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IGT Reports Income Down

RENO, Nevada – (PRESS RELEASE) -- International Game Technology (NYSE: IGT) today reported its operating results for the first quarter ended December 31, 2004.

"We saw strong operating cash flows during the quarter at IGT. Our results demonstrate that despite a slowdown in domestic machine demand, we continue to execute on our strategy to grow the profitability of our international business and our efforts to expand the contribution from non-machine product sales. Further, IGT's strong financial position and pipeline of highly anticipated new MegaJackpots® products to be rolled out later this year should further enhance our strong cash flows," said TJ Matthews, IGT's Chief Executive Officer.

First quarter income from continuing operations was $122.4 million or $0.33 per diluted share, an increase from $116.7 million or $0.32 in the prior year quarter. Net income for the quarter was $122.4 million or $0.33 per diluted share versus $176.3 million or $0.48 per diluted share in the prior year quarter.

In the current quarter, we adopted EITF 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, requiring that convertible shares be included in diluted earnings per share regardless of whether the conversion event has occurred. Accordingly, we restated the first quarter of 2004 to include the impact of an additional 20.5 million shares related to our outstanding convertible debentures, previously excluded because the conversion event had not occurred. Fiscal 2004 first quarter results included income from discontinued operations of $59.7 million or $0.16 per diluted share, incorporating an after-tax gain of $56.8 million related to the sale of IGT OnLine Entertainment Systems (OES).

As a result of our 52/53-week fiscal years, fiscal 2004 contained 53 weeks versus the normal 52 weeks for fiscal 2005. As a result, the current year quarter was 13 weeks in length compared to the 14 weeks for the first quarter of fiscal 2004. This primarily impacted gaming operation revenues by approximately $19.9 million, gross profit by approximately $11.1 million and operating expenses by approximately $8.0 million in the prior year quarter.

Worldwide product sales revenues totaled a record $354.3 million, an increase of 7% over $330.5 million in the prior year quarter, primarily from strong results in our international markets, most notably Japan. Consolidated gross profit on product sales decreased slightly for the quarter to $163.6 million versus $166.2 million in the prior year quarter. Consolidated gross margins on product sales at 46% in the current quarter were down from 50% in the prior year quarter due to a higher mix of international sales.

International product sales revenues were a record at $172.2 million, an increase of 84% from $93.6 million in the same quarter last year. Gross margin for international product sales was 37% in the current quarter, down from 44% in the prior year quarter. Our record international results were due to sales of The Terminator(TM) pachisuro machine in Japan, our most successful game title ever at 29,600 units during the quarter. The higher mix of lower margin pachisuro machines led to the decline in gross margin for the quarter.

"We are extremely pleased with the efforts and results of our IGT-Japan team. The success of The Terminator(TM) product follows our previous record-setting game, Nobunaga(TM), in the first quarter of last year and represents our inaugural game introduction as part of our relationship with Sega Sammy Holdings Inc. (Sammy). Sammy is the most successful manufacturer in the Japanese pachisuro market, and we look forward to working with them on our future game releases," added Matthews.

In North America, product sales revenues of $182.1 million were down from $236.9 million in the prior year quarter. Gross profit margins on North America product sales were 55% for the current quarter versus 53% in the prior year quarter. While revenues in North America decreased as a result of slowing demand for TITO-related replacement machines, margins improved due to higher pricing realization, as well as an increased mix of systems revenues and game theme conversion kit sales.

Gaming Operations

Revenues from gaming operations totaled $286.9 million in the current quarter, an increase of 3% from $277.6 million in the first quarter of fiscal 2004 mostly due to increased machine placements. Quarterly gross profit from gaming operations was down 3% at $149.5 million compared to $154.8 million in the prior year quarter. Gross profit margins for gaming operations totaled 52% for the current quarter versus 56% in the same prior year period. The quarter-over-quarter decrease in margin resulted primarily from the consolidation of our variable interest entities (VIE's) and higher machine removal costs.

IGT's installed base of recurring revenue machines ended the current quarter at 37,000, an increase of 2,600 units from the same quarter last year and a decrease of 200 from the immediately preceding quarter. The year over year growth resulted from additional placements in the video lottery markets of New York, Delaware, and Rhode Island, the Native American markets of Florida and Oklahoma, and the charitable video bingo market of Alabama. IGT also continues to work to place its highest yielding games on casino floors, partially by managing the removal of lower yielding units.

Operating Expenses and Other Income/Expense

Total operating expenses increased $4.5 million to $123.3 million in the current quarter compared to the same period in fiscal 2004, primarily related to increased selling, general and administrative costs (SG&A), offset partially by a decrease in bad debt expense. SG&A expense increased due to the inclusion of an additional month of Acres Gaming, Inc. in the current quarter and higher international related expenses. Bad debt expense was lower due to a higher mix of international receivables. International receivables grew as a result of our success in Japan and carry a lower risk as they are secured by promissory notes. Operating expenses totaled 19% of revenues for the quarter, down from 20% of revenues in the prior year period.

Other income, net, totaled $1.6 million for the current quarter compared to a net expense of $15.6 million in the prior year quarter, as a result of reduced interest expense related to the redemption of senior notes issuances that were outstanding in the prior year quarter.

Cash Flows & Balance Sheet

During the quarter, we generated $153.7 million in cash flows provided by operating activities on net income of $122.4 million. Working capital was $1.0 billion at December 31, 2004, compared to $0.9 billion at September 30, 2004.

Cash and equivalents increased to $876.1 million at December 31, 2004, up from $765.1 million at September 30, 2004, primarily as a result of continued strong cash flows from operations. Long-term debt totaled $794.4 million at December 31, 2004 compared to $791.8 million at September 30, 2004.

Capital expenditures totaled $44.4 million during the quarter, up from $37.9 million in the prior year quarter. Construction costs for our Reno facility expansion and Las Vegas campus development, along with increased spending on intellectual property, comprised most of the increase.

Capital Deployment

On December 8, 2004, our Board of Directors declared a quarterly cash dividend of $0.12 per share that was paid on January 4, 2005 to shareholders of record on December 21, 2004.

The remaining share repurchase authorization under IGT's stock repurchase program totaled 35.8 million shares at December 31, 2004. No shares were repurchased during the quarter.

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