Notes to Condensed Consolidated Financial Statements (Unaudited)
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1
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Description of the Business
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International Game Technology PLC (the "Parent"), together with its consolidated subsidiaries, is a leading commercial operator and provider of technology in the regulated worldwide gaming markets that operates and provides a full range of services and leading-edge technology products across all gaming markets, including lotteries, machine gaming, sports betting, interactive gaming and commercial services. Our state-of-the-art information technology platforms and software enable distribution of our products and services through land-based systems, the internet and mobile devices.
When used in these notes, unless otherwise specified or the context otherwise indicates, all references to "IGT PLC," the "Company," "we," "our," or "us" refer to the business and operations of the Parent and its consolidated subsidiaries.
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2
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Summary of Significant Accounting Policies
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Basis of Preparation
The accompanying condensed consolidated financial statements and notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, these interim financial statements do not include all of the information and note disclosures required by GAAP for complete financial statements, but reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the interim period results. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our
2018
Form 20-F.
The condensed consolidated financial statements are stated in thousands of U.S. dollars (except share and per share data) unless otherwise indicated. Certain reclassifications have been made to prior periods to align with the current period presentation. All references to "U.S. dollars," "U.S. dollar" and "$" refer to the currency of the United States of America. All references to "euro" and "€" refer to the currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant to the Treaty on the Functioning of the European Union, as amended.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies on the balance sheet dates and the reported amounts of revenue and expense during the reporting periods.
We evaluate our estimates continuously and base them on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates if the assumptions prove incorrect. To the extent there are material differences between actual results and these estimates, our future results could be materially and adversely affected. We believe the accounting policies described in Note 2 of our 2018 Form 20-F require us to make significant judgments and estimates in the preparation of our condensed consolidated financial statements.
Our most critical accounting estimates include revenue recognition, allowance for doubtful accounts and credit losses, income taxes, legal and other contingencies and evaluation of long-lived assets for impairment.
Significant Accounting Policies
There have been no changes to our significant accounting policies described in Note 2 of our 2018 Form 20-F other than the adoption of Accounting Standards Update ("ASU") No. 2016-02,
Leases
(Topic 842), as described below.
Leases
We determine whether a contract is or contains a lease at inception. As a lessee, we recognize right-of-use ("ROU") assets and lease liabilities on the lease commencement date based on the present value of lease payments over the lease term. ROU assets also include any upfront lease payments or initial direct costs and are adjusted for lease incentives received.
We consider renewal and termination options, including whether they are reasonably certain to be exercised, in determining the lease term and establishing the ROU assets and lease liabilities. ROU assets and lease liabilities are calculated using our incremental borrowing rate, which is based on the lease currency and length of the lease, unless the implicit rate is determinable.
Most of our lease contracts contain both lease and non-lease components. As a lessee, we combine lease and non-lease components into a single lease component for all classes of underlying assets except certain communication equipment. For certain communication equipment, we allocate the consideration between lease and nonlease components based on relative standalone price. Lease expense is recognized on a straight-line basis over the lease term.
Variable lease payments are generally expensed as incurred except for certain rent payments that depend on an index, which are included in lease payments using the index rate in effect as of the lease commencement date.
Short-term leases, which are leases with an initial term of 12 months or less with no purchase options that are reasonably certain of exercise, are not recognized on the balance sheet. The rental payments are recognized as lease expense on a straight-line basis over the lease term.
Certain of our lottery and commercial gaming arrangements include leases for equipment installed at customer locations as part of our long-term technology service contracts. As the lessor, we combine lease and non-lease components for all classes of underlying assets in arrangements that involve operating leases. The single combined component is accounted for under Accounting Standards Codification ("ASC") 842,
Leases
, or ASC 606,
Revenue from Contracts with Customers
("ASC 606"), depending on which component is the predominant component in the arrangement. If a component cannot be combined, the consideration is allocated between the lease component and the nonlease component based on relative standalone price.
New Accounting Standards - Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842) ("ASU 2016-02") to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. In 2017, 2018, and 2019, the FASB amended ASU 2016-02. We adopted ASU 2016-02 and subsequent amendments (collectively "ASC 842") as of January 1, 2019.
We used the optional transition method which resulted in a cumulative effect adjustment to retained earnings on January 1, 2019. We elected to apply the package of practical expedients and to use hindsight in determining the lease term and assessing impairment. Our election of the hindsight practical expedient resulted in longer lease terms for certain existing leases.
The adoption of the new standard resulted in the recognition of ROU assets and leases liabilities of $419.5 million and $445.2 million, respectively. The adoption did not materially impact our condensed consolidated statements of operations, comprehensive income, or cash flows.
While lessor accounting is largely unchanged under ASC 842, certain of our lottery and gaming arrangements include leases for implicitly or explicitly identified equipment installed at customer locations as part of our long-term technology service contracts. In these arrangements, we are typically compensated based on a percentage of sales or other forms of variable payment. While most of these leases will be classified as operating leases, certain of these are leases that could be classified as sales-type financing leases either at inception or upon modification of existing contracts in future periods. After electing the practical expedient to combine lease and non-lease components as the lessor for an operating lease, most contracts will fall under the guidance of ASC 606 because the predominant component of a technology service contract is for non-lease components.
New Accounting Standards - Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement
("ASU 2018-13"), which provides guidance around disclosure requirements for fair value measurement of investments. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the date of adoption as well as the impact of adoption.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13") and amendments, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. ASU 2016-13 and amendments will be effective beginning January 1, 2020, with early
adoption permitted beginning January 1, 2018. Application of ASU 2016-13 and amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact and timing of adopting this guidance.
We do not currently expect that any other recently issued accounting guidance will have a significant effect on the consolidated financial statements.
Contract Balances
Information about receivables, contract assets and contract liabilities is as follows:
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($ thousands)
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March 31, 2019
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December 31, 2018
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Balance Sheet Classification
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Receivables, net
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934,219
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949,085
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Trade and other receivables, net
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Contract assets:
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Current
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61,519
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58,739
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Other current assets
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Non-current
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73,883
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69,691
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Other non-current assets
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135,402
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128,430
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Contract liabilities:
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Current
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(76,276
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(72,005
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Other current liabilities
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Non-current
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(55,729
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(67,022
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Other non-current liabilities
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(132,005
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(139,027
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The amount of revenue recognized during the
three months ended March 31, 2019
that was included in the contract liabilities balance at
December 31, 2018
was
$22.5 million
. The amount of revenue recognized during the
three months ended March 31, 2018
that was included in the contract liabilities balance at January 1, 2018 was
$35.6 million
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Transaction Price Allocated to Remaining Performance Obligations
At
March 31, 2019
, unsatisfied performance obligations for contracts expected to be greater than one year or contracts for which we do not have a right to consideration from the customer in the amount that corresponds to the value to the customer for our performance completed to date were approximately 3% of our estimated annual revenue for 2019, of which approximately 23% is expected to be satisfied within one year and the remainder is expected to be satisfied over the subsequent seven years.
At December 31, 2018, unsatisfied performance obligations for contracts expected to be greater than one year or contracts for which we do not have a right to consideration from the customer in the amount that corresponds to the value to the customer for our performance completed to date were approximately 3% of our annual revenue for 2018, of which approximately 25% is expected to be satisfied within one year and the remainder is expected to be satisfied over the subsequent seven years.
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($ thousands)
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March 31, 2019
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December 31, 2018
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Raw materials
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133,737
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140,143
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Work in progress
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44,666
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32,835
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Finished goods
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116,388
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109,720
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294,791
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282,698
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Lessee
We have operating and finance leases for real estate (warehouses, office space, data centers), vehicles, communication equipment, and other equipment. Many of our real estate leases include one or more options to renew, while some include termination options. Certain vehicle and equipment leases include residual value guarantees and options to purchase the leased asset. We consider the options and whether they are reasonably certain to be exercised in determining the lease term and establishing the ROU assets and liabilities.
Many of our real estate leases include variable payments for maintenance, real estate taxes, and insurance that are determined based on the actual costs incurred by the landlord. Some of our equipment leases include variable payments that are determined based on percentage of sales.
The classification of our operating and finance leases in the condensed consolidated balance sheets are as follows:
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($ thousands)
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Balance Sheet Classification
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March 31, 2019
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Assets
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Operating ROU asset
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Operating lease right-of-use assets
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372,619
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Finance ROU asset, net
(1)
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Other non-current assets
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33,260
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Total lease assets
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405,879
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Liabilities
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Operating lease liability, current
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Other current liabilities
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53,179
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Finance lease liability, current
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Other current liabilities
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6,456
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Operating lease liability, non-current
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Operating lease liabilities
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336,658
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Finance lease liability, non-current
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Other non-current liabilities
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36,065
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Total lease liability
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432,358
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(1) Finance ROU assets are recorded net of accumulated amortization of $1.8 million at March 31, 2019
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Weighted average lease terms and discount rates at March 31, 2019 are as follows:
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Weighted Average
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Remaining Lease Term (in years)
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Discount Rate
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Operating leases
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8.91
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6.77
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%
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Finance leases
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7.05
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5.76
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%
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Components of lease expense are as follows:
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($ thousands)
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For the three months ended March 31, 2019
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Operating lease costs
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22,152
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Finance lease costs
(1)
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2,508
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Variable lease costs
(2)
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17,724
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(1) Finance lease costs include amortization of ROU assets of $1.8 million and interest on lease liabilities of $0.7 million.
(2) Variable lease costs include immaterial amounts related to short-term leases and sublease income
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Maturities of operating and finance lease liabilities at March 31, 2019 are as follows ($ thousands):
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Year
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Operating Leases
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Finance Leases
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Total
(2)
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2019
(1)
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58,456
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6,607
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65,063
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2020
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70,120
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8,264
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78,384
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2021
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60,371
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7,874
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68,245
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2022
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52,566
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6,373
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58,939
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2023
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48,841
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5,075
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53,916
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Thereafter
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251,224
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17,647
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268,871
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Total lease payments
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541,578
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51,840
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593,418
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Less: Imputed interest
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(151,741
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)
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(9,319
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)
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(161,060
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)
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Present value of lease liabilities
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389,837
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42,521
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432,358
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(1) Excludes the three months ended March 31, 2019.
