Scientific Games reports Second Quarter 2017 Results and announces intent to refinance a portion of its debt
Seventh consecutive quarter of year-over-year growth, driven by gaming and interactive segments
Operating Income doubles, leading to strong cash flow
LAS VEGAS, July 24, 2017 /PRNewswire/ -- Scientific Games Corporation (NASDAQ: SGMS) ("Scientific Games" or the "Company"), today reported results for the second quarter ended June 30, 2017 and announced plans to take advantage of favorable market conditions to refinance a portion of its debt to lower cash interest costs, extend debt maturities, and generally lower its cost of capital.
- Second quarter revenue rose 5 percent to $766.3 million, up from $729.2 million a year ago. The growth was driven by revenue increases in the gaming and interactive segments. Foreign exchange had an $8.0 million, or 1 percent, unfavorable impact on revenue.
- Operating income in the second quarter doubled to $117.3 million from $59.1 million a year ago, reflecting revenue growth, a more effective organizational structure and lower depreciation and amortization. Net loss declined to $39.1 million from $51.7 million in the prior-year period, reflecting the increase in operating income and a $14.1 million decrease in net interest expense, partially offset by a $26.0 million increase in the income tax provision. In addition, the prior year included a $25.2 million gain on early extinguishment of debt.
- Attributable EBITDA ("AEBITDA"), a non-GAAP financial measure defined below, increased 13 percent to $314.8 million from $279.7 million a year ago driven by higher revenue and a more effective organizational structure, which was partially offset by $7.7 million of lower EBITDA from equity investments. The AEBITDA margin, a non-GAAP financial measure defined below, improved to 41.1 percent from 38.4 percent in the prior-year period.
- Net cash flow from operating activities increased $77.7 million to $168.5 million, from $90.8 million a year ago. The primary driver was a $61.4 million increase in net income after adjustments for non-cash items, reflecting operating improvements across the Company.
<"Second quarter results represent our seventh quarter of consecutive year-over-year growth, including $169 million of cash flow from operating activities, as a result of ongoing improvements in our gaming, lottery and interactive operations," said Kevin Sheehan, Chief Executive Officer of Scientific Games. "We achieved year-over-year revenue growth in global gaming machine sales, gaming systems, table products and interactive; as well as in U.S. instant games revenue. In addition, as a result of our improving organizational structure, we increased our AEBITDA margin by 270 basis points.
"Across the Company, we are maintaining a laser focus on executing our strategies and capitalizing on our many opportunities," Sheehan added. "I am proud of all of our dedicated team members who daily commit themselves to empower our customers with the best gaming and lottery experiences in the world, while remaining focused on delivering our financial goals."
Michael Quartieri, Chief Financial Officer of Scientific Games, added, "Our focus on innovative new products, continuous process improvement and fiscal discipline have enabled us to grow operating income and cash flow, leading to a reduction in our net debt. This has resulted in our net debt leverage ratio at June 30, 2017 declining to 6.8 times twelve-month AEBITDA. With our strengthened performance, we are well positioned to further improve our capital structure and lower our cost of capital."
|SUMMARY CONSOLIDATED RESULTS|
|($ in millions)||Three Months Ended June 30,|
|Revenue||$ 766.3||$ 729.2|
|Net loss before incomeNet loss before income taxes||(32.7)||(71.3)|
|Net cash provided byNet cash provided by operating activities||168.5||90.8|
|Increase (decrease) inIncrease (decrease) in cash and cash equivalents||66.3||(44.3)|
|Non-GAAP FinancialNon-GAAP FinancialMeasures: (1)||31|
|AEBITDA||$ 4.8||$ 279.7|
|Free cash flow||101.0||15.0|
|As of June 30,||As of Dec. 31,|
|Balance Sheet Measures:||2017||2016|
|Cash and cashCash and cashequivalents||$ 198.2||$ 115.1|
|Principal face value ofPrincipal face value ofdebt outstanding||8,179.4||8,235.3|
|(1)The financial measures "AEBITDA", "AEBITDA margin", "free cash flow", and "EBITDA from equity investments" (disclosed in a table below) are non-GAAP financial measures defined below under "Non-GAAP Financial Measures" and reconciled to the most directly comparable GAAP measures in the accompanying supplemental tables at the end of this release.
