IGT Reports Strong Q3 Results

22 Jul 2004

RENO, Nevada – (PRESS RELEASE) -- International Game Technology (NYSE: IGT) today reported its operating results for the third quarter and nine months ended June 30, 2004.

Third quarter financial highlights:

* Adjusted income from continuing operations per diluted share of $0.35 increased 21% over prior year quarter

* Net income totaled $141.1 million or $0.38 per diluted share

* Revenues increased 10% to $618.9 million over prior year quarter

* Operating income of $211.1 million improved 22% over prior year quarter

* Year-to-date operating cash flows of $400.5 million increased 70% over prior year

Third quarter segment highlights:

* Gaming operations revenue of $303.3 million increased 16% over prior year quarter

* Gaming operations gross margins of 55% versus 52% in the prior year quarter

* Installed base of 36,400 recurring revenue games, up 2,800 over prior year quarter

* Product sales revenues of $315.6 million increased 5% over prior year quarter

* Consolidated average sales prices (ASPs) of $9,000 increased 13% over prior year quarter

* Consolidated product sales gross margins of 54% versus 48% in the prior year quarter

"We are very pleased with our quarterly and nine-month results," commented IGT Chief Executive Officer TJ Matthews. "Our industry-leading game content and gaming machine platforms resulted in record operating income during the quarter on the strength of record top line revenue in our gaming operations segment. Additionally, we continue to achieve success in our operational execution resulting in expanding gross margins within our product sales and gaming operations segments."

Third quarter net income totaled $141.1 million or $0.38 per diluted share versus $103.7 million or $0.30 per diluted share in the prior year quarter. For the nine months just ended, net income totaled $434.4 million or $1.19 per diluted share compared to $282.4 million or $0.80 per diluted share in the prior year period.

Our current quarter results included a $10.3 million reduction to the provision for income taxes due to the utilization of prior year foreign income tax credits resulting from changes to the geographic mix of estimated annual taxable income. We now consider the utilization of foreign tax credits probable and have included foreign income tax credits in our effective tax rate calculation. Excluding the $10.3 million reduction, we have adjusted our annual tax rate on continuing operations to 36.5% from 37.0%. The tax rate on discontinued operations remained unchanged at 37.5%.

Our adjusted income from continuing operations, excluding the $10.3 million tax credit, totaled $130.8 million or $0.35 per diluted share for the third quarter and $365.1 million or $1.00 per diluted share for the nine months ended June 30, 2004. We have provided a reconciliation between our GAAP income from continuing operations and adjusted income from continuing operations in a supplemental table at the end of this release.

During the first quarter of fiscal 2004, we completed the sale of IGT OnLine Entertainment Systems, Inc., resulting in a gain of $56.8 million, net of tax. Our prior period financial statements have been reclassified to present the lottery systems operations, as well as the casinos, slot route and pari-mutuel operations previously sold, in discontinued operations.

Business Segment Discussion -- Gaming Operations

Revenues from gaming operations totaled a record $303.3 million in the current quarter, an increase from $261.9 million in the third quarter of fiscal 2003. Our third quarter MegaJackpots(TM) wide-area progressive play levels increased across the majority of the domestic gaming markets. Quarterly gross profit from gaming operations was $166.5 million, up 23% compared to $135.5 million in the prior year quarter. Gross profit margins on gaming operations totaled 55% for the current quarter compared to 52% in the prior year period, primarily due to favorable interest rate movements and continued improvements in both our jurisdictional and wide-area progressive product mix. These favorable trends are being augmented by growth in new markets such as New York and Alabama. Under the guidance of new accounting rules related to variable interest entities, our current quarter also included the consolidation of revenues and expenses from the activities of our trusts in New Jersey and Iowa. Although these VIE consolidations had no material impact to gross profit or net income, gaming operations revenues and expenses increased by approximately $11.2 million, reducing gross margins by approximately 2%.

