Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SGMS > SEC Filings for SGMS > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for SCIENTIFIC GAMES CORP

Form 10-K for SCIENTIFIC GAMES CORP


17-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following MD&A is intended to enhance the reader's understanding of our operations and current business environment and should be read in conjunction with the description of our business (Item 1 of this Annual Report on Form 10-K) and our Consolidated Financial Statements and Notes (Item 8 of this Annual Report on Form 10-K).
This MD&A contains forward-looking statements and should be read in conjunction with the disclosures and information contained under "Forward-Looking Statements" and "Risk Factors" at the beginning and in Item 1A, respectively, of this Annual Report on Form 10-K. As used in this MD&A, the terms "we," "us," "our" and the "Company" mean Scientific Games Corporation together with its consolidated subsidiaries. Our MD&A is organized into the following sections:
BUSINESS OVERVIEW

CONSOLIDATED RESULTS

BUSINESS SEGMENT RESULTS

RECENTLY ISSUED ACCOUNTING GUIDANCE

CRITICAL ACCOUNTING ESTIMATES

LIQUIDITY, CAPITAL SOURCES AND WORKING CAPITAL

BUSINESS OVERVIEW
We are a leading developer of technology-based products and services and associated content for worldwide gaming and lottery markets. The Company's portfolio includes instant and draw-based lottery games; electronic gaming machines and game content; server-based lottery and gaming systems; sports betting technology; loyalty and rewards programs; and social, mobile and interactive content and services. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments. Impact of WMS Acquisition and Other Items On October 18, 2013, the Company acquired WMS for $1,485.9 million. For additional information regarding the WMS acquisition, please see Note 3 (Acquisitions and Dispositions). In connection with the WMS acquisition, we entered into new senior secured credit facilities in an aggregate principal amount of $2,600.0 million, consisting of a $300.0 million revolving credit facility and a $2,300.0 million term loan facility. The term loan facility was used, in part, to finance the consideration paid in the WMS acquisition, to pay off indebtedness under our and WMS's prior credit agreements and to pay related acquisition expenses and financing fees. For additional information regarding our new credit facilities, see Note 15 (Long-Term and Other Debt). We believe that the WMS acquisition is transformational for Scientific Games, creating one of the largest diversified global gaming suppliers. In particular, we believe that the WMS acquisition (1) significantly expands our gaming business, (2) diversifies our mix of products, customers and geographies in which we do business and (3) allows the combined company to leverage the unique core competencies of each organization. We also expect the combined company to benefit from economies of scale, which we believe will provide opportunities for synergies and cash flow improvements.
Our consolidated results of operations for the year ended December 31, 2013 were significantly impacted by the inclusion of the results of operations for WMS for the 74 days following the acquisition date. Results for the years ended December 2012 and 2011 do not include results of operations for WMS. Items related to the WMS acquisition and other items that impacted our results of operations are detailed below:
? $144.7 million of our revenue was attributable to WMS;

? our consolidated results also reflected:

            a $13.0 million increase of cost of product sales due to the
             write-up of finished goods inventory required under purchase
             accounting for the WMS acquisition;


            $19.8 million of acquisition-related fees and expenses related to
             the WMS acquisition and $24.5 million for legal contingencies and
             settlements that impacted SG&A;


            employee termination and restructuring charges of $22.7 million
             related to the WMS acquisition and other restructuring activities,
             including $5.3 million related to WMS integration activities, $2.2
             related to the discontinuance of a line of gaming machines following
             the WMS acquisition, $9.1 million related to management changes and
             $4.5 million related to the exit from our instant lottery game
             operations in Mexico;


            $18.5 million of accelerated or incremental depreciation expense,
             including $8.0 million of accelerated depreciation related to
             obsolete software, $4.9 million of incremental depreciation and
             amortization from the write-up of tangible and intangible assets
             under purchase accounting for the WMS acquisition, $3.1 million of
             accelerated depreciation related to our exit of our instant lottery
             game operations in Mexico and $2.5 million related to an impairment
             of a lottery systems contract;


            a $19.5 million year-over-year increase in interest expense related
             to the incremental indebtedness that we incurred under our new
             credit facilities to finance the WMS acquisition;


            a $26.6 million decline in our earnings from equity investments
             primarily reflecting $23.1 million in charges related to a change in
             the estimated useful lives of certain gaming machines that impacted
             results of our ITL equity investment and a write-down of our Guard
             Libang equity investment partially offset by a one-time $7.9 million
             early termination fee earned by ITL as part of a five-year contract
             extension;


            a loss on early extinguishment of debt of $5.9 million related to
             the early termination of our prior credit facilities in connection
             with the financing of the WMS acquisition; and


            an income tax benefit of $131.1 million related to the net deferred
             tax liabilities acquired in the WMS acquisition.

