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EX-32.2 - EXHIBIT 32.2 - SCIENTIFIC GAMES CORPa9302017ex322.htm
EX-32.1 - EXHIBIT 32.1 - SCIENTIFIC GAMES CORPa9302017ex321.htm
EX-31.2 - EXHIBIT 31.2 - SCIENTIFIC GAMES CORPa9302017ex312.htm
EX-31.1 - EXHIBIT 31.1 - SCIENTIFIC GAMES CORPa9302017ex311.htm
EX-10.1 - EXHIBIT 10.1 - SCIENTIFIC GAMES CORPexhibit101agreementandgene.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 September 30, 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)
 
 
 
6601 Bermuda Road, Las Vegas, Nevada 89119
(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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth 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)
 
 
 
 
 
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The registrant has the following number of shares outstanding of each of the registrant's classes of common stock as of October 30, 2017:
Class A Common Stock: 89,641,395
Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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
B2C
business to consumer model
CSG
Beijing CITIC Scientific Games Technology Co., Ltd.
D&A
depreciation, amortization and impairments (excluding goodwill)
ESPP
employee stock purchase plan
FASB
Financial Accounting Standards Board
F/X
foreign currency exchange
GLB
Beijing Guard Libang Technology Co., Ltd.
Guarantor Subsidiaries
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.
Junior Preferred Stock
SGC's Series C Junior Participating Preferred Stock, par value $1.00 per share
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l.
Non-Guarantor Subsidiaries
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
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 the amount wagered less payouts; (2) fixed daily-fees; (3) a percentage of the amount wagered; or (4) a combination of (2) and (3), 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
PPU
price-per-unit
PTG
proprietary table games
R&D
research and development
RFP
request for proposal
RMG
real-money gaming
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.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 
All ® notices signify marks registered in the United States.  © 2017 Scientific Games Corporation.  All Rights Reserved.


3




Forward-Looking Statements
 
Throughout this Quarterly Report on Form 10-Q, we make "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "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;
uncertainties relating to our pending acquisition of NYX, as defined in Note 1;
inability to complete our pending acquisition of NYX on the terms described herein or at all;
failure to achieve the intended benefits of our acquisitions, including our pending acquisition of NYX;
incurrence of restructuring costs;
the possibility that our stockholders may not approve the proposed reincorporation merger and the possibility that the proposed reincorporation merger does not close, including due to the failure to satisfy the closing conditions;


4




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 long-lived assets;
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 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 economic and political conditions in Greece;
possibility that the renewal of LNS' concession to operate the Italian instant games lottery is not finalized;
changes in tax laws or tax rulings, or the examination of our tax positions;
dependence on our key employees and uncertainties relating to our ability to attract and retain employees, including as a result of our pending acquisition of NYX;
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; 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 and under Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. 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.



5


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
2016
 
2017
2016
Revenue:
 
 
 
 
 
Services
$
386.7

$
356.4

 
$
1,135.0

$
1,070.2

Product sales
240.6

225.9

 
694.4

638.3

Instant games
141.6

137.7

 
431.2

422.7

Total revenue
768.9

720.0

 
2,260.6

2,131.2

Operating expenses:
 
 
 
 
 
Cost of services (1)
105.5

98.0

 
307.7

294.3

Cost of product sales (1)
116.9

104.6

 
332.2

299.7

Cost of instant games (1)
68.4

71.7

 
209.8

212.8

Selling, general and administrative
158.8

152.8

 
445.4

440.0

Research and development
47.8

53.9

 
138.3

155.4

Depreciation, amortization and impairments
173.1

191.7

 
513.2

565.4

Restructuring and other
7.8

13.8

 
18.1

20.7

Operating income
90.6

33.5

 
295.9

142.9

Other (expense) income:
 
 
 
 
 
Interest expense
(148.9
)
(165.4
)
 
(459.5
)
(496.4
)
Earnings from equity investments
7.5

7.3

 
20.1

18.5

(Loss) gain on debt financing transactions
(8.4
)

 
(38.1
)
25.2

Other (expense) income, net
(4.3
)
6.0

 
1.3

8.4

     Total other expense, net
(154.1
)
(152.1
)
 
(476.2
)
(444.3
)
           Net loss before income taxes
(63.5
)
(118.6
)
 
(180.3
)
(301.4
)
Income tax benefit (expense)
4.2

19.7

 
(18.9
)
58.5

Net loss
$
(59.3
)
$
(98.9
)
 
$
(199.2
)
$
(242.9
)
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation gain (loss)
73.4

1.9

 
139.1

(34.8
)
Pension and post-retirement (loss) gain, net of tax
(1.3
)
0.2

 
(2.0
)
0.7

Derivative financial instruments unrealized gain, net of tax
0.7

3.1

 
3.5

6.7

Other comprehensive income (loss)
72.8

5.2

 
140.6

(27.4
)
Comprehensive income (loss)
$
13.5

$
(93.7
)
 
$
(58.6
)
$
(270.3
)
 
 
 
 
 
 
Basic and diluted net loss per share:
 

 

 
 

 

Basic
$
(0.66
)
$
(1.13
)
 
$
(2.24
)
$
(2.79
)
Diluted
$
(0.66
)
$
(1.13
)
 
