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Scientific Games Announces First Quarter 2009 Results
Profitability Improvement Program on Track; Margins and Free Cash Flow Improve
Key Highlights
- Company achieves sequential quarterly improvement in gross margins, adjusted EBITDA, adjusted net income, and free cash flow
- Achieved
- Non-GAAP adjusted net income of
- Domestic "same-store" sales continue to improve; lottery industry retail sales remain resilient in current economic environment
- First quarter 2009 China Sports Lottery instant lottery ticket retail sales reach
- Repurchased
First Quarter 2009 Results
First quarter 2009 revenue was
Gross profit margins in the first quarter of 2009 were 39% compared to 43% in the first quarter of 2008 and 33% in the fourth quarter of 2008. The year-over-year decline in gross margins was primarily attributable to the revised terms of previously announced lottery contract awards. The sequential improvement in gross margins largely reflects the successful launch of instant lottery ticket printing operations in
Adjusted EBITDA for the first quarter of 2009 was
Net loss in the first quarter of 2009 was
"During the first quarter, lottery retail sales rebounded considerably from the fourth quarter of last year, as evidenced by our customers' results both domestically and abroad. Since then, lottery retail sales have continued to improve despite the continued weakness in the global economic environment, which attests to the resilience of our business and products and the value we provide to our customers," commented
Profitability Improvement Program Initiatives Update
In the fall of 2008, the Company launched its Profitability Improvement Program in order to obtain the synergies from past acquisitions, reduce capital and operating expenses and increase profit margins, free cash flow and return on investment. The Company is already beginning to benefit from the successful execution of this program, as evidenced by the
"In the first quarter, all three of our segments experienced sequential gross margin improvements. This is important because each percentage point increase in gross margin translates into approximately
Business Highlights
-- China Sports Lottery launched the first
-- Italian instant ticket sales grew 5% year-over-year to EUR2.6 billion in the first quarter of 2009
-- Global Draw installed base grew 31% year-over-year to 15,371 in the first quarter of 2009
-- Games Media installed base more than quadrupled from the first quarter 2008 to 1,894 in the first quarter of 2009
Printed Products Group
In the first quarter of 2009, Printed Products Group revenue, which represented 50% of the Company's total revenue, was
Printed Products Group gross profit margin in the first quarter of 2009 was 39% compared to 43% in the first quarter of 2008 and 36% in the fourth quarter of 2008. The year-over-year decline in gross margins was primarily attributable to revised terms of the
Printed Products Group adjusted EBITDA in the first quarter of 2009 was
"First quarter domestic instant ticket retail sales declined year-over-year by approximately 1.0% but increased 8.0% from the fourth quarter of 2008 and continue to strengthen. In fact, some states are reporting record results," commented Wright. "The states that are having the most success are doing so through more effective marketing and enhanced product mix. We believe our Company can offer tremendous value to our customers by supporting them with these efforts."
In
Lottery Systems Group
In the first quarter of 2009, Lottery Systems Group revenue, which represented 28% of the Company's total revenue, was
Lottery Systems Group gross profit margins were 38% in the first quarter of 2009 compared to 45% in the first quarter of 2008 and 24% in the fourth quarter of 2008. The year-over-year decline in gross margins was primarily attributable to the revised terms of the
Lottery Systems Group adjusted EBITDA in the first quarter of 2009 was
"Despite the weak economy and relatively flat year-over-year jackpot rolls in the quarter, domestic online lottery retail sales were down approximately 2% but increased 7.5% from the fourth quarter of 2008, again proving the resiliency of our products and markets. Furthermore, we are encouraged by the industry-wide effort between lotteries, vendors and regulators to attempt to change the scope of the online product mix, which could meaningfully improve industry growth and profitability," commented Mr. Chambrello. "In the meantime, we are continuing to focus on expense management and reducing capital needs."
Diversified Gaming Group
In the first quarter of 2009, Diversified Gaming Group revenue, which represented 22% of the Company's total revenue, was
Diversified Gaming Group gross profit margin in the first quarter of 2009 was 38% compared to 39% in the first quarter of 2008 and 38% in the fourth quarter of 2008. Diversified Gaming Group gross margins remained essentially flat as the decline in gross margins in the Company's Racing and Venue Management businesses were offset by increased gross margins from Global Draw.
