IGT Reports Q4 Results

International Game Technology today reported operating results for the fourth quarter and fiscal year ended September 30, 2005.

Fourth quarter income from continuing operations totaled $105.4 million or $0.30 per diluted share compared to $54.3 million or $0.15 in the prior year. Fiscal year 2005 income from continuing operations totaled $436.5 million or $1.20 per diluted share compared to $429.8 million or $1.17 per diluted share in fiscal 2004.

The closure of Gulf Coast area casinos in the wake of Hurricanes Katrina and Rita negatively impacted operating income results by approximately $14.9 million, pre-tax, comprised of a $9.4 million reduction in gross profit due to lost business activity, $2.8 million in asset-related charges and $2.7 million in additional operating expenses for the fourth quarter. These items reduced earnings per diluted share by approximately $0.026.

Prior year results included a significant charge of $77.0 million, net of taxes, for the early redemption of the Company's senior notes in the fourth quarter and favorable tax adjustments related to the utilization of foreign income tax credits totaling $3.6 million in the fourth quarter and $13.9 million for the full year.

"Although the Company faced difficult domestic marketplace conditions, IGT delivered meaningful accomplishments this year," said IGT Chairman and CEO TJ Matthews. "We generated record cash flow from operations and returned $520.6 million to shareholders in the form of share repurchases and dividends. We achieved record gaming operations, revenues and our international operations delivered another record-breaking year in terms of revenues, operating income and machine shipments. IGT successfully introduced competitive new penny-denominated and multi-level progressive products that have generated a strong order backlog. During the year, we entered several new domestic and international markets with our central determination systems and games, and our server-based gaming initiatives continue to progress. We gained access to new distribution channels for our game content through the acquisition of WagerWorks and entered into an alliance with Progressive Gaming International and Shuffle Master to further extend our product offerings into the table games area of the casino."

Gaming Operations

Fourth quarter revenues and gross profit from gaming operations totaled $307.6 million and $154.3 million, respectively, compared to $308.8 million and $160.5 million in the prior year. Gross profit margins for gaming operations were 50% versus 52% in the prior year primarily due to approximately $18.1 million in fixed asset salvage value adjustments to align the value of our asset base with our current product plan.

For the year, gaming operations revenues reached a record $1.20 billion compared to $1.16 billion in the prior year despite the interruption of Gulf Coast business activities and an additional week in the prior fiscal year due to our 52/53-week fiscal years. Gross profit margins for gaming operations were 51% compared to prior year margins of 54%. The decline in gaming operations margins was the result of technical obsolescence charges, changes in fixed asset salvage value estimates, and the consolidation of our variable interest entities that commenced in the third quarter of the prior year.

Our installed base of recurring revenue machines ended the quarter at 38,800 units, an increase of 1,600 units from the end of last year and an increase of 300 units from the immediately preceding quarter. The year-over- year growth was primarily driven by additional placements in casino operations markets that included Alabama, California, Florida and Washington. We also gained incremental placements in our domestic lease operations installed base in New York, Rhode Island and Delaware due to performance-based reallocations of market share, and in our international lease operations installed base with the initial placement of 500 units in Mexico. Sequential installed base growth was partially offset by the removal of 742 games from the Gulf Coast region that were either destroyed or rendered inoperable as a result of the damage caused by the hurricanes.

Fourth quarter worldwide product sales revenues and gross profits totaled $300.0 million and $141.4 million, respectively, compared to $312.9 million and $160.4 million in the prior year. Non-machine related revenues, such as systems sales and game theme conversions, grew to $84.3 million in the quarter compared to $70.8 million in the prior year. Consolidated gross margins in the current quarter were 47% versus 51% in the prior year, primarily due to a larger mix of international sales.

Domestically, a greater mix of non-machine related revenues, along with stronger pricing, helped maintain North American margins and improve average revenue per unit.

