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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
OR 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to        
 
Commission file number: 0-13063 
SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
81-0422894
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
750 Lexington Avenue, New York, New York 10022
(Address of principal executive offices)
(Zip Code)
 
(212) 754-2233
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ¨
 
Accelerated filer ý
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of October 28, 2014:
Class A Common Stock: 84,829,084
Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014
 
 
 
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
OTHER INFORMATION
74
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits



2




Glossary of Terms
 
 
 
As used in this Quarterly Report on Form 10-Q, the terms "we," "us," "our" and the "Company" mean Scientific Games Corporation and its consolidated subsidiaries. The following terms or acronyms used in this Form 10-Q are defined below:
Term or Acronym
Definition
2018 Notes
8.125% senior subordinated notes due 2018 issued by Scientific Games Corporation
2019 Notes
9.250% senior subordinated notes due 2019 issued by SGI
2020 Notes
6.250% senior subordinated notes due 2020 issued by SGI
2021 Notes
6.625% senior subordinated notes due 2021 issued by SGI
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bally
Bally Technologies, Inc.
Barcrest
Barcrest Group Limited, an indirect wholly owned subsidiary of Scientific Games Corporation
China Loans
RMB denominated loans due 2014
CSG
Beijing CITIC Scientific Games Technology Co., Ltd., the instant games supplier to the CSL, in which we have a 49% equity interest
CSL
China Sports Lottery
D&A
depreciation and amortization expense
ESPP
Employee Stock Purchase Plan
FASB
Financial Accounting Standards Board
GLB
Beijing Guard Libang Technology Co., Ltd., a provider of lottery systems and services to the China Welfare Lottery, in which we have a 50% equity interest
Global Draw
The Global Draw Limited, an indirect wholly owned subsidiary of Scientific Games Corporation
Hellenic Lotteries
Hellenic Lotteries S.A., the operator of the Greek state lotteries, in which we have a 16.5% equity interest
ITL
International Terminal Leasing, an entity that leases gaming machines to us for provision to our customers, in which we have a 50% equity interest
LAP
local-area progressive
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l., the operator of the Gratta e Vinci instant ticket lottery in Italy, in which we have a 20% equity interest
MD&A
Management’s discussion and analysis of financial condition and results of operations
Northstar Illinois
Northstar Lottery Group, LLC, the private manager of the Illinois lottery, in which we have a 20% equity interest
Northstar New Jersey
Northstar New Jersey Lottery Group, LLC, the operating entity that provides marketing and sales services to the New Jersey lottery, in which we have a 17.69% equity interest
Note
refers to a note to our Consolidated Financial Statements, unless otherwise specified
participation
with respect to our lottery business, refers to a contract or arrangement in which we are paid based on a percentage of retail sales
PMA
private management agreement
Provoloto
SG Provoloto, S. de R.L. de C.V., an indirect wholly owned subsidiary of Scientific Games Corporation until February 2014
R&D
research and development expense
RCN
Roberts Communications Network, LLC, a provider of communications services to racing and other customers, in which we have a 29.4% equity interest
RMB
Chinese Renminbi Yuan
RSU
restricted stock unit
SEC
Securities and Exchange Commission
SG&A
selling, general and administrative expense
SGMS Escrow Corp.
wholly owned unrestricted subsidiary of SGI
SGI
Scientific Games International, Inc., a direct wholly owned subsidiary of Scientific Games Corporation
Sportech
Sportech plc, an operator and supplier of sports pools and tote systems, in which we had a 20% equity interest until January 2014
U.S.
United States of America
U.S. GAAP
accounting principles generally accepted in the United States of America
VLT
video lottery terminal
WAP
wide-area progressive
WMS
WMS Industries Inc., a direct wholly owned subsidiary of Scientific Games Corporation


3




Forward-Looking Statements
 
Throughout this Quarterly Report on Form 10-Q, we make "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," "continue," "believe," "expect," "anticipate," "should," "could," "potential," "opportunity," or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of future timing, results or performance. 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, including declines in or slow growth of lottery retail sales or gross gaming revenues, reductions in or constraints on capital spending by gaming or lottery operators and credit risk relating to customers;
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 casino industry;
opposition to legalized gaming or the expansion thereof;
inability to adapt to, and offer products that keep pace with, evolving technology;
inability to develop successful gaming or lottery concepts and content;
laws and government regulation, including those relating to gaming licenses and environmental laws;
inability to identify and capitalize on trends and changes in the gaming and lottery industries, including the expansion of interactive gaming;
dependence upon key providers in our social gaming business;
retention and renewal of existing contracts or entry into new or revised contracts;
level of our indebtedness, higher interest rates, unavailability or inadequacy of cash flows and liquidity to satisfy obligations or future needs, and restrictions and covenants in our debt agreements;
protection of our intellectual property, ability to license third party intellectual property and the intellectual property rights of others;
security and integrity of our software and systems and reliance on or failures in our information technology systems;
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, including (1) the inability of our joint venture to meet the net income targets or otherwise to realize the anticipated benefits under its PMA with the Illinois lottery, (2) the inability of our joint venture to meet the net income targets or other requirements under its agreement to provide marketing and sales services to the New Jersey lottery or otherwise to realize the anticipated benefits under such agreement (including as a result of a protest) and (3) failure to realize the anticipated benefits related to the award to our consortium of an instant lottery game concession in Greece;
failure to achieve the intended benefits of the WMS acquisition, including due to the inability to realize synergies in the anticipated amounts or within the contemplated time-frames or cost expectations, or at all;
inability to complete future acquisitions, including the pending acquisition of Bally due to the failure to obtain the required approvals or debt financing or otherwise;
litigation relating to the pending Bally acquisition;
disruption of our current plans and operations in connection with the pending Bally acquisition (whether prior to its completion or following its completion, including in connection with the integration of Bally), including departure of key personnel or inability to recruit additional qualified personnel or maintain relationships with customers, suppliers or other third parties;
costs, charges and expenses relating to the pending Bally acquisition;
inability to successfully integrate future acquisitions, including Bally (including SHFL entertainment, Inc. and Dragonplay Ltd.) following completion of the pending Bally acquisition;
failure to realize the intended benefits of the pending Bally acquisition, including the inability to realize the anticipated synergies in the anticipated amounts or within the contemplated time-frames or cost expectations, or at all;
inability to control Bally until completion of the Bally acquisition;
incurrence of restructuring costs, revenue recognition standards and impairment charges;
fluctuations in our results due to seasonality and other factors;
dependence on suppliers and manufacturers;
risks relating to foreign operations, including fluctuations in foreign currency exchange rates and restrictions on the import of our products;


4




dependence on our 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, intellectual property and our strategic relationships;
influence of certain 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 under the heading “Risk Factors” in our most recent Annual Report on Form 10-K. 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 obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
This Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning the international lottery and gaming industries than the lottery and gaming industries in the U.S.


