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EX-32.2 - EXHIBIT 32.2 - SCIENTIFIC GAMES CORPsgms3312016ex322.htm
EX-31.1 - EXHIBIT 31.1 - SCIENTIFIC GAMES CORPsgms3312016ex311.htm
EX-32.1 - EXHIBIT 32.1 - SCIENTIFIC GAMES CORPsgms3312016ex321.htm
EX-31.2 - EXHIBIT 31.2 - SCIENTIFIC GAMES CORPsgms3312016ex312.htm
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 March 31, 2016
 
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)
 
 
 
6650 S. El Camino Road, Las Vegas, Nevada 89118
(Address of principal executive offices)
(Zip Code)
 
(702) 897-7150
(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 ý
 
Accelerated filer ¨
 
 
 
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 May 3, 2016:
Class A Common Stock: 87,363,008
Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 2016
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Condensed 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
 
 
 
 
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



3




Glossary of Terms
 
 
 
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
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.
Bally acquisition
the acquisition of Bally by the Company on November 21, 2014
Barcrest
Barcrest Group Limited
Coin-in
the amount wagered
Company
refers to Scientific Games Corporation and its consolidated subsidiaries, unless otherwise specified or the context otherwise dictates
CSG
Beijing CITIC Scientific Games Technology Co., Ltd.
CSL
China Sports Lottery
CSP
Cooperative Services Program
D&A
depreciation and amortization
ESPP
employee stock purchase plan
FASB
Financial Accounting Standards Board
GLB
Beijing Guard Libang Technology Co., Ltd.
Hellenic Lotteries
Hellenic Lotteries S.A.
ITL
International Terminal Leasing
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l.
Net win
Coin-in less payouts
Northstar Illinois
Northstar Lottery Group, LLC
Northstar New Jersey
Northstar New Jersey Lottery Group, LLC
Note
refers to a note in the Condensed Notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q, unless otherwise indicated
Participation
with respect to our Gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which we earn revenues and are paid based on: (1) a percentage of Net win; (2) fixed daily-fees; (3) a percentage of the Coin-in; or (4) a combination of a fixed daily-fee and a percentage of the Coin-in, and with respect to our Lottery business, refers to a contract or arrangement in which we earn revenues and are paid based on a percentage of retail sales
PMA
private management agreement
R&D
research and development
RCN
Roberts Communications Network, LLC
RFP
Request for proposal
RMG
real-money gaming
RSU
restricted stock unit
SEC
Securities and Exchange Commission
Secured Notes
7.00% senior secured notes due 2022 issued by SGI
Securities Act
Securities Act of 1933, as amended
SG&A
selling, general and administrative
SGI
Scientific Games International, Inc., a wholly-owned subsidiary of Scientific Games Corporation
SHFL
SHFL entertainment, Inc.
Shufflers
various models of automatic card shufflers, deck checkers and roulette chip sorters
Unsecured Notes
10.00% senior unsecured notes due 2022 issued by SGI
U.K.
United Kingdom of Great Britain and Northern Ireland
U.S.
United States of America


4




U.S. GAAP
accounting principles generally accepted in the U.S.
VLT
video lottery terminal
WAP
wide-area progressive
WMS
WMS Industries, Inc.
WMS acquisition
the acquisition of WMS by the Company on October 18, 2013

Intellectual Property Rights
 
® and ™ indicate U.S. trademarks. Marks are owned by their respective owners.



5




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," "plan," "continue," "believe," "expect," "anticipate," "target," "should," "could," "potential," "opportunity," "goal" or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth 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 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 gross gaming revenues or lottery retail sales, 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, including by casino operators;
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 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, lottery and interactive gaming industries;
dependence upon key providers in our social gaming business;
inability to retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts;
level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs;
inability to reduce or refinance our indebtedness;
restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;
protection of intellectual property, inability to license third party intellectual property and the intellectual property rights of others;
security and integrity of our products and systems and reliance on or failures in information technology and other 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 realize the anticipated benefits under its private management agreement with the Illinois lottery or from the disentanglement services performed in connection with the termination thereof, (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 and (3) the failure to realize the anticipated benefits related to our consortium's instant lottery game concession in Greece;


6




failure to achieve the intended benefits of the Bally acquisition, the WMS acquisition, our other recent acquisitions, or future acquisitions, including due to the inability to successfully complete or integrate such acquisitions or realize synergies in the anticipated amounts or within the contemplated time frames or cost expectations, or at all;
disruption of current plans and operations in connection with our recent acquisitions (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;
incurrence of employee termination or restructuring costs and impairment or asset write-down charges;
changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;
implementation of complex revenue recognition standards;
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, 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 key employees;
litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property 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 Item 1A "Risk Factors" in our 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016. 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.
You should also note that 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 gaming, lottery and interactive gaming industries than the same industries in the U.S.


7


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited, in millions, except per share amounts)
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2016
 
2015
 
Revenue:
 
 
 
 
 
Services
 
$
350.3

 
$
330.4

 
Product sales
 
197.6

 
199.4

 
Instant games
 
134.1

 
128.9

 
Total revenue
 
682.0

 
658.7

 
Operating expenses:
 
 
 
 
 
Cost of services (1)
 
94.9

 
90.5

 
Cost of product sales (1)
 
94.4

 
97.9

 
Cost of instant games (1)
 
67.0

 
67.0

 
Selling, general and administrative
 
142.3

 
145.9

 
Research and development
 
49.8

 
46.9

 
Employee termination and restructuring
 
2.7

 
8.2

 
Depreciation and amortization
 
180.6

 
184.2

 
Operating income
 
50.3

 
18.1

 
Other (expense) income:
 
 
 
 
 
Interest expense
 
(165.7
)
 
(164.3
)
 
Earnings from equity investments
 
3.2

 
3.1

 
Other income (expense), net
 
0.7

 
(5.6
)
 
     Total other expense, net
 
(161.8
)
 
(166.8
)
 
Net loss before income taxes
 
(111.5
)
 
(148.7
)
 
Income tax benefit
 
19.2

 
62.3

 
Net loss
 
$
(92.3
)
 
$
(86.4
)
 
Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation loss
 
(1.6
)
 
(106.3
)
 
Pension and post-retirement gain, net of tax
 
0.2

 
0.9

 
Derivative financial instruments unrealized loss, net of tax
 
(1.0
)
 
(4.9
)
 
Other comprehensive loss
 
(2.4
)
 
(110.3
)
 
Comprehensive loss
 
$
(94.7
)
 
$
(196.7
)
 
 
 
 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

 
Basic
 
$
(1.07
)
 
$
(1.01
)
 
Diluted
 
$
(1.07
)
 
$
(1.01
)
 
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

 
Basic shares
 
86.6

 
85.3

 
Diluted shares
 
86.6

 
85.3

 

(1) Exclusive of D&A.
See accompanying condensed notes to consolidated financial statements.


