Scientific Games Announces Third Quarter 2012 Results PR Newswire NEW YORK, Nov. 6, 2012 NEW YORK, Nov. 6, 2012 /PRNewswire/ --Scientific Games Corporation (Nasdaq: SGMS) today announced results for the third quarter ended September 30, 2012. Summary Financial Results ($ in millions, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenue $227.5 $222.7 $691.4 $639.6 Operating income 13.2 21.4 44.5 64.6 Attributable EBITDA 82.5 81.7 252.7 247.2 Net loss (27.1) (4.1) (37.9) (4.0) Net loss per share ($0.30) ($0.04) ($0.41) ($0.04) Total capital expenditures $29.7 $24.2 $80.0 $68.4 Free cash flow ($5.1) $30.8 $27.9 $84.3 Attributable EBITDA and free cash flow as used herein are non-GAAP financial measures defined below under "Non-GAAP Financial Measures" and reconciled to GAAP financial measures in the accompanying tables. Recent Business Highlights oScientific Games' U.S. instant ticket and lottery systems customers' retail sales increased 8.9% and 8.5%, respectively, in the third quarter of 2012 compared to the prior-year period, based on third-party data oGlobal Draw's U.K. total gross win and gross win per terminal per day increased 8.1% and 6.5%, respectively, in the third quarter of 2012 versus the prior-year period, excluding William Hill's gross win in the prior-year period oExecuted the following agreements: oContract with The Gala Coral Group ("Coral") for Global Draw to continue to be the exclusive provider of server-based gaming terminals for Coral's estate through 2017 oContract for Properties Plus^® internet-based player loyalty rewards program for the Kentucky Lottery oSeven-year contract with the Atlantic Lottery to remain the exclusive instant ticket supplier through July 2019 oThree-year contract with the Massachusetts Lottery to supply instant tickets through September 2015 oSix-year contract with the Texas Lottery to supply instant tickets through August 2018 oFive-year contract with the Connecticut Lottery to supply instant tickets through August 2017 oTwo-year contract with the New Zealand Lottery to supply instant tickets through July 2014 oCompleted $300 million offering of 6.250% senior subordinated notes due 2020 ("2020 Notes"); redeemed 7.875% senior subordinated notes due 2016 ("2016 Notes") oCompany repurchased 6,196,606 of its common shares at an aggregate cost of $45.5 million during the third quarter; through the settlement date of November 2, 2012, Company repurchased 8,092,198 shares for approximately $60.7 million during 2012 "We were very pleased with the continued strong retail sales in the U.S. and U.K., which helped to offset weakness in our Italy and China businesses and the unfavorable impact of foreign currency fluctuations on our results," Chairman and Chief Executive Officer A. Lorne Weil commented. "We are encouraged by signs of stabilization in Italy, based on a number of recent weeks of improved performance.While our China business remains soft as we move into the fourth quarter, we are taking a series of actions designed to revitalize our business there." Mr. Weil continued, "We remain focused on our longer term pipeline of growth opportunities. Our plans are ambitious for the U.S., where we believe the lottery industry is at the beginning of a new phase of growth with the ability to offer games to players via the internet. As the leader in internet-based player loyalty programs for U.S. lotteries, we believe we are uniquely positioned to help lotteries transition to offering pay-for-play products to their customers. We also see additional opportunities both in the U.S. and internationally to implement our industry-leading instant game management and optimization programs as well as our integrated lottery solutions that have proven successful in maximizing lottery performance in many jurisdictions globally." Jeffrey S. Lipkin, Senior Vice President and Chief Financial Officer, added, "We've taken further steps this quarter to strengthen our balance sheet. The favorable credit market environment provided an opportunity to refinance our debt at very attractive rates and extend our weighted average maturities to over five years, positioning us well to pursue our growth initiatives. Furthermore, we believe that the recent activity under our share repurchase program demonstrates our Board of Directors' and management's continued support of and confidence in our strategic plan and long-term growth prospects." Business Update Our third quarter results reflected varying levels of strength across our diverse global businesses. U.S. retail sales continued on a positive trend. Our customers' retail sales of instant tickets rose 8.9% in the quarter and their sales of draw games grew 8.5%. Instant ticket sales continue to be propelled by strong performance in larger states, and draw sales have benefited from higher average jackpots. We are also pleased that we secured a number of our instant ticket contracts during the quarter. We have seen sustained success with our services provided to the Illinois Lottery through Northstar, where revenue grew approximately 17% in the third quarter, driven by a nearly 20% increase in instant ticket retail sales and a 12% increase in draw sales. We think the results in Illinois are a good indicator of how we can help lotteries maximize their performance through our industry-leading instant game and facilities management programs, as we have done in other states such as Florida, Pennsylvania and Georgia, which also reported strong instant ticket sales increases this quarter. We believe these value-added programs, including game design, telemarketing, predictive