Diversified Gaming Group adjusted EBITDA in the first quarter of 2009 was
Mr. Chambrello stated, "Global Draw and Games Media continue to drive revenues for our customers and as a result have grown their terminal installed bases throughout the U.K. In the first quarter of 2009, Global Draw's terminal installed base grew to 15,371 terminals from 11,746 in the first quarter of 2008 and Games Media installed terminal base grew to 1,894 terminals from 346 over the same period. In addition, during the first quarter, we placed Global Draw terminals in the
Financial Highlights
-- Amended credit agreement to provide greater operational and financial flexibility
-- Reduced indebtedness by repurchasing
-- Deferred payment of a substantial portion of Global Draw earn-out until 2011
-- Strong balance sheet, with over
Effective Tax Rate
U.S. GAAP requires a valuation allowance to be established in the event that an enterprise is unable to determine with sufficient certainty that it can realize a deferred tax asset. As a result of the Company's ongoing participation in its successful Italian joint venture, the Company has accumulated significant foreign tax credits ("FTC") over the last three years. During the first quarter of 2009, management was unable to complete plans to utilize its accumulated FTC during the carry-forward period. Consequently, the Company established a valuation allowance of
Liquidity and Capital Resources
At
On
"During the quarter, we opportunistically amended our credit agreement and subsequently restructured the Global Draw earn-out in order to substantially improve our financial flexibility and liquidity in the challenging current credit environment," commented
Convertible Debentures
A market price event did not occur for the quarter ended
Conference Call Details
We invite you to join our conference call tomorrow at
About Scientific Games
Scientific Games Corporation is the leading integrated supplier of instant tickets, systems and services to lotteries worldwide, a leading supplier of server-based gaming machines and systems, Amusement and Skill with Prize betting terminals, interactive sports betting terminals and systems, and wagering systems and services to pari-mutuel operators. It is also a licensed pari-mutuel gaming operator in
Company Contact:
Investor Relations
Scientific Games
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 projected 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 in the Company's markets; technological change; retention and renewal of existing contracts and entry into new contracts; availability and adequacy of cash flow 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; seasonality; ability to enhance and develop successful gaming concepts; dependence on suppliers and manufacturers; liability for product defects; factors associated with foreign 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 the Company's most recent Annual Report on Form 10-K. 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 Disclosure
EBITDA, as included herein, represents net income plus income tax expense, interest expense, and depreciation and amortization expenses, net of other income. EBITDA is included in this document as it is a basis upon which the Company assesses its financial performance, and it provides useful information regarding the Company's ability to service its debt. In addition, EBITDA is useful to investors in evaluating the Company's financial performance because it is a commonly used financial analysis tool for measuring and comparing gaming companies in several areas of liquidity, operating performance and leverage. EBITDA should not be considered in isolation or as an alternative to net income, cash flows from operations, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles (GAAP) as measures of the Company's profitability or liquidity.
Free cash flow, as included herein, represents net cash provided by operations less capital expenditures, wagering systems expenditures and other intangible assets and software expenditures. Free cash flow is included in this document as it is a basis upon which the Company evaluates its liquidity, ability to service debt and fund capital expenditures.
EBITDA, adjusted EBITDA, non-GAAP adjusted net income, diluted non-GAAP adjusted net income per share and free cash flow are non-GAAP financial measures that are presented as supplemental disclosures and are reconciled to the nearest comparable GAAP measures in financial schedules accompanying this release. In calculating the adjusted financial measures, the Company excludes certain items in order to better facilitate an understanding of the Company's operating performance.
The Company's management uses these adjusted financial measures in conjunction with GAAP financial measures to monitor and evaluate the performance of the Company's business operations; 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 and as a measure in evaluating employee compensation and bonuses; 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.
