International Game Technology PLC Reports Fourth Quarter And Full Year 2017 Results

- Fourth quarter net income of $80 million includes one-time, non-cash tax benefit; adjusted EBITDA of $452 million reflects strong International performance, Italy sports betting results, and lower operating expenses

- 2017 net loss of $1,069 million includes previously reported $714 million non-cash impairment charge and $444 million of primarily non-cash net foreign exchange loss

- 2017 adjusted EBITDA of $1,676 million at top of expected range

- Net debt of $7,319 million at year end, better than outlook

- Cash dividend declared of $0.20 per ordinary share

"We had a strong finish to 2017, amplifying the progress we made throughout the year," said Marco Sala, CEO of IGT. "We delivered outstanding results in our Lottery business and improved our key performance indicators in the Gaming business. These achievements were enhanced by disciplined expense management. Bringing innovative content and technology to market remains the cornerstone of our strategy. Last year, we executed well along this path and established a solid foundation for growth in 2018 and beyond."

"We met all of our financial objectives for the year, including the top end of our EBITDA expectations. Net debt was slightly better than our outlook, despite the early Scratch & Win renewal in the fourth quarter," said Alberto Fornaro, CFO of IGT. "The results for the fourth quarter and full year highlight the diversity and resilience of the IGT franchise."

Summary of Consolidated Fourth Quarter and Full Year 2017 Financial Results

Comparability of Results

All figures presented in this news release are prepared under U.S. GAAP, unless noted otherwise. Adjusted figures exclude the impact of items such as purchase accounting, impairment charges, restructuring expense, foreign exchange, and certain one-time, primarily transaction-related items. Reconciliations to the most directly comparable U.S. GAAP measures are included in the tables in this news release. Constant currency changes for 2017 are calculated using the same foreign exchange rates as the corresponding 2016 period. Management uses non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, and to evaluate the Company's financial performance. Management believes these non-GAAP financial measures reflect the Company's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of business trends. These constant currency changes and non-GAAP financial measures should however be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with U.S. GAAP.

Overview of Consolidated Fourth Quarter Results

Consolidated revenue was $1,346 million compared to $1,321 million in the fourth quarter of 2016. At constant currency and scope (which adjusts for the Italy Lotto upfront payment amortization and the sale of Double Down Interactive LLC ("DoubleDown")), revenue was up 3%.

Adjusted operating income was $268 million compared to $281 million in the prior-year period. Adjusted EBITDA was $452 million compared to $422 million in the fourth quarter of 2016, on strong International performance, Italy sports betting results, and lower operating expenses.

Interest expense was $114 million compared to $116 million in the prior-year period.

Benefit from income taxes rose to $83 million from $5 million in the fourth quarter of 2016. Tax dynamics in the fourth quarter of 2017 primarily reflect the non-cash impacts of recent U.S. tax reform. Additional detail on the tax impacts is provided with the reconciliation tables in this news release.

Net income attributable to IGT was $80 million in the fourth quarter of 2017. On an adjusted basis, net income attributable to IGT was $4 million. The Company reported net income per diluted share of $0.39 and earned $0.02 per diluted share on an adjusted basis, which includes $0.66 of non-cash, net negative tax impacts.

Cash from operations was $686 million in 2017 versus $281 million in 2016. As previously disclosed, gross upfront payments for Italian license fees are now included in Cash Flows from Operating Activities. Capital expenditures were $698 million in 2017 compared to $542 million in the prior year.

Cash and cash equivalents were $1,057 million as of December 31, 2017, compared to $294 million as of December 31, 2016. Net debt was $7,319 million as of December 31, 2017, compared to $7,569 million as of December 31, 2016.

Operating Segment Review

North America Gaming & Interactive
Revenue for North America Gaming & Interactive was $281 million compared to $368 million in the fourth quarter of 2016. At constant scope, revenue was down 9%, primarily on lower product sales. 

Gaming service revenue was $167 million compared to $230 million in the prior-year period. The decline is primarily attributed to the sale of DoubleDown and a year-over-year decrease in the installed base. Yields were stable with the prior year.

Product sales revenue of $113 million declined from $138 million in the prior year, which benefited from significant new and expansion gaming machine and systems sales, as well as higher intellectual property revenue. The segment shipped 5,295 gaming machine units in the quarter compared to 5,419 units in the prior-year period.

Operating income for North America Gaming & Interactive was $69 million compared to $102 million in the fourth quarter of 2016. The decline is attributable to the sale of DoubleDown, lower revenue, and the timing of jackpot expense, partially offset by lower operating costs.

