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EX-32.2 - EXHIBIT 32.2 - SCIENTIFIC GAMES CORPsgms3312017ex322.htm
EX-32.1 - EXHIBIT 32.1 - SCIENTIFIC GAMES CORPsgms3312017ex321.htm
EX-31.2 - EXHIBIT 31.2 - SCIENTIFIC GAMES CORPsgms3312017ex312.htm
EX-31.1 - EXHIBIT 31.1 - SCIENTIFIC GAMES CORPsgms3312017ex311.htm
EX-10.4 - EXHIBIT 10.4 - SCIENTIFIC GAMES CORPexhibit104isaacsconsulting.htm
EX-10.3 - EXHIBIT 10.3 - SCIENTIFIC GAMES CORPexhibit103winterscheidt-am.htm
EX-10.1 - EXHIBIT 10.1 - SCIENTIFIC GAMES CORPexhibit101kjtjonagreement2.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, 2017
 
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 ¨
 
Accelerated filer ý
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The registrant has the following number of shares outstanding of each of the registrant's classes of common stock as April 26, 2017:
Class A Common Stock: 88,796,673
Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 2017
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed 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



2




Glossary of Terms
 
 
 
The following terms or acronyms used in this Quarterly Report on Form 10-Q are defined below:
Term or Acronym
Definition
2016 10-K
2016 Annual Report on Form 10-K filed with the SEC on March 3, 2017
2018 Notes
8.125% senior subordinated notes due 2018 issued by SGC
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
Annual Meeting
the annual meeting of stockholders held on June 15, 2016
B2C
business to consumer model
Barcrest
Barcrest Group Limited
Coin-in
the amount wagered
Company
refers to SGC 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, amortization and impairments (excluding goodwill)
ESPP
employee stock purchase plan
EU
European Union
FASB
Financial Accounting Standards Board
F/X
foreign currency exchange
GLB
Beijing Guard Libang Technology Co., Ltd.
Guarantor Subsidiaries
refers to substantially all of SGC’s 100%-owned U.S. subsidiaries other than SGC’s 100%-owned U.S. Interactive social gaming subsidiaries
Hellenic Lotteries
Hellenic Lotteries S.A.
ITL
International Terminal Leasing
KPIs
Key Performance Indicators
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l.
Net win
coin-in less payouts
Non-Guarantor Subsidiaries
refers to SGC’s U.S. subsidiaries that are not Guarantor Subsidiaries and SGC’s foreign subsidiaries
Northstar Illinois
Northstar Lottery Group, LLC
Northstar New Jersey
Northstar New Jersey Lottery Group, LLC
Note
refers to a note in the Notes to Condensed 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
PPU
price-per-unit
PTG
proprietary table games
R&D
research and development
RCN
Roberts Communications Network, LLC
RFP
request for proposal
RMG
real-money gaming


3




RSU
restricted stock unit
SEC
Securities and Exchange Commission
Secured Notes
7.000% senior secured notes due 2022 issued by SGI
SG&A
selling, general and administrative
SGC
Scientific Games Corporation
SGI
Scientific Games International, Inc., a wholly-owned subsidiary of SGC
Shufflers
various models of automatic card shufflers, deck checkers and roulette chip sorters
Unsecured Notes
10.000% senior unsecured notes due 2022 issued by SGI
U.K.
United Kingdom of Great Britain and Northern Ireland
U.S.
United States of America
U.S. GAAP
accounting principles generally accepted in the U.S.
U.S. jurisdictions
the 50 states in the U.S. plus the District of Columbia and Puerto Rico
VGT
video gaming terminal
VLT
video lottery terminal
WAP
wide-area progressive

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



4




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. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:

competition;
U.S. and international economic and industry conditions;
slow growth of new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of gaming machines;
ownership changes and consolidation in the gaming industry;
opposition to legalized gaming or the expansion thereof;
inability to adapt to, and offer products that keep pace with, evolving technology, including any failure of our investment of significant resources in our R&D efforts;

inability to develop successful products and services and capitalize on trends and changes in our industries, including the expansion of internet and other forms of interactive gaming;
laws and government regulations, including those relating to gaming licenses and environmental laws;
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;
protection of our intellectual property, inability to license third party intellectual property and the intellectual property rights of others;
security and integrity of our products and systems and reliance on or failures in information technology and other systems;
challenges or disruptions relating to the implementation of a new global enterprise resource planning system;
failure to maintain adequate internal control over financial reporting;
natural events that disrupt our operations or those of our customers, suppliers or regulators;
inability to benefit from, and risks associated with, strategic equity investments and relationships;
failure to achieve the intended benefits of our acquisitions;
incurrence of restructuring costs;
implementation of complex revenue recognition standards or other new accounting standards;
changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;
fluctuations in our results due to seasonality and other factors;
dependence on suppliers and manufacturers;


5




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 business resulting from the affirmative vote in the U.K. to withdraw from the EU, and the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece;
changes in tax laws or tax rulings, or the examination of our tax positions;
dependence on key employees;
litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property, environmental laws and our strategic relationships;
level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs;
inability to reduce or refinance our indebtedness;
restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;
influence of certain stockholders, including decisions that may conflict with the interests of other stockholders; and
stock price volatility.
Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under Item 1A "Risk Factors" in our 2016 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
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.



