LAS VEGAS, Aug. 3, 2015 /PRNewswire/ -- Scientific Games Corporation (NASDAQ: SGMS) ("Scientific Games" or the "Company") today reported results for the second quarter ended June 30, 2015.

"Throughout the second quarter we made further significant progress on implementing our key initiatives targeting revenue growth opportunities, advancing our comprehensive integration efforts and implementing our planned cost savings," said Gavin Isaacs, Scientific Games' President and Chief Executive Officer. "We have heightened our focus on innovation to take advantage of the unique value proposition we can deliver to drive growth for our customers, and we're looking forward to a strong showing next week at the Australia Gaming Expo, and demonstrating our entire portfolio of innovative solutions in the next two months at the Global Gaming Expo ("G2E™") and National Association of State and Provincial Lotteries ("NASPL") conference.

"In this regard, our recent new product introductions have been well received, including our Friends™ and The flintstones™ participation games and our WMS-branded s32 hybrid slant slot cabinet," continued Isaacs. 'We've launched the Shuffle Master Classic national tournament at more than 200 U.S. casinos, attracting thousands of players. Elsewhere, following the successful premiere season of the MONOPOLY MILLIONAIRES' CLUB™ TV game show, the show's second season syndication run is scheduled to begin next month. Also, we've achieved great traction in the commercialization of our SG Universe suite of interactive products, including signing agreements for 14 additional properties in the second quarter.

"Our focus on accelerating revenue growth is balanced with our commitment to deliver the realization of anticipated cost savings that will drive expected further enhancement of operating margin and cash flow in the second half of 2015 and beyond," Isaacs added. "Our cost savings progress is reflected in the year-over-year and quarterly-sequential improvement in AEBITDA and AEBITDA margin. By July 31, 2015, we had implemented $184 million in Bally-related annual cost savings and, as a result of accelerating actions originally planned for 2016 into 2015, we are raising our first-year target from $188 million of cost savings to an expected $200 million, while also implementing an additional $30 million of WMS-related annual cost savings by the end of 2015. We expect the progress from rapidly implementing our integration strategies during the first half of 2015 will be favorably reflected in our performance during the second half of this year."

Impact of Certain Significant Charges and Other Items

In the 2015 second quarter, the Company recorded certain charges and other items, including items related to the integration of the Bally and WMS acquisitions that impacted the comparability of reported results. In the 2014 second quarter, the Company had recorded employee termination and restructuring costs of $4.9 million and M&A and other charges of $2.9 million primarily associated with the WMS acquisition, along with $0.4 for legal contingencies and settlements. The impact of the charges and other items in the second quarter of 2015, all of which were add-backs to AEBITDA, is presented in the table below:

Included in "Impact of purchase accounting and other integration-related charges" is $1.4 million in "Cost of Product Sales" from assigning fair value to finished goods inventory in the purchase price accounting of the Bally acquisition. No further impact of this nature is expected in future periods.

The Company also recorded the following $9.2 million of aggregate charges in the 2015 second quarter that are not in the table above nor included as add-backs to AEBITDA:

• An incremental charge of $2.7 million for bad debt expense related to recent customer bankruptcies;
• Incremental inventory write-downs of $1.2 million due to excess and obsolete inventory;
• Legal costs of $2.0 million associated with legal settlements; and
• Accrual of $3.3 million related to Northstar Lottery Group, LLC ("Northstar Illinois"), which has signed a term sheet with the State of Illinois to settle their dispute regarding the termination of a private management agreement. Scientific Games recorded its share of the proposed settlement, of which $2.0 million was recorded as a reduction of earnings from equity investments and $1.3 million as a reduction in instant games revenue. The parties are negotiating a final settlement agreement based on the term sheet.

The cash impact of the aggregate $65.2 million of charges totaled $23.7 million, while $41.5 million did not have a cash impact. Additionally, purchase price accounting at the acquisition date reduced Bally's deferred revenue by $27.3 million, of which $6.9 million would have otherwise been recognized as revenue in the 2015 second quarter, and $9.4 of which would have been recorded as revenue in future periods.