Gaming operations revenues for the first nine months of 2004 increased 9% to $854.6 million from $784.8 million in the same prior year period. Gross profit from gaming operations for the nine months just ended increased 13% to $468.6 million compared to $415.0 million in the prior year period. Gross profit margins on gaming operations totaled 55% for the nine-month period, compared to 53% in the same prior year period. These year-over-year improvements resulted primarily from growth in our installed base, enhanced yields per game due to strong game introductions, and continued improvements in both our jurisdictional and wide-area progressive product mix.

IGT's installed base of recurring revenue machines, including machines placed in both casino and racino markets, ended the current quarter at a record 36,400 machines, an increase of 2,800 from the same quarter last year and 900 from the immediately preceding quarter. The year-over-year increase was primarily due to placements across the various Class III Native American markets, additional placements in Rhode Island and Delaware resulting from strong game performance, and placements in New York related to the commencement of video lottery operations at four racetracks within the state.

Placements of perennial favorite Wheel of Fortune® reel slots were also strong during the quarter, and Wheel of Fortune® Special Edition on our new PC-based Advanced Video Platform (AVP) machine continues to gain strong customer acceptance. Recent MegaJackpots(TM) game introductions that continue to receive favorable customer acceptance include such popular themes as Rodney Reel Respect(TM), The Twilight Zone(TM), and Dilbert(TM). Game themes expected to be rolled out next quarter include Animal House(TM) and brand extensions of I Dream of Jeannie(TM) and Marilyn Monroe(TM) which will be the first dollar game version of our popular Marilyn series.

Business Segment Discussion -- Product Sales

IGT sold 35,100 machines worldwide during the current quarter compared to 37,500 machines in the prior year quarter. Product sales revenue of $315.6 million increased 5% over the prior year quarter on slightly lower unit volume, due primarily to an increase in domestic gaming systems revenues, stronger domestic pricing realization, an improved geographical mix of international machine sales and favorable foreign currency exchange rates. Gross profit on product sales increased 20% for the quarter to $171.8 million versus $143.5 million in the prior year quarter. Gross profit margins on product sales improved to a record 54% for the current quarter versus 48% in the prior year quarter. Current quarter margins improved primarily due to lower material costs, increased operating efficiencies at our Reno manufacturing facility, a greater share of systems-related revenues and strong pricing realization.

Domestically, IGT sold 22,500 machines in the current quarter compared to 24,200 machines in the prior year quarter. Domestic replacement sales totaled 17,800 machines during the quarter, in line with 17,500 machines in the prior year quarter. New/expansion machine sales totaled 4,700 machines in the current quarter compared to 6,700 machines in the same quarter last year. Domestic product sales revenue of $243.1 million was up slightly from $242.6 million in the prior year, primarily due to stronger pricing realization and greater systems-related revenues, offset slightly by lower unit volumes. Domestic ASPs totaled $10,800 during the quarter versus $10,000 in the prior year quarter. Gross profit margins on domestic product sales improved to a record 56% for the current quarter versus 49% in the prior year quarter. The quarter-over-quarter decrease in total domestic unit sales resulted from fewer sales into the Canadian provinces of Quebec and Saskatchewan, offset by increased sales across the majority of the domestic casino markets and the Canadian province of Manitoba. Our top-selling video slot game themes during the quarter included Hexbreaker(TM), Alien(TM) and Used Cars(TM). The top selling spinning reel slot game themes for the quarter included Triple Double Wild Cherry(TM), Triple Stars(TM) and Triple Double Stars(TM).

International machine shipments for the quarter totaled 12,600 compared to 13,400 in the prior year period, due primarily to fewer shipments in the United Kingdom and Japan, offset by increased shipments in Latin America and the European casino markets. International product sales revenue of $72.5 million increased 26% from $57.5 million in the same quarter last year, primarily due to favorable foreign currency exchange rates and an improved geographical mix, resulting in international ASPs of $5,700 during the current quarter versus $4,300 in the prior year quarter. Gross profit margins on international product sales improved to 49% for the current quarter versus 41% in the prior year quarter.

IGT sold 126,600 machines worldwide during the first three quarters of fiscal 2004 compared to 102,000 machines in the same prior year period. Year-to-date product sales revenue reached $1.0 billion, an increase of 27% from $795.8 million in the prior year period. Gross profit on product sales increased 39% for the current nine-month period to $529.8 million versus $381.3 million in the prior year period. Gross profit margins on product sales increased to 53% versus 48% for the same prior year period. Year-over-year margins improved due to lower material costs, ongoing operational efficiencies due to record volumes, a greater share of systems-related revenues and improved pricing realization.

