Fourth quarter net income of $233 million; adjusted EBITDA of $422 million reflects broad-based lottery growth and higher gaming product sales 2016 net income of $211 million.
International Game Technology PLC ("IGT") (NYSE:IGT) today reported financial results for the fourth quarter and year ended December 31, 2016. Today, at 8:00 a.m. EST / 1:00 p.m. GMT / 2:00 p.m. CET, management will host a conference call and webcast to present the fourth quarter and full year 2016 results; access details are provided below.
"We reached many important milestones in 2016," said Marco Sala, CEO of IGT. "We reinforced our number one position in Lottery globally, achieving robust same-store revenue growth and securing valuable, multi-year contracts. We also made good progress with our Gaming turnaround, developing compelling new titles and hardware, in addition to expanding our International presence. We operate in growing global market segments and IGT has a long history of investing in innovation to create shareholder value."
"We achieved our financial goals for 2016 and ended the year in strong financial condition," said Alberto Fornaro, CFO of IGT. "Disciplined capital management enabled us to reduce our debt and improve our leverage profile despite the large upfront investment in the Italy Lotto. We expect 2017 to evolve as a year of two halves, with difficult comparisons in the first part of the year easing as we reach the second half."
Comparability of Results
All figures presented in this news release are prepared under U.S. GAAP, unless noted otherwise.
As a result of the combination of GTECH S.p.A. ("GTECH") and International Game Technology ("legacy IGT"), which was completed on April 7, 2015, a number of items affect the comparability of reported results. Reported financial information for the full year 2016 includes the results of operations of IGT PLC for the entire period, while reported financial information for the full year 2015 period includes IGT PLC for the second, third, and fourth quarters and only GTECH operations in the first quarter. Pro forma figures represent the combined results of both companies.
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.
Reported 2016 results were impacted by the strengthening of the U.S. dollar compared to the euro; the daily average Euro to U.S. dollar foreign exchange rate was 1.08 in the fourth quarter of 2016 compared to 1.10 in the fourth quarter of 2015, and was 1.11 for the full year 2016 period compared to 1.11 in 2015. Constant currency changes for 2016 are calculated using the same foreign exchange rates as the corresponding 2015 period.
Management believes that referring to certain pro forma, constant currency, or adjusted measures is a more useful way to evaluate the Company's underlying performance.
Overview of Consolidated Fourth Quarter Results
Consolidated revenue declined 3% to $1,321 million from $1,365 million in the fourth quarter of 2015, which included approximately $20 million of revenue benefits related to the catch-up reclassification of Stability Law taxes on gaming machines in Italy. Lower revenue reflects global lottery growth that was more than offset by lower gaming service revenue, mostly at DoubleDown.
Global lottery same-store revenue, excluding Italy, increased 2% during the fourth quarter while Italy lottery wagers increased 4%. Product sales rose 1% in the quarter on higher North America systems sales and the contribution from a recent intellectual property settlement. The Company shipped 10,320 gaming machines worldwide during the fourth quarter.
Adjusted EBITDA of $422 million was 6% below the fourth quarter of 2015. Operating income was $138 million compared to $132 million in the fourth quarter of 2015, and adjusted operating income was $281 million compared to $293 million in the prior year. The declines in adjusted EBITDA and adjusted operating income primarily reflect an incremental $14 million of Italy value-added tax ("VAT") credit in the prior-year period, in addition to higher selling, general and administrative expenses.
Interest expense was $116 million compared to $119 million in the prior-year period.
Net income attributable to IGT was $233 million in the fourth quarter of 2016, reflecting the impact of $196 million in primarily non-cash foreign exchange gains and the favorable settlement of discrete tax items. On an adjusted basis, net income attributable to IGT was $179 million. The Company reported net income per diluted share of $1.15 and earned $0.88 per diluted share on an adjusted basis.
Cash from operations was $985 million in the full-year period and capital expenditures were $557 million. The Company made two of three upfront installment payments for the new Lotto concession in Italy during the year.
Cash and cash equivalents were $294 million as of December 31, 2016, compared to $627 million as of December 31, 2015. Net debt was $7,569 million as of December 31, 2016.
Operating Segment Review
North America Gaming & Interactive
Revenue for the North America Gaming & Interactive segment was $368 million compared to $378 million in the fourth quarter of 2015.
Gaming service revenue was $230 million compared to $263 million in the prior-year period, primarily driven by fewer daily active users ("DAU") at DoubleDown and a year-on-year decrease in the installed base.
Product sales rose 20% to $138 million in the quarter primarily driven by large systems sales; the contribution from a recent intellectual property settlement; and, as previously communicated, revenue associated with certain gaming machines shipped in the third quarter of 2016. The segment shipped 5,419 units in the period compared to 6,597 units in the fourth quarter of 2015, which included an additional 1,100 Canada video lottery terminals ("VLT").
