Scientific Games Announces Second Quarter 2013 Results

PR Newswire

NEW YORK, Aug. 8, 2013 /PRNewswire/ -- Scientific Games Corporation (SGMS) today announced results for the second quarter ended June 30, 2013.


Summary Financial Results

($ in millions, except per share amounts)











Three Months Ended

June 30,


Six Months Ended

June 30,



2013


2012


2013


2012

Revenue


$235.0


$226.0


$454.6


$457.2

Operating income


12.5


11.4


23.6


36.3










Attributable EBITDA:









   Continuing operations


$86.5


$83.2


$165.2


$170.0

   Discontinued operations


(0.7)


0.3


(0.7)


0.2

       Attributable EBITDA

  


$85.8


$83.5


$164.5


$170.2

Net loss:









   Continuing operations


$(12.4)


$(10.9)


$(24.7)


$(7.0)

   Discontinued operations


(0.6)


(1.7)


(1.4)


(3.8)

       Net loss


$(13.0)


$(12.6)


$(26.1)


$(10.8)










Net loss per share:









   Continuing operations


$(0.14)


$(0.12)


$(0.29)


$(0.08)

   Discontinued operations


(0.01)


(0.02)


(0.02)


(0.04)

       Net loss per share


$(0.15)


$(0.14)


$(0.31)


$(0.12)










Capital expenditures


$44.2


$28.6


$80.5


$50.4

Free cash flow


2.6


32.9


(10.4)


33.0










Attributable EBITDA and free cash flow are non-GAAP financial measures defined below under "Non-GAAP Financial Measures" and reconciled to GAAP financial measures in the accompanying tables.

Scientific Games sold its installed base of gaming terminals in its pub business on March 25, 2013. The related results of operations are presented as discontinued operations in the Company's financial statements for all periods presented. All financial results referenced in this press release are for continuing operations only, unless otherwise noted.  

Recently Executed Contracts

New Contracts:

  • Northstar New Jersey Lottery Group ("Northstar New Jersey"), a joint venture in which Scientific Games owns an approximate 18% equity interest, signed a long-term contract to provide marketing and sales services for the New Jersey Lottery until 2029. Under separate supply agreements, Scientific Games and GTECH will provide Northstar New Jersey with instant lottery games, lottery systems and equipment, and related services. Scientific Games is expected to have a 30% economic interest (and to be responsible for 30% of the capital requirements) associated with these supply arrangements.
  • The Hellenic Republic Asset Development Fund signed a 12-year concession agreement with the consortium in which Scientific Games is a participant, for the exclusive rights to the production, operation, circulation, promotion and management of the Greek State Lotteries; Scientific Games has a 16.5% equity interest in the consortium and will have exclusive responsibility for instant ticket design and production; commencement of operations under the new concession is subject to Greek parliamentary and competition authority approvals
  • Lottery systems contract with the Hungarian State Lottery to provide next-generation central system hardware and software, additional lottery terminals and related services
  • Instant ticket cooperative services ("CSP") contract with Loteria Electronica Internacional Dominicana S.A. ("LEIDSA"), the largest electronic lottery in the Dominican Republic, for a seven-year period, with a three-year extension option held by the lottery
  • Agreement with Societe de la Loterie de la Suisse Romande ("LoRo") to provide and support approximately 3,000 new lottery retail terminals and new central application terminal software in Switzerland
  • Contracts with Norsk Tipping, the national lottery in Norway, to provide and support approximately 5,000 new lottery retail terminals, with terminal delivery and installation expected to begin in 2014, and to develop and support a central system for instant games
  • Contract with the Rhode Island Lottery to serve as the sole supplier of instant tickets on a price per thousand tickets basis through June 30, 2016, with five additional one-year extension options held by the lottery
  • Instant ticket CSP contract with the South Carolina Lottery through September 30, 2018, with a two-year extension option held by the lottery

Contract Extensions:

  • Agreement to serve as primary vendor for the central management system for sports betting for the Israeli Sports Betting Board ("ISBB") until February 2016
  • Contract with the Ohio Lottery to continue supplying instant tickets through June 2015
  • Contract with the Oregon Lottery to continue supplying instant tickets through June 2017
  • Instant ticket contract through December 2014 with Tatts Lotteries, the largest operator of lotteries in Australia; the contract includes two one-year extension options held by the customer
  • Contract with the West Virginia Lottery to continue to serve as the video lottery central system vendor for all video lottery machines within the state through January 2018

"Our business has performed well since our last update," Chairman and Chief Executive Officer A. Lorne Weil commented. "In addition to benefitting from strong U.S. lottery retail sales, we won a number of new contracts and extensions and have made significant progress on our pending acquisition of WMS. The New Jersey Lottery's award of a marketing and sales services contract to our joint venture reflects our success in demonstrating to lotteries how our industry-leading instant game management and other lottery outsourcing programs may help improve lottery performance.  We are also pleased with the progress we continue to make in our planning for the successful integration of WMS, while both companies remain focused on serving our respective customers and securing future business."

Jeffrey S. Lipkin, Senior Vice President and Chief Financial Officer, added, "Our solid second quarter results reflected the benefits of our diverse, participation-based business model and the strength of our core businesses. We are focused on executing on our numerous recent contract wins, several of which we expect will be reflected in our results beginning later this year, and continuing to prepare for the closing of the WMS acquisition. We are pleased that we achieved several key milestones to the closing, including WMS stockholder approval and the successful syndication of our term loan to finance the transaction. We are also continuing to make good progress in the gaming regulatory approval process, with approvals received in a number of jurisdictions, and we remain on track for a fall closing. Importantly, we believe we have the right framework in place to successfully integrate WMS with Scientific Games to create a world-class global lottery and gaming company and deliver on the expected synergies." 

Business Update

The Company's second quarter results reflected the strong performance of its core lottery businesses. The instant ticket and draw game retail sales of the Company's U.S. customers increased 4.9% and 10.8%, respectively, during the quarter. Instant ticket sales continued to be propelled by strong performance in larger states, while draw sales benefited from a record Powerball® jackpot of $591 million in the quarter.

In Italy, instant ticket retail sales decreased 2.4% in the second quarter compared to the prior-year period, a comparable percentage decrease relative to the year-over-year percentage decrease in the first quarter of 2013. While instant ticket sales appear to have been impacted in part by continued challenging economic conditions in Italy, we believe we are seeing some signs of stabilization. In China, instant ticket retail sales declined 7.6% in the second quarter of 2013 compared to the prior-year period, which we believe is primarily due to competition from other lottery products that is impacting instant ticket sales.

The Company's U.K. gaming business faced challenging year-over-year comparisons against strong gross win levels in the prior-year period. Additionally, economic conditions in the U.K. affected player activity and gross win across all betting shops.  While we had been able to grow this business in 2012 despite the economic backdrop, our gross win per terminal decreased modestly in the first two quarters of 2013, with gross win per terminal down 2.2% year-over-year in the second quarter.  However, as anticipated, the Company is seeing a positive response from players as it continues to roll out new Infinity2 gaming terminals with enhanced functionality to Gala Coral.  Revenue and profitability of the gaming business outside the U.K. were negatively affected by specific issues impacting two customers that the Company has been working to resolve.

Significant progress was made during the second quarter toward completing the Company's pending acquisition of WMS, as WMS' stockholders approved the acquisition and the Company successfully syndicated the term loan acquisition financing. The Company also continues to make meaningful progress in securing the required gaming regulatory approvals. Key executives of both companies are leading the detailed integration planning efforts, which are focused on positioning the Company to realize the acquisition's expected scale benefits and synergy opportunities that have been previously outlined. The completion of the WMS acquisition remains subject to the approval of gaming regulatory authorities and other customary closing conditions.

In connection with the pending WMS acquisition, the Company incurred regulatory costs, professional fees and other expenses totaling approximately $2.4 million in the second quarter of 2013, with additional transaction-related fees and expenses anticipated to be incurred throughout the balance of 2013.







