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EX-32.1 - EX-32.1 - SCIENTIFIC GAMES CORPsgms6302015ex321.htm
EX-32.2 - EX-32.2 - SCIENTIFIC GAMES CORPsgms6302015ex322.htm
EX-31.1 - EX-31.1 - SCIENTIFIC GAMES CORPsgms6302015ex311.htm
EX-31.2 - EX-31.2 - SCIENTIFIC GAMES CORPsgms6302015ex312.htm
EX-10.3 - EX-10.3 - SCIENTIFIC GAMES CORPsgms6302015ex103.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 June 30, 2015
 
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 of July 31, 2015:
Class A Common Stock: 86,104,168
Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE AND SIX MONTHS ENDED JUNE 30, 2015
 
 
 
Page
8
 
 
 
Item 1.
Financial Statements
8
 
 
 
 
Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014
8
 
 
 
 
Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
9
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
10
 
 
 
 
Condensed Notes to Consolidated Financial Statements
11
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
68
 
 
 
Item 4.
Controls and Procedures
68
 
 
 
OTHER INFORMATION
68
 
 
 
Item 1.
Legal Proceedings
68
 
 
 
Item 1A.
Risk Factors
68
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
68
 
 
 
Item 3.
Defaults Upon Senior Securities
68
 
 
 
Item 4.
Mine Safety Disclosures
68
 
 
 
Item 5.
Other Information
68
 
 
 
Item 6.
Exhibits
69



3




Glossary of Terms
 
 
 
The following terms or acronyms used in this Form 10-Q are defined below:
Term or Acronym
Definition
2018 Notes
8.125% senior subordinated notes due 2018 issued by Scientific Games Corporation
2019 Notes
9.250% senior subordinated notes due 2019 issued by SGI
2020 Notes
6.250% senior subordinated notes due 2020 issued by SGI
2021 Notes
6.625% senior subordinated notes due 2021 issued by SGI
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bally
Bally Technologies, Inc.
Bally acquisition
the acquisition of Bally by the Company on November 21, 2014

Barcrest
Barcrest Group Limited
coin-in
the amount wagered
Company
Scientific Games Corporation
CSG
Beijing CITIC Scientific Games Technology Co., Ltd.
CSL
China Sports Lottery
D&A
depreciation and amortization
ESPP
employee stock purchase plan
FASB
Financial Accounting Standards Board
Global Draw
The Global Draw Limited
GLB
Beijing Guard Libang Technology Co., Ltd.
Hellenic Lotteries
Hellenic Lotteries S.A.
ITL
International Terminal Leasing
LAP
local-area progressive
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l.
MGD
machine games duty
net win
coin-in less payouts
Northstar Illinois
Northstar Lottery Group, LLC
Northstar New Jersey
Northstar New Jersey Lottery Group, LLC
Note
refers to a note to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q, unless otherwise indicated
participation
with respect to our gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which we earn revenues and are paid based on: (1) a percentage of net win; (2) fixed daily fees; (3) a percentage of the coin-in; or (4) a combination of a fixed daily fee and a percentage of the coin-in, and with respect to our lottery business, refers to a contract or arrangement in which we earn revenues and are paid based on a percentage of retail sales
PMA
private management agreement
R&D
research and development
RCN
Roberts Communications Network, LLC
RGD
remote gaming duty
RMB
Chinese Renminbi Yuan
RMG
real-money gaming
RSU
restricted stock unit
SEC
Securities and Exchange Commission
Secured Notes
7.00% senior secured notes due 2022 issued by SGI
Securities Act
Securities Act of 1933, as amended
SG&A
selling, general and administrative
SGI
Scientific Games International, Inc.
SHFL
SHFL entertainment, Inc.


4




Shufflers
various models of automatic card shufflers, deck checkers and roulette chip sorters
Sportech
Sportech plc
Unsecured Notes
10.00% senior unsecured notes due 2022 issued by SGI
U.S.
United States of America
U.S. GAAP
accounting principles generally accepted in the U.S.
VLT
video lottery terminal
WAP
wide-area progressive
WMS
WMS Industries, Inc.
WMS acquisition
the acquisition of WMS by the Company on October 18, 2013



5




Forward-Looking Statements
 
Throughout this Quarterly Report on Form 10-Q, we make "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "plan," "continue," "believe," "expect," "anticipate," "should," "could," "potential," "opportunity," "goal" or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" but may be found in other locations as well. These statements are based upon management's current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:

competition;
U.S. and international economic and industry conditions, including declines in or slow growth of gross gaming revenues or lottery retail sales, reductions in or constraints on capital spending by gaming or lottery operators and bankruptcies of, or credit risk relating to, customers;
limited growth from new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of existing gaming machines;
ownership changes and consolidation in the casino industry;
opposition to legalized gaming or the expansion thereof;
inability to adapt to, and offer products that keep pace with, evolving technology;
inability to develop successful gaming concepts and content;
laws and government regulations, including those relating to gaming licenses and environmental laws;
inability to identify and capitalize on trends and changes in the gaming and lottery industries, including the expansion of interactive gaming;
dependence upon key providers in our social gaming business;
inability to retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts;
level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy obligations or future cash needs, and restrictions and covenants in debt agreements;
protection of intellectual property, inability to license third party intellectual property and the intellectual property rights of others;
security and integrity of software and systems and reliance on or failures in information technology systems;
natural events that disrupt our operations or those of our customers, suppliers or regulators;
inability to benefit from, and risks associated with, strategic equity investments and relationships, including (1) the inability of our joint venture to meet the net income targets or otherwise to realize the anticipated benefits under its private management agreement with the Illinois lottery (or in connection with any termination thereof), (2) the inability of our joint venture to meet the net income targets or other requirements under its agreement to provide marketing and sales services to the New Jersey Lottery or otherwise to realize the anticipated benefits under such agreement and (3) the failure to realize the anticipated benefits related to the award to our consortium of an instant lottery game concession in Greece;
failure to achieve the intended benefits of the Bally acquisition, the WMS acquisition, our other recent acquisitions, or future acquisitions, including due to the inability to successfully integrate such acquisitions or realize synergies in the anticipated amounts or within the contemplated timeframes or cost expectations, or at all;


6




disruption of current plans and operations in connection with our recent acquisitions (including in connection with the integration of Bally and WMS), including departure of key personnel or inability to recruit additional qualified personnel or maintain relationships with customers, suppliers or other third parties;
costs, charges and expenses relating to the Bally acquisition and the WMS acquisition;    
incurrence of employee termination or restructuring costs and impairment or asset write-down charges;
implementation of complex revenue recognition standards;
fluctuations in our results due to seasonality and other factors;
dependence on suppliers and manufacturers;
risks relating to foreign operations, including fluctuations in foreign currency exchange rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece;
dependence on employees;
litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees, intellectual property and our strategic relationships;
influence of certain stockholders; and
stock price volatility.
Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 17, 2015. 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 and lottery industries than the gaming and lottery industries in the U.S.


