Oct. 26, 2009 (PR Newswire) -- NEW YORK, Oct. 26 /PRNewswire-FirstCall/ -- Scientific Games Corporation (Nasdaq: SGMS) today reported third quarter 2009 results.

Key Highlights:

--  $6.9 million of third quarter Profitability Improvement Program savings;
$18.2 million year-to-date
--  Third quarter free cash flow of $21.6 million; $95.9 million
year-to-date
--  Bid submitted for new Italian instant lottery ticket concession
--  New instant lottery ticket contracts in Arkansas, Vermont and
Baden-Wurttemberg, Germany and an instant lottery ticket contract
extension in Indiana
--  New lottery services contract in Indiana and agreement with Israel
Sports Betting Board for terminals and services

--  Start-up of Global Draw terminal contract with Camarero Group in Puerto
Rico

Key Organizational Changes:

--  Joseph R. Wright to retire as CEO at end of 2009; will continue to serve
on Board
--  Michael R. Chambrello to become CEO and join Board

--  David L. Kennedy to join Board as Vice Chairman

Summary Financial Results:

Three Months Ended    Nine Months Ended
September 30,         September 30,
------------------    ------------------
2009       2008        2009      2008
----       ----        ----      ----
(dollars in thousands, except per share amounts)

Revenue                $239,146   $291,935    $694,864  $854,911
Adjusted EBITDA         $81,702    $96,837    $237,612  $290,742

Net Income              $15,106    $22,166     $10,262   $64,583
Diluted EPS               $0.16      $0.23       $0.11     $0.68

Adjusted Net Income     $22,403    $30,617     $67,698   $96,919
Adjusted EPS              $0.24      $0.32       $0.72     $1.02

Total Capital
Expenditures           $23,926    $48,757     $80,045  $163,924
Free Cash Flow          $21,555   ($15,568)    $95,949  ($18,327)

Consolidated Financial Results:

The decline in revenue in the third quarter of 2009 to $239.1 million from $291.9 million a year earlier was primarily the result of the shift in China instant tickets sales to the Company's joint venture ($12.8 million), previously announced revised lottery contract terms ($11.9 million) and the negative impact of foreign exchange rates ($10.0 million). Otherwise, service revenue in the Company's Printed Products and Lottery Systems Groups remained surprisingly resilient despite the difficult economic environment; domestic instant ticket retail sales declined only modestly and online lottery customers in the U.S. benefited from higher jackpots. Global Draw's revenue exhibited solid growth on a constant currency basis from an increase in the installed base of terminals. In general, we believe that our core lottery and server-based gaming businesses continue to outperform other segments of the gaming industry and the broader consumer products sector.

The Company's non-GAAP gross margin widened by two percentage points year-over-year to 42% in the third quarter of 2009, driven primarily by the launch of instant ticket production in China and cost improvements from the previously announced Profitability Improvement Program.

The decline in adjusted EBITDA in the third quarter of 2009 to $81.7 million from $96.8 million in the third quarter of 2008 mirrors the decline in revenue and non-GAAP gross margin mentioned above, offset to some extent by selling, general and administrative savings. Importantly, third quarter 2009 adjusted EBITDA margin improved to 34% from 33% a year earlier, suggesting that the Company is positioned to benefit from a potential upturn in the economy. Third quarter 2009 operating income and operating income margin were $30.0 million and 13%, respectively, compared to $38.8 million and 13% during the comparable period in 2008.

Net income in the third quarter of 2009 was $15.1 million, or $0.16 per diluted share, compared to $22.2 million, or $0.23 per diluted share, in the third quarter of 2008. Net income in the third quarter of 2009 was impacted by higher interest expense related to the 9.25% Senior Subordinated Notes that were issued in May 2009, partially offset by lower non-cash deferred financing fees, APB 14-1 synthetic interest expense and lower depreciation expense. Non-GAAP adjusted net income for the third quarter of 2009 was $22.4 million, or $0.24 per diluted share, compared to $30.6 million and $0.32, respectively, in the third quarter of 2008.

