GTECH Announces Fiscal Year 2007 First Quarter Results

WEST GREENWICH, R.I., June 22 /PRNewswire-FirstCall/ -- GTECH Holdings Corporation today announced earnings for its first quarter of fiscal year 2007, which ended May 27, 2006.

"We had a successful quarter across all three GTECH vertical markets -- Lottery, Gaming Solutions, and Commercial Services," said GTECH President and CEO W. Bruce Turner. "We completed the industry's fastest lottery system implementation in North Carolina in 58 days with more than 5,000 terminals. Gaming Solutions secured its first significant placement of the new WinWave gaming machine platform in two government jurisdictions. POLCARD experienced a 31 percent increase in bankcard acquiring turnover, and BillBird saw an 86 percent increase in bill payment and prepaid top-up transaction volume, from the same period last year."

"We are pleased with the performance of the business, despite the difficult quarter-over-quarter comparisons created by nonrecurring events in both periods," said GTECH Senior Vice President and CFO Jaymin B. Patel. "The fundamentals of our business remain strong, and we are well positioned to capture new opportunities in each of the markets we serve."

Operating Results

Revenues for the first quarter of fiscal 2007 were $315.9 million, compared to revenues of $326.4 million in the first quarter of fiscal 2006. Net income was $45.7 million, or $0.35 per diluted share in the first quarter of fiscal 2007, compared to net income of $54.8 million, or $0.43 per diluted share for the same period last year. For the quarter, service revenues were $290.2 million, comparable to the first quarter of last fiscal year, despite a year-over-year reduction of approximately $12.6 million of revenues from Brazil, which was principally related to the court-ordered return of revenues withheld in fiscal year 2005. Excluding the higher revenues from Brazil in fiscal 2006, service revenues for the first quarter of fiscal year 2007 increased $11.4 million or approximately 4 percent year-over-year, driven by the continued strength of the U.S. lottery market. Product sales for the quarter were $25.7 million, compared to $35.0 million in the first quarter of last year. Service margins were 39.4%, reflecting lower revenues from Brazil. Product margins increased 3.1 percentage points to 41.4% in the most recent quarter, reflecting a change in product mix.

The first quarter results include one-time costs of $6.8 million associated with the pending transaction with Lottomatica S.p.A. Excluding transaction-related costs, the Company would have reported net income of $52.5 million and fully diluted earnings per share of $0.40. This compares to net income of $46.8 million and fully diluted earnings per share of $0.36, excluding the higher revenues from Brazil in the first quarter of last fiscal year.

Cash Flow and Investments

During the first quarter of fiscal 2007, the Company generated $102.3 million of cash from operations. This cash was principally used to fund $80.2 million of systems, equipment, and other assets relating to contracts, including new systems in North Carolina, Arizona, and Washington State, and to pay cash dividends of $10.8 million. At May 27, 2006, the Company had $185.2 million of cash and cash equivalents and $323.1 million of short-term investment securities on hand.

At the end of the first quarter of fiscal 2007, the Company had $499.5 million available under its senior revolving credit facility.

First Quarter Highlights

In the first quarter of fiscal year 2007, GTECH continued to execute against its strategic objectives of maintaining and expanding the core lottery business, winning new customers, and growing perimeter businesses.

Domestically, GTECH was selected by the Virginia Lottery to provide a new central system, terminals, an IP wireless communications network, and ongoing services under a seven-year integrated services contract.

The Company also celebrated the success of the fastest, and smoothest, instant ticket launch in GTECH history in North Carolina on March 30, 2006. On May 30, 2006, GTECH launched North Carolina's online game offering, Powerball.

Internationally, GTECH signed a three-year contract extension with the Beijing Welfare Lottery Center to provide a new central system, terminals, and ongoing software licensing and support. In Brazil, Caixa Economica Federal approved a 90-day contract extension with the Company.

GTECH's subsidiary Spielo delivered 540 WinWave(TM) terminals to Svenska Spel in Sweden, and 300 WinWave terminals to Atlantic Lottery Corporation in Canada.

Also during the quarter, GTECH launched Pick 'n Play(TM) in Illinois. Pick 'n Play is the Company's new game concept designed to combine the appeal of instant gratification and multiple chances to win with the security and integrity of an online game. Since the inaugural launch in March 2006, sales in Illinois have topped the $11 million mark.