5


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited, in millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Instant games
$
130.8

 
$
129.7

 
$
392.4

 
$
379.0

Services
182.8

 
80.7

 
538.9

 
247.7

Product sales
102.0

 
24.0

 
289.3

 
62.3

Total revenue
415.6

 
234.4

 
1,220.6

 
689.0

Operating expenses:
 
 
 
 
 
 
 
Cost of instant games (1)
69.7

 
70.6

 
212.5

 
210.3

Cost of services (1)
69.6

 
42.6

 
200.7

 
135.0

Cost of product sales (1)
59.9

 
13.3

 
161.2

 
39.3

Selling, general and administrative
95.6

 
45.6

 
282.6

 
139.1

Research and development
26.3

 
1.4

 
77.0

 
4.7

Employee termination and restructuring
1.9

 

 
12.4

 
0.3

Depreciation and amortization
100.4

 
35.2

 
290.5

 
111.1

Operating (loss) income
(7.8
)
 
25.7

 
(16.3
)
 
49.2

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(45.7
)
 
(25.2
)
 
(142.9
)
 
(75.3
)
Earnings (loss) from equity investments
(14.0
)
 
3.4

 
(7.8
)
 
13.0

Loss on early extinguishment of debt

 

 
(25.9
)
 

Gain on sale of equity interest

 

 
14.5

 

Other income (expense), net
3.1

 

 
9.2

 
(0.8
)
     Total other expense
(56.6
)
 
(21.8
)
 
(152.9
)
 
(63.1
)
Net (loss) income from continuing operations before income taxes
(64.4
)
 
3.9

 
(169.2
)
 
(13.9
)
Income tax expense
(5.4
)
 
(4.3
)
 
(18.0
)
 
(11.2
)
Net loss from continuing operations
$
(69.8
)
 
$
(0.4
)
 
$
(187.2
)
 
$
(25.1
)
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss from discontinued operations

 
(0.1
)
 

 
(2.7
)
Gain on sale of assets

 

 

 
0.8

Income tax benefit

 

 

 
0.3

Net loss from discontinued operations
$

 
$
(0.1
)
 
$

 
$
(1.6
)
 
 
 
 
 
 
 
 
Net loss
$
(69.8
)
 
$
(0.5
)
 
$
(187.2
)
 
$
(26.7
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
(57.8
)
 
42.3

 
(47.7
)
 
3.6

Pension and post-retirement gain (loss), net of tax
0.4

 
(0.5
)
 
0.3

 
0.2

Derivative financial instruments unrealized (loss) gain, net of tax
2.3

 
(2.6
)
 
(4.0
)
 
(1.9
)
Other comprehensive (loss) income
(55.1
)
 
39.2

 
(51.4
)
 
1.9

Comprehensive (loss) income
$
(124.9
)
 
$
38.7

 
$
(238.6
)
 
$
(24.8
)
 
(1) Exclusive of depreciation and amortization.


6




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (cont'd)
(Unaudited, in millions, except per share amounts)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Basic net loss per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.29
)
Discontinued operations
 

 

 

 
(0.02
)
Total basic net loss per share
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.31
)
Diluted net loss per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.29
)
Discontinued operations
 

 

 

 
(0.02
)
Total diluted net loss per share
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic shares
 
84.7

 
85.1

 
84.5

 
84.9

Diluted shares
 
84.7

 
85.1

 
84.5

 
84.9



 See accompanying notes to consolidated financial statements.




7


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
 
September 30, 2014
 
December 31, 2013
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
132.5

 
$
153.7

Restricted cash
12.1

 
10.9

Accounts receivable, net
297.3

 
346.0

Notes receivable, net
128.1

 
158.7

Inventories
170.9

 
137.8

Deferred income taxes, current portion
36.2

 
31.0

Prepaid expenses, deposits and other current assets
72.9

 
119.3

Total current assets
850.0

 
957.4

Property and equipment, net
739.6

 
773.1

Long-term notes receivable
55.5

 
72.6

Goodwill
1,168.7

 
1,183.1

Intangible assets, net
500.3

 
411.1

Software, net
306.8

 
343.5

Equity investments
298.7

 
367.2

Other assets
119.3

 
128.4

Total assets
$
4,038.9

 
$
4,236.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Debt payments due within one year
$
30.9

 
$
30.4

Accounts payable
94.3

 
140.9

Accrued liabilities
266.9

 
280.3

Total current liabilities
392.1

 
451.6

Deferred income taxes
146.6

 
138.0

Other long-term liabilities
216.1

 
109.6

Long-term debt, excluding current installments
3,178.4

 
3,162.2

Total liabilities
3,933.2

 
3,861.4

Commitments and contingencies


 


Stockholders' equity:
 
 
 
Class A common stock, par value $0.01 per share: 199.3 shares authorized; 102.0 and 100.4 shares issued and 84.8 and 85.2 shares outstanding, respectively
1.0

 
1.0

Additional paid-in capital
736.6

 
737.8

Accumulated loss
(423.6
)
 
(236.4
)
Treasury stock, at cost: 17.2 and 15.2 shares held, respectively
(175.2
)
 
(145.7
)
Accumulated other comprehensive (loss) income
(33.1
)
 
18.3

Total stockholders' equity
105.7

 
375.0

Total liabilities and stockholders' equity
$
4,038.9

 
$
4,236.4

 
See accompanying notes to consolidated financial statements.