ordering, warehousing and distribution and retail execution, are a key factor behind the instant ticket sales growth that U.S. lotteries have been realizing for some period of time. During the third quarter, we began selling our new ULTRA^TM multi-game video gaming terminal. While the ULTRA has been in the field for just a short time, we are very excited about the prospects for this new, innovative product that builds on years of experience developed in our lottery and Global Draw businesses. This new product provides us with access to the North American machine business to complement our successful central monitoring and control systems business. As importantly, video gaming was launched in Illinois in early October, with statewide monitoring and control provided by our central system. Our Gaming business performed well again this quarter. Revenue grew 14% driven by the acquisition of Barcrest and an increase in Global Draw's U.K. total gross win and gross win per terminal per day. Based on the latest quarterly results reported by Ladbrokes and William Hill, Ladbrokes' gross win per terminal per week is approximately £50 higher than William Hill's, a significant improvement compared to the period before Scientific Games was the exclusive provider to Ladbrokes, when Ladbrokes' gross win per terminal per week was approximately £120 lower than William Hill's. Additionally, the Gaming business has already realized some benefits from the recent acquisition of ADS and its leading field-based service team, which has expanded the range of products and services offered to betting shop customers. The extension of the exclusive Coral contract secures this significant customer through 2017 and Coral will be the first customer to introduce Global Draw's new state-of the-art Infinity2 terminal that features an innovative new design and expanded functionality to enhance the player's experience. In Italy, retail sales of instant tickets declined by approximately 6.3% in the third quarter, which we believe continued to be due to a decrease in consumer spending related to difficult economic conditions and tax increases. We are encouraged by some recent evidence of stabilization in the instant ticket business in Italy, based on a number of weeks of improved performance in both September and October. While it is too early to determine if this is a turnaround, it is encouraging. Instant ticket retail sales in China remained weak in the third quarter, with sales softening further in the fourth quarter. However, retail sales of the entire lottery segment in China grew by 20% year-to-date through September 30, 2012, indicating sustained consumer demand for lottery products. Instant ticket sales have been impacted by a number of factors, including competition from other lottery games. With our lottery partners, we have developed a series of remedial actions that we believe will slow down and ultimately reverse the recent trends; however, we expect it will take some time for these actions to take effect so that we may better capitalize on the long-term opportunity in China. Looking ahead, other growth initiatives include additional roll-outs of our Properties Plus player rewards programs. During the quarter, the Kentucky Lottery became our seventh Properties Plus customer and we continue to realize increased revenue from this business. We see additional opportunities in the pipeline and believe the Properties Plus program will help lead the way for states to begin providing internet-based offerings. We expect that our long track record as an internet-based services vendor will provide a competitive advantage. Other developments during the quarter include the execution of a new license agreement with Zynga, which provides us the ability to feature many of Zynga's key brands on lottery instant tickets and virtual games. Consistent with the increasing interest in driving players online, lotteries will now have access to Zynga-branded 2^nd Chance interactive games and 2^nd Chance virtual prizes that players can redeem in conjunction with their favorite Zynga social games. The "$1 Million Las Vegas Game Show Experience," our 2012 multi-state game, which launched in the second quarter, has shown promising initial results, with 11 states signed up for the game. The recent acquisitions of Provoloto and Parspro have also created new opportunities for Scientific Games. We are working to build on Provoloto's position as a leading provider of instant ticket services in Mexico with our content, licensing and marketing capabilities, in order to strengthen our presence there and create a platform for further expansion in Latin America. In Delaware, where we are the only vendor supplying a sports betting platform for a lottery in the U.S., betting through our system during the current NFL season has increased by 37% through late October 2012 compared to the prior-year period, reinforcing the enthusiasm for this business that we have had for some time. Indeed, with our many years of gaming expertise, combined with our recent acquisition of Parspro and its state-of-the art sports betting solutions, we see the potential for this area to be one of the next waves of lottery development. Third Quarter 2012 Financial Results Revenue oRevenue increase of 2.1% reflects growth in Gaming and Lottery Systems segments, partially offset by a decline in Printed Products and an unfavorable foreign exchange impact of $5.0 million Operating Income oDecrease in operating income primarily reflects: o$11.2 million increase in depreciation and amortization