$
(2.24
)
$
(2.79
)
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 

 

 
 

 

Basic shares
89.6

87.5

 
88.9

87.1

Diluted shares
89.6

87.5

 
88.9

87.1

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


6



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
196.4

 
$
115.1

Restricted cash
27.0

 
24.7

Accounts receivable, net
492.7

 
495.0

Notes receivable, net
118.3

 
125.4

Inventories
255.2

 
242.3

Prepaid expenses, deposits and other current assets
135.8

 
114.1

Total current assets
1,225.4

 
1,116.6

Non-current assets:
 
 
 
   Restricted cash
16.3

 
17.1

   Notes receivable, net
44.4

 
48.1

   Property and equipment, net
567.2

 
612.2

   Goodwill
2,961.3

 
2,888.4

   Intangible assets, net
1,667.8

 
1,768.3

   Software, net
356.7

 
409.1

   Equity investments
168.4

 
179.9

   Other assets
54.9

 
47.7

Total assets
$
7,062.4

 
$
7,087.4

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
39.9

 
$
49.3

Accounts payable
178.4

 
188.9

Accrued liabilities
452.3

 
454.2

Total current liabilities
670.6

 
692.4

Deferred income taxes
80.9

 
70.2

Other long-term liabilities
238.5

 
235.6

Long-term debt, excluding current portion
8,048.9

 
8,024.9

Total liabilities
9,038.9

 
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; 106.8 and 105.2 shares issued and 89.6 and 88.0 shares outstanding, respectively
1.1

 
1.0

Additional paid-in capital
808.5

 
790.8

Accumulated loss
(2,417.9
)
 
(2,218.7
)
Treasury stock, at cost, 17.2 shares
(175.2
)
 
(175.2
)
Accumulated other comprehensive loss
(193.0
)
 
(333.6
)
Total stockholders' deficit
(1,976.5
)
 
(1,935.7
)
Total liabilities and stockholders' deficit
$
7,062.4

 
$
7,087.4

 
See accompanying notes to condensed consolidated financial statements.


7


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(199.2
)
 
$
(242.9
)
Adjustments to reconcile net loss to cash provided by operating activities
589.4

 
592.2

    Changes in working capital accounts
(6.0
)
 
96.3

    Changes in deferred income taxes and other
4.8

 
(102.8
)
Net cash provided by operating activities
389.0

 
342.8

Cash flows from investing activities:
 
 
 
Capital expenditures
(214.1
)
 
(214.4
)
Acquisitions of businesses, net of cash acquired
(57.7
)
 

Proceeds from asset sales
7.5

 
3.1

Distributions of capital from equity investments
23.9

 
24.0

Other
2.5

 
3.0

Net cash used in investing activities
(237.9
)
 
(184.3
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
125.0

 
270.0

Repayments under revolving credit facility
(170.0
)
 
(315.0
)
Proceeds from issuance of senior notes and term loans
1,762.4

 

Repayment of senior notes and term loans
(1,693.4
)
 
(39.9
)
    Payments of debt issuance and deferred financing costs
(52.3
)
 

Payments on long-term debt
(13.1
)
 
(37.6
)
Payments on license obligations
(29.0
)
 
(34.5
)
Net redemptions of common stock under stock-based compensation plans and other
(2.7
)
 
(4.7
)
Net cash used in financing activities
(73.1
)
 
(161.7
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
4.8

 
(1.1
)
Increase (decrease) in cash, cash equivalents and restricted cash
82.8

 
(4.3
)
Cash, cash equivalents and restricted cash, beginning of period
156.9

 
166.8

Cash, cash equivalents and restricted cash, end of period
$
239.7

 
$
162.5

 
 
 
 
Supplemental cash flow information:
 
 
 
   Cash paid for interest
$
423.1

 
$
433.5

   Income taxes paid
27.8

 
9.8

Supplemental non-cash transactions:
 
 
 
   Non-cash rollover and refinancing of Term loans (see Note 10)
6,030.4

 

   Non-cash interest expense
17.4

 
30.3

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

 
91.3

 See accompanying notes to condensed consolidated financial statements.


8




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. 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 to be expected 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
On January 18, 2017, we closed the acquisition of all of the issued and outstanding common shares of DEQ Systems Corp. ("DEQ"), which was announced in the third quarter of 2016. DEQ was integrated into our gaming business segment and expands the depth and breadth of our table product portfolio.

On April 7, 2017, we completed the acquisition of all of the issued and outstanding capital stock of privately held mobile and social game company Spicerack Media, Inc. ("Spicerack"), which expands our existing portfolio of social casino games and our customer base. Spicerack was integrated into our interactive business segment.

On April 25, 2017, we completed the acquisition of all of the issued and outstanding membership interests of privately held lottery sales force and retail performance technology and consulting services company Lapis Software Associates, LLC (“Lapis”), which expands our suite of value-added retail lottery products. Lapis was integrated into our lottery business segment.
    
