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| SGMS > SEC Filings for SGMS > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
The following discussion addresses the results of operations of Scientific Games Corporation (together with its consolidated subsidiaries, "we," "us," "our" or the "Company" unless otherwise specified or the context otherwise requires), for the three and nine months ended September 30, 2009, compared to the corresponding periods in the prior year. This discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year ended December 31, 2008 included in our Current Report on Form 8-K filed on May 18, 2009.
The first and fourth quarters of the calendar year traditionally comprise the weakest season for our Diversified Gaming segment. As a result of inclement weather during the winter months, a number of racetracks do not operate and those that do operate often experience missed racing days. This adversely affects the amounts wagered and our corresponding service revenues. Additionally, the fourth quarter is the weakest quarter for Global Draw Limited ("Global Draw") due to reduced wagering during the holiday season. Wagering and lottery equipment sales and software license revenues usually reflect a limited number of large transactions, which do not recur on an annual basis. Consequently, revenues and operating results of our Lottery Systems Group can vary substantially from period to period as a result of the timing of revenue recognition for major equipment sales and software licensing transactions and the size of the jackpots of lottery games such as Powerball® and Mega Millions during the relevant period. In addition, Printed Products sales may vary depending on the season and timing of contract awards, changes in customer budgets, changes in the way that we price our contracts, inventory ticket levels, lottery retail sales and general economic conditions.
Background
We operate in three business segments: Printed Products Group, Lottery Systems Group and Diversified Gaming Group. Our revenues consist of two major components: services revenues and sales revenues.
Printed Products Group
We provide instant lottery tickets and related services. Instant ticket and related services include ticket design and manufacturing as well as value-added services, including game design, sales and marketing support, inventory management and warehousing and fulfillment services. Additionally, this division provides lotteries with access to a licensed property portfolio, including Deal or No Deal™, Major League Baseball®, National Basketball Association, Harley-Davidson®, Wheel-of-Fortune®, Monopoly™, Corvette® and World Poker Tour®. This division also includes promotional instant tickets and pull-tab tickets that we sell to both lottery and non-lottery customers.
We are a manufacturer of prepaid phone cards, which entitle cellular phone users to a pre-specified value of airtime. Prepaid phone cards offer consumers a cost-effective way to purchase cellular airtime, without requiring phone companies to extend credit or consumers to commit to contracts. Prepaid phone cards utilize the same secure process that we employ in the production of instant lottery tickets.
In 2007, we entered into an arrangement to sell instant lottery tickets directly to the China Sports Lottery between March and December in 2008. During 2008, we recorded approximately $40.2 million in revenues from the China Sports Lottery as a result of this temporary arrangement. Beginning in 2009, the China Sports Lottery began purchasing instant lottery tickets through our joint venture, CSG Lottery Technology (Beijing) Co. Ltd., ("CSG"), in which we have a 49% interest.
Lottery Systems Group
Our lottery systems business includes the supply of transaction processing software for the accounting and validation of instant ticket and online lottery games, point-of-sale terminal hardware sales, central site computers and communication hardware sales, and ongoing support and maintenance services for these products. This business also includes software and hardware and support services for sports betting and the operation of credit card processing systems.
Diversified Gaming Group
Our Diversified Gaming Group provides services and systems to private and public operators in the wide area gaming markets and in the pari-mutuel wagering industry. Our product offering includes server-based gaming machines, video lottery terminals ("VLTs"), monitor games, wagering systems for the pari-mutuel racing industry, sports betting systems and services and Great Britain regulated Category C Amusement With Prize ("AWP") and Skill With Prize ("SWP") terminals. Business units within the Diversified Gaming Group include Global Draw, a leading supplier of gaming terminals, systems and monitor games to licensed bookmakers, primarily in the U.K., Austria and Mexico; Scientific Games Racing LLC, a leading worldwide supplier of computerized systems for pari-mutuel wagering; Games Media Limited ("Games Media"), our AWP and SWP terminal supplier to U.K. pub operators; and our pari-mutuel gaming operations in Connecticut, Maine and the Netherlands.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
The following analysis compares the results of operations for the quarter ended September 30, 2009 to the results of operations for the quarter ended September 30, 2008.
