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EX-4.3 - EXHIBIT 4.3 - SCIENTIFIC GAMES CORPsgms9302015ex43.htm
EX-4.4 - EXHIBIT 4.4 - SCIENTIFIC GAMES CORPsgms9302015ex44.htm
EX-10.2 - EXHIBIT 10.2 - SCIENTIFIC GAMES CORPsgms9302015ex102.htm
EX-4.1 - EXHIBIT 4.1 - SCIENTIFIC GAMES CORPsgms9302015ex41.htm
EX-10.1 - EXHIBIT 10.1 - SCIENTIFIC GAMES CORPsgms9302015ex101.htm
EX-4.5 - EXHIBIT 4.5 - SCIENTIFIC GAMES CORPsgms9302015ex45.htm
EX-32.1 - EXHIBIT 32.1 - SCIENTIFIC GAMES CORPsgms9302015ex321.htm
EX-4.2 - EXHIBIT 4.2 - SCIENTIFIC GAMES CORPsgms9302015ex42.htm
EX-31.1 - EXHIBIT 31.1 - SCIENTIFIC GAMES CORPsgms9302015ex311.htm
EX-31.2 - EXHIBIT 31.2 - SCIENTIFIC GAMES CORPsgms9302015ex312.htm
EX-32..2 - EXHIBIT 32.2 - SCIENTIFIC GAMES CORPsgms6302015ex322.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, 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 November 5, 2015:
Class A Common Stock: 86,231,747
Class B Common Stock: None





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Condensed Notes to Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits



3




Glossary of Terms
 
 
 
The following terms or acronyms used in this Form 10-Q are defined below:
Term or Acronym
Definition
2018 Notes
8.125% senior subordinated notes due 2018 issued by Scientific Games Corporation
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


Intellectual Property Rights
 
Brands and product names protected by intellectual property rights (including trademarks and copyrights) that the Company owns are identified herein as italicized text.



5




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

competition;
U.S. and international economic and industry conditions, including declines in or slow growth of gross gaming revenues or lottery retail sales, reductions in or constraints on capital spending by gaming or lottery operators and bankruptcies of, or credit risk relating to, customers;
limited growth from new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of existing gaming machines;
ownership changes and consolidation in the casino industry;
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 realize the anticipated benefits under its private management agreement with the Illinois lottery or from the disentanglement services performed in connection with the termination thereof, (2) the inability of our joint venture to meet the net income targets or other requirements under its agreement to provide marketing and sales services to the New Jersey Lottery or otherwise to realize the anticipated benefits under such agreement and (3) the failure to realize the anticipated benefits related to 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 time frames 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;
inability to complete or successfully integrate future acquisitions;     
incurrence of employee termination or restructuring costs and impairment or asset write-down charges;
changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;
implementation of complex revenue recognition standards;
fluctuations in our results due to seasonality and other factors;
dependence on suppliers and manufacturers;
risks relating to foreign operations, including fluctuations in foreign currency exchange rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece;
dependence on key employees;
litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees, 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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
340.5

 
$
182.8

 
$
1,008.8

 
538.9

Product sales
 
193.5

 
102.0

 
611.0

 
289.3

Instant games
 
137.6

 
130.8

 
402.0

 
392.4

Total revenue
 
671.6

 
415.6

 
2,021.8

 
1,220.6

Operating expenses:
 
 
 
 
 
 
 
 
Cost of services (1)
 
85.5

 
69.6

 
274.6

 
200.7

Cost of product sales (1)
 
87.4

 
59.9

 
293.2

 
161.2

Cost of instant games (1)
 
77.1

 
69.7

 
212.9

 
212.5

Selling, general and administrative
 
136.8

 
95.6

 
423.6

 
282.6

Research and development
 
45.9

 
26.3

 
140.8

 
77.0

Employee termination and restructuring
 
5.6

 
1.9

 
19.0

 
12.4

Depreciation and amortization
 
286.5

 
100.4

 
692.9

 
290.5

Goodwill impairment
 
535.0

 

 
535.0

 

Operating loss
 
(588.2
)
 
(7.8
)
 
