Scientific Games Announces Fourth Quarter and Year End 2010 Results
Fourth Quarter Revenue Excluding Racing Business Increased Approximately 2% vs. Prior-Year Period

NEW YORK, March 1, 2011 /PRNewswire/ -- Scientific Games Corporation (Nasdaq: SGMS) today announced results for the fourth quarter and year ended December 31, 2010.

Summary Financial Results
($ in millions, except per share amounts)




Three Months Ended,
December 31,


Twelve Months Ended,
December 31,



2010


2009


2010


2009

Revenue


$212.1


$232.9


$882.5


$927.7

Operating income (loss)


(11.0)


(69.5)


58.7


(0.0)

Attributable EBITDA


77.7


79.1


314.9


331.5










Net loss


$(158.4)


$(50.1)


$(149.2)


$(39.9)

Net loss per share


$(1.74)


$(0.54)


$(1.61)


$(0.43)










Capital expenditures (1)


30.2


31.5


108.7


111.6

Free cash flow


$(2.9)


$12.5


$61.9


$108.5



In this release, the Company has provided “attributable EBITDA” as a key performance metric, which is comprised of the Company’s consolidated EBITDA plus the Company’s proportionate share of the EBITDA of its joint ventures. Attributable EBITDA and free cash flow as used herein are non-GAAP financial measures defined below under “Non-GAAP Financial Measures” and reconciled to GAAP financial measures in the accompanying tables.  Note that, as explained more fully below under “Non-GAAP Financial Measures,” the “attributable EBITDA” metric as used herein is different from the “adjusted EBITDA” metric used in earnings releases for prior periods.

The results reported in this press release include the results of operations of the Company’s racing and venue management businesses (“Racing Business”) until the sale of the business on October 5, 2010, other than associated depreciation and amortization expense which is not reflected in the results in accordance with “held for sale” accounting treatment. The financial tables at the end of this release provide the standalone reported results for the Racing Business, and provide a reconciliation of both the Company’s results and Diversified Gaming Group’s results to the respective results excluding the Racing Business for all of the periods presented herein.  

(1) Includes wagering systems expenditures and other intangible assets and software expenditures.

Business Highlights

  • Scientific Games’ U.S. instant ticket and lottery systems customers’ retail sales increased 4.9% and 2.2%, respectively, in the fourth quarter of 2010 compared to the fourth quarter of 2009, based on third-party data
  • Fourth quarter 2010 China Sports Lottery instant ticket retail sales increased 22.8% versus the prior-year period
  • The Company’s Italian joint venture, Lotterie Nazionali S.r.l. (“LNS”), began operating under the new instant ticket lottery concession on October 1, 2010
  • The Global Draw’s U.K. gross win per machine per day achieved record quarterly performance
  • The Company recently announced the following signed contracts:
    • Northstar Private Management Agreement with the Illinois Lottery for a ten-year term (which is moving forward following a stay pending appeal of an Illinois court decision that upheld a constitutional challenge to the related revenue statute on grounds that the statute impermissibly addressed more than one subject)
    • Netherlands primary instant ticket supply contract and cooperative services program (“CSP”)
    • Iowa lottery systems contract and instant ticket contract extension
    • Louisiana primary instant ticket supply contract
    • OLG (Ontario Lottery) secondary instant ticket supply contract

Jeffrey S. Lipkin, Senior Vice President and Chief Financial Officer, stated, “Our fourth quarter results reflected the impact of the sale of our Racing Business and accounting for the new structure of our Italian joint venture. We also incurred several non-cash charges, including a valuation allowance for our U.S. deferred tax assets in the quarter. While these items make comparability to prior periods challenging, we are pleased with our underlying performance metrics, including revenue growth on a consolidated basis in our core lottery and gaming businesses and solid margins.  We are also encouraged by signs of improving retail sales in U.S. instant tickets and lottery systems, along with positive sales trends in China and Italy and increased gross win per machine per day in our Global Draw business.  While we are pleased with these trends, we view 2011 as a year of investment for the Company.  We intend to focus resources toward executing on our strategic initiatives, while remaining disciplined regarding capital deployment, with capital expenditure levels anticipated to be generally in line with recent years.” 

Chairman and Chief Executive Officer Lorne Weil added, "During the past few months we have made meaningful strides toward positioning Scientific Games for the next phase of growth.  We have expanded and strengthened our global leadership team and realigned our business units in an effort to enhance execution on our key growth initiatives. We have also renewed our emphasis on innovation throughout our Company, and remain focused on expanding our server-based gaming business, implementing attractive new business models such as lottery private management, pursuing new retail and digital delivery channels, introducing new content, and developing the international instant ticket market.  I believe that we are taking the necessary actions to further bolster our already strong platform and position the Company to drive growth well into the future.”  

