Scientific Games announces fourth quarter and year end 2011 results

Business highlights
-Scientific Games’ U.S. instant ticket and lottery systems customers’ retail sales increased 8.5% and 2.7%, respectively, in the fourth quarter of 2011 compared to the prior-year period, and increased 6.5% and 0.1%, respectively, in the full-year 2011 compared to the prior-year period, based on third-party data.

-China Sports Lottery instant ticket retail sales increased 15.7% in the fourth quarter of 2011 versus the prior-year period; full-year 2011 sales reached a record level of approximately 20 billion RMB, a 21.4% increase over 2010 sales .

-Italian instant ticket retail sales were flat in the fourth quarter of 2011 compared to the prior-year period; full-year 2011 sales reached euro 10.2 billion, an 8.4% increase over 2010 sales.

-Global Draw’s U.K. total gross win and gross win per machine per day increased approximately 71.0% and 8.3%, respectively, in the fourth quarter of 2011 versus the prior-year period, and increased 52.6% and 6.7% respectively, in the full-year 2011 versus the prior-year period.

-The company signed a contract with the Illinois Gaming Board to provide a management and central communication system to operate up to 60,000 terminals for six years, with options for four one-year extensions.

-Illinois Lottery instant ticket sales increased approximately 26% for the first six months of the lottery’s fiscal year ending June 30, 2012, which coincides with the operation of the Northstar private management agreement.

-The price for a Powerball ticket increased from us$ 1 to us$ 2 starting on January 15, 2012; the first jackpot won following the price increase was us$ 336 million, representing the third largest Powerball jackpot and the sixth largest U.S. lottery jackpot in history.

"This is a truly exciting time for the lottery and gaming industries, and of course, for Scientific Games," Chairman and CEO A. Lorne Weil commented. "We are pursuing a number of growth initiatives, including lottery privatization and other outsourcing models, and expansion of our international lottery and gaming businesses.  Also, we believe the Department of Justice’s recent opinion on the legality of in-state lottery sales over the internet could provide substantial growth opportunities for the industry in the years to come.  We are presently in discussions with our U.S. customers to help them evaluate how best to exploit this potential new channel for distribution, while continuing to drive growth in traditional brick and mortar channels. Simultaneously, we are expanding our portfolio of internet solutions and content to better meet our customers’ needs."

Jeffrey S. Lipkin, Senior VP and CFO, added, "We’re pleased that our business continued to perform well across all segments, and that our revenue has grown both sequentially and year-over-year in each quarter of 2011.  While the acquisition of Barcrest and our ongoing investments in our growth initiatives impacted our profitability this quarter, we anticipate capitalizing on these investments in 2012 and beyond as we expect various business development initiatives to come to fruition and we realize synergies from the Barcrest acquisition.”

Fourth quarter 2011 financial results
Revenue was us$ 239.1 million in the fourth quarter of 2011 compared to us$ 212.1 million in the fourth quarter of 2010. This 13% increase in revenue reflects growth across all of the Company’s operating segments, led by Gaming.

Operating income was us$ 19.2 million in the fourth quarter of 2011 compared to an operating loss of us$ 11 million in the prior-year period. This increase primarily reflects higher revenue along with a decrease of us$ 29 million in depreciation and amortization expense due to the absence of non-cash charges recorded in the fourth quarter of 2010 related to underperforming Lottery Systems contracts (us$ 17.5 million), obsolete Lottery Systems and Global Draw equipment (us$ 5.5 million) and accelerated depreciation associated with Global Draw's migration to a new technology platform (us$ 8.3 million).

Partially offsetting these results was a us$ 9.4 million year-over-year increase in selling, general and administrative expense, of which us$ 2.7 million related to fees in connection with M&A activities and financing-related expenses, an accrual of us$ 2.3 million for the Asia-Pacific incentive compensation plan, us$ 2.1 million related to investments in the Company’s growth initiatives, including increased headcount, us$ 1.8 million for incremental overhead from the acquisition of Barcrest and us$ 0.8 million related to stock-based compensation expense. 

The company’s share of EBITDA generated from equity investments was $19.5 million in the fourth quarter of 2011, compared with us$ 19.3 million in the prior-year period. Attributable EBITDA was us$ 80.3 million in the fourth quarter of 2011, compared to us$ 77.7 million in the prior-year period.
Net loss in the fourth quarter of 2011 was us$ 8.5 million, compared to a net loss of us$ 158.4 million in the prior-year period. In addition to the impact of the items mentioned above, the increase in net income was driven by a us$ 1.9 million decrease in interest expense and a us$ 123.8 million decrease in income tax expense due to the absence of a non-cash charge of us$ 137.3 million that was recorded in the fourth quarter of 2010 to establish a valuation allowance against the company’s U.S. deferred tax assets.