6


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated 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,
 
2017
2016
Revenue:
 
 
Services
$
362.5

$
350.3

Product sales
222.7

197.6

Instant games
140.2

134.1

Total revenue
725.4

682.0

Operating expenses:
 
 
Cost of services (1)
103.3

94.9

Cost of product sales (1)
106.6

94.4

Cost of instant games (1)
70.1

67.0

Selling, general and administrative
140.7

142.3

Research and development
42.4

49.8

Depreciation, amortization and impairments
165.1

180.6

Restructuring and other
9.2

2.7

Operating income
88.0

50.3

Other (expense) income:
 
 
Interest expense
(159.4
)
(165.7
)
Earnings from equity investments
9.5

3.2

Loss on extinguishment and modification of debt
(29.7
)

Other income (expense), net
7.5

0.7

     Total other expense, net
(172.1
)
(161.8
)
           Net loss before income taxes
(84.1
)
(111.5
)
Income tax (expense) benefit
(16.7
)
19.2

Net loss
$
(100.8
)
$
(92.3
)
Other comprehensive income (loss):
 
 
Foreign currency translation gain (loss)
33.6

(1.6
)
Pension and post-retirement (loss) gain, net of tax
(0.3
)
0.2

Derivative financial instruments unrealized gain (loss), net of tax
2.8

(1.0
)
Other comprehensive income (loss)
36.1

(2.4
)
Comprehensive loss
$
(64.7
)
$
(94.7
)
 
 
 
Basic and diluted net loss per share:
 

 

Basic
$
(1.14
)
$
(1.07
)
Diluted
$
(1.14
)
$
(1.07
)
 
 
 
Weighted average number of shares used in per share calculations:
 

 

Basic shares
88.2

86.6

Diluted shares
88.2

86.6

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


7



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
131.9

 
$
115.1

Restricted cash
27.1

 
24.7

Accounts receivable, net
463.5

 
495.0

Notes receivable, net
131.0

 
125.4

Inventories
253.5

 
242.3

Prepaid expenses, deposits and other current assets
113.2

 
114.1

Total current assets
1,120.2

 
1,116.6

Non-current assets:
 
 
 
   Restricted cash
16.8

 
17.1

   Notes receivable, net
48.7

 
48.1

   Property and equipment, net
584.7

 
612.2

   Goodwill
2,906.1

 
2,888.4

   Intangible assets, net
1,761.9

 
1,768.3

   Software, net
395.5

 
409.1

   Equity investments
187.0

 
179.9

   Other assets
52.3

 
47.7

Total assets
$
7,073.2

 
$
7,087.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
39.3

 
$
49.3

Accounts payable
182.9

 
188.9

Accrued liabilities
463.3

 
454.2

Total current liabilities
685.5

 
692.4

Deferred income taxes
75.6

 
70.2

Other long-term liabilities
238.9

 
235.6

Long-term debt, excluding current portion
8,068.4

 
8,024.9

Total liabilities
9,068.4

 
9,023.1

Commitments and contingencies (see Note 14)


 


Stockholders' deficit:
 
 
 
Class A common stock, par value $0.01 per share: 199.3 shares authorized; 105.9 and 105.2 shares issued and 88.7 and 88.0 shares outstanding, respectively
1.0

 
1.0

Additional paid-in capital
796.0

 
790.8

Accumulated loss
(2,319.5
)
 
(2,218.7
)
Treasury stock, at cost, 17.2 shares
(175.2
)
 
(175.2
)
Accumulated other comprehensive loss
(297.5
)
 
(333.6
)
Total stockholders' deficit
(1,995.2
)
 
(1,935.7
)
Total liabilities and stockholders' deficit
$
7,073.2

 
$
7,087.4

 
See accompanying notes to condensed consolidated financial statements.


8


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net cash provided by operating activities
$
111.0

 
$
101.1

Cash flows from investing activities:
 
 
 
Capital expenditures
(61.3
)
 
(51.2
)
Acquisition of business, net of cash acquired
(21.5
)
 

Distributions of capital from equity investments
1.3

 
1.5

Changes in other assets and liabilities and other
2.0

 
1.5

Net cash used in investing activities
(79.5
)
 
(48.2
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
125.0

 
95.0

Repayments under revolving credit facility
(170.0
)
 
(110.0
)
Proceeds from issuance of senior notes and term loans
1,762.4

 

    Repayments of senior notes and term loans
(1,693.4
)
 

    Payments of debt issuance and deferred financing costs
(27.2
)
 

Payments on long-term debt
(1.5
)
 
(12.5
)
Payments on license obligations
(9.8
)
 
(9.6
)
Net redemptions of common stock under stock-based compensation plans
(0.6
)
 

Net cash used in financing activities
(15.1
)
 
(37.1
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2.5

 
1.8

Increase in cash, cash equivalents and restricted cash
18.9

 
17.6

Cash, cash equivalents and restricted cash, beginning of period
156.9

 
166.8

Cash, cash equivalents and restricted cash, end of period
$
175.8

 
$
184.4

 
 
 
 
Supplemental cash flow information:
 
 
 
   Cash paid for interest
$
113.5

 
$
122.3

   Income taxes paid
5.7

 
2.7

Non-cash investing and financing transactions:
 
 
 
   Non-cash rollover of Term loans (see Note 10)
2,747.6

 

   Non-cash additions to intangible assets related to license agreements
28.1

 
86.9

 See accompanying notes to condensed consolidated financial statements.


9




SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in USD, 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, lottery systems, lottery content and services, interactive gaming and social casino solutions, as well as other products and services. We report our operations in three business segments—Gaming, Lottery and Interactive.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of SGC 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 condensed consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2016 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 within the Notes of our 2016 10-K.
Acquisitions

During the third quarter of 2016, we entered into a definitive agreement to acquire all of the issued and outstanding common shares of DEQ Systems Corp. (DEQ) for $22.0 million in cash consideration transferred. The transaction closed on January 18, 2017. Substantially all of the purchase price was allocated to acquired intellectual property.

Refer to Subsequent Events Note 15.
    