(2) The maturities above exclude leases that have not yet commenced. We have committed rental payments of $7.9 million for leases that will commence in 2019 through 2020 with lease terms ranging from 3 to 15 years
.
Cash flow information and non-cash activity related to leases is as follows:
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($ thousands)
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For the three months ended March 31, 2019
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Cash paid for amounts included in the measurement of lease liabilities:
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Operating cash flows from operating and finance leases
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21,803
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Finance cash flows from finance leases
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1,771
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Non-cash activity:
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ROU assets obtained in exchange for lease obligations
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Operating leases
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3,791
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Finance leases
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1,085
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Operating ROU assets by segment are as follows:
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($ thousands)
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March 31, 2019
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North America Gaming and Interactive
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31,263
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North America Lottery
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54,523
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International
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32,233
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Italy
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88,788
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Segment Total
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206,807
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Corporate Support
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165,812
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372,619
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Lessor
We have various arrangements for commercial gaming and lottery equipment under which we are the lessor. These leases generally meet the criteria for operating lease classification. Lease income for operating leases is included within service revenue, while lease income for sales type leases is included within product sales in the condensed consolidated statements of operation. Lease income was approximately 7% of total revenue for the three months ended March 31, 2019 and 2018.
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($ thousands)
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March 31, 2019
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December 31, 2018
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4.125% Senior Secured Notes due February 2020
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—
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499,167
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4.750% Senior Secured Notes due March 2020
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—
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438,252
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5.500% Senior Secured Notes due June 2020
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27,482
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|
|
27,519
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6.250% Senior Secured Notes due February 2022
|
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1,476,655
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|
1,469,609
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4.750% Senior Secured Notes due February 2023
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947,070
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964,730
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5.350% Senior Secured Notes due October 2023
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60,961
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|
|
60,983
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3.500% Senior Secured Notes due July 2024
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556,740
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|
567,179
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6.500% Senior Secured Notes due February 2025
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1,088,769
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1,088,385
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6.250% Senior Secured Notes due January 2027
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742,843
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742,667
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Senior Secured Notes, long-term
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4,900,520
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5,858,491
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Revolving Credit Facilities due July 2021
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439,920
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413,381
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Term Loan Facility due January 2023
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1,314,580
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1,705,395
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Long-term debt, less current portion
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6,655,020
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7,977,267
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Term Loan Facility due January 2023
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359,520
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|
—
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4.125% Senior Secured Notes due February 2020
|
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490,198
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|
—
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4.750% Senior Secured Notes due March 2020
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431,210
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|
|
—
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Current portion of long-term debt
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1,280,928
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|
—
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Short-term borrowings
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67,969
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34,822
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|
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Total Debt
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8,003,917
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|
|
8,012,089
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The principal balance of each debt obligation, excluding short-term borrowings, reconciles to the condensed consolidated balance sheet as follows:
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March 31, 2019
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($ thousands)
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Principal
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Debt issuance
cost, net
|
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Premium
|
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Swap
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Total
|
|
4.125% Senior Secured Notes due February 2020
|
|
491,650
|
|
|
(1,452
|
)
|
|
—
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|
|
—
|
|
|
490,198
|
|
|
4.750% Senior Secured Notes due March 2020
|
|
435,806
|
|
|
(4,596
|
)
|
|
—
|
|
|
—
|
|
|
431,210
|
|
|
5.500% Senior Secured Notes due June 2020
|
|
27,311
|
|
|
—
|
|
|
194
|
|
|
(23
|
)
|
|
27,482
|
|
|
6.250% Senior Secured Notes due February 2022
|
|
1,500,000
|
|
|
(10,779
|
)
|
|
—
|
|
|
(12,566
|
)
|
|
1,476,655
|
|
|
4.750% Senior Secured Notes due February 2023
|
|
954,975
|
|
|
(7,905
|
)
|
|
—
|
|
|
—
|
|
|
947,070
|
|
|
5.350% Senior Secured Notes due October 2023
|
|
60,567
|
|
|
—
|
|
|
394
|
|
|
—
|
|
|
60,961
|
|
|
3.500% Senior Secured Notes due July 2024
|
|
561,750
|
|
|
(5,010
|
)
|
|
—
|
|
|
—
|
|
|
556,740
|
|
|
6.500% Senior Secured Notes due February 2025
|
|
1,100,000
|
|
|
(11,231
|
)
|
|
—
|
|
|
—
|
|
|
1,088,769
|
|
|
6.250% Senior Secured Notes due January 2027
|
|
750,000
|
|
|
(7,157
|
)
|
|
—
|
|
|
—
|
|
|
742,843
|
|
|
Senior Secured Notes
|
|
5,882,059
|
|
|
(48,130
|
)
|
|
588
|
|
|
(12,589
|
)
|
|
5,821,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facilities due July 2021
|
|
453,162
|
|
|
(13,242
|
)
|
|
—
|
|
|
—
|
|
|
439,920
|
|
|
Term Loan Facility due January 2023
|
|
1,685,250
|
|
|
(11,150
|
)
|
|
—
|
|
|
—
|
|
|
1,674,100
|
|
|
Total Debt, excluding short-term borrowings
|
|
8,020,471
|
|
|
(72,522
|
)
|
|
588
|
|
|
(12,589
|
)
|
|
7,935,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
($ thousands)
|
|
Principal
|
|
Debt issuance
cost, net
|
|
Premium
|
|
Swap
|
|
Total
|
|
4.125% Senior Secured Notes due February 2020
|
|
501,058
|
|
|
(1,891
|
)
|
|
—
|
|
|
—
|
|
|
499,167
|
|
|
4.750% Senior Secured Notes due March 2020
|
|
444,146
|
|
|
(5,894
|
)
|
|
—
|
|
|
—
|
|
|
438,252
|
|
|
5.500% Senior Secured Notes due June 2020
|
|
27,311
|
|
|
—
|
|
|
234
|
|
|
(26
|
)
|
|
27,519
|
|
|
6.250% Senior Secured Notes due February 2022
|
|
1,500,000
|
|
|
(11,611
|
)
|
|
—
|
|
|
(18,780
|
)
|
|
1,469,609
|
|
|
4.750% Senior Secured Notes due February 2023
|
|
973,250
|
|
|
(8,520
|
)
|
|
—
|
|
|
—
|
|
|
964,730
|
|
|
5.350% Senior Secured Notes due October 2023
|
|
60,567
|
|
|
—
|
|
|
416
|
|
|
—
|
|
|
60,983
|
|
|
3.500% Senior Secured Notes due July 2024
|
|
572,500
|
|
|
(5,321
|
)
|
|
—
|
|
|
—
|
|
|
567,179
|
|
|
6.500% Senior Secured Notes due February 2025
|
|
1,100,000
|
|
|
(11,615
|
)
|
|
—
|
|
|
—
|
|
|
1,088,385
|
|
|
6.250% Senior Secured Notes due January 2027
|
|
750,000
|
|
|
(7,333
|
)
|
|
—
|
|
|
—
|
|
|
742,667
|
|
|
Senior Secured Notes
|
|
5,928,832
|
|
|
(52,185
|
)
|
|
650
|
|
|
(18,806
|
)
|
|
5,858,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facilities due July 2021
|
|
428,158
|
|
|
(14,777
|
)
|
|
—
|
|
|
—
|
|
|
413,381
|
|
|
Term Loan Facility due January 2023
|
|
1,717,500
|
|
|
(12,105
|
)
|
|
—
|
|
|
—
|
|
|
1,705,395
|
|
|
Total Debt, excluding short-term borrowings
|
|
8,074,490
|
|
|
(79,067
|
)
|
|
650
|
|
|
(18,806
|
)
|
|
7,977,267
|
|
Principal payments on long-term debt for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year
|
|
($ thousands)
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 and
thereafter
|
|
Total
|
|
4.125% Senior Secured Notes due February 2020
|
|
491,650
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
491,650
|
|
|
4.750% Senior Secured Notes due March 2020
|
|
435,806
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
435,806
|
|
|
5.500% Senior Secured Notes due June 2020
|
|
27,311
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,311
|
|
|
6.250% Senior Secured Notes due February 2022
|
|
—
|
|
|
—
|
|
|
1,500,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,500,000
|
|
|
4.750% Senior Secured Notes due February 2023
|
|
—
|
|
|
—
|
|
|
—
|
|
|
954,975
|
|
|
—
|
|
|
—
|
|
|
954,975
|
|
|
5.350% Senior Secured Notes due October 2023
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,567
|
|
|
—
|
|
|
—
|
|
|
60,567
|
|
|
3.500% Senior Secured Notes due July 2024
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
561,750
|
|
|
—
|
|
|
561,750
|
|
|
6.500% Senior Secured Notes due February 2025
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,100,000
|
|
|
1,100,000
|
|
|
6.250% Senior Secured Notes due January 2027
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
750,000
|
|
|
750,000
|
|
|
Senior Secured Notes
|
|
954,767
|
|
|
—
|
|
|
1,500,000
|
|
|
1,015,542
|
|
|
561,750
|
|
|
1,850,000
|
|
|
5,882,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facilities due July 2021
|
|
—
|
|
|
453,162
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
453,162
|
|
|
Term Loan Facility due January 2023
|
|
359,520
|
|
|
359,520
|
|
|
359,520
|
|
|
606,690
|
|
|
—
|
|
|
—
|
|
|
1,685,250
|
|
|
Total Principal Payments
|
|
1,314,287
|
|
|
812,682
|
|
|
1,859,520
|
|
|
1,622,232
|
|
|
561,750
|
|
|
1,850,000
|
|
|
8,020,471
|
|
At
March 31, 2019
and
December 31, 2018
, we were in compliance with all covenants under our debt agreements.
Fair Value of Debt
Debt is categorized within Level 2 of the fair value hierarchy. Senior Secured Notes are valued using quoted market prices or dealer quotes for the identical financial instrument when traded as an asset in markets that are not active. All other debt is valued using current interest rates, excluding the effect of debt issuance costs.
