Scientific Games Reports Third Quarter 2019 Results
LAS VEGAS, Nov. 7, 2019 /PRNewswire/ -- Scientific Games Corporation (NASDAQ: SGMS) ("Scientific Games," "SGC" or the "Company") today reported results for the third quarter ended September 30, 2019.
Third Quarter 2019 Financial Highlights:
-- Third quarter revenue rose 4 percent to $855 million, up from $821
million in the year ago period. The growth was achieved across every
business segment.
-- Net income was $18 million compared to a net loss of $352 million in the
prior year period. Net income was driven by growth in revenue and a $19
million gain on remeasurement of Euro denominated debt versus a $4
million loss in the prior year period. The prior year period included
$339 million in restructuring and other charges primarily related to the
verdict in the Shuffle Tech legal matter.
-- Consolidated Adjusted EBITDA ("Consolidated AEBITDA"), a non-GAAP
financial measure, increased 6 percent to $344 million from $326 million
in the prior year period, primarily driven by higher revenues and
business improvements.
-- Net cash provided by operating activities was $141 million compared to
$223 million in the year ago period, primarily due to a $48 million
change in the timing of interest payments and an increase in receivables
driven by higher game sales and the timing of collections throughout the
quarter.
-- Free cash flow, a non-GAAP financial measure, was $53 million. Net debt,
a non-GAAP financial measure, decreased $50 million sequentially to $8.6
billion at quarter end ($9 billion in face value of debt outstanding
less $363 million of cash and cash equivalents). Net debt leverage
ratio, a non-GAAP financial measure, decreased to 6.4x. The company is
targeting net debt leverage of approximately 5.5x by the end of 2020.
Barry Cottle, President and Chief Executive Officer of Scientific Games, said, "Each of our business segments is growing on both the top and bottom line, enabling us to continue on our path to 5.5x net debt leverage by the end of 2020. We showcased our great games and products at G2E which demonstrated our industry leading position as a one-stop solution across platforms and key content. This positioning will allow us to enhance partner operations, grow in existing markets and win in emerging markets."
Michael Quartieri, Chief Financial Officer of Scientific Games, added, "Our products grew the top-line, and operating leverage was driven by business improvements. We believe there are a number of avenues for further growth driven by share gains and new market opportunities. We remain firmly committed to maximize cash flows and delever our balance sheet."
SUMMARY CONSOLIDATED RESULTS
($ in millions)
Three Months Ended September 30,
2019 2018
Revenue $
855 $
821
Net income (loss) 18 (352)
Net cash provided by operating activities(1) 141 223
Capital expenditures 75 93
Non-GAAP Financial Measures
(2)
---
Consolidated AEBITDA $
344 $
326
Consolidated AEBITDA margin 40
% 40
%
Free cash flow $
53 $
122
Balance Sheet Measures As of September 30, 2019 As of December 31, 2018
---
Cash and cash equivalents $
363 $
168
Principal face value of debt outstanding(3) 8,960 9,219
Available liquidity 1,121 439
(1) The three months ended September
30, 2019 and 2018 include a $15
million and $63 million favorable
change, respectively, in accrued
interest due to refinancing
transactions. The three months ended
September 30, 2019 include
approximately $3 million of payments
related to contingent acquisition
consideration.
(2) The financial measures
"Consolidated AEBITDA",
"Consolidated AEBITDA margin", and
"free cash flow" are non-GAAP
financial measures defined below
under "Non-GAAP Financial Measures"
and reconciled to the most directly
comparable GAAP measures in the
accompanying supplemental tables at
the end of this release.
(3) Principal face value of
outstanding 2026 Secured Euro Notes
and 2026 Unsecured Euro Notes are
translated at the constant foreign
exchange rate at issuance of these
notes. Euro to USD exchange rates at
issuance and as of September 30,
2019 were 1.24 and 1.10,
respectively, resulting in an $85
million adjustment increasing the
2019 principal face value of debt
outstanding presented above.
Additionally, the 2019 principal
face value excludes $11 million in
finance lease obligations and
proceeds received from transactions
completed in 2018, which are
presented as debt.
BUSINESS SEGMENT HIGHLIGHTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019
($ in
millions)
Revenue
AEBITDA
AEBITDA Margin
2019 2018
$ % 2019 2018
$ % 2019 2018 PP Change(2)
Gaming $
454 $
448 6 1 $
226 $
233 (7) (3) 50 52
% % % % (2)
Lottery 220 207 13 6 99 92 7 8 45 44
% % % % 1
SciPlay 116 105 11 11 32 24 8 35 28 23
(1)
% % % % 5
Digital 65 61 4 7 17 12 5 42 26 20
% % % % 6
PP -percentage points.