Revenue

The following table summarizes our revenues by type within each of our business segments:



10




 
Three Months Ended March 31,
 
2017
 
2016
Gaming
 
 
 
  Gaming operations
$
172.4

 
$
184.4

  Gaming machine sales
156.2

 
134.5

Gaming systems
61.5

 
59.7

  Table products
49.9

 
43.1

    Total
$
440.0

 
$
421.7

 
 
 
 
Lottery
 
 
 
  Instant products
$
141.7

 
$
137.3

  Lottery systems
47.4

 
50.4

    Total
$
189.1

 
$
187.7

 
 
 
 
Interactive
 
 
 
  Social Gaming - B2C
$
80.2

 
$
60.2

  Other
16.1

 
12.4

    Total
$
96.3

 
$
72.6


Deferred Revenue

The following table summarizes the deferred revenue activity for the reporting period:

 
Three Months Ended March 31,
 
2017
 
2016
Deferred revenue balance, beginning of period
$
67.4

 
$
57.8

New deferrals
45.8

 
92.9

Amounts recognized in revenue
(51.8
)
 
(85.5
)
Deferred revenue balance, end of period
$
61.4

 
$
65.2


Computation of Basic and Diluted Net Loss Per Share

Basic and diluted net loss per share were the same for all periods presented as all common stock equivalents would be anti-dilutive. We excluded 3.0 million and 1.8 million of stock options from the diluted weighted-average common shares outstanding for the three-month periods ended March 31, 2017 and 2016, respectively, and 5.0 million and 4.6 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three-month periods ended March 31, 2017 and 2016, respectively.

New Accounting Guidance - Recently Adopted

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, accounting for forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 has separate transition guidance for each element of the new standard. We adopted the guidance at the beginning of first quarter 2017. The adoption of this guidance did not result in a net cumulative-effect adjustment to accumulated loss, as the previously unrecognized excess tax benefit of $10.1 million was fully offset by an increase in the valuation allowance as of December 31, 2016. The excess tax benefit recognized in our provision for income taxes for the three months ended March 31, 2017 was immaterial. In addition, we elected to continue to account for forfeitures by estimating the expected forfeitures over the course of a vesting period.



11




In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the guidance retrospectively at the beginning of first quarter 2017. The adoption of this guidance resulted in increases to the cash, cash equivalents and restricted cash beginning-of-period and end-of period line item totaling $38.1 million and $38.7 million, respectively, which now includes restricted cash, and a $0.6 million decrease in net cash used in investing activities for the three months ended March 31, 2016.
    
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted this guidance prospectively at the beginning of first quarter 2017, which will simplify our future goodwill impairment testing.

New Accounting Guidance - Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 combined with all subsequent amendments (collectively ASC 606) provides guidance outlining a single comprehensive revenue model in accounting for revenue from contracts with customers. ASC 606 supersedes existing revenue recognition guidance, including industry-specific guidance, and replaces it with a five-step revenue model with a core principle 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." This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We will adopt this guidance at the beginning of the first quarter of 2018, using a modified retrospective application approach. Refer to Note 1 of our 2016 10-K for our current assessment of the anticipated impact of adopting this guidance on revenue recognition for each of our business segments.

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 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 Sheet. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This guidance 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 and timing of adopting this guidance.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted beginning January 1, 2018. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact and timing of adopting this guidance.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of adopting this guidance.

We do not expect that any other recently issued accounting guidance will have a significant effect on our financial statements.



12


(2) Business Segments
We report our operations in three business segments—Gaming, Lottery and Interactive—representing our different products and services. A detailed discussion regarding the products and services from which each reportable business segment derives its revenue is included in Notes 2 and 3 in our 2016 10-K.
In evaluating financial performance, we focus on operating income (loss) as a segment's measure of profit or loss. The accounting policies of our business segments are the same as those described within the Notes in our 2016 10-K. The following tables present our segment information:
 
Three Months Ended March 31, 2017
 
Gaming
 
Lottery
 
Interactive
 
Corporate(1)
 
Total
Total revenue
$
440.0

 
$
189.1

 
$
96.3

 
$

 
$
725.4

Depreciation, amortization and impairments
123.3

 
13.9

 
4.0

 
23.9

 
165.1

Restructuring and other
4.2

 
0.3

 
0.8

 
3.9

 
9.2

Operating income (loss)
77.5

 
56.1

 
17.2

 
(62.8
)
 
88.0

Interest expense
 
 
 
 
 
 
 
 
(159.4
)
Earnings from equity investments
 
 
 
 
 
 
 
 
9.5

Loss on extinguishment and modification of debt
 
 
 
 
 
 
 
 
(29.7
)
Other income (expense), net
 
 
 
 
 
 
 
 
7.5

Net loss before income taxes
 
 
 
 
 
 
 
 
$
(84.1
)
(1) Includes corporate amounts not allocated to the business segments.
 
Three Months Ended March 31, 2016
 
Gaming
 
Lottery
 
Interactive
 
Corporate(1)
 
Total
Total revenue
$
421.7

 
$
187.7

 
$
72.6

 
$

 
$
682.0

Depreciation, amortization and impairments
141.6

 
17.8

 
3.7

 
17.5

 
180.6

Restructuring and other
1.6

 
1.1

 

 

 
2.7

Operating income (loss)
43.4

 
48.0

 
11.5

 
(52.6
)
 
50.3

Interest expense
 
 
 
 
 
 
 
 
(165.7
)
Earnings from equity investments
 
 
 
 
 
 
 
 
3.2

Other income (expense), net
 
 
 
 
 
 
 
 
0.7

Net loss before income taxes
 
 
 
 
 
 
 
 
$
(111.5
)
(1) Includes corporate amounts not allocated to the business segments.
 