Domestic machine shipments for the nine months just ended totaled 72,300 machines, an increase from 63,200 machines in the comparable prior year period. Domestic replacement sales totaled 57,500 machines, an increase of 35% from 42,500 machines in the prior year period. New/expansion machine sales totaled 14,800 machines for the year compared to 20,700 machines in the prior year. The increase in total domestic machine shipments was due to strong replacement demand across most domestic gaming markets resulting primarily from continued implementation of IGT's EZ Pay(TM) ticket-in, ticket-out technology, offset by fewer replacement sales into the Canadian provinces of Quebec and Saskatchewan and fewer new/expansion units.

International machine shipments for the first nine months of the year totaled 54,300 compared to 38,800 in the prior year period, due primarily to the strength in Japan, Latin America and European casino markets, offset by fewer sales into the United Kingdom and Australia.

Operating Expenses and Other Income/Expense

Operating expenses for the quarter and year-to-date periods totaled $127.2 million and $379.1 million, respectively, compared to $105.5 million and $312.6 million in the prior year periods. Increased operating expenses related primarily to the acquisition of Acres Gaming in late October 2003, along with additional investment in research and development and foreign currency exchange rate fluctuations. Current quarter operating expenses were 21% of revenues versus 19% in the same quarter last year. Year-to-date operating expenses totaled 20% in the current and prior year periods.

Other expense, net, for the current quarter and year-to-date periods decreased to $8.0 million and $44.3 million, respectively, from $16.1 million and $47.3 million in the prior year periods, primarily due to a reduction in interest expense resulting from the early redemption of our $400.0 million senior notes in February 2004.

Cash Flows & Balance Sheet

During the nine months ended June 30, 2004, IGT generated $400.5 million in cash flows from operating activities on income from continuing operations of $375.4 million. Working capital remained unchanged at $1.1 billion at the end of the current quarter from the end of fiscal 2003. Capital expenditures, including investment in gaming operations equipment and intellectual property, increased to $141.3 million for the first nine months of the current fiscal year from $101.1 million for the comparable prior year period, primarily related to the incremental placements of recurring revenue units in both casino and racino markets mentioned above.

Cash and equivalents totaled $1.2 billion at June 30, 2004 and $1.3 billion at September 30, 2003. Total debt of $1.1 billion at June 30, 2004 decreased $406.0 million from September 30, 2003 primarily due to the early debt redemption mentioned above.

Capital Deployment

As previously announced on June 16, 2004, International Game Technology's Board of Directors declared a quarterly cash dividend of $0.10 per share that was paid on July 13, 2004 to shareholders of record on June 29, 2004. The Board intends to review the current dividend level at the September 2004 meeting.

IGT repurchased 670,000 shares during the quarter for $24.1 million at an average price of $35.86 per share. As of June 30, 2004, the remaining share repurchase authorization under IGT's stock repurchase program totaled 39.2 million shares.

IGT also previously announced that it entered into a $1.5 billion credit facility with a syndicate of banks. The credit facility consists of a five-year $1.3 billion revolver and a five-year $200.0 million term loan. The new credit facility replaces IGT's existing $260.0 million credit facility. Using the proceeds of the new $200.0 million term loan and available cash, on July 16, 2004 IGT redeemed all $569.6 million in principal amount outstanding of its 8.375% senior notes due May 2009 and cancelled the corresponding interest rate swaps for a total payment of $682.5 million. As a result of these transactions, IGT will recognize a loss on early debt retirement in the fourth quarter of fiscal 2004 totaling $76.3 million, net of tax.

As previously announced on July 2, 2004, International Game Technology (NYSE "IGT") will host a conference call regarding its Third Quarter Fiscal Year 2004 earnings release on Thursday, July 22, 2004 at 6:00 a.m. (Pacific Daylight Time) with TJ Matthews, Chief Executive Officer, and Maureen T. Mullarkey, Chief Financial Officer, of International Game Technology.

