International Game Technology Reports Second Quarter Fiscal 2005 Results
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Thursday April 21, 7:30 am ET
RENO, Nev., April 21 /PRNewswire-FirstCall/ -- International Game Technology today reported its operating results for the second quarter ended March 31, 2005.
Second quarter net income totaled $93.9 million or $0.26 per diluted share, compared to $116.9 million or $0.32 in the prior year quarter.
The second quarter results were adversely affected by charges related to technical obsolescence of certain gaming operations assets due to shifting market demand toward IGT's newer products that incorporate more innovative features. These charges, as well as less significant costs principally consisting of severance, collectively totaled $21.8 million before tax, $13.9 million after tax or $0.04 per fully diluted share.
For the six months ended March 31, 2005, income from continuing operations totaled $216.4 million or $0.59 per diluted share compared to $234.3 million or $0.63 per diluted share in the prior year period. Net income for the first half of fiscal 2005 was $216.4 million or $0.59 per diluted share compared to $293.3 million or $0.79 per diluted share for the first half of fiscal 2004.
Net income for the first six months of fiscal 2004 included income from discontinued operations of $58.9 million or $0.16 per diluted share, including an after-tax gain of $56.8 million related to the sale of IGT OnLine Entertainment Systems (OES).
Additionally, as a result of our 52/53-week fiscal years, the prior year six-month period contained 27 weeks versus the normal 26 weeks in the current six-month period. The extra week in fiscal 2004 primarily impacted gaming operations, adding revenues of approximately $19.9 million, gross profit of approximately $11.1 million and operating expenses of approximately $8.0 million.
In the first quarter of fiscal 2005, we adopted EITF 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, that requires convertible debt securities to be included in diluted earnings per share regardless of whether the market price condition has been satisfied. Accordingly, we have restated the first six months of fiscal 2004 to include the full impact of an additional 20.5 million shares related to our outstanding convertible debentures.
Gaming Operations
Revenues from gaming operations totaled $298.9 million in the current quarter, an increase of 9% from $273.7 million in the second quarter of fiscal 2004. Gaming operations revenue for the first half of fiscal 2005 totaled $585.8 million, an increase of 6% from $551.3 million in the first half of the prior year.
"We are pleased with the growth in gaming operations revenue as it reflects success on several fronts. We are deploying several new products, including Fort Knox®, our new penny progressive on both the Reel Touch® and Video Reel Touch® platforms. We introduced the Star Wars(TM) video slot, and it has been met with enthusiasm by both our customers and the players," said TJ Matthews, IGT's Chief Executive Officer. "During the quarter we also placed over 1,000 games into the Alabama charitable bingo and Class II Native American markets."
Quarterly gross profit from gaming operations was $145.8 million compared to $147.3 million in the prior year quarter. Gross profit margins for gaming operations totaled 49% versus 54% in the same prior year period. Year-to-date gross profit margins were 50% in the current year compared to 55% in the prior year-to-date period. The decline in both the quarter and year-to-date gaming operations gross margin was primarily a result of $19.9 million in asset obsolescence charges incurred in the second quarter related to the transition in demand toward our newer, more innovative gaming operations products, including updated cabinet designs and the addition of LCDs to our spinning-reel and video product lines. Margins in the current year quarter were also reduced by approximately 200 basis points due to the consolidation of our variable interest entities' activity, which commenced in the third quarter of the prior year.
IGT's installed base of recurring revenue machines ended the current quarter at 37,900, an increase of 2,400 units from the same quarter last year and an increase of 900 units from the immediately preceding quarter. The year-over-year growth resulted from additional placements in the video lottery markets of New York, Delaware, and Rhode Island, the Native American markets in Florida and Oklahoma, and the charitable video bingo market in Alabama. IGT continues to work to place its highest yielding games on casino floors, partially by managing the removal of lower yielding units.