8



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
 
March 31, 2016
 
December 31, 2015
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
145.7

 
$
128.7

Restricted cash
21.2

 
20.2

Accounts receivable, net
472.1

 
487.1

Notes receivable, net
161.8

 
167.7

Inventories
259.9

 
248.5

Prepaid expenses, deposits and other current assets
124.7

 
123.3

Total current assets
1,185.4

 
1,175.5

Long-term restricted cash
17.5

 
17.9

Long-term notes receivable, net
45.8

 
51.3

Property and equipment, net
734.8

 
794.0

Goodwill
3,012.0

 
3,013.7

Intangible assets, net
1,946.0

 
1,920.0

Software, net
469.9

 
485.9

Equity investments
231.7

 
228.5

Other assets
47.6

 
45.4

Total assets
$
7,690.7

 
$
7,732.2

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
50.0

 
$
50.3

Accounts payable
168.5

 
159.8

Accrued liabilities
450.6

 
443.8

Total current liabilities
669.1

 
653.9

Deferred income taxes
214.8

 
228.2

Other long-term liabilities
253.6

 
188.9

Long-term debt, excluding current portion
8,137.1

 
8,156.7

Total liabilities
9,274.6

 
9,227.7

Commitments and contingencies (see Note 16)


 


Stockholders' deficit:
 
 
 
Class A common stock, par value $0.01 per share: 199.3 shares authorized; 104.2 and 103.7 shares issued and 87.0 and 86.5 shares outstanding, respectively
1.0

 
1.0

Additional paid-in capital
772.2

 
765.9

Accumulated loss
(1,957.3
)
 
(1,865.0
)
Treasury stock, at cost, 17.2 shares
(175.2
)
 
(175.2
)
Accumulated other comprehensive loss
(224.6
)
 
(222.2
)
Total stockholders' deficit
(1,583.9
)
 
(1,495.5
)
Total liabilities and stockholders' deficit
$
7,690.7

 
$
7,732.2

 
See accompanying condensed notes to consolidated financial statements.


9


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(92.3
)
 
$
(86.4
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
Depreciation and amortization
180.6

 
184.2

Change in deferred income taxes
(18.3
)
 
(67.1
)
Stock-based compensation
6.5

 
5.1

Non-cash interest expense
10.0

 
9.5

Earnings from equity investments, net
(3.2
)
 
(3.1
)
Distributed earnings from equity investments

 
1.6

Changes in current assets and liabilities:
 
 
 
Accounts and notes receivable, net
23.6

 
34.7

Inventories
(10.6
)
 
9.5

Other current assets and liabilities
3.9

 
1.3

Accounts payable
0.4

 
(17.3
)
Accrued liabilities
1.3

 
5.5

Other, net
(0.8
)
 
0.3

Net cash provided by operating activities
101.1

 
77.8

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(4.0
)
 
(4.2
)
Gaming and lottery operations expenditures
(30.3
)
 
(48.3
)
Intangible assets and software expenditures
(16.9
)
 
(19.6
)
Changes in other assets and liabilities and other
1.5

 
(0.2
)
Restricted cash
(0.6
)
 
0.2

Distributions of capital on equity investments
1.5

 
3.8

Net cash used in investing activities
(48.8
)
 
(68.3
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
95.0

 
15.0

Repayments under revolving credit facility
(110.0
)
 
(20.0
)
Payments on long-term debt
(12.5
)
 
(12.0
)
Payments on license obligations
(9.6
)
 
(9.0
)
Net redemptions of common stock under stock-based compensation plans

 
(0.7
)
Net cash used in financing activities
(37.1
)
 
(26.7
)
Effect of exchange rate changes on cash and cash equivalents
1.8

 
(3.4
)
Increase (decrease) in cash and cash equivalents
17.0

 
(20.6
)
Cash and cash equivalents, beginning of period
128.7

 
171.8

Cash and cash equivalents, end of period
$
145.7

 
$
151.2

 See accompanying condensed notes to consolidated financial statements.


10




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED 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 developer of technology‑based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio includes gaming machines and game content, casino management systems, table game products and services, instant and draw‑based lottery games, server‑based gaming and lottery systems, sports betting technology, lottery content and services, loyalty and rewards programs, interactive gaming and social casino solutions. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments. We report our operations in three business segments—Gaming, Lottery and Interactive.
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 United States dollars ("USD" or "$") unless otherwise stated herein. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as those subsidiaries 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 our 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 these financial statements were issued.
In the opinion of management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations and comprehensive loss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2015 Annual Report on Form 10-K. Interim results of operations are not necessarily indicative of results of operations for a full year.
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 2015 Annual Report on Form 10-K.
New Accounting Guidance - Recently Adopted

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amended guidance simplifies the accounting for equity investments and eliminates the requirements in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendment requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendment also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. The prospective adoption of the ASU is required. We adopted this guidance during the first quarter of 2016. The adoption of this guidance did not have a material effect on our financial condition, results of operations or cash flows. 

New Accounting Guidance - Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09 (Topic 606), 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." In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year to now be effective for fiscal years, and


11




interim reporting periods within those years, beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date of December 15, 2016. The ASU may be adopted using a full retrospective approach or reporting the cumulative effect as of the date of adoption. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principle versus agent considerations. Additionally, in April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability of the licensing implementation guidance. Both ASU No. 2016-08 and 2016-10 have the same effective date and transition requirements as ASU No. 2014-09. We are currently evaluating the impact of adopting this guidance.

In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU. Inventory will now be measured at the lower of cost and net realizable value, while the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier adoption permitted. The prospective adoption of the ASU is required. The adoption of this guidance is not expected to have a material effect on our financial condition, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases, where we are the lessee, to be recognized on our Consolidated Balance Sheets. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with earlier adoption permitted. We are currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amended guidance is intended to simplify several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. The amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value are required to be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term is required to be applied prospectively. The guidance related to the presentation of employee taxes paid in the statement of cash flows is required to be applied retrospectively and amendments related to the presentation of excess tax benefits in the cash flows statement of cash flows may be adopted either prospectively or retrospectively. ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years with earlier adoption permitted. We are currently evaluating the impact of adopting this guidance.


(2) Business Segments
We report our operations in three business segments—Gaming, Lottery and Interactive—representing our different products and services. These are our reportable segments under ASC 280, Segment Reporting. Each of our business segments is managed by a separate executive who reports to our chief executive officer (who is our "chief operating decision maker" as defined under applicable accounting standards). Our three business segments represent separate standalone businesses based on the industries in which we operate. Our Gaming business segment generally sells gaming machines, VLTs and conversion kits and parts, leases or otherwise provides gaming machines, server-based systems and content, sells and supports casino-management systems-based software and hardware, and sells and leases PTG content and Shufflers, including automatic card shufflers, deck checkers and roulette chip sorters, to commercial, tribal and governmental gaming operators. Our Lottery business segment provides instant lottery games and related value-added services, as well as licensed brands utilized in instant lottery games and loyalty and reward services. Our Lottery business segment also provides systems products and services generally comprised of point-of-sale terminals, a central system, customized computer software, data communication services, support and/or related equipment. Our Interactive business segment provides social gaming and RMG services to online casino operators through our remote game servers. Additional discussion regarding the products and services from which each


12


reportable business segment derives its revenue is included in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2015 Annual Report on Form 10-K.
The following tables present revenue, cost of revenue, SG&A, R&D, employee termination and restructuring, D&A, operating income and earnings (loss) from equity investments for the three months ended March 31, 2016 and 2015, respectively, by business segment. Certain unallocated corporate amounts consisted primarily of general and administrative expenses, other income (expense) and D&A.
 
 
Three Months Ended March 31, 2016
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
232.6

 
$
45.1

 
$
72.6

 
$
350.3

Product sales
 
189.1

 
8.5

 

 
197.6

Instant games
 

 
134.1

 

 
134.1

Total revenue
 
421.7

 
187.7

 
72.6

 
682.0

Cost of services (1)
 
41.2

 
28.1

 
25.6

 
94.9

Cost of product sales (1)
 
87.8

 
6.6

 

 
94.4

Cost of instant games (1)
 

 
67.0

 

 
67.0

Selling, general and administrative
 
67.9

 
16.5

 
24.5

 
108.9

Research and development
 
38.2

 
2.6

 
7.3

 
48.1

Employee termination and restructuring
 
1.6

 
1.1

 

 
2.7

Depreciation and amortization
 
141.6

 
17.8

 
3.7

 
163.1

Segment operating income
 
$
43.4

 
$
48.0

 
$
11.5

 
$
102.9

Unallocated corporate costs
 
 
 
 
 
 
 
(52.6
)
Consolidated operating income
 
 
 
 
 
 
 
$
50.3

 
 
 
 
 
 
 
 
 
Earnings from equity investments
 
$

 
$
3.2

 
$

 
$
3.2

(1) Exclusive of D&A.
 