Merger Integration Update

"Concurrent with our commitment to deliver new products that support our customers' goal of increasing player engagement, our teams remain focused on the implementation of our comprehensive integration initiatives," said Scott Schweinfurth, Scientific Games' Executive Vice President, Chief Financial Officer and Corporate Secretary. "Through June 30, 2015, implementation of our integration efforts has generated approximately $150 million of annualized cost savings related to the Bally integration. These savings largely reflect the elimination of duplicative positions in the Gaming and Interactive businesses and corporate functions, as well as the elimination of duplicative overhead costs. Notably, we began the closure of the WMS Waukegan, Illinois facility during the second quarter and, as of today, it is operationally closed. As a result of cost-savings actions implemented through July 2015, we now have implemented approximately $184 million of Bally-related annual cost savings synergies, or nearly all of the $188 million in annual savings that had been anticipated to be implemented by December 31, 2015. As a result of accelerating cost savings actions originally planned for 2016 into 2015, we are raising our Bally-related cost savings target for 2015 to $200 million of anticipated cost savings to be implemented."

Schweinfurth continued, "The benefit of these Bally-related savings, as well as the savings realized from the earlier WMS- and SHFL-related integration initiatives, is primarily reflected in the $52.4 million year-over-year decrease in aggregate quarterly selling, general and administrative expense and research and development costs on a pro forma basis, notwithstanding $9.8 million of higher integration, acquisition, bad debt expense and legal settlement costs, plus we've implemented cost savings in cost of product sales and cost of services. As a result of our cost savings, second quarter 2015 AEBITDA margin increased to 38 percent from 32 percent in the prior-year quarter."

In addition to the Bally integration savings, the Company has also implemented approximately $26 million of the anticipated $30 million of second-year incremental cost savings actions related to the WMS acquisition through July 2015. As originally planned, the Company continues to expect to achieve a total of $115 million of annualized cost savings from the WMS acquisition by the end of 2015.

In addition to approximately $14.6 million in aggregate restructuring and integration costs incurred in the 2015 second quarter, the Company expects to incur $5 million - $10 million of additional costs to achieve anticipated cost savings and $10 million - $15 million of capital expenditures related to integration efforts during the remainder of 2015. In 2016, the Company expects to incur $10 million - $15 million in additional operating costs to achieve anticipated cost savings and $15 million - $25 million of additional integration-related capital expenditures.

2015 Second Quarter Business Update

Gaming Segment

Financial results and operating metrics presented below reflect Bally's results of operations in the 2015 second quarter but not in the 2014 second quarter. Bally results are included in the Company's Gaming segment, except for results from Bally's interactive products and services, including Dragonplay Ltd., which are included in the Interactive segment.