This was partially offset by us$ 4.7 million of lower earnings from equity investments and a us$ 2 million increase in other expense primarily due to us$ 1.1 million of foreign exchange transaction expense in the current-year period. The decline in earnings from equity investments was principally due to decreased earnings from Lotterie Nazionali (LNS), primarily related to increased advertising and other expenses, including certain one-time items, and reduced earnings from another equity investment due to an asset impairment.

Printed Products

Printed Products revenue increased to us$ 125.2 million in the fourth quarter of 2011 from us$ 124.2 million in the prior-year period. The increase in instant ticket revenue resulted primarily from us$ 3.8 million of higher sales to U.S. customers due in large part to increased instant ticket sales to the Illinois Lottery. These results were partially offset by a decrease of us$ 3.6 million in sales to international customers, primarily due to a lower volume of instant tickets sold to Italy.

Operating income increased 16% to us$ 32.2 million in the fourth quarter of 2011 from us$ 27.8 million in the prior-year period. This improvement was driven by a higher and more profitable mix of revenue (us$ 2.3 million) and a decrease of us$ 1.9 million in selling, general and administrative expenses primarily due to the absence of a us$ 2.3 million earn-out payment that occurred in the fourth quarter of 2010 related to an acquisition that was completed in 2004.

Lottery Systems
Lottery Systems revenue increased 10% to us$ 69.5 million in the fourth quarter of 2011 from us$ 63.2 million in the fourth quarter of 2010. The 8.5% increase in service revenue primarily reflected an increase of us$ 3.1 million in U.S. revenue, primarily driven by increased instant ticket validation revenue and higher bloc lotto jackpots. The 17% year-over-year increase in sales revenue in the fourth quarter of 2011 resulted largely from us$ 2.6 million of increased sales of software and hardware to international customers.

Operating income was us$ 11.1 million in the fourth quarter of 2011 compared to an operating loss of us$ 7.7 million in the fourth quarter of 2010. This increase was driven primarily by a us$ 20.7 million reduction in depreciation and amortization expense, which resulted from the absence of non-cash impairment charges that occurred in the fourth quarter of 2010 related to underperforming Lottery Systems contracts (us$ 17.5 million) and obsolete Lottery Systems equipment (us$ 3 million). This improvement was partially offset by a less profitable revenue mix compared to the prior-year period as a result of higher cost of services of us$ 1.3 million due in part to a customer hardware refurbishment program in the fourth quarter of 2011, along with a us$ 2.1 million increase in selling, general and administrative expense primarily due to higher headcount and expenses to support the expansion of the company’s business in China. 

China Sports Lottery retail sales increased 15.7% in the fourth quarter of 2011 versus the prior-year period, primarily driven by continued expansion of the retailer and validation network, along with continued strong performance of the 30 RMB instant ticket.

Gaming
Gaming revenue was us$ 44.4 million in the fourth quarter of 2011 compared to us$ 24.7 million in the fourth quarter of 2010. This 80% increase in revenue was driven by the acquisition of Barcrest (us$ 11.5 million), a 40% year-over-year increase in Global Draw’s and Games Media’s installed base of server-based gaming terminals and an 8.3% year-over-year increase in Global Draw’s gross win per machine per day.

Operating income was us$ 2.8 million in the fourth quarter of 2011 compared to an operating loss of us$ 10.6 million in the fourth quarter of 2010. This increase was primarily due to the impact of us$ 19.7 million in higher revenue and an us$ 8.3 million decline in depreciation and amortization expense. While operating income benefitted from higher revenue and a more profitable mix of service business, Gaming sales revenue partially offset this increase due to lower margin sales of Barcrest analog amusement with prizes (AWP) gaming terminals for the U.K. pub sector.

During the first quarter of 2012, the company decided to discontinue Barcrest’s analog AWP operations in order to focus solely on its digital server-based supply model.  The determination to exit from the analog AWP business was part of a comprehensive strategic review, which was designed to focus resources on those operations believed to have the greatest potential for both the Company and its customers. The company anticipates realizing additional cost savings as a result of this action during 2012.

The decline in depreciation and amortization expense resulted from the absence of non-cash impairments relating to obsolete Global Draw equipment (us$ 2.5 million) and accelerated depreciation associated with Global Draw's migration to a new technology platform (us$ 8.3 million) that occurred in the fourth quarter of 2010.  These benefits were partially offset by a us$ 2.9 million increase in selling, general and administrative expenses that largely resulted from the addition of overhead expense for Barcrest and increased incentive compensation expense, and us$ 1 million in employee termination and restructuring charges related to the integration of Barcrest.