Overview
Revenue Analysis
For the quarter ended September 30, 2009, total revenue was $239.1 million compared to $291.9 million for the quarter ended September 30, 2008, a decrease of $52.8 million or 18%. Our service revenue for the quarter ended September 30, 2009 was $222.0 million compared to $265.4 million for the quarter ended September 30, 2008, a decrease of $43.4 million, or 16%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($12.8 million), the impact of revised terms of previously announced lottery contract awards ($11.9 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts ($3.5 million), a decrease in our licensed property revenues ($6.2 million), decreased sales of instant lottery tickets internationally and domestically ($3.9 million), lower dollars wagered, or handle, in our pari-mutuel business ($2.2 million) and the negative impact of foreign exchange rates ($7.8 million), partially offset by an increase in the sale of instant lottery tickets in Italy and the United Kingdom ($3.7 million) and increased service revenue from Global Draw and Games Media ($3.3 million).
Our sales revenue for the quarter ended September 30, 2009 was $17.1 million compared to $26.5 million for the quarter ended September 30, 2008, a decrease of $9.4 million or 35%. The decrease was primarily due to lower phone card sales revenue in the quarter ($4.3 million), lower hardware and software sales in Lottery Systems and Diversified Gaming ($6.4 million) and the negative impact of foreign exchange rates.
Expense Analysis
Cost of services of $127.8 million for the quarter ended September 30, 2009 was $29.7 million or 19% lower than for the quarter ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($12.2 million), lower costs associated with our licensed properties business ($5.2 million), savings related to the Company's Profitability Improvement Program ($4.4 million), our exit from the Mexico online lottery contract ($2.3 million), the loss of our South Carolina, West Virginia and South Dakota online lottery contracts ($2.5 million), lower costs associated with decreased revenue from our pari-mutuel and venue management business ($1.6 million) and the impact of foreign exchange rates ($4.3 million).
Cost of sales of $10.5 million for the quarter ended September 30, 2009 was $6.8 million or 39% lower than for the quarter ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales in the quarter and lower costs associated with decreased Lottery Systems and Diversified Gaming hardware and software sales.
Selling, general and administrative expense of $38.9 million for the quarter ended September 30, 2009 was $3.0 million or 7% lower than for the quarter ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs, savings realized from our Profitability Improvement Program ($2.5 million) and the favorable impact of foreign exchange rates.
Depreciation and amortization expense of $32.0 million for the quarter ended September 30, 2009 decreased $4.5 million or 12% from the quarter ended September 30, 2008 primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Mexico, Oklahoma, South Carolina, West Virginia and South Dakota online lottery contracts, partially offset by increased depreciation from our domestic pari-mutuel business.
Interest expense of $22.7 million for the quarter ended September 30, 2009 increased $1.8 million or 9% from the quarter ended September 30, 2008, primarily attributable to increased borrowings from the issuance of the 2009 Notes, partially offset by decreased borrowings from the repurchase of debt during the third quarter of 2009 and a decline in LIBOR rates.
Equity in earnings of joint ventures primarily reflects our share of the earnings of CLN in connection with the operation of the Italian Gratta e Vinci instant lottery, our share of the earnings of CSG, our share of the earnings of Roberts Communications Network, LLC ("RCN") and our interest in Guard Libang. For the quarter ended September 30, 2009, our share of CLN's income totaled $11.2 million compared to $12.0 million in the quarter ended September 30, 2008. The decrease in income for the quarter ended September 30, 2009 primarily reflects the negative impact of foreign exchange rates and lower retail sales. For the quarter ended September 30, 2009 our share of the earnings of CSG was $1.5 million; there was no comparable amount in 2008. For the quarters ended September 30, 2009 and 2008, our share of the earnings of RCN was $0.9 million and $1.0 million, respectively. For the quarters ended September 30, 2009 and 2008, our share of
the earnings of Guard Libang was $0.6 million and $0.5 million respectively.
Income tax expense was $6.9 million for the quarter ended September 30, 2009 compared to $9.9 million for the quarter ended September 30, 2008. The effective income tax rates for the quarters ended September 30, 2009 and 2008 were 31.2% and 30.8%, respectively. The effective tax rate for the three months ended September 30, 2009 includes the impact of the release of certain FIN 48 reserves associated with tax settlements in the quarter. The effective tax rate for the quarter ended September 30, 2008 was less than the U.S. federal statutory rate of 35% due to lower tax rates applicable to earnings on operations outside the United States.
