Moody’s boosts IGT following report of record earnings

Jan 28, 2003 4:41 AM

Not only did International Game Technology (IGT) beat Wall Street estimates for the quarter ended on Dec. 28, 2002, but company officials projected that earnings for the current fiscal year would grow by 15% to 20%

The projection was supported shortly after the announcement by Moody’s Ratings Services with an upgrade on the company’s debt. Senior unsecured debt was raised to Baa3 from Ba1 and the ratings outlook was listed as stable.

Moody’s said the upgrades reflected three specific areas:

(1) IGT’s leading market position in casino gaming products in the U.S., which has grown in recent years and has resulted in strong and improving cash flow from operations.

(2) The prospect of increasing demand for slot machines over the next few years.

(3) Moody’s expectation that debt levels will remain moderate.

The report noted that IGT’s market share has grown from 50% to nearly 70% of the North American installed base of slot machines over the last 10 years as a result of organic growth and acquisitions. Also, IGT has an extensive portfolio of trademarks as well as strong technological and manufacturing capabilities, all of which supports IGT’s market position and healthy profitability.

IGT’s cash flow from operations reached $504 million in fiscal year 2002 up from $129 million in fiscal year 2000, driven by an expansion of gaming that increased demand for new slot machines, replacement demand, and an increase in the installed base of machines under recurring revenue contracts, as well as the acquisition of Anchor Gaming in 2001, Moody’s said.

Moody’s added that it believes IGT can maintain these improved credit statistics given its leading market share, the strength of its intellectual property that supports demand for its products, as well as expansion of gaming. IGT’s EZ Pay coin-less technology has been widely accepted by casino patrons and operators, and will likely drive the demand for replacement games for the next three to five years since currently only 10% to 15% of existing games are enabled with coinless technology, representing a large opportunity for IGT to supply replacement machines.

Reporting on its most recent earnings period, IGT said it experienced its 12th consecutive quarter of rising earnings with a record net income of $87.9 million, excluding discontinued operations from acquired unit Anchor Gaming, on revenues of $531.5 million.

Earnings per share amounted to $1.04 a share, compared to $0.70 a share in the comparable period. The earnings from continuing operations came in at $1.00 a share or an average of $0.08 a share better than Wall Street estimates.

The company said that during the period it had repurchased 273,700 shares of its common stock for $19.7 million at an average price of about $72 a share.

Funds diverted

Last year, Indiana lawmakers made changes in the gaming laws that were intended to increase revenues for what the state called the Build Indiana Fund.

The increased taxes and modified gaming regulations accomplished their goals, that is to increase both the amount of gambling taking place on the state’s 10 riverboats and to increase the flow of funds to the state.

During the period when the new regulations were in effect ”” August to December ”” casinos took in $888 million compared to $767 million the previous year.

Great news for the Build Indiana Fund, or it was until Gov. Frank O’Bannon decided that he needed $33 million to balance his budget so he planned to tap the Fund for the additional monies.

That didn’t sit well with the mayors and heads of the state’s cities and towns who were promised the Fund’s revenues to assist with their infrastructure needs. Now they’re complaining that they feel they were deceived in supporting the legislation.

On the warpath

Hopes of California Gov. Gray Davis to have Indian casino operators contribute some of their revenues to help relieve the state’s fiscal crisis were dashed last week when representatives from about 90 tribes met at the Eighth Annual Western Indian Gaming Conference.

Essentially, the Indians felt they were blindsided when Davis announced that he expects the tribes to agree to contribute about $1.5 billion to be applied toward the state’s growing deficit, estimated to be in the area of $35 billion.

State officials said they had patterned the tribal agreement on arrangements between Native American casino operators in Connecticut where the tribes turn over to the state 25% of their slot machine revenue.

"This isn’t Connecticut," announced Michael Lombardi, who serves as a liaison for the Augustine Band of Missions Indians. He called the proposal "preposterous."

No slam dunk

Democrats lost the governor’s mansion in Maryland last November because of candidate Kathleen Kennedy Townsend’s opposition to slot machines at the state’s racetracks, according to political observers. That led to the election of Republican Robert Ehrlich, a staunch supporter of the slot proposal.

Following the election, racetrack operators started counting the money they planned to make with the expansion of gaming.

But, there were no regulations to specify the number of machines to be installed and the split with the state of the revenues. Initially, Gov. Ehrlich proposed 10,000 machines at four racetracks. Then he realized that wouldn’t provide him with enough tax money to meet the state’s needs. So, he upped the amount to 13,250 machines at three tracks.

That plan caused a split among his own party while firming up the Democratic opposition. And, a plan to restrict the number to 10,000 with the state taking as much as 64% of the revenues has caused the racetracks to take up arms against the plan.