8


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(187.2
)
 
$
(26.7
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
290.5

 
111.7

Change in deferred income taxes
5.2

 
1.5

Stock-based compensation
18.1

 
17.3

Non-cash interest expense
12.8

 
5.1

Loss (earnings) from equity investments, net
7.8

 
(13.0
)
Distributed earnings from equity investments
22.5

 
28.8

Loss on early extinguishment of debt
25.9

 

Gain on sale of equity interest
(14.5
)
 

Changes in current assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts and notes receivable
80.8

 
9.6

Inventories
(30.9
)
 
(9.3
)
Accounts payable
(36.5
)
 
(18.2
)
Accrued liabilities
1.2

 
(2.4
)
Other current assets and liabilities
41.6

 
(4.8
)
Other
(3.9
)
 
(4.0
)
Net cash provided by operating activities
233.4

 
95.6

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(32.4
)
 
(22.9
)
Lottery and gaming services expenditures
(73.1
)
 
(51.3
)
Intangible assets and software expenditures
(70.8
)
 
(38.1
)
Proceeds from asset disposals
0.5

 
10.9

Change in other assets and liabilities, net

 
(0.2
)
Additions to equity method investments
(43.3
)
 
(65.0
)
Distributions of capital on equity investments
45.4

 
19.4

Proceeds from sale of equity interest
44.9

 

Restricted cash
(1.1
)
 
30.8

Business acquisitions, net of cash acquired

 
(0.4
)
Net cash used in investing activities
(129.9
)
 
(116.8
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of long-term debt
347.9

 
3.9

Payments on long-term debt
(377.3
)
 
(13.4
)
Payments of financing fees
(22.8
)
 
(2.0
)
Payments on license obligations
(7.0
)
 

Common stock repurchases
(29.5
)
 

Contingent earnout payments
(10.2
)
 

Net redemptions of common stock under stock-based compensation plans
(19.1
)
 
(2.1
)
Net cash used in financing activities
(118.0
)
 
(13.6
)
Effect of exchange rate changes on cash and cash equivalents
(6.7
)
 
(0.7
)
Decrease in cash and cash equivalents
(21.2
)
 
(35.5
)
Cash and cash equivalents, beginning of period
153.7

 
109.0

Cash and cash equivalents, end of period
$
132.5

 
$
73.5

 See accompanying notes to consolidated financial statements.


9





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, table amounts in millions, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies
Description of the Business
We are a leading diversified supplier of technology-based products and services to the gaming and lottery industries.  Our portfolio includes instant and draw-based lottery games; gaming machines and game content; server-based lottery and gaming systems; sports betting technology; loyalty and rewards programs; and interactive products and services. Upon our acquisition of WMS in October 2013, we significantly expanded our global gaming business.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of the Company have been prepared in accordance with SEC and U.S. GAAP requirements. All monetary values set forth in these financial statements are in U.S. dollars ("$") unless otherwise stated herein. The accompanying consolidated financial statements include the Company's accounts and subsidiaries that are wholly owned and in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in the consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation. We have evaluated subsequent events through the date of these financial statements. In the opinion of management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations, comprehensive (loss) income and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K. Interim results of operations are not necessarily indicative of results of operations for a full year.
In our Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2013, we reclassified $1.4 million and $4.7 million, respectively, of R&D expense previously included within SG&A to conform to the current-year presentation.
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) in this Quarterly Report on Form 10-Q. The results of the discontinued pub operations for the three and nine months ended September 30, 2013 are presented herein in accordance with ASC 205, Presentation of Financial Statements - Discontinued Operations. There were no results of operations for this business for the three or nine months ended September 30, 2014.
Significant Accounting Policies
There have been no changes to our significant accounting policies described in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2013 Annual Report on Form 10-K except for the addition of our lease accounting policy and an update to our minimum guarantees policy as described below.
Lease Accounting
We account for assets held under leases in accordance with ASC 840, Leases. For leases classified as operating leases, we record expense on a straight-line basis over the base term of the lease agreements. For assets accounted for as capital leases, we record the lower of the net present value of the future minimum lease payments or the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the asset or the period of the related lease.
Minimum Guarantees
We enter into long-term license agreements in which we are obligated to pay a minimum guaranteed amount of royalties, typically annually. We account for the minimum guaranteed obligations within other long-term liabilities at the onset of the license arrangement and record a corresponding licensed asset within intangible assets, net. The licensed assets related to the minimum guaranteed obligations are amortized over the term of the license agreement and included in depreciation and amortization. The long-term liability related to the minimum guaranteed obligations is reduced as royalty payments are made under the license agreement.  The weighted average remaining term of our license agreements with minimum guaranteed obligations was six years and four years as of September 30, 2014 and December 31, 2013, respectively. Our total minimum guaranteed obligations reflected in our Consolidated Balance Sheets were $178.3 million and $216.0 million as of September


10




30, 2014 and December 31, 2013, respectively.  Additionally, our remaining expected future payments of minimum guaranteed obligations is $10.6 million (with $27.4 million of payments made through September 30, 2014), $29.2 million, $28.9 million, $28.7 million and $80.9 million in the years ending December 31, 2014, 2015, 2016, 2017 and 2018 and thereafter, respectively.  
Recently Issued Accounting Guidance
In January 2014, the FASB issued ASU 2014-05, Service Concession Arrangements (Topic 853), a consensus of the FASB Emerging Issues Task Force, which specified that an operating entity should not account for a service concession arrangement within the scope of the update as a lease in accordance with ASC 840, Leases. The guidance is effective for fiscal years beginning after December 15, 2014. We do not expect ASU 2014-05 to have a material effect on our financial condition, results of operations or cash flows.
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods thereafter. We do not expect ASU 2014-08 to have a material effect on our financial condition, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amended guidance outlines a single comprehensive revenue model for entities to use in accounting for revenue from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016 (early adoption is not permitted). We are currently evaluating the impact of adopting ASU 2014-09.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation—Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We do not expect ASU 2014-12 to have a material effect on our financial condition, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to perform interim and annual assessments as to whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. We do not expect ASU 2014-15 to have a material effect on our financial condition, results of operations or cash flows.
(2) Reportable Business Segment Information 