 
Three Months Ended March 31, 2015
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
237.9

 
$
45.6

 
$
46.9

 
$
330.4

Product sales
 
187.9

 
11.5

 

 
199.4

Instant games
 

 
128.9

 

 
128.9

Total revenue
 
425.8

 
186.0

 
46.9

 
658.7

Cost of services (1)
 
45.5

 
28.4

 
16.6

 
90.5

Cost of product sales (1)
 
87.8

 
10.1

 

 
97.9

Cost of instant games (1)
 

 
67.0

 

 
67.0

Selling, general and administrative
 
74.2

 
17.1

 
15.1

 
106.4

Research and development
 
39.8

 
1.6

 
5.5

 
46.9

Employee termination and restructuring
 
4.2

 
0.2

 
0.7

 
5.1

Depreciation and amortization
 
143.3

 
21.3

 
5.1

 
169.7

Segment operating income
 
$
31.0

 
$
40.3

 
$
3.9

 
$
75.2

Unallocated corporate costs
 
 
 
 
 
 
 
(57.1
)
Consolidated operating income
 
 
 
 
 
 
 
$
18.1

 
 
 
 
 
 
 
 
 
(Loss) earnings from equity investments
 
$
(0.1
)
 
$
3.2

 
$

 
$
3.1

(1) Exclusive of D&A.
 
 
 
 
 
 
 
 
 


13


 
 
 
 
 
 
 
 
 
The following table presents a reconciliation of business segment operating income to net loss before income taxes for each period:
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Business segment operating income
 
$
102.9

 
$
75.2

Unallocated corporate costs
 
(52.6
)
 
(57.1
)
Consolidated operating income
 
50.3

 
18.1

Interest expense
 
(165.7
)
 
(164.3
)
Earnings from equity investments
 
3.2

 
3.1

Other income (expense), net
 
0.7

 
(5.6
)
Net loss before income taxes
 
$
(111.5
)
 
$
(148.7
)
In evaluating financial performance, we focus on operating income (loss) as a segment's measure of profit or loss. Segment operating income is income before interest expense, earnings (loss) from equity investments, other income (expense), net, unallocated corporate costs and income taxes. The accounting policies of our 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 our 2015 Annual Report on Form 10-K.

(3) Restructuring Plans
We recorded pre-tax employee termination and restructuring costs of $2.7 million and $8.2 million for the three months ended March 31, 2016 and 2015, respectively. No new material employee termination and restructuring plans were initiated during the three months ended March 31, 2016. We expect to complete the integration-related restructuring plan actions discussed below relating to the Bally integration during 2016. All other employee termination and restructuring actions reported in 2015 were completed as of March 31, 2016.
Bally Integration-Related Restructuring Plan
Upon our acquisition of Bally in November 2014, we began integrating Scientific Games and Bally by 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 ("ASC 420"), in each of our business segments associated with integration activities that have been initiated in the relevant period. These costs include employee termination costs, costs relating to the exiting of facilities and product lines, as well as costs relating to existing contracts.
Other Restructuring Plans
Upon our acquisition of WMS in October 2013, we began integrating Scientific Games and WMS and this integration was completed during the three months ended March 31, 2016. We recorded costs that met the criteria under ASC 420, associated with integration activities that were initiated in the relevant period. These costs included employee termination costs, costs related to the exiting of facilities and product lines, as well as costs related to existing contracts.
Employee Termination and Restructuring Costs by Business Segment
The following table presents a summary of employee termination and restructuring costs by business segment related to the restructuring plans described above, including the costs incurred during the three months ended March 31, 2016, the cumulative costs incurred through March 31, 2016 from initiation of the relevant restructuring activities and the total expected costs related to the relevant restructuring activities that have been initiated. As additional integration-related activities are


14




initiated, we expect to incur additional costs related to those activities.
Business Segment
 
 
Employee Termination Costs
 
Property Costs
 
Other
 
Total
Gaming
Three Months Ended March 31, 2016
 
$
1.2

 
$
0.4

 
$

 
$
1.6

 
Cumulative
 
22.4

 
0.4

 
1.6

 
24.4

 
Expected Total
 
24.4

 
1.4

 
1.6

 
27.4

 
 
 
 
 
 
 
 
 
 
Lottery
Three Months Ended March 31, 2016
 
1.1

 

 

 
1.1

 
Cumulative
 
2.3

 

 

 
2.3

 
Expected Total
 
4.3

 
1.0

 

 
5.3

 
 
 
 
 
 
 
 
 
 
Interactive
Three Months Ended March 31, 2016
 

 

 

 

 
Cumulative
 
2.5

 

 
1.7

 
4.2

 
Expected Total
 
2.5

 

 
1.7

 
4.2

 
 
 
 
 
 
 
 
 
 
Unallocated corporate (1)
Three Months Ended March 31, 2016
 

 

 

 

 
Cumulative
 
6.3

 
4.3

 
2.1

 
12.7

 
Expected Total
 
8.3

 
4.3

 
2.1

 
14.7

 
 
 
 
 
 
 
 
 
 
Total
Three Months Ended March 31, 2016
 
$
2.3

 
$
0.4

 
$

 
$
2.7

 
Cumulative
 
$
33.5

 
$
4.7

 
$
5.4

 
$
43.6

 
Expected Total
 
$
39.5

 
$
6.7

 
$
5.4

 
$
51.6

(1) Cumulative unallocated corporate employee termination costs include cash severance paid to the former chief executive officer and special termination benefits related to the retirement of our former chief financial officer.
The following table presents a summary of restructuring charges and the changes in the restructuring accrual during the three months ended March 31, 2016:
 
 
Employee Termination Costs
 
Property Costs
 
Other
 
Total
Balance as of December 31, 2015
 
$
7.3

 
$
0.8

 
$
1.4

 
$
9.5

Additional accruals
 
2.3

 
0.4

 

 
2.7

Cash payments
 
(3.3
)
 
(0.7
)
 
(0.3
)
 
(4.3
)
Balance as of March 31, 2016
 
$
6.3

 
$
0.5

 
$
1.1

 
$
7.9


(4) Basic and Diluted Net Loss Per Share
Basic net loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share gives effect to all potentially dilutive common shares that were outstanding during the period. As of March 31, 2016 and 2015, we had outstanding stock options and RSUs that could potentially dilute basic earnings per share in the future.
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 months ended March 31, 2016 and 2015:


15




 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Loss (numerator):
 
 

 
 

     Net loss
 
$
(92.3
)
 
$
(86.4
)
 
 


 


Shares (denominator):
 
 
 
 
     Basic weighted-average common shares outstanding
 
86.6

 
85.3

     Diluted weighted-average common shares outstanding
 
86.6

 
85.3

 
 
 
 
 
Basic and diluted net loss per share amounts:
 
 

 
 

Basic net loss per share
 
$
(1.07
)
 
$
(1.01
)
Diluted net loss per share
 
$
(1.07
)
 
$
(1.01
)
For all periods presented, basic and diluted net loss per share were the same, as any additional common stock equivalents would be anti-dilutive. We excluded 1.8 million and 1.5 million of stock options from the diluted weighted-average common shares outstanding as of March 31, 2016 and 2015, respectively, which would have been anti-dilutive due to the net loss in those periods. In addition, we excluded 4.6 million and 4.3 million of RSUs from the calculation of diluted weighted- average common shares outstanding as of March 31, 2016 and 2015, respectively, which would have been anti-dilutive due to the net loss in those periods.