7


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited, in millions, except per share amounts)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
337.9

 
$
179.3

 
$
668.3

 
356.1

Product sales
 
218.1

 
102.2

 
417.5

 
187.3

Instant games
 
135.5

 
135.4

 
264.4

 
261.6

Total revenue
 
691.5

 
416.9

 
1,350.2

 
805.0

Operating expenses:
 
 
 
 
 
 
 
 
Cost of services (1)
 
98.6

 
64.6

 
189.1

 
131.1

Cost of product sales (1)
 
107.9

 
54.9

 
205.8

 
101.3

Cost of instant games (1)
 
68.8

 
72.9

 
135.8

 
142.8

Selling, general and administrative
 
140.9

 
95.2

 
286.8

 
187.0

Research and development
 
48.0

 
24.8

 
94.9

 
50.7

Employee termination and restructuring
 
5.2

 
4.9

 
13.4

 
10.5

Depreciation and amortization
 
222.2

 
96.0

 
406.4

 
190.1

Operating income (loss)
 
(0.1
)
 
3.6

 
18.0

 
(8.5
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
(166.4
)
 
(49.3
)
 
(330.7
)
 
(97.2
)
Earnings from equity investments
 
3.3

 
0.7

 
6.4

 
6.2

Loss on early extinguishment of debt
 

 
(25.9
)
 

 
(25.9
)
Gain on sale of equity interest
 

 

 

 
14.5

Other (expense) income, net
 
(4.3
)
 
3.2

 
(9.9
)
 
6.1

     Total other expense, net
 
(167.4
)
 
(71.3
)
 
(334.2
)
 
(96.3
)
Net loss before income taxes
 
(167.5
)
 
(67.7
)
 
(316.2
)
 
(104.8
)
Income tax benefit (expense)
 
65.3

 
(4.7
)
 
127.6

 
(12.6
)
Net loss
 
$
(102.2
)
 
$
(72.4
)
 
$
(188.6
)
 
$
(117.4
)
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
 
17.8

 
10.0

 
(88.4
)
 
10.1

Pension and post-retirement gain (loss), net of tax
 
(0.7
)
 
(0.2
)
 
0.2

 
(0.1
)
Derivative financial instruments unrealized gain (loss), net of tax
 
6.0

 
(5.6
)
 
1.1

 
(6.3
)
Other comprehensive (loss) income
 
23.1

 
4.2

 
(87.1
)
 
3.7

Comprehensive loss
 
$
(79.1
)
 
$
(68.2
)
 
$
(275.7
)
 
$
(113.7
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

 
 

 
 

Basic
 
$
(1.19
)
 
$
(0.86
)
 
$
(2.20
)
 
$
(1.39
)
Diluted
 
$
(1.19
)
 
$
(0.86
)
 
$
(2.20
)
 
$
(1.39
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

 
 

 
 

Basic shares
 
85.9

 
84.4

 
85.6

 
84.4

Diluted shares
 
85.9

 
84.4

 
85.6

 
84.4

(1) Exclusive of depreciation and amortization.
See accompanying condensed notes to consolidated financial statements.



8


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
 
June 30, 2015
 
December 31, 2014
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
129.1

 
$
171.8

Restricted cash
26.7

 
27.2

Accounts receivable, net
485.2

 
468.4

Notes receivable, net
169.8

 
188.7

Inventories
250.4

 
265.6

Deferred income taxes
73.5

 
72.8

Prepaid expenses, deposits and other current assets
213.7

 
183.5

Total current assets
1,348.4

 
1,378.0

Long-term restricted cash
16.2

 
16.8

Long-term notes receivable
58.5

 
87.5

Property and equipment, net
902.2

 
1,012.8

Goodwill
4,048.7

 
4,108.3

Intangible assets, net
2,108.7

 
2,251.6

Software, net
539.1

 
592.7

Equity investments
230.0

 
288.2

Other assets
234.7

 
259.3

Total assets
$
9,486.5

 
$
9,995.2

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
Current liabilities:
 
 
 
Debt payments due within one year
$
50.6

 
$
50.6

Accounts payable
136.4

 
155.8

Accrued liabilities
420.2

 
453.9

Total current liabilities
607.2

 
660.3

Deferred income taxes
482.7

 
628.8

Other long-term liabilities
224.7

 
236.8

Long-term debt, excluding current installments
8,432.0

 
8,465.4

Total liabilities
9,746.6

 
9,991.3

Commitments and contingencies


 


Stockholders' (deficit) equity:
 
 
 
Class A common stock, par value $0.01 per share: 199.3 shares authorized; 103.3 and 102.3 shares issued and 86.1 and 85.1 shares outstanding, respectively
1.0

 
1.0

Additional paid-in capital
754.9

 
743.2

Accumulated loss
(659.3
)
 
(470.7
)
Treasury stock, at cost: 17.2 and 17.2 shares held, respectively
(175.2
)
 
(175.2
)
Accumulated other comprehensive loss
(181.5
)
 
(94.4
)
Total stockholders' (deficit) equity
(260.1
)
 
3.9

Total liabilities and stockholders' (deficit) equity
$
9,486.5

 
$
9,995.2

 
See accompanying condensed notes to consolidated financial statements.


