55 Technology Way
West Greenwich, Rhode Island 02817 USA
Telephone: 401 392-1000
Fax: 401 392-1234
Website: WWW.GTECH.COM
For Immediate Release Contact: Robert K. Vincent
December 12, 2002 Public Affairs
GTECH Corporation
401-392-7452
GTECH ANNOUNCES FISCAL YEAR 2003 THIRD QUARTER RESULTS
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Company Exceeds Targets; Increases Full Year Guidance
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WEST GREENWICH, RI - (December 12, 2002) - GTECH (NYSE: GTK) today announced
earnings for the third quarter and first nine months of fiscal year 2003, ended
November 23, 2002.
"The third quarter was an outstanding quarter for GTECH, financially,
operationally, and strategically," said GTECH President and Chief Executive
Officer W. Bruce Turner. "Our financial performance has once again exceeded
targets on all levels, driven by robust same store sales growth in the U.S., new
international services contracts, and the benefits of our efficiency-improvement
process."
"We are encouraged by the positive trends we have seen in recent months," said
GTECH Senior Vice President and Chief Financial Officer Jaymin B. Patel. "The
combined effect of growth in service revenues, margin expansion, and close
management of operating expenses drove operating income up by approximately $15
million or 40 percent."
Operating Results
- -----------------
Revenues for the third quarter of fiscal 2003 totaled $256.5 million, down 2.7%
from the $263.6 million of revenues in the third quarter of fiscal 2002, due to
lower product sales, which were partially offset by higher service revenues. Net
income was $32.8 million, or $0.57 per diluted share, up substantially over net
income of $21.6 million, or $0.37 per diluted share, for the same period last
year [$23.0 million, or $0.39 per diluted share, had the new rules on accounting
for goodwill been applicable].
Revenues for the first nine months of fiscal 2003 were $708.8 million, down 3.6%
from revenues of $735.1 million for the same period last year, due to lower
product sales, which were partially offset by higher service revenues. Net
income was $100.1 million, or $1.71 per diluted share, up substantially over net
income of $57.4 million, or $0.94 per diluted share, for the same period last
year [$61.6 million, or $1.02 per diluted share, had the new rules on accounting
for goodwill been applicable].
Earnings per share in the prior year have been restated to reflect the 2-for-1
common stock split effected in the form of a stock dividend, which was
distributed on May 23, 2002, to shareholders of record as of May 16, 2002.
Third Quarter
- -------------
Service revenues were $207.8 million in the third quarter, up 5.8% over the
$196.4 million of service revenues in the same quarter last year. Stronger same
store sales, combined with several new international contracts and higher
service revenues from Colombia, drove this increase, which was partially offset
by lower service revenues from the weakening of the Brazilian real against the
U.S. dollar.
Had last year's average exchange rates prevailed throughout the most recent
quarter, the Company estimates that service revenues would have increased by
approximately 10.0%, compared to the third quarter of last year.
Product sales in the third quarter of fiscal 2003 were $48.7 million, down $18.5
million from the $67.2 million recorded in the third quarter of fiscal 2002.
Prior year product sales included one-time sales of terminals and software to
our customer in the United Kingdom, which were partially offset by the sale of a
turnkey system to our customer in France and the sale of terminals to our
customer in Spain in the third quarter of the current fiscal year.
Service margins improved to 37.9% in the third quarter of fiscal 2003 from 29.6%
in the third quarter of fiscal 2002, primarily driven by new contracts, lower
depreciation associated with existing contracts, and improved operating
efficiencies.
Product margins declined to 19.7% in the third quarter of fiscal 2003 versus
23.8% in the third quarter of last year, reflecting the sale of a turnkey system
to France and the sale of terminals to Spain, partially offset by the absence of
inventory reserves recorded in the prior year in connection with a product sale
contract with a customer in Italy.
Other income of $0.2 million in the third quarter of fiscal 2003 includes $2.8
million of foreign exchange gains principally associated with Brazil, partially
offset by $2.3 million of net costs associated with the early retirement of the
balance of $40 million of 2004 Private Placement Notes.
Interest expense declined $2.9 million, or 51.5%, from $5.6 million in the third
quarter of fiscal 2002 to $2.7 million in the third quarter of fiscal 2003,
primarily due to lower debt resulting from the retirement of $165 million of
Private Placement Notes in the fourth quarter of fiscal 2002, and $40 million of
Private Placement Notes in the third quarter of fiscal 2003.
Year to Date
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Service revenues for the first nine months of fiscal 2003 were $643.1 million,
up $26.5 million, or 4.3%, over the $616.6 million of service revenues in the
same period last year. Stronger same store sales, combined with several new
international contracts and higher service revenues from Colombia, drove this
increase, which was partially offset by lower service revenues from the
weakening of the Brazilian real against the U.S. dollar.