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Carrying value (excluding swap adjustments)
|
|
7,948,537
|
|
|
7,996,073
|
|
|
Fair value
|
|
8,206,639
|
|
|
8,089,154
|
|
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
Senior Secured Notes
|
|
(86,101
|
)
|
|
(91,502
|
)
|
|
Term Loan Facilities
|
|
(9,487
|
)
|
|
(10,165
|
)
|
|
Revolving Credit Facilities
|
|
(9,090
|
)
|
|
(6,243
|
)
|
|
Other
|
|
(1,351
|
)
|
|
(2,369
|
)
|
|
Interest expense
|
|
(106,029
|
)
|
|
(110,279
|
)
|
|
Interest income
|
|
2,960
|
|
|
2,999
|
|
|
Interest expense, net
|
|
(103,069
|
)
|
|
(107,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
($ thousands, except percentages)
|
|
2019
|
|
2018
|
|
Provision for income taxes
|
|
52,692
|
|
|
60,505
|
|
|
Income (loss) before provision for income taxes
|
|
133,187
|
|
|
(3,999
|
)
|
|
Effective income tax rate (determined using an estimated annual effective tax rate)
|
|
39.6
|
%
|
|
(1,513.0
|
)%
|
The effective income tax rate for the
three months ended March 31, 2019
of
39.6%
differed from the U.K. statutory rate of 19.0% primarily due to U.K. and foreign losses with no tax benefit and the impact of the U.S. Tax Cuts and Jobs Act of 2017 (the "Tax Act").
The effective income tax rate for the
three
months ended
March 31, 2018
of
(1,513.0)%
differed from the U.K. statutory rate of 19.00% primarily related to U.K. and foreign losses with no tax benefit, increases in uncertain tax positions relating to a foreign tax audit, the impact of the Tax Act and foreign rate differential.
On a quarterly basis, we evaluate the realizability of the deferred income tax assets by jurisdiction and assess the need for a valuation allowance. At
March 31, 2019
, we believe it will be more-likely-than-not that we realize the deferred income tax assets, net of valuation allowances, recorded on the condensed consolidated balance sheet. However, should we believe that it is more-likely-than-not that the deferred income tax assets would not be realized, the tax provision would increase in the period in which we determined that the realizability was not likely. We consider the probability of future taxable income and historical profitability, among other factors, in assessing the realizability of the deferred income tax assets.
We had $26.6 million of reserves for uncertain tax positions at
March 31, 2019
and
December 31, 2018
. We recognize interest and penalties related to income tax matters in income tax expense. At
March 31, 2019
and
December 31, 2018
, $16.8 million and $16.4 million, respectively, of interest and penalties were accrued for uncertain tax positions.
|
|
|
|
8
.
|
Commitments and Contingencies
|
Legal Proceedings
From time to time, the Parent and/or one or more of its subsidiaries are party to legal, regulatory, or administrative proceedings
regarding, among other matters, claims by and against the Company, and injunctions by third parties arising out of the ordinary course of business. Licenses are also subject to legal challenges by competitors, including Sisal and Stanley International Betting Limited, seeking to annul awards made to the Company. The Parent and/or one or more of its subsidiaries are also, from time to time, subjects of or parties to ethics and compliance inquiries and investigations related to the Company’s ongoing operations. The following matters were described in Note 17 within the Company's 2018 Form 20-F.
Texas Fun 5’s Instant Ticket Game
Five lawsuits have been filed against IGT Global Solutions Corporation (f/k/a GTECH Corporation) in Texas state court arising out of the Fun 5’s instant ticket game sold by the Texas Lottery Commission ("TLC") from September 14, 2014 to October 21, 2014. Plaintiffs allege each ticket’s instruction for Game 5 provided a 5x win (five times the prize box amount) any time the "Money Bag" symbol was revealed in the "5X BOX". However, TLC awarded a 5x win only when (1) the "Money Bag" symbol was revealed and (2) three symbols in a pattern were revealed.
|
|
|
|
(a)
|
Steele, James et al. v. GTECH Corp.
, filed on December 9, 2014, in Travis County (No. D1GN145114). Through intervenor actions, over 1,200 plaintiffs claim damages in excess of $500.0 million. GTECH Corporation’s plea to the jurisdiction for dismissal based on sovereign immunity was denied. GTECH Corporation appealed. The appellate court ordered that plaintiffs' sole remaining claim should be reconsidered. On April 27, 2018, IGT Global Solutions Corporation petitioned for Texas Supreme Court review and the Texas Supreme Court has requested briefs.
|
|
|
|
|
(b)
|
Nettles, Dawn v. GTECH Corp. et al.
, filed on January 7, 2015, in Dallas County (No. 051501559CV). Plaintiff claims damages in excess of $4.0 million. GTECH Corporation and the Texas Lottery Commission won pleas to the jurisdiction for dismissal based on sovereign immunity. Plaintiff lost her appeal and petitioned for Texas Supreme Court review. The Texas Supreme Court has requested briefs.
|
|
|
|
|
(c)
|
Guerra, Esmeralda v. GTECH Corp. et al.
, filed on June 10, 2016, in Hidalgo County (No. C277716B). Plaintiff claims damages in excess of $0.5 million.
|
|
|
|
|
(d)
|
Wiggins, Mario & Kimberly v. IGT Global Solutions Corp.
, filed on September 15, 2016, in Travis County (No. D1GN16004344). Plaintiffs claim damages in excess of $1.0 million.
|
|
|
|
|
(e)
|
Campos, Osvaldo Guadalupe et al. v. GTECH Corp.
, filed on October 20, 2016, in Travis County (No. D1GN16005300). Plaintiffs claim damages in excess of $1.0 million.
|
We dispute the claims made in each of these cases and continue to defend against these lawsuits.
Illinois State Lottery
On February 2, 2017, putative class representatives of retailers and lottery ticket purchasers alleged the Illinois Lottery collected millions of dollars from sales of instant ticket games and wrongfully ended certain games before all top prizes had been sold.
Raqqa, Inc. et al. v. Northstar Lottery Group, LLC
, was filed in Illinois state court, St. Clair County (No. 17L51) against Northstar Lottery Group LLC, a consortium in which the Parent indirectly holds an 80% controlling interest. The claims include tortious interference with contract, violations of Illinois Consumer Fraud and Deceptive Practices Act, and unjust enrichment. The lawsuit was removed to the U.S. District Court for the Southern District of Illinois. On May 9, 2018, IGT Global Solutions Corporation and Scientific Games International, Inc. were added as defendants. On March 15, 2017, a second lawsuit,
Atteberry, Dennis et al. v. Northstar Lottery Group, LLC
, was filed in Illinois state court, Cook County (No. 2017CHO3755) seeking damages on the same matter. We dispute the claims made in both cases and continue to defend against these lawsuits.
Mexican Inventory Tax
The Mexican Tax Administration Service levied an assessment of income tax, VAT, profit sharing, interest and penalties on GTECH Mexico for the 2006 fiscal year that, as at
March 31, 2019
, amounted to
539.0 million
Mexican Pesos. Approximately 65% of the assessment relates to denial of the deductibility of cost of goods sold ("cost of goods sold deduction") by GTECH Mexico to its parent and the remaining assessment relates primarily to intercompany loan proceeds (treated as taxable income) received from GTECH Mexico’s parent. Although lower courts upheld the assessment, the Mexican Appellate Court ruled the loan proceeds non-taxable, but denied our cost of goods sold deduction. The Mexican Supreme Court upheld the Appellate Court’s ruling that the cost of goods sold deduction would not apply. As a result of this loss, an accrual in the amount of
354.8 million
Mexican Pesos (
$18.1 million
at the
March 31, 2019
exchange rate) was recorded to income taxes payable in the consolidated balance sheet at
December 31, 2018
. GTECH Mexico filed a constitutional appeal on November 23, 2017. The other tax issues are still being addressed in the courts in Mexico. We maintain that the assessment is without merit.
Accumulated Other Comprehensive Income ("AOCI")
The following tables detail the changes in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on:
|
|
|
|
Less: OCI attributable
to non-controlling
interests
|
|
Total
AOCI
attributable
to IGT PLC
|
|
($ thousands)
|
|
Foreign
Currency
Translation
|
|
Cash
Flow
Hedges
|
|
Hedge of
Net
Investment
|
|
Available
for Sale
Securities
|
|
Defined
Benefit
Plans
|
|
Other
|
|
|
|
Balance at December 31, 2018
|
|
247,362
|
|
|
(1,240
|
)
|
|
(5,518
|
)
|
|
6,195
|
|
|
(4,454
|
)
|
|
(748
|
)
|
|
19,940
|
|
|
261,537
|
|
|
Change during period
|
|
(24,639
|
)
|
|
775
|
|
|
—
|
|
|
1,204
|
|
|
(63
|
)
|
|
—
|
|
|
16,213
|
|
|
(6,510
|
)
|
|
Reclassified to operations
|
|
(46
|
)
|
|
(186
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(232
|
)
|
|
Tax effect
|
|
—
|
|
|
(82
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(85
|
)
|
|
OCI
|
|
(24,685
|
)
|
|
507
|
|
|
—
|
|
|
1,201
|
|
|
(63
|
)
|
|
—
|
|
|
16,213
|
|
|
(6,827
|
)
|
|
Balance at March 31, 2019
|
|
222,677
|
|
|
(733
|
)
|
|
(5,518
|
)
|
|
7,396
|
|
|
(4,517
|
)
|
|
(748
|
)
|
|
36,153
|
|
|
254,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on:
|
|
|
|
Less: OCI attributable
to non-controlling
interests
|
|
Total
AOCI
attributable
to IGT PLC
|
|
($ thousands)
|
|
Foreign
Currency
Translation
|
|
Cash
Flow
Hedges
|
|
Hedge of
Net
Investment
|
|
Available
for Sale
Securities
|
|
Defined
Benefit
Plans
|
|
Other
|
|
|
|
Balance at December 31, 2017
|
|
338,146
|
|
|
(649
|
)
|
|
(4,578
|
)
|
|
11,588
|
|
|
(4,839
|
)
|
|
(748
|
)
|
|
1,249
|
|
|
340,169
|
|
|
Change during period
|
|
35,101
|
|
|
(6,112
|
)
|
|
—
|
|
|
1,225
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
30,258
|
|
|
Reclassified to operations
|
|
—
|
|
|
1,225
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,225
|
|
|
Tax effect
|
|
2,094
|
|
|
7
|
|
|
(969
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,133
|
|
|
OCI
|
|
37,195
|
|
|
(4,880
|
)
|
|
(969
|
)
|
|
1,226
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
32,616
|
|
|
Balance at March 31, 2018
|
|
375,341
|
|
|
(5,529
|
)
|
|
(5,547
|
)
|
|
12,814
|
|
|
(4,839
|
)
|
|
(748
|
)
|
|
1,293
|
|
|
372,785
|
|
For the
three months ended March 31, 2019
and
2018
,
$(0.2) million
and
$1.2 million
, respectively, were reclassified from AOCI into service revenue on the condensed consolidated statements of operations.