(2)The 2017 second quarter includes $26.0 million of higher income tax provision, and the prior year included a $25.2 million non-cash gain on early extinguishment of debt.
|GAMING SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED JUNE 30, 2017|
|GAMING SEGMENT||Three Months Ended|
|($ in millions)||June 30,||Increase/(Decrease )|
|Revenue(1)||$ 178.4||$ 186.0||$(7.6)||(4.1)%|
|Gaming machine sales||67.1||59.5||7.6||12.8%|
|TableTableproducts||$ 457.2||$ 441.0||$ 15.0||3.5%|
|OperatinOperating income||$ 85.9||$ 946.7||$ 339.2||83.9%|
|AEBITDA(2)||$ 226.9||$ 201.3||$ 225.6||12.12.7%|
|(1)Gaming operations revenue is included in services revenue, gaming machine sales revenue is included in product sales revenue, and portions of gaming systems and table products revenue are included in both services revenue and product sales revenue.
(2)AEBITDA in the 2017 and 2016 second quarter periods included $1.5 million and $1.9 million, respectively, of EBITDA from equity investments in International Terminal Leasing ("ITL") and Roberts Communications Network, LLC ("RCN").
- Total gaming revenue increased $15.3 million, or 3 percent, compared to the year-ago period, inclusive of a $4.9 million unfavorable foreign exchange impact.
- Operating income improved $39.2 million to $85.9 million. The increase primarily reflected the benefit of the higher revenue and a more profitable business mix, along with lower depreciation and amortization compared to the 2016 second quarter. In the prior year, selling, general and administrative expense included the benefit from $7.5 million of insurance proceeds related to settlement of a legal matter.
- AEBITDA increased to $226.9 million with an AEBITDA margin of 49.6 percent, reflecting the higher revenue and more profitable business mix compared to the prior year.
- Gaming operations revenue declined $7.6 million, or 4 percent, largely reflecting a year-over- year decrease in the installed base of WAP, premium, and daily-fee participation gaming machines. On a quarterly sequential basis, gaming operations revenue grew $6.1 million, or 4 percent, including the benefit from a 1,191-unit increase in the installed base of other leased and participation gaming machines due to the placement of additional VLTs at New York gaming facilities and the ongoing roll-out of VLTs in Greece. On a quarterly sequential basis, revenue from WAP, premium and daily-fee participation units was essentially flat, as a $1.08 increase in the average daily revenue per unit, partially reflecting the strong performance of the innovative GamescapeTM cabinet, offset a 187-unit decline of older units in the installed footprint of WAP, premium, and daily-fee participation units.
- Gaming machine sales revenue increased $8.9 million, or 6 percent, year over year, despite no new casino openings, primarily reflecting a 24-percent increase in shipments of U.S. and Canadian replacement gaming machines. The average sales price increased to $17,550 from $16,859 in the prior year, reflecting a favorable mix of units. U.S. and Canadian shipments totaled 4,367 gaming machines, including 3,773 replacement units and 594 VGTs for the Illinois market. In the prior-year period, U.S. and Canadian shipments totaled 4,678 units, which comprised 3,037 replacement units, 431 VLTs to Oregon, 470 units for new casino openings and expansions, and 740 VGTs for the Illinois market. International shipments increased 421 units, or 14 percent, to 3,411 units, including 54 units for new casino openings, up from a total of 2,990 units in the prior year, which had included 125 units for new casino openings.
- Gaming systems revenue increased 13 percent to $67.1 million, primarily reflecting an increase in software and hardware sales, including shipment of innovative new iVIEW4 player- interface display units, and the installation of new systems at the ilani tribal casino, the Baha Mar Resort and the Aliante Casino Hotel.
- Table products revenue increased 15 percent to $48.4 million, principally reflecting growth in leased shufflers, proprietary table games, and progressives, including a benefit from the acquisition of DEQ Systems Corp. completed on January 18, 2017.
|LOTTERY SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED JUNE 30, 2017|
|LOTTERY SEGMENT||Three Months Ended|
|($ in millions)||June 30,||Increase/(Decrease)|
|Revenue||$ 149.4||$ 150.9||$ (1.5)||(1.0)%|
|Product sales||$ 202.3||$ 203.9||$ (1.6)||(0.8)%|
|Operating income||$ 70.3||$ 57.9||$ 12.4||21.4%|
|AEBITDA(1)||$ 95.6||$ 95.2||$ 0.4||0.4%|
|(1) AEBITDA in the 2017 and 2016 second quarter periods included $11.6 million and $18.9 million, respectively, of EBITDA from equity investments in Lotterie Nazionali S.r.l. ("LNS"), Northstar New Jersey Lottery Group, LLC, Beijing Guard Libang Technology Co., Ltd., Beijing CITIC Scientific Games Technology Co. Ltd. ("CSG"), Hellenic Lotteries S.A. ("Hellenic Lotteries") and Northstar Lottery Group, LLC ("Northstar Illinois").|
- Total lottery revenue decreased $1.6 million, or 1 percent, inclusive of a $2.2 million unfavorable foreign exchange impact compared to the year-ago period.