 

 
 

(3) Restructuring and other
Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; and (v) acquisition costs and other unusual items. The following table summarizes pre-tax restructuring and other costs for the periods presented:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Employee severance (1)
 
$
2.7

 
$
2.3

Acquisitions and related costs
 
3.4

 

Restructuring, integration and other
 
3.1

 
0.4

Total
 
$
9.2

 
$
2.7



13




(1) Inclusive of employee severance and termination costs associated with restructuring activities. 
On November 3, 2016, we announced that we began implementing a new business improvement initiative, which we expect will streamline our organization, increase our efficiencies, and significantly reduce our operating costs once the initiative is fully implemented. These cost savings are expected to be achieved across all our divisions and will encompass a combination of headcount reductions, facilities streamlining and reduction in other operating costs.
The following table presents a summary of restructuring charges and the changes in the restructuring accrual during 2017:     
 
 
Restructuring Accrual
Balance as of January 1, 2017
 
$
16.4

Accrual additions
 
2.2

Cash payments
 
(12.6
)
Balance as of March 31, 2017
 
$
6.0



(4) 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, 2017
 
December 31, 2016
Current:
 
 
 
Accounts receivable
$
474.8

 
$
508.1

Notes receivable
146.9

 
140.0

Allowance for doubtful accounts and notes
(27.2
)
 
(27.7
)
Current accounts and notes receivable, net
$
594.5

 
$
620.4

Long-term:
 
 
 
Notes receivable, net of allowance of $0.4 and $0.4
48.7

 
48.1

  Total accounts and notes receivable, net
$
643.2

 
$
668.5

Credit Quality of Notes Receivable
The interest rates on our outstanding notes receivable ranged from 4.0% to 10.4% at March 31, 2017 and 3.3% to 10.4% at December 31, 2016.
We have certain concentrations of outstanding notes receivable in international locations that impact our assessment of the credit quality of our notes receivable. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our notes receivable. We have not identified changes in the aforementioned factors during the three months ended March 31, 2017 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our notes receivable are as follows:
Mexico - Our notes receivable, net, from certain customers in Mexico at March 31, 2017 was $30.8 million. We collected $8.1 million of outstanding receivables from these customers during the three months ended March 31, 2017.
Peru - Our notes receivable, net, from certain customers in Peru at March 31, 2017 was $25.1 million. We collected $4.4 million of outstanding receivables from these customers during the three months ended March 31, 2017.
Argentina - Our notes receivable, net, from customers in Argentina at March 31, 2017 was $11.8 million denominated in USD. Our customers are required to, and have continued to, pay us in pesos at the spot exchange rate on the date of payment. We collected $6.4 million of outstanding receivables from customers in Argentina during the three months ended March 31, 2017.
In addition to the macroeconomic and political factors noted above, we also evaluated recent 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.


14


The following summarizes the components of total notes receivable, net:
 
March 31, 2017
 
Balances over 90 days past due
 
December 31, 2016
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
66.1

 
$
1.4

 
$
45.1

 
$
1.1

International
129.9

 
37.4

 
143.0

 
38.7

     Total notes receivable
196.0

 
38.8

 
188.1

 
39.8

 
 
 
 
 
 
 
 
Notes receivable allowance
 
 
 
 
 
 
 
Domestic
(2.1
)
 
(2.0
)
 
(1.0
)
 
(0.9
)
International
(14.2
)

(14.2
)
 
(14.0
)
 
(14.0
)
     Total notes receivable allowance
(16.3
)
 
(16.2
)
 
(15.0
)
 
(14.9
)
Notes receivable, net
$
179.7

 
$
22.6

 
$
173.1

 
$
24.9

At March 31, 2017, 12.6% of our total notes receivable, net, was past due by over 90 days, compared to 14.4% at December 31, 2016.
We evaluate our exposure to credit loss on notes receivable on both a collective and individual basis. In addition, we evaluate such notes receivable on a geographic basis and take into account any other factors (such as general economic conditions, other macroeconomic considerations, etc.) that could impact our collectability of notes receivable individually or in the aggregate. Accordingly, notes receivable may be evaluated under multiple methodologies, and the resulting allowance is not determined based on one specific methodology taking all factors into consideration. The activity in our allowance for notes receivable for each of the three month periods ended March 31, 2017 and 2016 is as follows:
 
 
For the Three Months Ended March 31,
 
 
2017

 
2016

Beginning allowance for notes receivable
 
$
15.0

 
$
13.2

Provision
 
1.7

 
2.0

Charge-offs and recoveries
 
(0.4
)
 
(0.6
)
Ending allowance for notes receivable
 
$
16.3

 
$
14.6


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, 2017 and December 31, 2016, the fair value of notes receivable, net, approximated the carrying value due to contractual terms of notes receivable generally being under 24 months.
(5) Inventories
Inventories consisted of the following as of the dates presented below:
    
 
 
March 31, 2017
 
December 31, 2016
     Parts and work-in-process
 
$
114.7

 
$
110.5

     Finished goods
 
138.8

 
131.8

          Total inventories
 
$
253.5

 
$
242.3

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.

(6) Property and Equipment, net    
 
 
 
 
 
Property and equipment, net consisted of the following:


15


 
 
March 31, 2017
 
December 31, 2016
Land
 
$
36.8

 
$
36.5

Buildings and leasehold improvements
 
185.4

 
182.2

Gaming and lottery machinery and equipment
 
983.0

 
993.3

Furniture and fixtures
 
30.3

 
28.6

Construction in progress
 
16.8

 
21.2

Other property and equipment
 
247.2

 
239.3

Less: accumulated depreciation
 
(914.8
)
 
(888.9
)
Total property and equipment, net
 
$
584.7

 
$
612.2

Depreciation expense is excluded from Cost of services, Cost of product sales, Cost of instant games and Other operating expenses and is separately presented within D&A.
 