(5) Accounts and Notes Receivable and Credit Quality of Notes Receivable
Accounts and Notes Receivable
The following summarizes the components of current and long-term accounts and notes receivable, net:
 
March 31, 2016
 
December 31, 2015
Current:
 
 
 
Accounts receivable
$
483.2

 
$
497.7

Notes receivable
176.3

 
180.4

Allowance for doubtful accounts
(25.6
)
 
(23.3
)
Current accounts and notes receivable, net
$
633.9

 
$
654.8

Long-term:
 
 
 
Notes receivable, net
45.8

 
51.3

  Total accounts and notes receivable, net
$
679.7

 
$
706.1

Credit Quality of Notes Receivable
The Company has provided extended payment terms and development financing to certain customers in the form of notes receivable. We carry our notes receivable at face amounts less an allowance for doubtful accounts and imputed interest, if any. 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 generally 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 3.25% to 10.42% at March 31, 2016 and December 31, 2015. Our policy is to generally recognize interest on our notes receivable until the note receivable is deemed non-performing, which we define as a note on which payments are over 180 days past due. The amount of our non-performing notes was immaterial at March 31, 2016 and December 31, 2015.
We monitor the credit quality of our accounts and notes receivable by reviewing an aging of customer invoices. Invoices are considered past due if a scheduled payment is not received within the agreed-upon terms. 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


16


possible, we seek payment deposits, collateral, pledge agreements, bills of exchange, foreign bank letters of credit, post-dated checks or personal guarantees with respect to notes receivable from our customers. However, the majority of our international notes receivable do not have these features. Currently, we have not sold our notes receivable to third parties; therefore, we do not have any off-balance sheet liabilities for factored receivables.
Over the past few years, the government authorities in Argentina had limited the exchange of pesos into USD and the transfer of funds from Argentina. In December 2015, the newly elected government removed the limitations of the previous government and also devalued the "official" peso to the market rate. Our accounts and notes receivable, net, from customers in Argentina at March 31, 2016 was $16.5 million, which is denominated in USD, 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 USD on the date of payment. With the recent devaluation of the peso, our customers will now have to pay more pesos to reduce their obligations. In evaluating the collectability of customer receivables in Argentina at March 31, 2016, we specifically evaluated recent government actions, payments, receivables 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 USD on the payment date. We collected $4.5 million of outstanding receivables from customers in Argentina during the three months ended March 31, 2016.
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 these certain customers in Mexico at March 31, 2016 was $38.6 million. We collected $7.2 million of outstanding receivables from these certain customers during the three months ended March 31, 2016.
The following summarizes the components of total notes receivable, net:
 
March 31, 2016
 
Balances over 90 days past due
 
December 31, 2015
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
52.3

 
$
2.9

 
$
62.4

 
$
2.6

International
169.9

 
36.0

 
169.8

 
26.6

     Total notes receivable
222.2

 
38.9

 
232.2

 
29.2

 
 
 
 
 
 
 
 
Notes receivable allowance for doubtful accounts:
 
 
 
 
 
 
 
Domestic
(2.5
)
 
(2.5
)
 
(2.6
)
 
(2.5
)
International
(12.1
)

(12.1
)
 
(10.6
)
 
(9.5
)
     Total notes receivable allowance for doubtful accounts
(14.6
)
 
(14.6
)
 
(13.2
)
 
(12.0
)
Notes receivable, net
$
207.6

 
$
24.3

 
$
219.0

 
$
17.2

At March 31, 2016, 11.7% of our total notes receivable, net, was past due by over 90 days compared to 7.9% at December 31, 2015.
The following tables detail our evaluation of notes receivable for impairment as of March 31, 2016 and December 31, 2015:
 
March 31, 2016
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
52.3

 
$
16.3

 
$
36.0

International
169.9

 
79.1

 
90.8

Total notes receivable
$
222.2

  
$
95.4

  
$
126.8



17


 
December 31, 2015
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
62.4

  
$
20.7

  
$
41.7

International
169.8

  
101.8

  
68.0

Total notes receivable
$
232.2

  
$
122.5

  
$
109.7

The following table reconciles the allowance for doubtful notes receivable from December 31, 2015 to March 31, 2016:
 
Total
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Beginning balance at December 31, 2015
$
13.2

 
$
12.9

 
$
0.3

Charge-offs
(0.5
)
 
(0.5
)
 

Recoveries
(0.1
)
 
(0.1
)
 

Provision
2.0

 
2.0

 

Ending balance at March 31, 2016
$
14.6

 
$
14.3

 
$
0.3

The following table reconciles the allowance for doubtful notes receivable from December 31, 2014 to March 31, 2015:
 
Total
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Beginning balance at December 31, 2014
$
5.9

 
$
5.9

 
$

Charge-offs
(0.1
)
 
(0.1
)
 

Recoveries

 

 

Provision
2.4

 
1.8

 
0.6

Ending balance at March 31, 2015
$
8.2

 
$
7.6

 
$
0.6

For the three months ended March 31, 2016 and 2015, we had no significant modifications to the original financing terms.    
 
 
 
 
 
 
 
In certain international jurisdictions, we offer extended payment terms to our customers. Such payment terms 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 March 31, 2016:
Mexico
20
%
Peru
17
%
Colombia
7
%
Australia
6
%
Argentina
6
%
Other (less than 5% individually)
15
%
Total international notes receivable as a percentage of total notes receivable
71
%

(6) Inventories
Inventories consisted of the following as of the dates presented below:


18




 
 
March 31, 2016
 
December 31, 2015
Parts and work-in-process
 
$
124.0

 
$
118.3

Finished goods
 
135.9

 
130.2

Total inventories
 
$
259.9

 
$
248.5

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

(7) Property and Equipment, net
Gaming and Lottery machinery and equipment, including assets under capital leases, were as follows:
 
 
March 31, 2016
 
December 31, 2015
Gaming equipment
 
$
771.9

 
$
770.8

Less: accumulated depreciation
 
(288.9
)
 
(274.0
)
Gaming equipment, net
 
483.0

 
496.8

 
 
 
 
 
Lottery machinery and equipment
 
306.8

 
313.8

Less: accumulated depreciation
 
(235.7
)
 
(238.3
)
Lottery machinery and equipment, net
 
71.1

 
75.5

 
 
 
 
 
Total gaming and lottery machinery and equipment, net
 
$
554.1

 
$
572.3

Property and equipment, net consisted of the following:
 
 
March 31, 2016
 
December 31, 2015
Land
 
$
38.6

 
$
38.5

Buildings and leasehold improvements
 
188.5

 
185.2

Furniture and fixtures
 
31.5

 
36.0

Construction in progress
 
16.2

 
25.5

Other property and equipment, at cost
 
266.1

 
271.0

Less: accumulated depreciation
 
(360.2
)
 
(334.5
)
Property and equipment, net
 
$
180.7

 
$
221.7

 
 
 
 
 
Total property and equipment, net
 
$
734.8

 
$
794.0

Depreciation expense for the three months ended March 31, 2016 and 2015 was $80.6 million and $82.3 million, respectively. Depreciation expense is excluded from cost of services, cost of product sales, cost of instant games and other operating expenses and is separately included within D&A in the Consolidated Statements of Operations and Comprehensive Loss.
During the three months ended March 31, 2016, the Gaming and Lottery business segments disposed of certain gaming and lottery assets with gross balances of approximately $22.5 million and $32.0 million, respectively. These disposals did not result in receipt of material cash proceeds and had an immaterial impact on property and equipment, net in our Consolidated Balance Sheet as of March 31, 2016 and the Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2016.
    