We report our operations in three business segments—Instant Products, Lottery Systems and Gaming—representing our different products and services. These are our reportable segments under ASC 280, Segment Reporting. The Instant Products and Lottery Systems business segments are managed by one executive and the Gaming business segment is managed by a different executive, both of whom report to our chief executive officer (who is our "chief operating decision maker" under applicable accounting standards). Our three business segments represent the aggregation of similar operating segments. Our Instant Products business segment is comprised of our instant products operating segment, which provides instant lottery games and related value-added services, as well as licensed brands that are printed on instant lottery games and other promotional lottery products.  Our Lottery Systems business segment is comprised of our lottery systems operating segment, which provides products and services to lottery operators generally comprised of a central system, customized computer software, data communication services, support and/or related equipment.  Our Gaming business segment includes (1) our gaming operating segment, which generally sells new and used gaming machines, conversion kits and parts, and leases or otherwise provides gaming machines, systems and content, to commercial, tribal and governmental gaming operators, and (2) our interactive


11


operating segment, which provides social gaming entertainment and game server services for real-money gaming. Additional discussion regarding the products and services from which each reportable business segment derives its revenue is included in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2013 Annual Report on Form 10-K.
Effective in the fourth quarter of 2013, we revised our business and operating segments to reflect the reorganization of our business following the WMS acquisition and the resulting changes in the financial information regularly reviewed by our chief executive officer. Based on that review, we moved our video systems operating segment from the Lottery Systems business segment to the Gaming business segment. This change, which was effective as of December 31, 2013, had no impact on the Company's consolidated financial statements for any periods. Business segment information for the three and nine months ended September 30, 2013 has been adjusted to reflect this change.
The following tables present revenue, cost of revenue, SG&A, R&D, employee termination and restructuring, D&A, operating (loss) income from continuing operations and earnings (loss) from equity investments by business segment for the three and nine months ended September 30, 2014 and 2013. Certain unallocated expenses managed at the corporate level, comprised primarily of general and administrative costs and other income (expense), net, are not allocated to our business segments. Segment results for 2013 below do not include the results of WMS, which we acquired in October 2013. The increase in unallocated corporate costs for the three and nine months ended September 30, 2014 primarily related to the inclusion of WMS results.
 
 
Three Months Ended September 30, 2014
 
 
Instant Products
 
Lottery Systems
 
Gaming
 
Total
Revenue:
 
 
 
 
 
 
 
 
Instant games
 
$
130.8

 
$

 
$

 
$
130.8

Services
 

 
48.2

 
134.6

 
182.8

Product sales
 
3.2

 
30.5

 
68.3

 
102.0

Total revenue
 
134.0

 
78.7

 
202.9

 
415.6

Cost of instant games (1)
 
69.7

 

 

 
69.7

Cost of services (1)
 

 
30.4

 
39.2

 
69.6

Cost of product sales (1)
 
2.4

 
24.6

 
32.9

 
59.9

Selling, general and administrative
 
12.2

 
5.6

 
42.4

 
60.2

Research and development
 
0.5

 
0.9

 
24.9

 
26.3

Employee termination and restructuring
 
0.4

 

 
1.5

 
1.9

Depreciation and amortization
 
8.9

 
16.0

 
69.8

 
94.7

Segment operating income (loss) from continuing operations
 
$
39.9

 
$
1.2

 
$
(7.8
)
 
$
33.3

Unallocated corporate costs
 
 
 
 
 
 
 
41.1

Consolidated operating loss from continuing operations
 
 
 
 
 
 
 
$
(7.8
)
Earnings (loss) from equity investments
 
$
(15.4
)
 
$
0.1

 
$
1.3

 
$
(14.0
)

(1) Exclusive of depreciation and amortization.
 


12


 
 
Three Months Ended September 30, 2013
 
 
Instant Products
 
Lottery Systems
 
Gaming
 
Total
Revenue:
 
 
 
 
 
 
 
 
Instant games
 
$
129.7

 
$

 
$

 
$
129.7

Services
 

 
48.6

 
32.1

 
80.7

Product sales
 
3.1

 
13.6

 
7.3

 
24.0

Total revenue
 
132.8

 
62.2

 
39.4

 
234.4

Cost of instant games (1)
 
70.6

 

 

 
70.6

Cost of services (1)
 

 
27.1

 
15.5

 
42.6

Cost of product sales (1)
 
2.2

 
7.3

 
3.8

 
13.3

Selling, general and administrative
 
11.5

 
5.3

 
6.3

 
23.1

Research and development
 
0.1

 
0.9

 
0.4

 
1.4

Depreciation and amortization
 
9.2

 
13.4

 
12.4

 
35.0

Segment operating income from continuing operations
 
$
39.2

 
$
8.2

 
$
1.0

 
$
48.4

Unallocated corporate costs
 
 
 
 
 
 
 
22.7

Consolidated operating income from continuing operations
 
 
 
 
 
 
 
$
25.7

Earnings (loss) from equity investments
 
$
5.2

 
$
0.1

 
$
(1.9
)
 
$
3.4


(1) Exclusive of depreciation and amortization.
 
 
Nine Months Ended September 30, 2014
 
 
Instant Products
 
Lottery
Systems
 
Gaming
 
Total
Revenue:
 
 

 
 

 
 

 
 

Instant games
 
$
392.4

 
$

 
$

 
$
392.4

Services
 

 
149.3

 
389.6

 
538.9

Product sales
 
9.4

 
63.3

 
216.6

 
289.3

Total revenue
 
401.8

 
212.6

 
606.2

 
1,220.6

Cost of instant games (1)
 
212.5

 

 

 
212.5

Cost of services (1)
 

 
90.4

 
110.3

 
200.7

Cost of product sales (1)
 
6.5

 
50.8

 
103.9

 
161.2

Selling, general and administrative
 
38.9

 
17.1

 
132.9

 
188.9

Research and development
 
1.0

 
1.7

 
74.3

 
77.0

Employee termination and restructuring
 
1.6

 

 
8.9

 
10.5

Depreciation and amortization
 
26.2

 
44.6

 
200.2

 
271.0

Segment operating income (loss) from continuing operations
 
$
115.1

 
$
8.0

 
$
(24.3
)
 
$
98.8

Unallocated corporate costs
 
 

 
 

 
 

 
115.1

Consolidated operating loss from continuing operations
 
 

 
 

 
 

 
$
(16.3
)
Earnings (loss) from equity investments
 
$
(12.4
)
 
$
1.3

 
$
3.3

 
$
(7.8
)

(1) Exclusive of depreciation and amortization.