Dividends
We declared cash dividends of
$0.20
per share during the
three months ended March 31, 2019
and
2018
.
The structure of our internal organization is customer-facing aligned around four segments operating in three regions as follows:
|
|
|
|
•
|
North America Gaming and Interactive
|
We monitor the operating results of our segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating income. Segment accounting policies are consistent with those of the condensed consolidated financial statements.
Corporate support expenses, which are not allocated to the segments, are principally composed of selling, general and administrative expenses and other expenses that are managed at the corporate level, including restructuring, transaction, corporate headquarters and Board of Directors’ expenses.
Purchase accounting principally represents the depreciation and amortization of acquired tangible and intangible assets in connection with acquired companies.
Segment information is as follows ($ thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2019
|
|
($ thousands)
|
|
North America Gaming and Interactive
|
|
North America Lottery
|
|
International
|
|
Italy
|
|
Segment Total
|
|
Corporate Support
|
|
Purchase Accounting
|
|
Total
|
|
Operating and Facilities Management Contracts
|
|
—
|
|
|
208,102
|
|
|
69,572
|
|
|
203,702
|
|
|
481,376
|
|
|
—
|
|
|
—
|
|
|
481,376
|
|
|
Machine gaming
|
|
99,890
|
|
|
25,052
|
|
|
12,353
|
|
|
138,711
|
|
|
276,006
|
|
|
—
|
|
|
—
|
|
|
276,006
|
|
|
Lottery Management Agreements
|
|
—
|
|
|
32,202
|
|
|
—
|
|
|
—
|
|
|
32,202
|
|
|
—
|
|
|
—
|
|
|
32,202
|
|
|
Other services
|
|
55,802
|
|
|
16,407
|
|
|
34,908
|
|
|
94,152
|
|
|
201,269
|
|
|
—
|
|
|
178
|
|
|
201,447
|
|
|
Service revenue
|
|
155,692
|
|
|
281,763
|
|
|
116,833
|
|
|
436,565
|
|
|
990,853
|
|
|
—
|
|
|
178
|
|
|
991,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming machines
|
|
63,449
|
|
|
—
|
|
|
35,324
|
|
|
—
|
|
|
98,773
|
|
|
—
|
|
|
—
|
|
|
98,773
|
|
|
Lottery product
|
|
—
|
|
|
14,006
|
|
|
4,406
|
|
|
—
|
|
|
18,412
|
|
|
—
|
|
|
—
|
|
|
18,412
|
|
|
Systems and other
|
|
20,796
|
|
|
273
|
|
|
15,494
|
|
|
137
|
|
|
36,700
|
|
|
—
|
|
|
—
|
|
|
36,700
|
|
|
Product sales
|
|
84,245
|
|
|
14,279
|
|
|
55,224
|
|
|
137
|
|
|
153,885
|
|
|
—
|
|
|
—
|
|
|
153,885
|
|
|
Total revenue
|
|
239,937
|
|
|
296,042
|
|
|
172,057
|
|
|
436,702
|
|
|
1,144,738
|
|
|
—
|
|
|
178
|
|
|
1,144,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
48,687
|
|
|
75,795
|
|
|
13,584
|
|
|
147,274
|
|
|
285,340
|
|
|
(58,424
|
)
|
|
(48,764
|
)
|
|
178,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2018
|
|
($ thousands)
|
|
North America Gaming and Interactive
|
|
North America Lottery
|
|
International
|
|
Italy
|
|
Segment Total
|
|
Corporate Support
|
|
Purchase Accounting
|
|
Total
|
|
Operating and Facilities Management Contracts
|
|
—
|
|
|
205,441
|
|
|
71,635
|
|
|
213,915
|
|
|
490,991
|
|
|
—
|
|
|
—
|
|
|
490,991
|
|
|
Machine gaming
|
|
105,480
|
|
|
24,536
|
|
|
14,304
|
|
|
174,188
|
|
|
318,508
|
|
|
—
|
|
|
—
|
|
|
318,508
|
|
|
Lottery Management Agreements
|
|
—
|
|
|
35,722
|
|
|
—
|
|
|
—
|
|
|
35,722
|
|
|
—
|
|
|
—
|
|
|
35,722
|
|
|
Other services
|
|
48,820
|
|
|
13,343
|
|
|
44,596
|
|
|
94,794
|
|
|
201,553
|
|
|
—
|
|
|
177
|
|
|
201,730
|
|
|
Service revenue
|
|
154,300
|
|
|
279,042
|
|
|
130,535
|
|
|
482,897
|
|
|
1,046,774
|
|
|
—
|
|
|
177
|
|
|
1,046,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming machines
|
|
49,946
|
|
|
—
|
|
|
30,073
|
|
|
—
|
|
|
80,019
|
|
|
—
|
|
|
—
|
|
|
80,019
|
|
|
Lottery machines
|
|
—
|
|
|
16,277
|
|
|
2,642
|
|
|
—
|
|
|
18,919
|
|
|
—
|
|
|
—
|
|
|
18,919
|
|
|
Systems and other
|
|
39,505
|
|
|
80
|
|
|
21,235
|
|
|
247
|
|
|
61,067
|
|
|
—
|
|
|
—
|
|
|
61,067
|
|
|
Product sales
|
|
89,451
|
|
|
16,357
|
|
|
53,950
|
|
|
247
|
|
|
160,005
|
|
|
—
|
|
|
—
|
|
|
160,005
|
|
|
Total revenue
|
|
243,751
|
|
|
295,399
|
|
|
184,485
|
|
|
483,144
|
|
|
1,206,779
|
|
|
—
|
|
|
177
|
|
|
1,206,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
57,159
|
|
|
76,396
|
|
|
21,559
|
|
|
147,134
|
|
|
302,248
|
|
|
(53,322
|
)
|
|
(51,931
|
)
|
|
196,995
|
|
The following table presents the computation of basic and diluted income (loss) per share of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
($ and shares in thousands, except per share amounts)
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) attributable to IGT PLC
|
|
40,254
|
|
|
(103,146
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares - basic
|
|
204,300
|
|
|
203,597
|
|
|
Incremental shares under stock based compensation plans
|
|
442
|
|
|
—
|
|
|
Weighted-average shares - diluted
|
|
204,742
|
|
|
203,597
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to IGT PLC per common share - basic
|
|
0.20
|
|
|
(0.51
|
)
|
|
Net income (loss) attributable to IGT PLC per common share - diluted
|
|
0.20
|
|
|
(0.51
|
)
|
Certain stock options to purchase common shares were outstanding, but were excluded from the computation of diluted earnings per share, because the exercise price of the options was greater than the average market price of the common shares for the period, and therefore, the effect would have been antidilutive.
During periods when we are in a net loss position, certain outstanding stock options and unvested restricted stock awards are excluded from the computation of diluted earnings per share because including them would have had an antidilutive effect.
Stock options and unvested restricted stock awards totaling
1.6 million
and
0.6 million
for the
three months ended March 31, 2019
and
2018
, respectively, were excluded from the computation of diluted earnings per share because including them would have had an antidilutive effect.
In December 2013, we invested €19.8 million to obtain a 30% ownership interest in Yeonama Holdings Co. Limited ("Yeonama"), a 24.12% shareholder in Emma Delta. Emma Delta owns a 33% stake in OPAP S.A., a Greek gaming and sports betting operator. At March 31, 2019, we had a commitment to invest up to an additional €1.5 million in Yeonama, representing a total potential €21.3 million investment.
During the second quarter of 2019, we sold our ownership interest in Yeonama, resulting in a pre-tax gain of approximately €26.1 million ($29.1 million at the May 31, 2019 exchange rate) and the expiration of our commitment.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, included in this report, as well as "Item 5. Operating and Financial Review and Prospects" and "Item 18. Financial Statements" in the Company's
2018
Form 20-F.
The following discussion includes certain forward-looking statements. Actual results may differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this report and in "Item 3.D. Risk Factors" and "Item 5.G. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" included in the Company's
2018
Form 20-F.
Certain totals in the tables included in Item 2 may not add due to rounding.
Overview
The Company is a leading commercial operator and provider of technology in the regulated worldwide gaming markets that operates and provides a full range of services and leading-edge technology products across all gaming markets, including lotteries, machine gaming, sports betting, interactive gaming and commercial services. The Company's state-of-the-art information technology platforms and software enable distribution of its products and services through land-based systems, the internet and mobile devices.
The structure of our internal organization is customer-facing aligned around four segments operating in three regions as follows:
|
|
|
|
•
|
North America Gaming and Interactive
|
Key Factors Affecting Operations and Financial Condition
There have been no material changes to "Key Factors Affecting Operations and Financial Condition" as disclosed in "Item 5.A. Operating Results" in the Company's
2018
Form 20-F.
Critical Accounting Estimates
The Company's consolidated financial statements are prepared in conformity with United States Generally Accepted Accounting Principles ("GAAP") which require the use of estimates, judgments and assumptions that affect the carrying amount of assets and liabilities and the amounts of income and expenses recognized. The estimates and underlying assumptions are based on information available at the date that the financial statements are prepared, on historical experience, and are considered to be reasonable and realistic.
The Company periodically and continuously reviews its estimates and assumptions. Actual results for those areas requiring management judgment or estimates may differ from those recorded in the consolidated financial statements due to the occurrence of events and the uncertainties which characterize the assumptions and conditions on which the estimates are based.