o$0.8 million increase in employee termination and restructuring oIncreases partially offset by $3.3 million decrease in selling, general and administrative oIncrease in depreciation and amortization principally reflects: oAccelerated depreciation of $8.6 million related to a write-down of gaming terminals and previously announced closing of Australia printing facility o$1.6 million of additional depreciation from acquisition of Barcrest oReduction in selling, general and administrative primarily due to: o$4.5 million decrease in accrual related to the Asia-Pacific business incentive compensation plan o$1.1 million decrease in acquisition and advisory fees o$1.0 million reduction in contractual marketing commitments oDecreases partially offset by $2.4 million increase in accounts receivable reserves and $1.5 million of incremental overhead from acquisition of Barcrest oIncrease in employee termination and restructuring in the Printed Products and Gaming groups of $0.3 million and $0.5 million, respectively Net Income oIn addition to the impact of the items mentioned above, the decline in net income reflected: o$11.3 million increase in loss on early extinguishment of debt related to the redemption of the 2016 Notes and the write-off of previously deferred financing costs o$3.2 million of lower earnings from equity investments, primarily reflecting a decline in instant ticket retail sales in Italy o$2.9 million increase in income tax expense oDecline partially offset by $2.2 million decrease in other expense principally due to a decline in foreign exchange transaction expense EBITDA from Equity Investments oEBITDA from equity investments decreased by $3.5 million, principally due to lower results from Italy and China of $3.6 million and $0.9 million, respectively Attributable EBITDA oAttributable EBITDA increased by $0.8 million, despite a reduction in EBITDA of approximately $6.4 million from Italy and China businesses including unfavorable currency fluctuations Third Quarter 2012 Operating Results by Segment ($ in millions) Revenue Operating Income Three Months Ended Three Months Ended September 30, September 30, 2012 2011 2012 2011 Printed Products $127.4 $129.6 $30.3 $34.7 Lottery Systems 61.9 59.6 8.9 7.3 Gaming 38.3 33.5 (7.7) 3.2 Printed Products Revenue oRevenue decrease of 1.8% resulted primarily from decline in licensed properties business of $6.2 million, largely due to challenging year-over-year comparisons resulting from timing of launch of the Wheel of Fortune^® multi-state game in 2011 compared to the timing of the Las Vegas Game Show multi-state game in 2012, which launched later during the year o$3.2 million decline in international revenue from customers that purchase tickets on a price per thousand unit basis, including lower sales to Italy o$1.4 million unfavorable foreign exchange impact oRevenue decreases partially offset by: o$5.2 million increase in revenue from U.S. and international customers that compensate us based on a percentage of retail sales, including cooperative services customers o$3.4 million increase in revenue from U.S. customers that purchase tickets on a price per thousand unit basis Operating Income oOperating income decrease reflected: o$3.5 million impact from lower revenue and less profitable mix of revenue o$2.2 million increase in depreciation and amortization o$0.3 million of employee termination and restructuring related to closing of Australia printing facility oIncrease in depreciation and amortization principally reflected: o$1.9 million of accelerated depreciation related to closing Australia printing facility oDecrease in operating income partially offset by $1.6 million decrease in selling, general and administrative principally due to a reduction in contractual marketing commitments and incentive compensation expense in current-year period Lottery Systems Revenue oRevenue increase of 3.8% primarily reflected higher sales revenue from increased demand for equipment and systems from both U.S. and international customers oService revenue was essentially flat compared to the prior-year period as strength in current-year period in U.S. business resulted in $2.7 million revenue increase, driven by a large Powerball^® jackpot and higher instant ticket validation revenue, which was in large part offset by $1.9 million of lower revenue in China o$2.1 million unfavorable foreign exchange impact Operating Income oIncrease in operating income primarily reflects higher revenue from system sales Gaming Revenue oRevenue increase of 14.2% principally driven by acquisition of Barcrest, which contributed $3.7 million and $3.0 million of service revenue and sales revenue, respectively oResults also benefitted from $1.7 million increase in service revenue from licensed betting office customers in the U.K. due in part to higher gross win per terminal per day, partially offset by impact of loss of William Hill contract oRevenue growth was partially offset by: o$1.7 million negative impact from exiting Austrian over-the-counter business o$1.5 million unfavorable foreign exchange impact Operating Income oDecrease in operating income primarily due to: o$9.0 million increase in depreciation and amortization o$4.4 million increase in selling, general and administrative o$0.5 million increase in employee termination and restructuring; current-period amount relates to previously announced reorganization of Gaming business oIncrease in depreciation and amortization principally reflects: o$6.7 million of accelerated depreciation related to a write-down of gaming terminals o$1.6 million of