13


 
 
Nine Months Ended September 30, 2013
 
 
Instant Products
 
Lottery
Systems
 
Gaming
 
Total
Revenue:
 
 

 
 

 
 

 
 

Instant games
 
$
379.0

 
$

 
$

 
$
379.0

Services
 

 
146.1

 
101.6

 
247.7

Product sales
 
10.1

 
35.2

 
17.0

 
62.3

Total revenue
 
389.1

 
181.3

 
118.6

 
689.0

Cost of instant games (1)
 
210.3

 

 

 
210.3

Cost of services (1)
 

 
82.0

 
53.0

 
135.0

Cost of product sales (1)
 
7.2

 
22.4

 
9.7

 
39.3

Selling, general and administrative
 
35.5

 
16.0

 
19.3

 
70.8

Research and development
 
0.4

 
3.1

 
1.2

 
4.7

Employee termination and restructuring
 
0.3

 

 

 
0.3

Depreciation and amortization
 
27.0

 
38.8

 
44.8

 
110.6

Segment operating income (loss) from continuing operations
 
$
108.4

 
$
19.0

 
$
(9.4
)
 
$
118.0

Unallocated corporate costs
 
 

 
 

 
 

 
68.8

Consolidated operating income from continuing operations
 
 

 
 

 
 

 
$
49.2

Earnings (loss) from equity investments
 
$
15.8

 
$
0.7

 
$
(3.5
)
 
$
13.0


(1) Exclusive of depreciation and amortization.

The following table presents a reconciliation of business segment operating income from continuing operations to net (loss) income from continuing operations before income taxes for each period:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Reportable business segment operating income from continuing operations
 
$
33.3

 
$
48.4

 
$
98.8

 
$
118.0

Unallocated corporate costs
 
(41.1
)
 
(22.7
)
 
(115.1
)
 
(68.8
)
Consolidated operating (loss) income from continuing operations
 
(7.8
)
 
25.7

 
(16.3
)
 
49.2

Interest expense
 
(45.7
)
 
(25.2
)
 
(142.9
)
 
(75.3
)
Earnings (loss) from equity investments
 
(14.0
)
 
3.4

 
(7.8
)
 
13.0

Loss on early extinguishment of debt
 

 

 
(25.9
)
 

Gain on sale of equity interest
 

 

 
14.5

 

Other income (expense), net
 
3.1

 

 
9.2

 
(0.8
)
Net (loss) income from continuing operations before income taxes
 
$
(64.4
)
 
$
3.9

 
$
(169.2
)
 
$
(13.9
)

In evaluating segment financial performance, we focus on operating income as a segment’s measure of profit or loss. Segment operating income is income before other income (expense), net, interest expense, earnings (loss) from equity investments, loss on early extinguishment of debt, gain on sale of equity interest, unallocated corporate costs and income taxes. The accounting policies of the business segments are the same as those described in our summary of significant accounting policies in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in this Quarterly Report on Form 10-Q and Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2013 Annual Report on Form 10-K.
(3) Acquisitions and Dispositions
Pending Acquisition of Bally
On August 1, 2014, we entered into a merger agreement pursuant to which we agreed to acquire Bally, a leading supplier of gaming machines, table game products, systems, and interactive gaming solutions, for $83.30 in cash per common share. The aggregate transaction value is approximately $5.1 billion, including the refinancing of approximately $1.8 billion of existing Bally net debt. 


14




We received early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), in August 2014, which satisfied one of the conditions to closing the merger. The closing of the merger remains subject to approval of the merger by Bally stockholders, receipt of certain gaming regulatory approvals and other customary closing conditions.
The merger agreement contains certain termination rights for both Scientific Games and Bally and further provides that, in connection with termination of the merger agreement under specified circumstances, (1) we may be required to pay to Bally a termination fee of $105.0 million if all the conditions to closing have been met and the merger is not consummated because of a breach by our lenders of their obligations to finance the transaction, (2) we may be required to pay to Bally a termination fee of $105.0 million if the parties are unable to obtain the gaming regulatory approvals that are conditions to closing and (3) Bally may be required to pay us a termination fee of $80.0 million under specified circumstances, including, but not limited to, a change in the Bally board’s recommendation of the merger or in connection with Bally’s termination of the merger agreement to enter into a written definitive agreement for a “superior proposal” (as defined in the merger agreement).
The transaction is expected to be completed in the fourth quarter. However, no assurance can be given that the transaction will be completed.
Acquisitions
On October 18, 2013, we acquired WMS, a global gaming supplier with a diversified suite of products and strong content creation capabilities, for $1,485.9 million.
Subsequent to the filing of our 2013 Annual Report on Form 10-K, we adjusted the estimated fair values of certain WMS assets to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date. The adjustments resulted in a decrease in goodwill of approximately $3.8 million related to the recognition of non-U.S.-based current and deferred tax assets and liabilities. We have applied the adjustment retrospectively to the opening balance sheet at October 18, 2013.
We have completed the allocation of the purchase price, which resulted in the purchase price exceeding the aggregate fair value of the acquired assets and assumed liabilities at the acquisition date by $381.8 million. Such excess amount has been recognized as goodwill within our Gaming segment. We attribute this goodwill to enhanced financial and operational scale, market diversification, opportunities for synergies and other strategic benefits. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.
 
