: The company reported a net income of $80.5 million compared to a net loss of $64.5 million in the prior year. This improvement was significantly driven by a $58.6 million foreign exchange gain, compared to a $96.7 million loss in Q1 2018.
- Segment Performance:
- Italy: Revenue declined 9.6% due to increased gaming taxes (PREU) and a regulator-mandated reduction in machines, though operating margin improved to 33.7%.
- International: Revenue dropped 10.5% and operating income fell 37.0% due to lower interactive and commercial gaming activity.
- North America Lottery: Revenue increased 1.0% driven by strong same-store growth in instant tickets and draw-based games.
- Debt Structure: Total debt remained relatively flat. Significant maturities of $954.8 million in Senior Secured Notes are due in 2020.
- Accounting Changes: The company adopted ASC 842 (Leases) on January 1, 2019, recognizing $419.5 million in right-of-use assets and $445.2 million in lease liabilities.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Risk (Wire Act): A significant risk factor involves the U.S. Department of Justice's January 2019 opinion reversing its stance on the Interstate Wire Act of 1961, potentially applying it to non-sports betting. While a federal court in New Hampshire ruled in June 2019 that the Act applies only to sports betting, the DOJ's enforcement stance remains a material uncertainty.
- Legal Contingencies:
- Texas Fun 5's: Five lawsuits regarding instant ticket game instructions claim damages exceeding $500 million. The Texas Supreme Court has requested briefs.
- Illinois Lottery: Class action lawsuits allege wrongful termination of games before top prizes were sold.
- Mexican Tax: A constitutional appeal is pending regarding a tax assessment of approximately $18.1 million (354.8 million MXN) related to cost of goods sold deductions.
- Subsequent Event: In Q2 2019, the company sold its 30% ownership interest in Yeonama Holdings, realizing a pre-tax gain of approximately $29.1 million.
- Dividends: A cash dividend of $0.20 per share was declared in Q1 2019, payable in April 2019.
Investor Verification Checklist
- Wire Act Impact: Verify the final outcome of the DOJ's review and potential appeals regarding the Wire Act's applicability to state lotteries and vendors.
- Italy Tax Environment: Monitor the impact of the PREU tax increase and machine reduction mandates on future Italy segment margins.
- Debt Maturities: Confirm refinancing plans for the $954.8 million in Senior Secured Notes maturing in 2020.
- Legal Exposure: Track the status of the Texas Fun 5's litigation and the Mexican tax appeal, as these represent significant potential liabilities.
- Foreign Exchange Volatility: Assess the sustainability of earnings given the significant swing in foreign exchange gains/losses between 2018 and 2019.