Gaming Segment Financial Highlights

• Revenue increased $272.8 million, inclusive of a $2.7 million unfavorable foreign currency translation impact, principally due to the inclusion of $310.3 million from Bally, which included $143.7 million in service revenue and $166.6 million in product sales revenue, partially offset by $37.5 million lower revenue in legacy Gaming revenue (i.e. that which existed prior to the Bally acquisition), principally due to lower gaming machine unit sales as a result of lower market demand.
• Gaming operations revenue increased $96.7 million year over year, reflecting the inclusion of $97.4 million from Bally and growth in the overall average daily revenue per unit from the legacy Gaming business, partially offset by a decrease in the legacy Gaming average installed base.
  • The inclusion of 15,128 Bally WAP, premium and daily-fee units to the ending installed base was partially offset by a 640 unit decrease in the legacy Gaming installed base. The inclusion of Bally's installed base of WAP, premium and daily-fee units led to a $18.68 per unit decrease in average daily revenue, while average daily revenue for the legacy Gaming installed base increased 11 percent, or $8.32, year over year to $83.77 per unit, reflecting strong performance of WMS WAP games.
  • The year-over-year increase in the quarter-end installed base of other leased and participation units primarily reflected the inclusion of 17,661 Bally units and a 496-unit increase in the legacy Gaming installed base. The addition of Bally's other leased and participation units led to a $3.08 increase in daily average revenue per unit, partially offset by a slight decrease in the legacy Gaming average daily revenue per unit in UK customers' betting shops, reflecting a year-over-year impact from a 5 percent increase in the UK duty on gaming machines.
• Gaming machine sales revenue increased $58.1 million, reflecting the inclusion of $95.7 million from Bally, partially offset by $37.6 million in lower legacy Gaming product sales due to lower market demand. The Company shipped 6,805 new gaming machines, including 4,001 new units to U.S. and Canadian customers and 2,804 new units to international customers. Other product sales revenue increased $5.9 million, inclusive of $12.3 million from Bally, partially offset by $6.4 million in lower legacy Gaming revenue, primarily due to lower used gaming machine sales. The 13 percent increase in average sales price per new unit reflected the benefit from Bally units, particularly sales of premium Bally Pro Wave gaming machines.
  • Total new unit shipments in the 2015 second quarter were lower than the combined new unit shipments of the legacy Gaming business and Bally during the prior-year quarter, primarily reflecting 508 fewer unit sales to the Illinois VLT market, 677 fewer unit sales for new casino openings and 1,436 replacement units due to lower market demand. Shipments to U.S. and Canadian customers in the 2015 second quarter reflected 417 Illinois VLT units, 583 units for new casino openings and 3,001 replacement units.  Combined shipments by WMS and Bally to U.S. and Canadian customers in the prior-year period included 925 Illinois VLTs units, 1,260 units for new casino openings and 4,437 replacement units.
• Primarily due to the inclusion of Bally, gaming systems revenue increased $74.4 million to $77.6 million and table products revenue increased to $43.6 million.
• Operating loss decreased to $0.8 million from an operating loss of $3.6 million reflecting the inclusion of Bally and benefits from cost savings associated with the Company's integration initiatives, mostly offset by an incremental $53.2 million of higher integration-related costs, asset impairments and other significant charges.
  • Cost of services increased $29.8 million primarily due to the inclusion of Bally;
  • Cost of product sales increased $62.6 million, primarily due to Bally, inclusive of the $1.4 million impact from the write-up to fair market value of Bally's finished goods inventory due to purchase price accounting, plus $5.9 million related to inventory write-downs related to certain discontinued Gaming products as a result of the Bally integration, plus incremental write-downs of $1.2 million due to excess and obsolete inventory, partially offset by lower costs of legacy Gaming products as a result of lower unit shipments;
  • Selling, general and administrative expense increased $38.3 million, primarily due to Bally, $5.5 million in higher integration-related charges over the prior-year period, $2.7 million of charges for incremental bad debt expense and $2.0 million in higher legal costs, primarily related to legal settlements, partially offset by the benefit of the above-noted integration cost-savings activities;
  • Research and development expense increased $20.0 million, primarily due to Bally, partially offset by the benefit of the above-noted integration cost-savings activities;
  • Employee termination and restructuring expense was $2.7 million, primarily related to employee separations and facility closing costs; and,
  • Depreciation and amortization expense increased $117.6 million, primarily due to Bally, inclusive of the incremental depreciation and amortization related to the impact of purchase price accounting on intangible and other assets, plus $35.1 million of impairment and other long-lived asset write-downs, partially offset by lower legacy Gaming depreciation and amortization.

Gaming Segment Business Development Highlights

• Entered into an expanded agreement with Ladbrokes to supply 3,000 additional self-service sports betting terminals, plus service for two and one-half years.
• Launched the inaugural Shuffle Master Classic tournament featuring Shuffle Master-branded proprietary poker table games at more than 200 casinos nationwide, which will culminate in the Three Card Poker National Championship event in Las Vegas on September 28, 2015.

