Loss per diluted share of $(0.03); $0.24 excluding asset impairment
charges, Mexico start-up loss and stock compensation expense
NEW YORK, Nov. 1 /PRNewswire-FirstCall/ -- Scientific Games Corporation
(Nasdaq: SGMS) today reported third quarter 2007 revenues of $266.9
million, up 23 percent from $217.4 million in the third quarter of 2006.
Net loss was $2.9 million or $(0.03) per diluted share, down from net
income of $11.5 million or $0.12 per diluted share in the third quarter of
2006. Non-GAAP adjusted net income, excluding asset impairment charges, a
net loss from the start-up in Mexico and stock compensation expense, was
$22.3 million or $0.24 per nonGAAP diluted share, compared to non-GAAP
adjusted net income of $22.8 million or $0.24 per non-GAAP diluted share in
the third quarter of 2006.
EBITDA for the third quarter of 2007 was $73.7 million, up 16 percent
from $63.8 million in the third quarter of 2006. Adjusted EBITDA increased
19 percent to $81.1 million for the third quarter of 2007, compared to
adjusted EBITDA of $68.3 million for the third quarter of 2006.
During the quarter ended September 30, 2007 the Company incurred
printed products asset impairment charges of $26.1 million related to the
rationalization of its global Printed Products Group operations in Germany
and Peru. The Company reported a net loss of $2.0 million for the start-up
of its Mexican operation and $6.3 million in charges for stock compensation
costs in the quarter.
For the nine months ended September 30, 2007, revenues were $778.7
million, compared to $665.2 million for the nine months ended September 30,
2006, an increase of 17 percent. Net income was $49.0 million or $0.51 per
diluted share, compared to $58.9 million or $0.62 per diluted share in
2006. EBITDA increased to $233.8 million, compared to $191.2 million in
2006. Adjusted EBITDA increased 24 percent to $256.1 million, compared to
$206.9 million in 2006.
"The revenue trend in the quarter was strong and essentially in line
with the Company's expectations," said Lorne Weil, Chairman and CEO of
Scientific Games. "Nevertheless, overall profit margins, and therefore,
profit growth, were below the Company's expectations. We believe that the
third quarter results reflect events that were predominantly unusual and
infrequent in nature, rather than any deterioration in the inherent
profitability of the business." The results are discussed in more detail
below.
Printed Products
Printed Products Group service revenue for the quarter ended September
30, 2007 was $139.1 million, 53 percent ahead of the third quarter of 2006
and 24 percent ahead excluding the impact of revenues of Oberthur Gaming
Technologies (OGT). 'Same store' sales growth excluding OGT was
approximately 22 percent in the quarter. The strong revenue growth was led
by record licensed products revenue including the launch of Deal or No
Deal(TM) in 32 states and year-over-year growth in Italy.
Printed Products Group service margins went from 48.5 percent in the
third quarter of 2006 to 40.8 percent in the third quarter of 2007 due to
several factors. While OGT margins improved from the second quarter of
2007, they still lagged those of the legacy Scientific Games instant ticket
business, thereby dragging down the average. Scientific Games margins were
also considerably lower than normal due to the start-up of the new "P6"
printing line in the Company's Alpharetta, Georgia manufacturing facility.
There were substantial direct and indirect costs associated with the
start-up, with no associated revenues in the quarter, as the Company
continued to operate the "P1" printing line in parallel.
Early in the fourth quarter, all P1 production had been shifted to P6,
resulting in a considerably improved cost situation. And most importantly,
in the first quarter of 2008 all production currently taking place in San
Antonio, Texas, about 4.5 billion tickets annually, will be relocated to
Alpharetta, which is expected to result in significantly lower costs and
higher margins.