Segment Overview
Printed Products
For the quarter ended September 30, 2009, total revenue for Printed Products was $120.8 million compared to $154.6 million for the quarter ended September 30, 2008, a decrease of $33.8 million or 22%. For the quarter ended September 30, 2009, service revenue for Printed Products was $117.7 million compared to $147.1 million in the corresponding period in the prior year, a decrease of $29.4 million or 20%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($12.8 million), the impact of the revised terms of previously announced lottery contract awards ($5.4 million), the loss of our cooperative services contract with Ohio, decreased licensed property revenues ($6.2 million), decreased sales of instant lottery tickets internationally and domestically ($3.9 million) and the negative impact of foreign exchange rates ($2.8 million). The decrease was partially offset by an increase in the sale of instant lottery tickets in Italy and the United Kingdom ($3.7 million).
Printed Products sales revenue for the quarter ended September 30, 2009 was $3.0 million compared to $7.4 million for the quarter ended September 30, 2008, a decrease of $4.4 million or 59%. The decrease was primarily the result of lower phone card sales revenue in the quarter ($4.3 million).
Cost of services of $69.9 million for the quarter ended September 30, 2009 was $21.6 million or 24% lower than for the quarter ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($12.2 million), lower costs associated with our licensed properties business ($5.2 million), the loss of our cooperative services contract with Ohio, lower costs associated with the decreased sales of instant lottery tickets, savings related to the Company's Profitability Improvement Program and the impact of foreign exchange rates ($2.5 million).
Cost of sales of $2.2 million for the quarter ended September 30, 2009 was $2.2 million or 50% lower than for the quarter ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales in the quarter.
Selling, general and administrative expense of $11.8 million for the quarter ended September 30, 2009 was $2.5 million or 17% lower than for the quarter ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs, savings realized from our Profitability Improvement Program ($0.9 million) and the impact of foreign exchange rates.
Depreciation and amortization expense of $8.2 million for the quarter ended September 30, 2009 decreased $1.1 million or 12% compared to the quarter ended September 30, 2008, primarily due to reduced depreciation and amortization from our domestic and international contracts.
Lottery Systems
For the quarter ended September 30, 2009, total revenue for Lottery Systems was $65.5 million compared to $77.4 million for the quarter ended September 30, 2008, a decrease of $11.9 million or 15%. Lottery Systems service revenue for the quarter ended September 30, 2009 was $52.3 million compared to $62.4 million for the quarter ended September 30, 2008, a decrease of $10.1 million or 16%. The decrease was primarily due to the revised terms of our online lottery contracts ($6.5 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts ($3.5 million) and the impact of foreign exchange rates.
Lottery Systems sales revenue for the quarter ended September 30, 2009 was $13.1 million compared to $15.1 million for the
quarter ended September 30, 2008, a decrease of $2.0 million or 13%. The decrease was primarily due to lower sales of Lottery Systems hardware and software in 2009 ($4.3 million), partially offset by increased sales of lottery terminals to Italy ($3.3 million).
Cost of services of $26.7 million for the quarter ended September 30, 2009 was $5.9 million or 18% lower than for the quarter ended September 30, 2008. The decrease was primarily due to our exit from the Mexico online lottery contract ($2.3 million) and the loss of our South Carolina, West Virginia and South Dakota online lottery contracts ($2.5 million).
Cost of sales of $7.7 million for the quarter ended September 30, 2009 was $3.9 million or 34% lower than for the quarter ended September 30, 2008, primarily due to fewer lottery hardware and software sales in 2009.
Selling, general and administrative expense of $8.2 million for the quarter ended September 30, 2009 was $1.3 million or 19% higher than for the quarter ended September 30, 2008. The increase was primarily attributable to a favorable adjustment made to internal labor allocation rates in 2008 and increased hardware engineering expenses, partially offset by reduced incentive compensation costs and savings realized from our Profitability Improvement Program.
Depreciation and amortization expense of $11.5 million for the quarter ended September 30, 2009 decreased $3.9 million or 25% compared to the quarter ended September 30, 2008, primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Mexico, Oklahoma, South Carolina, West Virginia and South Dakota online lottery contracts.