additional depreciation from acquisition of Barcrest oIncrease in selling, general and administrative primarily due to: o$2.4 million increase in accounts receivable reserves o$1.5 million of incremental overhead from acquisition of Barcrest oDecrease in operating income partially offset by $3.0 million impact from higher and more profitable mix of revenue Liquidity and Capital Resources oAt September 30, 2012, cash and cash equivalents of $136.0 million and availability under revolving credit facility of $210.3 million oTotal debt of $1,469.1 million as of September 30, 2012 increased from $1,390.7 million at December 31, 2011, primarily reflecting the issuance of $300 million in 2020 Notes and the redemption of $200 million in 2016 Notes during the third quarter, and the reduction of our China loans by approximately $16.3 million in the nine months ended September 30, 2012 oFree cash flow for third quarter was $(5.1) million, compared to $30.8 million in prior-year quarter, primarily due to increased capital expenditures of $5.5 million and increased working capital usage oReceived $0.6 million in cash dividends from equity investment in RCN during third quarter oCompany repurchased 6,196,606 of its common shares at an aggregate cost of $45.5 million during the third quarter. Through the settlement date of November 2, 2012, Company repurchased 8,092,198 shares for approximately $60.7 million during 2012. Conference Call Details Scientific Games will host a conference call today at 5:00 pm Eastern Standard Time to review these results and discuss other topics. To access the call live via a listen-only webcast, please visit www.scientificgames.com and click on the webcast link under the Investor Information section. To access the call by telephone, please dial (866) 713-8566 (U.S. and Canada) or (617) 597-5325 (international) 15 minutes prior to the start of the call. The conference ID is 73844124. A presentation summarizing the results will also be provided in the Investor Information section on our website prior to the conference call. A replay of the webcast and accompanying presentation will be archived in the Investor Information section on our website. About Scientific Games Scientific Games Corporation is a global leader in providing customized, end-to-end gaming solutions to lottery and gaming organizations worldwide. Scientific Games' integrated array of products and services includes instant lottery games, lottery gaming systems, terminals and services, and internet applications, as well as server-based interactive gaming terminals and associated gaming control systems. For more information, please visit our website at www.scientificgames.com. Company Contact: Cindi Buckwalter, Investor Relations (212) 754-2233 Forward-Looking Statements In this press release the Company makes "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "continue," "believe," "expect," "anticipate," "could," "potential," "opportunity," or similar terminology. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of future results or performance. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; material adverse changes in economic and industry conditions; technological change; retention and renewal of existing contracts and entry into new or revised contracts; availability and adequacy of cash flows to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; inability to benefit from, and risks associated with, strategic equity investments and relationships; failure of Northstar to meet the net income targets or otherwise realize the anticipated benefits under its private management agreement with the Illinois Lottery; seasonality; inability to identify and capitalize on trends and changes in the lottery and gaming industries, including the potential expansion of regulated gaming via the internet; inability to enhance and develop successful gaming concepts; dependence on suppliers and manufacturers; liability for product defects; fluctuations in foreign currency exchange rates and other factors associated with international operations; influence of certain stockholders; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; and stock price volatility. Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in the Company's filings with the Securities and Exchange Commission, including under the heading "Risk Factors" in our periodic reports. Forward-looking statements speak only as of the date they are made and, except for the Company's ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Non-GAAP Financial Measures Attributable EBITDA, as used herein, is based on the definition of "consolidated EBITDA" in our credit agreement (summarized below), except that attributable EBITDA as used herein includes our share of the EBITDA of all of our equity investments (whereas "consolidated EBITDA" for purposes of the credit agreement generally includes our share of the EBITDA of our Italian joint venture but only the income of our other equity investments to the extent it has been distributed to us). Attributable EBITDA is a non-GAAP financial measure that is presented herein as a supplemental disclosure and is reconciled to net income (loss) in a schedule below. Attributable EBITDA includes adjustments only to the extent contemplated by the definition of "consolidated EBITDA" in our credit agreement (which adjustments are summarized in the paragraph below). Note that the adjustment referred to in clause (9) in the paragraph below was added to the definition of "consolidated EBITDA" as part of the March 11, 2011 amendment to our credit