At October 18, 2013
Current assets
$
503.9

Long-term notes receivable
76.2

Property, plant and equipment, net
465.8

Goodwill
381.8

Intangible assets
325.0

Intellectual property
201.2

Other long-term assets
7.8

Total assets
1,961.7

Current liabilities
(158.9
)
Deferred income taxes
(166.6
)
Long-term liabilities
(150.3
)
Total liabilities
(475.8
)
Total equity purchase price
$
1,485.9

As required by ASC 805, Business Combinations, the following unaudited pro forma financial information for the three and nine months ended September 30, 2013 gives effect to the WMS acquisition as if it had been completed on January 1, 2012. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been had the WMS acquisition been completed on January 1, 2012. The unaudited pro forma financial information does not purport to project the future operating results of the Company. The unaudited pro forma financial information does not reflect (1) any anticipated synergies (or costs to achieve anticipated


15




synergies) or (2) the impact of non-recurring items directly related to the WMS acquisition.
 
Three Months Ended 
 September 30, 2013
 
Nine Months Ended 
 September 30, 2013
Revenue from Consolidated Statements of Operations and Comprehensive (Loss) Income
$
234.4

 
$
689.0

Add: WMS revenue not reflected in Consolidated Statements of Operations and Comprehensive (Loss) Income
166.4

 
547.1

Unaudited pro forma revenue
$
400.8

 
$
1,236.1

 
Three Months Ended 
 September 30, 2013
 
Nine Months Ended 
 September 30, 2013
Net loss from continuing operations from Consolidated Statements of Operations and Comprehensive (Loss) Income
$
(0.4
)
 
$
(25.1
)
Add: WMS net loss from continuing operations not reflected in Consolidated Statements of Operations and Comprehensive (Loss) Income plus pro forma adjustments (1), (2), (3) and (4) below
(25.4
)
 
(45.0
)
Unaudited pro forma net loss from continuing operations
$
(25.8
)
 
$
(70.1
)
Unaudited pro forma amounts reflect the following adjustments:
(1) An adjustment to reflect additional D&A of $8.4 million and $28.9 million for the three and nine months ended September 30, 2013, respectively, that would have been incurred assuming the fair value adjustments to intangible assets and property and equipment had been applied on January 1, 2012.
(2) An adjustment to reverse acquisition-related fees and expenses of $3.5 million and $20.5 million for the three and nine months ended September 30, 2013, respectively.
(3) An adjustment to reflect additional interest expense of $20.4 million and $61.0 million for the three and nine months ended September 30, 2013, respectively, that would have been incurred assuming our new credit facilities were in place as of January 1, 2012.
(4) An adjustment of $0.5 million and $3.0 million to reverse the U.S. tax benefit and expense of WMS for the three and nine months ended September 30, 2013, respectively, under the assumption that the U.S. taxable income of WMS would have been offset by U.S. tax attributes of the Company.
Dispositions
On March 25, 2013, we completed the sale of our installed base of gaming terminals in our pub business for £0.5 million. There were no results of operations for this business for the three and nine months ended September 30, 2014. The components of our loss from discontinued operations for the three and nine months ended September 30, 2013 are presented below:
 
Three Months Ended 
 September 30, 2013
 
Nine Months Ended 
 September 30, 2013
Revenue:
 
 
 
Services
$

 
$
1.8

 
 
 
 
Operating expenses:
 
 
 
Cost of services (1)
0.1

 
3.0

Selling, general and administrative

 
1.0

Depreciation and amortization

 
0.5

 
 
 
 
Loss from discontinued operations
(0.1
)
 
(2.7
)
 
 
 
 
Other expense

 

Gain on sale of assets

 
0.8

Income tax benefits

 
0.3

 
 
 
 
Net loss from discontinued operations
$
(0.1
)
 
$
(1.6
)
(1) Exclusive of depreciation and amortization.


16





(4) Restructuring Plans
We recorded pre-tax employee termination and restructuring costs of $1.9 million and $0 for the three months ended September 30, 2014 and 2013, respectively, and recorded pre-tax employee termination and restructuring costs of $12.4 million and $0.3 million for the nine months ended September 30, 2014 and 2013, respectively. Employee termination and restructuring initiatives reported in the nine months ended September 30, 2013 were related to initiatives that were completed as of September 30, 2013 and therefore, are not included in the tables below.
WMS Integration-Related Restructuring Plan
Upon our acquisition of WMS in October 2013, we began integrating Scientific Games and WMS and implementing our plans to streamline our operations and cost structure. We have recorded costs that meet the criteria under ASC 420, Exit and Disposal Cost Obligations, in each of our segments associated with integration activities that have been initiated in the relevant period. These costs include employee severance costs, costs relating to the exiting of facilities and costs related to exiting two immaterial businesses.
Unallocated corporate employee termination costs primarily related to terminations of certain executives, including our former chief executive officer, in the fourth quarter of 2013.
Other Restructuring Plans
In December 2013, we initiated a plan to exit our Provoloto instant lottery game operations in Mexico, which was completed during the three months ended March 31, 2014. In June 2014, we initiated a plan to exit our paper roll conversion operations in the U.S., which are immaterial to our operations. Employee termination and restructuring costs related to these initiatives are included in our Instant Products segment.
Employee Termination and Restructuring Costs by Segment
The following table presents a summary of employee termination and restructuring costs by segment related to the restructuring plans described above, including the costs incurred during the three and nine months ended September 30, 2014, the cumulative costs incurred through September 30, 2014 since the relevant restructuring activities were initiated and the total expected costs related to the relevant restructuring activities that have been initiated. As additional integration-related activities are initiated, we expect to incur additional costs related to those activities.