See Note 3 (Acquisitions and Dispositions), Note 4 (Restructuring Plans), Note 8 (Property and Equipment), Note 9 (Intangible Assets and Goodwill), Note 10 (Software), Note 11 (Equity Investments), Note 15 (Long-Term and Other Debt), Note 21 (Income Tax Expense) and Note 22 (Litigation) for additional information regarding the foregoing items.
Our results of operations for the year ending December 31, 2014 will reflect a full year of the results of operations for WMS. Among other things, these results are anticipated to reflect (1) significant investment in R&D by WMS (as illustrated by the $19.4 million increase in our R&D expense for the year ended December 31, 2013, almost all of which was attributable to the inclusion of WMS in our results since October 18, 2013), (2) higher SG&A, including the significant resources expended in the WMS interactive business for player acquisition, (3) incremental depreciation and amortization resulting from the write-up of tangible and intangible assets required under purchase accounting for the WMS acquisition and (4) higher interest expense related to our new credit facilities (as illustrated by the $19.5 million increase in interest expense for the year ended December 31, 2013).
For 2014, we are focused on successfully integrating WMS and Scientific Games and achieving anticipated cost synergies by implementing our plans to streamline our operations and cost structure. We are also focused on positioning the Company for profitable growth by leveraging our core strengths and capabilities to enhance our portfolio of products and services and to expand market penetration worldwide. We anticipate our future results of operations will benefit from these efforts, although we expect these benefits to be offset to some extent by incremental costs and capital expenditures related to our contemplated integration activities. We also expect to incur additional costs during 2014 to position ourselves to capitalize on longer-term revenue synergy opportunities.
Segments
We report our operations in three business segments: Instant Products, Lottery Systems and Gaming. The Instant Products and Lottery Systems business segments are managed by a single executive and the Gaming business segment is managed by a separate executive, both of whom report to our chief executive officer (who is the "chief operating decision maker" under applicable accounting rules). See "Business Segment Results" below and Note 2 (Business and Geographic Segments) for additional business segment information. Discontinued Operations
On March 25, 2013, we completed the sale of our installed base of gaming machines in our pub business, as discussed in Note 3 (Acquisitions and Dispositions). The results of our discontinued pub operations for the years ended December 31, 2013, 2012 and 2011 are presented in the Consolidated Statements of Operations and Comprehensive Loss in accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations. For the years ended December 31, 2013, 2012 and 2011, we recorded a loss from discontinued operations of $3.0 million, $24.6 million and $8.4 million, respectively, and a net loss from discontinued operations of $4.6 million, $18.7 million and $6.8 million, respectively.


Foreign Exchange
Our results are subject to the impact of changes in foreign currency exchange rates, which results in the translation of foreign functional currencies into U.S. dollars and the re-measurement of foreign currency transactions. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior period rates applied to current activity. We derived approximately 49% and 53% of our revenue from sales to customers outside of the U.S. in 2013 and 2012, respectively. We have exposure to foreign currency volatility, particularly the British Pound Sterling and the Euro. The British Pound Sterling and the Euro represented, respectively, $228.9 million, or 21%, and $65.5 million, or 6%, of our consolidated revenue for the year ended December 31, 2013. We also have foreign currency exposure related to certain of our equity investments. Our earnings from our Euro-denominated equity investment in LNS were $17.9 million for the year ended December 31, 2013. See further information regarding our foreign exchange exposures in "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of this Annual Report on Form 10-K.