Fourth Quarter Financial Results

Revenue was $212.1 million in the fourth quarter of 2010 compared to $232.9 million in the fourth quarter of 2009. The decrease in revenue was primarily due to the sale of the Racing Business, which closed on October 5, 2010. Excluding the results of the Racing Business in both periods, revenue in the fourth quarter of 2010 was $210.9 million compared to $207.5 million in the prior-year period.

Operating loss was $11.0 million in the fourth quarter of 2010 compared to an operating loss of $69.5 million in the prior-year period. Fourth quarter 2010 results reflect non-cash impairment charges related to underperforming Lottery Systems contracts ($17.5 million), obsolete Lottery Systems and Global Draw equipment ($5.5 million) and accelerated depreciation on existing platform technology due to Global Draw’s migration to a new technology platform ($8.3 million). The fourth quarter 2009 operating loss reflected charges related to the sale of the Racing Business (write-down of $50.4 million and transaction expenses of $4.0 million), non-cash impairment charges related to Lottery Systems contracts ($24.7 million), transaction expenses ($5.7 million) and restructuring expenses ($5.0 million). Excluding the results of the Racing Business in both periods, operating loss in the fourth quarter of 2010 was $10.8 million compared to an operating loss of $11.9 million in the prior-year period.

Net loss in the fourth quarter of 2010 was $158.4 million, or $1.74 per share, compared to a net loss of $50.1 million, or $0.54 per share, in the prior-year period. In addition to the impact of the above-mentioned items, the year-over-year increase in net loss was primarily due to higher interest expense ($2.9 million) and an increase in the tax provision primarily due to a non-cash charge of $137.3 million in the fourth quarter of 2010 to establish a valuation allowance against the Company’s U.S. deferred tax assets under applicable accounting rules.  The fourth quarter 2010 results also reflect lower equity in earnings of joint ventures ($7.8 million), primarily due to the structure of LNS, the Company’s recently formed joint venture that holds the new concession for the Italian instant ticket lottery.  The Company’s share of net earnings from Italy are now reported on an after-tax basis (as compared to on a pre-tax basis under the prior concession) and reflect amortization of the upfront fee for the new concession, which together reduced equity in earnings of the Italian joint venture by approximately $8.0 million in the fourth quarter of 2010. These items were partially offset by a change in other income ($4.8 million) due to a loss on a foreign currency hedge in the fourth quarter of 2009.  

Joint venture EBITDA was $19.3 million in the fourth quarter of 2010, compared to $16.0 million in the prior-year period, primarily due to higher EBITDA of the Company’s Italian and China joint ventures, along with the inclusion of the Company’s 20% equity interest in Sportech Plc beginning in the fourth quarter of 2010 that was acquired in connection with the sale of the Racing Business to Sportech. Attributable EBITDA was $77.7 million in the fourth quarter of 2010, compared to $79.1 million in the prior-year period.

Net loss for the fourth quarter of 2010 was also impacted by the following items (which are adjustments to “consolidated EBITDA” under the Company’s credit agreement and reflected on a pre-tax basis in attributable EBITDA), presented below on an after-tax basis:

  • write-off of deferred financing costs in connection with the Company’s recent debt refinancing of $0.7 million,
  • earn-out payment related to an acquisition completed in 2004 of $2.3 million,
  • professional fees related to the Italian instant ticket tender process of $0.2 million,
  • charges related to the sale of the Racing Business of $0.4 million,
  • royalties and fees related to the Company’s new technology platform of $0.3 million,
  • legal and advisory fees of $0.2 million, and
  • stock-based compensation expense of $5.3 million.

By way of comparison, net loss for the fourth quarter of 2009 was impacted by the following items (which are adjustments to “consolidated EBITDA” under the Company’s credit agreement and reflected on a pre-tax basis in attributable EBITDA), presented below on an after-tax basis:

  • write-down of $30.9 million and transaction expenses of $2.5 million related to the sale of the Racing Business,
  • restructuring and transaction expenses of $5.4 million,
  • professional fees and a loss on a foreign currency hedge related to the Italian instant ticket tender process of $1.2 million,
  • debt related fees and charges of $0.1 million, and
  • stock-based compensation expense of $5.4 million.

Printed Products Group

Scientific Games’ U.S. instant ticket customers’ retail sales increased approximately 4.9% and 2.9% in the fourth quarter and year ended December 31, 2010, respectively, compared to the prior-year periods, based on third-party data.

Printed Products Group revenue was $124.2 million in the fourth quarter of 2010, compared to $116.2 million in the fourth quarter of 2009.  The increase was primarily related to improved performance from the Company’s MDI licensed properties and Internet services business ($4.8 million), higher revenue from international customers ($4.8 million) and higher revenue from the Company’s U.S. and European CSP contracts ($0.9 million). This was partially offset by a decrease in sales of instant tickets to Italy ($1.9 million) due to a decline in the Company’s share of the printing volume, and lower phone card sales ($0.8 million).