Had last year's average exchange rates prevailed throughout the first nine
months of fiscal 2003, the Company estimates that service revenues would have
increased by approximately 6.6%, compared to the same period last year.
Product sales in the first nine months of fiscal 2003 were $65.7 million, down
$52.8 million from the $118.5 million in the same period last year. Prior year
product sales included one-time sales of terminals and software to our customer
in the United Kingdom, which were partially offset by the sale, in the third
quarter of the current year, of a turnkey system to our customer in France and
the sale of terminals to our customer in Spain.
Service margins improved to 37.3% compared to 30.8% in fiscal 2002, primarily
driven by new contracts, lower depreciation associated with existing contracts,
and improved operating efficiencies.
Product margins improved to 24.8% this year versus 20.1% last year due to the
absence of prior year inventory reserves recorded in connection with a product
sale contract with a customer in Italy, partially offset by lower margins
associated with the sale of a turnkey system to our customer in France, and the
sale of terminals to our customer in Spain, which were recorded in the current
fiscal year.
Operating expenses in the first nine months of fiscal 2003 were $94.7 million,
down $17.1 million, compared to the $111.8 million of operating expenses
incurred in the first nine months of fiscal 2002, primarily driven by the
continued execution of cost saving initiatives and emphasis on improving
operating efficiencies. The Company also benefited from the new rules on
goodwill accounting, which eliminated the amortization of goodwill.
Interest expense declined $10.1 million, or 54.7%, from $18.5 million in the
first nine months of fiscal 2002, to $8.4 million in the first nine months of
fiscal 2003, primarily due to lower debt balances resulting from the retirement
of $165.0 million of Private Placement Notes in the fourth quarter of fiscal
2002, and $40 million of Private Placement Notes in the third quarter of fiscal
2003.
Cash Flow and Investments
- -------------------------
During the first nine months of fiscal 2003, the Company generated $281.0
million of cash from operations, which was used to fund investing activities
totaling $132.6 million, resulting in free cash flows of $148.4 million. These
free cash flows were used to retire $40 million of Private Placement Notes and
repurchase $57.4 million, or 2.1 million shares, of the Company's common stock.
At the end of the fiscal 2003 third quarter, the Company had no borrowings under
its $300 million credit facility.
Share Repurchase
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GTECH also announced last week that the Board of Directors authorized a new open
market share repurchase program for up to an aggregate amount of $100 million of
the Company's outstanding common stock through March 31, 2004. The new program
is in addition to the unused capacity remaining in the existing program, which
is scheduled to expire in February 2003. It is contemplated that the share
repurchases will be accomplished through periodic purchases on the open market.
The timing of such purchases will be dependent upon market conditions and
corporate considerations.
Financial Outlook
- -----------------
The Company also revised the guidance upward for fiscal year ending February 22,
2003.
The Company continues to expect service revenue growth in the range of 2% to 3%.
The Company expects product sales to be in the range of $100 to $110 million.
The Company expects that service profit margins will be in the range of 37% to
39%, and product sale profit margins to be in the range of 25% to 27%.
Based on the improved outlook, it now expects earnings per share for fiscal 2003
to be in the range of $2.30 to $2.35 on a fully-diluted basis, rather than the
previously announced $2.10 to $2.20 per share.
Earnings per diluted share for the fourth quarter are expected to be in the
range of $0.59 to $0.64.
For fiscal 2004, ending February 28, 2004, the Company expects service revenues
to be comparable to fiscal 2003 levels, reflecting a 5% to 6% increase in same
store sales and net contract wins, offset by a number of factors, including
contractual rate changes, fluctuations in foreign exchange rates against the
U.S. Dollar, and modified revenue expectations from Brazil. The Company expects
product sales in the range of $90 to $100 million.
The Company expects service margins to be in the range of 39% to 41% and product
margins in the range of 21% to 23%.
Based upon a diluted share estimate of 57 million, the Company believes that
earnings per share will be in the range of $2.50 to $2.60 for fiscal 2004.
The Company notes that fiscal 2004 will be a 53-week year, an event that occurs
every five to six years.
Quarter Highlights
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During the third quarter, GTECH:
o Signed a five-year contract extension with the Oregon State Lottery to
provide video lottery software development services;
o Signed a three-year field services agreement with the Virginia Lottery;
o Signed a multi-year integrated services contract with the California
Lottery to provide a new lottery system and communications network;
o Was selected by Westdeutsche Lotterie GmbH & Co (WestLotto) to provide a
new online and instant-ticket central system solution and services;
o Was awarded five-year subcontracts to provide call center services for
select automated government benefits programs in Illinois and Maine;
o Was invited to negotiate a new five-year contract to provide online lottery
services to the Wisconsin Lottery; and,
o Was awarded a seven-year integrated services contract with the Georgia
Lottery to provide a new online lottery solution and wireless
telecommunications network.