The state of Illinois was also the first in the United States to receive GTECH's ISYS(TM) Text-to-Speech (TTS) application that enables a visually-impaired retailer's personal computer to audibly "read" the text that is displayed on the ISYS terminal. In effect, the ISYS can now "talk" to the visually-impaired lottery clerk. The Text-to-Speech application is easily configurable for all ISYS terminals currently in the field worldwide. GTECH will work with customers on an individual basis to determine how best to implement the application for visually-impaired retailers in other jurisdictions.

"We remain committed to helping customers drive revenue through new content and new technology," continued Mr. Turner. "With the addition of Connie Laverty as GTECH's Senior Vice President and Chief Marketing Officer, we will continue to identify market trends and long-range market opportunities for product development, content development, sales, and potential acquisitions."

Other Business Developments

After the close of the quarter, GTECH shareholders voted to approve the previously-announced merger agreement providing for the acquisition of GTECH by Lottomatica S.p.A., at a special meeting of shareholders. Subject to the satisfaction or waiver of the remaining conditions set forth in the merger agreement, the proposed merger is expected to be completed in mid-2006. If the proposed merger is completed, GTECH will become an indirect wholly-owned subsidiary of Lottomatica and each outstanding share of GTECH common stock will be converted into the right to receive $35.00 in cash, without interest.

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. The Company identifies forward looking statements by words such as "may," "will," "should," "could," "expect," "plan," "anticipate," "intend," "believe," "estimate," "continue," or similar words that refer to the future. Such statements include, without limitation, statements relating to (a) 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, and (b) the expected timing, completion, and effects of the proposed merger. 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 possibility of adverse determinations in legal proceedings in Brazil; (iii) the continued ability of the Company to retain and extend its existing contracts and win new contracts; (iv) the possibility of slower than expected growth or declines in sales of lottery and gaming goods and services; (v) economic, political and social instability risks inherent in doing business in foreign jurisdictions; (vi) exposure to foreign currency exchange rate fluctuations; (vii) the relatively large percentage of the Company's revenues attributable to a relatively small number of the Company's customers; (viii) the possibility of significant fluctuation of quarterly operating results; (ix) the intensity of competition in the lottery and gaming industries; (x) the possibility of substantial penalties under 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) acquisitions by the Company; (xiii) opposition to the expansion of lottery and gaming; (xiv) the Company's ability to attract and retain qualified employees; (xv) the Company's heavy dependence upon the integrity of its employees and executives and the security of its systems; (xvi) the Company's dependence upon certain suppliers and the related risk of implementation delays; (xvii) the Company's non-lottery ventures, which are an increasingly important part of its business, given the Company's relative lack of experience in markets outside of its core lottery market and the difficulty in obtaining non-lottery gaming licenses; (xviii) the Company's ability to protect its intellectual property or prevent its use by third parties; (xix) third party infringement claims; (xx) network interruption risks; and (xxi) the ability of Lottomatica and the Company to complete the proposed merger.

GTECH is a leading gaming technology and services company. With more than $1.3 billion in annual revenues and 5,300 people in over 50 countries, GTECH provides integrated technology, creative content, and business services to effectively manage and grow today's evolving gaming markets. In targeted emerging economies, GTECH also leverages its operational presence and infrastructure to supply commercial transaction processing services. For more information about the Company, please visit GTECH's website at http://www.gtech.com/.