On July 7, 2017, we completed the acquisition of all of the issued and outstanding capital shares of privately held U.K.-based mobile and interactive casino content developer Red7Mobile Ltd. ("Red7"), which expands our existing portfolio of mobile and interactive game titles. Red7 was integrated into our interactive business segment.
We accounted for these acquisitions using the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on respective estimated fair values. The following table summarizes an aggregate disclosure related to business acquisitions completed through September 30, 2017 and is based on the preliminary allocations of the purchase price expected to be finalized by the fourth quarter of 2017, pending


9




completion of the valuation analyses for acquired intangible assets:
 
Total
Consideration
Cash paid, net
of cash
acquired
Contingent Consideration 1
Allocation of
purchase price
to Intangible
assets, net
2
Weighted
average useful
life of acquired intangible assets
Excess purchase
price allocated
to Goodwill
Aggregate total
$
66.0

$
57.7

$
7.5

$
56.4

8.3
$
14.6

1 Contingent consideration as determined by fair value and included in the consideration transferred.
2 Intangible assets primarily consist of technology-based and customer relationship intangible assets. The fair value of these intangible assets was determined using a combination of a royalty savings method and the excess earnings method using Level 3 in the hierarchy as established by ASC 820. The discount rates and royalty rates used in the valuation analysis ranged between 9% and 20% and 1% and 16%, respectively.

The contingent consideration value is primarily based on reaching certain earnings-based metrics, with a maximum payout of up to $38.5 million. The goodwill recognized relates to the Spicerack acquisition, and the factors contributing to the recognition of goodwill are based on expected synergies resulting from this acquisition, including the expansion of the customer base. None of the resultant goodwill is expected to be deductible for income tax purposes.

The amount of revenue and earnings associated with the above acquisitions and since the acquisition date included in the consolidated financial statements were less than 1.0% for all of the periods presented, thus not significant to our consolidated financial statements.

Pending Acquisition of NYX Gaming Group Limited

As previously disclosed in Item 1.01 of our Current Report on Form 8-K filed with the SEC on September 21, 2017, during the third quarter of 2017, we entered into a definitive agreement (the “Arrangement Agreement”) to acquire all of the outstanding ordinary shares of NYX Gaming Group Limited, a Guernsey company ("NYX"), for CAD $2.40 per share, equivalent to an aggregate enterprise value of approximately CAD $775.0 million, or approximately $631.0 million, including the refinancing of the existing indebtedness of NYX (the "NYX Acquisition"). NYX, a leading digital gaming software supplier for interactive, social and mobile gaming worldwide, is headquartered in Las Vegas, Nevada and is listed on the Toronto Stock Exchange - Venture Exchange (“TSX-V”) under the ticker symbol “NYX.” The transaction, which was approved by each company’s board of directors, is expected to close in the first quarter of 2018, subject to the satisfaction of certain conditions, including NYX shareholder approval, approval by the Royal Court of Guernsey and receipt of gaming approvals in certain jurisdictions. The Arrangement Agreement contains customary deal protection provisions in favor of us, including a termination fee payable by NYX in certain circumstances. If the conditions to closing the NYX Acquisition have been satisfied and we are unable to close, we would be required to pay to NYX a termination fee of CAD$30 million. We expect to finance the NYX Acquisition with a combination of cash on hand, borrowings under our existing revolving credit facility and the October 2017 Financing Transaction (see Note 10). See “Uncertainties related to our proposed acquisition of NYX may negatively affect our financial condition and results of operations and could negatively impact our stock price” contained in “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q which discusses our ability to complete this transaction and other uncertainties related to this proposed acquisition.

Upon consummation of the NYX Acquisition, we anticipate reporting our operations in four business segments, representing our different products and services -- Gaming, Lottery, Social, and Digital Gaming & Sports. 

Revenue

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


10




 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Gaming
 
 
 
 
 
 
 
  Gaming operations
$
176.0

 
$
182.4

 
$
526.8

 
$
552.8

  Gaming machine sales
163.1

 
159.8

 
482.6

 
448.7

Gaming systems
62.0

 
57.6

 
190.6

 
176.8

  Table products
53.5

 
48.4

 
151.8

 
133.5

    Total
$
454.6

 
$
448.2

 
$
1,351.8

 
$
1,311.8

 
 
 
 
 
 
 
 
Lottery
 
 
 
 
 
 
 
  Instant products
$
142.7

 
$
140.3

 
$
435.7

 
$
431.3

  Lottery systems
60.2

 
46.3

 
158.6

 
146.9

    Total
$
202.9

 
$
186.6

 
$
594.3

 
$
578.2

 
 
 
 
 
 
 
 
Interactive
 
 
 
 
 
 
 
  Social Gaming - B2C
$
95.1

 
$
70.3

 
$
266.4

 
$
199.5

  Other
16.3

 
14.9

 
48.1

 
41.7

    Total
$
111.4

 
$
85.2

 
$
314.5

 
$
241.2


Deferred Revenue

The following table summarizes the deferred revenue activity for the reporting period:
 
Nine Months Ended September 30,
 
2017
 
2016
Deferred revenue balance, beginning of period
$
67.4

 
$
57.8

New deferrals
173.3

 
194.6

Amounts recognized in revenue
(178.4
)
 
(192.8
)
Deferred revenue balance, end of period
$
62.3

 
$
59.6


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 2.6 million and 3.2 million of stock options from the diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2017 and 2016, respectively. We excluded 4.2 million and 5.6 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three and nine months ended September 30, 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 the first quarter of 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 and nine months ended September 30, 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 $41.6 million, respectively, which now includes restricted cash, and a $3.5 million decrease in net cash used in investing activities for the nine months ended September 30, 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 the first quarter of 2017, which will simplify our future goodwill impairment testing, if testing necessitates an impairment charge.