(570.2
)
 
(16.3
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
(166.8
)
 
(45.7
)
 
(497.5
)
 
(142.9
)
Earnings (loss) from equity investments
 
3.0

 
(14.0
)
 
9.4

 
(7.8
)
Loss on early extinguishment of debt
 

 

 

 
(25.9
)
Gain on sale of equity interest
 

 

 

 
14.5

Other (expense) income, net
 
(7.5
)
 
3.1

 
(17.4
)
 
9.2

     Total other expense, net
 
(171.3
)
 
(56.6
)
 
(505.5
)
 
(152.9
)
Net loss before income taxes
 
(759.5
)
 
(64.4
)
 
(1,075.7
)
 
(169.2
)
Income tax benefit (expense)
 
81.3

 
(5.4
)
 
208.9

 
(18.0
)
Net loss
 
$
(678.2
)
 
$
(69.8
)
 
$
(866.8
)
 
$
(187.2
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation loss
 
(47.9
)
 
(57.8
)
 
(136.3
)
 
(47.7
)
Pension and post-retirement gain, net of tax
 
0.8

 
0.4

 
1.0

 
0.3

Derivative financial instruments unrealized gain (loss), net of tax
 
(1.9
)
 
2.3

 
(0.8
)
 
(4.0
)
Other comprehensive loss
 
(49.0
)
 
(55.1
)
 
(136.1
)
 
(51.4
)
Comprehensive loss
 
$
(727.2
)
 
$
(124.9
)
 
$
(1,002.9
)
 
$
(238.6
)
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

 
 

 
 

Basic
 
$
(7.88
)
 
$
(0.82
)
 
$
(10.10
)
 
$
(2.22
)
Diluted
 
$
(7.88
)
 
$
(0.82
)
 
$
(10.10
)
 
$
(2.22
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

 
 

 
 

Basic shares
 
86.1

 
84.7

 
85.8

 
84.5

Diluted shares
 
86.1

 
84.7

 
85.8

 
84.5

(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)
 
September 30, 2015
 
December 31, 2014
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
102.1

 
$
171.8

Restricted cash
17.2

 
27.2

Accounts receivable, net
470.6

 
468.4

Notes receivable, net
163.1

 
188.7

Inventories
243.8

 
265.6

Deferred income taxes
73.2

 
72.8

Prepaid expenses, deposits and other current assets
199.5

 
183.5

Total current assets
1,269.5

 
1,378.0

Long-term restricted cash
17.5

 
16.8

Long-term notes receivable
57.6

 
87.5

Property and equipment, net
868.4

 
1,012.8

Goodwill
3,485.2

 
4,108.3

Intangible assets, net
1,940.8

 
2,251.6

Software, net
527.0

 
592.7

Equity investments
227.0

 
288.2

Other assets
222.1

 
259.3

Total assets
$
8,615.1

 
$
9,995.2

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
50.4

 
$
50.6

Accounts payable
120.4

 
155.8

Accrued liabilities
443.6

 
453.9

Total current liabilities
614.4

 
660.3

Deferred income taxes
400.5

 
628.8

Other long-term liabilities
221.2

 
236.8

Long-term debt
8,359.8

 
8,465.4

Total liabilities
9,595.9

 
9,991.3

Commitments and contingencies


 


Stockholders' (deficit) equity:
 
 
 
Class A common stock, par value $0.01 per share: 199.3 shares authorized; 103.4 and 102.3 shares issued and 86.2 and 85.1 shares outstanding, respectively
1.0

 
1.0

Additional paid-in capital
761.4

 
743.2

Accumulated loss
(1,337.5
)
 
(470.7
)
Treasury stock, at cost: 17.2 and 17.2 shares held, respectively
(175.2
)
 
(175.2
)
Accumulated other comprehensive loss
(230.5
)
 
(94.4
)
Total stockholders' (deficit) equity
(980.8
)
 
3.9

Total liabilities and stockholders' (deficit) equity
$
8,615.1

 
$
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)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(866.8
)
 
$
(187.2
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
692.9

 
290.5

Change in deferred income taxes
(223.3
)
 