(1) As a result of the initial
public offering of a minority
interest in SciPlay and starting
with the first quarter of 2019, we
changed the calculation of SciPlay
AEBITDA, which now reflects
intercompany charges for corporate
services and certain royalties paid
for by SciPlay to other segments or
to Corporate. SciPlay information
for the prior comparable period has
been recast to reflect these
changes.
(2) As calculations are made using
whole dollar numbers, actual
results may vary compared to
calculations presented in this
table.
Key Highlights vs. Third Quarter 2018
-- Gaming machine sales - total new unit shipments in the U.S. and Canada
increased 10% due to continued strong demand for the Twinstar J43 and
momentum in the Twinstar Wave XL cabinet. U.S. and Canadian replacements
units increased 24% excluding units from a strategic long-term
relationship entered into in Oklahoma in the prior year. Openings and
expansion units increased by over 600 units driven by strong sales into
Illinois and a new opening in California.
-- Gaming operations - total gaming operations revenues decreased by $1
million sequentially. The U.S. and Canadian installed base decreased 547
units sequentially from the removal and convert to sale of some low fee
per day machines. International gaming operations revenue increased
driven by strength in the Europe, Middle East, and Africa (EMEA) region
offsetting the anticipated removal of machines in the U.K.
-- Gaming systems revenue was higher due to growth in maintenance and
services revenue from existing systems.
-- Table Products continued to grow with revenue up $8 million from the
prior year period to $60 million on continued strength in the business.
-- Lottery awarded multiple long-term contracts including being named the
exclusive supplier to the joint venture operating the Turkey National
Lottery and the exclusive terminal hardware partner to Sisal in Italy.
In early October, the Florida Lottery selected Scientific Games as its
primary instant games provider through 2027, continuing a more than
30-year partnership.
-- Lottery systems revenue was $5 million higher primarily related to
hardware sales as part of a recent award of a 10-year sports betting
contract in Turkey.
-- Lottery instant products revenue was $8 million higher with strength
both domestically and internationally.
-- SciPlay revenue increased 11%, which exceeded the market rate of growth.
The growth was driven by increased monetization of paying players, with
ARPDAU up 9% to $0.47.
-- Digital revenue increased 7% and AEBITDA increased 42%. Received the
Digital Product of the Year prize at the Global Gaming Awards 2019 for
OpenSports, our end-to-end sports betting product suite, for the second
consecutive year.
LIQUIDITY
($ in millions) Three Months Ended September 30,
2019 2018 Increase /(Decrease)
Net income
(loss) $
18 $
(352) $
370
Non-cash
adjustments
included in net
loss 149 184 (35)
Non-cash
interest 6 7 (1)
Changes in
deferred income
taxes and other 4 (4)
Distributed
earnings from
equity
investments 2 5 (3)
Change in legal
reserves 310 (310)
Changes in
working capital
accounts (34) 65 (99)
Net cash
provided by
operating
activities $
141 $
223 $
(82)
-- Net cash provided by operating activities was $141 million compared to
$223 million in the year ago period, primarily due to a $48 million
change in the timing of interest payments and an increase in receivables
driven by higher game sales and the timing of collections throughout the
quarter.
-- Free cash flow, a non-GAAP financial measure defined below, was $53
million compared to$122 million in the prior year period.
-- The Company made voluntary debt repayments of $45 million and $10
million in mandatory amortization of its term loans.
-- Available liquidity totaled $1,121 million compared to $439 million at
year end 2018.
-- In November 2019, the Company received commitments from some of its
revolving lenders to extend approximately $600 million of commitments
under the existing revolving credit facility for a five-year period. The
Company is still in discussions with other lenders regarding potential
additional extended revolver commitments.
-- Capital expenditures totaled $75 million, compared to $93 million in the
prior year period. For 2019, the Company now expects capital
expenditures will be $295-$315 million, which is lower than the prior
range of $340-$360 million.
