GTK Gtech

GTECH Announces Record Revenues and Earnings for Fiscal 2005 Company Provides Update on Recent Developments in Brazil WEST GREENWICH, R.I., April 14 /PRNewswire-FirstCall/ -- GTECH Holdings Corporation (NYSE:GTK) today announced fourth quarter and year-end earnings for the fiscal year ended February 26, 2005. "GTECH's fourth quarter and full-year results provide further validation that our business is operationally sound, financially strong, and strategically on track," said GTECH President and CEO W. Bruce Turner. "We enjoyed significant growth in total revenues in both the quarter and the year, driven by the continued strength in same store sales and strong product sales. We also met our overall financial goals and objectives, despite the unexpected revenue holdback in Brazil." "We are pleased with the strong operating performance of the business in fiscal 2005, despite several challenges," said GTECH Senior Vice President and CFO Jaymin B. Patel. "The outlook for fiscal 2006 is promising, and we remain excited about the future. Our significant successes in the marketplace over the past 12 months position us well for continued growth, and provide confidence in our ability to achieve our long-term goals of profitability and value creation for our shareholders." Operating Results Revenues for the fourth quarter of fiscal 2005 were $337.9 million, up 20.9% over revenues of $279.6 million in the fourth quarter of fiscal 2004. Net income was $43.8 million, or $0.34 per diluted share, down 8.3% from net income of $47.8 million, or $0.36 per diluted share for the same period last year. Revenues for fiscal 2005 were $1.26 billion, up 19.6% over revenues of $1.05 billion in fiscal 2004. Net income was $196.4 million, or $1.50 per diluted share, up 7.2% over net income of $183.2 million, or $1.40 per diluted share, for the same period last year. Net income in fiscal 2005 includes a one-time, after-tax gain of $7.0 million, or approximately $0.05 per diluted share, associated with the sale of the Company's 50% interest in Gaming Entertainment (Delaware) L.L.C. Net income in fiscal 2004 includes a one-time, after-tax gain of $3.3 million, or approximately $0.03 per diluted share, from the consolidation of the partnership that owns the Company's corporate headquarters in West Greenwich, Rhode Island. Earnings per share and dividends per share have been restated to reflect the 2-for-1 common stock split effected in the form of a stock dividend, which was distributed on July 30, 2004, to shareholders of record as of July 1, 2004. As required by EITF 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share," which became effective in December 2004, diluted earnings per share for fiscal 2004 and 2003 have been restated from $1.42 per share to $1.40 per share and $1.21 per share to $1.11 per share, respectively. EITF 04-8 requires that all 12.7 million shares underlying the Company's 1.75% Convertible Debentures be included in diluted earnings per share computations, if dilutive, regardless of whether the contingency has been met. Cash Flow and Investments During fiscal 2005, the Company generated $375.2 million of cash from operations. This cash, along with cash generated by the sale of available- for-sale investment securities, was principally used to fund the Spielo Manufacturing Incorporated, Leeward Islands Lottery Holding Company, Inc. (LILHCo), and BillBird S.A. acquisitions of $200.7 million and to fund $245.6 million of systems, equipment, and other assets relating to contracts. In addition, the Company issued $300 million of Senior Notes during fiscal 2005; repaid the remaining $90.0 million of the Company's 7.87% Senior Notes; repurchased $120.7 million, or 5.3 million shares of the Company's common stock; and paid cash dividends of $39.8 million. At February 26, 2005, the Company had $94.4 million of cash and cash equivalents and $196.8 million of short-term investment securities on hand. At the end of fiscal 2005, the Company had no borrowings under its $500 million senior revolving credit facility. Developments in Brazil The Company has recently received written confirmation of an appellate court decision concerning an appeal of a lower court's order freezing GTECH's Brazilian assets and imposing a 30% withholding of GTECH's fees from Caixa Economica Federal (Caixa) as indemnification for potential future liabilities should a civil suit brought by the Public Ministry prevail. GTECH has aggressively defended against the civil suit which the Company believes is based on outdated and faulty information. The three judge panel that heard the appeal issued a unanimous ruling granting partial relief to GTECH that reverses a substantial portion of the withhold-and-freeze order and discontinues future withholding. At the end of fiscal 2005, the amount withheld by Caixa from GTECH was approximately BRR68 million or US$26 million. The court ordered amounts in excess of BRR40 million should be returned to the Company. As of today, the Company is awaiting the return of withholdings which amount to BRR38 million or US$14 million, representing excess funds held in escrow as of April 8, 2005. The appellate court decision is subject