Second Quarter 2013 Operating Results by Segment

($ in millions)













Revenue


Operating Income (Loss)








Three Months Ended

June 30,


Three Months Ended

June 30,








2013


2012


2013


2012

Printed Products







$130.1


$122.7


35.3


23.1

Lottery Systems







68.9


64.6


8.3


10.5

Gaming







36.0


38.7


(8.4)


(0.8)















Printed Products

Revenue

  • Revenue growth was primarily driven by a $5.3 million increase in revenue from customers that purchase tickets on a price per thousand tickets basis and a $1.8 million increase in revenue from customers who purchase tickets on a percentage of sales basis along with the acquisition of Provoloto in 2012

Operating Income

  • Increase in operating income primarily reflected:
    • the absence of $4.5 million of employee termination and restructuring costs recorded in the prior-year period
    • a $4.0 million decrease in depreciation and amortization as the prior-year period was negatively impacted by a $3.1 million write-down of certain development costs and $1.5 million of accelerated depreciation related to closing the Australia printing facility
    • a $3.8 million benefit from a higher and more profitable revenue mix

Lottery Systems

Revenue

  • Sales revenue increased $3.1 million, largely due to higher sales to international customers
  • Service revenue increased $1.1 million, primarily driven by higher U.S. retail sales from a record Powerball jackpot

Operating Income

  • Decrease in operating income primarily reflected a $1.8 million increase in depreciation and amortization related to new hardware deployed in the U.S. and China, along with a less profitable service revenue mix

Gaming

Revenue

  • The service revenue decrease was primarily due to:
    • $1.5 million of lower revenue from customers outside the U.K.
    • $1.2 million of negative foreign exchange impact
    • $0.8 million from the loss of the William Hill contract in 2012
  • The decline in service revenue was partially offset by increased revenue from U.K. LBO customers (excluding William Hill), growth of the interactive business and the acquisition of ADS in 2012
  • The decline in sales revenue primarily reflected lower sales of gaming terminals

Operating Income

  • Decrease in operating income was principally due to:
    • an $8.4 million increase in depreciation and amortization, which reflects a write-down of used gaming terminals and accelerated depreciation related to a change in the estimated useful lives of terminals
    • a $2.9 million impact of a lower and less profitable revenue mix
  • The decline in operating income was partially offset by:
    • a $2.3 million reduction in selling, general and administrative expenses primarily related to lower accounts receivable reserves
    • the absence of $1.2 million of employee termination and restructuring costs recorded in the prior-year period           

Interest Expense and Other Income (Expense)  

  • Interest expense increased by $1.0 million due to the issuance of senior subordinated notes in the third quarter of 2012
  • Other income increased  by $1.4 million driven by a decrease in foreign exchange transaction expense

Earnings and EBITDA from Equity Investments

  • Earnings from equity investments decreased by $3.4 million, primarily due to lower results from the Company's International Terminal Leasing ("ITL") and Northstar Illinois joint ventures
    • Decrease in ITL results due to change in estimated useful lives of gaming terminals
    • Decrease in Northstar Illinois results due to recording an estimated net shortfall payment obligation in the second quarter that is being amortized over the ten-year contract life
  • EBITDA from equity investments declined by $1.1 million, primarily reflecting lower results from the Company's LNS joint venture in Italy ("LNS")

Liquidity and Capital Resources

  • At June 30, 2013, cash and cash equivalents of $78.1 million and availability under revolving credit facility of $213.8 million
  • Total debt of $1,459.4 million as of June 30, 2013 compared to $1,468.2 million at December 31, 2012
  • Free cash flow for the second quarter was $2.6 million, compared to $32.9 million in the prior-year quarter, principally reflecting a $15.6 million increase in total capital expenditures primarily related to the purchase of gaming terminals in the U.K. and printing press upgrades
  • Received return of capital payments in the second quarter of 2013 from equity investments in Italy of $16.0 million. In the second quarter of 2012, received return of capital payments from LNS of $15.1 million and ITL of $0.9 million. These amounts are not included in the free cash flow metric
  • Received $26.0 million in cash dividends from equity investments representing distribution of earnings in the second quarter:
    • Italy - $17.9 million
    • China - $3.8 million
    • ITL - $2.4 million
    • Roberts Communications Network - $1.9 million
  • Made $21.4 million equity investment in Northstar New Jersey in the second quarter