Third quarter 2009 free cash flow improved to $21.6 million from negative $15.6 million in the third quarter of 2008. The $37.2 million improvement in free cash flow was driven primarily by improved working capital management and more stringent criteria for capital expenditure allocation.

Revenue and non-GAAP gross margin for the nine months ended September 30, 2009 were $694.9 million and 41%, respectively, compared to $854.9 million and 41% during the same period in 2008. Adjusted EBITDA for the first nine months of 2009 declined to $237.6 million from $290.7 million in the 2008 period, while adjusted EBITDA margin was 34% in both periods. Operating income and operating income margin for the first nine months of 2009 were $69.4 million and 10%, respectively, compared to $103.8 million and 12% during the comparable period in 2008. Net income for the nine months ended September 30, 2009 was $10.3 million, or $0.11 per diluted share, compared to $64.6 million, or $0.68 per diluted share, in the comparable period in 2008. Adjusted net income for the nine months ended September 30, 2009 was $67.7 million, or $0.72 per diluted share, compared to $96.9 million, or $1.02 per diluted share, in the comparable period in 2008. Most importantly, there was positive free cash flow of $95.9 million in the first nine months of 2009 compared to negative cash flow of $18.3 million in the comparable period in 2008.

Joe Wright, Chief Executive Officer, stated "When you consider the extraordinarily difficult economic environment, particularly for the gaming industry and the broader consumer products sector, our cost savings, growth in margins and turnaround in free cash flow are very significant achievements. We continue to weather a severe worldwide economic downturn and believe we have positioned ourselves strongly to exploit important emerging growth opportunities."

Profitability Improvement Program Update

The Profitability Improvement Program initiated in the fall of 2008 has yielded cost savings of $18.2 million in 2009 to date putting the Company well on track to meet its stated goal of $15 to $20 million for the full year. As part of the program, the Company recently launched a global procurement initiative intended to leverage its worldwide purchasing power, outsource where appropriate and encourage a competitive bidding process for certain goods and services. The Company anticipates that additional cost savings of $10 to $20 million on a run rate basis could result from this program beginning in 2010.

Italy Instant Lottery Ticket Update

On October 12, 2009, the members of Consorzio Lotterie Nazionali ("CLN"), a consortium currently holding the Gratta e Vinci instant ticket lottery concession and consisting primarily of the Company, Lottomatica S.p.A and the Federation of Italian Tobacconists, tendered for a new concession to operate the Gratta e Vinci instant ticket lottery upon the termination of CLN's current concession. A maximum of four concessions can be granted by the terms of the tender. In the event that a single concession is granted to the members of CLN, our bidding entity will be responsible for an upfront fee of Euro 800 million, of which 65% will be due in November 2009 and 35% will be due in November 2010. The Company's share of the fee would be approximately Euro 160 million assuming a 20% ownership in the bidding entity. The concession, anticipated to begin in June 2010, will have an initial term of nine years (subject to a performance evaluation during the fifth year) and may be extended by the Monopoli di Stato for an additional nine years. Pricing for the new concession is set at 11.9% of retail sales, inclusive of retailer commissions of 8.0%, compared to the current tiered pricing structure, which averaged 12.1% of retail sales in the second quarter of 2009 inclusive of retailer commissions of 8.0% and a value-added tax ("VAT"). The new rate is exclusive of VAT; however VAT will be charged at a rate of 20% of the operating expenses of the concessionaire.