17




Business Segment
 
 
Employee Termination Costs
 
Property Costs
 
Other
 
Total
Instant Products
Three months ended September 30, 2014
 
$

 
$
0.4

 
$

 
$
0.4

Nine months ended September 30, 2014
 
1.0

 
0.4

 
0.2

 
1.6

Cumulative
 
1.0

 
0.4

 
4.9

 
6.3

Expected Total
 
1.0

 
0.4

 
4.9

 
6.3

 
 
 
 
 
 
 
 
 
 
Lottery Systems
Three months ended September 30, 2014
 

 

 

 

Nine months ended September 30, 2014
 

 

 

 

Cumulative
 
0.4

 

 

 
0.4

Expected Total
 
0.4

 

 

 
0.4

 
 
 
 
 
 
 
 
 
 
Gaming
Three months ended September 30, 2014
 
1.4

 

 
0.1

 
1.5

Nine months ended September 30, 2014
 
6.8

 
0.4

 
1.7

 
8.9

Cumulative
 
10.6

 
1.4

 
5.5

 
17.5

Expected Total
 
10.6

 
1.4

 
5.6

 
17.6

 
 
 
 
 
 
 
 
 
 
Unallocated corporate
Three months ended September 30, 2014
 

 

 

 

Nine months ended September 30, 2014
 
1.7

 
0.2

 

 
1.9

Cumulative
 
8.6

 
2.3

 

 
10.9

Expected Total
 
8.6

 
2.3

 

 
10.9

 
 
 
 
 
 
 
 
 
 
Total
Three months ended September 30, 2014
 
$
1.4

 
$
0.4

 
$
0.1

 
$
1.9

Nine months ended September 30, 2014
 
$
9.5

 
$
1.0

 
$
1.9

 
$
12.4

Cumulative
 
$
20.6

 
$
4.1

 
$
10.4

 
$
35.1

Expected Total
 
$
20.6

 
$
4.1

 
$
10.5

 
$
35.2

The following table presents a summary of employee termination and restructuring costs and changes in the related accruals.
 
 
Employee Termination Costs
 
Property Costs
 
Other
 
Total
Balance as of December 31, 2013
 
$
9.3

 
$
2.8

 
$
0.1

 
$
12.2

Additional accruals
 
9.5

 
1.0

 
1.9

 
12.4

Cash payments
 
(12.1
)
 
(0.9
)
 
(1.9
)
 
(14.9
)
Non-cash expense
 
0.5

 
(0.6
)
 
1.6

 
1.5

Balance as of September 30, 2014
 
$
7.2

 
$
2.3

 
$
1.7

 
$
11.2






















18




(5) Basic and Diluted Net Loss Per Share
 
The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share available to common stockholders for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Net loss
 
 

 
 

 
 
 
 
Net loss from continuing operations
 
$
(69.8
)
 
$
(0.4
)
 
$
(187.2
)
 
$
(25.1
)
Net loss from discontinued operations
 

 
(0.1
)
 

 
(1.6
)
Net loss
 
$
(69.8
)
 
$
(0.5
)
 
$
(187.2
)
 
$
(26.7
)
Weighted average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic shares
 
84.7

 
85.1

 
84.5

 
84.9

Diluted shares
 
84.7

 
85.1

 
84.5

 
84.9

Basic net loss per share:
 
 

 
 

 
 
 
 
Continuing operations
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.29
)
Discontinued operations
 

 

 

 
(0.02
)
Total basic net loss per share
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.31
)
Diluted net loss per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.29
)
Discontinued operations
 

 

 

 
(0.02
)
Total diluted net loss per share
 
$
(0.82
)
 
$
(0.01
)
 
$
(2.22
)
 
$
(0.31
)
 
For all periods presented, basic and diluted net loss per share is the same, as any additional common stock equivalents would be anti-dilutive. We excluded 1.7 million and 3.4 million of stock options from the weighted average diluted common shares outstanding as of September 30, 2014 and 2013, respectively, which would have been anti-dilutive due to the net loss in those periods. In addition, we excluded 4.0 million and 5.1 million of RSUs from the calculation of weighted average diluted common shares outstanding as of September 30, 2014 and 2013, respectively, which would have been anti-dilutive due to the net loss in those periods.

(6) Accounts and Notes Receivable and Credit Quality of Notes Receivable
Accounts and Notes Receivable
The following summarizes the components of our current and long-term accounts and notes receivable, net, as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
December 31, 2013
Current:
 
 
 
Accounts receivable
$
307.9

 
$
360.4

Notes receivable
135.5

 
164.3

Allowance for doubtful accounts
(18.0
)
 
(20.0
)
Current accounts and notes receivable, net
$
425.4

 
$
504.7

Long-term:
 
 
 
Notes receivable
55.5

 
72.6

  Total accounts and notes receivable, net
$
480.9

 
$
577.3

Credit Quality of Notes Receivable
We carry our notes receivable at face amounts less an allowance for doubtful accounts and imputed interest. Interest income is recognized ratably over the life of the note receivable and any related fees or costs to establish the notes are expensed as incurred, as they are considered insignificant. Actual or imputed interest, if any, is determined based on stated rates or current market rates at the time the note originated and is recorded as interest income in other income (expense), net, ratably over the payment period. We impute interest income on notes receivable with terms greater than one year that do not contain a stated interest rate. The interest rates on our outstanding notes receivable ranged from 4.0% to 10.4% at September 30, 2014. Our policy is to generally recognize interest on our notes receivable until the note receivable is deemed non-performing, which we


19


define as a note on which payments are over 180 days past due. The amount of our non-performing notes was immaterial at September 30, 2014.
We monitor the credit quality of our accounts receivable by reviewing an aging of customer invoices. Invoices are considered past due if a scheduled payment is not received within agreed upon terms. Our notes receivable are reviewed for impairment at least quarterly. We also review a variety of other relevant qualitative information such as collection experience, economic conditions and customer-specific financial conditions to evaluate credit risk in recording the allowance for doubtful accounts or as an indicator of an impaired loan. Where possible, we seek payment deposits, collateral, pledge agreements, bills of exchange, foreign bank letters of credit or personal guarantees with respect to notes receivable from our customers. However, the majority of our international notes receivable are not collateralized. Currently, we have not sold our notes receivable to third parties; therefore, we do not have any off-balance sheet liabilities for factored receivables.
The government authorities in Argentina limit the exchange of pesos into U.S. dollars and the transfer of funds from Argentina. Our accounts and notes receivable, net, from customers in Argentina at September 30, 2014 was $24.9 million, which is denominated in U.S. dollars, although, under the terms of our arrangements with our customers in Argentina, they are required to pay us in pesos at the spot exchange rate between the peso and the U.S. dollar on the date of payment. In evaluating the collectability of customer receivables in Argentina at September 30, 2014, we specifically evaluated recent payments, receivable aging, any additional security or collateral we had (bills of exchange, pledge agreements, etc.) and other facts and circumstances relevant to our customers’ ability to pay. Our customers in Argentina have continued to pay us in pesos based on the spot exchange rate between the peso and the U.S. dollar on the payment date. We collected $27.5 million of outstanding receivables from customers in Argentina during the nine months ended September 30, 2014.
Recent government actions and challenges affecting the gaming industry in Mexico have increased the credit quality risk with respect to certain of our current Mexico customers. Our accounts and notes receivable, net, from customers in Mexico at September 30, 2014 was $36.1 million. We collected $14.2 million of outstanding receivables from customers in Mexico during the nine months ended September 30, 2014.
The following summarizes the components of total notes receivable, net, as of September 30, 2014 and December 31, 2013:
 