International product sales revenues totaled $139.7 million in the fourth quarter, an increase of 80% over the prior year. Higher international revenues were primarily driven by the sale of 18,500 units in Japan during the quarter following the release of Winning Post(TM). Additionally, we realized revenue growth of 56% in Australia primarily as a result of a stronger product mix that included new premium and linked products. International gross profit margins were 41% compared to 46% in the prior year due to the heavy volume of lower margin pachisuro machine sales in Japan.

For the year, worldwide product sales revenues and gross profit totaled $1.18 billion and $576.6 million, respectively, compared to $1.32 billion and $690.2 million in the prior year. Consolidated non-machine related revenues grew to $313.0 million in fiscal 2005 compared to $256.0 million in fiscal 2004, driven by an increase in systems and game theme conversion sales. The decline in total revenues was primarily the result of lower domestic replacement volumes. However, our international division delivered strong results driven by record-breaking performances for nearly all of our international subsidiaries, particularly Japan, Australia and Latin America. Consolidated product sales gross margins were 49% versus 52% in the prior year, primarily due to the growth in pachisuro machine sales in Japan during the current year.

Operating Expenses and Other Income/Expense

Total operating expenses were $135.3 million for the quarter and $526.9 million for fiscal 2005 compared to $125.8 million and $504.9 million, respectively, in the same prior-year periods. For the year, selling, general and administrative costs increased primarily as a result of higher legal and compliance fees, and $10.0 million in additional costs as a result of reorganization efforts that were undertaken to move IGT closer to its customer base and to further enhance market responsiveness. Research and development costs increased with continued investments in game development and approximately $1.3 million in purchased-in-process research and development costs associated with the WagerWorks acquisition. Bad debt expense was lower in the current year as a result of a more favorable risk profile on outstanding receivables and lower domestic sales.

Other income, net, totaled $3.5 million for the quarter and $17.6 million for fiscal 2005 compared to other expense, net, of $116.6 million and $160.9 million, respectively, in the same prior-year periods. Significant charges for the redemption of outstanding senior notes in the prior year and the subsequent reduction to interest expense were the primary factors in the favorable shift. Additionally, interest income in the current year included $10.2 million in financing fees realized on early customer loan repayments.

Cash Flows & Balance Sheet

IGT generated $726.4 million in cash flows provided by operating activities on net income of $436.5 million in fiscal 2005, an increase of 16% from prior year cash flows. Working capital was $219.6 million at September 30, 2005 compared to $949.7 million at September 30, 2004. The change in working capital was primarily the result of the reclassification of our convertible debentures from long-term to current liabilities in the second quarter of fiscal 2005.

Cash equivalents and short-term investments (inclusive of restricted amounts) totaled $688.1 million at September 30, 2005 compared to $766.6 million at September 30, 2004. Debt totaled $811.1 million at September 30, 2005 compared to $792.0 million at September 30, 2004.

Capital expenditures totaled $238.6 million in fiscal 2005 compared to $210.9 million in the prior year. Fiscal 2005 included additional investments in gaming operations equipment and construction costs related to the expansion of the Reno facility and the development of the Las Vegas campus.

Capital Deployment

On September 27, 2005, our Board of Directors declared a quarterly cash dividend of $0.125 per share payable on October 25, 2005 to shareholders of record on October 11, 2005. During fiscal 2005, IGT returned $165.8 million to shareholders in the form of dividends.

IGT repurchased 5.7 million shares of common stock for an aggregate cost of $154.7 million during the fourth quarter. For the full year, IGT repurchased 12.8 million shares for an aggregate cost of $354.7 million. The remaining authorization under the Company's stock repurchase program totaled 23.1 million shares at September 30, 2005.

Credit Facility

IGT plans to amend and restate its existing $1.5 billion credit facilities with a $2.0 billion five-year revolving credit facility. In addition, pursuant to the proposed terms of the credit facility, IGT will have the right to accept incremental commitments to increase the revolving credit facility by up to an additional $500.0 million. IGT's ability to complete the new credit facility and the ultimate size of this facility is subject to market and customary closing conditions. The new credit facility is expected to close on or before December 31, 2005.