Operating income of $25.7 million in the fourth quarter of 2010 decreased slightly from $26.1 million in the fourth quarter of 2009. This was primarily due to an increase in legal expense ($2.3 million) and incentive compensation expense ($1.1 million), along with an earn-out related to an acquisition completed in 2004 ($2.3 million). This was partially offset by increased revenue and a more profitable revenue mix, along with the positive impact of production efficiencies.

Lottery Systems Group

Scientific Games’ U.S. lottery systems customers’ retail sales increased approximately 2.2% and decreased approximately 1.0% in the fourth quarter and year ended December 31, 2010, respectively, compared to the prior- year periods, based on third-party data.

Lottery Systems Group revenue was $63.2 million in the fourth quarter of 2010, compared to revenue of $66.9 million in the fourth quarter of 2009.  Reflected in this performance were lower sales of hardware and software ($3.2 million) and a decline in service revenue ($0.5 million).  The decline in sales revenue was primarily the result of a large hardware order to a European customer in the prior-year period. The decline in service revenue reflected the loss of contracts in New Hampshire and Vermont ($2.2 million), contract rate changes ($0.9 million), and unfavorable foreign currency translation ($0.6 million), partially offset by an increase in China Sports Lottery sales ($1.8 million) and an increase in U.S. revenue ($1.2 million).

Operating loss was $10.1 million in the fourth quarter of 2010, compared to an operating loss of $14.1 million in the fourth quarter of 2009.  This improvement primarily resulted from a more profitable mix of revenue and a decline in depreciation and amortization ($3.7 million) due to lower non-cash impairment charges. The fourth quarter 2010 results included non-cash impairment charges related to obsolete Lottery Systems equipment ($3.0 million) and underperforming Lottery Systems contracts ($17.5 million), while the fourth quarter 2009 results included non-cash impairments of Lottery Systems contracts ($24.7 million).

China Sports Lottery retail sales increased by 22.8% and 8.3% in the fourth quarter and year ended December 31, 2010, respectively, compared to the prior-year periods, due to a combination of higher average selling prices, expansion of the retailer and validation network, and enhanced merchandising and promotional activity.

Diversified Gaming Group

Diversified Gaming Group revenue was $24.7 million in the fourth quarter of 2010, compared to revenue of $49.8 million in the fourth quarter of 2009. The decrease in revenue was principally due to the sale of the Racing Business, which closed in October 2010. Excluding the results of the Racing Business in both periods, Diversified Gaming Group revenue in the fourth quarter of 2010 was $23.5 million compared to $24.4 million in the prior-year period. Global Draw benefited from terminal growth and international expansion ($1.8 million) and realized record levels of gross win per terminal per day; however, revenue declined primarily due to revised contract terms in the U.K. ($0.8 million), decreased revenue from the Austrian over-the-counter product ($0.5 million) and unfavorable foreign currency translation ($0.9 million).

Operating loss was $10.6 million in the fourth quarter of 2010, compared to an operating loss of $58.2 million in the fourth quarter of 2009, which included a write-down of $50.4 million and transaction expenses of $4.0 million related to the sale of the Racing Business.  Excluding the results of the Racing Business in both periods, Diversified Gaming Group operating loss was $10.4 million in the fourth quarter of 2010, which compared to an operating loss of $0.6 million in the prior-year period. This decline was primarily the result of an increase in depreciation and amortization due to non-cash impairments of obsolete Global Draw equipment ($2.5 million) and accelerated depreciation on existing platform technology as a result of Global Draw’s migration to a new technology platform ($8.3 million). This was partially offset by a decrease in incentive compensation expense ($1.2 million).

Liquidity and Capital Resources

At December 31, 2010, the Company had cash and cash equivalents of $124.3 million and availability under its revolving credit facility of $134.3 million.  The Company had total indebtedness of $1,396.7 million as of December 31, 2010, compared to $1,367.1 million as of December 31, 2009.  

The Company continued to manage working capital and focus on higher returns on capital while investing in growth, which resulted in free cash flow of $61.9 million for the year ended December 31, 2010.  

Conference Call Details

Scientific Games will host a conference call today at 5:00 PM Eastern Standard Time to review these results and discuss other topics.  To access the call live via a listen-only webcast, please visit www.scientificgames.com and click on the webcast link under the Investor Information section.  To access the call by telephone, please dial (866) 277-1181 (U.S. and Canada) or (617) 597-5358 (International) 15 minutes prior to the start of the call. The conference ID is 63156424. A replay of the webcast and accompanying presentation will be archived in the Investor Information section on the Company’s 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 include instant lottery games, lottery gaming systems, terminals and services, and internet applications, as well as server-based interactive gaming machines and associated gaming control systems. For more information, please visit our website at www.scientificgames.com.