The Company's management believes that these adjusted 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. The Company's management also believes that because it has historically provided such adjusted non-GAAP financial measures in its earnings releases, continuing to do so provides consistency in its financial reporting and continuity to investors for comparability purposes. Accordingly, the Company's management believes that the presentation of the adjusted 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 adjusted financial measures should not be considered in isolation of, as a substitute for or superior to the financial information prepared in accordance with GAAP. The adjusted financial measures as defined in this press release may differ from similarly titled measures presented by other companies. The adjusted 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
Three Months Ended March 31, 2008 and 2009
(Unaudited, in thousands, except per share amounts)
Three Months
Ended March 31,
----------------
2008 2009
----------------
Operating revenues:
Services $233,953 210,338
Sales 23,054 20,352
------ ------
257,007 230,690
------- -------
Operating expenses:
Cost of services (exclusive of
depreciation and amortization) 130,378 125,762
Cost of sales (exclusive of
depreciation and amortization) 16,844 15,422
Selling, general and administrative
expenses 47,016 41,486
Employee termination costs 2,772 3,920
Depreciation and amortization 34,504 31,143
------ ------
Operating income 25,493 12,957
------ ------
Other (income) deductions:
Interest expense 17,145 18,809
Equity in earnings of joint ventures (16,859) (15,098)
Other (income) expense 50 (4,205)
-- ------
336 (494)
--- ----
Income before income tax expense 25,157 13,451
Income tax expense 8,494 38,641
----- ------
Net income (loss) $16,663 (25,190)
======= =======
Basic and diluted net income per share:
Basic net income (loss) $0.18 (0.27)
===== =====
Diluted net income (loss) $0.18 (0.27)
===== =====
Weighted average number of shares
Basic shares 93,314 92,539
====== ======
Diluted shares 94,718 92,539
====== ======
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED BALANCE SHEET DATA
December 31, 2008 and March 31, 2009
(Unaudited, in thousands)
December 31, March 31,
2008 2009
----------------------
Assets:
Cash and cash equivalents $140,639 108,703
Other current assets 371,139 345,678
Property and equipment, net 575,479 560,175
Long-term assets 1,095,196 1,138,976
--------- ---------
Total assets $2,182,453 2,153,532
========== =========
Liabilities and Stockholders' Equity:
Current portion of long-term debt $43,384 43,152
Other current liabilities 217,300 287,315
Long-term debt, excluding current
portion 1,196,083 1,153,931
Other long-term liabilities 129,857 122,386
Stockholders' equity 595,829 546,748
------- -------
Total liabilities and stockholders'
equity $2,182,453 2,153,532
========== =========
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED SEGMENT OPERATING DATA
Three Months Ended March 31, 2008 and 2009
(Unaudited, in thousands)
Three Months Ended March 31, 2008
-------------------------------------
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
-------------------------------------
Service revenues $127,226 54,646 52,081 233,953
Sales revenues 8,671 7,764 6,619 23,054
----- ----- ----- ------
Total revenues 135,897 62,410 58,700 257,007
------- ------ ------ -------
Cost of services (1) 70,813 28,649 30,916 130,378
Cost of sales (1) 6,245 5,872 4,727 16,844
Selling, general and administrative
expenses 14,969 9,278 6,783 31,030
Employee termination costs 2,772 - - 2,772
Depreciation and amortization (2) 9,976 14,974 9,285 34,235
----- ------ ----- ------
Segment operating income $31,122 3,637 6,989 41,748
------- ----- ----- ------
Unallocated corporate expense 16,255
------
Consolidated operating income $25,493
=======
Three Months Ended March 31, 2009
-------------------------------------
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
------------------------------------
Service revenues $110,077 52,068 48,193 210,338
Sales revenues 4,590 13,869 1,893 20,352
----- ------ ----- ------
Total revenues 114,667 65,937 50,086 230,690
------- ------ ------ -------
Cost of services (1) 67,094 28,875 29,793 125,762
Cost of sales (1) 2,601 11,808 1,013 15,422
Selling, general and administrative
expenses 11,523 7,490 5,176 24,189
Employee termination costs 2,016 125 433 2,574
Depreciation and amortization (2) 7,679 10,732 12,557 30,968
----- ------ ------ ------
Segment operating income $23,754 6,907 1,114 31,775
------- ----- ----- ------
Unallocated corporate expense 17,472
Corporate employee termination costs 1,346
-----
Consolidated operating income $12,957
=======
(1) Exclusive of depreciation and amortization
(2) Includes amortization of service contract software
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CALCULATION OF NON-GAAP ADJUSTED NET INCOME
(Unaudited, in thousands)
Three Months
Three Months Ended
Ended March 31, December 31,
---------------- -------------
2008 2009 2008
---- ---- ----
Net income (loss) $16,663 (25,190) (69,067)