The areas which require greater subjectivity of management in making estimates and judgments and where a change in such underlying assumptions could have a significant impact on the Company's consolidated financial statements are discussed in "Critical Accounting Estimates" as disclosed in "Item 5.A. Operating Results" in the Company's
2018
Form 20-F and are fully described in "Notes to the Consolidated Financial Statements—2. Summary of Significant Accounting Policies" included in "Item 18. Financial Statements" in the Company's
2018
Form 20-F.
There have been no material changes to these Critical Accounting Estimates.
Consolidated Results
The discussion below includes information calculated at constant currency. The Company calculates constant currency by applying the prior-year/period exchange rates to current financial data expressed in local currency in order to eliminate the impact of foreign exchange rate fluctuations originating from translating the income statement of the Company's foreign entities into U.S. dollars. These constant currency measures are non-GAAP measures. Although the Company does not believe that these measures are a substitute for GAAP measures, it does believe that such results excluding the impact of currency fluctuations period-on-period provide additional useful information to investors regarding operating performance on a local currency basis.
Comparison of the
three months ended March 31, 2019
and
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
($ thousands)
|
|
$
|
|
% of
Revenue
|
|
$
|
|
% of
Revenue
|
|
Service revenue
|
|
991,031
|
|
|
86.6
|
|
|
1,046,951
|
|
|
86.7
|
|
|
Product sales
|
|
153,885
|
|
|
13.4
|
|
|
160,005
|
|
|
13.3
|
|
|
Total revenue
|
|
1,144,916
|
|
|
100.0
|
|
|
1,206,956
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
595,327
|
|
|
52.0
|
|
|
618,058
|
|
|
51.2
|
|
|
Cost of product sales
|
|
100,185
|
|
|
8.8
|
|
|
103,351
|
|
|
8.6
|
|
|
Selling, general and administrative
|
|
205,134
|
|
|
17.9
|
|
|
217,289
|
|
|
18.0
|
|
|
Research and development
|
|
66,118
|
|
|
5.8
|
|
|
71,263
|
|
|
5.9
|
|
|
Total operating expenses
|
|
966,764
|
|
|
84.4
|
|
|
1,009,961
|
|
|
83.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
178,152
|
|
|
15.6
|
|
|
196,995
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
(103,069
|
)
|
|
(9.0
|
)
|
|
(107,280
|
)
|
|
(8.9
|
)
|
|
Foreign exchange gain (loss), net
|
|
58,602
|
|
|
5.1
|
|
|
(96,695
|
)
|
|
(8.0
|
)
|
|
Other (expense) income, net
|
|
(498
|
)
|
|
—
|
|
|
2,981
|
|
|
0.2
|
|
|
Total non-operating expenses
|
|
(44,965
|
)
|
|
(3.9
|
)
|
|
(200,994
|
)
|
|
(16.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
133,187
|
|
|
11.6
|
|
|
(3,999
|
)
|
|
(0.3
|
)
|
|
Provision for income taxes
|
|
52,692
|
|
|
4.6
|
|
|
60,505
|
|
|
5.0
|
|
|
Net income (loss)
|
|
80,495
|
|
|
7.0
|
|
|
(64,504
|
)
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to non-controlling interests
|
|
40,241
|
|
|
3.5
|
|
|
18,316
|
|
|
1.5
|
|
|
Less: Net income attributable to redeemable non-controlling interests
|
|
—
|
|
|
—
|
|
|
20,326
|
|
|
1.7
|
|
|
Net income (loss) attributable to IGT PLC
|
|
40,254
|
|
|
3.5
|
|
|
(103,146
|
)
|
|
(8.5
|
)
|
Service revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
$ Change
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
North America Gaming and Interactive
|
|
155,692
|
|
|
154,300
|
|
|
1,392
|
|
|
0.9
|
|
|
North America Lottery
|
|
281,763
|
|
|
279,042
|
|
|
2,721
|
|
|
1.0
|
|
|
International
|
|
116,833
|
|
|
130,535
|
|
|
(13,702
|
)
|
|
(10.5
|
)
|
|
Italy
|
|
436,565
|
|
|
482,897
|
|
|
(46,332
|
)
|
|
(9.6
|
)
|
|
Operating Segments
|
|
990,853
|
|
|
1,046,774
|
|
|
(55,921
|
)
|
|
(5.3
|
)
|
|
Corporate Support
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase accounting
|
|
178
|
|
|
177
|
|
|
1
|
|
|
0.6
|
|
|
|
|
991,031
|
|
|
1,046,951
|
|
|
(55,920
|
)
|
|
(5.3
|
)
|
The following table sets forth constant currency changes in service revenue for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant Currency Change
|
|
($ thousands)
|
|
$
|
|
%
|
|
North America Gaming and Interactive
|
|
1,625
|
|
|
1.1
|
|
|
North America Lottery
|
|
3,085
|
|
|
1.1
|
|
|
International
|
|
(4,980
|
)
|
|
(3.8
|
)
|
|
Italy
|
|
(9,713
|
)
|
|
(2.0
|
)
|
|
Operating Segments
|
|
(9,983
|
)
|
|
(1.0
|
)
|
|
Corporate Support
|
|
—
|
|
|
—
|
|
|
Purchase accounting
|
|
1
|
|
|
0.6
|
|
|
|
|
(9,982
|
)
|
|
(1.0
|
)
|
North America Gaming and Interactive segment
The following table sets forth changes in service revenue for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue Change
|
|
($ thousands)
|
|
Constant
Currency
|
|
$ Change
|
|
Machine gaming
|
|
(5,345
|
)
|
|
(5,590
|
)
|
|
Other services
|
|
6,970
|
|
|
6,982
|
|
|
|
|
1,625
|
|
|
1,392
|
|
The principal drivers of the
$1.6 million
constant currency
increase
in service revenue were as follows:
|
|
|
|
•
|
A
decrease
of
$5.3 million
in
Machine gaming
, primarily driven by a decrease in the average yield from overall product mix and a
2.0%
decrease
in the casino installed base (
22,713
machines installed at
March 31, 2019
compared to
23,183
machines installed at
March 31, 2018
); and
|
|
|
|
|
•
|
An
increase
of
$7.0 million
in
Other services
, principally due to an increase of $9.3 million in poker revenue, primarily due to a large, multi-year poker site license contract, partially offset by a decrease of $2.5 million in usage-based royalties as a result of a contract renegotiation.
|
North America Lottery segment
The following table sets forth changes in service revenue for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue Change
|
|
($ thousands)
|
|
Constant
Currency
|
|
$ Change
|
|
Operating and Facilities Management Contracts
|
|
2,662
|
|
|
2,661
|
|
|
Lottery Management Agreements
|
|
(3,520
|
)
|
|
(3,520
|
)
|
|
Machine gaming
|
|
516
|
|
|
516
|
|
|
Other services
|
|
3,427
|
|
|
3,064
|
|
|
|
|
3,085
|
|
|
2,721
|
|
The principal drivers of the
$3.1 million
constant currency
increase
in service revenue were as follows:
|
|
|
|
•
|
An
increase
of
$2.7 million
in
Operating and Facilities Management Contracts
, principally driven by strong same store revenue (revenue from existing customers as opposed to new customers) growth of 2.8%, primarily due to a 5.2% increase in instant tickets and draw-based games, and a reversal of contra-revenue related to service level agreement provisions incurred in the prior year, partially offset by the impact of the conclusion of the Illinois supply contract during the current period and a 9.3% decrease in multi-state jackpot activity due to four large jackpot prizes in the prior period;
|
|
|
|
|
•
|
A
decrease
of
$3.5 million
in
Lottery Management Agreements
("LMA"), primarily related to a $2.9 million decrease in pass through service revenue related to the timing of reimbursable expenses from the New Jersey LMA contract; and
|
|
|
|
|
•
|
An
increase
of
$3.4 million
in
Other services
, principally due to the expansion of an online jackpot game in Canada.
|
International segment
The following table sets forth changes in service revenue for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue Change
|
|
($ thousands)
|
|
Constant
Currency
|
|
$ Change
|
|
Operating and Facilities Management Contracts
|
|
1,835
|
|
|
(2,063
|
)
|
|
Machine gaming
|
|
(174
|
)
|
|
(1,952
|
)
|
|
Other services
|
|
(6,641
|
)
|
|
(9,687
|
)
|
|
|
|
(4,980
|
)
|
|
(13,702
|
)
|
The principal drivers of the
$5.0 million
constant currency
decrease
in service revenue were as follows:
|
|
|
|
•
|
An
increase
of
$1.8 million
in
Operating and Facilities Management Contracts
, principally driven by strong same store revenue growth of 3.6%, primarily due to a 3.4% increase in instant tickets and draw-based games and an 8.2% increase in multi-jackpot activity; and
|
|
|
|
|
•
|
A
decrease
of
$6.6 million
in
Other services
, principally due to:
|
|
|
|
|
◦
|
A decrease of $2.6 million in interactive, primarily driven by lower levels of remote game server and multi-jackpot activity; and
|
|
|
|
|
◦
|
A decrease of $1.7 million in commercial gaming, primarily related to Europe, Africa and Latin America.
|
Italy segment
The following table sets forth changes in service revenue for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue Change
|
|
($ thousands)
|
|
Constant Currency
|
|
$ Change
|
|
Operating and Facilities Management Contracts
|
|
6,915
|
|
|
(10,213
|
)
|
|
Machine gaming
|
|
(23,843
|
)
|
|
(35,477
|
)
|
|
Other services
|
|
7,215
|
|
|
(642
|
)
|
|
|
|
(9,713
|
)
|
|
(46,332
|
)
|
The constant currency movements in service revenues for each of the core activities within the Italy segment are discussed below.
Operating and Facilities Management Contracts
The following table sets forth constant currency changes in Operating and Facilities Management Contracts
for the three months ended March 31, 2019
when compared
to the three months ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant Currency Change
|
|
($ thousands)
|
|
$
|
|
%
|
|
Lotto
|
|
7,926
|
|
|
6.3
|
|
|
Instant Tickets
|
|
(1,011
|
)
|
|
(1.1
|
)
|
|
|
|
6,915
|
|
|
3.2
|
|
Lotto
At constant currency, Lotto for the
three months ended
March 31, 2019
increased
by
$7.9 million
compared to the
three months ended
March 31, 2018
, principally due to a
6.4%
increase
in 10eLotto wagers as a result of an increase in bets and growing player frequency and a
47.1%
increase
in Million Day wagers which launched in February 2018.