Earnings Conference Call
Scientific Games executive leadership will host a conference call on Thursday, November 7, 2019, at 4:15 pm. EST to review the Company's third quarter results. To access the call live via a listen-only webcast and presentation, please visit http://www.scientificgames.com/investors/events-presentations/ and click on the webcast link under the Investor Information section. To access the call by telephone, please dial: +1 (412) 317-5420 (U.S. and International) and ask to join the Scientific Games Corporation call. A replay of the webcast will be archived in the Investors section on www.scientificgames.com.
About Scientific Games
Scientific Games Corporation (NASDAQ: SGMS) is the world leader in offering customers a fully integrated portfolio of technology platforms, robust systems, engaging content and services. The Company is the global leader in technology-based gaming systems, digital real-money gaming and sports betting platforms, table games, table products and instant games, and a leader in products, services and content for gaming, lottery and social gaming markets. Scientific Games delivers what customers and players value most: trusted security, creative entertaining content, operating efficiencies and innovative technology.
You can access our filings with the SEC through the SEC website at www.sec.gov or through our website, and we strongly encourage you to do so. We routinely post information that may be important to investors on our website at www.scientificgames.com/investors/, and we use our website as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC's Regulation Fair Disclosure (Reg FD). The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this document, and shall not be deemed "filed" under the Securities Exchange Act of 1934, as amended.
COMPANY CONTACTS
Media Relations
Investor Relations
Susan Cartwright +1 702-532-7981
Trent Kruse +1 702-532-7641
Vice President, Corporate Communications
Senior Vice President, Investor Relations
susan.cartwright@scientificgames.com
trent.kruse@scientificgames.com
All ® notices signify marks registered in the United States. © 2019 Scientific Games Corporation. All Rights Reserved.
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
---
Revenue:
Services $
452 $
439 $
1,368 $
1,315
Product sales 255 240 731 721
Instant products 148 142 438 442
Total revenue 855 821 2,537 2,478
Operating Expenses:
Cost of services(1) 133 124 401 371
Cost of product sales(1) 115 110 333 335
Cost of instant products(1) 69 67 211 208
Selling, general and
administrative 175 170 535 515
Research and development 47 50 142 153
Depreciation, amortization
and impairments 162 166 497 527
Restructuring and other 11 339 24 424
Total operating expenses 712 1,026 2,143 2,533
Operating income (loss) 143 (205) 394 (55)
Other (expense) income:
Interest expense (146) (147) (447) (448)
Earnings from equity
investments 4 4 17 16
Loss on debt financing
transactions - (60) (93)
Gain (loss) on remeasurement
of debt 19 (4) 21 29
Other (expense) income, net (5) 2 (2)
Total other expense, net (128) (147) (467) (498)
Net income (loss) before
income taxes 15 (352) (73) (553)
Income tax benefit (expense) 3 (8) (6)
Net income (loss) 18 (352) (81) (559)
Less: Net income
attributable to
noncontrolling interest 4 6
Net income (loss)
attributable to SGC $
14 $
(352) $
(87) $
(559)
Basic and diluted net income (loss)
attributable to SGC per share:
Basic $
0.15 $
(3.85) $
(0.94) $
(6.15)
Diluted $
0.15 $
(3.85) $
(0.94) $
(6.15)
Weighted average number of shares used in
per share calculations:
Basic shares 93 91 93 91
Diluted shares 94 91 93 91
(1) Excludes depreciation and
amortization.
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions)
September 30, December 31,
2019 2018
Assets:
Cash and cash equivalents $
363 $
168
Restricted cash 46 39
Accounts receivable, net 636 599
Notes receivable, net 123 114
Inventories 257 216
Prepaid expenses, deposits and other current assets 226 233
Total current assets 1,651 1,369
Restricted cash 12 13
Notes receivable, net 52 40
Property and equipment, net 516 547
Operating lease right-of-use assets 107
Goodwill 3,251 3,280
Intangible assets, net 1,579 1,809
Software, net 270 285
Equity investments 266 298
Other assets 203 77
Total assets $
7,907 $
7,718
Liabilities and Stockholders' Deficit:
Current portion of long-term debt $
288 $
45
Accounts payable 253 225
Accrued liabilities 504 477
Total current liabilities 1,045 747
Deferred income taxes 106 108
Operating lease liabilities 91
Other long-term liabilities 308 334
Long-term debt, excluding current portion 8,482 8,992
Total stockholders' deficit(1) (2,125) (2,463)
Total liabilities and stockholders' deficit $
7,907 $
7,718
(1) Includes $98 million in
noncontrolling interest as of
September 30, 2019.