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.

We continue to assess the anticipated impact of adopting this guidance in revenue recognition for our business segments. The following table summarizes the anticipated impact to the financial statements based on our assessment completed to date:



12




Business Segment
Revenue Type
Anticipated Impact
Gaming
Gaming operations










Gaming machine sales


Gaming systems





Table products and other
Ÿ We anticipate the following impact on the net amount of revenue for WAP jackpot payments, which will no longer be treated as an expense but rather as a reduction to revenue: WAP jackpot expense of $5.5 million and $17.9 million for the three and nine months ended September 30, 2017, respectively, and $6.1 million and $22.9 million for the three and nine months ended September 30, 2016, respectively, would have been recognized as a reduction to revenue.

Ÿ We do not anticipate a material impact on timing or amount of revenue, other than the WAP impact disclosed above.


Ÿ We do not anticipate a material impact on timing or amount of revenue.


Ÿ We anticipate impact on timing of revenue recognition primarily related to certain hardware products and professional services, for which timing of revenue recognition might accelerate. While we do not anticipate this will result in a material impact on our consolidated financial statements, we are in the process of quantifying this change.


Ÿ We do not anticipate a material impact on timing or amount of revenue.


We do not anticipate a material impact on timing or amount of revenue on our U.K. gaming operations, which includes gaming operations, machine sales and to a lesser extent gaming system revenue streams.
Lottery
Instant products under POS

























Lottery - other





Ÿ We anticipate there may be a material impact on the timing and amount of revenue for our instant products revenues generated under POS arrangements.

Timing of recognition- currently, we recognize revenue under POS arrangements when such amounts become fixed or determinable, which is when retail sales occur. Under ASC 606, we have concluded that control transfers to the lottery authorities when the lotteries have taken delivery of shipments of instant products. This will accelerate revenue when compared to the current timing of recognition.

Adoption impact- upon adoption of ASC 606, the amount that we expect to receive from our lottery customers for inventory that remains unsold through retail sales will be recognized as an adjustment (both the revenue and cost of such instant products) to retained earnings. As of December 31, 2016, approximately $55 million of revenue related to instant products was not recognized because those tickets had not been sold by lottery retailers; accordingly, under ASC 606 this amount would be recognized directly to retained earnings as opposed to being recognized as future revenue upon the occurrence of retail sales. Because the ultimate effect of this adoption is highly dependent on shipment of instant products under POS arrangements in the fourth quarter, we can not quantify the adoption impact at December 31, 2017.

Future impact- because of the timing change described above, revenues and associated operating income may be materially impacted depending on timing of shipments of instant products. We also expect that future revenues under POS arrangements could be much more volatile than we have experienced under current accounting. However, because the timing of future shipments is not known, we can not estimate the impact on future revenues and associated operating income.

Ÿ We anticipate other immaterial impacts on timing and amount of revenue related to our other instant product and lottery systems arrangements which we anticipate would result in a shift in the timing of revenue recognition from 2017 to 2018 by less than $12 million in the aggregate.
Interactive
All
Ÿ We do not anticipate a material impact on timing or amount of revenue.

Additionally, as disclosed in our 2016 10-K, ASC 606 will significantly increase revenue disclosure requirements; however many of these newly required disclosures, including disaggregation of revenue and discussion of deferred revenue are included in revenue presented in this Note 1. We currently do not anticipate significant changes to our business processes and systems to support the adoption of the new guidance and are currently assessing an impact on our internal controls. We will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.

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


13




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, including potentially early 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. We are currently evaluating the impact of adopting this guidance.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.    The new guidance makes improvements to simplify the application of hedge accounting guidance while also creating more transparency for results presented on the face of the financial statements and footnotes. The new guidance is effective for fiscal years beginning after December 15, 2018, 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.


14


(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 September 30, 2017
 
Gaming
 
Lottery
 
Interactive
 
Corporate(1)
 
Total
Total revenue
$
454.6

 
$
202.9

 
$
111.4

 
$

 
$
768.9

Depreciation, amortization and impairments
129.8

 
10.0

 
7.9

 
25.4

 
173.1

Restructuring and other
0.3

 
(0.1
)
 
0.5

 
7.1

 
7.8

Operating income (loss)
85.2

 
62.4

 
12.9

 
(69.9
)
 
90.6

Interest expense
 
 
 
 
 
 
 
 
(148.9
)
Earnings from equity investments
 
 
 
 
 
 
 
 
7.5

Loss on debt financing transactions
 
 
 
 
 
 
 
 
(8.4
)
Other income (expense), net
 
 
 
 
 
 
 
 
(4.3
)
Net loss before income taxes
 
 
 
 
 
 
 
 
(63.5
)
(1) Includes corporate amounts not allocated to the business segments.
 