Company Contact:

Cindi Buckwalter, Investor Relations

(212) 754-2233



Forward-Looking Statements

In this press release the Company makes “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “anticipate,” “could,” “potential,” “opportunity,” or similar terminology. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of future results or performance. Actual results may differ materially from those 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; 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, joint ventures and strategic investments and relationships; pending legal challenges that may affect our joint venture’s Illinois lottery private management agreement or the failure of our joint venture to meet the net income targets or otherwise realize the anticipated benefits under such agreement; seasonality; inability to identify and capitalize on trends and changes in the lottery and gaming industries; 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 foreign operations; influence of certain stockholders; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; and stock price volatility. Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in the Company’s filings with the Securities and Exchange Commission, including under the heading “Risk Factors” in our periodic reports. Forward-looking statements speak only as of the date they are made and, except for the Company’s ongoing obligations under the U.S. federal securities laws, the Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

Attributable EBITDA, as included 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 our joint ventures (whereas "consolidated EBITDA" for purposes of the credit agreement includes our share of the income of our joint ventures 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.  

The definition of “attributable EBITDA” as used herein is different from the definition of “adjusted EBITDA” used in our earnings releases for prior periods.  Both attributable EBITDA and adjusted EBITDA include adjustments only to the extent contemplated by the definition of “consolidated EBITDA” in our credit agreement. However, whereas “attributable EBITDA” includes our share of the EBITDA of our joint ventures, “adjusted EBITDA” included our share of the income of our joint ventures.  For the reasons explained below, the Company believes that attributable EBITDA is now a more relevant financial measure for the Company than adjusted EBITDA.

In order to provide continuity between the presentation of attributable EBITDA as used herein and the presentation of adjusted EBITDA in our earnings releases in prior periods, the Company has included below a reconciliation of adjusted EBITDA as part of the reconciliation of attributable EBITDA to net income (loss).  

"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 joint ventures except to the extent that such income has been distributed to us) for such period plus, to the extent reflected as a charge in the statement of such consolidated net income for such period, the sum of (1) income tax expense, (2) depreciation and amortization expense, (3) interest expense, (4) amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with debt (see line item captioned “Debt-Related Fees and Charges” in the schedules below), (5) amortization of intangibles (including goodwill) and organization costs (see line item captioned “Amortization of Intangibles” in the schedules below), (6) earn-out payments with respect to certain acquisitions that we have made, such as our acquisition of Global Draw, or any other permitted acquisitions (generally, acquisitions of companies that are primarily engaged in the same or related line of business and that become subsidiaries of ours, or acquisitions of all or substantially all of the assets of another company or division or business unit of another company), including any loss or expense with respect to such earn-out payments (see line item captioned “Earn-Outs for Permitted Acquisitions” in the schedules below), (7) extraordinary charges or losses determined in accordance with GAAP, (8) non-cash stock-based compensation expenses, (9) 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), (10) 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), (11) 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), (12) 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 amounts 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), (13) 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), (14) 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 (15) up to 5,250,000 British Pound 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).  Consolidated EBITDA is also subject to certain adjustments in connection with material acquisitions and dispositions as provided in the credit agreement.  The foregoing definitions of “consolidated net income” and “consolidated EBITDA” are qualified in their entirety by the full text of such definitions in our credit agreement, 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 February 19, 2010.

Free cash flow, as included herein, represents net cash provided by operating activities less total capital expenditures (which includes wagering 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.   

Joint venture EBITDA, as included herein, represents our share of our joint ventures’ EBITDA, which is defined as equity in earnings of our joint ventures (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.  Joint venture EBITDA is a non-GAAP financial measure that is presented herein as a supplemental disclosure and is reconciled to equity in earnings of joint ventures 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 joint ventures, 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 joint ventures and highlighting trends in the Company’s and its joint ventures’ 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 joint ventures’ earnings financial items that management believes have less bearing on the Company’s and its joint ventures’ performance, such as income tax expense, depreciation and amortization expense and interest (income) expense.  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 joint venture EBITDA is helpful in monitoring the financial performance of the Company’s joint ventures and eliminates from the joint ventures’ earnings financial items that management believes have less bearing on the joint ventures’ 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, the operating income performance metric and the free cash flow performance metric (calculated by subtracting total capital expenditures (which includes wagering systems expenditures and other intangible assets and software expenditures) from adjusted EBITDA) used in determining performance-based bonuses for 2010 are subject to the same adjustments used to determine attributable EBITDA (and certain additional adjustments in the discretion of the Compensation Committee (e.g., to take into account acquisitions, divestitures, sign-on or guaranteed bonuses approved by the Compensation Committee and accounting changes during the year)).