Product Sales
IGT Product Sales Summary
Quarters Ended Six Months Ended
March 31, March 31,
2005 2004 2005 2004
Revenues (in millions)
North America $183.9 $275.7 $366.0 $512.5
International 68.3 86.7 240.4 180.3
Total $252.2 $362.4 $606.4 $692.8
Gross Margin
North America 53% 55% 54% 54%
International 45% 46% 39% 45%
Total 51% 53% 48% 52%
Units Shipped
North America 13,300 27,200 28,000 49,800
International 9,300 18,200 49,900 41,700
Total 22,600 45,400 77,900 91,500
Average Revenue
Per Unit (ARPU)
North America $13,800 $10,100 $13,100 $10,300
International 7,300 4,800 4,800 4,300
Total 11,100 8,000 7,800 7,600
Worldwide product sales revenues and gross profits totaled $252.2 million and $127.9 million, respectively, compared to $362.4 million and $191.8 million in the prior year quarter. During the quarter, consolidated non-machine revenues were $76.1 million or 30% of total product sales revenue. Consolidated gross margins on product sales of 51% were down from 53% in the prior year quarter primarily as a result of the allocation of fixed costs across lower domestic sales volumes.
In North America, product sales revenues of $183.9 million were down from $275.7 million in the prior year quarter. Gross profit margins on North America product sales were 53% versus 55% in the prior year quarter. Revenues in North America decreased as a result of the anticipated slowdown in demand for TITO-related replacement machines and fewer new market opportunities in the current year. Average revenue per unit (ARPU) increased 37% over the prior year quarter and 27% over the prior year-to-date period. The improvement is primarily due to stronger pricing realization and increased revenue from non-machine related sources, including game theme conversions and intellectual property fees.
International product sales revenues were $68.3 million, a decrease of 21% from $86.7 million in the same quarter last year. During the second quarter of the prior year, international revenues were boosted by sales of Nobunaga(TM) in Japan. Following the record-breaking success of The Terminator® in Japan during the first quarter of the current year, we plan to release our second game under our agreement with Sega Sammy Holdings, Inc. in the second half of fiscal 2005.
Operating Expenses and Other Income/Expense
Total operating expenses were $127.5 million and $250.8 million for the quarter and the six-month period ended March 31, 2005 compared to $133.1 million and $251.9 million in the same prior year periods. Bad debt expense for the quarter and year-to-date declined compared to the prior year periods primarily due to an improved collection risk profile and, to a lesser extent, lower receivable balances. Research and development expense increased with additional investments to support our commitment to the development of innovative gaming products.
During the second quarter we recognized $1.9 million in charges principally consisting of severance costs associated with our international operations and a reorganization of our North American sales and service group, including the integration of our Rapid City, South Dakota distribution facility. These operational changes were undertaken to move IGT closer to our customer base and further enhance our market responsiveness.
Other expense, net, decreased $20.7 million for the quarter and $37.9 million for the first half of fiscal 2005 compared to the same prior year periods. The favorable shift is primarily due to reduced interest expense related to the redemption of senior notes that were outstanding in the prior year periods. The prior year quarter included a $6.9 million loss before tax related to the early redemption.
Cash Flows & Balance Sheet
During the six months ended March 31, 2005, we generated $343.2 million in cash flows from operations on net income of $216.4 million. Working capital was $485.4 million at March 31, 2005, compared to $949.7 million at September 30, 2004. The change in working capital was primarily a result of the reclassification of our convertible debentures to current liabilities.
Cash and equivalents collectively with short-term investments totaled $830.4 million at March 31, 2005 compared to $766.6 million at September 30, 2004. Strong cash flows from operations were partially utilized to purchase additional investment securities, to pay cash dividends on common stock, and to repurchase shares under our stock repurchase program. Auction Rate Securities (ARS) totaling $470.8 million at March 31, 2005 and $371.5 million at September 30, 2004, previously classified as cash equivalents, are now reflected as investment securities on our balance sheet. Although ARS are convertible into cash, they have a stated long-term maturity and therefore are not considered a cash equivalent. This change in presentation has no impact to available liquidity to the Company for operating purposes. Debt totaled $797.0 million at March 31, 2005 compared to $792.0 million at September 30, 2004.
Capital expenditures increased to $105.1 million in the first half of fiscal year 2005 from $93.3 million in the prior year. Construction costs for our Reno facility expansion and Las Vegas campus development totaled $13.6 million for the six months ended March 31, 2005.
Capital Deployment
On March 1, 2005, our Board of Directors declared a quarterly cash dividend of $0.12 per share that was paid on March 29, 2005 to shareholders of record on March 15, 2005.
We repurchased 3.3 million shares during the second quarter for an aggregate cost of $97.0 million. The remaining authorization under IGT's stock repurchase program totaled 32.6 million shares at March 31, 2005. |