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	IGT Reports Strong Q3 Results 22 Jul 2004 RENO, Nevada – (PRESS RELEASE) -- International Game Technology (NYSE: IGT) today reported its operating results for the third quarter and nine months ended June 30, 2004. Third quarter financial highlights: * Adjusted income from continuing operations per diluted share of $0.35 increased 21% over prior year quarter * Net income totaled $141.1 million or $0.38 per diluted share * Revenues increased 10% to $618.9 million over prior year quarter * Operating income of $211.1 million improved 22% over prior year quarter * Year-to-date operating cash flows of $400.5 million increased 70% over prior year Third quarter segment highlights: * Gaming operations revenue of $303.3 million increased 16% over prior year quarter * Gaming operations gross margins of 55% versus 52% in the prior year quarter * Installed base of 36,400 recurring revenue games, up 2,800 over prior year quarter * Product sales revenues of $315.6 million increased 5% over prior year quarter * Consolidated average sales prices (ASPs) of $9,000 increased 13% over prior year quarter * Consolidated product sales gross margins of 54% versus 48% in the prior year quarter "We are very pleased with our quarterly and nine-month results," commented IGT Chief Executive Officer TJ Matthews. "Our industry-leading game content and gaming machine platforms resulted in record operating income during the quarter on the strength of record top line revenue in our gaming operations segment. Additionally, we continue to achieve success in our operational execution resulting in expanding gross margins within our product sales and gaming operations segments." Third quarter net income totaled $141.1 million or $0.38 per diluted share versus $103.7 million or $0.30 per diluted share in the prior year quarter. For the nine months just ended, net income totaled $434.4 million or $1.19 per diluted share compared to $282.4 million or $0.80 per diluted share in the prior year period. Our current quarter results included a $10.3 million reduction to the provision for income taxes due to the utilization of prior year foreign income tax credits resulting from changes to the geographic mix of estimated annual taxable income. We now consider the utilization of foreign tax credits probable and have included foreign income tax credits in our effective tax rate calculation. Excluding the $10.3 million reduction, we have adjusted our annual tax rate on continuing operations to 36.5% from 37.0%. The tax rate on discontinued operations remained unchanged at 37.5%. Our adjusted income from continuing operations, excluding the $10.3 million tax credit, totaled $130.8 million or $0.35 per diluted share for the third quarter and $365.1 million or $1.00 per diluted share for the nine months ended June 30, 2004. We have provided a reconciliation between our GAAP income from continuing operations and adjusted income from continuing operations in a supplemental table at the end of this release. During the first quarter of fiscal 2004, we completed the sale of IGT OnLine Entertainment Systems, Inc., resulting in a gain of $56.8 million, net of tax. Our prior period financial statements have been reclassified to present the lottery systems operations, as well as the casinos, slot route and pari-mutuel operations previously sold, in discontinued operations. Business Segment Discussion -- Gaming Operations Revenues from gaming operations totaled a record $303.3 million in the current quarter, an increase from $261.9 million in the third quarter of fiscal 2003. Our third quarter MegaJackpots(TM) wide-area progressive play levels increased across the majority of the domestic gaming markets. Quarterly gross profit from gaming operations was $166.5 million, up 23% compared to $135.5 million in the prior year quarter. Gross profit margins on gaming operations totaled 55% for the current quarter compared to 52% in the prior year period, primarily due to favorable interest rate movements and continued improvements in both our jurisdictional and wide-area progressive product mix. These favorable trends are being augmented by growth in new markets such as New York and Alabama. Under the guidance of new accounting rules related to variable interest entities, our current quarter also included the consolidation of revenues and expenses from the activities of our trusts in New Jersey and Iowa. Although these VIE consolidations had no material impact to gross profit or net income, gaming operations revenues and expenses increased by approximately $11.2 million, reducing gross margins by approximately 2%. Gaming operations revenues for the first nine months of 2004 increased 9% to $854.6 million from $784.8 million in the same prior year period. Gross profit from gaming operations for the nine months just ended increased 13% to $468.6 million compared to $415.0 million in the