The Company believes that attributable EBITDA is now a more relevant financial measure for the Company than adjusted EBITDA because a significant and increasing amount of the Company’s business is from its joint ventures, and beginning in the fourth quarter of 2010, the Company’s proportionate share of net earnings of LNS, its largest joint venture, is now reported on an after-tax basis and after amortization of the upfront fee for the new concession for the Italian instant ticket lottery. Unlike adjusted EBITDA, which was based on the EBITDA of the Company and its subsidiaries plus their share of the income of our joint ventures, attributable EBITDA is an entirely EBITDA-based financial metric (i.e., based on EBITDA of the Company and its subsidiaries plus their share of the EBITDA of our joint ventures). 

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 December 31,


Twelve Months Ended December 31,


2010


2009


2010


2009

Revenues:








Instant tickets

$  121,584


$112,621


$  465,090


$453,238

Services

75,611


100,016


363,138


410,014

Sales

14,871


20,248


54,271


64,497

Total revenues

212,066


232,885


882,499


927,749









Operating expenses:








Cost of instant tickets (1)

71,505


68,229


270,787


270,836

Cost of services (1)

38,698


59,022


206,034


234,093

Cost of sales (1)

10,202


13,641


38,045


44,539

Selling, general and administrative expenses

42,957


48,769


158,500


168,248

Write-down of assets held for sale

-


54,356


8,029


54,356

Employee termination costs

-


-


602


3,920

Depreciation and amortization

59,749


58,331


141,766


151,784

Operating income (loss)

(11,045)


(69,463)


58,736


(27)

Other (income) expense:








Interest expense

27,437


24,558


101,613


87,498

Equity in earnings of joint ventures

(6,616)


(14,462)


(49,090)


(59,220)

Loss (gain) on early extinguishment of debt

696


(234)


2,932


(4,829)

Other (income) expense, net

(961)


3,868


8,594


2,856


20,556


13,730


64,049


26,305

Income (loss) before income tax expense

(31,601)


(83,193)


(5,313)


(26,332)

Income tax expense (benefit)

126,848


(33,052)


143,888


13,547

Net income (loss)

$(158,449)


$ (50,141)


$(149,201)


$ (39,879)









Net income (loss) per share:








Basic net income (loss)

$      (1.74)


$     (0.54)


$      (1.61)


$     (0.43)

Diluted net income (loss)

$      (1.74)


$     (0.54)


$      (1.61)


$     (0.43)

Weighted average number of shares:








Basic shares

91,277


93,070


92,666


92,701

Diluted shares

91,277


93,070


92,666


92,701









(1) Exclusive of depreciation and amortization.



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SELECTED CONSOLIDATED BALANCE SHEET DATA





December 31, 2010 and December 31, 2009

(Unaudited, in thousands)










December 31,


December 31,


2010


2009

Assets:




Cash and cash equivalents

$        124,281


$        260,131

Other current assets

289,384


321,495

Assets held for sale

-


91,102

Property and equipment, net

450,581


468,439

Long-term assets

1,287,292


1,150,625

  Total assets

$     2,151,538


$     2,291,792





Liabilities and Stockholders' Equity:




Current portion of long-term debt

$            8,431


$          24,808

Other current liabilities

187,567


180,298

Liabilities held for sale

-


20,097

Long-term debt, excluding current portion

1,388,259


1,342,255

Other long-term liabilities

114,623


104,576

Stockholders' equity

452,658


619,758

  Total liabilities and stockholders' equity

$     2,151,538


$     2,291,792



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED SEGMENT OPERATING DATA


Three Months Ended December 31, 2010 and 2009

(Unaudited, in thousands)












Three Months Ended December 31, 2010


Printed


Lottery


Diversified


Unallocated




Products


Systems


Gaming


Corporate




Group


Group


Group


Expense


Totals











Instant tickets

$121,584


$          -


$             -


$              -


$121,584

Service revenue

-


51,105


24,506


-


75,611

Sales revenue

2,597


12,079


195


-


14,871

   Total revenue

124,181


63,184


24,701


-


212,066

Cost of instant tickets (1)

71,505


-


-


-


71,505

Cost of services (1)

-


25,514


13,184


-


38,698

Cost of sales (1)

2,050


8,008


144


-


10,202

Selling, general and administrative expenses

15,700


6,689


2,422


12,722


37,533

Stock-based compensation

1,104


750


425


3,145


5,424

Write-down of assets held for sale

-


-


-


-


-

Employee termination costs

-


-


-


-


-

Depreciation and amortization

8,153


32,357


19,111


128


59,749

Operating income (loss)

$  25,669


$(10,134)


$   (10,585)


$     (15,995)


$ (11,045)