Three Months Ended September 30, 2016
 
Gaming
 
Lottery
 
Interactive
 
Corporate(1)
 
Total
Total revenue
$
448.2

 
$
186.6

 
$
85.2

 
$

 
$
720.0

Depreciation, amortization and impairments
154.0

 
15.2

 
3.7

 
18.8

 
191.7

Restructuring and other

 
0.5

 
(0.4
)
 
13.7

 
13.8

Operating income (loss)
51.5

 
43.2

 
9.6

 
(70.8
)
 
33.5

Interest expense
 
 
 
 
 
 
 
 
(165.4
)
Earnings from equity investments
 
 
 
 
 
 
 
 
7.3

Other income (expense), net
 
 
 
 
 
 
 
 
6.0

Net loss before income taxes
 
 
 
 
 
 
 
 
(118.6
)
(1) Includes corporate amounts not allocated to the business segments.
 
Nine Months Ended September 30, 2017
 
Gaming
 
Lottery
 
Interactive
 
Corporate(1)
 
Total
Total revenue
$
1,351.8

 
$
594.3

 
$
314.5

 
$

 
$
2,260.6

Depreciation, amortization and impairments
389.1

 
37.2

 
16.3

 
70.6

 
513.2

Restructuring and other
4.8

 
(0.9
)
 
1.6

 
12.6

 
18.1

Operating income (loss)
248.6

 
188.8

 
48.9

 
(190.4
)
 
295.9

Interest expense
 
 
 
 
 
 
 
 
(459.5
)
Earnings from equity investments
 
 
 
 
 
 
 
 
20.1

Loss on debt financing transactions
 
 
 
 
 
 
 
 
(38.1
)
Other income (expense), net
 
 
 
 
 
 
 
 
1.3

Net loss before income taxes
 
 
 
 
 
 
 
 
(180.3
)
(1) Includes corporate amounts not allocated to the business segments.



15


 
Nine Months Ended September 30, 2016
 
Gaming
 
Lottery
 
Interactive
 
Corporate(1)
 
Total
Total revenue
$
1,311.8

 
$
578.2

 
$
241.2

 
$

 
$
2,131.2

Depreciation, amortization and impairments
449.9

 
50.2

 
11.2

 
54.1

 
565.4

Restructuring and other
5.0

 
1.8

 
0.1

 
13.8

 
20.7

Operating income (loss)
141.6

 
149.1

 
34.8

 
(182.6
)
 
142.9

Interest expense
 
 
 
 
 
 
 
 
(496.4
)
Earnings from equity investments
 
 
 
 
 
 
 
 
18.5

Gain on debt financing transactions
 
 
 
 
 
 
 
 
25.2

Other income (expense), net
 
 
 
 
 
 
 
 
8.4

Net loss before income taxes
 
 
 
 
 
 
 
 
(301.4
)
(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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Employee severance (1)
 
$
1.7

 
$
4.1

 
$
4.4

 
$
8.9

Acquisitions and related costs
 
4.0

 
1.5

 
8.2

 
1.5

Restructuring, integration and other
 
2.1

 
8.2

 
5.5

 
10.3

Total
 
$
7.8

 
$
13.8

 
$
18.1

 
$
20.7

(1) Inclusive of employee severance and termination costs associated with restructuring activities. 
In the fourth quarter of 2016, we announced a new business improvement initiative, which has streamlined our organization, increased our efficiencies and significantly reduced our operating costs across all our divisions through a combination of headcount reductions, facilities streamlining and reduction in other operating costs. We have completed these actions related to this initiative. The following table presents a summary of restructuring charges and the charges in the restructuring accrual during 2017:    
 
 
Restructuring Accrual
Balance as of January 1, 2017
 
$
16.4

Accrual additions
 
2.2

Cash payments and other
 
(18.6
)
Balance as of September 30, 2017
 
$



(4) Accounts and Notes Receivable and Credit Quality of Receivables
Accounts and Notes Receivable


16


The following summarizes the components of current and long-term accounts and notes receivable, net:
 
September 30, 2017
 
December 31, 2016
Current:
 
 
 
Accounts receivable
$
502.4

 
$
508.1

Notes receivable
136.5

 
140.0

Allowance for doubtful accounts and notes
(27.9
)
 
(27.7
)
Current accounts and notes receivable, net
$
611.0

 
$
620.4

Long-term:
 
 
 
Notes receivable, net of allowance of $0.4 and $0.4
44.4

 
48.1

  Total accounts and notes receivable, net
$
655.4

 
$
668.5

Credit Quality of Receivables
The interest rates on our outstanding notes receivable ranged from 3.0% to 10.4% at September 30, 2017 and 3.3% to 10.4% at December 31, 2016.
We have certain concentrations of outstanding accounts and notes receivable in international locations that impact our assessment of the credit quality of those receivables. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our receivables. We have not identified changes in the aforementioned factors during the nine months ended September 30, 2017 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our accounts and notes receivable are as follows:
Mexico - Our notes receivable, net, from certain customers in Mexico at September 30, 2017 was $27.4 million. We collected $28.7 million of outstanding receivables from these customers during the nine months ended September 30, 2017.
Peru - Our notes receivable, net, from certain customers in Peru at September 30, 2017 was $21.4 million. We collected $12.1 million of outstanding receivables from these customers during the nine months ended September 30, 2017.
Argentina - Our notes receivable, net, from customers in Argentina at September 30, 2017 was $21.6 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 $18.1 million of outstanding receivables from customers in Argentina during the nine months ended September 30, 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.
The following summarizes the components of total notes receivable, net:
 