Pending Acquisition of WMS Industries Inc. ("WMS")

As previously announced on January 31, 2013, Scientific Games entered into an agreement to acquire WMS for $26.00 in cash per common share, or approximately $1.5 billion in the aggregate.

WMS' stockholders approved the proposed merger at a special stockholders' meeting on May 10, 2013, which satisfied a key condition to closing. On May 22, 2013, Scientific Games successfully completed the syndication of a contemplated $2.3 billion term loan facility that, together with a previously syndicated $300 million revolving credit facility, is expected to comprise the financing necessary to complete the merger.  Scientific Games has also received notice from the Federal Trade Commission of early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with the merger, which satisfied the related closing condition.  Completion of the transaction remains subject to approvals by gaming regulatory authorities and customary closing conditions.  Scientific Games and WMS have filed applications (or otherwise provided the required documentation or information) in each of the approximately 50 jurisdictions where gaming regulatory approval is a condition to closing or have received confirmation that receipt of such approval is not required prior to closing, with approvals received in a number of jurisdictions. The Company expects the transaction to close in the fall of 2013. However, no assurance can be given that the merger will be completed.

Conference Call Details

Scientific Games will host a conference call today at 8:00 am Eastern 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 (800) 295-4740 (U.S. and Canada) or (617) 614-3925 (international). The conference ID is 78727593.

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," "should," "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 our Northstar Illinois joint venture to meet the net income targets or otherwise to realize the anticipated benefits under its private management agreement with the Illinois Lottery; failure of our Northstar New Jersey joint venture to meet the net income targets or other requirements under its agreement to provide marketing and sales services to the New Jersey Lottery or otherwise to realize the anticipated benefits under such agreement (including as a result of a protest); the seasonality of our business; failure to receive the required approvals related to the award to our consortium of an instant ticket concession in Greece on a timely basis or at all, or otherwise to realize the anticipated benefits in connection with such concession; failure to complete the pending acquisition of WMS Industries Inc. ("WMS") on a timely basis or at all, including due to the inability to obtain the gaming regulatory approvals required to complete the acquisition; disruption of our current plans and operations in connection with the WMS acquisition; failure to achieve the intended benefits of the WMS acquisition, including due to the inability to realize synergies in the anticipated amounts or within the contemplated time-frames or cost expectations, or at all; 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 under our 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 ("SEC"), including under the heading "Risk Factors" in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2013 and in its subsequent 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). For purposes of calculating our financial ratios under the credit agreement, consolidated EBITDA is calculated over a trailing period of four consecutive fiscal quarters and more recent adjustments may replace older adjustments within such four-quarter period, subject to any caps specified in the credit agreement with respect to particular categories of adjustments (as discussed below).  Accordingly, the aggregate amount of any such adjustments within a particular category reported in our quarterly earnings releases over a four-quarter period may exceed such cap over such period (but will not exceed such cap in any particular quarter). 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 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 reference to 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 investees' 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 investees' earnings financial items that management believes have less bearing on the Company's and its equity investees' 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 through 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 investees' 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 June 30,


Six Months Ended June 30,



2013


2012


2013


2012

Revenue:









  Instant tickets


$           126,538


$           119,627


$           249,351


$           242,951

  Services 


85,176


85,335


166,943


172,240

  Sales 


23,330


21,045


38,338


42,010

  Total revenue


235,044


226,007


454,632


457,201










Operating expenses:









  Cost of instant tickets(1)


71,510


68,420


139,704


138,383

  Cost of services (1)


46,204


42,926


92,437


86,229

  Cost of sales(1)