5.2

Stock-based compensation
19.5

 
18.1

Non-cash interest expense
29.0

 
12.8

Loss (earnings) from equity investments, net
(9.4
)
 
7.8

Distributed earnings from equity investments
20.9

 
22.5

Loss on early extinguishment of debt

 
25.9

Gain on sale of equity interest

 
(14.5
)
Goodwill impairment
535.0

 

Changes in current assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts and notes receivable, net
43.7

 
80.8

Inventories
36.8

 
(30.9
)
Accounts payable
(17.7
)
 
(36.5
)
Accrued liabilities
(17.4
)
 
1.2

Other current assets and liabilities
11.8

 
41.6

Other, net
0.5

 
(3.9
)
Net cash provided by operating activities
255.5

 
233.4

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(15.7
)
 
(32.4
)
Gaming and lottery operations expenditures
(151.1
)
 
(73.1
)
Intangible assets and software expenditures
(66.8
)
 
(70.8
)
Changes in other assets and liabilities and other
10.1

 
0.5

Additions to equity method investments

 
(43.3
)
Distributions of capital on equity investments
37.0

 
45.4

Proceeds from sale of equity interest

 
44.9

Restricted cash
9.3

 
(1.1
)
Net cash used in investing activities
(177.2
)
 
(129.9
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
110.0

 

Repayments under revolving credit facility
(180.0
)
 

Proceeds from issuance of long-term debt

 
347.9

Payments on long-term debt
(38.8
)
 
(377.3
)
Payments of deferred financing fees

 
(22.8
)
Payments on license obligations
(32.0
)
 
(7.0
)
Common stock repurchases

 
(29.5
)
Contingent earnout payments
(0.5
)
 
(10.2
)
Net issuance (redemptions) of common stock under stock-based compensation plans
0.4

 
(19.1
)
Net cash used in financing activities
(140.9
)
 
(118.0
)
Effect of exchange rate changes on cash and cash equivalents
(7.1
)
 
(6.7
)
Decrease in cash and cash equivalents
(69.7
)
 
(21.2
)
Cash and cash equivalents, beginning of period
171.8

 
153.7

Cash and cash equivalents, end of period
$
102.1

 
$
132.5

 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, casino-management systems, table game products and services, instant and draw‑based lottery games, server‑based gaming and lottery systems, sports betting technology, lottery content and services, loyalty and rewards programs and interactive gaming. 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 and interactive businesses. 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. 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 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." In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year to now be effective for fiscal years, and 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 this guidance.
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. In August 2015, the FASB issued ASU No. 2015-15 which amended Subtopic 835-30 for the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. In the amendment, an entity can defer and present debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We do not expect this guidance to have a material effect on our financial position, results of operations or cash flows.
    


11




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 this guidance.
In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient (consensuses of the FASB Emerging Issues Task Force). ASU 2015-12 intends to simplify the measurement and presentation of fully benefit-responsive investment contracts. Under the amendments, fully benefit-responsive investment contracts are measured, presented, and disclosed only at contract value. A plan will continue to provide disclosures that help users understand the nature and risks of fully benefit-responsive investment contracts. ASU 2015-12 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement to retrospectively apply adjustments made to provisional amounts recognized in a business combination. It requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this ASU 2015-16 should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. We do not expect this guidance to have a material effect on our financial position, results of operations or cash flows.

(2) Business Segments
We report our operations in three business segments—gaming, lottery and Interactive—representing our different products and services. These are our reportable segments under ASC 280, Segment Reporting. Each of our business segments is managed by a separate executive who reports to our chief executive officer (who is our "chief operating decision maker" as defined by 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 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 nine months ended September 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, goodwill impairment, operating income (loss) and earnings (loss) from equity investments by business segment for the three and nine months ended September 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 nine months ended September 30, 2015 primarily relates to the inclusion of Bally's results.


