Business Context and Reporting Period
Company: International Game Technology PLC (IGT PLC)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2018 (Interim Unaudited)
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) | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Revenue | 2,409,294 | 2,372,088 |
| Operating Income | 406,072 | 311,093 |
| Net Income (Consolidated) | 130,695 | (279,028) |
| Net Income Attributable to IGT PLC | 58,350 | (344,691) |
| Diluted EPS (IGT PLC) | $0.29 | $(1.70) |
| Operating Cash Flow | 120,150 | 323,924 |
| Total Debt | 8,143,964 | 8,376,559 |
| Cash and Cash Equivalents | 613,777 | 1,057,418 |
| Total Liquidity (Cash + Revolver) | 2,295,869 | 3,031,911 |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $130.7 million for the six months ended June 30, 2018, compared to a net loss of $279.0 million in the prior year period. This improvement was driven by a significant foreign exchange gain of $75.9 million (vs. a loss of $267.2 million in 2017) and the absence of the $27.3 million gain from the sale of Double Down Interactive LLC recorded in 2017.
- Revenue Growth: Total revenue increased by 1.6% to $2.41 billion. The Italy segment was the primary growth driver, with revenue increasing 14.7% due to higher lotto and instant ticket wagers. Conversely, the North America Gaming and Interactive segment revenue decreased 19.1% primarily due to the prior year's sale of Double Down Interactive.
- Operating Expenses: Total operating expenses decreased by 2.8% to $2.00 billion. This reduction was largely due to a $93.7 million decrease in depreciation and amortization related to the sale of Double Down Interactive and a $15.6 million decrease in restructuring expenses.
- Cash Flow: Net cash provided by operating activities decreased by $203.8 million to $120.2 million. This decline was principally due to an $180.9 million increase in upfront Italian license fee payments and timing differences in trade receivables collections.
- Debt Management: Total debt decreased by $232.6 million. The company redeemed €500 million of 6.625% Senior Secured Notes at maturity and partially tendered other senior notes, while issuing €500 million of new 3.500% Senior Secured Notes due 2024.
Guidance, Outlook, and Risks
- Accounting Changes: The company adopted ASC 606 (Revenue from Contracts with Customers) in Q1 2018 using a modified retrospective approach. This resulted in a $61.2 million pre-tax adjustment to retained earnings and reclassified jackpot expenses from cost of services to a reduction of service revenue.
- Legal Proceedings:
- Texas Fun 5's: Five lawsuits remain pending regarding instant ticket game instructions, with claims exceeding $500 million in one case. The company disputes these claims.
- Brazil ICMS Tax: A tax dispute regarding the classification of consumables continues, with a net claim of approximately $4.8 million after a favorable appellate ruling.
- Mexican Inventory Tax: A constitutional appeal is pending regarding a $26.2 million tax assessment; the company recorded a $19.1 million charge in 2017.
- Regulatory Risks: The company faces risks related to the EU General Data Protection Regulation (GDPR), which came into effect in May 2018. Non-compliance could result in fines up to €20 million or 4% of worldwide annual revenue.
- Internal Controls: Management concluded that a previously reported material weakness regarding the classification of non-recurring transactions on the Statement of Cash Flows was remediated as of March 31, 2018.
- Liquidity: The company expects sufficient liquidity to meet obligations for at least the next 12 months, supported by operating cash flows and $1.68 billion in available revolver capacity.
Investor Verification Checklist
- ASC 606 Impact: Verify the long-term effects of the revenue recognition standard adoption on future revenue recognition patterns, particularly regarding multi-year licenses and incentive fees.
- Foreign Exchange Volatility: Assess the sustainability of the $75.9 million foreign exchange gain, which significantly boosted net income, given the company's heavy exposure to Euro-denominated debt.
- Italy Segment Performance: Monitor the sustainability of the 14.7% revenue growth in the Italy segment, which is driven by specific game launches (e.g., Doppio Numero Oro) and regulatory changes.
- Legal Exposure: Review the status of the Texas Fun 5's litigation and the potential financial impact of the $500 million+ claim.
- Debt Maturity Profile: Analyze the upcoming debt maturities, specifically the significant principal payments due in 2020 ($1.69 billion) and 2022 ($1.50 billion).