agreement and revised as part of the August 25, 2011 amendment to our credit agreement. "Consolidated EBITDA" means, for any period, "consolidated net income" as defined in the credit agreement (i.e., generally our consolidated net income (or loss) excluding the income (or deficit) of our equity investments (other than our Italian joint venture) except to the extent that such income has been distributed to us) for such period plus, to the extent deducted in calculating such consolidated net income for such period, the sum of (1) income tax expense, (2) depreciation and amortization expense, (3) interest expense (other than any interest expense of our Italian joint venture in respect of debt for borrowed money of such joint venture if such debt exceeds $25,000,000 in the aggregate), (4) amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with debt (see line item captioned "Debt-Related Fees and Charges" in the schedules below), (5) amortization of intangibles (including goodwill) and organization costs (see line item captioned "Amortization of Intangibles" in the schedules below), (6) earn-out payments with respect to certain acquisitions that we have made, such as our acquisition of Global Draw, or any other "permitted acquisitions" (generally, acquisitions of companies that are primarily engaged in the same or related line of business and that become subsidiaries of ours, or acquisitions of all or substantially all of the assets of another company or division or business unit of another company), including any loss or expense with respect to such earn-out payments (see line item captioned "Earn-Outs for Permitted Acquisitions" in the schedules below), (7) extraordinary charges or losses determined in accordance with GAAP, (8) non-cash stock-based compensation expenses, (9) any cash compensation expense incurred but not paid in such period so long as no cash payment in respect thereof is made or required to be made prior to the scheduled maturity of the borrowings under the credit agreement (provided that up to $993,000 of non-cash compensation expense accrued prior to August 25, 2011 may be added back notwithstanding that cash payments may be required to be made in respect thereof prior to the scheduled maturity of the borrowings) (see line item captioned "Deferred Contingent Compensation Expense" in the schedules below), (10) up to $3,000,000 of expenses, charges or losses resulting from certain Peru investments (see line item captioned "Peru Investment Expenses, Charges or Losses" in the schedules below), (11) the non-cash portion of any non-recurring write-offs or write-downs as required in accordance with GAAP (see line item captioned "Non-Recurring Write-Offs under GAAP" in the schedules below), (12) advisory fees and related expenses paid to advisory firms in connection with "permitted acquisitions" (see line item captioned "Acquisition Advisory Fees" in the schedules below), (13) certain specified "permitted add-backs" (i.e., (A) up to $15,000,000 (less the amount of certain permitted pro forma adjustments to "consolidated EBITDA" in connection with material acquisitions) of charges incurred during any 12-month period in connection with (i) reductions in workforce, (ii) contract losses, discontinued operations, shutdown expenses and cost reduction initiatives, (iii) transaction expenses incurred in connection with potential acquisitions and divestitures, whether or not consummated, and (iv) restructuring charges and transaction expenses incurred in connection with certain transactions with Playtech Limited or its affiliates, and (B) reasonable and customary costs incurred in connection with amendments to the credit agreement) (see line item captioned "Specified Permitted Add-Backs" in the schedules below) (provided that the foregoing items (1) through (13) do not include write-offs or write-downs of accounts receivable or inventory and, except with respect to "permitted add-backs", any write-off or write-down to the extent it is in respect of cash payments to be made in a future period), (14) to the extent treated as an expense in the period paid or incurred, certain payments, costs and obligations made or incurred by us in connection with any award of a concession to operate the instant ticket lottery in Italy, including any up-front fee required under the applicable tender process (see line item captioned "Italian Concession Obligations" in the schedules below), (15) restructuring charges, transaction expenses and shutdown expenses incurred in connection with the disposition of all or part of our racing and venue management businesses, together with any charges incurred in connection with discontinued operations and cost-reduction initiatives associated with such disposition, in an aggregate amount (for all periods combined) not to exceed $7,325,000 (see line item captioned "Racing Disposition Charges and Expenses" in the schedules below) and (16) up to 5,250,000 pounds Sterling during any four-quarter period of expenses or charges incurred in connection with the payment of license royalties or other fees to Playtech Limited or its affiliates and for software services provided to Global Draw or Games Media by Playtech Limited or its affiliates (see line item captioned "Playtech Royalties and Fees" in the schedules below), minus, to the extent included in the statement of such consolidated net income for such period, the sum of (1) interest income, (2) extraordinary income or gains determined in accordance with GAAP and (3) income or gains with respect to earn-out payments with respect to acquisitions