prior year period. Gross profit margins on gaming operations totaled 55% for the nine-month period, compared to 53% in the same prior year period. These year-over-year improvements resulted primarily from growth in our installed base, enhanced yields per game due to strong game introductions, and continued improvements in both our jurisdictional and wide-area progressive product mix. IGT's installed base of recurring revenue machines, including machines placed in both casino and racino markets, ended the current quarter at a record 36,400 machines, an increase of 2,800 from the same quarter last year and 900 from the immediately preceding quarter. The year-over-year increase was primarily due to placements across the various Class III Native American markets, additional placements in Rhode Island and Delaware resulting from strong game performance, and placements in New York related to the commencement of video lottery operations at four racetracks within the state. Placements of perennial favorite Wheel of Fortune® reel slots were also strong during the quarter, and Wheel of Fortune® Special Edition on our new PC-based Advanced Video Platform (AVP) machine continues to gain strong customer acceptance. Recent MegaJackpots(TM) game introductions that continue to receive favorable customer acceptance include such popular themes as Rodney Reel Respect(TM), The Twilight Zone(TM), and Dilbert(TM). Game themes expected to be rolled out next quarter include Animal House(TM) and brand extensions of I Dream of Jeannie(TM) and Marilyn Monroe(TM) which will be the first dollar game version of our popular Marilyn series. Business Segment Discussion -- Product Sales IGT sold 35,100 machines worldwide during the current quarter compared to 37,500 machines in the prior year quarter. Product sales revenue of $315.6 million increased 5% over the prior year quarter on slightly lower unit volume, due primarily to an increase in domestic gaming systems revenues, stronger domestic pricing realization, an improved geographical mix of international machine sales and favorable foreign currency exchange rates. Gross profit on product sales increased 20% for the quarter to $171.8 million versus $143.5 million in the prior year quarter. Gross profit margins on product sales improved to a record 54% for the current quarter versus 48% in the prior year quarter. Current quarter margins improved primarily due to lower material costs, increased operating efficiencies at our Reno manufacturing facility, a greater share of systems-related revenues and strong pricing realization. Domestically, IGT sold 22,500 machines in the current quarter compared to 24,200 machines in the prior year quarter. Domestic replacement sales totaled 17,800 machines during the quarter, in line with 17,500 machines in the prior year quarter. New/expansion machine sales totaled 4,700 machines in the current quarter compared to 6,700 machines in the same quarter last year. Domestic product sales revenue of $243.1 million was up slightly from $242.6 million in the prior year, primarily due to stronger pricing realization and greater systems-related revenues, offset slightly by lower unit volumes. Domestic ASPs totaled $10,800 during the quarter versus $10,000 in the prior year quarter. Gross profit margins on domestic product sales improved to a record 56% for the current quarter versus 49% in the prior year quarter. The quarter-over-quarter decrease in total domestic unit sales resulted from fewer sales into the Canadian provinces of Quebec and Saskatchewan, offset by increased sales across the majority of the domestic casino markets and the Canadian province of Manitoba. Our top-selling video slot game themes during the quarter included Hexbreaker(TM), Alien(TM) and Used Cars(TM). The top selling spinning reel slot game themes for the quarter included Triple Double Wild Cherry(TM), Triple Stars(TM) and Triple Double Stars(TM). International machine shipments for the quarter totaled 12,600 compared to 13,400 in the prior year period, due primarily to fewer shipments in the United Kingdom and Japan, offset by increased shipments in Latin America and the European casino markets. International product sales revenue of $72.5 million increased 26% from $57.5 million in the same quarter last year, primarily due to favorable foreign currency exchange rates and an improved geographical mix, resulting in international ASPs of $5,700 during the current quarter versus $4,300 in the prior year quarter. Gross profit margins on international product sales improved to 49% for the current quarter versus 41% in the prior year quarter. IGT sold 126,600 machines worldwide during the first three quarters of fiscal 2004 compared to 102,000 machines in the same prior year period. Year-to-date product sales revenue reached $1.0 billion, an increase of 27% from $795.8 million in the prior year period. Gross profit on product sales increased 39% for