North America Lottery
North America Lottery revenue of $304 million was up 7% from the prior-year period, on strong wager growth and product sales.

Lottery same-store revenue rose 8.3%, supported by broad-based strength in instant tickets and draw games as well as multistate jackpots.

Product sales revenue doubled to $34 million, primarily due to lottery terminal and VLT central system sales.

Operating income was relatively stable at $66 million in the fourth quarter, as revenue growth was offset by higher service delivery costs and legal fees.

International
International revenue of $280 million was up 27% from the prior year, reflecting strong growth in both Lottery and Gaming.

Lottery same-store revenue was slightly below the prior year. Broad-based strength in EMEA and Latin America was offset by weakness in Colombia.  U.K. Lottery trends were stable.

Gaming service revenue from terminals was up 1% at constant currency, as a higher installed base was offset by lower average yields due to the geographic mix of revenue. The installed base grew to 15,543 machines from 10,453 in the fourth quarter of 2016 on unit growth in Africa, Greek VLTs, and video bingo machines.

Product sales revenue rose 20%, benefiting from higher lottery software sales. The segment shipped a total of 5,565 gaming machine units during the fourth quarter of 2017 compared to 4,901 units in the prior-year period, as a 41% increase in replacement units more than offset lower new and expansion activity.

Operating income of $72 million increased 64%, reflecting higher revenue and disciplined cost management.

Italy
Italy revenue rose 7% to $481 million. At constant currency and scope, revenue was stable with the prior-year period.

Total Lotto wagers were €1,951 million compared to €2,141 million in the prior-year period. Excluding Late Numbers, Lotto wagers increased 4% over the prior-year period reflecting strong growth in 10eLotto.

Scratch & Win wagers increased 2% to €2,344 million on continued demand for Miliardario and multiplier tickets.

Machine gaming revenue was slightly below the prior year, primarily on the higher gaming machine taxes that went in effect in April 2017.

Sports betting revenues were up sharply on higher wagers and lower payout. Wagers grew over 8% as a result of recent network optimization and increased levels of online play. Total payout of 76.2% was 10 percentage points below the prior year.

Operating income was $115 million compared to $129 million in the prior-year period, reflecting higher depreciation and amortization related to the new Lotto concession. 

Overview of Consolidated Full Year 2017 Results

Consolidated revenue was $4,939 million compared to $5,154 million in 2016. At constant currency and scope, consolidated revenue was in line with the prior year.

Global lottery same-store revenue, excluding Italy, increased 0.7% in 2017, on top of 8.1% growth in 2016, which included a record Powerball jackpot. Italy lottery wagers declined 3% in 2017 primarily as a result of high Late Numbers activity in the prior year. Excluding Late Numbers, Lotto wagers increased 3% over the prior year.

The Company shipped 32,103 gaming machines worldwide in 2017. The total installed base grew over 6% to 62,236 units.

Adjusted operating income was $1,028 million compared to $1,167 million in the prior year. Adjusted EBITDA of $1,676 million declined 6% at constant currency from $1,755 million in 2016 primarily due to the high-margin contribution from elevated jackpot and Late Number activity in the prior year, in addition to the DoubleDown sale, partially offset by expense savings.

Interest expense was $459 million compared to $469 million in the prior-year period.

Benefit from income taxes was $29 million compared to a provision for taxes of $59 million in 2016, reflecting the impact of recent U.S. tax reform.

Net loss attributable to IGT was $1,069 million in 2017 and includes a $714 million non-cash impairment charge and $444 million of primarily non-cash net foreign exchange loss. On an adjusted basis, net income was $175 million. The Company reported net loss per diluted share of ($5.26) and earned $0.86 per diluted share on an adjusted basis in 2017.

Other Developments

The Company's board of directors declared a quarterly cash dividend of $0.20 per ordinary share. The dividend is payable on April 5, 2018 to holders of record as of the close of business on March 22, 2018.   

Outlook

The Company currently expects to achieve adjusted EBITDA of $1,700-$1,780 million in 2018. Capital expenditures are expected to be $575-$625 million. The Company's outlook assumes a 2018 average EUR/USD exchange rate of 1.22.

The Italy Scratch & Win renewal will require upfront payments of approximately €750 million during 2018, which will be reflected in Cash Flows from Operating Activities. The €270 million in contributions from minority partners for their portion of these payments will be included in Cash Flows from Financing Activities.