Lottery Segment

Lottery Segment Financial Highlights

• Lottery revenue declined $17.6 million, inclusive of an aggregate $8.8 million unfavorable foreign currency translation impact, reflecting $12.6 million in lower lottery systems product sales and $5.1 million in lower services revenue, while instant games revenue was essentially flat.
• Services revenue decreased $5.1 million, inclusive of an unfavorable $1.7 million foreign currency translation impact, largely reflecting the cessation of sales related to the previously announced loss of the Colorado lottery systems contract effective October 2014 and lower international sports betting revenue, partially offset by higher U.S. retail sales of Powerball and MegaMillions tickets.
• Product sales revenue declined $12.6 million, inclusive of an unfavorable $3.1 million foreign currency translation impact, primarily reflecting lower hardware sales to international customers.
• Instant games revenue increased $0.1 million, inclusive of an unfavorable $4.0 million foreign currency translation impact, driven by:
  • A 1.3 percent increase in revenue from customers to which the Company supplies tickets on a participation basis, primarily driven by higher domestic retail sales as well as a full quarter of sales to Hellenic Lotteries, which commenced operations in May 2014;
  • Slightly higher revenue from customers to which the Company supplies tickets on a price-per-unit basis, primarily international customers partially offset by lower revenue from domestic customers; and
  • A 6.4 percent decrease in licensing and player loyalty revenue, primarily relating to the timing of launches of licensed games.
• Operating income increased $4.8 million, or 10.9 percent, despite 8.5 percent lower revenue, primarily reflecting a more profitable mix of business and lower operating costs. Lower operating expense included a $2.4 million decrease in selling, general and administrative expense and a $3.4 million decline in depreciation and amortization partially offset by a $0.8 million increase in R&D expense.

Lottery Segment Business Development Highlights

• Syndication agreements with 150 TV affiliate stations (reaching an estimated 95 percent of all U.S. lottery television homes) to air MONOPOLY MILLIONAIRES' CLUB game show for its second season expected to begin airing in September 2015.
• Signed an agreement to expand the relationship with Norsk Tipping (Norway National Lottery) to become the sole provider of instant games, as well as supply a new system to manage their instant games.
• Signed a one-year extension through October 2016 to the instant games contract with the Massachusetts Lottery, which ranks first in the world for instant game per capital sales (La Fleur's 2015 Almanac), as well as a two-year extension through June 2017 to the instant games contract with the Missouri Lottery, and an extension until January 2016 of the instant games contract with the Arizona Lottery.

Interactive Segment

Interactive Segment Financial Highlights

• Interactive revenue increased $19.4 million, reflecting the inclusion of $8.6 million of revenue from Bally, a $3.2 million increase in real money gaming revenue and higher DAU from both the launch of two new social game apps and continued increases in the Jackpot Party® and Gold Fish® social casino apps, partially offset by a slight decrease in ARPDAU.
• Operating income increased $5.5 million, benefiting from the higher revenue and improved scale of the legacy Interactive business, partially offset by the impact of acquiring and integrating Bally.

Interactive Segment Business Development Highlights

• Launched two new social game apps, Quick Hit® Slots and Hot Shot® Casino, which is the Company's first integrated game app that includes social game content from across multiple Scientific Games game studios.
• Entered into 14 new agreements with casino operators for the deployment of our SG Universe interactive gaming suite of products bringing the total to 48, including the Play4Fun social casino platform and Mobile Concierge marketing capabilities.
• Launched the Company's real money gaming products on seven new customer sites, including the launch of several new premium slot games, along with the robust rollout of mobile games, and entry into Denmark and Spain, where the Company was one of the providers on the country's first day of live online slot games.

Corporate

• Corporate selling, general and administrative expense increased $7.8 million to $34.9 million, which included the impact of Bally, $3.2 million of integration-related costs compared with $1.9 million of such charges in the prior-year period, as well as higher legal expense, professional fees and costs for other outside services.
• The 2014 second quarter included a $25.9 million loss on the early extinguishment of debt related to the refinancing of $350 million of the Company's 9.25% senior subordinated notes due 2019 with a new issue of $350 million of 6.625% senior subordinated notes due 2021.
• Employee termination and restructuring expense was $2.2 million, primarily representing employee severance costs, compared to $1.9 million in the prior-year quarter.
• Depreciation and amortization expense increased $9.4 million, primarily for corporate third-party brand licensing costs.