Three Months Ended
March 31,
 
2017
 
2016
Depreciation expense
$
66.9

 
$
80.6


(7) Intangible Assets, net and Goodwill
Intangible Assets, net
The following tables present certain information regarding our intangible assets as of March 31, 2017 and December 31, 2016.
 
March 31, 2017
 
December 31, 2016
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
878.6

 
$
(178.5
)
 
$
700.1

 
$
875.8

 
$
(163.9
)
 
$
711.9

Intellectual property
750.7

 
(244.3
)
 
506.4

 
726.0

 
(218.2
)
 
507.8

Licenses
435.2

 
(164.8
)
 
270.4

 
413.2

 
(153.5
)
 
259.7

Brand names
125.1

 
(35.7
)
 
89.4

 
123.7

 
(32.1
)
 
91.6

Trade names
97.4

 
(9.7
)
 
87.7

 
97.4

 
(8.1
)
 
89.3

Patents and other
28.4

 
(14.7
)
 
13.7

 
28.0

 
(14.2
)
 
13.8

 
2,315.4

 
(647.7
)
 
1,667.7

 
2,264.1

 
(590.0
)
 
1,674.1

Non-amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade names
96.3

 
(2.1
)
 
94.2

 
96.3

 
(2.1
)
 
94.2

Total intangible assets
$
2,411.7

 
$
(649.8
)
 
$
1,761.9

 
$
2,360.4

 
$
(592.1
)
 
$
1,768.3

 

The following reflects intangible amortization expense included within D&A:
 
Three Months Ended
March 31,
 
2017
 
2016
Amortization expense
$
61.9

 
$
65.6

Goodwill


16


The table below reconciles the change in the carrying value of goodwill by business segment for the period from
December 31, 2016 to March 31, 2017.
Goodwill
 
Gaming
 
Lottery
 
Interactive
 
Totals
Balance as of December 31, 2016
 
$
2,428.6

 
$
350.0

 
$
109.8

 
$
2,888.4

Foreign currency adjustments
 
15.9

 
1.8

 

 
17.7

Balance as of March 31, 2017
 
$
2,444.5


$
351.8


$
109.8


$
2,906.1


(8) Software, net
Software, net consisted of the following:
    
 
 
March 31, 2017
 
December 31, 2016
Software
 
$
951.2

 
$
924.8

 Accumulated amortization
 
(555.7
)
 
(515.7
)
Software, net
 
$
395.5

 
$
409.1

The following reflects amortization of software included within D&A:

 
Three Months Ended
March 31,
 
2017
 
2016
Amortization expense
$
36.3

 
$
34.4


(9) Equity Investments
Equity investments totaled $187.0 million and $179.9 million as of March 31, 2017 and December 31, 2016, respectively. We received distributions and dividends totaling $3.7 million and $1.5 million during the three months ended March 31, 2017 and 2016, respectively.

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


17


The following reflects our outstanding debt:
 
 
As of
 
 
March 31, 2017
 
December 31, 2016
 
 
Face value
 
Unamortized debt (discount) premium
 
Unamortized deferred financing costs
 
Book value
 
Book value
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
 
 
Revolver, varying interest rate, due 2018
 
$

 
$

 
$

 
$

 
$
45.0

Revolver, varying interest rate, due 2020
 

 

 

 

 

Term Loan B-1
 

 

 

 

 
2,183.5

Term Loan B-2
 

 

 

 

 
1,905.8

Term Loan B-3
 
3,291.0

 
(16.3
)
 
(58.2
)
 
3,216.5

 

Senior Notes:
 
 
 
 
 
 
 
 
 
 
Secured Notes
 
2,100.0

 
67.5

 
(31.8
)
 
2,135.7

 
936.3

Unsecured Notes
 
2,200.0

 

 
(34.5
)
 
2,165.5

 
2,164.0

Subordinated Notes:
 
 
 
 
 
 
 
 
 
 
2018 Notes
 

 

 

 

 
248.7

2020 Notes
 
243.5

 

 
(2.1
)
 
241.4

 
241.2

2021 Notes
 
340.6

 
(1.4
)
 
(4.3
)
 
334.9

 
334.5

Capital lease obligations, 3.9% interest as of March 31, 2017 payable monthly through 2019
 
13.7

 

 

 
13.7

 
15.2

Total long-term debt outstanding
 
$
8,188.8

 
$
49.8

 
$
(130.9
)
 
$
8,107.7

 
$
8,074.2

Less: current portion of long-term debt
 
 
 
 
 
 
 
(39.3
)
 
(49.3
)
Long-term debt, excluding current portion
 
 
 
 
 
 
 
$
8,068.4

 
$
8,024.9

Fair value of debt(1)
 
$
8,379.2

 
 
 
 
 
 
 
$
8,221.8

(1) Fair value of our fixed rate and variable interest rate debt is classified within level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities.
We were in compliance with the financial covenants under our debt agreements as of March 31, 2017.
February 2017 Refinancing Transactions
On February 14, 2017, we entered into an amendment to our credit agreement which provides for a $3,291.0 million senior secured term B-3 loan facility which matures in 2021 and reduces the commitments on the revolving credit facility to $556.2 million through October 2018, with a step-down in availability at that time to $381.7 million until the extended maturity in October 2020. We also successfully completed an additional offering of our Secured Notes in the aggregate principal amount of $1.15 billion (the "additional Secured Notes"). The net proceeds of the term B-3 loan facility and the additional Secured Notes were used to (a) prepay the balances on the term B-1 and term B-2 loans and the existing revolving credit facility, (b) redeem all $250.0 million aggregate principal amount of our outstanding 2018 Notes at a redemption price equal to 100% of the principal amount of the 2018 Notes, plus accrued and unpaid interest to but not including the redemption date (which redemption was completed on March 17, 2017) and (c) pay related fees and expenses (the "February 2017 Refinancing").
In connection with the February 2017 Refinancing, we recorded $27.9 million in financing costs presented primarily as a reduction to long-term debt.
Term Loan B-3

The new term B-3 loans that were entered into as part of the February 2017 Refinancing mature in October 2021 and will amortize in equal quarterly installments in an amount equal to 1.00% per annum of the stated principal amount thereof, with the remaining balance due at final maturity.    