to appeal by the Federal Attorneys through a motion for clarification. If such a motion is not granted, the next level of appeal is to the Supreme Judicial Court, the highest level appellate court for civil matters. As background, GTECH's contract with Caixa expires on May 14, 2005. Caixa has announced an aggressive plan to implement a new business model that includes the in-house development of its own central system application, a phased de-installation of GTECH retailer terminals, and the eventual takeover of operations from GTECH. Caixa has conducted four commodities auctions for various products and services and is completing its vendor contracting process. GTECH elected not to participate in the commodity procurements. Caixa has also publicly expressed its intent to enter into a new contract with GTECH or extend its current contract to assist in the migration process. Negotiations have recently begun. The Company will issue updates as appropriate with respect to developments on the recent court ruling and contract negotiations. Financial Outlook The Company provided guidance for the full year and first quarter of fiscal 2006. For the fiscal year ending February 25, 2006, the Company expects service revenue growth in the range of 8% to 10%, reflecting a 5% to 6% increase in same store sales, the net effect of contract wins and the impact of acquisitions, offset by a number of factors, including contractual rate changes and fluctuations in certain foreign exchange rates against the U.S. Dollar. The Company expects product sales in the range of $180 million to $210 million. GTECH expects service margins of approximately 40% and product margins in the range of 38% to 40%. The Company expects the full year tax rate to be approximately 35%. Based upon this outlook, the Company believes that earnings per share will be in the range of $1.53 to $1.58 for fiscal year 2006, excluding the impact of the adoption of SFAS 123R, share-based payment, which may require companies to expense stock options beginning in the third quarter of the Company's current fiscal year. If GTECH were to adopt this new accounting mandate at that time, it believes fully diluted earnings per share would be in the range of $1.50 and $1.55 per share. For the first quarter of fiscal 2006, ending May 28, 2005, the Company expects service revenues to increase 5% to 7%, versus the first quarter of last year, and product sales in the range of $30 million to $35 million. GTECH expects both service and product margins in the range of 38% to 40%. The Company expects the effective tax rate to be 36% in the first quarter. Based upon this outlook, the Company expects earnings per share to be in the range of $0.33 to $0.36 per share. This compares to the $0.40 per share reported in the first quarter of fiscal 2005, which included a one-time gain associated with the sale of the Company's interest in Harrington Raceway in Delaware. Excluding that gain, recurring earnings per share for the first quarter of fiscal 2005 were $0.35. In giving guidance, the Company noted that ongoing developments in Brazil could positively impact both the outlook for the first quarter and full fiscal year. As the situation is fluid, the Company indicated it would not include the potential impact in current guidance until the situation becomes more certain. However, it noted that under certain assumptions, incremental service revenues for the fiscal year ending February 25, 2006 could be in the range of $25 million to $35 million, and incremental earnings per share in the range of $0.07 to $0.12. Those assumptions include: -- Receipt of 100% of its Caixa-related service revenues during the fiscal year; -- Release of $14 million from the escrow account, including $11 million relating to the fiscal 2005 holdback; -- Negotiating a one-year extension with Caixa that would conform to Caixa's public goals to accelerate the de-installation of GTECH terminals; and -- Impact of potential incremental (non-Brazil) investments currently being contemplated, in the range of $8 million to $10 million. In the event that the court order is upheld and the Company receives all monies due by the end of May, $15 million to $20 million in incremental service revenues would occur in the first quarter and the impact to fully diluted earnings per share would be $0.06 to $0.08. The balance would accrue evenly throughout the remainder of the fiscal year. The Company will provide updates as appropriate. Fourth Quarter and Full Year Highlights In the fourth quarter and full year of fiscal 2005, GTECH reasserted its technology leadership and made significant strategic progress on all sides of the business -- Lottery, Gaming Solutions, and Commercial Services. During the quarter, GTECH was selected by the New Zealand Lottery as the lead bidder for a complete lottery system conversion to include a new integrated online and instant lottery system and new terminals, following a competitive procurement. The Company also signed a two-year contract extension to provide online lottery products and services for the Argentine National Lottery. In addition, GTECH's subsidiary Spielo will provide Sweden's Svenska Spel with 2,000 