12


 
 
Three Months Ended September 30, 2015
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
244.3

 
$
45.0

 
$
51.2

 
$
340.5

Product sales
 
184.8

 
8.7

 

 
193.5

Instant games
 

 
137.6

 

 
137.6

Total revenue
 
429.1

 
191.3

 
51.2

 
671.6

Cost of services (1)
 
41.3

 
27.2

 
17.0

 
85.5

Cost of product sales (1)
 
80.1

 
7.3

 

 
87.4

Cost of instant games (1)
 

 
77.1

 

 
77.1

Selling, general and administrative
 
70.3

 
15.7

 
16.6

 
102.6

Research and development
 
39.4

 
1.1

 
5.4

 
45.9

Employee termination and restructuring
 
3.2

 

 
0.5

 
3.7

Depreciation and amortization
 
245.1

 
21.6

 
5.4

 
272.1

Goodwill impairment
 
535.0

 

 

 
535.0

Segment operating income (loss)
 
$
(585.3
)
 
$
41.3

 
$
6.3

 
$
(537.7
)
Unallocated corporate costs
 
 
 
 
 
 
 
(50.5
)
Consolidated operating loss
 
 
 
 
 
 
 
$
(588.2
)
 
 
 
 
 
 
 
 
 
Earnings from equity investments
 
$
1.0

 
$
2.0

 
$

 
$
3.0

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

 
$
48.2

 
$
38.5

 
$
182.8

Product sales
 
68.3

 
33.7

 

 
102.0

Instant games
 

 
130.8

 

 
130.8

Total revenue
 
164.4

 
212.7

 
38.5

 
415.6

Cost of services (1)
 
24.9

 
30.4

 
14.3

 
69.6

Cost of product sales (1)
 
32.9

 
27.0

 

 
59.9

Cost of instant games (1)
 

 
69.7

 

 
69.7

Selling, general and administrative
 
28.7

 
17.8

 
13.7

 
60.2

Research and development
 
21.5

 
1.4

 
3.4

 
26.3

Employee termination and restructuring
 
0.9

 
0.4

 
0.6

 
1.9

Depreciation and amortization
 
66.4

 
24.9

 
3.4

 
94.7

Segment operating income (loss)
 
$
(10.9
)
 
$
41.1

 
$
3.1

 
$
33.3

Unallocated corporate costs
 
 
 
 
 
 
 
$
(41.1
)
Consolidated operating loss
 
 
 
 
 
 
 
$
(7.8
)
 
 
 
 
 
 
 
 
 
Earnings (loss) from equity investments
 
$
1.3

 
$
(15.3
)
 
$

 
$
(14.0
)
(1) Exclusive of depreciation and amortization.


13


 
 
Nine months ended September 30, 2015
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
722.6

 
$
136.5

 
$
149.7

 
$
1,008.8

Product sales
 
582.0

 
29.0

 

 
611.0

Instant games
 

 
402.0

 

 
402.0

Total revenue
 
1,304.6

 
567.5

 
149.7

 
2,021.8

Cost of services (1)
 
139.9

 
83.1

 
51.6

 
274.6

Cost of product sales (1)
 
268.8

 
24.4

 

 
293.2

Cost of instant games (1)
 

 
212.9

 

 
212.9

Selling, general and administrative
 
215.7

 
49.2

 
46.9

 
311.8

Research and development
 
120.3

 
4.2

 
16.3

 
140.8

Employee termination and restructuring
 
10.1

 
0.2

 
1.5

 
11.8

Depreciation and amortization
 
569.9

 
62.9

 
15.9

 
648.7

Goodwill impairment
 
535.0

 

 

 
535.0

Segment operating income (loss)
 
$
(555.1
)
 
$
130.6

 
$
17.5

 
$
(407.0
)
Unallocated corporate costs
 
 
 
 
 
 
 
(163.2
)
Consolidated operating loss
 
 
 
 
 
 
 
$
(570.2
)
 
 
 
 
 
 
 
 
 
Earnings from equity investments
 
$
2.7

 
$
6.7

 
$

 
$
9.4

(1) Exclusive of depreciation and amortization.
 