Three Months Ended December 31, 2009


Printed


Lottery


Diversified


Unallocated




Products


Systems


Gaming


Corporate




Group


Group


Group


Expense


Totals











Instant tickets

$112,621


$          -


$             -


$              -


$112,621

Service revenue

-


51,602


48,414


-


100,016

Sales revenue

3,598


15,284


1,366


-


20,248

   Total revenue

116,219


66,886


49,780


-


232,885

Cost of instant tickets (1)

68,229


-


-


-


68,229

Cost of services (1)

-


27,149


31,873


-


59,022

Cost of sales (1)

2,195


10,592


854


-


13,641

Selling, general and administrative expenses

10,060


6,603


7,073


16,347


40,083

Stock-based compensation

778


580


567


6,761


8,686

Write-down of assets held for sale

-


-


54,356


-


54,356

Employee termination costs

-


-


-


-


-

Depreciation and amortization

8,886


36,021


13,265


159


58,331

Operating income (loss)

$  26,071


$(14,059)


$   (58,208)


$     (23,267)


$ (69,463)





















(1) Exclusive of depreciation and amortization.



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED SEGMENT OPERATING DATA


Twelve Months Ended December 31, 2010 and 2009

(Unaudited, in thousands)












Twelve Months Ended December 31, 2010


Printed


Lottery


Diversified


Unallocated




Products


Systems


Gaming


Corporate




Group


Group


Group


Expense


Totals











Instant tickets

$465,090


$         -


$             -


$              -


$465,090

Service revenue

-


199,439


163,699


-


363,138

Sales revenue

9,222


36,597


8,452


-


54,271

   Total revenue

474,312


236,036


172,151


-


882,499

Cost of instant tickets (1)

270,787


-


-


-


270,787

Cost of services (1)

-


104,274


101,760


-


206,034

Cost of sales (1)

6,981


25,716


5,348


-


38,045

Selling, general and administrative expenses

51,512


28,616


18,406


37,159


135,693

Stock-based compensation

4,006


2,796


2,112


13,893


22,807

Write-down of assets held for sale

-


-


8,029


-


8,029

Employee termination costs

-


-


602


-


602

Depreciation and amortization

33,303


64,979


42,983


501


141,766

Operating income (loss)

$107,723


$    9,655


$     (7,089)


$     (51,553)


$  58,736
























Twelve Months Ended December 31, 2009


Printed


Lottery


Diversified


Unallocated




Products


Systems


Gaming


Corporate




Group


Group


Group


Expense


Totals











Instant tickets

$453,238


$         -


$             -


$              -


$453,238

Service revenue

-


211,015


198,999


-


410,014

Sales revenue

13,374


46,372


4,751


-


64,497

   Total revenue

466,612


257,387


203,750


-


927,749

Cost of instant tickets (1)

270,836


-


-


-


270,836

Cost of services (1)

-


110,660


123,433


-


234,093

Cost of sales (1)

8,923


32,619


2,997


-


44,539

Selling, general and administrative expenses

41,691


27,756


22,516


41,696


133,659

Stock-based compensation

3,288


2,469


2,407


26,425


34,589

Write-down of assets held for sale

-


-


54,356


-


54,356

Employee termination costs

2,016


125


433


1,346


3,920

Depreciation and amortization

32,982


68,902


49,224


676


151,784

Operating income (loss)

$106,876


$  14,856


$   (51,616)


$     (70,143)


$        (27)





















(1) Exclusive of depreciation and amortization.



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA AND ATTRIBUTABLE EBITDA

RECONCILIATION OF EQUITY IN EARNINGS OF JOINT VENTURES TO JOINT VENTURE EBITDA

(Unaudited, in thousands)











Three Months Ended December 31,


Twelve Months Ended December 31,


2010


2009


2010


2009









Net income (loss)

$ (158,449)


$(50,141)


$ (149,201)


$ (39,879)

Add: Income tax expense (benefit)

126,848


(33,052)


143,888


13,547

Add: Depreciation and amortization expense

59,749


58,331


141,766


151,784

Add: Interest expense

27,437


24,558


101,613


87,498

Add: Other expense (income), net

(961)


3,868


8,594


2,856

Add: Loss (gain) on early extinguishment of debt

696


(234)


2,932


(4,829)

EBITDA

$    55,320


$    3,330


$  249,592


$210,977









Credit Agreement adjustments:








Add: Debt Related Fees and Charges (1)

$         696


$       122


$      2,932


$    1,138

Add: Amortization of Intangibles

-


-


-


-

Add: Earn-outs for Permitted Acquisitions (2)

2,331


-


2,331


219

Add: Extraordinary Charges or Losses under GAAP

-


-


-


-

Add: Non-Cash Stock-Based Compensation Expenses

5,424


8,686


22,807


34,589

Add: Peru Investment Expenses, Charges or Losses

-


-


-


-

Add: Non-Recurring Write-Offs under GAAP

-


50,361


5,165


50,361

Add: Acquisition Advisory Fees

-


-


234


-

Add: Specified Permitted Add-Backs (3)