referred to above (see line item captioned "Income on Earn-Outs for Permitted Acquisitions" in the schedules below), provided that the aggregate amount of "consolidated EBITDA" that is attributable to the Company's interest in its Italian joint venture that would not have otherwise been permitted to be included in "consolidated EBITDA" prior to giving effect to the March 11, 2011 amendment to the credit agreement will be capped at $25,000,000 in any period of four consecutive fiscal quarters (or $30,000,000 in the case of any such period ending on or prior to June 30, 2012). "Consolidated EBITDA" is also subject to certain adjustments in connection with material acquisitions and dispositions as provided in the credit agreement. The foregoing definitions of "consolidated net income" and "consolidated EBITDA" are qualified in their entirety by the full text of such definitions in our credit agreement which was amended and restated on August 25, 2011, a copy of which is attached as Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 31, 2011. Free cash flow, as included herein, represents net cash provided by operating activities less total capital expenditures (which includes lottery and gaming systems expenditures and other intangible assets and software expenditures). Free cash flow is a non-GAAP financial measure that is presented herein as a supplemental disclosure and is reconciled to net cash provided by operating activities in a schedule below. EBITDA from equity investments, as included herein, represents our share of EBITDA from equity investments, which is defined as equity in earnings from our equity investments (whether or not any such earnings have been distributed to us) plus income tax expense, depreciation and amortization expense and interest (income) expense, net of other. EBITDA from equity investments is a non-GAAP financial measure that is presented herein as a supplemental disclosure and is reconciled to earnings from equity investments in a schedule below. The Company's management uses the foregoing non-GAAP financial measures in conjunction with GAAP financial measures to: monitor and evaluate the performance of the Company's business operations, as well as the performance of its equity investments, which have become a more significant part of the Company's business; facilitate management's internal comparisons of the Company's historical operating performance of its business operations; facilitate management's external comparisons of the results of its overall business to the historical operating performance of other companies that may have different capital structures and debt levels; review and assess the operating performance of the Company's management team; analyze and evaluate financial and strategic planning decisions regarding future operating investments; and plan for and prepare future annual operating budgets and determine appropriate levels of operating investments. Accordingly, the Company's management believes that these non-GAAP financial measures are useful to investors to provide them with disclosures of the Company's operating results on the same basis as that used by the Company's management. In addition, the Company's management believes that attributable EBITDA is helpful in assessing the overall operating performance of the Company and its equity investments and highlighting trends in the Company's and its equity investments' core businesses that may not otherwise be apparent when relying solely on GAAP financial measures, because this non-GAAP financial measure eliminates from the Company's and its equity investments' earnings financial items that management believes have less bearing on the Company's and its equity investments' performance, such as income tax expense, depreciation and amortization expense and interest (income) expense. Moreover, management believes attributable EBITDA is useful to investors because a significant and increasing amount of the Company's business is from its equity investments. Management further believes that attributable EBITDA and free cash flow provide useful information regarding the Company's liquidity and its ability to service debt and fund investments. Management believes that EBITDA from equity investments is helpful in monitoring the financial performance of the Company's equity investments and eliminates from the equity investments' earnings financial items that management believes have less bearing on the equity investments' performance. The Company's management also believes attributable EBITDA is useful to investors because the definition is derived from the definition of "consolidated EBITDA" in our credit agreement, which is used to calculate the Company's compliance with the financial covenants contained in the credit agreement. Moreover, attributable EBITDA and free cash flow (calculated by subtracting total capital expenditures (which includes lottery and gaming systems expenditures and other intangible assets and software expenditures) from attributable EBITDA) are metrics used in determining performance-based bonuses (subject to certain additional adjustments in the discretion of the Compensation Committee (e.g., to take into account changes in applicable accounting rules during the year)). Accordingly, the Company's management believes that the presentation of the non-GAAP financial measures, when used in conjunction with GAAP financial measures, provides both management and investors with financial information that can be useful in assessing the Company's financial condition and operating performance. The non-GAAP