Diversified Gaming
For the quarter ended September 30, 2009, total revenue for Diversified Gaming was $52.9 million compared to $59.9 million for the quarter ended September 30, 2008, a decrease of $7.0 million or 12%. Diversified Gaming service revenue for the three months ended September 30, 2009 was $51.9 million compared to $55.9 million for the quarter ended September 30, 2008, a decrease of $4.0 million or 7%. The decrease in service revenue was primarily due to lower handle in our pari-mutuel and venue management business ($2.2 million) and the negative impact of foreign exchange rates, partially offset by increased service revenue from Global Draw and Games Media ($3.3 million).
Diversified Gaming sales revenue for the quarter ended September 30, 2009 was $0.9 million compared to $4.0 million for the quarter ended September 30, 2008, a decrease of $3.1 million or 78%. The decrease was primarily due to decreased sales from Games Media reflecting the expected decline in sales of analog AWP terminals as a result of the roll-out of digital AWP terminals, which are being deployed under revenue participation agreements ($0.2 million), lower sales from Global Draw ($2.3 million) and the negative impact of foreign exchange rates.
Cost of services of $31.1 million for the quarter ended September 30, 2009 was $2.3 million or 7% lower than for the quarter ended September 30, 2008. The decrease was primarily due to lower costs associated with decreased revenue from our pari-mutuel and venue management business ($1.6 million), lower costs from Global Draw and the impact of foreign exchange rates ($1.5 million), partially offset by costs from increased service revenue from Games Media.
Cost of sales of $0.6 million for the quarter ended September 30, 2009 was $0.7 million or 54% lower than for the quarter ended September 30, 2008, primarily due to reduced sales from Games Media and Global Draw.
Selling, general and administrative expense of $5.6 million for the quarter ended September 30, 2009 was $0.2 million or 4% higher than for the quarter ended September 30, 2008. The increase was primarily due to increased costs from Global Draw and from our domestic pari-mutuel business, partially offset by lower costs from Games Media.
Depreciation and amortization expense of $12.2 million for the quarter ended September 30, 2009 increased $0.7 million or 6% from the quarter ended September 30, 2008, primarily due to increased depreciation from Games Media and from our domestic pari-mutuel business.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The following analysis compares the results of operations for the nine months ended September 30, 2009 to the results of operations for the nine months ended September 30, 2008.
Overview
Revenue Analysis
For the nine months ended September 30, 2009, total revenue was $694.9 million compared to $854.9 million for the nine months ended September 30, 2008, a decrease of $160.0 million or 19%. Our service revenue for the nine months ended September 30, 2009 was $650.6 million compared to $764.0 million for the nine months ended September 30, 2008, a decrease of $113.4 million, or 15%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($25.2 million), the revised terms of previously announced lottery contract awards ($43.8 million), the loss of the South Carolina, West Virginia and South Dakota online lottery contracts, decreased licensed property revenues ($15.5 million), lower handle in our pari-mutuel and venue management business ($8.9 million) and the negative impact of foreign exchange rates ($31.6 million). The decrease was partially offset by increased revenue from instant ticket validation services in China ($7.8 million) and increased service revenue from Global Draw and Games Media ($13.1million).
Our sales revenue for the nine months ended September 30, 2009 was $44.2 million compared to $90.9 million for the nine months ended September 30, 2008, a decrease of $46.7 million or 51%. The decrease was primarily the result of lower phone card sales revenue ($12.9 million), decreased Lottery Systems and Diversified Gaming hardware and software sales in 2009 ($29.5 million) and the negative impact of foreign exchange rates ($7.7 million).
Expense Analysis
Cost of services of $377.7 million for the nine months ended September 30, 2009 was $62.7 million or 14% lower than for the nine months ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($23.2 million), lower costs associated with our licensed properties ($8.2 million), savings related to the Company's Profitability Improvement Program ($11.4 million), the loss of our South Carolina, West Virginia and South Dakota online lottery contracts ($2.5 million), decreased costs from the Mexico online contract ($6.2 million), lower costs associated with decreased revenue from our pari-mutuel and venue management business ($5.9 million) and the impact of foreign exchange rates, partially offset by increased costs related to China ($1.9 million) and increased costs associated with increased service revenue from Global Draw and Games Media ($5.1 million).
Cost of sales of $30.9 million for the nine months ended September 30, 2009 was $32.9 million or 52% lower than for the nine months ended September 30, 2008 primarily due to lower costs in our phone card business as a result of lower sales revenue, fewer Lottery Systems hardware and software sales, reduced sales from Games Media and Global Draw and the impact of foreign exchange rates.