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
---
Cash flows from operating
activities:
Net income (loss) $
18 $
(352) $
(81) $
(559)
Adjustments to
reconcile net income
(loss) to cash
provided by operating
activities 157 196 597 678
Changes in working
capital accounts, net
of effects of
acquisitions (34) 375 (120) 237
Changes in deferred
income taxes and
other 4 7
Net cash provided by
operating activities 141 223 403 356
Cash flows from investing
activities:
Capital expenditures (75) (93) (207) (293)
Acquisitions of
businesses and
assets, net of cash
acquired (274)
Distributions of
capital from equity
investments 1 18 24
Additions to equity
method investments (1) (1) (76)
Net cash used in
investing activities (75) (93) (190) (619)
Cash flows from financing
activities:
Payments of long-term
debt, net of proceeds (55) (122) (308) (30)
Repayment of assumed
NYX debt (288)
Payments of debt
issuance and deferred
financing and
offering costs (1) (24) (39)
Net proceeds from
issuance of SciPlay's
common stock 342
Payments on license
obligations (13) (8) (26) (22)
Sale of future revenue 11
Net redemptions of
common stock under
stock-based
compensation plans
and other 1 (3) (6) (24)
Net cash used in
financing activities (68) (133) (11) (403)
Effect of exchange
rate changes on cash,
cash equivalents and
restricted cash (2) 1 (1) (2)
(Decrease) increase in
cash, cash
equivalents and
restricted cash (4) (2) 201 (668)
Cash, cash equivalents
and restricted cash,
beginning of period 425 168 220 834
Cash, cash equivalents
and restricted cash,
end of period $
421 $
166 $
421 $
166
Supplemental cash flow information:
Cash paid for interest $
121 $
76 $
391 $
442
Income taxes paid 10 10 28 25
Distributed earnings
from equity
investments 2 5 24 24
Cash paid for
contingent
consideration
included in operating
activities 4 23
Supplemental non-cash transactions:
Non-cash rollover and
refinancing of Term
loans 3,275
Non-cash interest
expense 6 7 19 19
NYX non-cash
consideration
transferred 93
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
RECONCILIATION OF NET INCOME (LOSS) ATTRIBUTABLE TO
SGC TO CONSOLIDATED ADJUSTED EBITDA
AND SUPPLEMENTAL BUSINESS SEGMENT DATA
(Unaudited, in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
Reconciliation of Net Income
(Loss) Attributable to SGC to
Consolidated Adjusted EBITDA
---
Net income (loss) attributable to
SGC $
14 $
(352) $
(87) $
(559)
Net income attributable to
noncontrolling interest 4 6
Net income (loss) 18 (352) (81) (559)
Restructuring and other(1) 11 339 24 424
Depreciation, amortization and
impairments 162 166 497 527
Other expense, net 9 2 7 9
Interest expense 146 147 447 448
Income tax (benefit) expense (3) 8 6
Stock-based compensation 9 10 33 34
Loss on debt financing
transactions 60 93
(Gain) loss on remeasurement of
debt (19) 4 (21) (29)
EBITDA from equity investments(2) 15 14 50 49
Earnings from equity investments (4) (4) (17) (16)
Consolidated Adjusted EBITDA $
344 $
326 $
1,007 $
986
Supplemental Business Segment
Data
---
Business segments Adjusted EBITDA
Gaming(3) $
226 $
233 $
656 $
686
Lottery 99 92 306 286
SciPlay(3) 32 24 90 70
Digital 17 12 42 42
Total business segments Adjusted
EBITDA 374 361 1,094 1,084
Corporate and other(4) (30) (35) (87) (98)
Consolidated Adjusted EBITDA $
344 $
326 $
1,007 $
986
Reconciliation to Consolidated
Adjusted EBITDA margin
---
Consolidated Adjusted EBITDA $
344 $
326 $
1,007 $
986
Revenue 855 821 2,537 2,478
Consolidated Adjusted EBITDA 40 40 40
% 40
margin % % %
(1) Refer to Consolidated AEBITDA
definition for a description of items
included in restructuring and other.
(2) The Company received $3 million and
$43 million in cash distributions and
return of capital payments from its
equity investees for the three and
nine months ended September 30, 2019,
respectively, and $7 million and $49
million in cash distributions and
return of capital payments from its
equity investees for the three and
nine months ended September 30, 2018,
respectively.