Lorne Weil noted, "After multiple acquisitions on four continents and
several years of significant capacity and revenue growth, our Printed
Products Group has recognized that a rationalization of its operational
infrastructure will yield significant improvements in productivity,
efficiency, competitiveness and profitability. While a few details of the
plan remain to be worked out, this rationalization occasioned a non-cash
asset impairment charge in the third quarter of $26.1 million together with
approximately $5 million of cash charges projected for the fourth quarter
2007. We believe this overall plan, including the previously announced
closure of the San Antonio production facility, will yield approximately
$20 million in annualized cost savings starting in 2008."
Printed Products Group sales revenue for the quarter ended September
30, 2007 was $9.4 million compared to $10.6 million for the quarter ended
September 30, 2006. This decrease was primarily attributable to a
continuing decline in phone card prices and volumes reflecting the market
driven shift to lower priced products. Printed Products Group sales margins
went from 18.5 percent in the third quarter of 2006 to 16.8 percent in the
third quarter of 2007 due to pricing pressure and decreased economies of
scale.
Lottery Systems Group
Lottery Systems Group service revenue increased 7 percent during the
third quarter from $50.9 million in third quarter 2006 to $54.6 million.
Excluding new contract revenues, 'same store' sales increased 7 percent
largely due to an increase in Powerball jackpots. The launch of the
Televisa Mexican lottery contract continues to be a significant drag on
earnings. The third quarter impact on the Company was approximately ($0.02)
in earnings per share. Despite this, the Lottery Systems Group service
margins improved to 47.1 percent from 45.1 percent in the third quarter
2006.
Mr. Weil noted, "The two keys to the success of the Televisa Mexican
lottery are the expansion of the size and quality of the distribution
network to levels anticipated at the time the Company entered into the
contract, and perhaps more importantly the introduction of instant tickets.
The Company is working together with Televisa to move forward with the
changes we believe are necessary and we continue to be optimistic that
success can be achieved in the early part of next year."
Lottery Systems Group sales revenue was $8.4 million, an increase of 17
percent from $7.2 million in the third quarter of 2006. Lottery Systems
Group sales margins also increased to 54.8 percent from 46.6 percent in the
third quarter 2006. The Company is optimistic that add-on sales of
terminals and other equipment to Germany should continue to improve if the
German Lotto Bloc's contract is extended by year end.
Diversified Gaming
Diversified Gaming Group service revenue decreased from $56.9 million
in the third quarter of 2006 to $50.8 million in 2007. During July and
August, the winding down of Global Draw's Betfred business, the beginning
of contract renewals at lower prices, and the initial impact of the United
Kingdom (U.K.) smoking ban that came into effect in July had not yet been
offset by increases in machine density that had largely moved from 3
machines per shop to 4. But by September, the new U.K. regulations combined
with the increased density produced average win per shop across the entire
U.K. installed base that was 20% ahead of September 2006, and for the month
of October, average win per shop ran approximately 31% ahead of October
2006.
During the quarter, Global Draw successfully converted its full estate
of approximately 9,500 gaming terminals to meet the requirements of the new
U.K. gambling bill ahead of the September 1, 2007 effective date, and was
the only supplier in the U.K. to do so. This new legislation allows the
betting shops to offer B3 Jackpot content as well as B2 fixed odds betting
terminal (FOBT) content on each of their allocated four machines. Global
Draw replaced all of its original terminals with state of the art dual
screen 'Nevada' terminals, which are specifically designed to allow both B2
and B3 games to be offered on all terminals.
Mr. Weil noted, "While shipments of Games Media analog machines
declined sharply between the second and third quarters of 2007, we are very
excited by the prospects of our pub-based digital business. As evidenced by
the recent announcement of our trial agreements with four major pub
retailers, the launch of the digital business is well underway, and thus
far the results of the trials have been extremely encouraging. We believe
it will take a few quarters to build digital revenues back to prior analog
levels, but the changeover is expected to have significant benefits. As
compared to the one-time sale nature of the analog business, the digital
business will produce a 'participation based' recurring service revenue
stream that is expected to be inherently far more profitable and faster
growing than the analog business, all the more so because it will utilize
the Global Draw operating infrastructure."