15,660


14,238


25,951


31,165

  Selling, general and administrative


46,154


46,464


96,795


91,762

  Employee termination and restructuring


-


5,747


331


8,051

  Depreciation and amortization


43,064


36,818


75,833


65,286

Operating income


12,452


11,394


23,581


36,325

Other (expense) income:









  Interest expense 


(25,138)


(24,185)


(50,146)


(49,083)

  Earnings from equity investments


3,495


6,915


9,631


15,760

  Other income (expense), net


193


(1,208)


(805)


(686)

Total other expense


(21,450)


(18,478)


(41,320)


(34,009)

Net (loss) income before income tax expense 


(8,998)


(7,084)


(17,739)


2,316

  Income tax expense


3,385


3,828


6,931


9,360

Net loss from continuing operations


$           (12,383)


$           (10,912)


$           (24,670)


$             (7,044)










Discontinued operations:









  Loss from discontinued operations


$               (771)


$             (2,321)


$             (2,682)


$             (4,991)

  Other (expense) income


(1)


100


(46)


56

  Gain on sale of assets


-


-


828


-

  Income tax benefit


180


544


442


1,209

Net loss from discontinued operations


$               (592)


$             (1,677)


$             (1,458)


$             (3,726)










Net loss


$           (12,975)


$           (12,589)


$           (26,128)


$           (10,770)










Basic earnings per share:









  Continuing operations


$              (0.14)


$              (0.12)


$              (0.29)


$              (0.08)

  Discontinued operations


(0.01)


(0.02)


(0.02)


(0.04)

  Basic net loss


$              (0.15)


$              (0.14)


$              (0.31)


$              (0.12)










Diluted earnings per share:









  Continuing operations


$              (0.14)


$              (0.12)


$              (0.29)


$              (0.08)

  Discontinued operations


(0.01)


(0.02)


(0.02)


(0.04)

  Diluted net loss


$              (0.15)


$              (0.14)


$              (0.31)


$              (0.12)










Weighted average number of shares:









  Basic shares 


85,016


92,767


84,813


92,625

  Diluted shares 


85,016


92,767


84,813


92,625










(1) Exclusive of depreciation and amortization.













 









SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET DATA

 (Unaudited, in thousands)






















June 30,


December 31,






2013


2012

Assets:








  Cash and cash equivalents





$       78,084


$      109,015

  Other current assets





349,289


375,603

  Property and equipment, net





374,108


376,877

  Equity investments





298,917


316,234

  Other long-term assets





1,002,905


1,009,179

       Total assets





$   2,103,303


$   2,186,908









Liabilities and Stockholders' Equity:








  Current portion of long-term debt





$       10,269


$       16,458

  Other current liabilities





202,955


239,889

  Long-term debt, excluding current portion





1,449,122


1,451,708

  Other long-term liabilities





131,320


114,062

  Stockholders' equity





309,637


364,791

       Total liabilities and stockholders' equity





$   2,103,303


$   2,186,908









 












SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED SEGMENT OPERATING DATA

 (Unaudited, in thousands)














Three Months Ended June 30, 2013









Unallocated





Printed


Lottery 




Corporate





Products


Systems


Gaming


Expense


Totals












Instant tickets


$      126,538


$              -


$              -


$                  -


$      126,538

Services


-


52,228


32,948


-


85,176

Sales


3,584


16,642


3,104


-


23,330

    Total revenue


130,122


68,870


36,052


-


235,044

Cost of instant tickets(1)


71,510


-


-


-


71,510

Cost of services (1)


-


28,747


17,457


-


46,204

Cost of sales(1)


2,521


10,831


2,308


-


15,660

Selling, general and administrative


11,101


6,185


4,461


18,743


40,490

Stock-based compensation


822


655


234


3,953


5,664

Employee termination and restructuring


-


-


-


-


-

Depreciation and amortization


8,840


14,111


19,950


163


43,064

Operating income (loss) from continuing operations


$       35,328


$         8,341


$        (8,358)


$          (22,859)