next-generation wide area video lottery terminals (VLTs). Also in the quarter, GTECH further strengthened its corporate leadership and governance with the appointments of Walter DeSocio as Senior Vice President, General Counsel, and Corporate Secretary; and Paget Alves as a new member of its Board of Directors. In addition, GTECH's Board was named the Top Performing Board of Directors in Gaming by HVS Executive Search, an international executive recruiting and compensation consulting firm specializing in the gaming, lodging, and restaurant/retail industries. During fiscal 2005, GTECH was awarded online lottery contracts in Missouri, Thailand, Mexico, Finland, Switzerland, and Germany (Thuringen). ONCE in Spain ordered a total of 12,000 additional handhelds terminals, adding to the existing base of 7,000 handhelds. Singapore Pools also signed a five- year contract with GTECH for ES Connect(TM) and ES Connect(TM) B2B. In addition, lottery contracts were extended in Minnesota, Oregon, Colorado, Luxembourg, South Australia, and Turkey. Also during the fiscal year, customers in Atlantic (Canada), Jamaica, and Italy awarded GTECH contracts to supply video lottery (or gaming) central system solutions and related services. In December, the Multi State Lottery Association (MUSL) selected GTECH to supply equipment and service for the first ever multi-vendor, multi-state video lottery Wide Area Progressive (WAP) solution. Spielo was also selected to provide the Oregon Lottery with approximately 2,000 PowerStation 5(TM) VLTs. Shortly after the close of the fiscal year, GTECH was chosen to supply the video central control system by the Pennsylvania Department of Revenue in a highly competitive procurement process. GTECH received contracts for Instant Ticket Vending Machines (ITVMs) from lotteries in Virginia, Illinois, Washington, and Maine, further validating the Interlott brand. Moreover, the Arizona and New Mexico lotteries extended the Company's ITVM contracts for three years and two years, respectively. Also in the year, GTECH successfully implemented new online systems for lotteries in Tennessee, Florida, Germany (WestLotto), and Sri Lanka. In the Commercial Services vertical, GTECH continued to expand its services offerings around the globe. GTECH's subsidiary PolCard exceeded expectations on all fronts, signing on with three new bank customers and three additional national merchant accounts. In the third quarter of the year, GTECH acquired BillBird, a leading bill payment and prepay company in Poland. Since that time, BillBird has increased transactions per retailer 21%, and grown the overall retail base from 1,849 to approximately 6,600 VIA(TM) branded retail points-of-presence. Additionally, GTECH began selling prepaid mobile phone top-ups through lottery terminals in Barbados and in Lithuania. In Trinidad and Tobago, the sale of prepaid mobile phone top-ups and bill payments also commenced. "GTECH scored major successes across all three vertical markets: Lottery, Gaming Solutions, and Commercial Services, in fiscal 2005," continued Mr. Turner. "All told, we won a record 32 new contracts, including extensions and re-bids, the total contract revenue value of which is estimated to be between $635 million and $690 million." Fiscal 2005 was a year of major strategic progress, as well, with successful acquisitions in all three vertical markets. "In addition to BillBird, we strengthened our lottery presence in the Caribbean with the acquisition of LILHCo, and our Gaming Solutions strategy took a big leap forward when we entered into an agreement with the Gauselmann Group of Germany to purchase a 50 percent controlling equity interest in Atronic, one of the world's leading video slot machine manufacturers," said Mr. Turner. Certain statements contained in this press release are forward looking statements within the meaning of the United States Private Litigation Reform Act of 1995. We identify forward looking statements by words such as "may," "will," "should," "could," "expect," "plan," "anticipate," "intend," "believe," "estimate," "continue," "project," or similar words that refer to the future. Such statements include, without limitation, statements related to: (i) the future prospects for and stability of the lottery industry and other businesses in which we are engaged or expect to be engaged, (ii) our future operating and financial performance (including, without limitation, expected future growth in revenues, profit margins and earnings per share), (iii) our ability to retain existing business and to obtain and retain new business; (iv) our ability to realize the anticipated benefits of our acquisitions and (v) the results and effects of legal proceedings. Such forward looking statements reflect management's assessment based on information currently available, but are not guarantees and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in the forward looking statements. These risks and uncertainties include, but are not limited to, those set forth above, in our subsequent press releases and on reports by the Company on Forms 10-K, 10-Q and 8-K, and other reports and filings with the Securities and Exchange Commission, as well as