(3) As a result of the IP License
Agreement effective as of May 7, 2019,
our Gaming business segment AEBITDA no
longer benefits from related royalties
and/or fees for use of intellectual
property, while our SciPlay business
segment AEBITDA increased
proportionately. While there were no
IP charges for the three months ended
September 30, 2019, the nine months
ended September 30, 2019 included $10
million of IP charges. The three and
nine months ended September 30, 2018
included IP charges of $7 million and
$19 million, respectively.
(4) Includes amounts not allocated to
the business segments (including
corporate costs) and other non-
operating expenses (income).
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION - SEGMENTS KEY PERFORMANCE INDICATORS AND SUPPLEMENTAL FINANCIAL DATA
(Unaudited, in millions, except unit and per unit data)
Three Months Ended
September 30, September 30, June 30,
2019 2018 2019
Gaming Business Segment Supplemental
Financial Data:
---
Revenue by line of business:
---
Gaming operations $
149 $
159 $
150
Gaming machine sales 168 167 148
Gaming systems 77 70 67
Table products 60 52 62
Total revenue $
454 $
448 $
427
Gaming Operations Revenue:
---
U.S. and Canada:
Installed base at
period end 31,509 33,530 32,056
Average daily revenue
per unit $
38.85 $
39.44 $
38.98
International:
Installed base at
period end 33,663 33,567 34,112
Average daily revenue
per unit $
9.73 $
10.50 $
11.24 (5)
Gaming Machine Sales Revenue:
---
U.S. and Canada new
unit shipments 5,530 5,038 4,671
International new
unit shipments 2,731 2,625 2,730
New unit shipments 8,261 7,663 7,401
Average sales price
per new unit $
17,500 $
18,199 $
17,436
Gaming Machine Unit Sales Components:
---
U.S. and Canada unit shipments:
Replacement units 4,152 4,266 3,443
Casino opening and
expansion units 1,378 772 1,228
Total unit shipments 5,530 5,038 4,671
International unit shipments:
Replacement units 2,631 2,414 2,674
Casino opening and
expansion units 100 211 56
Total unit shipments 2,731 2,625 2,730
Lottery Business Segment Supplemental
Financial Data:
---
Instant products revenue by geography:
---
United States $
104 $
99 $
102
International 46 43 48
Instant products
revenue $
150 $
142 $
150
Lottery systems revenue by financial
statement line item:
---
Services revenue $
50 $
50 $
54
Product sales revenue 20 15 27
Total Lottery systems
revenue $
70 $
65 $
81
Digital Business Segment Supplemental
Financial Data:
---
Revenue by Lines of Business:
---
Sports and platform $
29 $
21 $
26
Gaming and other 36 40 43
Total revenue $
65 $
61 $
69
Wagers processed
through OGS (in
billions) $
9.0 $
8.6 $
9.3
---
SciPlay Business Segment Supplemental
Financial Data:
---
Revenue by Platform:
---
Mobile $
97 $
83 $
98
Web and other 19 22 20
Total revenue $
116 $
105 $
118
Mobile penetration(1) 84
% 79
% 83
%
Average MAU(2) 7.8 8.4 8.1
Average DAU(3) 2.7 2.7 2.7
ARPDAU(4) $
0.47 $
0.43 $
0.48
(1) Mobile penetration is defined as
the percentage of SciPlay revenue
generated from mobile platforms.
(2) MAU = Monthly Active Users is a
count of visitors to our sites during
a month. An individual who plays two
different games or from two different
devices may, in certain circumstances,
be counted twice. However, we use
third-party data to limit the
occurrence of double counting.
(3) DAU = Daily Active Users is a count
of visitors to our sites during a day.
An individual who plays two different
games or from two different devices
may, in certain circumstances, be
counted twice. However, we use third-
party data to limit the occurrence of
double counting.
(4) ARPDAU = Average revenue per DAU is
calculated by dividing revenue for a
period by the DAU for the period by
the number of days for the period.
(5) Includes the impact of game content
licensing revenue recognized during
the three months ended June 30, 2019.
The average daily revenue per unit for
the three months ended June 30, 2019
would have been $10.31 if such items
were recognized over the license term.