9


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Six Months Ended
 
June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(188.6
)
 
$
(117.4
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
406.4

 
190.1

Change in deferred income taxes
(145.7
)
 
1.9

Stock-based compensation
12.1

 
13.4

Non-cash interest expense
19.0

 
8.6

Earnings from equity investments, net
(6.4
)
 
(6.2
)
Distributed earnings from equity investments
19.9

 
21.2

Loss on early extinguishment of debt

 
25.9

Gain on sale of equity interest

 
(14.5
)
Changes in current assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts and notes receivable, net
23.7

 
60.9

Inventories
18.4

 
(30.2
)
Accounts payable
(9.4
)
 
(48.6
)
Accrued liabilities
(44.7
)
 
(4.1
)
Other current assets and liabilities
10.8

 
9.2

Other, net
(1.1
)
 
(3.1
)
Net cash provided by operating activities
114.4

 
107.1

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(7.8
)
 
(21.1
)
Gaming and lottery operations expenditures
(103.7
)
 
(44.8
)
Intangible assets and software expenditures
(31.3
)
 
(48.8
)
Payments received from development financing and other
8.5

 
(0.2
)
Additions to equity method investments

 
(40.6
)
Distributions of capital on equity investments
35.2

 
32.9

Proceeds from sale of equity interest

 
44.9

Restricted cash
1.0

 
(0.9
)
Net cash used in investing activities
(98.1
)
 
(78.6
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
110.0

 

Repayments under revolving credit facility
(120.0
)
 

Proceeds from issuance of long-term debt

 
347.9

Payments on long-term debt
(26.2
)
 
(364.7
)
Payments of deferred financing fees

 
(22.8
)
Payments on license obligations
(18.7
)
 

Common stock repurchases

 
(29.5
)
Contingent earnout payments
(0.5
)
 
(3.2
)
Net issuance (redemptions) of common stock under stock-based compensation plans
0.9

 
(19.2
)
Net cash used in financing activities
(54.5
)
 
(91.5
)
Effect of exchange rate changes on cash and cash equivalents
(4.5
)
 
(1.5
)
Decrease in cash and cash equivalents
(42.7
)
 
(64.5
)
Cash and cash equivalents, beginning of period
171.8

 
153.7

Cash and cash equivalents, end of period
$
129.1

 
$
89.2

 See accompanying condensed notes to consolidated financial statements.


10




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

(1) Description of the Business and Summary of Significant Accounting Policies
Description of the Business
We are a leading developer of technology‑based products and services and associated content for the worldwide gaming and lottery industries. Our portfolio includes gaming machines and game content, instant and draw‑based lottery games, server‑based gaming and lottery systems, casino-management systems, table game products and services, sports betting technology, loyalty and rewards programs and interactive gaming and lottery content and services. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments. As a result of our recent acquisitions of Bally and WMS, we have significantly expanded our global gaming business. We report our operations in three business segments—Gaming, Lottery and Interactive.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of the Company have been prepared in accordance with SEC and U.S. GAAP requirements. All monetary values set forth in these financial statements are in U.S. dollars ("$") unless otherwise stated herein. The accompanying consolidated financial statements include the accounts of the Company and its 100%-owned subsidiaries, as well as those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation. We have evaluated subsequent events through the date these financial statements were issued. In the opinion of management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations and comprehensive loss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2014 Annual Report on Form 10-K. Interim results of operations are not necessarily indicative of results of operations for a full year.
Significant Accounting Policies
There have been no changes to our significant accounting policies described in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2014 Annual Report on Form 10-K.
Recently Issued Accounting Guidance
In January 2014, the FASB issued ASU No. 2014-05, Service Concession Arrangements (Topic 853), a consensus of the FASB Emerging Issues Task Force, which specified that an operating entity should not account for a service concession arrangement within the scope of the update as a lease in accordance with ASC 840, Leases. The guidance was effective for fiscal years beginning after December 15, 2014. The adoption of ASU 2014-05 did not have an impact on our financial position, results of operations or cash flows.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance was effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods thereafter. The adoption of ASU 2014-08 did not have an impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amended guidance outlines a single comprehensive revenue model for entities to use in accounting for revenue from contracts with customers. The guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." On July 9, 2015, the FASB voted to defer the effective date by one year to now be effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date of December 15, 2016. The ASU may be adopted using a full retrospective approach or reporting the cumulative effect as of the date of adoption. We are currently evaluating the impact of adopting ASU 2014-09.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a


11




performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation—Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We do not expect ASU 2014-12 to have a material effect on our financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to perform interim and annual assessments as to whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year of the date the financial statements are issued and to provide related disclosures, if required. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. We do not expect ASU 2014-15 to have a material effect on our financial position, results of operations or cash flows.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.  ASU 2015-01 eliminates from GAAP the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that were previously classified as extraordinary. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 with early adoption permitted using either a prospective or retrospective method. We do not expect ASU 2015-01 to have a material effect on our financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 intends to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We do not expect ASU 2015-03 to have a material effect on our financial position, results of operations or cash flows.
In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. ASU 2015-10 covers a wide range of Topics in the Codification. The amendments represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. We do not expect ASU 2015-10 to have a material impact on our financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU. Inventory will now be measured at the lower of cost and net realizable value, while the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of adopting ASU 2015-11.
(2) Business Segments
We report our operations in three business segments—Gaming, Lottery and Interactive—representing our different products and services. These are our reportable segments under ASC 280, Segment Reporting. Each of our business segments is managed by a separate executive who reports to our chief executive officer (who is our "chief operating decision maker" under applicable accounting standards). Our three business segments represent separate standalone businesses based on the industries in which we operate. Additional discussion regarding the products and services from which each reportable business segment derives its revenue is included in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2014 Annual Report on Form 10-K.
In connection with the Bally acquisition in the fourth quarter of 2014, we reviewed our operating and business segments in light of certain changes in the financial information regularly reviewed by our chief executive officer and other factors. Based on this review, we combined our previous lottery-related Instant Products and Lottery Systems business segments into one "Lottery" segment. We also determined that the interactive operating segment should be disclosed as a


12


separate business segment and not aggregated with the gaming operating segment, reflecting the growth of the interactive operating segment. These changes, which were effective prior to December 31, 2014, had no impact on our consolidated financial statements for any periods. Business segment information for the three and six months ended June 30, 2014 has been adjusted to reflect these changes.
The following tables present revenue, cost of revenue, SG&A, R&D, employee termination and restructuring, D&A, operating income (loss) and earnings (loss) from equity investments by business segment for the three and six months ended June 30, 2015 and 2014. Certain unallocated expenses managed at the corporate level, comprised primarily of general and administrative costs and other (expense) income, net, are not allocated to our business segments. Segment results for 2014 below do not include the results of Bally, which we acquired in November 2014. The increase in unallocated corporate costs for the three and six months ended June 30, 2015 primarily relates to the inclusion of Bally's results.
 