Business Development
Third quarter business development included instant ticket contract
awards in Connecticut, Ohio, Idaho, Iowa, Rhode Island and the U.K.,
instant ticket Cooperative Services contracts with Rheinland Pfalz in
Germany and MSL in the Ukraine, and new pari-mutuel systems contracts with
Great Canadian Gaming and the California Horse Racing Industry.
Subsequent to the end of the quarter, the Company inaugurated the new
"P6" high-speed printing press in Alpharetta, Games Media was awarded trial
agreements with four pub retailers in the U.K. for its new integrated
digital solution, and Global Draw was awarded a five-year contract to
supply up to 1,500 of its multi-game server based gaming terminals to
Corporacion Interamericana de Entretenimiento ("CIE") in Mexico. The latter
is extremely significant and casts important light on Global Draw's growth
strategy.
Information about the use of non-GAAP financial information is provided
under the section "Non-GAAP Disclosure" below. The non-GAAP measures
(adjusted net income, diluted adjusted net income per share, EBITDA and
adjusted EBITDA) are reconciled to the corresponding GAAP measures in the
financial schedules accompanying this release.
Conference Call Details
We invite you to join our conference call tomorrow at 8:30 a.m.
Eastern. To access the call live via webcast please visit
http://www.scientificgames.com and click on the webcast link under the Investors
tab. To access the call by telephone, please dial (800) 659-2032 (US &
Canada) or (617) 614-2712 (International) fifteen minutes before the start
of the call. The Conference ID# is 21885533. The call will be archived for
replay on the Company's website for 30 days.
About Scientific Games
Scientific Games Corporation is the leading integrated supplier of
instant tickets, systems and services to lotteries worldwide, a leading
supplier of fixed odds betting terminals 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 Connecticut, Maine and the
Netherlands and is a leading supplier of prepaid phone cards to telephone
companies. Scientific Games' customers are in the United States and more
than 60 other countries. For more information about Scientific Games,
please visit our web site at http://www.scientificgames.com.
Company Contact:
Investor Relations
Scientific Games
212-754-2233
Convertible Debentures
A market price event did not occur for the quarter ended September 30,
2007 and, accordingly, the Convertible Debentures are not convertible
during the current quarter ending December 31, 2007. During the third
quarter of 2007, the average price of the Company's common stock did exceed
the specified conversion price of $29.10 of the Convertible Debentures.
Because of this, an additional 1,669 shares of common stock have been
included in the Company's weighted average number of diluted shares for the
third quarter of 2007. For the first nine months of 2007, the Company has
added an additional 1,307 shares of common stock in its weighted average
number of diluted shares. Although the Company purchased a hedge in
December 2004 to mitigate the potential economic dilution of the underlying
Convertible Debenture shares, the Company is are precluded from reflecting
this hedge in the GAAP weighted average number of diluted shares because
the effect would be anti-dilutive. Upon conversion of the debentures, the
dilutive share count will revert to the true economic number.
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 outcomes 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; dependence on suppliers and
manufacturers; factors associated with foreign operations; 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 Security 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. EBITDA as defined in this press
release may differ from similarly titled measures presented by other
companies.
EBITDA, Adjusted EBITDA, non-GAAP adjusted net income and diluted
non-GAAP adjusted net income per share are non-GAAP financial measures that
are presented as supplemental disclosures and are reconciled to GAAP net
income and GAAP net income per diluted share 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 useful
financial information that can be used in assessing the Company's financial
condition and operating performance.