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
(Unaudited, in millions, except for ratio)
CALCULATION OF NET DEBT LEVERAGE RATIO
Twelve Months Ended Twelve Months Ended
September 30, 2019 September 30, 2018
---
Net income (loss) attributable to
SGC $
120 $
(602)
Net income attributable to
noncontrolling interest 6
Net income (loss) 126 (602)
Restructuring and other (147) 452
Depreciation, amortization and
impairments 660 697
Other (income) expense, net (9) 13
Interest expense 596 599
Income tax expense 15 1
Stock-based compensation 43 41
Loss on debt financing transactions 60 93
Gain on remeasurement of debt (35) (29)
EBITDA from equity investments(1) 68 69
Earnings from equity investments (26) (23)
Consolidated Adjusted EBITDA $
1,351 $
1,311
Principal face value of debt
outstanding(2) $
8,960 $
8,951
Less: Cash and cash equivalents 363 113
Net debt $
8,597 $
8,838
Net debt leverage ratio 6.4 6.7
(1) The Company received $57 million and $73 million in cash distributions and return of capital payments from its equity investees for the twelve months ended September 30, 2019, and 2018, respectively.
(2) Principal face value of outstanding 2026 Secured Euro Notes and 2026 Unsecured Euro Notes are translated at the constant foreign exchange rate at issuance of these notes. Euro to USD exchange rates at issuance and as of
September 30, 2019 were 1.24 and 1.10, respectively, resulting in a $85 million adjustment increasing the 2019 principal face value of debt outstanding presented above. Euro to USD exchange rate as of September 30, 2018 was
1.18, resulting in a $36 million adjustment increasing the 2018 principal face value of debt outstanding presented above. Additionally, the 2019 principal face value excludes $11 million in finance lease obligations and
proceeds received from transactions completed in 2018, which are presented as debt. The 2018 principal face value includes incremental debt associated with the NYX acquisition.
CALCULATION OF FREE CASH FLOW
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
---
Net cash provided by operating
activities(1) $
141 $
223 $
403 $
356
Less: Capital expenditures (75) (93) (207) (293)
Add: Distributions of capital from
equity investments - 1 18 24
Less: Additions to equity method
investments (2) - (1) (1) (76)
Less: Payments on license
obligations (13) (8) (26) (22)
Free cash flow $
53 $
122 $
187 $
(11)
(1) The three months ended September 30, 2019 and 2018 include a $15 million and $63 million favorable change, respectively, in accrued interest due to refinancing transactions. The three and nine months ended September 30,
2019, include approximately $3 million and $24 million, respectively, of payments related to contingent acquisition considerations. The nine months ended September 30, 2018 cash flows includes $263 million related to the
acquisition of NYX and $39 million in costs related to the refinancing transactions reflected in investing and financing activities, respectively.
(2) The nine months ended September 30, 2018 include $74 million (EUR60 million) in LNS contributions representing our second pro-rata concession funding payment.
RECONCILIATION OF EARNINGS FROM EQUITY INVESTMENTS TO EBITDA FROM EQUITY INVESTMENTS
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
---
EBITDA from equity investments:
---
Earnings from equity investments $
4 $
4 $
17 $
16
Add: Income tax expense 2 1 7 4
Add: Depreciation and amortization 9 9 25 28
Add: Interest income, net and other - 1 1
EBITDA from equity investments $
15 $
14 $
50 $
49
Forward-Looking Statements
In this press release, Scientific Games makes "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "plan," "continue," "believe," "expect," "anticipate," "target," "should," "could," "potential," "opportunity," "goal," or similar terminology. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things: competition; U.S. and international economic and industry conditions; slow growth of new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of gaming machines; ownership changes and consolidation in the gaming industry; opposition to legalized gaming or the expansion thereof and potential restrictions on internet wagering; inability to adapt to, and offer products that keep pace with, evolving technology, including any failure of our investment of significant resources in our R&D efforts; inability to develop successful products and services and capitalize on trends and changes in our industries, including the expansion of internet and other forms of interactive gaming; laws and government regulations, both foreign and domestic, including those relating to gaming, data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data, and environmental laws, and those laws and regulations that affect companies conducting business on the internet, including online gambling; the continuing evolution of the scope of data privacy and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions; significant opposition in some jurisdictions to interactive social gaming, including social casinos and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casinos specifically, and how this could result in a prohibition on interactive social gaming or social casinos altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations; legislative interpretation and enforcement, regulatory perception and regulatory risks with respect to gaming, especially internet wagering, social gaming and sports wagering; reliance on technological blocking systems; expectations of shift to regulated online gaming or sports wagering; expectations of growth in total consumer spending on social casino gaming; SciPlay's dependence on certain key providers; inability to win, retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts; protection of our intellectual property, inability to license third-party intellectual property and the intellectual property rights of others; security and integrity of our products and systems; reliance on or failures in information technology and other systems; security breaches and cyber-attacks, challenges or disruptions relating to the implementation of a new global enterprise resource planning system; failure to maintain adequate internal control over financial reporting; natural events that disrupt our operations or those of our customers, suppliers or regulators; inability to benefit from, and risks associated with, strategic equity investments