7.000% Senior Secured Notes due 2022



18


In connection with the February 2017 Refinancing, SGI issued $1.15 billion in aggregate principal amount of additional Secured Notes under the existing indenture governing the Secured Notes. Therefore the additional Secured Notes have the same terms as the previously issued $950.0 million in aggregate principal amount of Secured Notes initially issued in November 2014 except for the issue date and offering price. The additional Secured Notes and the initial Secured Notes will be treated as a single series of debt securities for all other purposes under the indenture governing the Secured Notes.

For additional information regarding terms of our credit agreement and Secured Notes, see Note 16 (Long-Term and Other Debt) in our 2016 10-K.

Loss on Extinguishment and Modification of Debt

The following are components of the loss on extinguishment and modification of debt for the three months ended March 31, 2017:
 
 
 
Unamortized debt discount and deferred financing costs
 
$
(25.8
)
Third party debt issuance fees
 
(3.9
)
Total loss on extinguishment and modification of debt
 
$
(29.7
)


(11) Fair Value Measurements
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. Our assets and liabilities measured at fair value on a recurring basis are described below.
Interest rate swap contracts
We record derivative financial instruments on the balance sheet at their respective fair values. We currently use swap contracts as described below to mitigate gains or losses associated with the change in expected cash flows due to fluctuations in interest rates on our variable rate debt.
We hedge a portion of our interest expense associated with our variable rate debt to effectively fix the interest rates that we pay. We have interest rate swap contracts designated as cash flow hedges under ASC 815. Under these hedges, we pay interest at a weighted-average fixed rate of 2.151% and receive interest at the greater of 1% or the prevailing three-month LIBOR rate. The total notional amount of interest rate swaps outstanding was $700.0 million as of both March 31, 2017 and December 31, 2016.
These hedges are highly effective in offsetting changes in our future expected cash flows due to the 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. As a result of the effective matching of the critical terms on our variable rate interest expense being hedged to the hedging instruments being used, we have not measured any hedge ineffectiveness through the date of our debt refinancing transactions as described in Note 10. Subsequent to the debt refinancing, we have measured ineffectiveness totaling $0.6 million as a result of the terms of our swaps no longer matching critical terms with the hedged forecasted interest payments; however, those hedges remain highly effective as measured by our regression analysis. We expect our interest rate swaps to continue to remain highly effective. 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. 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.
The following table shows the (gains) losses on our interest rate swap contracts:


19


 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
(Gains) losses recorded in accumulated other comprehensive loss, net of tax
 
$
(2.8
)
 
$
1.0

Reclassifications of losses out of accumulated other comprehensive loss
 
2.1

 
2.1

Ineffectiveness recorded in interest expense
 
0.6

 

We expect to reclassify additional losses of $4.6 million from accumulated other comprehensive loss to interest expense in the next twelve months. The following table shows the fair value of our hedges:
 
March 31, 2017
 
December 31, 2016
Accrued liabilities
$
4.6

 
$
6.7

Other long-term liabilities

 
0.2

Total fair value
$
4.6

 
$
6.9

(12) Stock-based Compensation and Employee Benefit Plans
We provide stock-based compensation using stock options and RSUs. At the Annual Meeting, our stockholders approved the adoption of a new ESPP. The first offering period under the new ESPP commenced on January 1, 2017. The following reflects stock-based compensation expense recognized:
 
 
 
 
Three Months Ended
March 31,
2017
 
2016
Related to vesting of stock options
$
0.2

 
$
0.7

Related to vesting of RSUs
5.7

 
5.8

   Total
$
5.9

 
$
6.5


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") as well as a 401(k) plan for U.S.-based employees, which are described in Note 19 in our 2016 10-K. We recognized no material costs in 2017 and 2016 under these plans.

    
(13) Income Taxes
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. Upon evaluation of all available evidence, and considering the projected U.S. pre-tax losses for 2017, a valuation allowance has been contemplated as a component of the estimated annual effective tax rate for 2017. The valuation allowance to be recorded during 2017 related to the U.S. federal tax jurisdiction is incremental to the valuation allowance recorded as of December 31, 2016. The Company maintained other valuation allowances for certain non-U.S. jurisdictions with cumulative losses.
The effective income tax rates for the three months ended March 31, 2017 and 2016 were (19.9)% and 17.2%, respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. The change in the effective tax rates relates primarily to an increase in the valuation allowance recorded against net deferred tax assets in the U.S. federal tax jurisdiction for the three months ended March 31, 2017. The effective income tax rate for the three months ended March 31, 2017 reflects an overall tax expense due to the application of a full valuation allowance against the U.S. pre-tax losses coupled with a tax expense on foreign pre-tax earnings. In the three months ended March 31, 2016, we have an overall tax benefit as the valuation allowance recorded during the period was only applicable to a portion of the U.S. pre-tax losses.
    