Earnings and EBITDA from Equity Investments

• Earnings from equity investments increased $2.6 million, largely reflecting a reduction of $6.0 million compared to the prior-year period in the net shortfall accrual recorded by the Company's Northstar Illinois joint venture partially offset by lower performance of LNS related to the timing of new instant game launches and lower earnings from CSG.
• EBITDA from equity investments was flat year over year reflecting a reduction compared to the prior-year period in the net shortfall accrual recorded by the Company's Northstar Illinois joint venture and lower performance at LNS, while benefiting from the contribution from of our Hellenic Lotteries joint venture.

Liquidity and Capital Resources

• At June 30, 2015, cash and cash equivalents were $129.1 million compared with $171.8 million at December 31, 2014.
• Since December 31, 2014, the Company has paid $36.2 million in total debt payments, including repayment in the second quarter of $5.0 million net of borrowings under the Company's revolving credit facility, $10.8 million of mandatory debt repayments and payments on capital leases. The Company remains firmly committed to using available cash flow for voluntary debt payments to pay down debt.
• Reflecting the June 1, 2015 semi-annual interest payments for the Company's 10% senior unsecured Notes due in 2022, total debt service payments in the June 2015 quarter were $208.5 million, an increase of $101.5 million over the $107.0 million in debt service payments in the March 2015 quarter.
• Liquidity at June 30, 2015 was $502.2million, reflecting $129.1 million of cash and cash equivalents and $373.1 million of availability under the Company's revolving credit facility.
• Capital expenditures increased $15.6 million year over year to $70.7 million for the three months ended June 30, 2015, primarily due to the acquisition and integration of Bally.
  • For 2015, based on existing contractual obligations and planned investments, the Company continues to expect capital expenditures within a range of $300 million to $325 million, including the expected placement of VLTs into Greece (although installation is currently on hold) and approximately $15 million - $25 million of integration-related capital expenditures.
• Net cash provided by operating activities for the three months ended June 30, 2015 was $36.6 million, inclusive of $23.7 million of cash-based costs associated with integration-related and restructuring charges.  Net cash provided by operating activities increased $12.8 million over the prior-year quarter, primarily reflecting a $15.3 million increase in distributed earnings from equity investments and a favorable change in working capital.
  • The change in working capital in the three months ended June 30, 2015 largely reflects a $110.0 million impact from the timing of semi-annual bond interest payments offset by the favorable impact of a $42.1 million reduction in inventory and accounts and notes receivable.
• The Company received total cash distributions of earnings and capital from equity investments of $49.7 million in the June 2015 quarter, including $14.5 million in dividends from LNS, $2.0 million in dividends from Hellenic Lotteries, $1.8 million in dividends from RCN, $16.8 million in return of capital payments from LNS, $12.0 million in return of capital payments from Hellenic Lotteries and $2.6 million in return of capital payments from ITL.  In the prior-year period, the Company received a $10.5 million return of capital payment from ITL and $3.0 million in dividends from RCN and made a $22.9 million addition to its ITL equity investment related to the Company's UK Gaming business roll-out of fixed-odds betting terminals for Ladbrokes.
• Free cash flow of a negative $34.1 million declined slightly compared with the prior-year period.    

Conference Call Details

Scientific Games will host a conference call today at 5:00 p.m. EDT to review results and discuss other topics. To access the call live via a listen-only webcast, please visit www.scientificgames.com and click on the webcast link under the Investor Information section. To access the call by telephone, please dial (866) 318-8615 (U.S. and Canada) or +1 (617) 399-5134 (international). The conference ID is SGMS. A replay of the webcast will be archived in the Investor Information section on our website.