and relationships; risks related to the initial public offering of a minority interest in our Social gaming business via the SciPlay initial public offering, including the possibility that the anticipated benefits of the initial public offering are not realized; incurrence of restructuring costs; implementation of complex new accounting standards; changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets; changes in demand for our products; fluctuations in our results due to seasonality and other factors; dependence on suppliers and manufacturers; risks relating to foreign operations, including anti-corruption laws, fluctuations in currency rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the considerable uncertainty around the U.K.'s withdrawal from the European Union ("EU") and the possibility of the British parliament's failure to approve the U.K.'s withdrawal from the EU, resulting in a "hard Brexit" or "no deal Brexit"; possibility that the renewal of LNS' concession to operate the Italian instant games lottery is not finalized (including as the result of a pending third-party protest against the renewal of the concession, or any appeal from existing court rulings relating to such third-party protest); the impact of the new U.K. legislation approving the reduction of fixed-odds betting terminals maximum stakes limit; changes in tax laws or tax rulings, or the examination of our tax positions; difficulty predicting what impact, if any, new tariffs imposed by and other trade actions taken by the U.S. and foreign jurisdictions could have on our business; dependence on key employees; litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property, environmental laws and our strategic relationships; level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs; inability to reduce or refinance our indebtedness; restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness; influence of certain stockholders, including decisions that may conflict with the interests of other stockholders; 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 our filings with the SEC, including the Company's current reports on Form 8-K, quarterly reports on Form 10-Q and its latest annual report on Form 10-K filed with the SEC on February 28, 2019 (including under the headings "Forward Looking Statements" and "Risk Factors"). Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no and expressly disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
Due to rounding, certain numbers presented herein may not precisely agree or add up on a cumulative basis to the totals previously reported.
Non-GAAP Financial Measures
The Company's management uses the following non-GAAP financial measures in conjunction with GAAP financial measures: Consolidated AEBITDA, Consolidated AEBITDA margin, free cash flow, EBITDA from equity investments, net debt and net debt leverage ratio (each, as described more fully below). These non-GAAP financial measures are presented as supplemental disclosures. They should not be considered in isolation of, as a substitute for, or superior to, the financial information prepared in accordance with GAAP, and should be read in conjunction with the Company's financial statements filed with the SEC. The non-GAAP financial measures used by the Company may differ from similarly titled measures presented by other companies.
Specifically, the Company's management uses Consolidated AEBITDA to, among other things: (i) monitor and evaluate the performance of the consolidated Company's business operations; (ii) facilitate management's internal and external comparisons of the Company's consolidated historical operating performance; and (iii) analyze and evaluate financial and strategic planning decisions regarding future operating investments and operating budgets.
In addition, the Company's management uses Consolidated AEBITDA and Consolidated AEBITDA margin to facilitate management's external comparisons of the Company's consolidated results to the historical operating performance of other companies that may have different capital structures and debt levels.
The Company's management uses EBITDA from equity investments to monitor and evaluate the performance of the Company's equity investments. The Company's management uses net debt and net debt leverage ratio in monitoring and evaluating the Company's overall liquidity, financial flexibility and leverage.
The Company's management believes that each of these non-GAAP financial measures are useful as they provide management and investors with information regarding the Company's financial condition and operating performance that is an integral part of management's reporting and planning processes. In particular, the Company's management believes that Consolidated AEBITDA is helpful because this non-GAAP financial measure eliminates the effects of restructuring, transaction, integration or other items that management believes is less indicative of the Company's ongoing underlying operating performance and are better evaluated separately. Management believes Consolidated AEBITDA margin is useful for analysts and investors as this measure allows an evaluation of the performance of our ongoing business operations and provides insight into the cash operating income margins generated from our business, from which capital investments are made and debt is serviced. Moreover, management believes EBITDA from equity investments is useful to investors because the Company's Lottery business is conducted through a number of equity investments, and this measure eliminates financial items from the equity investees' earnings that management believes has less bearing on the equity investees' performance. Management believes that free cash flow provides useful information regarding the Company's liquidity and its ability to service debt and fund investments. Management also believes that free cash flow is useful for investors because it provides them with an important perspective on the cash available for debt repayment and other strategic measures, after making necessary capital investments in property and equipment and necessary license payments to support the Company's ongoing business operations and taking into account cash flows relating to the Company's equity investments. Management believes that net debt and net debt leverage ratio are useful for investors in evaluating the Company's overall liquidity.