financial measures used herein should not be considered in isolation of, as a substitute for, or superior to, the financial information prepared in accordance with GAAP. The non-GAAP financial measures as defined in this press release may differ from similarly titled measures presented by other companies. The non-GAAP financial measures, as well as other information in this press release, should be read in conjunction with the Company's financial statements filed with the Securities and Exchange Commission. SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Revenue: Instant tickets $124,434 $126,693 $367,385 $370,972 Services 82,622 81,429 261,543 237,272 Sales 20,421 14,617 62,431 31,399 Total revenue 227,477 222,739 691,359 639,643 Operating expenses: Cost of instant 73,085 71,785 211,468 211,151 tickets^(1) Cost of services ^(1) 42,947 42,562 134,079 122,944 Cost of sales^(1) 12,784 10,332 43,949 21,383 Selling, general and 44,383 47,660 137,726 130,640 administrative Employee termination and 1,830 1,030 10,751 1,030 restructuring Depreciation and 39,241 27,994 108,845 87,902 amortization Operating income 13,207 21,376 44,541 64,593 Other (income) expense: Interest expense 25,990 26,297 75,073 79,161 Earnings from equity (5,702) (8,895) (21,462) (27,469) investments Early extinguishment of 15,464 4,185 15,464 4,185 debt Other (income) expense, (537) 1,711 93 (159) net Total other expense 35,215 23,298 69,168 55,718 Income (loss) before (22,008) (1,922) (24,627) 8,875 income tax expense Income tax expense 5,125 2,202 13,276 12,912 Net income (loss) $(27,133) $ (4,124) $(37,903) $ (4,037) Net income (loss) per share: Basic net income (loss) $ (0.30) $ (0.04) $ (0.41) $ (0.04) Diluted net income (loss) $ (0.30) $ (0.04) $ (0.41) $ (0.04) Weighted average number of shares: Basic shares 89,950 92,125 91,723 92,027 Diluted shares 89,950 92,125 91,723 92,027 (1) Exclusive of depreciation and amortization. SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET DATA (Unaudited, in thousands) September 30, December 31, 2012 2011 Assets: Cash and cash equivalents $ 135,954 $ 104,402 Other current assets 326,138 301,154 Property and equipment, net 396,400 426,488 Equity investments 321,005 340,494 Other long-term assets 1,018,538 989,373 Total assets $ 2,198,035 $ 2,161,911 Liabilities and Stockholders' Equity: Current portion of long-term debt $ 14,978 $ 26,191 Other current liabilities 211,926 210,902 Long-term debt, excluding current portion 1,454,088 1,364,476 Other long-term liabilities 116,906 116,628 Stockholders' equity 400,137 443,714 Total liabilities and stockholders' equity $ 2,198,035 $ 2,161,911 SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED SEGMENT OPERATING DATA (Unaudited, in thousands) Three Months Ended September 30, 2012 Unallocated Printed Lottery Corporate Products Systems Gaming Expense Totals Instant tickets $ 124,434 $ - $ $ $ - - 124,434 Services - 49,391 33,231 - 82,622 Sales 2,932 12,469 5,020 - 20,421 Total revenue 127,366 61,860 38,251 - 227,477 Cost of instant 73,085 - - - 73,085 tickets^(1) Cost of services ^(1) - 27,852 15,095 - 42,947 Cost of sales^(1) 1,844 6,997 3,943 - 12,784 Selling, general and 10,567 5,658 8,166 14,085 38,476 administrative Stock-based 863 583 463 3,998 5,907 compensation Employee termination 287 - 1,543 - 1,830 and restructuring Depreciation and 10,426 11,877 16,788 150 39,241 amortization Operating income $ 30,294 $ 8,893 $ $ $ (loss) (7,747) (18,233) 13,207 Three Months Ended September 30, 2011 Unallocated Printed Lottery Corporate Products Systems Gaming Expense Totals Instant tickets $ 126,693 $ - $ $ $ - - 126,693 Services - 49,944 31,485 - 81,429 Sales 2,953 9,640 2,024 - 14,617 Total revenue 129,646 59,584 33,509 - 222,739 Cost of instant 71,785 - - - 71,785 tickets ^(1) Cost of services^(1) - 26,899 15,663 - 42,562 Cost of sales^(1) 1,906 6,813 1,613 - 10,332 Selling, general and 12,173 6,104 3,885 19,907 42,069 administrative Stock-based 856 522 353 3,860 5,591 compensation Employee termination - - 1,030 - 1,030 and restructuring Depreciation and 8,177 11,939 7,744 134 27,994 amortization Operating income $ 34,749 $ 7,307 $ $ $ (loss) 3,221 (23,901) 21,376 (1) Exclusive of depreciation and amortization. SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CONSOLIDATED SEGMENT OPERATING DATA (Unaudited, in thousands) Nine Months Ended September 30, 2012 Unallocated Printed Lottery Corporate Products Systems Gaming Expense Totals Instant tickets $ 367,385 $ $ $ $ - - - 367,385 Services - 153,511 108,032 - 261,543 Sales 8,177 37,446 16,808 - 62,431 Total revenue 375,562 190,957 124,840 - 691,359 Cost of instant 211,468 - - - 211,468 tickets^(1) Cost of services - 84,174 49,905 - 134,079 ^(1) Cost of sales^(1) 5,245 23,681 15,023 - 43,949 Selling, general 31,745 17,791 21,309 49,352 120,197 and administrative Stock-based 2,544 1,701 1,306 11,978 17,529 compensation Employee termination and 4,794 - 5,957 - 10,751 restructuring Depreciation and 31,242 35,953 41,201 449 108,845 amortization Operating income $ 88,524 $ 27,657 $ $ $ (loss) (9,861) (61,779) 44,541 Nine Months Ended September 30, 2011 Unallocated Printed Lottery Corporate Products Systems Gaming Expense Totals Instant tickets $ 370,972 $ $ $ $ - - - 370,972 Services - 150,356 86,916 - 237,272 Sales 6,810 22,447 2,142 - 31,399 Total revenue 377,782 172,803 89,058 - 639,643 Cost of instant 211,151 - - - 211,151 tickets^(1) Cost of services - 79,087 43,857 - 122,944 ^(1) Cost of sales^(1) 4,150 15,585 1,648 - 21,383 Selling, general 33,950 15,047 9,620 56,730 115,347 and administrative