September 30, 2017
 
Balances over 90 days past due
 
December 31, 2016
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
74.9

 
$
9.3

 
$
45.1

 
$
1.1

International
106.4

 
29.8

 
143.0

 
38.7

     Total notes receivable
181.3

 
39.1

 
188.1

 
39.8

 
 
 
 
 
 
 
 
Notes receivable allowance
 
 
 
 
 
 
 
Domestic
(3.4
)
 
(3.4
)
 
(1.0
)
 
(0.9
)
International
(15.2
)

(15.2
)
 
(14.0
)
 
(14.0
)
     Total notes receivable allowance
(18.6
)
 
(18.6
)
 
(15.0
)
 
(14.9
)
Notes receivable, net
$
162.7

 
$
20.5

 
$
173.1

 
$
24.9



17


At September 30, 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 nine month periods ended September 30, 2017 and 2016 is as follows:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Beginning allowance for notes receivable
 
$
15.0

 
$
13.2

Provision
 
4.8

 
3.8

Charge-offs and recoveries
 
(1.2
)
 
(2.2
)
Ending allowance for notes receivable
 
$
18.6

 
$
14.8


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 September 30, 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:
    
 
 
September 30, 2017
 
December 31, 2016
     Parts and work-in-process
 
$
123.8

 
$
110.5

     Finished goods
 
131.4

 
131.8

          Total inventories
 
$
255.2

 
$
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:
 
 
September 30, 2017
 
December 31, 2016
Land
 
$
35.8

 
$
36.5

Buildings and leasehold improvements
 
177.3

 
182.2

Gaming and lottery machinery and equipment
 
986.8

 
993.3

Furniture and fixtures
 
32.9

 
28.6

Construction in progress
 
20.6

 
21.2

Other property and equipment
 
240.0

 
239.3

Less: accumulated depreciation
 
(926.2
)
 
(888.9
)
Total property and equipment, net
 
$
567.2

 
$
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.


18


 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation expense
$
69.0

 
$
80.9

 
$
205.9

 
$
248.3


(7) Intangible Assets, net and Goodwill
Intangible Assets, net
The following tables present certain information regarding our intangible assets as of September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
December 31, 2016
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
882.8

 
$
(201.0
)
 
$
681.8

 
$
875.8

 
$
(163.9
)
 
$
711.9

Intellectual property
789.1

 
(304.0
)
 
485.1

 
726.0

 
(218.2
)
 
507.8

Licenses
417.0

 
(189.0
)
 
228.0

 
413.2

 
(153.5
)
 
259.7

Brand names
126.4

 
(43.1
)
 
83.3

 
123.7

 
(32.1
)
 
91.6

Trade names
98.8

 
(13.0
)
 
85.8

 
97.4

 
(8.1
)
 
89.3

Patents and other
23.5

 
(13.9
)
 
9.6

 
28.0

 
(14.2
)
 
13.8

 
2,337.6

 
(764.0
)
 
1,573.6

 
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
$
2,433.9

 
$
(766.1
)
 
$
1,667.8

 
$
2,360.4

 
$
(592.1
)
 
$
1,768.3

 

The following reflects intangible amortization expense included within D&A:
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Amortization expense
$
62.3

 
$
60.9

 
$
193.1

 
$
188.8

Goodwill
The table below reconciles the change in the carrying value of goodwill by business segment for the period from
December 31, 2016 to September 30, 2017.
Goodwill
 
Gaming
 
Lottery
 
Interactive
 
Totals
Balance as of December 31, 2016
 
$
2,428.6

 
$
350.0

 
$
109.8

 
$
2,888.4

Acquired goodwill
 

 

 
14.6

 
14.6

Foreign currency adjustments
 
51.3

 
7.0

 

 
58.3

Balance as of September 30, 2017
 
$
2,479.9


$
357.0


$
124.4


$
2,961.3


(8) Software, net
Software, net consisted of the following:


19


    
 
 
September 30, 2017
 
December 31, 2016
Software
 
$
989.2

 
$
924.8

 Accumulated amortization
 
(632.5
)
 
(515.7
)
Software, net
 
$
356.7

 
$
409.1

The following reflects amortization of software included within D&A:
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Amortization expense
$
41.8

 
$
44.2

 
$
114.2

 
$
122.6


(9) Equity Investments
Equity investments totaled $168.4 million and $179.9 million as of September 30, 2017 and December 31, 2016, respectively. We received distributions and dividends totaling $44.1 million and $40.7 million during the nine months ended September 30, 2017 and 2016, respectively, primarily related to our LNS equity investment.