CONSOLIDATED RESULTS
 (in millions)                        Years ended December 31,                           Variance
                                   2013       2012 (2)     2011 (2)        2013 vs 2012            2012 vs 2011
Revenue:
Instant games                   $  516.0     $  493.6     $  493.3     $   22.4         5  %   $   0.3         -  %
Services                           415.0        340.3        318.9         74.7        22  %      21.4         7  %
Product sales                      159.9         94.7         53.7         65.2        69  %      41.0        76  %
Total revenue                    1,090.9        928.6        865.9        162.3        17  %      62.7         7  %
Operating expenses:
Cost of instant games (1)          285.1        282.5        281.6          2.6         1  %       0.9         -  %
Cost of services (1)               203.1        170.7        161.8         32.4        19  %       8.9         6  %
Costs of product sales (1)         103.5         65.1         38.3         38.4        59  %      26.8        70  %
Selling, general and
administrative                     266.4        179.4        172.9         87.0        48  %       6.5         4  %
Research and development            26.0          6.6          6.1         19.4       294  %       0.5         8  %
Employee termination and
restructuring                       22.7         10.6          2.0         12.1       114  %       8.6       430  %
Depreciation and amortization      202.4        150.8        111.0         51.6        34  %      39.8        36  %
Operating (loss) income            (18.3 )       62.9         92.2        (81.2 )    (129 )%     (29.3 )     (32 )%
Total other (expense) income      (125.0 )      (86.1 )      (79.6 )      (38.9 )      45  %      (6.5 )       8  %
Net (loss) income from
continuing operations before
income taxes                      (143.3 )      (23.2 )       12.6       (120.1 )     518  %     (35.8 )    (284 )%
Income tax benefit (expense)       117.7        (20.7 )      (18.4 )      138.4      (669 )%      (2.3 )      13  %
Net loss from continuing
operations                      $  (25.6 )   $  (43.9 )   $   (5.8 )   $   18.3       (42 )%   $ (38.1 )     657  %



(1) Exclusive of depreciation and amortization.

(2) Prior year consolidated results were recast to exclude discontinued operations.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 Revenue
Consolidated revenue increased in each of our categories of revenues (instant games, services and product sales). The inclusion of revenue from WMS following the acquisition increased consolidated revenue by $144.7 million. Consolidated revenue also reflected unfavorable foreign currency translation of $1.7 million.

Instant games revenue increased by $22.4 million reflecting higher revenue from game licensing and player loyalty programs, higher revenue from our participation contracts in U.S. and international jurisdictions and higher revenue from our international price-per-unit contracts, partially offset by a decrease in revenue from our U.S. price-per-unit contracts.


Service revenue, which includes our participation-based and other service revenue from our Lottery Systems and Gaming business segments, increased $74.7 million reflecting the inclusion of $75.9 million of WMS service revenue. Excluding the portion related to WMS, service revenue was essentially flat year-over-year.

Product sales revenue included $68.8 million of post-acquisition WMS product sales revenue, and otherwise decreased by $3.6 million. The decrease resulted from lower U.S. lottery systems hardware sales and lower sales of gaming machines to our bingo and arcade customers in the U.K., partially offset by higher sales of hardware and software to our international lottery systems customers.
Cost of Revenue
Consolidated cost of revenue increased $73.4 million, including $63.8 million from WMS. Cost of instant games increased primarily due to increased revenue. Excluding $19.5 million of cost of revenue incurred by WMS following the acquisition, cost of service revenue increased $12.9 million related to a less profitable mix of service revenue. Excluding cost of product sales related to WMS, cost of product sales decreased $5.9 million primarily due to lower product sales in our U.K. gaming business.
SG&A
SG&A increased $87.0 million, which reflected $47.5 million of SG&A incurred by WMS following the acquisition, $19.8 million of fees and expenses related to the WMS acquisition and $24.5 million related to legal contingencies and settlements. The increase in SG&A was partially offset by a $6.2 million decrease in compensation expense.
R&D
R&D increased $19.4 million primarily related to WMS, which accounted for $19.1 million of the increase.
Employee Termination and Restructuring
Employee termination and restructuring costs included $5.3 million related to WMS integration activities, $9.1 million related to management changes, $4.5 million related to the exit from our instant lottery game operations in Mexico and $2.2 related to the discontinuance of a line of gaming machines following the WMS acquisition. We discuss these charges in more detail in Note 4 (Restructuring Plans).
Depreciation and Amortization
Depreciation and amortization increased $51.6 million, including $40.1 million of depreciation and amortization from WMS, which included $4.9 million of incremental depreciation and amortization resulting from the write-up of tangible and intangible assets under our purchase accounting for the WMS acquisition. In addition, as a result of our restructuring activities, we recorded $4.6 million of accelerated depreciation related to software for a line of gaming machines that we discontinued following the WMS acquisition and $3.1 million of accelerated depreciation related to the exit from our instant lottery game operations in Mexico. We also recorded an additional $3.4 million of accelerated depreciation expense related to other obsolete software in our gaming business and higher depreciation due to the placement of an internally developed software platform into service and the deployment of new lottery terminals in China. These increases were offset by $3.3 million of lower lottery systems impairments as compared to the prior year. Other Income and Expense
Interest expense increased $19.5 million due to the incremental indebtedness that we incurred under our new credit facilities to finance the WMS acquisition. In addition, we recorded a loss on early extinguishment of debt of $5.9 million related to the write-off of deferred financing costs associated with the early termination of our prior credit facilities in connection with the financing of the WMS acquisition. See further details regarding our indebtedness in Note 15 (Long-term and Other Debt). In 2012, we recorded a loss on early extinguishment of debt of $15.5 million due to the redemption of our 2016 Notes comprised primarily of the redemption premium and the write-off of previously deferred financing costs.