Stock-based 2,571 1,375 1,180 10,167 15,293 compensation Employee termination and - - 1,030 - 1,030 restructuring Depreciation and 24,745 35,185 27,581 391 87,902 amortization Operating income $ 101,215 $ 26,524 $ 4,142 $ $ (loss) (67,288) 64,593 (1) Exclusive of depreciation and amortization. SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES RECONCILIATION OF NET INCOME TO ATTRIBUTABLE EBITDA RECONCILIATION OF EARNINGS FROM EQUITY INVESTMENTS TO EBITDA FROM EQUITY INVESTMENTS (Unaudited, in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2012 2011 2012 2011 Net income (loss) $(27,133) $(4,124) $(37,903) $ (4,037) Add: Income tax 5,125 2,202 13,276 12,912 expense Add: Depreciation and 39,241 27,994 108,845 87,902 amortization Add: Interest expense 25,990 26,297 75,073 79,161 Add: Early extinguishment of 15,464 4,185 15,464 4,185 debt Add: Other (income) (537) 1,711 93 (159) expense EBITDA $ 58,150 $58,265 $174,848 $179,964 Credit Agreement adjustments: Add: Debt-Related $ 15,509 $ 4,185 $ 15,564 $ 4,306 Fees and Charges ^(1) Add: Amortization of - - - - Intangibles Add: Earn-outs for Permitted - - - 105 Acquisitions Add: Extraordinary Charges or Losses - - - - under GAAP Add: Non-Cash Stock-Based 5,907 5,591 17,529 15,293 Compensation Expenses Add: Deferred Contingent - - - 993 Compensation Expense Add: Non-Recurring Write-Offs under - 324 - 324 GAAP Add: Acquisition 485 1,587 1,156 1,587 Advisory Fees Add: Specified Permitted Add-Backs 2,339 3,305 12,124 6,097 ^(2) Add: Italian Concession - - - - Obligations Add: Racing Disposition Charges - 18 - 96 and Expenses Add: Playtech 1,834 494 5,364 1,653 Royalties and Fees Less: Interest Income (296) (69) (356) (274) Less: Extraordinary Income or Gains under - - - - GAAP Less: Income on Earn-Outs for - - - - Permitted Acquisitions Adjustments to conform to Credit Agreement definition: Add/Less: Other 537 (1,711) (93) 159 (income) expense ^(3) Less: Early extinguishment of (15,464) (4,185) (15,464) (4,185) debt Less: Earnings from (5,702) (8,895) (21,462) (27,469) equity investments Add: EBITDA from 19,202 22,751 63,535 68,525 equity investments Attributable EBITDA $ 82,501 $81,660 $252,745 $247,174 EBITDA from equity investments ^(4): Earnings from equity $ 5,702 $ 8,895 $ 21,462 $ 27,469 investments Add: Income tax 2,477 3,641 9,250 9,912 expense Add: Depreciation and 10,192 9,259 29,884 27,494 amortization Add: Interest expense, net of 831 956 2,939 3,650 other EBITDA from equity $ 19,202 $22,751 $ 63,535 $ 68,525 investments (1) Amount reflects write-off of unamortized deferred financing costs in connection with early extinguishment of debt and other debt-related fees and charges. (2) Amount includes management transition expenses, transaction expenses and restructuring expenses. (3) Amounts include foreign exchange transactions, interest income, minority interest and other items. (4) EBITDA from equity investments includes results from the Company's participation in Lotterie Nazionali S.r.l., Roberts Communications Network, LLC, CSG Lottery Technology (Beijing) Co. Ltd., Sportech Plc, Sciplay (through January 23, 2012), Guard Libang and Northstar Lottery Group, LLC (beginning March 1, 2011). SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES CALCULATION OF FREE CASH FLOW (Unaudited, in thousands) Three Months Ended September Nine Months Ended 30, September 30, 2012 2011 2012 2011 Net cash provided by operating $ 24,572 $ 55,044 $107,928 $152,627 activities Less: Capital (4,883) (2,250) (9,194) (5,863) expenditures Less: Lottery and gaming systems (11,367) (11,781) (30,723) (33,972) expenditures Less: Other intangible assets (13,408) (10,164) (40,109) (28,536) and software expenditures Total Capital $(29,658) $(24,195) $ (80,026) $ (68,371) Expenditures Free cash flow $ (5,086) $ 30,849 $ 27,902 $ 84,256 For the third quarter ended September 30, 2012, the Company received no return of capital payments from its equity investments. For the third quarter ended September 30, 2011, the Company received a return of capital payment from its equity investment in LNS of $0.4 million. For the second quarter ended June 30, 2012, the Company received return of capital payments from its equity investments in LNS of $15.1 million and ITL of $0.9 million. For the second quarter ended June 30, 2011, the Company received return of capital payments from its equity investment in LNS of $6.3 million. For the first quarter ended March 31, 2012, the Company received return of capital payments from its equity investment in ITL of $2.2 million. For the first quarter ended March 31, 2011, the Company received no return of capital payments from its equity investments. These items were not included in the Company's Free Cash Flow metric. SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES KEY PERFORMANCE INDICATORS (Unaudited, in millions, except terminals and ASP) Three Months Ended September Nine Months Ended September 30, 30, 2012 2011 2012 2011 Italy - Gratta e Vinci ^(1): Retail Sales 2,243.0 2,393.0 7,296.0 7,764.0 (Euros) ^(1) China - China Sports Lottery ^(1): Retail Sales (RMB) 3,897.0 4,730.0 13,480.0 14,697.0 Tickets Sold 510.0 651.0 1,801.0 2,097.0 ASP (RMB) 7.64 7.27 7.48 7.01 As of September 30, Terminal installed base at end of 2012 2011 period: Global Draw 24,752 26,632 Games Media 2,514 3,641 Barcrest 4,352 5,267 (1) Information provided by third-party lottery operators. SOURCE Scientific Games Corporation Website: http://www.scientificgames.com
Scientific Games Announces Third Quarter 2012 Results
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