19


(8) Intangible Assets, net and Goodwill
Intangible Assets, net
The following tables present certain information regarding our intangible assets as of March 31, 2016 and December 31, 2015. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual value, which materially approximates the expected pattern of use of these intangible assets.
Intangible Assets
Gross Carrying Amount
 
Accumulated Amortization
 
Net Balance
Balance as of March 31, 2016
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
Patents
$
25.6

 
$
12.7

 
$
12.9

Customer relationships
878.9

 
123.3

 
755.6

Licenses
403.3

 
104.5

 
298.8

Intellectual property(1)
733.3

 
146.2

 
587.1

Trade names
97.4

 
3.2

 
94.2

Brand names
124.8

 
22.3

 
102.5

Non-compete agreements
0.3

 
0.3

 

 
2,263.6

 
412.5

 
1,851.1

Non-amortizable intangible assets:
 
 
 
 
 
Trade names
97.0

 
2.1

 
94.9

Total intangible assets
$
2,360.6

 
$
414.6

 
$
1,946.0

 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
Patents
$
26.8

 
$
12.5

 
$
14.3

Customer relationships
877.7

 
109.1

 
768.6

Licenses
326.1

 
91.6

 
234.5

Intellectual property(1)
731.1

 
124.5

 
606.6

Trade names
97.5

 
1.9

 
95.6

Brand names
124.0

 
18.9

 
105.1

Non-compete agreements
0.3

 
0.3

 

 
2,183.5

 
358.8

 
1,824.7

Non-amortizable intangible assets:
 
 
 
 
 
Trade names
97.4

 
2.1

 
95.3

Total intangible assets
$
2,280.9

 
$
360.9

 
$
1,920.0

 
(1) Includes $33 million of in-process R&D assets that will not be subject to amortization until they reach commercial feasibility.
In January 2016, we amended and extended the terms of one of our existing license agreements through December 31, 2022. Under the terms of the amended agreement, we are obligated to pay aggregate minimum guarantees of $88.0 million over the life of the contract in exchange for the right to use certain licensed properties in game content themes, which are incorporated into our slot games, online games, lottery products and promotional materials. We account for the minimum guaranteed obligations within other long-term liabilities (or, with respect to the portion that is a current liability within accounts payable or accrued liabilities) at the onset of the license arrangement and record a corresponding licensed asset within intangible assets, net in our Consolidated Balance Sheets. The current and long-term portions of our minimum guaranteed obligations related to the amended license agreement were $12.4 million and $74.6 million, respectively, and are recorded in accounts payable and other long-term liabilities, respectively, in our Consolidated Balance Sheet as of March 31, 2016.


20



The aggregate intangible asset amortization expense for the three months ended March 31, 2016 and 2015 was $65.6 million and $63.1 million, respectively. Amortization expense is excluded from cost of services, cost of product sales, cost of instant games and other operating expenses and is separately stated within D&A in the Consolidated Statements of Operations and Comprehensive Loss.
Goodwill
The table below reconciles the change in the carrying amount of goodwill by business segment for the period from
December 31, 2015 to March 31, 2016.
Goodwill
 
Gaming
 
Lottery
 
Interactive
 
Totals
Balance as of December 31, 2015
 
$
2,486.0


$
417.9


$
109.8


$
3,013.7

Foreign currency adjustments
 
(4.9
)
 
3.2

 

 
(1.7
)
Balance as of March 31, 2016
 
$
2,481.1


$
421.1


$
109.8


$
3,012.0


(9) Software, net
Software, net consisted of the following:
 
 
March 31, 2016
 
December 31, 2015
Software
 
$
881.0

 
$
854.2

Accumulated amortization
 
(411.1
)
 
(368.3
)
Software, net
 
$
469.9

 
$
485.9

Amortization expense for the three months ended March 31, 2016 and 2015 was $34.4 million and $38.8 million, respectively. Amortization expense is excluded from cost of services, cost of product sales, cost of instant games and other operating expenses and is separately stated within D&A in the Consolidated Statements of Operations and Comprehensive Loss.

(10) Equity Investments
The following provides an update for events that occurred during the three months ended March 31, 2016 related to our equity investments, which are disclosed in Note 11 (Equity Investments) in our 2015 Annual Report on Form 10-K.
ITL
During the three months ended March 31, 2016, we received a distribution of capital of €1.4 million, or $1.5 million. During the three months ended March 31, 2015, we received a distribution of capital of €3.4 million, or $3.8 million.

(11) Long-Term and Other Debt
Outstanding Debt and Capital Leases


21


The following reflects our outstanding debt as of the dates indicated below:
 
 
Principal
 
Unamortized debt discount
 
Unamortized deferred financing costs
 
Book value March 31, 2016
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
Revolver, varying interest rate, due 2018
 
$
80.0

 
$

 
$

 
$
80.0

Term Loan, varying interest rate, due 2020
 
2,248.3

 
(7.4
)
 
(49.9
)
 
2,191.0

Term Loan, varying interest rate, due 2021
 
1,975.0

 
(15.9
)
 
(47.0
)
 
1,912.1

2018 Notes
 
250.0

 

 
(1.9
)
 
248.1

2020 Notes
 
300.0

 

 
(3.4
)
 
296.6

2021 Notes
 
350.0

 
(1.8
)
 
(5.4
)
 
342.8

Secured Notes
 
950.0

 

 
(15.7
)
 
934.3

Unsecured Notes
 
2,200.0

 

 
(40.6
)
 
2,159.4

Capital lease obligations, 3.9% interest as of March 31, 2016 payable monthly through 2019
 
22.8

 

 

 
22.8

Total long-term debt outstanding
 
$
8,376.1

 
$
(25.1
)
 
$
(163.9
)
 
$
8,187.1

Less: current portion of long-term debt
 
 
 
 
 
 
 
(50.0
)
Long-term debt, excluding current portion
 


 
 
 
 
 
$
8,137.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
 
Unamortized debt discount
 
Unamortized deferred financing costs
 
Book value December 31, 2015
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
Revolver, varying interest rate, due 2018
 
$
95.0

 
$

 
$

 
$
95.0

Term Loan, varying interest rate, due 2020
 
2,254.0

 
(7.8
)
 
(52.5
)
 
2,193.7

Term Loan, varying interest rate, due 2021
 
1,980.0

 
(16.7
)
 
(49.2
)
 
1,914.1

2018 Notes
 
250.0

 

 
(2.0
)
 
248.0

2020 Notes
 
300.0

 

 
(3.6
)
 
296.4

2021 Notes
 
350.0

 
(1.8
)
 
(5.6
)
 
342.6

Secured Notes
 
950.0

 

 
(16.4
)
 
933.6

Unsecured Notes
 
2,200.0

 

 
(42.1
)
 
2,157.9

Capital lease obligations, 3.9% interest as of December 31, 2015 payable monthly through 2019
 
25.7

 

 

 
25.7

Total long-term debt outstanding
 
$
8,404.7

 
$
(26.3
)
 
$
(171.4
)
 
$
8,207.0

Less: current portion of long-term debt
 
 
 
 
 
 
 
(50.3
)
Long-term debt, excluding current portion
 


 
 
 
 