Earnings from equity investments decreased by $26.6 million primarily due to lower earnings from our investment in ITL related to the accelerated depreciation of certain gaming machines, as well as lower earnings from our investments in Northstar Illinois and RCN. We also recorded a $6.4 million impairment charge on our equity investment in Guard Libang. These decreases in earnings from equity investments were partially offset by a one-time $7.9 million early termination fee earned by ITL as part of a five-year contract extension. See further details in Note 11 (Equity Investments).


Income Tax Benefit (Expense)
We recorded an income tax benefit of $117.7 million for the year ended December 31, 2013 compared to income tax expense of $20.7 million for the year ended December 31, 2012. The effective income tax rates for the years ended December 31, 2013 and 2012 were 82.1% and (89.2)% respectively. In 2013, the Company recorded an income tax benefit of $131.1 million related to the net deferred tax liabilities acquired in the WMS acquisition. The income tax benefit was partially offset by income tax related to current-year profits of our foreign operations, the tax impact related to amortization of indefinite lived intangibles and our inability to recognize tax benefits associated with current-year losses in the U.S. After considering the net deferred tax liabilities acquired as a result of the WMS acquisition and the current-year U.S. loss, the Company recorded a partial release of the valuation allowance related to its net U.S. deferred tax assets in the amount of $68.9 million.

Our 2013 effective income tax rate on foreign earnings was impacted by the mix of income and the statutory tax rates in our foreign jurisdictions, which ranged from a low of 0% to a high of 35%. The foreign jurisdictions that had the most impact on our foreign income tax benefit (expense) in 2013 include Austria, Bermuda, Canada, Ireland, Mexico and the U.K.

Our income tax benefit (expense) may change from period to period based on, among other factors, the mix of earnings between U.S. and foreign jurisdictions and among foreign jurisdictions, the effect of the valuation allowance related to our U.S. deferred tax assets (or the release thereof), state and local taxes, specific events such as the settlement of income tax audits and changes in tax law, and the effects of our global income tax strategies. Please refer to Note
21 (Income Tax Expense) for additional information regarding our foreign and domestic pre-tax income (loss), our foreign and domestic income tax benefit (expense) and the effect foreign taxes have on our overall effective tax rate. Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue
Consolidated revenue reflected increases in each of our categories of revenue and the acquisition of Barcrest, which increased consolidated revenue by $26.9 million. Consolidated revenue also reflected unfavorable foreign currency translation of $8.9 million.

The increase in instant games revenue reflected higher revenue from our U.S. and international participation contracts and higher revenue from our player loyalty programs. This increase was partially offset by a decrease in game licensing revenue and by lower revenue from our U.S. and international price-per-unit contracts.

The increase in consolidated service revenue reflected higher lottery systems service revenue due in part to larger Powerball and Mega Millions jackpots in 2012 and higher instant game validation revenue, as well as higher gaming service revenue due to the acquisition of Barcrest and an increase in revenue from our U.K. LBO contracts.

The increase in product sales revenue resulted from higher equipment sales to U.S. customers, higher hardware and software sales to our international customers and the acquisition of Barcrest.