September 30, 2014
 
Balances over 90 days past due
 
December 31, 2013
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
48.1

 
$
2.2

 
$
65.1

 
$
0.4

International
142.9

 
8.2

 
171.8

 
8.7

     Total notes receivable
191.0

 
10.4

 
236.9

 
9.1

 
 
 
 
 
 
 
 
Notes receivable allowance for doubtful accounts:
 
 
 
 
 
 
 
Domestic

 

 

 

International
(7.4
)

(4.7
)
 
(5.6
)
 
(3.3
)
     Total notes receivable allowance for doubtful accounts
(7.4
)
 
(4.7
)
 
(5.6
)
 
(3.3
)
Note receivable, net
$
183.6

 
$
5.7

 
$
231.3

 
$
5.8

At September 30, 2014, 3.1% of our total notes receivable, net, was past due by over 90 days compared to 2.5% at December 31, 2013.
The following tables detail our evaluation of notes receivable for impairment as of September 30, 2014 and December 31, 2013:


20


 
September 30, 2014
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
48.1

  
$
6.7

  
$
41.4

International
142.9

  
78.9

  
64.0

Total notes receivable
$
191.0

  
$
85.6

  
$
105.4


 
December 31, 2013
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
65.1

  
$
4.8

  
$
60.3

International
171.8

  
99.7

  
72.1

Total notes receivable
$
236.9

  
$
104.5

  
$
132.4


The following table reconciles the allowance for doubtful notes receivable from December 31, 2013 to September 30, 2014:
 
Total
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Beginning balance at December 31, 2013
$
5.6

 
$
5.6

 
$

Charge-offs
(0.1
)
 
(0.1
)
 

Recoveries

 

 

Provision
1.9

 
1.9

 

Ending balance at September 30, 2014
$
7.4

 
$
7.4

 
$

Modifications to original financing terms are exceptions to our cash collection process and are a function of collection activities with the customer. If a customer requests a modification of financing terms during the collection process, we evaluate the proposed modification in relation to the recovery of our gaming machines, generally seek additional security and recognize any additional interest income ratably over the remaining new financing term. Additionally, we often take the opportunity to simplify the customer's future payments by consolidating several notes (each typically representing an individual purchase transaction) into one note. In those instances, the aging of any outstanding receivable balance would be adjusted to reflect the new payment terms. Any such modifications generally do not include a concession on the amount owed and generally result only in a delay of payments relative to the original terms.
The following summarizes the notes receivable financing terms that were modified during the nine months ended September 30, 2014:
 
 
Nine Months Ended September 30, 2014
 
# of
 Customers
# of Notes
 
Pre-Modification
 Investment
 
Post-Modification
 Investment
Financing term modifications:
 
 
 
 
 
 
International (1)
9

28

  
$
12.8

  
$
12.8

Total financing term modifications
9

28

  
$
12.8

  
$
12.8

(1) The modifications are detailed below:
One customer for which 12 notes were consolidated into one note aggregating $4.0 million, with an average 28-month payment extension;
One customer for which three notes were consolidated into one note aggregating $3.1 million, with an average four-month payment extension;
One customer with a note for $2.3 million for which original payment terms were extended by nine months;


21


One customer for which four notes were consolidated into one note aggregating $1.4 million, with an average five-month extension, and another note for $0.2 million for which original payment terms were extended by seven months;
One customer for which two notes were consolidated into one note aggregating $0.7 million, with an average 15-month payment extension;
One customer with a note for $0.5 million for which original payment terms were extended by 21 months;
One customer with a note for $0.3 million for which original payment terms were extended by 27 months;
One customer for which two notes were consolidated into one note aggregating $0.2 million, with an average 14-month payment extension; and
One customer with a note for $0.1 million for which original payment terms were extended by 21 months.
In certain international jurisdictions, we offer extended financing terms related to our customers. Such financing activities subject us to increased credit risk, which could be exacerbated by, among other things, unfavorable economic conditions or political or economic instability in those regions. Our notes receivable were concentrated in the following international gaming jurisdictions at September 30, 2014:
Peru
25
%
Mexico
17
%
Argentina
12
%
Colombia
10
%
Other (less than 5% individually)
11
%
Total international notes receivable as a percentage of total notes receivable
75
%
(7) Inventories
 
Inventories consisted of the following as of the dates presented below:
 
 
September 30, 2014
 
December 31, 2013
Parts and work-in-process
 
$
70.4

 
$
62.1

Finished goods
 
100.5

 
75.7

Inventory
 
$
170.9

 
$
137.8

 
Parts and work-in-process include parts for lottery terminals, gaming machines and instant lottery ticket materials as well as labor and overhead costs associated with the manufacturing of instant lottery games. Our finished goods inventory primarily consists of instant games for our participation arrangements, gaming machines for sale and our licensed branded merchandise.













22


(8) Property and Equipment
The following table presents certain information regarding our lottery and gaming equipment at September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
December 31, 2013
Lottery equipment
 
$
358.8

 
$
350.3

Less: accumulated depreciation
 
(237.7
)
 
(210.6
)
Net lottery equipment
 
121.1

 
139.7