- Operating income increased $12.4 million, primarily reflecting a more profitable business mix coupled with lower selling, general and administrative expense and lower depreciation and amortization.
- AEBITDA was essentially flat at $95.6 million compared to $95.2 million in the prior year, primarily reflecting a more profitable business mix and lower selling, general and administrative expense, offset by $7.3 million of lower EBITDA from equity investments, which had benefited in the prior-year period from a multi-year, value-added tax credit at our LNS joint venture. The AEBITDA margin increased to 47.3 percent, largely reflecting a more profitable business mix and lower selling, general and administrative expense.
- Instant games revenue decreased $1.5 million, as a $4.9 million, or 5 percent, increase in U.S. revenue was offset by a $6.4 million decline in international revenue, reflecting unfavorable timing of instant game launches in markets with price-per-unit contracts and an unfavorable foreign exchange impact of $1.8 million. During the second quarter, the Company won a four-year contract, with two two-year extension options to continue to provide the New Hampshire Lottery with instant games and services, and more recently won a six-year contract, with two extension options for up to four more years, to continue to be the primary supplier of instant games and services to Colorado.
- Services revenue decreased $2.9 million, primarily reflecting lower retail sales of multi-state games compared to sales in the prior year, and lower international revenue primarily due to an unfavorable foreign exchange impact of $0.4 million. During the quarter, the Company signed a new eight-year contract with the Maryland Lottery to provide systems and services.
- Product sales revenue increased $2.8 million, primarily reflecting higher U.S. and international hardware sales.
|INTERACTIVE SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED JUNE 30, 2017|
|INTERACTIVE SEGMENT||Three Months Ended|
|($ in millions)||June 30,||Increase/(Decrease)|
|Revenue||$ 91.1||$ 69.1||$ 22.0||31.8%|
|Social gaming - B2C||15.7||14.3||1.4||9.8%|
|Other interactive - B2B||$ 106.8||$ 83.4||$ 23.4||28.1%|
|Product sales||$ 202.3||$ 203.9||$ (1.6)||(0.8)%|
|Operating income||$ 18.8||$ 13.7||$ 5.1||37.2%|
|AEBITDA(1)||$ 24.6||$ 18.2||$ 6.4||35.2%|
|AEBITDA margin||23.0%||$ 18.2||21.8%|
- Total interactive revenue grew 28 percent to $106.8 million, primarily reflecting a 32 percent increase in social gaming B2C revenue due to the ongoing popularity and growth of Jackpot Party®Social Casino, coupled with the success of more recent apps, such as the introduction of the 88 Fortunes app in the first quarter of 2017, and the acquisition of Spicerack Media, Inc. completed on April 7, 2017, which included the Bingo Showdown app.
- Operating income increased 37 percent to $18.8 million, primarily reflecting the higher revenue. Selling, general and administrative expense and research and development expense increased primarily due to higher marketing expenses to support ongoing growth and pre- launch game development expenses.
- AEBITDA rose 35 percent to $24.6 million and AEBITDA margin increased to 23.0 percent, primarily reflecting higher revenue and improved operating leverage, partially offset by increased marketing costs and ongoing development initiatives underlying the rapid growth.
|Cash flows from operating activities||Three Months Ended June 30,||Increase/(Decrease)|
|($ in millions)||2017||2016||2017 vs. 2016|
|Net loss||$ (39.1)||$ (51.7)||$ 12.6|
|Non-cash adjustments included in net loss||179.0||165.9||13.1|
|Non-cash interest expense||5.1||10.2||(5.1)|
|Changes in deferred income taxes and other||1.7||(39.1)||40.8|
|Distributed earnings from equity investments||16.2||16.3||(0.1)|
|Changes in working capital accounts||5.6||(10.8)||16.4|
|Net cash provided by operating activities||$ 168.5||$ 90.8||$ 77.7|
- Net cash flow from operating activities increased $77.7 million to $168.5 million, inclusive of approximately $6.0 million of cash payments related to the business improvement initiatives implemented in the 2016 fourth quarter. The primary driver was a $61.4 million increase in net income after adjustment for non-cash items included in net loss.
- The change in deferred income taxes and other is a result of the valuation allowance on our deferred taxes.
- The change in working capital accounts was primarily driven by a $2.9 million decrease in accounts and notes receivables primarily due to the timing of orders and an $8.0 million decrease in inventories, partially offset by a $5.3 million unfavorable net impact from changes in other current assets and liabilities.