 
Nine months ended September 30, 2014
 
 
Gaming
 
Lottery
 
Interactive
 
Total
Revenue:
 
 
 
 
 
 
 
 
Services
 
$
288.1

 
$
149.3

 
$
101.5

 
$
538.9

Product sales
 
216.6

 
72.7

 

 
289.3

Instant games
 

 
392.4

 

 
392.4

Total revenue
 
504.7

 
614.4

 
101.5

 
1,220.6

Cost of services (1)
 
73.4

 
90.4

 
36.9

 
200.7

Cost of product sales (1)
 
103.9

 
57.3

 

 
161.2

Cost of instant games (1)
 

 
212.5

 

 
212.5

Selling, general and administrative
 
92.8

 
56.0

 
40.1

 
188.9

Research and development
 
64.9

 
2.7

 
9.4

 
77.0

Employee termination and restructuring
 
4.2

 
1.6

 
4.7

 
10.5

Depreciation and amortization
 
190.9

 
70.8

 
9.3

 
271.0

Segment operating income (loss)
 
$
(25.4
)
 
$
123.1

 
$
1.1

 
$
98.8

Unallocated corporate costs
 
 
 
 
 
 
 
(115.1
)
Consolidated operating loss
 
 
 
 
 
 
 
$
(16.3
)
 
 
 
 
 
 
 
 
 
Earnings (loss) from equity investments
 
$
3.3

 
$
(11.1
)
 
$

 
$
(7.8
)
(1) Exclusive of depreciation and amortization.
The following table presents a reconciliation of reportable business segment operating income (loss) to net loss before income taxes for each period:


14


 
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Reportable business segment operating income (loss)
 
$
(537.7
)
 
$
33.3

 
$
(407.0
)
 
$
98.8

Unallocated corporate costs
 
(50.5
)
 
(41.1
)
 
(163.2
)
 
(115.1
)
Consolidated operating loss
 
(588.2
)
 
(7.8
)
 
(570.2
)
 
(16.3
)
Interest expense
 
(166.8
)
 
(45.7
)
 
(497.5
)
 
(142.9
)
Earnings (loss) from equity investments
 
3.0

 
(14.0
)
 
9.4

 
(7.8
)
Loss on early extinguishment of debt
 

 

 

 
(25.9
)
Gain on sale of equity interest
 

 

 

 
14.5

Other (expense) income, net
 
(7.5
)
 
3.1

 
(17.4
)
 
9.2

Net loss before income taxes
 
$
(759.5
)
 
$
(64.4
)
 
$
(1,075.7
)
 
$
(169.2
)
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 completed the allocation of the purchase price, which resulted in the purchase price exceeding the aggregate fair value of the acquired assets and assumed liabilities at the acquisition date by $2,956.1 million. Such excess amount has been recognized as goodwill within our Gaming and Interactive business segments. We attribute this goodwill to 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 allocation of the purchase price to the fair values of assets acquired and liabilities assumed did not change during the nine months ended September 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 nine months ended September 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, 2013. In addition, the unaudited pro forma financial information does not purport to project future operating results. The unaudited pro forma statements of operations do not reflect: (1) any anticipated synergies (or anticipated costs to achieve synergies) or (2) the impact of non-recurring items directly related to the Bally acquisition.
 
Three Months Ended September 30, 2014
 
Nine Months Ended 
 September 30, 2014
Revenue from Consolidated Statements of Operations and Comprehensive Loss
$
415.6

 
$
1,220.6

Add: Bally revenue not reflected in Consolidated Statements of Operations and Comprehensive Loss
320.7

 
1,018.0

Unaudited pro forma revenue
$
736.3

 
$
2,238.6



15




 
Three Months Ended September 30, 2014
 
Nine Months Ended 
 September 30, 2014
Net loss from Consolidated Statements of Operations and Comprehensive Loss
$
(69.8
)
 
$
(187.2
)
Add: Bally net income not reflected in Consolidated Statements of Operations and Comprehensive Loss adjusted by pro forma adjustments (1), (2), (3), (4), (5), and (6) below
(40.7
)
 
(112.9
)
Unaudited pro forma net loss
$
(110.5
)
 