About Scientific Games

Scientific Games Corporation (NASDAQ: SGMS) is a leading developer of technology-based products and services and associated content for worldwide gaming, lottery and interactive markets. The Company's portfolio includes gaming machines, game content and systems; table games products and shufflers; instant and draw-based lottery games; server-based lottery and gaming systems; sports betting technology; loyalty and rewards programs; and interactive content and services. For more information, please visit www.scientificgames.com.

Company Contacts

Investor Relations:
Bill Pfund +1 702-532-7663
Vice President, Investor Relations
bill.pfund@scientificgames.com

Media Relations:
Mollie Cole +1 773-961-1194
Director, Corporate Communications
mollie.cole@scientificgames.com

FRIENDS and all related characters and elements are trademarks of and © Warner Bros. Entertainment Inc. (s15)
THE FLINTSTONES TM/MC & © Hanna-Barbera
The MONOPOLY name and logos are trademarks of Hasbro. The distinctive design of the gameboard, the four corner squares, the MR. MONOPOLY name and character, as well as each of the distinctive elements of the board and playing pieces, are trademarks of Hasbro, Inc. for its property trading game and game equipment. ©1935, 2015 Hasbro, Pawtucket, RI 02862. All Rights Reserved.

Unless otherwise noted, trademarks are owned by, or under license to or from, Scientific Games Corporation, or one or more of its directly or indirectly wholly owned companies, in the United States or elsewhere. © 2015 Scientific Games Corporation. All Rights Reserved.

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. 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 bankruptcies of, or credit risk relating to, customers; limited growth from new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of existing gaming machines; ownership changes and consolidation in the casino industry; opposition to legalized gaming or the expansion thereof; ability to adapt to, and offer products that keep pace with, evolving technology; ability to develop successful gaming concepts and content; laws and government regulations, 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, availability and adequacy 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 (i) the inability of our joint venture to meet the net income targets or otherwise to realize the anticipated benefits under its private management agreement with the Illinois lottery (or in connection with any termination thereof), (ii) 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 and (iii) 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 Bally acquisition or the WMS acquisition, including due to the inability to successfully integrate such acquisitions or realize synergies in the anticipated amounts or within the contemplated timeframes or cost expectations, or at all; litigation relating to the Bally acquisition; disruption of our current plans and operations in connection with the Bally acquisition and the WMS acquisition (including in connection with the integration of Bally and WMS), 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 Bally acquisition and the WMS acquisition; inability to complete or successfully integrate future acquisitions; incurrence of restructuring costs, revenue recognition standards and impairment or asset write-down 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 payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece; dependence on our key employees; litigation and other liabilities relating to our business, including risks relating to product defects or other claims relating to products; influence of certain stockholders; and stock price volatility.

Additional information regarding risks, 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 March 17, 2015 (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 Scientific Games' ongoing obligations under the U.S. federal securities laws, Scientific Games undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

Non-GAAP Financial Measures

The Company's management uses the following non-GAAP financial measures in conjunction with GAAP financial measures: attributable EBITDA ("AEBITDA"), pro forma AEBITDA, AEBITDA as a % of revenue, pro forma AEBITDA as a % of revenue, free cash flow and EBITDA from equity investments (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.

The Company's management uses these non-GAAP financial measures to, among other things: (i) monitor and evaluate the performance of the Company's business operations, as well as the performance of its equity investments; (ii) facilitate management's internal comparisons of the Company's historical operating performance; (iii) facilitate management's external comparisons of the Company's results to the historical operating performance of other companies that may have different capital structures and debt levels; and (iv) analyze and evaluate financial and strategic planning decisions regarding future operating investments and operating budgets. Accordingly, the Company's management believes that these non-GAAP financial measures are useful as they provide 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 AEBITDA is helpful because this non-GAAP financial measure eliminates the effects of unusual, infrequent or other items that management believes have less bearing on the Company's underlying operating performance. Moreover, management believes AEBITDA and EBITDA from equity investments are useful to investors because a significant amount of the Company's business is conducted through its equity investments, and those measures eliminate financial items from the equity investees' earnings that management believes have less bearing on the equity investees' performance. Management believes that AEBITDA and free cash flow provide 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 to support the Company's ongoing business operations. In addition, AEBITDA is used in determining performance-based bonuses (subject to certain additional adjustments in the discretion of the Company's compensation committee).