Cost of Revenue

Consolidated cost of revenue increased in 2012 versus 2011 reflecting the increase in consolidated revenue for the same period. The increase in consolidated cost of revenue included an increase in cost of services and cost of product sales reflecting the increase in service and product sales revenue, respectively, and an increase due to the impact of foreign currency translation of $5.3 million.
SG&A
The increase in SG&A reflected $5.4 million of incremental expense from our business acquisitions, higher compensation expense of $5.8 million (including a $2.6 million increase in stock-based compensation expense), a $6.2 million increase in accounts receivable reserves related to certain gaming customers and $2.9 million of higher expenses related to the expansion of our U.K. LBO business. This increase was partially offset by a decrease of $7.1 million in our accrual for potential incentive compensation under our performance-based incentive compensation plan relating to our Asia-Pacific business (the "Asia-Pacific Plan"), a decrease of $5.9 million due to the impact of a customer claim recorded during the year ended December 31, 2011 and an insurance settlement recovered in 2012 related to that claim, and lower professional and advisory fees of $3.0 million. The overall increase in SG&A was also partially offset by a $1.0 million decrease due to the impact of foreign currency translation.


Employee Termination and Restructuring
Employee termination and restructuring costs of $10.6 million related to our exit from the Barcrest analog AWP business, the reorganization of our pub business in an effort to more effectively capitalize on the Barcrest acquisition and the reorganization of our Australian printing operations. Depreciation and Amortization
Depreciation and amortization increased principally due to $31.9 million of accelerated depreciation expense in our gaming business, including $12.5 million related to the write-down of gaming machines and software in our pub business and $19.4 million related to a write-down of gaming machines primarily related to customers transitioning to newer generation terminals. Depreciation and amortization also increased due to the $5.8 million impairment of certain long-lived assets related to underperforming Lottery Systems contracts, $4.4 million of accelerated depreciation expense related to the write-down of certain development costs in our licensed properties business and $6.8 million of incremental depreciation expense from the acquisition of Barcrest. In addition, we recorded $3.4 million of accelerated depreciation expense related to the reorganization of our Australian printing operations. The increase was partially offset by a $6.4 million decrease due to accelerated depreciation expense recorded in 2011 related to the replacement of our Gaming business technology platform.
Other Income and Expense
Interest expense decreased primarily due to a decline in borrowing costs related to our variable interest rate debt and the expiration of an interest rate swap in October 2011.
Earnings from equity investments decreased due to lower earnings from most of our equity method investments, partially offset by an increase in earnings from RCN.
Loss on early extinguishment of debt increased due to the redemption of our 2016 Notes resulting in a charge of $15.5 million comprised primarily of the redemption premium and the write-off of previously deferred financing costs. Other expense increased principally due to an increase in foreign exchange transaction expenses.
Income Tax Expense
Income tax expense was $20.7 million for the year ended December 31, 2012 compared to $18.4 million for the year ended December 31, 2011. The effective income tax rates for the year ended December 31, 2012 and 2011 were (89.2)% and 146.0%, respectively. The effective tax rate for 2012 did not include the benefit of the current year U.S. tax loss as a result of the valuation allowance against our U.S. deferred tax assets. Our effective income tax rate on foreign earnings was impacted by the mix of income and the statutory tax rates in our foreign jurisdictions, which ranged from a low of 0% to 35%. The foreign jurisdictions that had the most impact on our foreign income tax in 2012 include Austria, Canada, Ireland, Mexico and the U.K.

Our income tax benefit (expense) may change from period-to-period based on, among other factors, the mix of earnings between U.S. and foreign jurisdictions and among foreign jurisdictions, the effect of the valuation allowance related to our U.S. deferred tax assets, state and local taxes, specific events such as the settlement of income tax audits and changes in tax law, and the effects of the Company's global income tax strategies. Please refer to Note 21 (Income Tax Expense) for additional information regarding our foreign and domestic pre-tax income (loss), our foreign and domestic income tax provision and the effect foreign taxes have on our overall effective tax rate.
BUSINESS SEGMENTS RESULTS
INSTANT PRODUCTS
Our Instant Products segment is primarily comprised of our global instant lottery games business. We generate revenue from the manufacturing and sale of instant lottery games, as well as the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management and warehousing and fulfillment services. In addition, we provide licensed games, promotional entertainment and internet-based marketing services to the lottery industry. These revenues are presented as Instant Games in our results of operations. Revenue generated from the sale of phone cards that we manufacture is presented as product sales in our results of operations. Our equity investments in LNS (Italy), Northstar Illinois, Northstar New Jersey, CSG (China) and Hellenic Lotteries (Greece) are included in the Instant Products segment.
Overview
In addition to maintaining our traditional base of U.S. Instant Products customers, we continue to seek opportunities to expand internationally. In May . . .

  Add SGMS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SGMS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.