$
(300.1
)
Unaudited pro forma amounts reflect the following adjustments:
(1) An adjustment to reflect additional D&A of $43.0 million and $113.2 million for the three and nine months ended September 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, 2013.
(2) An adjustment to reflect lower costs of sales of $0 million and $5.2 million for the three and nine months ended September 30, 2014 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 reverse acquisition-related fees and expenses of $5.6 million for the three and nine months ended September 30, 2014, which relate to costs incurred in connection with the Bally acquisition.
(4) An adjustment to reflect additional interest expense of $77.5 million and $228.6 million for the three and nine months ended September 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, 2013.
(5) An adjustment to reverse the loss on extinguishment of debt of $0 million and $25.9 million for the three and nine months ended September 30, 2014, respectively, recorded in connection with the purchase and redemption of the 2019 Notes.
(6) An adjustment of $43.6 million and $115.6 million for the three and nine months ended September 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 nine months ended September 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 $5.6 million and $1.9 million for the three months ended September 30, 2015 and 2014, respectively, and recorded pre-tax employee termination and restructuring costs of $19.0 million and $12.4 million for the nine months ended September 30, 2015 and 2014, respectively. No new employee termination and restructuring plans were initiated during the nine months ended September 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 existing contracts.
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


16




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 nine months ended September 30, 2015, the cumulative costs incurred through September 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 September 30, 2015
 
$
2.6

 
$

 
$
0.6

 
$
3.2

 
Nine Months Ended September 30, 2015
 
9.4

 

 
0.7

 
10.1

 
Cumulative
 
27.7

 
0.9

 
3.6

 
32.2

 
Expected Total
 
31.0

 
0.9

 
3.6

 
35.5

 
 
 
 
 
 
 
 
 
 
Lottery
Three Months Ended September 30, 2015
 

 

 

 

 
Nine Months Ended September 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 September 30, 2015
 
0.4

 

 
0.1

 
0.5

 
Nine Months Ended September 30, 2015
 
1.3

 

 
0.2

 
1.5

 
Cumulative
 
5.1

 
0.4

 
5.1

 
10.6

 
Expected Total
 
5.1

 
0.4

 
5.1

 
10.6

 
 
 
 
 
 
 
 
 
 
Unallocated corporate (2)
Three Months Ended September 30, 2015
 
1.8

 
0.1

 

 
1.9

 
Nine Months Ended September 30, 2015
 
2.4

 
1.9

 
2.9

 
7.2

 
Cumulative
 
13.8

 
4.2

 
2.9

 
20.9

 
Expected Total
 
13.8

 
4.2

 
3.0

 
21.0

 
 
 
 
 
 
 
 
 
 
Total
Three Months Ended September 30, 2015
 
$
4.8

 
$
0.1

 
$
0.7

 
$
5.6

 
Nine Months Ended September 30, 2015
 
$
13.3

 
$
1.9

 
$
3.8

 
$
19.0

 
Cumulative
 
$
49.9

 
$
5.9

 
$
11.6

 
$
67.4

 
Expected Total
 
$
53.2

 
$
5.9

 
$
11.7

 
$
70.8

(1) Other restructuring costs reflect costs related to the exit of two immaterial business lines.
(2) Unallocated corporate employee termination costs primarily relates to accrual for cash severance due to former executives.
The following table presents a summary of restructuring charges and the changes in the restructuring accrual during the nine months ended September 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
 
13.3

 
1.9

 
3.8

 
19.0

Cash payments
 
(21.6
)
 
(2.3
)
 
(3.8
)
 
(27.7
)
Balance as of September 30, 2015
 
$
9.6

 
$
1.3

 
$
3.0

 
$
13.9





17




(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 nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 

 
 

 
 
 
 
Net loss
 
$
(678.2
)
 
$
(69.8
)
 
(866.8
)
 
$
(187.2
)
 
 


 


 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

 
 
 
 
Basic
 
$
(7.88
)
 
$
(0.82
)
 
$
(10.10
)
 
(2.22
)
Diluted
 
$
(7.88
)
 
$
(0.82
)
 
$
(10.10
)
 
(2.22
)
 
 
 
 
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 
 
 
 
 
 