Pro forma AEBITDA is presented herein as a supplemental disclosure for illustrative purposes only. In light of the recently completed Bally acquisition, Scientific Games' management believes it is useful to investors to present this non-GAAP financial measure on a pro forma basis to illustrate the combined company's attributable EBITDA for the three months ended June 30, 2014 and December 31, 2014, as if the Bally acquisition and the related financing (and the other transactions referenced in the lead-in to the table attached to this release) had occurred on January 1, 2014. This measure should not be taken to represent how the companies would have performed had their operations been combined during the period presented, or how the companies will perform on a combined basis in any subsequent period.

AEBITDA

AEBITDA, as used herein, is a non-GAAP financial measure that is presented herein as supplemental disclosure that is reconciled to net income (loss) as set forth in the schedules titled "Reconciliation of Net Loss to Attributable EBITDA" below.

AEBITDA, as used herein, is derived from the definition of "consolidated EBITDA" in our credit agreement and includes our consolidated EBITDA plus (without duplication) our pro rata share of the EBITDA of our joint ventures and minority equity investments, subject to adjustments only to the extent contemplated by the definition of consolidated EBITDA in our credit agreement ("credit agreement adjustments").

The Company anticipates that it will not include certain credit agreement adjustments in AEBITDA for purposes of the Company's earnings releases (and has not included those adjustments in the calculation of AEBITDA in this earnings release). For example, we do not expect to give effect in AEBIDTA to certain "pro forma" adjustments contemplated by the credit agreement (including adjustments for acquisitions or dispositions), expected cost savings and other synergies, franchise taxes, Sarbanes-Oxley compliance costs or certain charges related to Northstar Illinois. AEBIDTA for purposes of the Company's earnings releases will not include any add-backs beyond those contemplated by the credit agreement adjustments.