Contact: Robert K. Vincent Public Affairs GTECH Corporation 401-392-7452 Consolidated financial statements to follow: GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (Unaudited) Three Months Ended May 27, May 28, 2006 2005 (Dollars in thousands, except per share amounts) Revenues: Services $290,175 $291,364 Sales of products 25,671 35,035 315,846 326,399 Costs and expenses: Costs of services 175,821 168,917 Costs of sales 15,051 21,604 190,872 190,521 Gross profit 124,974 135,878 Selling, general and administrative 39,275 32,019 Research and development 10,797 12,938 Operating expenses 50,072 44,957 Operating income 74,902 90,921 Other income (expense): Interest income 4,389 2,045 Equity in earnings of unconsolidated affiliates 601 1,787 Other expense (75) (1,794) Interest expense (7,453) (7,265) (2,538) (5,227) Income before income taxes 72,364 85,694 Income taxes 26,702 30,850 Net income $45,662 $54,844 Basic earnings per share $0.36 $0.48 Diluted earnings per share $0.35 $0.43 Weighted average shares outstanding - basic 127,279 114,646 Weighted average shares outstanding - diluted 130,436 129,707 Cash dividends declared per common share $0.085 $0.085 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) May 27, February 25, 2006 2006 ASSETS (Dollars in thousands) CURRENT ASSETS: Cash and cash equivalents $185,177 $235,191 Investment securities available-for- sale 323,125 260,725 Trade and other receivables, net 151,449 183,561 Refundable performance deposit 8,000 8,000 Inventories 108,539 88,024 Deferred income taxes 27,783 26,398 Other current assets 55,003 47,819 TOTAL CURRENT ASSETS 859,076 849,718 SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS, net 731,266 692,545 GOODWILL 346,096 346,096 PROPERTY, PLANT AND EQUIPMENT, net 108,693 101,416 INTANGIBLE ASSETS, net 61,589 64,212 OTHER ASSETS 43,789 45,915 TOTAL ASSETS $2,150,509 $2,099,902 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $78,698 $93,205 Accrued expenses 49,123 46,220 Employee compensation 23,792 31,804 Advance payments from customers 79,287 63,768 Deferred revenue and advance billings 31,354 17,889 Income taxes payable 64,852 67,098 Taxes other than income taxes 16,887 17,106 Short term borrowings 1,748 - Current portion of long-term debt 6,326 9,148 TOTAL CURRENT LIABILITIES 352,067 346,238 LONG-TERM DEBT, less current portion 539,769 542,259 OTHER LIABILITIES 114,142 106,671 DEFERRED INCOME TAXES 97,765 99,362 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, 127,381,252 and 127,179,225 shares issued and outstanding at May 27, 2006 and February 25, 2006, respectively 1,274 1,272 Additional paid-in capital 449,302 444,810 Accumulated other comprehensive loss (33,551) (35,662) Retained earnings 629,741 594,952 1,046,766 1,005,372 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,150,509 $2,099,902 GTECH HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended May 27, May 28, 2006 2005 (Dollars in thousands) OPERATING ACTIVITIES Net income $45,662 $54,844 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 42,008 42,023 Intangibles amortization 2,444 2,485 Other amortization 430 156 Stock-based compensation expense 2,556 2,523 Deferred income taxes (2,982) 4,372 Excess tax benefit from stock option exercises (842) 3,044 Minority interest 720 1,309 Equity in earnings of unconsolidated affiliates, net of dividends received 266 (1,787) Other 1,987 5,183 Changes in operating assets and liabilities: Trade and other receivables, net 30,410 17,820 Inventories (20,515) 13,486 Other current assets (6,984) (4,631) Accounts payable (13,015) (32,448) Employee compensation (8,984) 3,188 Advance payments from customers 15,519 (192) Deferred revenue and advance billings 13,465 (5,101) Income taxes payable (1,404) 11,558 Other assets and liabilities 1,562 3,744 NET CASH PROVIDED BY OPERATING ACTIVITIES 102,303 121,576 INVESTING ACTIVITIES Purchases of systems, equipment and other assets relating to contracts (80,235) (40,562) Purchases of available-for-sale investment securities (63,500) (85,000) Maturities and sales of available- for-sale investment securities 1,100 72,325 Purchases of property, plant and equipment (2,986) (2,394) Decrease in restricted cash - 5,080 Other (163) 296 NET CASH USED FOR INVESTING ACTIVITIES (145,784) (50,255) FINANCING ACTIVITIES Dividends paid (10,822) (9,770) Principal payments on long-term debt (2,553) (1,317) Proceeds from stock options 330 3,322 Excess tax benefit from stock option exercises 842 - Purchases of treasury stock - (32,051) Other 3,201 863 NET CASH USED FOR FINANCING ACTIVITIES (9,002) (38,953) Effect of exchange rate changes on cash 2,469 (1,180) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (50,014) 31,188 Cash and cash equivalents at beginning of period 235,191 94,446 CASH AND CASH EQUIVALENTS AT END OF PERIOD $185,177 $125,634