Printed Products Group

A significant portion of the decline in Printed Products Group revenue to $120.8 million in the third quarter 2009 from $154.6 million in the third quarter of 2008 was attributable to the shift in instant lottery ticket sales in China to our joint venture, a decline in our licensed properties division ($6.2 million) and revised contract terms ($5.4 million), partially offset by increased year-over-year instant ticket sales in Italy and the U.K. Despite lower year-over-year sales, which would normally be expected to negatively impact unit manufacturing costs, Printed Products Group non-GAAP gross profit margin improved from 38% in the third quarter of 2008 to 40% in the third quarter of 2009, driven by the launch of instant ticket production in China and savings related to the Profitability Improvement Program ($2.7 million), partially offset by the impact of revised contract terms.

Notably, Printed Products Group adjusted EBITDA declined less than revenue on a percentage basis to $38.3 million in the third quarter of 2009 from $45.3 million in the third quarter of 2008 due to margin improvements and Profitability Improvement Program savings ($0.9 million). Third quarter 2009 Printed Products Group operating income and operating income margin were $28.7 million and 24%, respectively, compared to $35.1 million and 23% during the comparable period in 2008.

During the quarter, the Company successfully launched an instant ticket cooperative services operation for the start-up of the Arkansas Scholarship Lottery, and was awarded a contract as the primary instant ticket vendor in Vermont. Internationally, the Company was awarded an instant lottery ticket and related services contract by Staatliche Toto-Lotto GmbH Baden-Wurttemberg in Germany, which became the Company's sixth cooperative services customer in Germany.

Lottery Systems Group

Despite the decline in third quarter 2009 revenue to $65.5 million from $77.4 million in the third quarter of 2008, driven largely by revised contract terms ($6.4 million) and the termination of online lottery contracts in South Carolina, South Dakota and West Virginia ($3.5 million), Lottery Systems Group non-GAAP gross margin improved to 47% in the third quarter of 2009 from 43% in the third quarter of 2008, reflecting higher margins on product sales and the impact of the Profitability Improvement Program ($1.7 million). In addition, there was a one-time benefit realized from our earlier-than-anticipated exit from our contract in Mexico and benefits from an insurance settlement that positively impacted Lottery Systems Group non-GAAP gross margin during the quarter.

Lottery Systems Group adjusted EBITDA decreased to $21.0 million in the third quarter of 2009 from $27.2 million in the third quarter of 2008 and benefitted from selling, general and administrative savings related to the Profitability Improvement Program ($1.0 million). Third quarter 2009 Lottery Systems Group operating income and operating income margin improved to $11.4 million and 17%, respectively, from $11.0 million and 14% during the comparable period in 2008.

In August, the Hoosier Lottery in Indiana awarded the Company a new six-year online lottery systems contract and, in connection with this award, the Company received a one-year extension to its instant ticket contract. During the quarter, the Company also entered into an agreement with the Israel Sports Betting Board for the delivery of new online lottery terminals including maintenance and other services.

Diversified Gaming Group

Diversified Gaming Group revenue declined to $52.9 million in the third quarter of 2009 from $59.9 million in the third quarter of 2008 primarily due to the negative impact of foreign exchange rates ($4.1 million) and lower terminal and content sales. The decline was partially offset by service revenue growth in the Company's Global Draw and Games Media divisions on a constant currency basis ($3.3 million). Diversified Gaming Group non-GAAP gross margin declined to 40% in the third quarter of 2009 from 42% in the third quarter of 2008, primarily due to a one-time, high margin content sale in the third quarter of 2008.

The decline in Diversified Gaming Group adjusted EBITDA to $16.1 million in the third quarter of 2009 from $20.2 million in the third quarter of 2008 was attributable to the above-mentioned factors affecting revenue and non-GAAP gross margin. Third quarter 2009 Diversified Gaming Group operating income and operating income margin were $3.3 million and 6%, respectively, compared to $8.3 million and 14% in the third quarter of 2008.

In the third quarter of 2009, Global Draw's equipment base grew by 1,118 terminals to a total of 17,075, with 300 terminals installed in Ladbrokes in the U.K. and 300 terminals installed in OTB shops in Puerto Rico.