 
Basic shares
 
86.1

 
84.7

 
85.8

 
84.5

Diluted shares
 
86.1

 
84.7

 
85.8

 
84.5

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 1.7 million of stock options from the weighted average diluted common shares outstanding as of September 30, 2015 and 2014, respectively, which would have been anti-dilutive due to the net loss in those periods. In addition, we excluded 6.0 million and 4.0 million of RSUs from the calculation of weighted average diluted common shares outstanding as of September 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:
 
September 30, 2015
 
December 31, 2014
Current:
 
 
 
Accounts receivable
$
478.9

 
$
479.5

Notes receivable
174.5

 
194.6

Allowance for doubtful accounts
(19.7
)
 
(17.0
)
Current accounts and notes receivable, net
$
633.7

 
$
657.1

Long-term:
 
 
 
Notes receivable
57.6

 
87.5

  Total accounts and notes receivable, net
$
691.3

 
$
744.6

Credit Quality of Notes Receivable
The Company includes in its notes receivable amounts due in installment payments and any amounts due for development financing provided to certain customers. 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 3.25% to 10.4% at September 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


18


payments are over 180 days past due. The amount of our non-performing notes was immaterial at September 30, 2015 and December 31, 2014.
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 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.
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 September 30, 2015 were $19.1 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 September 30, 2015, we specifically 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. 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 $23.6 million of outstanding receivables from customers in Argentina during the nine months ended September 30, 2015. In late November 2015, Argentinians will elect a new president and we cannot predict what the impact of this change in leadership may have on our operations, customer payments or our ability to transfer funds from Argentina.
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 September 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 $42.1 million at September 30, 2015. We collected $23.7 million of outstanding receivables from customers during the nine months ended September 30, 2015.
The following summarizes the components of total notes receivable, net:
 
September 30, 2015
 
Balances over 90 days past due
 
December 31, 2014
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
63.1

 
$
2.6

 
$
95.3

 
$
7.9

International
169.0

 
20.3

 
186.8

 
12.0

     Total notes receivable
232.1

 
22.9

 
282.1

 
19.9

 
 
 
 
 
 
 
 
Notes receivable allowance for doubtful accounts:
 
 
 
 
 
 
 
Domestic
(2.9
)
 
(1.5
)
 

 

International
(8.5
)

(4.4
)
 
(5.9
)
 
(3.5
)
     Total notes receivable allowance for doubtful accounts
(11.4
)
 
(5.9
)
 
(5.9
)
 
(3.5
)
Note receivable, net
$
220.7

 
$
17.0

 
$
276.2

 
$
16.4

At September 30, 2015, 7.7% of our total notes receivable, net, was past due by over 90 days compared to 5.9% at December 31, 2014.
    




19


The following tables detail our evaluation of notes receivable for impairment as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Ending Balance Individually Evaluated for Impairment
 
Ending Balance Collectively Evaluated for Impairment
Notes receivable:
 
  
 
 
 
Domestic
$
63.1

 
$
32.4

 
$
30.7

International
169.0

 
112.3

 
56.7

Total notes receivable
$
232.1

  
$
144.7

  
$
87.4

 
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 September 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
(1.9
)
 
(1.9
)
 

Recoveries
(0.5
)
 
(0.4
)
 
(0.1
)
Provision
7.9

 
6.2

 
1.7

Ending balance at September 30, 2015
$
11.4

 
$
9.8

 
$
1.6

    
The following table reconciles the allowance for doubtful notes receivable from December 31, 2013 to September 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
1.9

 
1.9

 

Ending balance at September 30, 2014
$
7.4

 
$
7.4

 
$

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 nine months ended September 30, 2015, we had no significant modifications to the original financing terms.
    