Consolidated EBITDA as defined in our credit agreement means, for any period, "consolidated net income" as defined in the credit agreement for such period plus, without duplication and, if applicable, except with respect to clauses (9), (10), (16) and (19) below, to the extent deducted in calculating such consolidated net income for such period, the sum of: (1) provisions for income (or similar) taxes, including franchise, excise and similar taxes and foreign withholding taxes; (2) interest expense (net of interest income, other than interest income earned on customer accounts), net losses on interest rate hedging obligations, amortization or write-off of debt discount and debt issuance costs and commissions, premiums, discounts and other fees and charges associated with debt; (3) depreciation and amortization expense and impairment charges; (4) extraordinary, unusual or non-recurring charges, expenses or losses, including severance costs and legal and settlements; (5) any other non-cash charges, expenses or losses (except to the extent such charges, expenses or losses represent an accrual of or reserve for cash expenses in any future period or an amortization of a prepaid cash expense paid in a prior period); (6) non-cash stock-based compensation expenses; (7) transaction costs, fees, losses and expenses (whether or not any transaction is consummated); (8) management, monitoring, consulting and advisory fees, and due diligence expense and other transaction fees and expenses and related expenses paid; (9) proceeds from any business interruption insurance (to the extent not reflected as revenue or income); (10) certain pro forma cost savings and other synergies; (11) earn-out and similar obligations incurred in connection with any acquisition or other investment; (12) charges and expenses to the extent indemnified or insured by a third party to the extent that coverage has not been denied (other than any such denial that is being contested in good faith) and so long as such amounts are actually reimbursed within one year; (13) net realized losses relating to amounts denominated in foreign currencies resulting from the application of FASB ASC 830; (14) costs of surety bonds in connection with financing activities, (15) costs associated with compliance with the requirements of the Sarbanes-Oxley Act of 2002; (16) certain identified pro forma adjustments; (17) charges or expenses attributable to cost savings initiatives, business optimization, management changes, restructurings and integrations; (18) (a) any net loss resulting from hedge agreements and the application of FASB ASC 815 or currency translation losses related to currency re-measurements of debt and (b) the amount of loss resulting from a sale of receivables, payment intangibles and related assets in connection with a receivables financing; (19) cash receipts not included in consolidated EBITDA in any period to the extent non-cash gains relating to such receipts were deducted in the calculation of consolidated EBITDA for any previous period and not added back; (20) up-front fees and certain other costs in connection with certain lottery or gaming licenses or concessions; and (21) charges not to exceed $8 million in respect of liabilities of Northstar Illinois, as disclosed in our quarterly report for the fiscal quarter ended June 30, 2014; minus, to the extent reflected in the statement of such consolidated net income for such period, the sum, without duplication, of: (1) any extraordinary, unusual or non-recurring income or gains; (2) non-cash income or gains (other than the accrual of revenue in the ordinary course), subject to specified exceptions; (3) gains realized and income accrued in connection with the effect of currency and exchange rate fluctuations on intercompany balances and other balance sheet items; (4) the amount of cash received in such period in respect of any non-cash income or gain in a prior period (to the extent such non-cash income or gain previously increased consolidated net income in a prior period); (5) net realized gains relating to amounts denominated in foreign currencies resulting from the application of FASB ASC 830; and (6) (a) any net gain resulting from hedge agreements and the application of FASB ASC Topic 815, (b) any net gain resulting in such period from currency translation gains related to currency re-measurements of debt and (c) the amount of gain resulting in such period from a sale of receivables, payment intangibles and related assets in connection with a receivables financing. Consolidated EBITDA is subject to certain pro forma adjustments in connection with material acquisitions and dispositions as provided in the credit agreement. Consolidated EBITDA also includes our pro rata share of the EBITDA of our joint ventures and minority equity investments (without duplication of amounts otherwise constituting consolidated net income, as noted above). The foregoing definition of consolidated EBITDA is summary in nature and is qualified in its entirety by reference to the full text of such definition in the Company's credit agreement, a copy of which is attached as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2014.

AEBITDA as a % of Revenue and Pro Forma AEBITDA as a % of Revenue

AEBITDA as a % of Revenue, as used herein, represents our AEBITDA (as defined above) for the three months ended June 30, 2015 and June 30, 2014 calculated as a percentage of revenue, and pro forma AEBITDA for the three months ended March, 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014, and for the twelve months ended December 31, 2014, calculated as a percentage of pro forma revenue for the periods. AEBITDA as a % of revenue and pro forma AEBITDA as a % of revenue are non-GAAP financial measures that are presented herein as supplemental disclosures for illustrative purposes only and are reconciled to net loss and pro forma net loss in a schedule below.

Pro forma AEBITDA

Pro forma AEBITDA, as used herein, represents our AEBITDA (as defined above) for the three months ended March, 31, 2014, June 30, 2014, September 30, 2014 and December 31, 2014, and for the twelve months ended December 31, 2014, giving effect to the Bally acquisition and the related financing (and the other transactions referenced in the lead-in to the table attached to this release) as if they had occurred on January 1, 2014. Pro forma AEBITDA is a non-GAAP financial measure that is presented herein as supplemental disclosure for illustrative purposes only and is reconciled to pro forma net loss in a schedule below.

Free Cash Flow

Free cash flow, as used herein, represents net cash provided (used) by operating activities less total capital expenditures (which includes lottery and gaming systems expenditures and other intangible assets and software expenditures). Free cash flow is a non-GAAP financial measure that is presented herein as supplemental disclosure and is reconciled to net cash provided by operating activities in a schedule below.

EBITDA from Equity Investments

EBITDA from equity investments, as used herein, represents our share of the EBITDA (i.e., earnings (whether or not distributed to us) plus income tax expense, depreciation and amortization expense and interest (income) expense, net of other) of our joint ventures and minority investees. EBITDA from equity investments is a non-GAAP financial measure that is presented herein as supplemental disclosure and is reconciled to earnings from equity investments in a schedule below.