Selling, general and administrative expense of $119.5 million for the nine months ended September 30, 2009 was $18.5 million or 13% lower than for the nine months ended September 30, 2008. The decrease was primarily attributable to reduced incentive compensation costs ($6.2 million), savings realized from our Profitability Improvement Program ($6.8 million) and the favorable impact of foreign exchange rates offset by costs associated with a property tax settlement.
Employee termination costs of $3.9 million for the nine months ended September 30, 2009 were a result of our cost reduction initiatives. Employee termination costs of $2.8 million for the nine months ended September 30, 2008 were a result of the restructuring of our phone card business in the U.K.
Depreciation and amortization expense of $93.5 million for the nine months ended September 30, 2009 decreased $12.6 million or 12% from the nine months ended September 30, 2008 primarily due to decreased depreciation and amortization on our new Pennsylvania online lottery contract and decreased depreciation and amortization from the Oklahoma and Mexico online lottery contracts, partially offset by increased depreciation from Global Draw, Games Media and our domestic pari-mutuel business.
Interest expense of $62.9 million for the nine months ended September 30, 2009 increased $7.2 million or 13% from the nine months ended September 30, 2008, primarily attributable to increased borrowings from the 2009 Notes and the June 2008 debt refinancing, partially offset by decreased borrowings from the repurchase of debt during 2009 and a decline in LIBOR rates.
Equity in earnings of joint ventures primarily reflects our share of the earnings from the CLN, our share of the earnings from CSG, our share of the earnings of RCN and our interest in Guard Libang. For the nine months ended September 30, 2009, our share of CLN's income totaled $37.8 million compared to $43.0 million in the nine months ended September 30, 2008. The decrease in income for the nine months ended September 30, 2009 primarily reflects the negative impact of foreign exchange rates. For the nine months ended September 30, 2009 and 2008, our share of the earnings of CSG was $2.9 million and $0.0 million respectively. For the nine months ended September 30, 2009 and 2008, our share of the earnings of RCN was $2.2 million and $2.9 million, respectively. For the nine months ended September 30, 2009 and 2008, our share of the earnings of Guard Libang was $2.3 million and $2.8 million respectively.
Income tax expense was $46.6 million for the nine months ended September 30, 2009 compared to $30.7 million for the nine months ended September 30, 2008. The effective income tax rates for the nine months ended September 30, 2009 and 2008 were 82.0% and 32.2%, respectively. The effective rate for the nine months ended September 30, 2009 includes the impact of a valuation allowance against the deferred tax asset related to foreign tax credits. The effective tax rate for the nine months ended September 30, 2008 was less than the U.S. federal statutory rate of 35% due to lower tax rates applicable to earnings on operations outside the United States.
Segment Overview
Printed Products
For the nine months ended September 30, 2009, total revenue for Printed Products was $350.4 million compared to $445.8 million for the nine months ended September 30, 2008, a decrease of $95.4 million or 21%. For the nine months ended September 30, 2009, service revenue for Printed Products was $340.6 million compared to $421.2 million in the corresponding period in the prior year, a decrease of $80.6 million or 19%. The decrease was primarily attributable to instant lottery tickets now being sold in China by our joint venture rather than by us directly ($25.2 million), the impact of the revised terms of previously announced lottery contract awards ($25.1 million), decreased licensed property revenues ($15.5 million) and the negative impact of foreign exchange rates ($12.4 million), partially offset by an increase in the sale of instant lottery tickets in Italy and the United Kingdom ($3.7 million).
Printed Products sales revenue for the nine months ended September 30, 2009 was $9.8 million compared to $24.6 million for the nine months ended September 30, 2008, a decrease of $14.8 million or 60%. The decrease was primarily the result of lower phone card sales revenue ($12.9 million) and decreased sales in Germany due to the closing of the Honsel facility in the first quarter of 2008 ($1.3 million).
Cost of services of $202.6 million for the nine months ended September 30, 2009 was $47.1 million or 19% lower than for the nine months ended September 30, 2008. The decrease was primarily due to instant lottery tickets now being produced in China by our joint venture rather than by us directly ($23.2 million), lower costs associated with our licensed properties ($8.2 million), savings related to the Company's Profitability Improvement Program and the impact of foreign exchange rates.
Cost of sales of $6.7 million for the nine months ended September 30, 2009 was $9.6 million or 59% lower than for the nine months ended September 30, 2008 . . .
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