Consolidated AEBITDA
Consolidated AEBITDA, as used herein, is a non-GAAP financial measure that is presented as supplemental disclosure and is reconciled to net income (loss) as the most directly comparable GAAP measure, as set forth in the schedule titled "Reconciliation of Net Income (Loss) Attributable to SGC to Consolidated Adjusted EBITDA," Consolidated AEBITDA should not be considered in isolation of, as a substitute for, or superior to, the consolidated financial information prepared in accordance with GAAP, and should be read in conjunction with the Company's financial statements filed with the SEC. Consolidated AEBITDA may differ from similarly titled measures presented by other companies.
Consolidated AEBITDA is reconciled to consolidated net income (loss) and includes net income (loss) attributable to SGC with the following adjustments: (1) net income attributable to noncontrolling interest, (2) restructuring and other, which includes charges or expenses attributable to: (i) employee severance; (ii) management changes; (iii) restructuring and integration; (iv) M&A and other, which includes: (a) M&A transaction costs, (b) purchase accounting, (c) unusual items (including certain litigation), and (d) other non-cash items; and (v) cost savings initiatives; (3) depreciation and amortization expense and impairment charges (including goodwill impairment charges); (4) change in fair value of investments and remeasurement of debt; (5) interest expense; (6) income taxes (benefit) expense; (7) stock-based compensation; and (8) loss (gain) on debt financing transactions. In addition to the preceding adjustments, we exclude earnings from equity method investments and add (without duplication) our pro rata share of EBITDA of our equity investments, which represents our share of earnings (whether or not distributed to us) before income tax expense, depreciation and amortization expense, and interest (income) expense, net of our joint ventures and minority investees. AEBITDA is presented exclusively as our segment measure of profit or loss.
Consolidated AEBITDA Margin
Consolidated AEBITDA margin, as used herein, represents our Consolidated AEBITDA (as defined above) for the three and nine-month periods ended September 30, 2019 and 2018, each calculated as a percentage of revenue. Consolidated AEBITDA margin is a non-GAAP financial measure that is presented as supplemental disclosures for illustrative purposes only and is reconciled to net income (loss) attributable to SGC, the most directly comparable GAAP measure, in a schedule above.
Free Cash Flow
Free cash flow, as used herein, represents net cash (used in) provided by operating activities less total capital expenditures (which includes lottery, gaming and digital systems expenditures and other intangible assets and software expenditures), less payments on license obligations, less additions to equity method investments plus distributions of capital from equity investments. Free cash flow is a non-GAAP financial measure that is presented as supplemental disclosure for illustrative purposes only and is reconciled to net cash provided by operating activities in a schedule above.
EBITDA from Equity Investments
EBITDA from equity investments, as used herein, represents our share of earnings (whether or not distributed to us) plus income tax expense, depreciation and amortization expense (inclusive of amortization of payments made to customers for LNS), interest (income) expense, net, and other non-cash and unusual items from our joint ventures and minority investees. EBITDA from equity investments is a non-GAAP financial measure that is presented as supplemental disclosure for illustrative purposes only and is reconciled to earnings from equity investments, the most directly comparable GAAP measure, in a schedule above.
Net Debt and Net Debt Leverage Ratio
Net debt is defined as total principal face value of debt outstanding, the most directly comparable GAAP measure, less cash and cash equivalents. Principal face value of debt outstanding includes the face value of debt issued under Senior Secured Credit Facilities, Senior Notes and Subordinated Notes, all described in Note 11 of the Company's Report on Form 10-Q for the third quarter of 2019, but it does not include long term obligations under financing leases or $10 million in proceeds received from transactions completed in 2018 which are presented as debt. In addition, principal face value of debt outstanding with respect to the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes are translated at the constant foreign exchange rate at issuance of these notes as those amounts remain payable at the original issuance amounts in Euro. Net debt leverage ratio, as used herein, represents net debt divided by Consolidated AEBITDA (as defined above) for the trailing twelve-month period.
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