 
$
8,156.7

Senior Secured Credit Facilities
The Company and certain of its subsidiaries are party to a credit agreement dated as of October 18, 2013, by and among SGI, as the borrower, the Company, as a guarantor, Bank of America, N.A., as administrative agent, and the lenders and other agents party thereto. Prior to the increase in the revolving credit facility and the assumption of the incremental term loans referred to below, the credit agreement provided for senior secured credit facilities in an aggregate principal amount of $2,600.0 million, including a $300.0 million revolving credit facility, which has USD and multi-currency tranches, and a $2,300.0 million term B-1 loan facility.
On October 1, 2014, in connection with the Bally acquisition, we amended our existing credit agreement pursuant to which our $300.0 million revolving credit facility was increased by $267.6 million effective upon the consummation of the Bally acquisition. In addition, we entered into an escrow credit agreement providing for a $2.0 billion senior secured


22


incremental term B-2 loan facility (which became an incremental term B-2 loan facility under our existing credit agreement upon the consummation of the Bally acquisition).
On February 11, 2015, SGI entered into a lender joinder agreement to the credit agreement with an additional commitment lender. Pursuant to the joinder agreement, the amount of the revolving credit facility under the credit agreement was increased by $25.0 million to $592.6 million. Up to $350.0 million of the revolving credit facility is available for issuances of letters of credit.
The term B-1 loans incurred in 2013 under the credit agreement are scheduled to mature on October 18, 2020, the term B-2 loans incurred in 2014 under the credit agreement are scheduled to mature on October 1, 2021 and the revolving credit facility under the credit agreement is scheduled to mature on October 18, 2018. All of the debt incurred under the Credit Agreement is subject to accelerated maturity depending on our liquidity at the time our 2018 Notes, 2020 Notes and 2021 Notes become due.
For additional information regarding our senior secured credit facilities, see Note 15 (Long-Term and Other Debt) in our 2015 Annual Report on Form 10-K.
Capital Lease Obligations
During the three months ended March 31, 2016, we did not enter into any new capital lease arrangements and our remaining obligation at March 31, 2016 was $22.8 million.
For additional information regarding our 2018 Notes, 2020 Notes, 2021 Notes, Secured Notes, Unsecured Notes and capital lease obligations, see Note 15 (Long-Term and Other Debt) in our 2015 Annual Report on Form 10-K.
Fair Value of Debt
We believe that the fair value of our fixed interest rate debt approximated $3,327.9 million and $2,975.1 million as of March 31, 2016 and December 31, 2015, respectively, based on quoted market prices for our securities. We believe that the fair value of our variable interest rate debt as of March 31, 2016 and December 31, 2015 approximated $4,153.5 million and $3,956.5 million, respectively, based on quoted market prices for our securities. We estimate the fair value of debt based on quoted market prices of our publicly-traded debt and senior credit facility. We categorize inputs used to measure the fair value of debt as Level 2 in the fair value hierarchy due to the volume and frequency of transactions in the market.

(12) Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. Where required by U.S. GAAP or SEC rules and regulations, we estimate the fair value of our assets and liabilities utilizing an established three-level hierarchy as described in Note 16 (Fair Value Measurements) in our 2015 Annual Report on Form 10-K.     
The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, approximates their recorded values due to the short-term nature of these instruments. Our assets and liabilities measured at fair value on a recurring basis are described below.
Interest rate swap contracts
In August 2013, we entered into forward starting interest rate swap contracts with an aggregate notional value of $500.0 million. In October 2013, we entered into additional forward starting interest rate swap contracts with an aggregate notional value of $200.0 million. These hedges became effective in April 2015 and will mature in January 2018. We entered into the forward starting interest rate swap contracts, which are designated as cash flow hedges of the future interest payment transactions in accordance with ASC 815, Derivatives and Hedging, in order to eliminate the variability of cash flows attributable to the LIBOR component of interest expense to be paid on our variable rate debt. Under these hedges, beginning in April 2015, we began to pay interest on the notional amount at a weighted-average fixed rate of 2.151% and began to receive interest on the notional amount at the greater of 1% or the then prevailing three-month LIBOR rate.


23


These hedges are highly effective in offsetting changes in our future expected cash flows due to fluctuation in the three-month LIBOR rate associated with our variable rate debt. The effectiveness of these hedges is measured quarterly on a retrospective basis by comparing the cumulative change in the hedging instrument's fair value to the change in the hedged transaction's fair value. To the extent these hedges have no ineffectiveness, all gains and losses from these hedges are recorded in other comprehensive income (loss) until the future underlying payment transactions occur. Any realized gains or losses resulting from the hedges will be recognized (together with the hedged transaction) as interest expense in our Consolidated Statements of Operations and Comprehensive Loss. For the three months ended March 31, 2016 and 2015, we recorded losses, net of tax, of $1.0 million and $4.9 million, respectively, which represent the change in the fair value associated with these hedges, in other comprehensive income (loss) in our Consolidated Statements of Operations and Comprehensive Loss. We realized losses of $2.1 million, which represent reclassifications from accumulated other comprehensive income (loss) to interest expense in our Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2016. The Company expects to reclassify additional losses of $8.2 million from accumulated other comprehensive loss to interest expense in the next twelve months. As of March 31, 2016, the fair value of these hedges was $13.0 million, of which $8.2 million is recorded in accrued liabilities and $4.8 million is recorded in other long-term liabilities in our Consolidated Balance Sheet. As of December 31, 2015, the fair value of these hedges was $11.9 million, of which $7.9 million is recorded in accrued liabilities and $4.0 million is recorded in other long-term liabilities in our Consolidated Balance Sheet. We estimate the fair value of our interest rate swap contracts by discounting the future cash flows of both the fixed rate and variable rate interest payments based on market yield curves. The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy.
Other
In accordance with ASC 323, Investments - equity method and joint ventures, we record our share of a derivative instrument held by LNS, an entity in which we have a 20% equity investment. Changes in the fair value of the derivative instrument are recorded by LNS in other comprehensive income on LNS' statement of comprehensive income. During the three months ended March 31, 2016 and 2015, our 20% share of recorded losses associated with this derivative instrument was not material to other comprehensive income (loss) in our Consolidated Statements of Operations and Comprehensive Loss or to equity investments in our Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015.
As of March 31, 2016 and December 31, 2015, we had $16.7 million of assets held for sale, which primarily consists of our Waukegan, Illinois manufacturing facility and a portion of our Chicago, Illinois R&D campus. Each of these facilities is included in our Consolidated Balance Sheets within Prepaid expenses, deposits and other current assets and is reported at the lower of the carrying amount or fair market value, less expected costs to sell, which approximated the fair value as of March 31, 2016 and December 31, 2015. The inputs used to measure the fair value of our assets held for sale were based on market approach and are categorized as Level 3 in the fair value hierarchy.

Notes Receivable
The fair value of notes receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 2016 and December 31, 2015, the fair value of the notes receivable, net, approximated the carrying amount due to the short-term nature of notes receivable.


(13) Stockholders' Deficit
Stock-based and other incentive compensation
We offer stock-based compensation in the form of stock options and RSUs. We also offered an ESPP through June 30, 2015, at which point in time the shares allocated to this plan were fully issued and the ESPP terminated in accordance with its terms. See Note 18 (Stock-Based and Other Incentive Compensation) in our 2015 Annual Report on Form 10-K. At our forthcoming annual meeting of stockholders, we are proposing to adopt a new ESPP, the terms of which are described in our annual proxy statement, filed on Schedule 14A with the SEC on April 29, 2016.
We may grant certain awards in which the vesting is contingent upon the Company achieving certain performance targets. Upon determining that the performance target is probable, the fair value of the award is recognized over the service period, subject to potential adjustment.