risks and uncertainties respecting: (i) government regulations and other actions affecting the online lottery industry could have a negative effect on our business and sales; (ii) we may be subject to adverse determinations in legal proceedings (including previously announced legal proceedings in Brazil) which could result in substantial monetary judgments or reputational damage; (iii) our lottery operations are dependent upon our continued ability to retain and extend our existing contracts and win new contract; (iv) slow growth or declines in sales of online lottery goods and services could lead to lower revenues and cash flows; (v) we derive over half of our revenues from foreign jurisdictions (including over 7.4% in fiscal 2005 from Brazilian operations) and are subject to the economic, political and social instability risks of doing business in foreign jurisdictions; (vi) our results of operations are exposed to foreign currency exchange rate fluctuations which could result in lower revenues, net income and cash flows when such results are translated into U.S. Dollar accounts; (vii) we have a concentrated customer base and the loss of any of our larger customers (or lower sales from any of these customers) could lead to lower revenue; (viii) our quarterly operating results may fluctuate significantly; (ix) we operating in a highly competitive environment and increased competition may cause us to experience lower net cash flows or to lose contracts; (x) we are subject to substantial penalties for failure to perform under our contracts; (xi) we may not be able to respond to technological changes or to satisfy future technology demands of our customers in which case we could fall behind our competitors; (xii) if we are unable to manage potential risks related to acquisitions, our business and growth prospects could suffer; (xiii) expansion of the gaming industry faces opposition which could limit our access to some markets; (xiv) our business prospects and future success depend upon our ability to attract and retain qualified employees; (xv) our business prospects and future success rely heavily upon the integrity of our employees and executives and the security of our systems; (xvi) our dependence on certain suppliers creates a risk of implementation delays if the supply contract is terminated or breached, and any delays may result in substantial penalties and (xvii) our non-lottery ventures, which are an increasingly important aspect of our business, may fail. GTECH, a leading global information technology company with over $1 billion in revenues and 5,300 people in over 50 countries, provides software, networks, and professional services that power high-performance, transaction processing solutions. The Company's core market is the lottery industry, with a growing presence in commercial gaming technology and financial services transaction processing. For more information about the Company, please visit GTECH's website at http://www.gtech.com/. Consolidated financial statements to follow: GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS Fourth Quarter Fiscal Year Ended February 26, February 28, 2005 2004 (Dollars in thousands, except per share amounts) Revenues: Services $264,298 $264,689 Sales of products 73,570 14,887 337,868 279,576 Costs and expenses: Costs of services 164,897 146,246 Costs of sales 53,996 8,693 218,893 154,939 Gross profit 118,975 124,637 Selling, general and administrative 29,989 29,594 Research and development 13,818 15,896 Operating expenses 43,807 45,490 Operating income 75,168 79,147 Other income (expense): Interest income 1,657 2,030 Equity in earnings of unconsolidated affiliates 403 116 Other expense (1,175) (1,448) Interest expense (7,470) (3,922) (6,585) (3,224) Income before income taxes 68,583 75,923 Income taxes 24,740 28,092 Net income $43,843 $47,831 Basic earnings per share $0.38 $0.40 Diluted earnings per share $0.34 $0.36 Weighted average shares outstanding - basic 115,555 118,280 Weighted average shares outstanding - diluted 131,075 134,735 Dividends per share - common stock $0.085 $0.085 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS Fiscal Year Ended February 26, February 28, February 22, 2005 2004 2003 (Dollars in thousands, except per share amounts) Revenues: Services $1,017,683 $957,471 $868,896 Sales of products 239,552 93,859 109,894 1,257,235 1,051,330 978,790 Costs and expenses: Costs of services 616,633 537,839 535,041 Costs of sales 157,974 59,226 78,943 774,607 597,065 613,984 Gross profit 482,628 454,265 364,806 Selling, general and administrative 117,253 109,092 96,130 Research and development 52,559 57,318 42,852 Special credit - - (1,121) Operating expenses 169,812 166,410 137,861 Operating income 312,816 287,855 226,945 Other income (expense): Interest income 4,615 5,733 3,837 Equity in earnings of unconsolidated affiliates 2,812 6,236 7,376 Other income 5,356 1,889 2,175 Interest expense (19,213) (10,919) (11,267) (6,430) 2,939 2,121 Income before income taxes 306,386 290,794 229,066 Income taxes 109,992 107,594 87,045 Net income $196,394 $183,200 $142,021 Basic earnings per share $1.68 $1.57 $1.24 Diluted earnings per share $1.50 $1.40 $1.11 Weighted