Games Media's installed terminal base grew to 2,323 in the third quarter of 2009 at almost 1,000 pubs.

"Global Draw's proven success in the U.K. and Mexico has been instrumental in establishing a significant pipeline of new international opportunities. For instance, Global Draw has installed 530 terminals in 111 of Camarero's OTBs to date, with an opportunity to greatly expand the number of terminals," commented Mike Chambrello, President and Chief Operating Officer of the Company. "As a result of Global Draw's year-to-date contract awards and the growing pipeline of opportunities, we expect our Global Draw business to be a significant driver of growth for the Company going forward."

Liquidity and Capital Resources

Free cash flow in the third quarter of 2009 was $21.6 million compared to negative cash flow of $15.6 million in the third quarter of 2008, reflecting lower working capital requirements and capital expenditures, the latter having declined from $48.8 million in the third quarter of 2008 to $23.9 million in the third quarter of 2009. For the first nine months of 2009, free cash flow and total capital expenditures were $95.9 million and $80.0 million, respectively, compared to negative $18.3 million and $163.9 million during the comparable period in 2008.

During the third quarter of 2009, under the previously announced debt repurchase programs, the Company repurchased $43.0 million in aggregate principal amount of its 0.75% Convertible Senior Subordinated Debentures due 2024 (the "Convertible Debentures"). The Company has repurchased $174.6 million of its outstanding Convertible Debentures during 2009, leaving a balance of $99.0 million outstanding.

At September 30, 2009, the Company had cash and cash equivalents of $213.1 million and availability of $201.4 million under its revolving credit facility, after outstanding letters of credit, for a total of $414.5 million of available liquidity. As of September 30, 2009, the Company had net indebtedness of $1,115.1 million, compared to $1,098.8 million as of December 31, 2008.

Key Organizational Changes

The Company today announced that Mike Chambrello, currently President and Chief Operating Officer, will succeed Joe Wright as President and Chief Executive Officer beginning in 2010. Mr. Wright, who plans to retire as Chief Executive Officer at the end of 2009, will continue to serve as a director of the Company. Also, effective today, Mr. Chambrello has joined the Company's Board of Directors along with David L. Kennedy, who will serve as the newly appointed Vice Chairman.

The Company also announced the creation of a new Office of the Chairman, which will provide strategic guidance and oversight to the Company. The four-person Office of the Chairman, which will report to the Board, will be comprised of A. Lorne Weil, who will continue to serve as Chairman of the Board, Mr. Chambrello, Mr. Kennedy and Jeffrey S. Lipkin, the Company's Chief Financial Officer.

Mr. Kennedy is currently Senior Executive Vice President of MacAndrews & Forbes Holdings Inc. and Vice Chairman of Revlon, Inc. Mr. Kennedy served as the President and Chief Executive Officer of Revlon from September 2006 through May 2009 and has held various senior management and senior financial positions with Revlon and The Coca-Cola Company during his 36-year business career.

Mr. Wright stated: "I took on the job of Chief Executive Officer at Scientific Games with a specific purpose. My goal was to work with the management team to increase operating margins, reduce capital and operating expenditures and increase free cash flow. We have accomplished these goals much quicker than I expected and I believe the Company is well positioned for profitable growth."

"Joe Wright has done an impressive job in leading the Company through a difficult economic environment and we believe that he has set the stage for future growth," stated Mr. Weil. "It's time to pass the torch to Mike Chambrello, who has been running the day-to-day operations for many years and has been instrumental in our international growth efforts, particularly in China and Italy. Mike has a deep knowledge of Scientific Games and the industry and we believe that he will continue to provide the Company with outstanding leadership in his new role. We are also excited to add a talented, experienced executive like David Kennedy to our Board."

"I look forward to continuing to work with the Board and the management team in my new capacity as we continue to strengthen the Company's core franchise, expand our global product and service offerings and enhance shareholder value," stated Mr. Chambrello.