24


We grant stock options to employees and directors under our stock-based compensation plans with exercise prices that are not less than the fair market value of our common stock on the date of grant. The terms of the stock option and RSU awards, including the vesting schedule of such awards, are determined at our discretion subject to the terms of the applicable stock-based compensation plan. Options granted over the last several years have generally become exercisable in four equal installments beginning on the first anniversary of the date of grant or when certain performance targets are determined to have been met, in each case, with a maximum period to exercise of ten years. RSUs typically vest in four equal installments beginning on the first anniversary of the date of grant or when certain performance targets are determined to have been met. We record compensation cost for all stock options and RSUs based on the fair value at the grant date.    
Stock Options
There have been no material changes in stock options outstanding during the three months ended March 31, 2016. We had approximately 1.8 million and 0.8 million of options outstanding and options exercisable as of March 31, 2016, respectively.
    
For the three months ended March 31, 2016 and 2015, we recognized stock-based compensation expense of $0.7 million and $0.4 million, respectively, related to the service period of stock options and a related tax benefit of $0.1 million for the three months ended March 31, 2015.
As of March 31, 2016, we had unrecognized compensation expense of $4.8 million relating to stock option awards that is scheduled to be expensed over a weighted average period of approximately two years.
Restricted Stock Units
A summary of the changes in RSUs outstanding under our stock-based compensation plans during the three months ended March 31, 2016 is presented below:
 
 
Number of
Restricted Stock Units
 
Weighted Average Grant Date Fair Value
Unvested RSUs as of December 31, 2015
 
5.6

 
$
13.05

Granted
 
0.2

 
8.21

Vested
 
(0.8
)
 
12.46

Canceled
 
(0.4
)
 
12.56

Unvested RSUs as of March 31, 2016
 
4.6

 
$
13.00

The weighted average grant date fair value of RSUs granted during the three months ended March 31, 2016 and 2015 was $8.21 and $13.24, respectively. The fair value of each RSU grant is based on the fair market value of our common stock at the time of grant. During the three months ended March 31, 2016 and 2015, we recognized stock-based compensation expense of $5.8 million and $4.7 million, respectively, related to the vesting of RSUs.
As of March 31, 2016, we had $48.3 million of unrecognized stock-based compensation relating to unvested RSUs that will be amortized over a weighted average period of approximately two years. 
    
(14) Employee Benefit Plans
We have defined benefit pension plans for our U.K.-based union employees (the "U.K. Plan") and certain Canadian-based employees (the "Canadian Plan"). Retirement benefits under the U.K. Plan are generally based on an employee's average compensation over the two years preceding retirement. Retirement benefits under the Canadian Plan are generally based on the number of years of credited service. Our policy is to fund the minimum contribution permissible by the applicable authorities. See Note 19 (Pension and Other Post Retirement Plans) in our 2015 Annual Report on Form 10-K.
Our pension benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, inflation, compensation increase rates, expected returns on plan assets, mortality rates and other factors. The assumptions utilized in recording the obligations under our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends. Differences in actual experience or changes in assumptions may affect our pension obligations and future expense. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets.


25


The following table sets forth the combined amount of net periodic benefit cost recognized for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Components of net periodic pension benefit cost:
 
 

 
 

Service cost
 
$
0.6

 
$
0.7

Interest cost
 
1.2

 
1.2

Expected return on plan assets
 
(1.6
)
 
(1.7
)
Amortization of actuarial losses
 
0.2

 
0.3

Amortization of unrecognized prior service cost
 
(0.1
)
 

Net periodic cost
 
$
0.3

 
$
0.5

We have a 401(k) plan for U.S.-based employees. Those employees who participate in our 401(k) plan are eligible to receive matching contributions of 35% from us for participant contributions up to the first 6% of their compensation (as defined in the plan document). Contribution expense for the three months ended March 31, 2016 and 2015 was $2.9 million and $3.1 million, respectively.

(15) Income Taxes
The effective income tax rates for the three months ended March 31, 2016 and 2015 were 17.2% and 41.9%, respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. The expected reduction in income tax rate for the three months ended March 31, 2016 when compared to the three months ended March 31, 2015 is primarily attributable to the impact of negative evidence related to the realizability of the deferred tax assets expected to be created by 2016 U.S. taxable losses.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. The Company has remained in a three year cumulative loss in the U.S. federal tax jurisdiction. As of March 31, 2016, on the basis of this evaluation and considering the projected U.S. pre-tax losses for 2016 and the resulting net U.S. deferred tax asset position anticipated to occur during 2016, a valuation allowance has been contemplated as a component of the estimated annual effective tax rate in order to recognize only the portion of the benefit related to current year losses that is more likely than not to be realized.

As of December 31, 2015, the Company remained in a net U.S. deferred tax liability position and therefore a valuation allowance against its U.S. deferred tax assets was only necessary for certain state deferred tax assets and U.S. foreign tax credit carryforwards. The Company maintained other valuation allowances for certain non-U.S. jurisdictions with cumulative losses. The Company is projecting a pre-tax loss for its U.S. operations in 2016 in an amount that will more than exceed, on an after tax basis, the net deferred tax liability recorded as of December 31, 2015. Thus, we are projecting to be in a net U.S. deferred tax asset position at December 31, 2016.
Our effective income tax rate on foreign earnings is impacted by the mix of income and the statutory tax rates in our foreign jurisdictions, which range from a low of 0% to a high of 48%. The foreign jurisdictions that had the most impact on our foreign income tax expense (benefit) in the three months ended March 31, 2016 included Austria, Bermuda, Canada, India, Ireland and the U.K.

(16) Litigation
The Company is involved in various legal proceedings, including those discussed below. We record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss can be reasonably estimated (although, as discussed below, there may be an exposure to loss in excess of the accrued liability). We evaluate our accruals for legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect (1) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments, (2) the advice and analyses of counsel and (3) the assumptions and judgment of management. Legal costs associated with our legal proceedings are expensed as incurred. We had accrued


26


liabilities of $13.1 million and $16.4 million for all of our legal matters that were contingencies as of March 31, 2016 and December 31, 2015, respectively.
Substantially all of our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss involves a series of complex judgments about future events. Consequently, the ultimate outcomes of our legal contingencies could result in losses in excess of amounts we have accrued. We may be unable to estimate a range of possible losses for some matters pending against the Company or its subsidiaries, even when the amount of damages claimed against the Company or its subsidiaries is stated because, among other things: (1) the claimed amount may be exaggerated or unsupported; (2) the claim may be based on a novel legal theory or involve a large number of parties; (3) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (4) there may be uncertainty as to the outcome of pending appeals or motions; (5) the matter may not have progressed sufficiently through discovery or there may be significant factual or legal issues to be resolved or developed; and/or (6) there may be uncertainty as to the enforceability of legal judgments and outcomes in certain jurisdictions. Other matters have progressed sufficiently that we are able to estimate a range of possible loss. For those legal contingencies disclosed below, as well as those related to the previously disclosed settlement agreement entered into in February 2015 with SNAI S.p.a., as to which a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a range of possible loss, the current estimated range is up to approximately $13.4 million in excess of the accrued liabilities (if any) related to those legal contingencies. This aggregate range represents management's estimate of additional possible loss in excess of the accrued liabilities (if any) with respect to these matters based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, management may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co‑defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that management had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which the Company is not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent our maximum loss exposure. Any such losses could have a material adverse impact on our results of operations, cash flows or financial condition. The legal proceedings underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
Colombia Litigation
Our subsidiary, SGI, owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), which formerly operated the Colombian national lottery under a contract with Empresa Colombiana de Recursos para la Salud, S.A. (together with its successors, "Ecosalud"), an agency of the Colombian government. The contract provided for a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5.0 million if certain levels of lottery sales were not achieved. In addition, SGI delivered to Ecosalud a $4.0 million surety bond as a further guarantee of performance under the contract. Wintech started the instant lottery in Colombia but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia that we believe was in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 30, 1993.
In 1993, Ecosalud issued a resolution declaring that the contract was in default. In 1994, Ecosalud issued a liquidation resolution asserting claims for compensation and damages against Wintech, SGI and other shareholders of Wintech for, among other things, realization of the full amount of the penalty, plus interest, and the amount of the bond. SGI filed separate actions opposing each resolution with the Tribunal Contencioso of Cundinamarca in Colombia (the "Tribunal"), which upheld both resolutions. SGI appealed each decision to the Council of State. In May 2012, the Council of State upheld the contract default resolution, which decision was notified to us in August 2012. In October 2013, the Council of State upheld the liquidation resolution, which decision was notified to us in December 2013.
In July 1996, Ecosalud filed a lawsuit against SGI in the U.S. District Court for the Northern District of Georgia asserting many of the same claims asserted in the Colombia proceedings, including breach of contract, and seeking damages. In March 1997, the District Court dismissed Ecosalud's claims. Ecosalud appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit. The Court of Appeals affirmed the District Court's decision in 1998.
In June 1999, Ecosalud filed a collection proceeding against SGI to enforce the liquidation resolution and recover the claimed damages. In May 2013, the Tribunal denied SGI's merit defenses to the collection proceeding and issued an order of payment of approximately 90 billion Colombian pesos (or approximately $29.1 million), plus default interest potentially accrued since 1994 at a 12% statutory interest rate. SGI has filed an appeal to the Council of State, which appeal has stayed the payment order.