the current nine-month period to $529.8 million versus $381.3 million in the prior year period. Gross profit margins on product sales increased to 53% versus 48% for the same prior year period. Year-over-year margins improved due to lower material costs, ongoing operational efficiencies due to record volumes, a greater share of systems-related revenues and improved pricing realization. Domestic machine shipments for the nine months just ended totaled 72,300 machines, an increase from 63,200 machines in the comparable prior year period. Domestic replacement sales totaled 57,500 machines, an increase of 35% from 42,500 machines in the prior year period. New/expansion machine sales totaled 14,800 machines for the year compared to 20,700 machines in the prior year. The increase in total domestic machine shipments was due to strong replacement demand across most domestic gaming markets resulting primarily from continued implementation of IGT's EZ Pay(TM) ticket-in, ticket-out technology, offset by fewer replacement sales into the Canadian provinces of Quebec and Saskatchewan and fewer new/expansion units. International machine shipments for the first nine months of the year totaled 54,300 compared to 38,800 in the prior year period, due primarily to the strength in Japan, Latin America and European casino markets, offset by fewer sales into the United Kingdom and Australia. Operating Expenses and Other Income/Expense Operating expenses for the quarter and year-to-date periods totaled $127.2 million and $379.1 million, respectively, compared to $105.5 million and $312.6 million in the prior year periods. Increased operating expenses related primarily to the acquisition of Acres Gaming in late October 2003, along with additional investment in research and development and foreign currency exchange rate fluctuations. Current quarter operating expenses were 21% of revenues versus 19% in the same quarter last year. Year-to-date operating expenses totaled 20% in the current and prior year periods. Other expense, net, for the current quarter and year-to-date periods decreased to $8.0 million and $44.3 million, respectively, from $16.1 million and $47.3 million in the prior year periods, primarily due to a reduction in interest expense resulting from the early redemption of our $400.0 million senior notes in February 2004. Cash Flows & Balance Sheet During the nine months ended June 30, 2004, IGT generated $400.5 million in cash flows from operating activities on income from continuing operations of $375.4 million. Working capital remained unchanged at $1.1 billion at the end of the current quarter from the end of fiscal 2003. Capital expenditures, including investment in gaming operations equipment and intellectual property, increased to $141.3 million for the first nine months of the current fiscal year from $101.1 million for the comparable prior year period, primarily related to the incremental placements of recurring revenue units in both casino and racino markets mentioned above. Cash and equivalents totaled $1.2 billion at June 30, 2004 and $1.3 billion at September 30, 2003. Total debt of $1.1 billion at June 30, 2004 decreased $406.0 million from September 30, 2003 primarily due to the early debt redemption mentioned above. Capital Deployment As previously announced on June 16, 2004, International Game Technology's Board of Directors declared a quarterly cash dividend of $0.10 per share that was paid on July 13, 2004 to shareholders of record on June 29, 2004. The Board intends to review the current dividend level at the September 2004 meeting. IGT repurchased 670,000 shares during the quarter for $24.1 million at an average price of $35.86 per share. As of June 30, 2004, the remaining share repurchase authorization under IGT's stock repurchase program totaled 39.2 million shares. IGT also previously announced that it entered into a $1.5 billion credit facility with a syndicate of banks. The credit facility consists of a five-year $1.3 billion revolver and a five-year $200.0 million term loan. The new credit facility replaces IGT's existing $260.0 million credit facility. Using the proceeds of the new $200.0 million term loan and available cash, on July 16, 2004 IGT redeemed all $569.6 million in principal amount outstanding of its 8.375% senior notes due May 2009 and cancelled the corresponding interest rate swaps for a total payment of $682.5 million. As a result of these transactions, IGT will recognize a loss on early debt retirement in the fourth quarter of fiscal 2004 totaling $76.3 million, net of tax. As previously announced on July 2, 2004, International Game Technology (NYSE "IGT") will host a conference call regarding its Third Quarter Fiscal Year 2004 earnings release on Thursday, July 22, 2004 at 6:00 a.m. (Pacific Daylight Time) with TJ Matthews, Chief Executive Officer, and Maureen T. Mullarkey, Chief Financial Officer, of International Game Technology.