 
Three Months Ended June 30, 2015
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
240.4

 
$
45.9

 
$
51.6

 
$
337.9

Product sales
 
209.3

 
8.8

 

 
218.1

Instant games
 

 
135.5

 

 
135.5

Total revenue
 
449.7

 
190.2

 
51.6

 
691.5

Cost of services (1)
 
53.1

 
27.5

 
18.0

 
98.6

Cost of product sales (1)
 
100.9

 
7.0

 

 
107.9

Cost of instant games (1)
 

 
68.8

 

 
68.8

Selling, general and administrative
 
71.2

 
16.4

 
15.2

 
102.8

Research and development
 
41.1

 
1.5

 
5.4

 
48.0

Employee termination and restructuring
 
2.7

 

 
0.3

 
3.0

Depreciation and amortization
 
181.5

 
20.0

 
5.4

 
206.9

Segment operating income (loss)
 
$
(0.8
)
 
$
49.0

 
$
7.3

 
$
55.5

Unallocated corporate costs
 
 
 
 
 
 
 
55.6

Consolidated operating loss
 
 
 
 
 
 
 
$
(0.1
)
Earnings from equity investments
 
$
1.8

 
$
1.5

 
$

 
$
3.3

(1) Exclusive of depreciation and amortization.
 
 
Three Months Ended June 30, 2014
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
96.1

 
$
51.0

 
$
32.2

 
$
179.3

Product sales
 
80.8

 
21.4

 

 
102.2

Instant games
 

 
135.4

 

 
135.4

Total revenue
 
176.9

 
207.8

 
32.2

 
416.9

Cost of services (1)
 
23.3

 
29.6

 
11.7

 
64.6

Cost of product sales (1)
 
38.3

 
16.6

 

 
54.9

Cost of instant games (1)
 

 
72.9

 

 
72.9

Selling, general and administrative
 
32.4

 
19.6

 
12.2

 
64.2

Research and development
 
21.1

 
0.7

 
3.0

 
24.8

Employee termination and restructuring
 
1.5

 
0.8

 
0.7

 
3.0

Depreciation and amortization
 
63.9

 
23.4

 
2.8

 
90.1

Segment operating income (loss)
 
$
(3.6
)
 
$
44.2

 
$
1.8

 
$
42.4

Unallocated corporate costs
 
 
 
 
 
 
 
38.8

Consolidated operating income
 
 
 
 
 
 
 
$
3.6

Earnings (loss) from equity investments
 
$
2.3

 
$
(1.6
)
 
$

 
$
0.7

(1) Exclusive of depreciation and amortization.


13


 
 
Six Months Ended June 30, 2015
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
478.3

 
$
91.5

 
$
98.5

 
$
668.3

Product sales
 
397.2

 
20.3

 

 
417.5

Instant games
 

 
264.4

 

 
264.4

Total revenue
 
875.5

 
376.2

 
98.5

 
1,350.2

Cost of services (1)
 
98.6

 
55.9

 
34.6

 
189.1

Cost of product sales (1)
 
188.7

 
17.1

 

 
205.8

Cost of instant games (1)
 

 
135.8

 

 
135.8

Selling, general and administrative
 
145.4

 
33.5

 
30.3

 
209.2

Research and development
 
80.9

 
3.1

 
10.9

 
94.9

Employee termination and restructuring
 
6.9

 
0.2

 
1.0

 
8.1

Depreciation and amortization
 
324.8

 
41.3

 
10.5

 
376.6

Segment operating income
 
$
30.2

 
$
89.3

 
$
11.2

 
$
130.7

Unallocated corporate costs
 
 
 
 
 
 
 
112.7

Consolidated operating income
 
 
 
 
 
 
 
$
18.0

Earnings from equity investments
 
$
1.7

 
$
4.7

 
$

 
$
6.4

(1) Exclusive of depreciation and amortization.
 
 
Six Months Ended June 30, 2014
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
192.0

 
$
101.1

 
$
63.0

 
$
356.1

Product sales
 
148.3

 
39.0

 

 
187.3

Instant games
 

 
261.6

 

 
261.6

Total revenue
 
340.3

 
401.7

 
63.0

 
805.0

Cost of services (1)
 
48.5

 
60.0

 
22.6

 
131.1

Cost of product sales (1)
 
71.0

 
30.3

 

 
101.3

Cost of instant games (1)
 

 
142.8

 

 
142.8

Selling, general and administrative
 
64.1

 
38.2

 
26.4

 
128.7

Research and development
 
43.4

 
1.3

 
6.0

 
50.7

Employee termination and restructuring
 
3.3

 
1.2

 
4.1

 
8.6

Depreciation and amortization
 
124.5

 
45.9

 
5.9

 
176.3

Segment operating income (loss)
 
$
(14.5
)
 
$
82.0

 
$
(2.0
)
 
$
65.5

Unallocated corporate costs
 
 
 
 
 
 
 
74.0

Consolidated operating loss
 
 
 
 
 
 
 
$
(8.5
)
Earnings from equity investments
 
$
2.0

 
$
4.2

 
$

 
$
6.2

(1) Exclusive of depreciation and amortization.
The following table presents a reconciliation of reportable business segment operating income to net loss before income taxes for each period:


14


 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
 
2015
 
2014
Reportable business segment operating income
 
$
55.5

 
$
42.4

 
$
130.7

 
$
65.5

Unallocated corporate costs
 
(55.6
)
 
(38.8
)
 
(112.7
)
 
(74.0
)
Consolidated operating income (loss)
 
(0.1
)
 
3.6

 
18.0

 
(8.5
)
Interest expense
 
(166.4
)
 
(49.3
)
 
(330.7
)
 
(97.2
)
Earnings from equity investments
 
3.3

 
0.7

 
6.4

 
6.2

Loss on early extinguishment of debt
 

 
(25.9
)
 

 
(25.9
)
Gain on sale of equity interest
 

 