Operating income for North America Gaming & Interactive was $101 million compared to $106 million in the fourth quarter of 2015. The decline is primarily due to lower DoubleDown and gaming service revenue, partially offset by higher product sales.
North America Lottery
North America Lottery revenue was $284 million, up 6% from the fourth quarter of 2015.
Service revenue of $267 million increased 5%. Lottery same-store revenue rose 1.5%, supported by the third consecutive year of strong instant tickets performance. Multi-state Jackpot game performance was modestly below the prior year's level after several quarters of above-average results.
Product sales were $17 million, compared to $14 million in the fourth quarter of 2015, primarily due to increased instant ticket printing activity.
Operating income for North America Lottery increased 54% to $65 million compared to the fourth quarter of 2015. Higher revenues, in addition to lower depreciation and amortization expense associated with recent lottery contract extensions, contributed to the substantial profit growth.
International
International revenue was $220 million compared to $265 million in the fourth quarter of 2015. On a constant currency basis, International revenue declined 15%.
International lottery same-store revenue increased 2.6% on broad-based geographical strength that was tempered by weakness in the United Kingdom.
International gaming service revenue rose 6% on a constant currency basis, primarily due to growth in the commercial gaming installed base, and despite approximately 600 units that were converted to product sales. The installed base grew in Eastern Europe, South Africa and Mexico.
Product sales were below the prior-year period, mostly on lottery product sales, which reflect the natural variability of that business. Gaming terminal sales declined slightly on lower unit volume. Systems sales increased double-digits year-over-year. The segment shipped a total of 4,901 gaming machines compared to 4,965 last year.
International operating income was $44 million compared to $55 million in the fourth quarter of 2015, reflecting lower revenue.
Italy
Italy revenue was $449 million compared to $455 million in the fourth quarter of 2015. At constant currency, revenue was in line with the prior year. The fourth quarter comparisons are impacted by an approximately $20 million catch-up Stability Law reclassification booked in the prior-year period, in addition to one month of amortization of the new Lotto upfront concession fee.
Total Lotto wagers in the quarter were €2,141 million, 15% greater than the €1,855 million achieved in the prior-year period. Strong Lotto performance was a result of significant late number activity and high single-digit growth in 10eLotto. Excluding late numbers, Lotto wagers increased 2% over the same period last year. Instant-ticket wagers were €2,289 million versus €2,391 million in the fourth quarter of 2015.
Machine gaming service revenue was down given the prior-year Stability Law reclassification. Sports betting wagers increased 6% on growth in live wagers.
Operating income for the Italy segment was $130 million compared to $132 million in the fourth quarter of 2015. At constant currency, operating income was stable as strong Lotto growth compensated for the VAT credit in the prior year.
Overview of Consolidated Full Year 2016 Results
Reported consolidated revenue was $5,154 million compared to $4,689 million in 2015. On a pro forma, constant currency basis, consolidated revenue increased 2%, primarily reflecting growth in lottery service revenue that was partially offset by lower DoubleDown performance and gaming product sales.
During the year, the Company shipped 33,147 gaming machines worldwide and global lottery same-store revenue, excluding Italy, increased 8%. Italy lottery wagers rose 6% in 2016.
On a reported basis, adjusted EBITDA of $1,755 million was 9% greater than the 2015 level. On a pro forma, constant currency basis, adjusted EBITDA increased 3%.
Reported operating income was $660 million compared to $540 million in 2015. On a pro forma, constant currency basis, adjusted operating income was 9% greater than 2015, primarily reflecting higher lottery service revenue that was partially offset by lower lottery product sales.
Interest expense was $469 million compared to $458 million in the prior-year period.
Net income attributable to IGT was $211 million in 2016. On an adjusted basis, net income was $472 million. The Company reported earnings per diluted share of $1.05 and earned $2.33 per diluted share on an adjusted basis in 2016.
Other Developments
In a separate news release issued today, the Company announced that Heather J. McGregor was appointed as an independent director to its board of directors.
Additionally, the Company's board of directors has declared a quarterly cash dividend of $0.20 per ordinary share. The dividend is payable on April 6, 2017 to all shareholders of record as of the close of business on March 23, 2017.
Outlook
The Company currently expects to achieve adjusted EBITDA of $1,680-$1,760 million for the full year 2017 period, as operational growth compensates for the Powerball and late numbers benefits recorded in 2016, in addition to new Lotto concession impacts in 2017.
Maintenance capital expenditures are expected to be $525-$575 million, including approximately $100 million related to the timing of the new Florida Lottery contract. Growth capital expenditures will be approximately $100 million.
The Italy Lotto renewal will require an outlay of approximately $320 million ($195 million net, after minority partner contribution), relating to the final upfront concession payment and associated network and infrastructure upgrades. Net debt is expected to be $7,600-$7,800 million at the end of 2017.
The Company's outlook assumes an average euro/dollar exchange rate of 1.10.