average shares outstanding - basic 116,739 116,464 114,162 Weighted average shares outstanding - diluted 132,559 132,625 129,509 Dividends per share - common stock $0.34 $0.255 $- GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS February 26, February 28, 2005 2004 ASSETS (Dollars in thousands) CURRENT ASSETS: Cash and cash equivalents $94,446 $129,339 Investment securities available-for-sale 196,825 221,850 Trade accounts receivable, net 168,706 118,902 Sales-type lease receivables 3,461 7,705 Refundable performance deposit 8,000 - Inventories 61,135 76,784 Deferred income taxes 31,435 34,396 Other current assets 26,646 24,426 TOTAL CURRENT ASSETS 590,654 613,402 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS, net 720,438 591,362 GOODWILL, net 331,022 188,612 PROPERTY, PLANT AND EQUIPMENT, net 74,558 57,576 INTANGIBLE ASSETS, net 70,839 28,231 REFUNDABLE PERFORMANCE DEPOSIT 12,000 20,000 SALES-TYPE LEASE RECEIVABLES 4,756 17,653 OTHER ASSETS 50,874 42,295 TOTAL ASSETS $1,855,141 $1,559,131 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $99,234 $80,004 Accrued expenses 54,227 47,428 Employee compensation 21,862 33,981 Advance payments from customers 42,865 104,128 Deferred revenue and advance billings 29,705 14,459 Income taxes payable 16,499 12,394 Taxes other than income taxes 16,572 19,459 Short-term borrowings 334 - Current portion of long-term debt 2,476 106,319 TOTAL CURRENT LIABILITIES 283,774 418,172 LONG-TERM DEBT, less current portion 726,329 463,215 OTHER LIABILITIES 83,260 53,736 DEFERRED INCOME TAXES 106,010 61,719 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY: Preferred Stock, par value $.01 per share - 20,000,000 shares authorized, none issued - - Common Stock, par value $.01 per share - 200,000,000 shares authorized, 116,551,144 and 184,590,808 shares issued; 115,006,751 and 118,395,168 shares outstanding at February 26, 2005 and February 28, 2004, respectively 1,166 923 Additional paid-in capital 278,204 266,320 Accumulated other comprehensive loss (43,227) (70,508) Retained earnings 455,537 839,270 691,680 1,036,005 Less cost of 1,544,393 and 66,195,640 shares in treasury at February 26, 2005 and February 28, 2004, respectively (35,912) (473,716) 655,768 562,289 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,855,141 $1,559,131 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended February 26, February 28, February 22, 2005 2004 2003 (Dollars in thousands) OPERATING ACTIVITIES Net income $196,394 $183,200 $142,021 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 145,999 115,324 133,452 Intangibles amortization 12,616 3,735 4,733 Deferred income taxes 34,740 59,457 (1,567) Tax benefit related to stock award plans 11,254 10,432 8,037 Minority interest 3,799 4,502 578 Equity in earnings of unconsolidated affiliates, net of dividends received 3,461 1,672 316 Gain on sale of investment (10,924) - - Non-cash gain from consolidation of West Greenwich Technology Associates, L.P. - (5,292) - Termination of interest rate swaps - - 11,357 Other 16,438 10,726 2,740 Changes in operating assets and liabilities: Trade accounts receivable (48,207) 3,788 (12,007) Inventories 28,522 3,030 14,387 Accounts payable 14,248 2,186 13,734 Employee compensation (15,118) (4,231) (1,022) Advance payments from customers (33,994) 51,601 (10,109) Deferred revenue and advance billings 15,037 (2,979) 6,954 Income taxes payable 11,484 (27,649) 5,590 Other assets and liabilities (10,540) 5,565 13,062 NET CASH PROVIDED BY OPERATING ACTIVITIES 375,209 415,067 332,256 INVESTING ACTIVITIES Acquisitions (net of cash acquired) (200,730) (74,442) - Purchases of systems, equipment and other assets relating to contracts (245,592) (268,010) (155,556) Purchases of available-for-sale investment securities (246,975) (242,050) - Maturities and sales of available- for-sale investment securities 272,000 20,200 - Proceeds from sale of investments 11,773 - 2,560 Purchases of property, plant and equipment (12,875) (12,772) (5,612) Increase in restricted cash (5,112) - - Investments in and advances to unconsolidated subsidiaries (2,071) (2,885) - Refundable performance deposit - (20,000) - License fee - (12,500) - NET CASH USED FOR INVESTING ACTIVITIES (429,582) (612,459) (158,608) FINANCING ACTIVITIES Net proceeds from issuance of long- term debt 343,254 252,588 - Principal payments on long-term debt (167,692) (33,293) (47,416) Purchases of treasury stock (120,658) - (64,032) Dividends paid (39,830) (29,977) - Premiums and fees paid in connection with the early retirement of debt (10,610) (731) (3,434) Proceeds from stock options 13,546 23,943 16,867 Other (505) (6,324) 1,822 NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 17,505 206,206 (96,193) Effect of exchange rate changes on cash 1,975 4,351 3,624 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (34,893) 13,165 81,079 Cash and cash equivalents at beginning of year 129,339 116,174 35,095 CASH AND CASH EQUIVALENTS AT END OF YEAR $94,446 $129,339 $116,174 DATASOURCE: GTECH Holdings Corporation CONTACT: Robert K. Vincent, Public Affairs of GTECH Corporation, 401-392-7452 Web site: http://www.gtech.com/

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