 

 
14.5

Other (expense) income, net
 
(4.3
)
 
3.2

 
(9.9
)
 
6.1

Net loss before income taxes
 
$
(167.5
)
 
$
(67.7
)
 
$
(316.2
)
 
$
(104.8
)
In evaluating segment financial performance, we focus on operating income (loss) as a segment’s measure of profit or loss. Segment operating income (loss) is income (loss) before other (expense) income, net, interest expense, earnings (loss) from equity investments, gain on sale of equity interest, unallocated corporate costs and income tax expense (benefit). The accounting policies of the business segments are the same as those described in our summary of significant accounting policies in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2014 Annual Report on Form 10-K.
(3) Acquisitions
On November 21, 2014, the Company acquired Bally for $5.1 billion (including the refinancing of approximately $1.9 billion of existing Bally indebtedness), creating one of the largest diversified global gaming suppliers.
We have recorded Bally's assets acquired and liabilities assumed based on our preliminary estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of Bally's assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. The significant items for which a final fair value has not been determined as of the filing of this Quarterly Report on Form 10-Q include accrued liabilities, deferred income taxes and other long-term liabilities.  We expect to complete our fair value determinations no later than the fourth quarter of 2015. We do not currently expect our fair value determinations to change; however, there may be differences compared to those amounts reflected in our consolidated financial statements at June 30, 2015 as we finalize our fair value analysis.
Based on our preliminary estimates, the equity purchase price exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities at the acquisition date by $2,956.1 million, which amount has been allocated and recognized as goodwill within our Gaming and Interactive business segments. We attribute this goodwill to our enhanced financial and operational scale, market diversification, opportunities for synergies, assembled workforce and other strategic benefits. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.
The preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed did not change during the six months ended June 30, 2015 from the amounts disclosed in Note 3 (Acquisitions and Dispositions) in our 2014 Annual Report on Form 10-K.
As required by ASC 805, Business Combinations, the following unaudited pro forma statements of operations for the three and six months ended June 30, 2014 give effect to the Bally acquisition as if it had been completed on January 1, 2013. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been during the period presented had the Bally acquisition been completed on January 1, 2014. In addition, the unaudited pro forma financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The unaudited pro forma statements of operations do not reflect: (1) any anticipated synergies (or anticipated costs to achieve synergies) or (2) the


15




impact of non-recurring items directly related to the Bally acquisition.
 
Three Months Ended June 30, 2014
 
Six Months Ended 
 June 30, 2014
Revenue from Consolidated Statements of Operations and Comprehensive Loss
$
416.9

 
$
805.0

Add: Bally revenue not reflected in Consolidated Statements of Operations and Comprehensive Loss
350.4

 
697.3

Unaudited pro forma revenue
$
767.3

 
$
1,502.3

 
Three Months Ended June 30, 2014
 
Six Months Ended 
 June 30, 2014
Net loss from Consolidated Statements of Operations and Comprehensive Loss
$
(72.4
)
 
$
(117.4
)
Add: Bally net income not reflected in Consolidated Statements of Operations and Comprehensive Loss adjusted by pro forma adjustments (1), (2), (3), (4) and (5) below
(36.5
)
 
(72.1
)
Unaudited pro forma net loss
$
(108.9
)
 
$
(189.5
)
Unaudited pro forma amounts reflect the following adjustments:
(1) An adjustment to reflect additional D&A of $39.9 million and $70.2 million for the three and six months ended June 30, 2014, respectively, associated with the fair value of the tangible and intangible assets acquired in the Bally acquisition that would have been incurred assuming the fair value adjustments had been applied on January 1, 2014.
(2) An adjustment to reflect lower costs of sales of $3.0 million and $5.2 million for the three and six months ended June 30, 2014, respectively, related to the reversal of the impact of purchase accounting adjustments on the carrying value of SHFL's finished goods inventory made in connection with Bally’s acquisition of SHFL.
(3) An adjustment to reflect additional interest expense of $73.6 million and $151.1 million for the three and six months ended June 30, 2014, respectively, that would have been incurred assuming the financing transactions relating to the Bally acquisition and the purchase and redemption of the 2019 Notes were both completed as of January 1, 2014.
(4) An adjustment to remove the impact of the $25.9 million for both the three and six months ended June 30, 2014, related to the loss on early extinguishment of debt incurred in connection with the purchase and redemption of the 2019 Notes in June 2014.
(5) An adjustment of $32.1 million and $72.1 million for the three and six months ended June 30, 2014, respectively, to tax effect the pre-tax pro forma adjustments listed above, calculated based on the statutory rates in effect in each significant jurisdiction for the three and six months ended June 30, 2014. This rate does not reflect the Company’s effective tax rate, which includes other tax items, such as state and foreign taxes, as well as other tax charges or benefits, and does not take into account any historical or possible future tax events that may impact the Company.
(4) Restructuring Plans
We recorded pre-tax employee termination and restructuring costs of $5.2 million and $4.9 million for the three months ended June 30, 2015 and 2014, respectively, and recorded pre-tax employee termination and restructuring costs of $13.4 million and $10.5 million for the six months ended June 30, 2015 and 2014, respectively. No new employee termination and restructuring plans were initiated during the six months ended June 30, 2015. We expect to complete the integration-related restructuring plan actions discussed below related to the Bally and WMS integrations during 2016 and 2015, respectively. All other employee termination and restructuring actions reported in 2014 were completed as of December 31, 2014 and are not reflected in the tables below.
Bally Integration-Related Restructuring Plan
Upon our acquisition of Bally in November 2014, we began integrating Scientific Games and Bally and implementing our plans to streamline our operations and cost structure. We have recorded costs that meet the criteria under ASC 420, Exit and Disposal Cost Obligations ("ASC 420"), in each of our business segments associated with integration activities that have been initiated in the relevant period. These costs include employee termination costs, costs relating to the exiting of facilities and product lines, as well as costs relating to exiting contracts.