(10) Long-Term and Other Debt
Outstanding Debt and Capital Leases
The following reflects our outstanding debt:
 
 
As of
 
 
September 30, 2017
 
December 31, 2016
 
 
Face value
 
Unamortized debt discount/premium and deferred financing costs, net
 
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
 

 

 

 

Term Loan B-4
 
3,282.8

 
(83.8
)
 
3,199.0

Term Loan B-4

Senior Notes:
 
 
 
 
 
 
 
 
Secured Notes
 
2,100.0

 
32.4

 
2,132.4

 
936.3

Unsecured Notes
 
2,200.0

 
(31.4
)
 
2,168.6

 
2,164.0

Subordinated Notes:
 
 
 
 
 
 
 
 
2018 Notes
 

 

 

 
248.7

2020 Notes
 
243.5

 
(1.8
)
 
241.7

 
241.2

2021 Notes
 
340.6

 
(5.0
)
 
335.6

 
334.5

Capital lease obligations, 3.9% interest as of September 30, 2017 payable monthly through 2019
 
11.5

 

 
11.5

 
15.2

Total long-term debt outstanding
 
$
8,178.4

 
$
(89.6
)
 
$
8,088.8

 
$
8,074.2

Less: current portion of long-term debt
 
 
 
 
 
(39.9
)
 
(49.3
)
Long-term debt, excluding current portion
 
 
 
 
 
$
8,048.9

 
$
8,024.9

Fair value of debt(1)
 
$
8,589.5

 
 
 
 
 
$
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.


20


We were in compliance with the financial covenants under our debt agreements as of September 30, 2017.    
October 2017 Financing Transaction

On October 17, 2017, we successfully completed the offering of our 5.000% Senior Secured Notes due 2025 (the "2025 Secured Notes") in the aggregate principal amount of $350.0 million (the "October 2017 Financing"). We intend to use the net proceeds of this offering, together with cash on hand and borrowings under the revolving credit facility under our credit agreement, to finance the NYX Acquisition, including the refinancing of certain indebtedness of NYX, and to pay related fees and expenses. If the NYX Acquisition is not consummated for any reason or other corporate needs arise, we may use the net proceeds from this offering for general corporate purposes, which may include the prepayment of term loan borrowings under our credit agreement.

Subsequent to the October 2017 Financing, the aggregate principal amount of Secured Notes and 2025 Secured Notes outstanding was $2,450.0 million.

August 2017 Refinancing Transaction

On August 14, 2017, we entered into an amendment to our credit agreement which provided for a $3,282.8 million senior secured term B-4 loan facility and extended the maturity from October 2021 to August 2024 as compared to the previous term B-3 loan facility. The net proceeds of the term B-4 loan facility were used to (a) prepay the balance on the term B-3 loans and (b) pay related fees and expenses (the “August 2017 Refinancing”).

In connection with the August 2017 Refinancing, we incurred $7.9 million in financing costs.

The new term B-4 loans that were entered into as part of the August 2017 Refinancing mature on August 14, 2024 and 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. The applicable margin for the new term B-4 loans is 3.25% per annum for eurocurrency (LIBOR) loans and 2.25% per annum for base rate loans, compared to 4.00% per annum for eurocurrency (LIBOR) loans and 3.00% per annum for base rate loans under the previous term B-3 loan facility.

February 2017 Refinancing Transactions

On February 14, 2017, we entered into an amendment to our credit agreement which provided for a $3,291.0 million senior secured term B-3 loan facility and reduced 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 were prepaid in full in connection with the August 2017 Refinancing.

7.000% Senior Secured Notes due 2022

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 are treated as a single series of debt securities for all other purposes under the indenture governing the Secured Notes.


21



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) Gain on Debt Financing Transactions

The following are components of the (loss) gain on debt financing transactions resulting from debt extinguishment and modification accounting for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Repurchase and cancellation of principal balance at discount
$

 
$

 
$

 
$
26.0

Unamortized debt discount and deferred financing costs
(0.6
)
 

 
(26.4
)
 
(0.8
)
Third party debt issuance fees
(7.8
)
 

 
(11.7
)
 

Total (loss) gain on debt financing transactions
$
(8.4
)

$


$
(38.1
)

$
25.2


(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, restricted cash, 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 September 30, 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 February 2017 Refinancing as described in Note 10. Subsequent to the February 2017 Refinancing, we have measured ineffectiveness totaling $0.5 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 are 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 on our interest rate swap contracts:


22


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Gains recorded in accumulated other comprehensive loss, net of tax
 
$
0.8

 
$
2.7

 
$
3.6

 
$
6.3

Reclassifications of losses out of accumulated other comprehensive loss
 
1.7

 
2.0

 
5.8

 
6.1

Ineffectiveness recorded in interest expense
 
(0.2
)
 

 
0.5

 

We expect to reclassify additional losses of $1.7 million from accumulated other comprehensive loss to interest expense in the next twelve months. The following table shows the fair value of our hedges:
 
September 30, 2017
 
December 31, 2016
Accrued liabilities
$
1.7

 
$
6.7

Other long-term liabilities

 
0.2

Total fair value
$
1.7

 
$
6.9

(12) Stockholders' Deficit and Employee Benefit Plans
Stock Based Compensation
We have stock-based compensation programs under which we use stock options and RSUs. In 2016, 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 total stock-based compensation expense recognized under all programs:
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2017
 
2016
 
2017
 
2016
Related to vesting of stock options
$
1.1

 
$
2.9

 
$
2.6

 
$
4.2

Related to vesting of RSUs
6.4

 
8.1

 
17.9

 
19.3

   Total
$
7.5

 
$
11.0

 
$
20.5

 
$
23.5

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") 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.