$       12,452

























Three Months Ended June 30, 2012









Unallocated





Printed


Lottery 




Corporate





Products


Systems


Gaming


Expense


Totals












Instant tickets


$      119,627


$              -


$              -


$                  -


$      119,627

Services


-


51,114


34,221


-


85,335

Sales


3,082


13,506


4,457


-


21,045

    Total revenue


122,709


64,620


38,678


-


226,007

Cost of instant tickets (1)


68,420


-


-


-


68,420

Cost of services(1)


-


26,963


15,963


-


42,926

Cost of sales(1)


1,991


8,729


3,518


-


14,238

Selling, general and administrative


10,985


5,623


6,718


17,292


40,618

Stock-based compensation


859


575


453


3,959


5,846

Employee termination and restructuring


4,507


-


1,240


-


5,747

Depreciation and amortization


12,813


12,278


11,577


150


36,818

Operating income (loss) from continuing operations


$       23,134


$       10,452


$          (791)


$          (21,401)


$       11,394























(1) Exclusive of depreciation and amortization.

















 












SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED SEGMENT OPERATING DATA

 (Unaudited, in thousands)














Six Months Ended June 30, 2013









Unallocated





Printed


Lottery 




Corporate





Products


Systems


Gaming


Expense


Totals












Instant tickets


$      249,351


$              -


$              -


$                -


$      249,351

Services


-


102,260


64,683


-


166,943

Sales


7,058


24,803


6,477


-


38,338

    Total revenue


256,409


127,063


71,160


-


454,632

Cost of instant tickets(1)


139,704


-


-


-


139,704

Cost of services (1)


-


58,005


34,432


-


92,437

Cost of sales(1)


4,964


16,560


4,427


-


25,951

Selling, general and administrative


22,769


13,125


11,598


37,799


85,291

Stock-based compensation


1,628


1,253


683


7,940


11,504

Employee termination and restructuring


331


-


-


-


331

Depreciation and amortization


17,812


27,869


29,829


323


75,833

Operating income (loss)


$       69,201


$       10,251


$        (9,809)


$         (46,062)


$       23,581

























Six Months Ended June 30, 2012









Unallocated





Printed


Lottery 




Corporate





Products


Systems


Gaming


Expense


Totals












Instant tickets


$      242,951


$              -


$              -


$                -


$      242,951

Services


-


104,120


68,120


-


172,240

Sales


5,245


24,977


11,788


-


42,010

    Total revenue


248,196


129,097


79,908


-


457,201

Cost of instant tickets(1)


138,383


-


-


-


138,383

Cost of services (1)


-


56,322


29,907


-


86,229

Cost of sales(1)


3,401


16,684


11,080


-


31,165

Selling, general and administrative


21,178


12,133


11,595


35,267


80,173

Stock-based compensation


1,681


1,118


810


7,980


11,589

Employee termination and restructuring


4,507


-


3,544


-


8,051

Depreciation and amortization


20,816


24,076


20,095


299


65,286

Operating income (loss)


$       58,230


$       18,764


$         2,877


$         (43,546)


$       36,325























(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 June 30,


Six Months Ended June 30,





2013


2012


2013


2012














Net income (loss) from continuing operations


$       (12,383)


$       (10,912)


$       (24,670)


$         (7,044)



Add: Income tax expense


3,385


3,828


6,931


9,360



Add: Depreciation and amortization


43,064


36,818


75,833


65,286



Add: Interest expense


25,138


24,185


50,146


49,083



Add: Early extinguishment of debt


-


-


-


-



Add/Less: Other (income) expense


(193)


1,208


805


686



EBITDA from continuing operations


$         59,011


$         55,127


$       109,045


$       117,371














Credit Agreement adjustments:











Add: Debt-Related Fees and Charges (1)


$                 8


$               55


$                 8


$               55



Add: Amortization of Intangibles 


-


-


-


-



Add: Earn-outs for Permitted Acquisitions


-


-


-


-



Add: Extraordinary Charges or Losses under GAAP


-


-


-


-



Add: Non-Cash Stock-Based Compensation Expenses


5,664


5,846


11,504


11,589



Add: Deferred Contingent Compensation Expense


-


-


-


-



Add: Non-Recurring Write-Offs under GAAP 


15


-


15


-



Add: Acquisition Advisory Fees 


-


671


42


671



Add: Specified Permitted Add-Backs (2) 