The adjusted financial measures should not be considered in isolation
or as a substitute for net income or net income per diluted share 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 September 30, 2006 and 2007
(Unaudited, in thousands, except per share amounts)
Three Months Ended
September 30,
2006 2007
Operating revenues:
Services $198,921 244,526
Sales 18,469 22,374
217,390 266,900
Operating expenses :
Cost of services (exclusive of
depreciation and amortization) 107,265 141,935
Cost of sales (exclusive of
depreciation and amortization) 13,406 15,874
Selling, general and administrative expenses 34,676 43,738
Depreciation and amortization 36,424 61,266
Operating income 25,619 4,087
Other deductions:
Interest expense 12,154 15,975
Equity in net income of joint ventures (1,722) (8,344)
Other (income) expense 10 (123)
10,442 7,508
Income (loss) before income tax expense 15,177 (3,421)
Income tax expense (benefit) 3,650 (543)
Net income (loss) $11,527 (2,878)
Basic and diluted net income (loss) per share:
Basic net income (loss) $0.13 (0.03)
Diluted net income (loss) $0.12 (0.03)
Weighted average number of shares
used in per share calculations:
Basic shares 91,346 92,737
Diluted shares 94,433 96,527
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2006 and 2007
(Unaudited, in thousands, except per share amounts)
Nine Months Ended
September 30,
2006 2007
Operating revenues:
Services $582,690 690,180
Sales 82,466 88,563
665,156 778,743
Operating expenses:
Cost of services (exclusive of
depreciation and amortization) 315,674 388,380
Cost of sales (exclusive of
depreciation and amortization) 62,332 64,815
Selling, general and administrative expenses 102,414 123,378
Depreciation and amortization 79,241 122,600
Operating income 105,495 79,570
Other deductions:
Interest expense 30,471 43,141
Equity in net income of joint ventures (6,455) (31,623)
Other income (859) (166)
23,157 11,352
Income before income tax expense 82,338 68,218
Income tax expense 23,464 19,230
Net income $58,874 48,988
Basic and diluted net income per share:
Basic net income $0.65 0.53
Diluted net income $0.62 0.51
Weighted average number of shares
used in per share calculations:
Basic shares 90,909 92,440
Diluted shares 94,795 95,894
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED BALANCE SHEET DATA
December 31, 2006 and September 30, 2007
(Unaudited, in thousands)
December 31, September 30,
2006 2007
Assets:
Cash and cash equivalents $ 27,791 41,072
Other current assets 316,911 370,562
Property and equipment, net 450,660 548,027
Long-term assets 964,248 1,096,547
Total assets $ 1,759,610 2,056,208
Liabilities and Stockholders' Equity:
Current portion of long-term debt $3,148 6,171
Other current liabilities 190,875 224,846
Long-term debt, excluding current portion 913,253 1,061,641
Other long-term liabilities 124,256 128,811
Stockholders' equity 528,078 634,739
Total liabilities and stockholders'
equity: $1,759,610 2,056,208
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED SEGMENT OPERATING DATA
Three Months Ended September 30, 2006 and 2007
(Unaudited, in thousands)
Three Months Ended September 30, 2006
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $91,135 50,877 56,909 198,921
Sales revenues 10,619 7,205 645 18,469
Total revenues 101,754 58,082 57,554 217,390
Cost of services (1) 46,906 27,937 32,422 107,265
Cost of sales (1) 8,656 3,846 904 13,406
Selling, general and
administrative expenses 10,894 7,284 5,170 23,348
Depreciation and amortization (2) 6,640 13,270 16,247 36,157
Segment operating income $28,658 5,745 2,811 37,214
Unallocated corporate expense 11,595
Consolidated operating income $25,619
Three Months Ended September 30, 2007
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $139,132 54,583 50,811 244,526
Sales revenues 9,378 8,429 4,567 22,374
Total revenues 148,510 63,012 55,378 266,900
Cost of services (1) 82,399 28,867 30,669 141,935