16




WMS Integration-Related Restructuring Plan
Upon our acquisition of WMS in October 2013, we began integrating Scientific Games and WMS and implementing our plans to streamline our operations and cost structure. We have recorded costs that meet the criteria under ASC 420 in each of our business segments associated with integration activities that have been initiated in the relevant period. These costs include employee termination costs, costs relating to the exiting of facilities and costs related to exiting two immaterial businesses.
Unallocated corporate employee termination costs primarily related to terminations of certain executives, including our former chief executive officer, in the fourth quarter of 2013.
Employee Termination and Restructuring Costs by Segment
The following table presents a summary of employee termination and restructuring costs by business segment related to the restructuring plans described above, including the costs incurred during the three and six months ended June 30, 2015, the cumulative costs incurred through June 30, 2015 from initiation of the relevant restructuring activities and the total expected costs related to the relevant restructuring activities that have been initiated. As additional integration-related activities are initiated, we expect to incur additional costs related to those activities.
Business Segment
 
 
Employee Termination Costs
 
Property Costs
 
Other
 
Total
Gaming (1)
Three months ended June 30, 2015
 
$
2.6

 
$

 
$
0.1

 
$
2.7

 
Six months ended June 30, 2015
 
6.8

 

 
0.1

 
6.9

 
Cumulative
 
25.1

 
0.9

 
3.0

 
29.0

 
Expected Total
 
32.2

 
1.4

 
3.0

 
36.6

 
 
 
 
 
 
 
 
 
 
Lottery
Three months ended June 30, 2015
 

 

 

 

 
Six months ended June 30, 2015
 
0.2

 

 

 
0.2

 
Cumulative
 
3.3

 
0.4

 

 
3.7

 
Expected Total
 
3.3

 
0.4

 

 
3.7

 
 
 
 
 
 
 
 
 
 
Interactive (1)
Three months ended June 30, 2015
 
0.3

 

 

 
0.3

 
Six months ended June 30, 2015
 
0.9

 

 
0.1

 
1.0

 
Cumulative
 
4.7

 
0.4

 
5.0

 
10.1

 
Expected Total
 
4.7

 
0.4

 
5.0

 
10.1

 
 
 
 
 
 
 
 
 
 
Unallocated corporate (2)
Three months ended June 30, 2015
 
0.3

 
0.3

 
1.6

 
2.2

 
Six months ended June 30, 2015
 
0.6

 
1.8

 
2.9

 
5.3

 
Cumulative
 
12.0

 
4.1

 
2.9

 
19.0

 
Expected Total
 
12.0

 
4.1

 
3.0

 
19.1

 
 
 
 
 
 
 
 
 
 
Total
Three months ended June 30, 2015
 
$
3.2

 
$
0.3

 
$
1.7

 
$
5.2

 
Six months ended June 30, 2015
 
$
8.5

 
$
1.8

 
$
3.1

 
$
13.4

 
Cumulative
 
$
45.1

 
$
5.8

 
$
10.9

 
$
61.8

 
Expected Total
 
$
52.2

 
$
6.3

 
$
11.0

 
$
69.5

(1) Other restructuring costs reflect costs related to the exit of two immaterial business lines.
(2) Unallocated corporate employee termination costs primarily relates to an accrual for cash severance due to former executives.


17




The following table presents a summary of restructuring charges and the changes in the restructuring accrual during the six months ended June 30, 2015:
 
 
Employee Termination Costs
 
Property Costs
 
Other
 
Total
Balance as of December 31, 2014
 
$
17.9

 
$
1.7

 
$
3.0

 
$
22.6

Additional accruals
 
8.5

 
1.8

 
3.1

 
13.4

Cash payments
 
(11.3
)
 
(1.6
)
 
(3.9
)
 
(16.8
)
Non-cash expense
 
0.1

 
0.2

 
(1.3
)
 
(1.0
)
Balance as of June 30, 2015
 
$
15.2

 
$
2.1

 
$
0.9

 
$
18.2

(5) Basic and Diluted Net Loss Per Share
The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net loss per share available to common stockholders for the three and six months ended June 30, 2015 and 2014:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 

 
 

 
 
 
 
Net loss
 
$
(102.2
)
 
$
(72.4
)
 
$
(188.6
)
 
$
(117.4
)
 
 


 


 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

 
 
 
 
Basic
 
$
(1.19
)
 
$
(0.86
)
 
$
(2.20
)
 
(1.39
)
Diluted
 
$
(1.19
)
 
$
(0.86
)
 
$
(2.20
)
 
(1.39
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic shares
 
85.9

 
84.4

 
85.6

 
84.4

Diluted shares
 
85.9

 
84.4

 
85.6

 
84.4

For all periods presented, basic and diluted net loss per share is the same, as any additional common stock equivalents would be anti-dilutive. We excluded 1.9 million and 2.0 million of stock options from the weighted average diluted common shares outstanding as of June 30, 2015 and 2014, respectively, which would have been anti-dilutive due to the net loss in those periods. In addition, we excluded 6.4 million and 4.4 million of RSUs from the calculation of weighted average diluted common shares outstanding as of June 30, 2015 and 2014, respectively, which would have been anti-dilutive due to the net loss in those periods.
(6) Accounts and Notes Receivable and Credit Quality of Notes Receivable
Accounts and Notes Receivable
The following summarizes the components of current and long-term accounts and notes receivable, net:
 
June 30, 2015
 
December 31, 2014
Current:
 
 
 
Accounts receivable
$
493.9

 
$
479.5

Notes receivable
179.5

 
194.6

Allowance for doubtful accounts
(18.4
)
 
(17.0
)
Current accounts and notes receivable, net
$
655.0

 
$
657.1

Long-term:
 
 
 
Notes receivable
58.5

 
87.5

  Total accounts and notes receivable, net
$
713.5

 
$
744.6

Credit Quality of Notes Receivable
The Company includes in its notes receivable amounts due in installment payments greater than 3 months and any amounts due for development financing provided to certain customers in the form of notes receivable. We carry our notes receivable at face amount less an allowance for doubtful accounts and imputed interest, if any. Interest income is recognized ratably over the life of the note receivable and any related fees or costs to establish the notes are expensed as incurred, as they are considered insignificant. Actual or imputed interest, if any, is determined based on stated rates or current market rates at the time the note originated and is recorded as interest income in other income (expense), net, ratably over the payment period. We generally impute interest income on notes receivable with terms greater than one year that do not contain a stated interest rate. The interest rates on our outstanding notes receivable ranged from 4.0% to 10.4% at June 30, 2015 and December 31, 2014. Our policy is to generally recognize interest on our notes receivable until the note receivable is deemed non-performing, which we define as a note on which payments are over 180 days past due. The amount of our non-performing notes was immaterial at June 30, 2015 and December 31, 2014.