Series C Junior Participating Preferred Stock and Rights Agreement
On June 19, 2017, the Board of Directors of SGC approved, and SGC entered into, a Rights Agreement between SGC and American Stock Transfer & Trust Company, LLC. Concurrently, the Board of Directors of SGC adopted a resolution reserving for issuance a series of 20,000 shares of preferred stock. Designated as SGC's Series C Junior Participating Preferred Stock ("Junior Preferred Stock"), par value $1.00 per share, upon the exercise of rights under the Rights Agreement. The Rights Agreement provides for a dividend of one preferred share purchase right (“Right”) for each share of Class A Common Stock, par value $0.01 per share, of SGC outstanding as of June 29, 2017. Each Right entitles the holder to purchase from SGC one ten-thousandth of a share of Junior Preferred Stock for a purchase price of $109.00, subject to adjustment as provided in the Rights Agreement. As of September 30, 2017, none of these shares were outstanding and no Rights were exercised.
    
(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. Based upon the evaluation of all available evidence, and considering the projected U.S. pre-tax losses for 2017, a valuation allowance has been recorded for the U.S. operations in 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. We maintained other valuation allowances for certain non-U.S. jurisdictions with cumulative losses.


23




The effective income tax rates for the three and nine months ended September 30, 2017 were 6.6% and (10.5)%, respectively, and 16.6% and 19.4% for the three and nine months ended September 30, 2016, respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. Due to a valuation allowance against our U.S. deferred tax assets, the effective tax rate for the three and nine months ended September 30, 2017 does not include the benefit of the current year U.S. tax loss. In the three and nine months ended September 30, 2016, we recorded 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. 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 and the overall mix of income in our foreign jurisdictions.
(14) Litigation
We are 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 $5.1 million and $7.7 million for all of our legal matters that were contingencies as of September 30, 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 us or our subsidiaries, even when the amount of damages claimed against us or our 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 $14.3 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 we are 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.
Oregon State Lottery update

On June 14, 2017, the Oregon Court of Appeals affirmed the trial court’s dismissal of the plaintiff's claims with prejudice. As noted in the 2016 10-K, the trial court indicated that all claims against WMS Gaming Inc. were moot as a result of its dismissal. In August 2017, the plaintiff filed to petition the Oregon Supreme Court to review the decision of the Oregon Court of Appeals, and that petition is pending.

Shuffle Tech update


24


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. The district court denied the motion for summary judgment on September 1, 2017. Trial is currently scheduled for May 2018. 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) 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 September 30, 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, which 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.
Presented below is condensed consolidating financial information for (1) SGC, (2) SGI, (3) the Guarantor Subsidiaries and (4) the Non-Guarantor Subsidiaries as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 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.        
            


25



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2017
 
 
SGC (Parent and Issuer1)
 
SGI (Issuer2)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
137.3

 
$
3.9

 
$

 
$
60.6

 
$
(5.4
)
 
$
196.4

Restricted cash
 

 

 
26.9

 
0.1

 

 
27.0

Accounts receivable, net
 
0.1

 
57.8

 
202.8

 
232.0

 

 
492.7

Notes receivable, net
 

 

 
96.1

 
22.2

 

 
118.3

Inventories
 

 
40.2

 
93.1

 
145.5

 
(23.6
)
 
255.2

Prepaid expenses, deposits and other current assets
 
9.7

 
25.3

 
44.5

 
56.3

 

 
135.8

Property and equipment, net
 
25.1

 
84.9

 
311.0

 
170.0

 
(23.8
)
 
567.2

Investment in subsidiaries
 
3,200.0

 
981.4

 
954.7

 

 
(5,136.1
)
 

Goodwill
 

 
188.3

 
1,932.4

 
840.6

 

 
2,961.3

Intangible assets, net
 
172.4

 
35.1

 
1,240.1

 
220.2

 

 
1,667.8

Intercompany balances
 

 
5,405.8

 

 
340.0

 
(5,745.8
)
 

Software, net
 
70.7

 
21.7

 
216.3

 
48.0

 

 
356.7

Other assets(3)
 
234.3

 
336.1

 
55.1

 
159.8

 
(501.3
)
 
284.0

Total assets
 
$
3,849.6

 
$
7,180.5

 
$
5,173.0

 
$
2,295.3

 
$
(11,436.0
)
 
$
7,062.4

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

 
$
32.8

 
$

 
$
7.1

 
$

 
$
39.9

Other current liabilities
 
101.6

 
178.3

 
198.6

 
160.2

 
(8.0
)
 
630.7

Long-term debt, excluding current portion
 

 
8,044.5

 

 
4.4

 

 
8,048.9

Other long-term liabilities
 
167.8

 
9.9

 
549.4

 
90.9

 
(498.6
)
 
319.4

Intercompany balances
 
5,556.7

 

 
189.1

 

 
(5,745.8
)
 

Stockholders' (deficit) equity
 
(1,976.5
)
 
(1,085.0
)
 
4,235.9

 
2,032.7

 
(5,183.6
)
 
(1,976.5
)
Total liabilities and stockholders' (deficit) equity
 
$
3,849.6

 
$
7,180.5

 
$
5,173.0