167


8,705


769


12,821

Add: Italian Concession Obligations

202


1,976


17,806


2,633

Add: Racing Disposition Charges and Expenses

361


3,995


3,225


3,995

Add: Playtech Royalties and Fees

300


-


300


-

Less: Interest Income

(88)


(413)


(509)


(1,256)

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 expense (income), net (4)

961


562


(8,594)


1,575

Add: Loss (gain) on early extinguishment of debt

(696)


234


(2,932)


4,829









Adjusted EBITDA

$    64,978


$  77,558


$  293,126


$321,881









Less: Equity in earnings of joint ventures

(6,616)


(14,462)


(49,090)


(59,220)

Add: Joint venture EBITDA

19,342


16,033


70,905


68,789

Attributable EBITDA

$    77,704


$  79,129


$  314,941


$331,450









Joint venture EBITDA (5):








Equity in earnings of joint ventures

$      6,616


$  14,462


$    49,090


$  59,220

Add: Income tax expense

2,548


307


4,147


1,687

Add: Depreciation and amortization expense

8,747


1,806


13,799


6,104

Add: Interest expense, net of other

1,431


(542)


3,869


1,778

Joint venture EBITDA

$    19,342


$  16,033


$    70,905


$  68,789









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

(2) Amounts reflect an earn-out in 2010 related to a 2004 acquisition and Global Draw employee contingent bonus payments in 2009.

(3) Amounts include management transition expenses, transaction expenses, contract impairments and restructuring expenses.

(4) Amounts include foreign exchange transactions, interest income, minority interest and other items.

(5) Joint venture EBITDA includes results from the Company's participation in Consorzio Lotterie Nazionali (through September 30, 2010), Lotterie Nazionali S.r.l. (beginning October 1, 2010), Roberts Communications Network, LLC, CSG Lottery Technology (Beijing) Co., Ltd., Shandong Inspur Scientific Games Technology, Ltd., Sportech Plc, Sciplay and Guard Libang.



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CALCULATION OF FREE CASH FLOW

(Unaudited, in thousands)


















Three Months Ended December 31,


Twelve Months Ended December 31,


2010


2009


2010


2009









Net cash provided by operating activities

$  27,331


$  44,082


$  170,573


$  220,077









Less: Capital expenditures

(2,479)


(3,795)


(9,352)


(12,932)

Less: Wagering systems expenditures

(17,669)


(19,741)


(62,926)


(64,610)

Less: Other intangible assets and software expenditures

(10,037)


(7,999)


(36,372)


(34,039)

   Total Capital Expenditures

$(30,185)


$(31,535)


$(108,650)


$(111,581)









Free cash flow

$  (2,854)


$  12,547


$    61,923


$  108,496

















For the fourth quarter and years ended December 31, 2010 and 2009, net cash provided by operating activities includes an outflow of $3 million and $10 million, respectively, relating to a retirement plan. This outflow is offset by an inflow connected with the retirement plan but reflected as an investing activity.  Other than capital expenditures, investing activities are not a component of free cash flow. As a result, only the outflow is being shown in the free cash flow calculation.



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

KEY PERFORMANCE INDICATORS

(Unaudited, in thousands, except terminals and ASP)


















Three Months Ended December 31,


Twelve Months Ended December 31,


2010


2009


2010


2009









Italy - Gratta e Vinci:








Revenues (Euros)

2,375,000


2,347,000


9,368,000


9,435,000









China - China Sports Lottery:








Revenues (RMB)

4,546,000


3,702,000


16,438,000


15,180,000

Tickets Sold

699,869


538,658


2,359,240


2,163,428

ASP (RMB)

6.49


6.87


6.97


7.02


















As of December 31,





Terminal installed base at end of period:

2010


2009





Global Draw

18,718


17,284





Games Media

3,298


2,351







SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES ("SGC")

RECONCILIATION OF COMPANY OPERATING RESULTS TO

RESULTS EXCLUDING THE RACING BUSINESS








(Unaudited, in thousands)
















Three Months Ended December 31, 2010


Twelve Months Ended December 31, 2010





Less:


SGC




Less:


SGC



SGC


Racing


Excluding


SGC


Racing


Excluding



Total


Business


Racing


Total


Business


Racing














Instant tickets


$121,584


$          -


$ 121,584


$465,090


$          -


$ 465,090

Service revenue


75,611


1,075


74,536


363,138


76,032


287,106

Sales revenue


14,871


92


14,779


54,271


7,811


46,460

   Total revenue


212,066


1,167


210,899


882,499


83,843


798,656

Cost of instant tickets (1)


71,505


-


71,505


270,787


-


270,787

Cost of services (1)