"These wins come on the heels of significant wins in California and Ireland and
are a clear validation of GTECH's business strategy, our technology, and above
all, our understanding of what lotteries, retailers, and players are looking for
today and in the future," continued Mr. Turner.
Other Business Developments
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GTECH further strengthened its board of directors and senior management team by
appointing General Emmett Paige, Jr. as Chairman of the Board; David J. Calabro
as Chief Operating Officer; and Timothy B. Nyman as Senior Vice President of
Global Services.
In addition, GTECH announced that it was not chosen by the Colorado Lottery as
the apparent successful vendor to provide equipment and services for a new
integrated online and instant-ticket lottery system.
The Company also announced a voluntary recall by the Taiwan Public Welfare
Lottery (the Lottery) of previously issued instant tickets distributed by
Lottery Technology Services Corporation, a partnership between Acer,
Incorporated and GTECH.
The Lottery took this action in response to concerns about potential operational
and technical issues related to the instant ticket games. As a result of the
voluntary recall, very few ticket books were returned and the event had little
effect on ticket sales.
The tickets have been replaced by a new set of tickets. The issues addressed in
Taiwan were the product of unique circumstances that are not present in other
GTECH(R) jurisdictions.
The Washington State Lottery joined the Mega Millions game, a multi-state
lottery game designed to produce larger payoffs for players and more profits for
participating states which include Georgia, Illinois, New York, Michigan, New
Jersey, Ohio, Massachusetts, Virginia, and Maryland.
In an effort to increase sales and fill a budget shortfall, the Michigan Lottery
recently introduced Sunday Lottery drawings and a new game, Change Play. Change
Play winners are selected each day after 9:00 p.m. in a computerized random
drawing that operates like a raffle. Players can buy computerized tickets for 25
cents to 99 cents each. Winnings are proportional to amounts wagered.
Certain statements contained in this press release are forward looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such statements include,
without limitation, statements relating to the prospects and financial outlook
for the Company, which reflect management assumptions regarding: (i) the future
prospects for and stability of the lottery industry and other businesses in
which the Company is engaged or expects to be engaged, (ii) the future operating
and financial performance of the Company (including, without limitation,
expected future growth in revenues, profit margins and earnings per share), and
(iii) the ability of the Company to retain existing business and to obtain and
retain new business. 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 the Company's 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) the
potential impact of extensive and evolving government regulations upon the
Company's business; (ii) the ability of the Company to continue to retain and
extend its existing contracts and win new contracts; (iii) the possibility of
slower than expected growth or declines in sales of lottery goods and services
by the Company or the Company's customers; (iv) exposure to foreign currency
fluctuations; (v) risks and uncertainties inherent in doing business in foreign
jurisdictions; (vi) the relatively large percentage of the Company's revenues
attributable to a relatively small number of the Company's customers; (vii) the
fact that several of the Company's larger contracts are to be rebid within the
next six months; (viii) the possibility of significant fluctuation of quarterly
operating results; (ix) the intensity of competition in the lottery industry;
(x) the possibility of substantial penalties under and/or termination of the
Company's contracts; (xi) the ability of the Company to respond to technological
change and to satisfy the future technological demands of its customers; (xii)
opposition to expansion of lottery and gaming; (xiii) the Company's ability to
attract and retain key employees; and (xiv) the possibility of adverse
determinations in pending legal proceedings. ooo GTECH, a leading global
information technology company with $1 billion in revenues and 4,300 people in
43 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 financial services transaction
processing. For more information about the Company, please visit GTECH's website
at http://www.gtech.com.