- Capital expenditures totaled $78.9 million for the quarter. For 2017, the Company continues to expect capital expenditures will be within a range of $280-$310 million, based on existing contractual obligations and planned investments.
- The Company announced today an intent to capitalize on its improved financials and favorable market conditions by initiating a process to amend and extend its existing term loans, with the stated purpose of reducing cash interest cost and extending the maturity out to 2024.
Earnings Conference Call
Scientific Games executive leadership will host a conference call today, July 24, 2017, at 10:00 a.m. EDT to review the Company's second quarter results. To access the call live via a listen-only webcast and presentation, please visit scientificgames.com/investors/quarterly-earnings and click on the webcast link under the Investor Information section. To access the call by telephone, please dial: 1 (412) 317-5413 (U.S. and International) and ask to join the Scientific Games Corporation call. A replay of the webcast will be archived in the Investors section on ScientificGames.com, which is updated regularly with financial and other information about the Company.
Full report available here.
About Scientific Games (www.scientificgames.com)
Scientific Games Corporation (NASDAQ:SGMS) is a leading developer of technology-based products and services and associated content for worldwide gaming, lottery and interactive markets. The Company's portfolio includes gaming machines, game content and systems; table games products and shufflers; instant and draw-based lottery games; server-based lottery and gaming systems; sports betting technology; loyalty and rewards programs; and interactive content and services.
Source: Scientific Games
Vice President, Investor Relations
Telephone: +1 702-532-7663
Vice President, Corporate Communications
In this press release, Scientific Games 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," "plan," "continue," "believe," "expect," "anticipate," "target," "should," "could," "potential," "opportunity," "goal," or similar terminology. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of timing, 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; U.S. and international economic and industry conditions, including declines in or slow growth of gross gaming revenues or lottery retail sales, reductions in or constraints on capital spending by gaming or lottery operators and bankruptcies of, or credit risk relating to, customers; limited growth from new gaming jurisdictions, declines in the replacement cycle of existing gaming machines and slow addition of casinos in existing jurisdictions; ownership changes and consolidation in the gaming industry, including by casino operators; opposition to legalized gaming or the expansion thereof; inability to adapt to, and offer products that keep pace with, evolving technology; inability to develop successful gaming concepts and content; laws and government regulations, including those relating to gaming licenses and environmental laws; inability to identify and capitalize on trends and changes in the gaming, lottery and interactive industries; dependence upon key providers in our social gaming business; inability to retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts; level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs; inability to reduce or refinance our indebtedness; restrictions and covenants in our debt agreements, including those that could result in acceleration of the maturity of our indebtedness; protection of our intellectual property, inability to license third party intellectual property, and the intellectual property rights of others; security and integrity of our software and systems and reliance on or failures in our information technology systems; natural events that disrupt our operations or those of our customers, suppliers or regulators; inability to benefit from, and risks associated with, strategic equity investments and relationships, including (i) the inability of our joint venture to realize the anticipated benefits under its private management agreement with the Illinois lottery or from the disentanglement services performed in connection with the termination thereof, (ii) the inability of our 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 and (iii) failure to realize the anticipated benefits related to the award to our consortium of an instant lottery game concession in Greece; failure to achieve the intended benefits of the Bally acquisition or the WMS acquisition, other recent acquisitions, or future acquisitions, including due to the inability to successfully integrate such acquisitions or realize synergies in the anticipated amounts or within the contemplated time frames or cost expectations, or at all; disruption of our current plans and operations in connection with our recent acquisitions (including in connection with the integration of Bally and WMS), including departure of key personnel or inability to recruit additional qualified personnel or maintain relationships with customers, suppliers or other third parties; incurrence of employee termination or restructuring costs, and impairment or asset write-down charges; changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets; implementation of complex revenue recognition standards; fluctuations in our results due to seasonality and other factors; dependence on suppliers and manufacturers; risks relating to foreign operations, including fluctuations in foreign currency exchange rates (including those fluctuations related to the affirmative vote in the U.K. to withdraw from the EU), restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the affirmative vote in the U.K. to withdraw from the EU and the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece; dependence on our key employees; litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property and our strategic relationships; influence of certain stockholders; and stock price volatility.
Additional information regarding risks, 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 our filings with the SEC, including the Company's current reports on Form 8-K, quarterly reports on Form 10-Q and its latest annual report on Form 10-K filed with the SEC on February 29, 2016 (including under the headings "Forward Looking Statements" and "Risk Factors"). Forward-looking statements speak only as of the date they are made and, except for Scientific Games' ongoing obligations under the U.S. federal securities laws, Scientific Games undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.