18


We monitor the credit quality of our accounts receivable by reviewing an aging of customer invoices. Invoices are considered past due if a scheduled payment is not received within agreed-upon terms. Our notes receivable are reviewed for impairment at least quarterly. We also review a variety of other relevant qualitative information such as collection experience, economic conditions and customer-specific financial conditions to evaluate credit risk in recording the allowance for doubtful accounts or as an indicator of an impaired loan. For notes receivable from customers in the U.S. with payment terms over 90 days, we generally file a UCC-1 form to retain a security interest in the gaming machines until we are fully paid. For notes receivable from international customers, where possible, we seek payment deposits, collateral, pledge agreements, bills of exchange, foreign bank letters of credit, post-dated checks or personal guarantees with respect to notes receivable from such customers. However, the majority of our notes receivable from international customers do not have these features. Currently, we have not sold our notes receivable to third parties; therefore, we do not have any off-balance sheet liabilities for factored receivables.
The government authorities in Argentina limit the exchange of pesos into U.S. dollars and the transfer of funds from Argentina. Our accounts and notes receivable, net, from customers in Argentina at June 30, 2015 were $18.9 million, which is denominated in U.S. dollars, although, under the terms of our arrangements with our customers in Argentina, they are required to pay us in pesos at the spot exchange rate between the peso and the U.S. dollar on the date of payment. In evaluating the collectability of customer receivables in Argentina at June 30, 2015, we specifically evaluated recent payments, receivable aging, any additional security or collateral we had (bills of exchange, pledge agreements, etc.) and other facts and circumstances relevant to our customers’ ability to pay. Our customers in Argentina have continued to pay us in pesos based on the spot exchange rate between the peso and the U.S. dollar on the payment date. We collected $15.6 million of outstanding receivables from customers in Argentina during the six months ended June 30, 2015.
Recent government actions and challenges affecting the gaming industry in Mexico have increased the credit quality risk with respect to certain of our current Mexico customers. In evaluating the collectability of customer receivables in Mexico at June 30, 2015, we specifically evaluated recent payments, receivable aging, any additional security or collateral we had (bills of exchange, pledge agreements, etc.) and other facts and circumstances relevant to our customers’ ability to pay. Our accounts and notes receivable, net, from all customers in Mexico was $44.2 million at June 30, 2015. We collected $14.6 million of outstanding receivables from customers during the six months ended June 30, 2015.
The following summarizes the components of total notes receivable, net:
 
June 30, 2015
 
Balances over 90 days past due
 
December 31, 2014
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
80.9

 
$
6.0

 
$
95.3

 
$
7.9

International
157.1

 
13.1

 
186.8

 
12.0

     Total notes receivable
238.0

 
19.1

 
282.1

 
19.9

 
 
 
 
 
 
 
 
Notes receivable allowance for doubtful accounts:
 
 
 
 
 
 
 
Domestic
(1.9
)
 
(0.8
)
 

 

International
(7.8
)

(5.9
)
 
(5.9
)
 
(3.5
)
     Total notes receivable allowance for doubtful accounts
(9.7
)
 
(6.7
)
 
(5.9
)
 
(3.5
)
Note receivable, net
$
228.3

 
$
12.4

 
$
276.2

 
$
16.4

At June 30, 2015, 5.4% of our total notes receivable, net, was past due by over 90 days compared to 5.9% at December 31, 2014.
The following tables detail our evaluation of notes receivable for impairment as of June 30, 2015 and December 31, 2014:


19


 
June 30, 2015
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
80.9

 
$
39.0

 
$
41.9

International
157.1

 
100.9

 
56.2

Total notes receivable
$
238.0

  
$
139.9

  
$
98.1

 
December 31, 2014
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
95.3

  
$
36.1

  
$
59.2

International
186.8

  
121.0

  
65.8

Total notes receivable
$
282.1

  
$
157.1

  
$
125.0

The following table reconciles the allowance for doubtful notes receivable from December 31, 2014 to June 30, 2015:
 
Total
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Beginning balance at December 31, 2014
$
5.9

 
$
5.9

 
$

Charge-offs
(2.1
)
 
(2.1
)
 

Recoveries
(0.5
)
 
(0.4
)
 
(0.1
)
Provision
6.4

 
5.2

 
1.2

Ending balance at June 30, 2015
$
9.7

 
$
8.6

 
$
1.1

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

 
$
5.6

 
$

Charge-offs
(0.1
)
 
(0.1
)
 

Recoveries

 

 

Provision
2.6

 
2.6

 

Ending balance at June 30, 2014
$
8.1

 
$
8.1

 
$

Modifications to original financing terms are exceptions to our cash collection process and are a function of collection activities with the customer. If a customer requests a modification of financing terms during the collection process, we evaluate the proposed modification in relation to the recovery of our gaming machines, generally seek additional security and recognize any additional interest income ratably over the remaining new financing term. Additionally, we often take the opportunity to simplify the customer's future payments by consolidating several notes (each typically representing an individual purchase transaction) into one note. In those instances, the aging of any outstanding receivable balance would be adjusted to reflect the new payment terms. Such modifications generally do not include a concession on the amount owed and typically result only in a delay of payments relative to the original terms.
For the six months ended June 30, 2015, we had no significant modifications to the original financing terms.
The following summarizes the notes receivable financing terms that were modified during the six months ended June 30, 2014:


20


 
 
Six Months Ended June 30, 2014
 
# of
 Customers
# of Notes
 
Pre-Modification
 Investment
 
Post-Modification
 Investment
Financing term modifications:
 
 
 
 
 