20


(14) Litigation
The Company is involved in various routine and other specific legal proceedings, including the following which are described in Note 22 within our 2016 10-K: Colombia litigation, SNAI litigation, Oregon State Lottery matter and Shuffle Tech matter. There have been no material changes to these matters since the 2016 10-K was filed with the SEC, except as described 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 liabilities of $4.8 million and $7.7 million for all of our legal matters that were contingencies as of March 31, 2017 and December 31, 2016, 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 and in Note 22 in our 2016 10-K, 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 $13.0 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.
Shuffle Tech update
On March 24, 2017, SGC, Bally Technologies, Inc. and Bally Gaming, Inc. filed a motion for summary judgment in their favor on all claims asserted by the plaintiffs in the lawsuit. We intend to continue to vigorously defend against the claims asserted in the lawsuit.
For additional information regarding our pending litigation matters, see Note 22 in our 2016 10-K.
(15) Subsequent Events
Subsequent to March 31, 2017, we entered into a settlement and seven-year patent cross-license agreement with another party that resolved outstanding intellectual property matters between the two companies. As part of this agreement, we received a $20.0 million advance royalty payment.
On April 7, 2017, we completed the acquisition of privately held mobile and social game company Spicerack Media, Inc., acquiring all of the issued and outstanding capital stock for approximately $25.0 million in cash with the potential for


21


additional contingent consideration. We expect that a substantial portion of the purchase price will be allocated to acquired intellectual property and customer list.


(16) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
We conduct substantially all of our business through our U.S. and foreign subsidiaries. As of March 31, 2017, SGI's obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes were fully and unconditionally and jointly and severally guaranteed by SGC and the Guarantor Subsidiaries other than SGI. We redeemed all of the outstanding 2018 Notes on March 17, 2017, but they were previously issued by SGC and fully and unconditionally and jointly and severally guaranteed by the Guarantor Subsidiaries. The guarantees of our 2020 Notes, 2021 Notes, Secured Notes and Unsecured Notes will terminate under the 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 SGC and SGI; and (5) the proper designation of the guarantor as an unrestricted subsidiary pursuant to the indenture governing the respective Notes. The guarantees of our 2018 Notes were released in connection with the redemption of the 2018 Notes.

During the third quarter of 2016, we designated certain of our wholly owned direct and indirect subsidiaries that hold substantially all of the assets of, and operate, our social gaming business, as “Unrestricted Subsidiaries” under our credit agreement and each of the indentures governing the 2018 Notes, 2020 Notes, 2021 Notes, Secured Notes and Unsecured Notes. As a result of these designations, our 100%-owned social gaming subsidiaries are no longer guarantors under our credit agreement and indentures. Therefore, the historical condensed consolidating financial information presented has been reclassified to show the nature of assets held, results of operations and cash flows assuming the "Unrestricted Subsidiary" designations were in effect at the beginning of all periods presented, consistent with their status as non-guarantors as of March 31, 2017. The affected subsidiaries are no longer allocated interest in this condensed consolidating financial information due to their present status as non-guarantors. Accordingly, for all periods presented, we no longer present an allocation of interest to any entities, including the Unrestricted Subsidiaries, other than the legal entity issuer of the associated debt.

Presented below is condensed consolidating financial information for (1) SGC, (2) SGI, (3) the Guarantor Subsidiaries and (4) the Non-Guarantor Subsidiaries as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of SGC, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the current guarantee structures of 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 SGC in SGI and 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.        
            


22



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2017
 
 
SGC (Parent and Issuer1)
 
SGI (Issuer2)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
37.8

 
$
1.0

 
$

 
$
98.7

 
$
(5.6
)
 
$
131.9

Restricted cash
 

 

 
27.0

 
0.1

 

 
27.1

Accounts receivable, net
 

 
51.9

 
202.5

 
209.1

 

 
463.5

Notes receivable, net
 

 

 
103.6

 
27.4

 

 
131.0

Inventories
 

 
39.9

 
88.3

 
141.4

 
(16.1
)
 
253.5

Prepaid expenses, deposits and other current assets
 
5.3

 
20.7

 
48.4

 
38.8

 

 
113.2

Property and equipment, net
 
7.3

 
93.7

 
347.0

 
156.6

 
(19.9
)
 
584.7

Investment in subsidiaries
 
3,045.4

 
941.0

 
1,022.4

 

 
(5,008.8
)
 

Goodwill
 

 
188.3

 
1,932.4

 
785.4

 

 
2,906.1

Intangible assets, net
 
196.0

 
37.3

 
1,323.2

 
205.4

 

 
1,761.9

Intercompany balances
 

 
5,594.2

 

 
213.3

 
(5,807.5
)
 

Software, net
 
77.6

 
20.2

 
248.4

 
49.3

 

 
395.5

Other assets(3)
 
233.6

 
281.0

 
57.1

 
178.0

 
(444.9
)
 
304.8

Total assets
 
$
3,603.0

 
$
7,269.2

 
$
5,400.3

 
$
2,103.5

 
$
(11,302.8
)
 
$
7,073.2

Liabilities and stockholders' (deficit) equity
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$

 
$
32.9

 
$

 
$
6.4

 
$

 
$
39.3

Other current liabilities
 
98.9

 
198.1

 
200.0

 
156.4

 
(7.2
)
 
646.2

Long-term debt, excluding current portion
 

 
8,061.0

 

 
7.4

 

 
8,068.4

Other long-term liabilities
 
189.1

 
9.0

 
487.7

 
71.9

 
(443.2
)
 
314.5

Intercompany balances
 
5,310.2

 

 
497.3

 

 
(5,807.5
)
 

Stockholders' (deficit) equity
 
(1,995.2
)
 
(1,031.8
)
 
4,215.3

 
1,861.4

 
(5,044.9
)
 
(1,995.2
)
Total liabilities and stockholders' (deficit) equity
 
$
3,603.0

 
$
7,269.2

 
$
5,400.3

 
$
2,103.5

 
$
(11,302.8
)
 
$
7,073.2


1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017. 
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes. 
3 - Includes $16.1 million and $0.7 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.  