38,698


917


37,781


206,034


58,091


147,943

Cost of sales (1)


10,202


98


10,104


38,045


4,833


33,212

Selling, general and administrative expenses


37,533


357


37,176


135,693


9,270


126,423

Stock-based compensation


5,424


13


5,411


22,807


623


22,184

Write-down of assets held for sale


-


-


-


8,029


8,029


-

Employee termination costs


-


-


-


602


-


602

Depreciation and amortization


59,749


11


59,738


141,766


52


141,714

Operating income (loss)


$ (11,045)


$      (229)


$ (10,816)


$  58,736


$     2,945


$   55,791





Three Months Ended December 31, 2009


Twelve Months Ended December 31, 2009





Less:


SGC




Less:


SGC



SGC


Racing


Excluding


SGC


Racing


Excluding



Total


Business


Racing


Total


Business


Racing














Instant tickets


$112,621


$          -


$ 112,621


$453,238


$          -


$ 453,238

Service revenue


100,016


24,419


75,597


410,014


105,207


304,807

Sales revenue


20,248


1,009


19,239


64,497


3,573


60,924

   Total revenue


232,885


25,428


207,457


927,749


108,780


818,969

Cost of instant tickets (1)


68,229


-


68,229


270,836


-


270,836

Cost of services (1)


59,022


19,483


39,539


234,093


79,751


154,342

Cost of sales (1)


13,641


545


13,096


44,539


1,959


42,580

Selling, general and administrative expenses


40,083


3,628


36,455


133,659


13,004


120,655

Stock-based compensation


8,686


229


8,457


34,589


945


33,644

Write-down of assets held for sale


54,356


54,356


-


54,356


54,356


-

Employee termination costs


-


-


-


3,920


433


3,487

Depreciation and amortization


58,331


4,779


53,552


151,784


19,281


132,503

Operating income (loss)


$ (69,463)


$ (57,592)


$ (11,871)


$        (27)


$ (60,949)


$   60,922








































(1) Exclusive of depreciation and amortization.



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

RECONCILIATION OF DIVERSIFIED GAMING GROUP ("DGG") OPERATING

RESULTS TO RESULTS EXCLUDING THE RACING BUSINESS








(Unaudited, in thousands)
















Three Months Ended December 31, 2010


Twelve Months Ended December 31, 2010





Less:


DGG




Less:


DGG



DGG


Racing


Excluding


DGG


Racing


Excluding



Total


Business


Racing


Total


Business


Racing














Instant tickets


$                -


$          -


$          -


$                -


$          -


$          -

Service revenue


24,506


1,075


23,431


163,699


76,032


87,667

Sales revenue


195


92


103


8,452


7,811


641

   Total revenue


24,701


1,167


23,534


172,151


83,843


88,308

Cost of instant tickets (1)


-


-


-


-


-


-

Cost of services (1)


13,184


917


12,267


101,760


58,091


43,669

Cost of sales (1)


144


98


46


5,348


4,833


515

Selling, general and administrative expenses


2,422


357


2,065


18,406


9,270


9,136

Stock-based compensation


425


13


412


2,112


623


1,489

Write-down of assets held for sale


-


-


-


8,029


8,029


-

Employee termination costs


-


-


-


602


-


602

Depreciation and amortization


19,111


11


19,100


42,983


52


42,931

Operating income (loss)


$      (10,585)


$      (229)


$ (10,356)


$        (7,089)


$     2,945


$ (10,034)





Three Months Ended December 31, 2009


Twelve Months Ended December 31, 2009





Less:


DGG




Less:


DGG



DGG


Racing


Excluding


DGG


Racing


Excluding



Total


Business


Racing


Total


Business


Racing














Instant tickets


$                -


$          -


$          -


$                -


$          -


$          -

Service revenue


48,414


24,419


23,995


198,999


105,207


93,792

Sales revenue


1,366


1,009


357


4,751


3,573


1,178

   Total revenue


49,780


25,428


24,352


203,750


108,780


94,970

Cost of instant tickets (1)


-


-


-


-


-


-

Cost of services (1)


31,873


19,483


12,390


123,433


79,751


43,682

Cost of sales (1)


854


545


309


2,997


1,959


1,038

Selling, general and administrative expenses


7,073


3,628


3,445


22,516


13,004


9,512

Stock-based compensation


567


229


338


2,407


945


1,462

Write-down of assets held for sale


54,356


54,356


-


54,356


54,356


-

Employee termination costs


-


-


-


433


433


-

Depreciation and amortization


13,265


4,779


8,486


49,224


19,281


29,943

Operating income (loss)


$      (58,208)


$ (57,592)


$      (616)


$      (51,616)


$ (60,949)


$     9,333








































(1) Exclusive of depreciation and amortization.



SOURCE Scientific Games Corporation

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