27


SGI believes it has various defenses, including on the merits, against Ecosalud's claims. Although we believe these claims will not result in a material adverse effect on our consolidated results of operations, cash flows or financial position, it is not feasible to predict the final outcome, and there can be no assurance that these claims will not ultimately be resolved adversely to us or result in material liability.
Oregon State Lottery Matter
On December 31, 2014, a representative of a purported class of persons alleged to have been financially harmed by relying on the "auto hold" feature of various manufacturers' video lottery terminals played in Oregon, filed suit in the Circuit Court of Multnomah County, Oregon, against the Oregon State Lottery and various manufacturers, including WMS Gaming Inc.  The suit alleges that the auto hold feature of video poker games is perceived by players as providing the best possible playing strategy that will maximize the odds of the player winning, when such auto hold feature does not maximize the players' odds of winning. The plaintiffs are seeking in excess of $134.0 million in monetary damages.
In April 2015, the court granted the Oregon State Lottery's motion to dismiss, stating the plaintiffs had not satisfied the Oregon Tort Claims Act. As a result of the dismissal, the court indicated that all claims against WMS Gaming Inc. were moot. In June 2015, plaintiffs filed an appeal. We intend to vigorously defend against the claims asserted in the lawsuit.
Shuffle Tech Matter
In April 2015, Shuffle Tech International, LLC, Aces Up Gaming, Inc. and Poydras-Talrick Holdings LLC brought a civil action in the United States District Court for the Northern District of Illinois against the Company, Bally and Bally Gaming, Inc., alleging monopolization of the market for card shufflers in violation of federal antitrust laws, fraudulent procurement of patents on card shufflers, unfair competition and deceptive trade practices. Specifically, the plaintiffs claim that the defendants utilized certain shuffler patents in a predatory manner to create and maintain a monopoly in the relevant shuffler market. The plaintiffs seek no less than $100.0 million in compensatory damages, treble damages and injunctive and declaratory relief. In June 2015, the defendants filed a motion to dismiss. In October 2015, the court dismissed all of the plaintiffs' claims against Bally and Bally Gaming, Inc. with prejudice, except for the claims of violation of antitrust laws related to the fraudulent procurement of patents on card shufflers. We intend to vigorously defend against the claims asserted in the lawsuit.

(17) Supplemental Disclosure of Cash Flow Information
Additional cash flow information is presented as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Interest paid
$
122.3

 
$
96.6

Income taxes paid/(received)
$
2.7

 
$
(7.7
)
Three months ended March 31, 2016
During the three months ended March 31, 2016, we recorded approximately $86.9 million of non-cash additions to intangible assets and related current and long-term liabilities related to license agreements with minimum guaranteed obligations entered into during the period.
There were no other significant non-cash investing or financing activities for the three months ended March 31, 2016.
Three months ended March 31, 2015
During the three months ended March 31, 2015, we recorded approximately $9.6 million of non-cash other assets and related long-term liabilities related to license agreements with minimum guaranteed obligations entered into during the period.
There were no other significant non-cash investing or financing activities for the three months ended March 31, 2015.

(18) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
We conduct substantially all of our business through our U.S. and foreign subsidiaries. SGI's obligations under our credit agreement, the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes are fully and unconditionally


28


and jointly and severally guaranteed by Scientific Games Corporation (the "Parent Company") and substantially all of our 100%-owned U.S. subsidiaries other than SGI (the "Guarantor Subsidiaries"). Our 2018 Notes, which were issued by the Parent Company, are fully and unconditionally and jointly and severally guaranteed by substantially all of our 100%-owned U.S. subsidiaries, including SGI. The guarantees of our 2018 Notes, 2020 Notes, 2021 Notes, Secured Notes and Unsecured Notes will terminate under following customary circumstances: (1) the sale or disposition of the capital stock of the guarantor (including by consolidation or merger of the guarantor into another person); (2) the liquidation or dissolution of the guarantor; (3) the defeasance or satisfaction and discharge of the notes; (4) the release of the guarantor from any guarantees of indebtedness of the Parent Company and SGI (or, in the case of the 2018 Notes, the release of the guarantor from any guarantees of indebtedness of the Parent Company); and (5) in the case of the 2020 Notes, the 2021 Notes and the Secured Notes and the Unsecured Notes, the proper designation of the guarantor as an unrestricted subsidiary pursuant to the indenture governing the respective Notes.
Presented below is condensed consolidated financial information for (1) the Parent Company, (2) SGI, (3) the Guarantor Subsidiaries and (4) our U.S. subsidiaries that are not Guarantor Subsidiaries and our foreign subsidiaries (collectively, the "Non-Guarantor Subsidiaries") as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the guarantee structures of our credit agreement, the 2018 Notes, the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes were in effect at the beginning of the periods presented. 
The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor Subsidiaries and Non-Guarantor Subsidiaries using the equity method of accounting. They also reflect the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Net changes in intercompany due from/due to accounts are reported in the accompanying Supplemental Condensed Consolidating Statements of Cash Flows as investing activities if the applicable entities have a net investment (asset) in intercompany accounts and as a financing activity if the applicable entities have a net intercompany borrowing (liability) balance.
            


29


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2016

 
 
Parent 
Company
 
SGI
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
61.8

 
$
0.1

 
$
2.3

 
$
81.5

 
$

 
$
145.7

Restricted cash
 

 

 
21.1

 
0.1

 

 
21.2

Accounts receivable, net
 

 
89.4

 
225.4

 
157.3

 

 
472.1

Notes receivable, net
 

 

 
110.8

 
51.0

 

 
161.8

Inventories
 

 
45.7

 
96.6

 
129.0

 
(11.4
)
 
259.9

Prepaid expenses, deposits and other current assets
 
23.5

 
3.9

 
41.0

 
56.3

 

 
124.7

Property and equipment, net
 
7.3

 
98.2

 
468.2

 
172.1

 
(11.0
)
 
734.8

Investment in subsidiaries
 
3,234.8

 
853.4