23


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2016
 
 
SGC (Parent and Issuer1)
 
SGI (Issuer2)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
32.7

 
$
1.7

 
$

 
$
81.8

 
$
(1.1
)
 
$
115.1

Restricted cash
 

 

 
24.6

 
0.1

 

 
24.7

Accounts receivable, net
 

 
61.4

 
199.2

 
234.4

 

 
495.0

Notes receivable, net
 

 

 
94.4

 
31.0

 

 
125.4

Inventories
 

 
40.3

 
83.1

 
138.1

 
(19.2
)
 
242.3

Prepaid expenses, deposits and other current assets
 
11.6

 
15.7

 
45.6

 
41.2

 

 
114.1

Property and equipment, net
 
5.6

 
98.4

 
369.3

 
154.9

 
(16.0
)
 
612.2

Investment in subsidiaries
 
3,000.7

 
926.7

 
944.0

 

 
(4,871.4
)
 

Goodwill
 

 
188.3

 
1,931.6

 
768.5

 

 
2,888.4

Intangible assets, net
 
185.8

 
37.5

 
1,343.0

 
202.0

 

 
1,768.3

Intercompany balances
 

 
5,415.1

 

 
116.6

 
(5,531.7
)
 

Software, net
 
74.7

 
21.4

 
264.6

 
48.4

 

 
409.1

Other assets(3)
 
233.6

 
236.5

 
50.8

 
173.5

 
(401.6
)
 
292.8

Total assets
 
$
3,544.7

 
$
7,043.0

 
$
5,350.2

 
$
1,990.5

 
$
(10,841.0
)
 
$
7,087.4

Liabilities and stockholders' (deficit) equity
 
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$

 
$
43.0

 
$

 
$
6.3

 
$

 
$
49.3

Other current liabilities
 
100.5

 
158.7

 
216.3

 
168.7

 
(1.1
)
 
643.1

Long-term debt, excluding current portion
 
248.7

 
7,767.3

 

 
8.9

 

 
8,024.9

Other long-term liabilities
 
159.0

 
12.4

 
468.8

 
67.2

 
(401.6
)
 
305.8

Intercompany balances
 
4,972.2

 

 
559.5

 

 
(5,531.7
)
 

Stockholders' (deficit) equity
 
(1,935.7
)
 
(938.4
)
 
4,105.6

 
1,739.4

 
(4,906.6
)
 
(1,935.7
)
Total liabilities and stockholders' (deficit) equity
 
$
3,544.7

 
$
7,043.0

 
$
5,350.2

 
$
1,990.5

 
$
(10,841.0
)
 
$
7,087.4


1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017. 
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes. 
3 - Includes $16.4 million and $0.7 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.  






24


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 31, 2017
 
 
SGC (Parent and Issuer1)
 
SGI (Issuer2)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Revenue
 
$

 
$
118.0

 
$
399.8

 
$
264.6

 
$
(57.0
)
 
$
725.4

Cost of services, cost of product sales and cost of instant games (3)
 

 
82.9

 
123.7

 
121.8

 
(48.4
)
 
280.0

Selling, general and administrative
 
29.7

 
9.5

 
48.8

 
62.4

 
(9.7
)
 
140.7

Research and development
 
0.5

 
1.4

 
34.2

 
6.3

 

 
42.4

Depreciation, amortization and impairments
 
20.3

 
7.5

 
111.9

 
27.8

 
(2.4
)
 
165.1

Restructuring and other
 
3.8

 
0.2

 
4.2

 
1.0

 

 
9.2

Operating (loss) income
 
(54.3
)
 
16.5

 
77.0

 
45.3

 
3.5

 
88.0

Interest expense
 
(4.5
)
 
(154.6
)
 

 
(0.3
)
 

 
(159.4
)
Loss on early extinguishment of debt
 
(1.1
)
 
(28.6
)
 

 

 

 
(29.7
)
Other (expense) income, net
 
(20.8
)
 
50.7

 
(25.5
)
 
12.6

 

 
17.0

Net (loss) income before equity in income of subsidiaries and income taxes
 
(80.7
)
 
(116.0
)
 
51.5

 
57.6

 
3.5

 
(84.1
)
Equity in income of subsidiaries
 
4.7

 
17.3

 
15.4

 

 
(37.4
)
 

Income tax (expense) benefit
 
(24.8
)
 
43.4

 
(20.6
)
 
(14.7
)
 

 
(16.7
)
Net (loss) income
 
$
(100.8
)
 
$
(55.3
)
 
$
46.3

 
$
42.9

 
$
(33.9
)
 
$
(100.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
36.1

 
4.0

 
21.5

 
29.5

 
(55.0
)
 
36.1

Comprehensive (loss) income
 
$
(64.7
)
 
$
(51.3
)
 
$
67.8

 
$
72.4

 
$
(88.9
)
 
$
(64.7
)

1 - Issuer of obligations under the 2018 Notes, which were redeemed on March 17, 2017. 
2 - Issuer of obligations under the 2020 Notes, the 2021 Notes, the Secured Notes and the Unsecured Notes. 
3 - Exclusive of D&A. 
 


25


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 31, 2016
 
 
SGC (Parent and Issuer1)
 
SGI (Issuer2)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Revenue
 
$

 
$
115.3

 
$
361.5