Wagers for the
three months ended
March 31, 2019
and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
Change
|
|
(€ millions)
|
|
2019
|
|
2018
|
|
€
|
|
%
|
|
10eLotto
|
|
1,544
|
|
|
1,451
|
|
|
93
|
|
|
6.4
|
|
|
Core
|
|
501
|
|
|
504
|
|
|
(3
|
)
|
|
(0.6
|
)
|
|
Million Day
|
|
50
|
|
|
34
|
|
|
16
|
|
|
47.1
|
|
|
Late Numbers
|
|
47
|
|
|
45
|
|
|
2
|
|
|
4.4
|
|
|
|
|
2,142
|
|
|
2,034
|
|
|
108
|
|
|
5.3
|
|
Instant tickets
At constant currency, instant tickets for the
three months ended
March 31, 2019
decreased
by
$1.0 million
compared to the
three months ended
March 31, 2018
, primarily driven by a
1.3%
decrease
in the number of tickets sold due to one less day of sales in the current period when compared to the prior period, partially offset by a
0.4%
increase
in the average price point (the average value of the tickets sold).
Total wagers for the
three months ended
March 31, 2019
and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
Change
|
|
(€ millions)
|
|
2019
|
|
2018
|
|
€
|
|
%
|
|
Total wagers
|
|
2,386
|
|
|
2,408
|
|
|
(22
|
)
|
|
(0.9
|
)
|
Machine gaming
At constant currency,
Machine gaming
for the
three months ended
March 31, 2019
decreased
by
$23.8 million
compared to the
three months ended
March 31, 2018
, primarily driven by an increase in gaming machine taxes related to the Prelievo Unico Erariale ("PREU") increase in September 2018 and January 2019 (PREU AWP increased on average quarter basis from 19.00%
for the
three months ended March 31, 2018
to 21.05%
for the three months ended March 31, 2019
and PREU Video Lottery Terminals ("VLT") increased on average quarter basis from 6.00%
for the three months ended March 31, 2018
to 7.50%
for the three months ended March 31, 2019
) and a decrease in total machines installed due to a regulator-mandated reduction in Amusement with prize ("AWP") machines, partially offset by a
4.3%
increase
on VLT driven wagers and higher productivity of the AWP machines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
Change
|
|
(€ millions)
|
|
2019
|
|
2018
|
|
€
|
|
%
|
|
VLT wagers
|
|
1,503
|
|
|
1,441
|
|
|
62
|
|
|
4.3
|
|
|
AWP wagers
|
|
939
|
|
|
955
|
|
|
(16
|
)
|
|
(1.7
|
)
|
|
|
|
2,442
|
|
|
2,396
|
|
|
46
|
|
|
1.9
|
|
Total wagers and machines installed correspond to the management of VLTs and AWPs under the Company's licenses.
Other services
At constant currency,
Other services
for the
three months ended
March 31, 2019
increased
by
$7.2 million
compared to the
three months ended
March 31, 2018
, driven primarily by:
|
|
|
|
•
|
An increase of $7.6 million in commercial services, primarily related to an increase is POS fees as a result of a new service offering during the
three months ended March 31, 2019
;
|
|
|
|
|
•
|
An 11.1% increase in sports betting wagers (
€274.0 million
for the three months ended March 31, 2019
compared to
€246.0 million
for the three months ended March 31, 2018
), partially offset by a higher combined payout in sports betting (
83.3%
for the three months ended March 31, 2019
compared to
81.2%
for the three months ended March 31, 2018
); and
|
|
|
|
|
•
|
A
decrease
of
0.8%
in interactive game wagers (
€489.0 million
for the three months ended March 31, 2019
compared to
€493.0 million
for the three months ended March 31, 2018
).
|
Product sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
$ Change
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
North America Gaming and Interactive
|
|
84,245
|
|
|
89,451
|
|
|
(5,206
|
)
|
|
(5.8
|
)
|
|
North America Lottery
|
|
14,279
|
|
|
16,357
|
|
|
(2,078
|
)
|
|
(12.7
|
)
|
|
International
|
|
55,224
|
|
|
53,950
|
|
|
1,274
|
|
|
2.4
|
|
|
Italy
|
|
137
|
|
|
247
|
|
|
(110
|
)
|
|
(44.5
|
)
|
|
Operating Segments
|
|
153,885
|
|
|
160,005
|
|
|
(6,120
|
)
|
|
(3.8
|
)
|
|
Corporate Support
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase accounting
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
153,885
|
|
|
160,005
|
|
|
(6,120
|
)
|
|
(3.8
|
)
|
The following table sets forth changes in product sales for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
on a constant currency basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant Currency Change
|
|
($ thousands)
|
|
$
|
|
%
|
|
North America Gaming and Interactive
|
|
(4,998
|
)
|
|
(5.6
|
)
|
|
North America Lottery
|
|
(1,714
|
)
|
|
(10.5
|
)
|
|
International
|
|
3,860
|
|
|
7.2
|
|
|
Italy
|
|
(102
|
)
|
|
(41.3
|
)
|
|
Operating Segments
|
|
(2,954
|
)
|
|
(1.8
|
)
|
|
Corporate Support
|
|
—
|
|
|
—
|
|
|
Purchase accounting
|
|
—
|
|
|
—
|
|
|
|
|
(2,954
|
)
|
|
(1.8
|
)
|
North America Gaming and Interactive segment
The following table sets forth changes in product sales for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sale Change
|
|
($ thousands)
|
|
Constant
Currency
|
|
$ Change
|
|
Gaming machines
|
|
13,719
|
|
|
13,503
|
|
|
Systems and other
|
|
(18,717
|
)
|
|
(18,709
|
)
|
|
|
|
(4,998
|
)
|
|
(5,206
|
)
|
The principal drivers of the
$5.0 million
constant currency
decrease
in product sales were as follows:
|
|
|
|
•
|
An
increase
of
$13.7 million
in
Gaming machines
, principally associated with
300
more machines sold during the current period, driven primarily by new and expansion sales in Massachusetts, along with an increase in the average selling price, driven by higher mix of casino sales in the current period; and
|
|
|
|
|
•
|
A
decrease
of
$18.7 million
in
Systems and other
, primarily driven by significant software and systems related sales in the prior period.
|
North America Lottery segment
The following table sets forth changes in product sales for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sale Change
|
|
($ thousands)
|
|
Constant
Currency
|
|
$ Change
|
|
Lottery product
|
|
(1,927
|
)
|
|
(2,271
|
)
|
|
Systems and other
|
|
213
|
|
|
193
|
|
|
|
|
(1,714
|
)
|
|
(2,078
|
)
|
The principal driver of the
$1.7 million
constant currency
decrease
in product sales was the
decrease
in
Lottery product
of
$1.9 million
, principally due to prior period lottery hardware sales in Massachusetts and Canada, partially offset by lottery hardware sales in Georgia and instant ticket printing sales.
International segment
The following table sets forth changes in product sales for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales Change
|
|
($ thousands)
|
|
Constant
Currency
|
|
$ Change
|
|
Lottery product
|
|
2,017
|
|
|
1,764
|
|
|
Gaming machines
|
|
6,579
|
|
|
5,251
|
|
|
Systems and other
|
|
(4,736
|
)
|
|
(5,741
|
)
|
|
|
|
3,860
|
|
|
1,274
|
|
The principal drivers of the
$3.9 million
constant currency
increase
in product sales were as follows:
|
|
|
|
•
|
An
increase
of
$2.0 million
in
Lottery product
, primarily related to product sales in Europe and Africa;
|
|
|
|
|
•
|
An
increase
of
$6.6 million
in
Gaming machines
, primarily driven by increased machine sales in Europe, Latin America and the Caribbean and Asia Pacific; and
|
|
|
|
|
•
|
A
decrease
of
$4.7 million
in
Systems and other
, principally due to:
|
|
|
|
|
◦
|
A decrease of $8.3 million in systems sales, primarily driven by sales in Asia in the prior period; and
|
|
|
|
|
◦
|
An increase of $2.4 million in software sales, primarily driven by $3.1 million in AWP game sales in Europe.
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant Currency Change
|
|
$ Change
|
|
($ thousands)
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Cost of services
|
|
4,500
|
|
|
0.7
|
|
|
(22,731
|
)
|
|
(3.7
|
)
|
|
Cost of product sales
|
|
(1,676
|
)
|
|
(1.6
|
)
|
|
(3,166
|
)
|
|
(3.1
|
)
|
|
Selling, general and administrative
|
|
(5,877
|
)
|
|
(2.7
|
)
|
|
(12,155
|
)
|
|
(5.6
|
)
|
|
Research and development
|
|
(2,361
|
)
|
|
(3.3
|
)
|
|
(5,145
|
)
|
|
(7.2
|
)
|
|
Total operating expenses
|
|
(5,414
|
)
|
|
(0.5
|
)
|
|
(43,197
|
)
|
|
(4.3
|
)
|
Information on the primary drivers of changes in operating expenses are as follows:
Cost of services
Cost of services
increased
$4.5 million
on a constant currency basis
for the three months ended March 31, 2019
compared
to the three months ended March 31, 2018
, principally due to:
|
|
|
|
•
|
An
$11.2 million
increase in the North America Gaming and Interactive segment, primarily related to:
|
|
|
|
|
◦
|
An increase of $8.4 million in depreciation and amortization; and
|
|
|
|
|
◦
|
An increase of $3.3 million in licensing and royalties, primarily related to the large, multi-year poker site license contract;
|
|
|
|
|
•
|
A
$5.3 million
increase in the North America Lottery segment, primarily related to a $5.4 million increase in depreciation and amortization;
|
|
|
|
|
•
|
A
$7.8 million
increase in the International segment, primarily related to:
|
|
|
|
|
◦
|
An increase of $4.5 million in other operating expenses, primarily related to a lottery contract settlement; and
|
|
|
|
|
◦
|
An increase of $1.1 million in POS fees, principally due to the 3.6% increase in same store revenues;
|
|
|
|
|
•
|
An
$18.1 million
decrease in the Italy segment, primarily related to:
|
|
|
|
|
◦
|
A $10.3 million decrease in marketing and advertising expense, primarily related to costs incurred for lottery games that did not recur in the current period and the timing of when marketing and advertising expense will be incurred in 2019; and
|
|
|
|
|
◦
|
A $7.0 million decrease in POS fees, primarily related to a decrease in VLT and AWP POS fees partially offset by an increase in commercial services POS fees.