3,063


6,459


9,136


8,915



Add: Italian Concession Obligations




-


-


-



Add: Racing Disposition Charges and Expenses


-


-


-


-



Add: Playtech Royalties and Fees


1,955


1,928


4,151


3,530



Less: Interest Income


(52)


(31)


(145)


(60)



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 (income) expense (3)


193


(1,208)


(805)


(686)



Less: Early extinguishment of debt


-


-


-


-



Less: Earnings from equity investments


(3,495)


(6,915)


(9,631)


(15,760)



Add: EBITDA from equity investments


20,167


21,228


41,844


44,333



Attributable EBITDA from continuing operations


86,529


83,160


165,164


169,958



Attributable EBITDA from discontinued operations


(772)


351


(713)


286



Attributable EBITDA


$       85,757


$       83,511


$     164,451


$     170,244














EBITDA from equity investments (4):











Earnings from equity investments


$           3,495


$           6,915


$           9,631


$         15,760



Add: Income tax expense


2,597


2,994


5,740


6,773



Add: Depreciation and amortization


14,560


10,107


25,723


19,692



Add: Interest expense, net of other 


(485)


1,212


750


2,108



EBITDA from equity investments


$         20,167


$         21,228


$         41,844


$         44,333














EBITDA from discontinued operations











Net income (loss) from discontinued operations


$            (592)


$         (1,677)


$         (1,458)


$         (3,726)



Add: Income tax (benefit) expense


(180)


(544)


(442)


(1,209)



Add: Depreciation and amortization


-


2,268


597


4,318



Add: Credit agreement adjustments


-


304


590


903



EBITDA from discontinued operations


$            (772)


$             351


$            (713)


$             286














(1) Amounts reflect write-off of unamortized deferred financing costs in connection with early extinguishment of debt and other debt-related fees and charges.

(2) Amounts include 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, Beijing CITIC Scientific Games Technology Co., Ltd., Sportech Plc, Sciplay (through January 23, 2012), Beijing Guard Libang Technology Co., Ltd. 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 June 30,


Six Months Ended June 30,



2013


2012


2013


2012










Net cash provided by operating activities


$            46,803


$          61,431


$            70,039


$          83,356










Less: Capital expenditures


(7,661)


(2,353)


(15,007)


(4,311)

Less: Lottery and gaming systems expenditures


(26,209)


(11,963)


(43,065)


(19,356)

Less: Other intangible assets and software expenditures


(10,327)


(14,255)


(22,405)


(26,701)

    Total Capital Expenditures


$          (44,197)


$        (28,571)


$          (80,477)


$        (50,368)










Free cash flow


$             2,606


$          32,860


$          (10,438)


$          32,988




























For the second quarter ended June 30, 2013, the Company received return of capital payments from its equity

investments in LNS of $13.9 million and CLN of $2.2 million.  For the second quarter ended  June 30, 2012, the

Company received return of capital payments from its equity investment in LNS of $15.1 million and ITL of $0.9 million. 










For the first quarter ended March 31, 2013, the Company received no return of capital payments from its

equity investments.  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. 










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 June 30,


Six Months Ended June 30,



2013


2012


2013


2012










Italy - Gratta e Vinci (1):









Retail Sales (Euros)


2,374


2,433


4,920


5,053










China - China Sports Lottery (1):









Retail Sales (RMB)


4,734


5,124


8,634


9,583

Tickets Sold


623


686


1,124


1,291

ASP (RMB)


7.60


7.47


7.68


7.42





















As of June 30,





Terminal installed base at end of period:


2013


2012





Global Draw 


26,563


24,455





Games Media 


-


2,891





Barcrest


3,099


4,369










(1) Information provided by third-party lottery operators.












 

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