20


The following summarizes the notes receivable financing terms that were modified during the nine months ended September 30, 2014:
 
 
Nine months ended September 30, 2014
 
# of
 Customers
# of Notes
 
Pre-Modification
 Investment
 
Post-Modification
 Investment
Financing term modifications:
 
 
 
 
 
 
International (1)
9

28

 
$
12.8

 
$
12.8

Total financing term modifications
9

28

  
$
12.8

  
$
12.8

(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 for which two notes were consolidated into one note aggregating $0.7 million, with an average 15-month payment extension;
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;
one customer for which two notes were consolidated into one note aggregating $0.2 million, with an average 14-month payment extension; 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 to our customers. Such financing activities subject us to increased credit risk, which could be worsened 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 September 30, 2015:
Mexico
19
%
Peru
17
%
Australia
8
%
Columbia
7
%
Argentina
7
%
Other (less than 5% individually)
15
%
Total international notes receivable as a percentage of total notes receivable
73
%

(7) Inventories
Inventories consisted of the following as of the dates presented below:
 
 
September 30, 2015
 
December 31, 2014
Parts and work-in-process
 
$
122.0

 
$
105.7

Finished goods
 
121.8

 
159.9

Total inventories
 
$
243.8

 
$
265.6



21




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 our gaming machines and 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 nine months ended September 30, 2015, we recorded valuation adjustments of $7.1 million related to the discontinuance of certain product lines as a result of the Bally acquisition. The impairments are included in cost of product sales in our Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2015. There were no inventory impairments recorded for the three months ended September 30, 2015 or the three and nine months ended September 30, 2014.

(8) Property and Equipment
Gaming and lottery machinery and equipment, including assets under capital leases, were as follows:
 
 
September 30, 2015
 
December 31, 2014
Gaming equipment
 
$
772.0

 
$
799.9

Less: accumulated depreciation
 
(266.4
)
 
(279.1
)
Gaming equipment, net
 
505.6

 
520.8

 
 
 
 
 
Lottery machinery and equipment
 
307.9

 
311.7

Less: accumulated depreciation
 
(231.2
)
 
(207.4
)
Lottery machinery and equipment, net
 
76.7

 
104.3

 
 
 
 
 
Total gaming and lottery machinery and equipment, net
 
$
582.3

 
$
625.1

Property and equipment consisted of the following:
 
 
September 30, 2015
 
December 31, 2014
Land
 
$
39.1

 
$
43.0

Buildings and leasehold improvements
 
183.1

 
206.3

Furniture and fixtures
 
40.8

 
36.2

Transportation equipment
 
4.4

 
5.0

Construction in progress
 
38.6

 
11.7

Other property and equipment, at cost
 
292.3

 
292.8

Less: accumulated depreciation
 
(312.2
)
 
(207.3
)
Property and equipment, net
 
$
286.1

 
$
387.7

 
 
 
 
 
Total property and equipment, net
 
$
868.4

 
$
1,012.8

Depreciation expense for the three and nine months ended September 30, 2015 was $72.8 million and $249.1 million, respectively. Depreciation expense for the three and nine months ended September 30, 2014 was $58.5 million and $166.8 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 $10.8 million and $5.3 million as of September 30, 2015 and December 31, 2014, respectively.
During the nine months ended September 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 September 30, 2015 or D&A in the Consolidated Statements of Operations and Comprehensive Loss for three and nine months ended September 30, 2015. In addition, during the three and nine months ended September 30, 2015, we recorded an impairment of $0.5 million and $5.7 million, respectively, 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 nine months ended September 30,


22


2015. There were no impairments of our gaming equipment fixed assets recorded for the three and nine months ended September 30, 2014.
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. During the second quarter of 2015, we initiated plans to sell our facility in Reno, Nevada, and consolidate our operations in one of our leased facilities, which supports sales, distribution, WAP operations and development operations for our Gaming business. In June 2015, we recorded a $4.9 million impairment of this facility to adjust the carrying value to fair value less cost to sell. This charge is included in D&A in the Consolidated Statements of Operations and Comprehensive Loss for nine months ended September 30, 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 September 30, 2015. In August 2015, we executed an agreement to sell our Reno facility and the sale closed in November 2015.

(9) Intangible Assets and Goodwill
Intangible Assets
The following tables present certain information regarding our intangible assets as of September 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 September 30, 2015
 
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
 
Patents
 
$
20.4

 
$
9.5

 
$
10.9

Customer relationships
 
876.5

 
95.1

 
781.4

Licenses
 
366.4

 
128.6

 
237.8

Intellectual property
 
727.1

 
117.3

 
609.8