Less: Income tax expense 8,494 38,641 (22,320)
----- ------ -------
Income before income tax expense 25,157 13,451 (91,387)
Add: Stock compensation charges 8,518 11,278 9,774
Add: Employee termination costs 2,772 3,920 10,923
Add: Global Draw earn-out 1,776 - 930
Add: Lottery Systems Mexico legal costs - 900 -
Add: Lottery Systems contract impairment - - 7,831
Add: Asset impairment charges - - 76,158
Add: Gain on early extinguishment of debt - (2,288) -
Add: Gain on forward contract - (718) -
Add: Imputed interest in convertible debt 3,261 3,150 3,262
----- ----- -----
Non-GAAP net income before income tax
expense 41,484 29,693 17,491
Non-GAAP income tax expense 12,989 8,663 945
------ ----- ---
Non-GAAP adjusted net income 28,495 21,030 16,546
------ ------ ------
Diluted non-GAAP adjusted net income per
share $0.30 $0.22 $0.18
Diluted GAAP net income (loss) per share $0.18 $(0.27) $(0.75)
Weighted average number of shares used in
per share calculations 94,718 92,539 92,704
------ ------ ------
Non-GAAP weighted average number of shares
used in per share calculations 94,718 93,585 93,895
------ ------ ------
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(Unaudited, in thousands)
Three Months
Three Months Ended
Ended March 31, December 31,
---------------- --------------
2008 2009 2008
---- ---- ----
Net income (loss) $16,663 (25,190) (69,067)
Add: Income tax expense 8,494 38,641 (22,320)
Add: Depreciation and amortization expense 34,504 31,143 112,543
Add: Interest expense, net of other
income or loss 17,195 14,604 19,148
------ ------ ------
EBITDA $76,856 59,198 40,304
======= ====== ======
Add: Employee termination costs 2,772 3,920 10,923
Add: Global Draw earn-out 1,776 - 930
Add: Lottery Systems Mexico legal costs - 900 -
Add: Lottery Systems contract impairment - - 7,831
Add: Stock compensation charges 8,518 11,278 9,774
----- ------ -----
Adjusted EBITDA $89,922 75,296 69,762
======= ====== ======
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO SEGMENT ADJUSTED EBITDA
(Unaudited, in thousands)
Three Months Three Months
Ended Ended
March 31, December 31,
--------- ------------
2008 2009 2008
---- ---- ----
Printed Products Group operating income $31,122 23,754 15,679
Add: Depreciation and amortization
expense 9,976 7,679 14,363
----- ----- ------
Printed Products Group EBITDA 41,098 31,433 30,042
------ ------ ------
Add: Printed Products Employee
termination costs 2,772 2,016 4,441
Add: Stock compensation charges 482 958 973
--- --- ---
Adjusted Printed Products Group EBITDA $44,352 34,407 35,456
------- ------ ------
Less: Impact of foreign exchange rates (1,503)
------
Adjusted EBITDA, excluding foreign
exchange rates 32,904
------
Three Months Three Months
Ended Ended
March 31, December 31,
--------- ------------
2008 2009 2008
---- ---- ----
Lottery Systems Group operating income $3,637 6,907 (73,212)
Add: Depreciation and amortization
expense 14,974 10,732 79,999
------ ------ ------
Lottery Systems Group EBITDA 18,611 17,639 6,787
------ ------ -----
Add: Lottery Systems Employee
termination costs - 125 2,576
Add: Lottery Systems Mexico legal costs - 900 -
Add: Lottery Systems contract
impairment - - 7,831
Add: Stock compensation charges 380 755 803
--- --- ---
Adjusted Lottery Systems Group EBITDA $18,991 19,419 17,997
------- ------ ------
Add: Impact of foreign exchange rates 652
---
Adjusted EBITDA, excluding foreign
exchange rates 20,071
------
Three Months Three Months
Ended Ended
March 31, December 31,
--------- ------------
2008 2009 2008
---- ---- ----
Diversified Gaming Group
operating income $6,989 1,114 (889)
Add: Depreciation and amortization
expense 9,285 12,557 14,800
----- ------ ------
Diversified Gaming Group EBITDA 16,274 13,671 13,911
------ ------ ------
Add: Global Draw earn-out 1,776 - 930
Add: Diversified Gaming Employee
termination costs - 433 1,152
Add: Stock compensation charges 304 764 396
--- --- ---
Adjusted Diversified Gaming
Group EBITDA $18,354 14,868 16,389
------- ------ ------
Add: Impact of foreign exchange rates 3,027
-----
Adjusted EBITDA, excluding foreign
exchange rates 17,895
------
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CALCULATION OF FOREIGN EXCHANGE IMPACT ON TOTAL REVENUES
(Unaudited, in thousands)
Three Months Ended March 31, 2009
---------------------------------
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
----- ----- ----- ------
Total revenues 114,667 65,937 50,086 230,690
Impact of foreign exchange rates 5,148 1,834 7,783 14,765
----- ----- ----- ------
Adjusted total revenues $119,815 67,771 57,869 245,455
-------- ------ ------ -------
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CALCULATION OF FREE CASH FLOW
(Unaudited, in thousands)
Three Months
Ended March 31,
----------------
2008 2009
---- ----
Net cash provided by operations $35,716 50,375
Less: Capital expenditures (3,680) (765)
Less: Wagering systems expenditures (46,600) (14,113)
Less: Other intangible assets and software
expenditures (11,031) (7,525)
------- ------
Free cash flow $(25,595) 27,972
-------- ------
SOURCE Scientific Games Corporation