Light & Wonder (LNW) Q4 2005 earnings summary

Executive summary

• FY05 revenue rose 8% to $781.7m; net income was $75.3m and diluted EPS $0.81. Lottery growth outweighed declines in pari-mutuel, venue management and telecommunications.

• Strategy emphasized growing existing markets, international expansion, new distribution channels and selective acquisitions; stated 2008 goals were $1bn+ revenue and $2.00 EPS.

Financial highlights

• Revenue was $781.7m vs. $725.5m in FY04; services revenue increased 8% to $639.3m and sales revenue increased 6% to $142.4m.

• Net income was $75.3m vs. $65.7m; diluted EPS was $0.81 vs. $0.72. Operating income declined to $131.0m from $147.7m.

• SG&A rose 25% to $131.8m, including a $12.4m SERP curtailment charge, $1.7m Honsel earn-out charge, $3.0m unusual legal/severance costs and $2.4m racing restructuring costs.

• Interest expense fell 14% to $26.5m; the effective tax rate declined to 27.3% from 30.5%, including a 5.8% R&D credit benefit, of which 4.5% was non-recurring.

Outlook and guidance

• Targeted revenue of $1bn+ and EPS of $2.00 by 2008; priorities included market growth, overseas expansion, new distribution channels and disciplined acquisitions.

• Management expected cash flow from operations, available cash and revolver capacity to cover liquidity needs and anticipated capex; renewal success and financing access remained conditions.

• Management expected reduced pari-mutuel wagering trends to continue; technology efficiencies and accretive new service contracts were expected to support future cash flow and operating results.

• 2006 planned acquisitions included online lottery assets for $60m and a fixed-odds betting business at an upfront price of ~$183m plus earn-out; the latter remained subject to definitive agreement and other conditions.