Cost of sales (1) 7,805 3,809 4,260 15,874
Selling, general and
administrative
expenses 16,541 8,606 4,846 29,993
Depreciation and
amortization (2) 37,013 16,130 7,893 61,036
Segment operating
income $4,752 5,600 7,710 18,062
Unallocated corporate expense 13,975
Consolidated operating income $4,087
(1) Exclusive of depreciation and amortization
(2) Includes amortization of service contract software
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED SEGMENT OPERATING DATA
Nine Months Ended September 30, 2006 and 2007
(Unaudited, in thousands)
Nine Months Ended September 30, 2006
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $285,329 152,830 144,531 582,690
Sales revenues 36,558 41,736 4,172 82,466
Total revenues 321,887 194,566 148,703 665,156
Cost of services (1) 145,892 84,170 85,612 315,674
Cost of sales (1) 28,635 29,433 4,264 62,332
Selling, general and
administrative expenses 33,099 22,812 12,145 68,056
Depreciation and amortization (2) 17,966 34,804 25,742 78,512
Segment operating income $96,295 23,347 20,940 140,582
Unallocated corporate expense 35,087
Consolidated operating income $105,495
Nine Months Ended September 30, 2007
Printed Lottery Diversified
Products Systems Gaming
Group Group Group Totals
Service revenues $370,714 161,726 157,740 690,180
Sales revenues 28,734 29,944 29,885 88,563
Total revenues 399,448 191,670 187,625 778,743
Cost of services (1) 208,929 86,335 93,116 388,380
Cost of sales (1) 23,809 15,935 25,071 64,815
Selling, general
and administrative
expenses 43,746 23,941 15,408 83,095
Depreciation and
amortization (2) 55,536 45,486 20,894 121,916
Segment operating
income $67,428 19,973 33,136 120,537
Unallocated corporate
expense 40,967
Consolidated
operating income $79,570
(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, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2007 2006 2007
Income (loss) before income tax
expense $15,177 (3,421) 82,338 68,218
Add: Employee termination costs -- -- 1,336 --
Add: Stock compensation charges 4,591 6,313 14,035 18,408
Add: SERP termination charge -- -- 313 --
Add: EssNet acquisition interest
charge -- -- 263 --
Add: Diversified Gaming asset
impairment charges 10,240 -- 10,240 --
Add: Printed Products asset
impairment charges -- 26,097 -- 26,097
Add: Loss on start-up of Mexico
online lottery contract -- 2,026 -- 5,794
Non-GAAP net income before income tax
expense 30,008 31,015 108,525 118,517
Non-GAAP income tax expense $7,201 8,684 30,930 33,185
Non-GAAP adjusted net income 22,807 22,331 77,595 85,332
Diluted non-GAAP net income per share $0.24 0.24 0.83 0.90
Diluted GAAP net income (loss) per
share $0.12 (0.03) 0.62 0.51
Weighted average number of shares used
in per share calculations 94,433 96,527 94,795 95,894
Less: Diluted shares included in
weighted average number of shares
related to potential conversion of
convertible debt 678 1,669 1,167 1,307
Non-GAAP weighted average number of
shares used in per share
calculations 93,755 94,858 93,628 94,587
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(Unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2007 2006 2007
Net income (loss) $11,527 (2,878) 58,874 48,988
Add: Income tax expense (benefit) 3,650 (543) 23,464 19,230
Add: Depreciation and amortization
expense 36,424 61,266 79,241 122,600
Add: Interest expense, net of other
income or loss 12,164 15,852 29,612 42,975
EBITDA $63,765 73,697 191,191 233,793
Add: Lottery Systems Group employee
termination costs -- -- 1,336 --
Add: Stock compensation charges 4,491 6,313 14,035 18,408
Add: SERP termination charge -- -- 313 --
Add: Loss on start-up of Mexico online
lottery contract -- 1,115 -- 3,880
Adjusted EBITDA $68,256 81,125 206,875 256,081
SOURCE Scientific Games Corporation
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CONTACT:
Investor Relations, Scientific Games,
+1-212-754-2233
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