 
International (1)
7

24

 
$
11.9

 
$
11.9

Total financing term modifications
7

24

  
$
11.9

  
$
11.9

(1) The modifications are detailed below:
one customer for which 12 notes were consolidated into one note aggregating $4.0 million, with an average 28-month payment extension;
one customer for which three notes were consolidated into one note aggregating $3.1 million, with an average four-month payment extension;
one customer with a note for $2.3 million for which original payment terms were extended by nine months;
one customer for which four notes were consolidated into one note aggregating $1.4 million, with an average five-month extension, and another note for $0.2 million for which original payment terms were extended by seven months;
one customer with a note for $0.5 million for which original payment terms were extended by 21 months;
one customer with a note for $0.3 million for which original payment terms were extended by 27 months; and
one customer with a note for $0.1 million for which original payment terms were extended by 21 months.
In certain international jurisdictions, we offer extended financing terms related to our customers. Such financing activities subject us to increased credit risk, which could be exacerbated by, among other things, unfavorable economic conditions or political or economic instability in those regions. Our notes receivable were concentrated in the following international gaming jurisdictions at June 30, 2015:
Mexico
17
%
Peru
17
%
Argentina
7
%
Colombia
6
%
Italy
4
%
Other (less than 5% individually)
15
%
Total international notes receivable as a percentage of total notes receivable
66
%
(7) Inventories
Inventories consisted of the following as of the dates presented below:
 
 
June 30, 2015
 
December 31, 2014
Parts and work-in-process
 
$
111.7

 
$
105.7

Finished goods
 
138.7

 
159.9

Total inventories
 
$
250.4

 
$
265.6

Parts and work-in-process include parts for gaming machines, lottery terminals and instant lottery ticket materials, as well as labor and overhead costs associated with the manufacturing of instant lottery games. Our finished goods inventory primarily consists of gaming machines for sale, instant games for our participation arrangements and our licensed branded merchandise.
During the three months ended June 30, 2015, we recorded an impairment of $7.1 million related to the discontinuance of certain product lines as a result of the Bally acquisition. The impairment is included in cost of product sales in our Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015. There were no inventory impairments recorded for the three and six months ended June 30, 2014.


21


(8) Property and Equipment
Gaming and lottery machinery and equipment, including assets under capital leases, were as follows:
 
 
June 30, 2015
 
December 31, 2014
Gaming equipment
 
$
773.8

 
$
799.9

Less: accumulated depreciation
 
(260.5
)
 
(279.1
)
Gaming equipment, net
 
513.3

 
520.8

 
 
 
 
 
Lottery machinery and equipment
 
319.3

 
311.7

Less: accumulated depreciation
 
(232.0
)
 
(207.4
)
Lottery machinery and equipment, net
 
87.3

 
104.3

 
 
 
 
 
Total gaming and lottery machinery and equipment, net
 
$
600.6

 
$
625.1

Property and equipment consisted of the following:
 
 
June 30, 2015
 
December 31, 2014
Land
 
$
35.0

 
$
43.0

Buildings and leasehold improvements
 
179.7

 
206.3

Furniture and fixtures
 
39.8

 
36.2

Transportation equipment
 
4.4

 
5.0

Construction in progress
 
34.2

 
11.7

Other property and equipment, at cost
 
287.0

 
292.8

Less: accumulated depreciation
 
(278.5
)
 
(207.3
)
Property and equipment, net
 
$
301.6

 
$
387.7

 
 
 
 
 
Total property and equipment, net
 
$
902.2

 
$
1,012.8

Depreciation expense for the three and six months ended June 30, 2015 was $93.9 million and $176.3 million, respectively. Depreciation expense for the three and six months ended June 30, 2014 was $55.8 million and $108.3 million, respectively. Depreciation expense is excluded from cost of services, cost of product sales, cost of instant games and other operating expenses and is separately stated within D&A in the Consolidated Statements of Operations and Comprehensive Loss. Accumulated amortization of capital lease assets was $9.2 million and $5.3 million as of June 30, 2015 and December 31, 2014, respectively.
During the three months ended June 30, 2015, the Gaming business segment disposed of certain fully depreciated gaming assets with a historical cost of $59.9 million. The disposal had no impact on property and equipment, net in our Consolidated Balance Sheets as of June 30, 2015 or D&A in the Consolidated Statements of Operations and Comprehensive Loss for three and six months ended June 30, 2015. In addition, during the three months ended June 30, 2015, we recorded an impairment of $5.2 million related to gaming equipment assets for certain product lines that were discontinued as a result of the Bally acquisition. The impairment is included in D&A in our Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015.
As a result of our acquisition of Bally in the fourth quarter of 2014, we determined that we would consolidate our gaming manufacturing operations in Las Vegas, Nevada and sell our manufacturing facility in Waukegan, Illinois. As a result, we recorded a $9.4 million facility impairment in the fourth quarter of 2014. In June 2015 we ceased manufacturing operations at our Waukegan facility and are actively marketing the facility for sale. In addition, in Reno, Nevada, we are selling our owned facility and consolidating our operations in our leased facility which will support sales, distribution, WAP operations and development of operations for our Gaming business. In June 2015, we recorded a $4.9 million impairment of this facility that we are in the process of selling. This charge is included in D&A in the Consolidated Statements of Operations and Comprehensive Loss for three and six months ended June 30, 2015. We expect to close on the sale of the Reno facility in the third quarter of 2015. Both the Waukegan and Reno facilities are part of our Gaming business segment and represented $27.5 million of land and buildings, which we have classified as held for sale within prepaid expenses, deposits and other current assets in our Consolidated Balance Sheets as of June 30, 2015.


22


(9) Intangible Assets and Goodwill
Intangible Assets
The following tables present certain information regarding our intangible assets as of June 30, 2015 and December 31, 2014. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual value.
Intangible Assets
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Balance
Balance as of June 30, 2015
 
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
 
Patents
 
$
19.3

 
$
9.0

 
$
10.3

Customer relationships
 
880.4

 
79.3

 
801.1

Licenses
 
350.2

 
113.7

 
236.5

Intellectual property
 
729.4

 
78.4

 
651.0

Brand names
 
125.3

 
12.0

 
113.3

Non-compete agreements
 
0.3

 
0.3

 

Lottery contracts
 
1.5

 
1.5

 

 
 
2,106.4

 
294.2

 
1,812.2

Non-amortizable intangible assets:
 
 
 
 
 
 
Trade names
 
298.6

 
2.1

 
296.5

Total intangible assets
 
$
2,405.0

 
$
296.3

 
$
2,108.7

 
 
 
 
 
 
 
Balance as of December 31, 2014
 
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
 
Patents
 
$
17.9

 
$
8.4

 
$
9.5

Customer relationships