What had appeared to be a proposal that would fly early in the legislative session has now taken on the appearance that it might founder along the way, political observers say.

Bonus settled

Negotiations rather than litigation have settled the dispute regarding a $1 million bonus won by War Emblem when he scored victories in both the Illinois Derby and in the Kentucky Derby.

The dispute arose because Chicago industrialist Russell Reineman sold the three-year-old colt to Saudi Arabian horse fancier, Prince Ahmed Salman and his The Thoroughbred Corp. for $900,000 following the Illinois Derby. At the time, there was no discussion of the $1 million bonus offered by National Jockey and Sportsman’s Park because the seller didn’t feel the colt would be competitive in the Run for the Roses.

Salman and his trainer, Bob Baffert, disagreed. The colt won easily. Salman and Reineman both claimed the bonus. A short time later, Salman died suddenly at the age of 42, leaving the bonus matter unresolved.

Lawyers from both sides negotiated the matter prior to going to court and agreed that Salman’s estate would get $700,000 of the bonus while Reineman would pocket $300,000.

Stock buyback

At a meeting of the board of directors last week, Shuffle Master Inc. (SHFL) announced that the board had authorized the repurchase of up to $20 million of the company’s common stock with the purchases to be made in the open market.

The buyback comes on the heels of last year’s program that ended with the company’s repurchase of 896,000 shares at a cost of about $16.3 million.

In announcing the repurchase plan, Dr. Mark Yoseloff, chairman and CEO, remarked, "As a management team focused on enhancing shareholder value, we constantly consider various alternate uses of our steady cash flow. At the end of fiscal 2002, we had approximately $30 million in available cash with an additional $5.3 million due as a tax refund. In fiscal 2003, we expect to generate over $30 million in EBITDA (earnings before interest, taxes, depreciation and amortization). Given our relatively modest operational and capital expenditures, Shuffle Master expects to generate over $20 million in free cash flow."

Deal postponed

It appeared in last December that the tons of litigation that had kept the status of the Belle of Orleans riverboat in doubt would end and the two principals would resolve their differences after five years of dispute,

But the deal, lacking State Police investigation, failed to receive the approval of the Louisiana Gaming Control Board who remembered too well the major hassle created in 1998 when the original owners, Hilton Hotels Corp., asked the board for a quick approval of its casino spin off to Park Place Entertainment Corp. (PPE).

That triggered a lawsuit by Norbert Simmons, a 50.1% owner of the boat, who charged that the board was steamrolling his rights.

This time, the board decided to await the results of the State Police review of the sale before calling a special meeting to pass on the matter.

Under the agreement, Simons will receive $21 million for his share of the riverboat.

The Insider

Scientific Games Corporation (SGMS) has completed the previously announced acquisition of MDI Entertainment Inc.

Mikohn Gaming Corporation (MIKN) says it will now be able to have its CasinoLink interface with the EZ Pay ticket-in, ticket-out operating system developed by International Game Technology (IGT).

Ameristar Casinos Inc. (ASCA) will release its fourth quarter and year-end 2002 earnings on Wednesday at 3 p.m. PDT Wednesday, Feb. 5.

The merger involving Paul-Son Gaming Corporation (PSON) and the Bud Jones Company, Inc. was essentially completed on Dec. 31, 2002.

The Borgata Hotel Casino and Spa in Atlantic City reportedly received more than 27,000 applications for the 4,800 jobs it is offering. The property is expected to open this summer.

The Illinois Casino Gaming Association has recommended a reduction in gaming tax from 50% to 35%, the elimination of capacity restrictions and the issuance of a 10th riverboat casino license.

Casino Journal Publishing Group Inc. (CJPG) says it will spin off its Gaming Venture Corp. USA to its stockholders. For every three shares of CJPG, the shareholders will receive one share of Gaming Venture Corp. which will be headed by gaming analyst Alan Woinski.

Looking to improve business, Woodbine Entertainment announced it will reduce the takeout on wagers made on U.S. racetracks from 0.1% to 1%.

Sigma Game Inc. has been denied a license renewal in Missouri because it failed to disclose details of a $20 million loan from Kazuo Okada, who with his company, Aruze Corp., is a partner of Steve Wynn in his development of Le Reve in Las Vegas and a casino in Macau.

The Illinois Gaming Board has set April 7 to begin new hearings on the bankrupt Emerald Casino’s license.

Kirk Kerkorian, majority stockholder in MGM MIRAGE Inc. (MGG), announced last week that his Tracinda Corp. will sell 28.75 million shares of stock he owns in the film studio Metro-Goldwyn-Mayer. This will reduce his ownership stake in the company from 77.3% to 67.3%.