-000-
Consolidated statement of operations to follow:
CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Three Months Ended
-----------------------------
November 23, November 24,
2002 2001
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(Dollars in thousands,
except per share amounts)
Revenues:
Services $ 207,784 $ 196,427
Sales of products 48,682 67,152
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256,466 263,579
Costs and expenses:
Costs of services 129,122 138,346
Costs of sales 39,070 51,147
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168,192 189,493
Gross profit 88,274 74,086
Selling, general and administrative 24,358 26,692
Research and development 10,903 7,980
Goodwill amortization -- 1,493
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Operating expenses 35,261 36,165
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Operating income 53,013 37,921
Other income (expense):
Interest income 1,028 1,070
Equity in earnings of unconsolidated affiliates 1,406 1,255
Other income 234 250
Interest expense (2,728) (5,624)
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(60) (3,049)
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Income before income taxes 52,953 34,872
Income taxes 20,122 13,251
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Net income $ 32,831 $ 21,621
========= =========
Basic earnings per share $ 0.58 $ 0.37
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Diluted earnings per share $ 0.57 $ 0.37
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CONSOLIDATED INCOME STATEMENTS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Nine Months Ended
-------------------------
November 23, November 24,
2002 2001
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(Dollars in thousands,
except per share amounts)
Revenues:
Services $ 643,119 $ 616,597
Sales of products 65,717 118,531
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708,836 735,128
Costs and expenses:
Costs of services 402,999 426,430
Costs of sales 49,426 94,747
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452,425 521,177
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Gross profit 256,411 213,951
Selling, general and administrative 70,168 83,343
Research and development 24,575 23,949
Goodwill amortization -- 4,556
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Operating expenses 94,743 111,848
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Operating income 161,668 102,103
Other income (expense):
Interest income 2,847 4,324
Equity in earnings of unconsolidated affiliates 3,363 3,830
Other income 1,912 743
Interest expense (8,371) (18,475)
--------- ---------
(249) (9,578)
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Income before income taxes 161,419 92,525
Income taxes 61,340 35,159
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Net income $ 100,079 $ 57,366
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Basic earnings per share $ 1.75 $ 0.96
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Diluted earnings per share $ 1.71 $ 0.94
========= =========
CONSOLIDATED BALANCE SHEETS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
November 23, February 23,
2002 2002
------------ ------------
ASSETS (Dollars in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 97,509 $ 35,095
Trade accounts receivable 82,815 100,361
Sales-type lease receivables 4,454 4,894
Inventories 71,685 86,629
Deferred income taxes 28,321 28,321
Other current assets 18,369 22,730
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TOTAL CURRENT ASSETS 303,153 278,030
SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS 398,157 369,595
GOODWILL 115,498 116,828
OTHER ASSETS 74,716 89,376
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TOTAL ASSETS $ 891,524 $ 853,829
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $ 3,624 $ 2,358
Accounts payable 51,905 43,430
Accrued expenses 68,947 75,666
Employee compensation 29,911 37,941
Advance payments from customers 74,665 72,645
Income taxes payable 47,306 53,928
Current portion of long-term debt 6,600 3,510
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TOTAL CURRENT LIABILITIES 282,958 289,478
========= =========
LONG-TERM DEBT, less current portion 287,974 329,715
OTHER LIABILITIES 41,255 27,986
DEFERRED INCOME TAXES 4,825 3,695
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--150,000,000 shares authorized,
92,296,404 and 92,297,404 shares issued; 56,739,848 and 57,491,256 shares
outstanding at November 23, 2002 and February 23, 2002, respectively (shares adjusted
to reflect May 2002 two-for-one stock split) 923 461
Additional paid-in capital 241,536 234,247
Equity carryover basis adjustment (7,008) (7,008)
Accumulated other comprehensive loss (97,155) (100,815)
Retained earnings 641,934 542,878
--------- ---------
780,230 669,763
Less cost of 35,556,556 and 34,806,148 shares in treasury at
November 23, 2002 and February 23, 2002, respectively (shares adjusted to reflect
May 2002 two-for-one stock split) (505,718) (466,808)
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274,512 202,955
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 891,524 $ 853,829
========= =========
CONSOLIDATED STATEMENTS OF CASH FLOWS
GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
(Unaudited)
Nine Months Ended
November 23, November 24,
2002 2001
------------ ------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 100,079 $ 57,366
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 101,858 118,483
Intangibles amortization 4,051 6,356
Goodwill amortization - 4,556
Termination of interest rate swaps 11,357 -
Tax benefit related to stock award plans 7,299 -
Deferred income taxes provision 1,130 -
Asset impairment charges - 9,313
Equity in earnings of unconsolidated affiliates, net of dividends received 559 (588)
Other 4,568 (2,145)
Changes in operating assets and liabilities:
Trade accounts receivable 11,723 27,332
Inventories 14,944 12,055
Special charge (364) (6,272)
Other assets and liabilities 23,760 26,865
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NET CASH PROVIDED BY OPERATING ACTIVITIES 280,964 253,321
INVESTING ACTIVITIES
Purchases of systems, equipment and other assets relating to contracts (131,221) (146,117)
Investments in and advances to unconsolidated subsidiaries - 3,786
Proceeds from the sale of majority interest in a subsidiary - 10,000
Proceeds from sale of investments - 2,098
Other (1,350) (3,556)
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NET CASH USED FOR INVESTING ACTIVITIES (132,571) (133,789)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt - 186,000
Principal payments on long-term debt (46,408) (182,298)
Purchases of treasury stock (57,424) (194,389)
Proceeds from stock options 15,842 40,968
Tender premiums and prepayment fees (3,434) -
Other 2,926 (1,056)
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NET CASH USED FOR FINANCING ACTIVITIES (88,498) (150,775)
Effect of exchange rate changes on cash 2,519 (4,272)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 62,414 (35,515)
Cash and cash equivalents at beginning of period 35,095 46,948
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 97,509 $ 11,433
========= =========