|
Cost of product sales
Cost of product sales
decreased
$1.7 million
on a constant currency basis
for the three months ended March 31, 2019
compared
to the three months ended March 31, 2018
, principally due to:
|
|
|
|
•
|
A
$3.2 million
decrease in the North America Gaming and Interactive segment, primarily related to the
$5.0 million
decrease
in product sales;
|
|
|
|
|
•
|
A
$1.6 million
decrease in the North America Lottery segment, primarily related to the
$1.7 million
decrease
in product sales; and
|
|
|
|
|
•
|
A
$3.0 million
increase in the International segment, primarily related to the
$3.9 million
increase
in product sales.
|
Selling, general and administrative
Selling, general and administrative expense
decreased
$5.9 million
on a constant currency basis
for the three months ended March 31, 2019
compared
to the three months ended March 31, 2018
, principally due to:
|
|
|
|
•
|
A
$3.2 million
decrease in the North America Gaming and Interactive segment, primarily related to:
|
|
|
|
|
◦
|
A decrease of $2.0 million in performance based compensation; and
|
|
|
|
|
◦
|
A decrease of $1.3 million in depreciation and amortization;
|
|
|
|
|
•
|
A
$4.5 million
decrease in the International segment, primarily related to:
|
|
|
|
|
◦
|
A $1.7 million decrease in bad debt expense, primarily related to prior period bad debt expense in Latin America; and
|
|
|
|
|
◦
|
A $1.3 million decrease in employee related costs and performance based compensation.
|
|
|
|
|
•
|
A
$3.5 million
decrease in the Italy segment, primarily related to prior period bad debt expense in Machine gaming due to the regulator-mandated reduction in AWP machines; and
|
|
|
|
|
•
|
A
$7.2 million
increase in Corporate Support, primarily related to:
|
|
|
|
|
◦
|
An increase of $3.5 million in outside services, principally due to legal costs related to on-going litigation and the U.S. Interstate Wire Act of 1961; and
|
|
|
|
|
◦
|
An increase of $1.6 million in employee related costs.
|
Research and development
Research and development expense
decreased
$2.4 million
on a constant currency basis
for the three months ended March 31, 2019
compared
to the three months ended March 31, 2018
, principally due to a $1.7 million decrease in employee related costs, primarily related to our North America Gaming and Interactive segment.
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
$ Change
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
North America Gaming and Interactive
|
|
48,687
|
|
|
57,159
|
|
|
(8,472
|
)
|
|
(14.8
|
)
|
|
North America Lottery
|
|
75,795
|
|
|
76,396
|
|
|
(601
|
)
|
|
(0.8
|
)
|
|
International
|
|
13,584
|
|
|
21,559
|
|
|
(7,975
|
)
|
|
(37.0
|
)
|
|
Italy
|
|
147,274
|
|
|
147,134
|
|
|
140
|
|
|
0.1
|
|
|
Operating Segments
|
|
285,340
|
|
|
302,248
|
|
|
(16,908
|
)
|
|
(5.6
|
)
|
|
Corporate support
|
|
(58,424
|
)
|
|
(53,322
|
)
|
|
(5,102
|
)
|
|
(9.6
|
)
|
|
Purchase accounting
|
|
(48,764
|
)
|
|
(51,931
|
)
|
|
3,167
|
|
|
6.1
|
|
|
|
|
178,152
|
|
|
196,995
|
|
|
(18,843
|
)
|
|
(9.6
|
)
|
The following table sets forth constant currency changes in operating income (loss) for the
three months ended
March 31, 2019
compared to the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Constant Currency Change
|
|
($ thousands)
|
|
$
|
|
%
|
|
North America Gaming and Interactive
|
|
(11,216
|
)
|
|
(19.6
|
)
|
|
North America Lottery
|
|
(167
|
)
|
|
(0.2
|
)
|
|
International
|
|
(5,026
|
)
|
|
(23.3
|
)
|
|
Italy
|
|
13,823
|
|
|
9.4
|
|
|
Operating Segments
|
|
(2,586
|
)
|
|
(0.9
|
)
|
|
Corporate support
|
|
(7,993
|
)
|
|
(15.0
|
)
|
|
Purchase accounting
|
|
3,115
|
|
|
6.0
|
|
|
|
|
(7,464
|
)
|
|
(3.8
|
)
|
Operating margin for each of the Company's operating segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin
|
|
|
|
For the three months ended
March 31,
|
|
|
|
2019
|
|
2018
|
|
North America Gaming and Interactive
|
|
20.3
|
%
|
|
23.4
|
%
|
|
North America Lottery
|
|
25.6
|
%
|
|
25.9
|
%
|
|
International
|
|
7.9
|
%
|
|
11.7
|
%
|
|
Italy
|
|
33.7
|
%
|
|
30.5
|
%
|
North America Gaming and Interactive
Segment operating margin
decreased
from
23.4%
for the three months ended March 31, 2018
to
20.3%
for the three months ended March 31, 2019
, principally due to the increase of $7.0 million in depreciation and amortization in the current period, partially offset by an increase in service revenue.
North America Lottery
Segment operating margin
decreased
slightly from
25.9%
for the three months ended March 31, 2018
to
25.6%
for the three months ended March 31, 2019
, principally due to an increase in depreciation and amortization driven by new capital requirements arising from contract wins and extensions with several customers within the United States.
International
Segment operating margin
decreased
from
11.7%
for the three months ended March 31, 2018
to
7.9%
for the three months ended March 31, 2019
, principally due to the reduction in service revenue, partially offset by a decrease in operating expenses.
Italy
Segment operating margin
increased
from
30.5%
for the three months ended March 31, 2018
to
33.7%
for the three months ended March 31, 2019
, principally due to Lotto performance and a decrease in marketing and advertising expense.
Non-operating expenses
Interest expense
Interest expense
for the three months ended March 31, 2019
decreased
by
$4.3 million
, or
3.9%
, compared
to the three months ended March 31, 2018
, as detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
Change
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Senior Secured Notes
|
|
(86,101
|
)
|
|
(91,502
|
)
|
|
(5,401
|
)
|
|
(5.9
|
)
|
|
Term Loan Facilities
|
|
(9,487
|
)
|
|
(10,165
|
)
|
|
(678
|
)
|
|
(6.7
|
)
|
|
Revolving Credit Facilities
|
|
(9,090
|
)
|
|
(6,243
|
)
|
|
2,847
|
|
|
45.6
|
|
|
Other
|
|
(1,351
|
)
|
|
(2,369
|
)
|
|
(1,018
|
)
|
|
(43.0
|
)
|
|
Interest expense
|
|
(106,029
|
)
|
|
(110,279
|
)
|
|
(4,250
|
)
|
|
(3.9
|
)
|
|
Interest income
|
|
2,960
|
|
|
2,999
|
|
|
39
|
|
|
1.3
|
|
|
Interest expense, net
|
|
(103,069
|
)
|
|
(107,280
|
)
|
|
(4,211
|
)
|
|
(3.9
|
)
|
Foreign exchange gain (loss), net
The Company recorded foreign exchange gains, net of
$58.6 million
and foreign exchange losses, net of
$96.7 million
in the
three months ended
March 31, 2019
and
2018
, respectively, principally due to non-cash foreign exchange gains and losses on euro denominated debt.
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
($ thousands, except percentages)
|
|
2019
|
|
2018
|
|
Provision for income taxes
|
|
52,692
|
|
|
60,505
|
|
|
Income (loss) before provision for income taxes
|
|
133,187
|
|
|
(3,999
|
)
|
|
Effective income tax rate (determined using an estimated annual effective tax rate)
|
|
39.6
|
%
|
|
(1,513.0
|
)%
|
The change in the effective income tax rates for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 is primarily related to foreign exchange gains and decreases in uncertain tax positions relating to a foreign tax audit in the prior period.
Liquidity and Capital Resources
The Company's business is capital intensive, and requires liquidity in order to meet its obligations and fund growth. Historically, the Company's primary sources of liquidity have been cash flows from operations and, to a lesser extent, cash proceeds from financing activities, including amounts available under the Revolving Credit Facilities due 2021. In addition to general working capital and operational needs, the Company's liquidity requirements arise primarily from its need to meet debt service requirements and to fund capital expenditures. The Company also requires liquidity to fund any acquisitions and associated costs. The Company's cash flows generated from operating activities together with cash flows generated from financing activities have historically been sufficient to meet the Company's liquidity requirements.
The Company believes its ability to generate cash from operations to reinvest in its business, primarily due to the long-term nature of its contracts, is one of its fundamental financial strengths. Combined with funds currently available and committed borrowing capacity, the Company expects to have sufficient liquidity to meet its financial obligations and working capital requirements in the ordinary course of business for at least the next 12 months.
The cash management, funding of operations and investment of excess liquidity are centrally coordinated by a dedicated treasury team with the objective of ensuring effective and efficient management of funds.
The Company's total available liquidity was as follows:
|
|
|
|
|
|
|
|
|
|
|
($ thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Revolving Credit Facilities due 2021
|
|
1,561,375
|
|
|
1,601,968
|
|
|
Cash and cash equivalents
|
|
290,359
|
|
|
250,669
|
|
|
Total Liquidity
|
|
1,851,734
|
|
|
1,852,637
|
|
The Revolving Credit Facilities due 2021 are subject to customary covenants (including maintaining a minimum ratio of EBITDA to net interest costs and a maximum ratio of total net debt to EBITDA) and events of default, none of which are expected to impact the Company's near-term liquidity or capital resources. At
March 31, 2019
and
December 31, 2018
, the borrowers under the Revolving Credit Facilities due 2021 were in compliance with all covenants. From time to time the Company and its creditors may amend these covenants, and maintaining compliance with these covenants in the future may restrict the ability of the Company to pay dividends, repurchase shares, acquire assets of other companies, or grant security interests in its assets.
