Earnings dip a mirage for high-flying IGT

The mainstream media in Nevada emitted a mild gasp last week when they reported that Reno's International Game Technology's earnings fell short of year-earlier figures.

Yes, but ... Those reports of IGT's earnings in the quarter ended Sept.

30 the final quarter of the slot machine maker's fiscal year didn't pay close attention to the reason that earnings fell short.

The company spent about $77 million this summer to buy up high-priced debt senior notes with an 8.375 percent coupon.

The notes totaled nearly $570 million.

Getting them off the balance sheet will save IGT about $25 million a year.

But to convince investors to give up the attractive yield from the notes, IGT needed to pay them a premium of about $77 million over the face value of the notes.

And that $77 million came out of the bottom line when the company reported its quarterly earnings.

When it announced last summer that it would redeem the notes, IGT also said that it had arranged a $1.5 million credit line with a syndicate of banks led by Wells Fargo.

So far, however, the company has used that credit line only minimally, and it hasn't replaced the $570 million in notes it retired with new loans.

But IGT paid a small cost in public perception for cleaning up its balance sheet those news stories that reported that earnings fell by half from year-earlier levels.

On an apples-to-apples comparison, however, IGT had a heck of a quarter.

Its revenues rose to $621.7 million up 14 percent from a year ago and its earnings totaled about $127 million once the effects of that debt redemption and a $3 million adjustment for foreign taxes are figured in.

That $127 million compares with $101.6 million a year ago.

Wall Street wasn't fooled by the apparent drop in earnings.

IGT's common shares were up about 7 percent after last week's earnings announcement.

Investors were buoyed by the company's prediction that earnings will

grow by 15 percent annually for the next five years, and they noted that the fourth-quarter earnings once the debt-related charges were factored out beat analysts' estimates.

As they discussed the quarter's earnings with IGT's management in a conference call last week, analysts also were interested in the company's growing presence in international markets.

In the most recent quarter, international sales totaled $77.5 million, up 36 percent from year-earlier figures.

Sales overseas contributed $80 million to IGT's operating income in its just-completed fiscal year compared with $50 million a year earlier.

TJ Matthews, IGT's chief executive officer, said the company wants income from international operations to more than double in the next five years,with a target of $175 million by 2009.

Macau, Russia, Japan and the United Kingdom are among the growth markets targeted by the Reno company.

The Russian market, which currently has somewhere around 180,000 operating slot machines, could grow to more than 300,000 slots,Matthews said, and the company is stepping up its sales efforts there.

An example of the company's commitment to growth in international trade is found at its Reno headquarters, where 50 employees devote their days to ensuring that IGT's games fit local tastes around the globe.

The growth of international markets is particularly important for IGT,Matthews said, because of the company's domination of the U.S.

slots market.

With a 70 percent market share, IGT can't expect domestic sales to grow much faster than the overall gaming business,Matthews said.

Growth opportunities will need to come from new markets.

Existing markets, however, continue to produce a big stream of cash $623.6 million in cash from operations during the most recent fiscal year.

That's an increase of about $225 million from the previous year.

IGT,Matthews said, plans to devote about a third of its cash flow to developing new opportunities including acquisitions, particularly of intellectual property.

The company will continue to devote about a third of its cash flow to share repurchases.

In the most recent quarter, the company repurchased 3.4 million shares for $105.6 million.

During its fiscal year, IGT repurchased 4.1 million shares for $129.8 million.

The remaining third of cash flow, Matthews said, will continue to be paid out to shareholders.

The company paid a quarterly cash dividend of 12 cents a share on Oct.

26.