The Company holds insignificant amounts of cash in countries where there may be restrictions on transfer due to regulatory or governmental bodies. Based on the Company's review of such transfer restrictions and the cash balances held in such countries, it does not believe such transfer restrictions have an adverse impact on its ability to meet liquidity requirements at the dates represented above.
The Company has two agreements with major European financial institutions to sell certain trade receivables related to the Italy segment on a non-recourse basis. These receivables have been derecognized from the Company's consolidated balance sheet. The agreements have a three- and five-year duration, respectively, and are subject to early termination by either party. The aggregate amount of outstanding receivables is limited to a maximum amount of €300 million and €180 million for Scratch & Win and Commercial Services, respectively. At
March 31, 2019
and
December 31, 2018
, the following receivables had been sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in thousands)
|
|
euro
|
|
$
|
|
euro
|
|
$
|
|
Scratch & Win
|
|
151,905
|
|
|
170,665
|
|
|
128,515
|
|
|
147,150
|
|
|
Commercial services
|
|
91,008
|
|
|
102,248
|
|
|
74,609
|
|
|
85,427
|
|
|
|
|
242,913
|
|
|
272,913
|
|
|
203,124
|
|
|
232,577
|
|
The Company also sold trade receivables (primarily in the North America Gaming and Interactive segment) and certain outstanding customer financing receivables on a non-recourse basis. At
March 31, 2019
and
December 31, 2018
, the following receivables had been sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
Trade receivables
|
|
19,754
|
|
|
21,383
|
|
|
Customer financing receivables
|
|
3,487
|
|
|
6,865
|
|
|
|
|
23,241
|
|
|
28,248
|
|
Cash Flow Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
March 31,
|
|
($ thousands)
|
|
2019
|
|
2018
|
|
Net cash provided by operating activities
|
|
146,614
|
|
|
77,210
|
|
|
Net cash used in investing activities
|
|
(115,089
|
)
|
|
(131,841
|
)
|
|
Net cash provided by (used in) financing activities
|
|
9,099
|
|
|
(463,233
|
)
|
|
Net cash flows
|
|
40,624
|
|
|
(517,864
|
)
|
Analysis of Cash Flows
Net Cash Provided By Operating Activities
During the
three months ended
March 31, 2019
, the Company generated
$146.6 million
of net cash flows from operating activities, an
increase
of
$69.4 million
compared to the
three months ended
March 31, 2018
. This
increase
was principally due to:
|
|
|
|
•
|
An increase of $43.6 million related to the decrease in interest paid;
|
|
|
|
|
•
|
An increase of $22.4 million in the change in accrued expenses related to timing;
|
|
|
|
|
•
|
An increase of $12.4 million related to the
conclusion of the Illinois supply contract;
|
|
|
|
|
•
|
An increase of $12.2 million in the change in trade and other receivables, principally due to the timing of payments related to the Italy segment; and
|
|
|
|
|
•
|
A decrease of $30.1 million in income tax expense, primarily related to a decrease in pre-tax income in certain U.S. and foreign jurisdictions and a decrease in uncertain tax positions related to a foreign tax audit in the prior period.
|
Net Cash (Used In) Provided By Investing Activities
During the
three months ended
March 31, 2019
, net cash flows used in investing activities were
$115.1 million
. During the
three months ended
March 31, 2018
, net cash flows used in investing activities were
$131.8 million
.
Investing activities for the
three months ended
March 31, 2019
|
|
|
|
•
|
Capital expenditures of
$119.2 million
, including:
|
|
|
|
|
◦
|
$47.6 million in the North America Lottery segment, principally for lottery contracts, including California, Florida and New York;
|
|
|
|
|
◦
|
$28.1 million in the Italy segment, principally for Machine gaming and Lotto;
|
|
|
|
|
◦
|
$27.6 million in the North America Gaming and Interactive segment, primarily due to the investment in new machines in the casino installed base; and
|
|
|
|
|
◦
|
$13.7 million in the International segment, principally related to commercial gaming.
|
Investing activities for the
three months ended
March 31, 2018
|
|
|
|
•
|
Capital expenditures of
$134.7 million
, including:
|
|
|
|
|
◦
|
$51.3 million in the Italy segment, principally for Machine gaming, sports betting and Lotto;
|
|
|
|
|
◦
|
$34.8 million in the North America Gaming and Interactive segment, primarily due to the investment in new machines in the installed base;
|
|
|
|
|
◦
|
$32.7 million in the North America Lottery segment, principally for lottery contracts, including South Carolina, West Virginia and Georgia; and
|
|
|
|
|
◦
|
$14.3 million in the International segment, principally related to upgrade the casino and VLT installed base to newer machines.
|
Net Cash Provided By (Used in) Financing Activities
During the
three months ended
March 31, 2019
and
2018
, net cash flows provided by (used in) financing activities were
$9.1 million
and
$(463.2) million
, respectively.
Financing activities for the
three months ended
March 31, 2019
|
|
|
|
•
|
The Company received proceeds of $68.9 million from debt, primarily related to:
|
|
|
|
|
◦
|
$35.7 million from the Revolving Credit Facilities due July 2021;
|
|
|
|
|
◦
|
$33.2 million from short-term borrowings;
|
|
|
|
|
•
|
Net payments of $44.7 million, primarily related to financial liabilities in our Italy segment; and
|
|
|
|
|
•
|
Dividends paid to non-controlling shareholders of
$13.4 million
.
|
Financing activities for the
three months ended
March 31, 2018
|
|
|
|
•
|
Principal payment of $625.5 million on the 6.625% Senior Secured Notes due February 2018 upon maturity; and
|
|
|
|
|
•
|
Net proceeds of $164.7 million from the Revolving Credit Facilities due July 2021.
|
Off-Balance Sheet Arrangements
At
March 31, 2019
, we did not have any significant changes to off-balance sheet arrangements.
Dividends
No dividends were distributed
during the three months ended March 31, 2019
. On March 7, 2019, the Company announced a
dividend payable on April 4, 2019 to holders of record as of the close of business on March 21, 2019. Historical payment of dividends is not an indication that dividends will be paid on any future date. The Company has not yet implemented a formal policy on dividend distributions, and any future dividend payment is subject to Board approval.
Contractual Obligations
There have been no material changes to our contractual obligations disclosed under "Item 5.F. Tabular Disclosure of Contractual Obligations" to our
2018
Form 20-F, except as disclosed in Note
6
,
Debt
, to the condensed consolidated financial statements herein.
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
There have been no material changes to the disclosure under "Part I, Item 11. Quantitative and Qualitative Disclosures about Market Risk" included in our
2018
Form 20-F.
|
|
|
|
Item 4.
|
Controls and Procedures
|
There were no changes in our internal control over financial reporting during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|
|
|
|
PART II.
|
OTHER INFORMATION
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
Please see Note
8
,
Commitments and Contingencies—Legal Proceedings
hereto.
Other than as set forth below, there have been no material new risk factors or material changes to the existing risk factors set forth in "Part I, Item 3.D. Risk Factors", to the Company's
2018
Form 20-F.
Changing enforcement of the U.S. Interstate Wire Act of 1961 (the "Wire Act") may negatively impact the Company's operations, business, financial condition, or prospects
On January 14, 2019, the U.S. Department of Justice (the “DOJ”) published an opinion reversing its previously-issued opinion that the Wire Act, which prohibits several types of wager-related communications over a “wire communications facility,” was applicable only to sports betting (the “2019 Opinion”). The 2019 Opinion interprets the Wire Act as applying to other forms of gambling that cross state lines, though the precise scope of the 2019 Opinion is unclear, and the DOJ has not yet addressed how it plans to enforce the Wire Act in light of the 2019 Opinion. The DOJ has issued a memorandum stating that it will not enforce the 2019 Opinion prior to June 14, 2019. Further, the New Hampshire Lottery Commission and certain private parties have commenced litigation in federal district court in New Hampshire challenging the 2019 Opinion. In response to this and other lawsuits, the DOJ issued a memorandum in April 2019 acknowledging that the 2019 Opinion did not consider whether the Wire Act applies to State lotteries and their vendors, and the DOJ is now considering this issue. In connection with such acknowledgment, the DOJ also extended the non-prosecution period for State lotteries and their vendors indefinitely while they consider the question. If the DOJ concludes that the Wire Act does apply to State lotteries and/or their vendors, they would extend the non-prosecution period for an additional period of 90 days after the DOJ publicly announces such position. The non-prosecution period for other gaming operations remains in place through until June 14, 2019. On June 3, 2019, the U.S. District Court for the District of New Hampshire ruled in favor of the plaintiffs and determined that the Wire Act applies only to sports betting and related activities (the “NH Decision”). The NH Decision also set aside the 2019 Opinion. It is unclear whether the DOJ will appeal the ruling, when the DOJ will conclude its consideration of whether the Wire Act applies to State lotteries and their vendors, or whether other courts would come to the same conclusions set forth in the NH Decision. The Company’s management is evaluating the NH Decision, the 2019 Opinion, and their implications to the Company, its customers, and the industries in which the Company operates. If the Wire Act is broadly interpreted to prohibit activities in which the Company and its customers are engaged, the Company could be subject to investigations, criminal and civil penalties, sanctions and/or other remedial measures and/or the Company may be required to substantially change the way it conducts its business, any of which could have a material adverse effect on the Company’s results of operations, business, financial condition, or prospects.
|
|
|
|
Item 5.
|
Other Information
|
In Item 6.E of the Company's 2018 Form 20-F, the Company disclosed that Marco Sala owned 1,515,119 of the Company’s ordinary shares as of February 28, 2019, representing an economic ownership in the Company of approximately 0.76%. The Company inadvertently omitted 400,000 ordinary shares from this calculation, which were held in a separate brokerage account. Including these shares, Mr. Sala owned 1,915,119 of the Company’s ordinary shares as of February 28, 2019, representing an economic ownership in the Company of approximately 0.94%.