Company Quick10K Filing
Quick10K
Scientific Games
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$21.90 93 $2,040
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-12 Officers, Shareholder Vote, Exhibits
8-K 2019-05-07 Earnings, Exhibits
8-K 2019-05-07 Enter Agreement, Officers, Exhibits
8-K 2019-04-22 Earnings, Regulation FD, Exhibits
8-K 2019-03-19 Enter Agreement, Regulation FD, Exhibits
8-K 2019-02-21 Earnings, Exhibits
8-K 2018-12-17 Earnings, Regulation FD
8-K 2018-12-16 Officers, Regulation FD, Exhibits
8-K 2018-12-13 Other Events, Exhibits
8-K 2018-12-12 Off-BS Arrangement
8-K 2018-12-03 Officers
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-09-15 Officers
8-K 2018-08-31 Officers, Regulation FD, Exhibits
8-K 2018-08-07 Other Events
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-08-01 Officers, Regulation FD, Exhibits
8-K 2018-06-13 Shareholder Vote
8-K 2018-05-14 Officers, Regulation FD, Exhibits
8-K 2018-05-02 Officers, Regulation FD, Exhibits
8-K 2018-02-28 Earnings, Exhibits
8-K 2018-02-14 Enter Agreement, Regulation FD, Exhibits
8-K 2018-01-31 Regulation FD, Exhibits
8-K 2018-01-29 Regulation FD, Exhibits
8-K 2018-01-24 Earnings, Regulation FD, Exhibits
8-K 2018-01-10 Enter Agreement, M&A, Off-BS Arrangement, Shareholder Rights, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2018-01-05 Regulation FD, Other Events, Exhibits
EC Ecopetrol 38,220
AMTD TD Ameritrade Holding 29,550
FITB Fifth Third Bancorp 20,580
EXPE Expedia 17,750
MFGP Micro Focus 8,020
MTSC MTS Systems 1,020
PBI Pitney Bowes 974
BKCC Blackrock Capital Investment 429
RWGE Regalwood Global Energy 304
IEC IEC Electronics 67
SGMS 2019-03-31
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. 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
EX-10.4 ex104-secondamendmenttocon.htm
EX-31.1 a3312019ex311.htm
EX-31.2 a3312019ex312.htm
EX-32.1 a3312019ex321.htm
EX-32.2 a3312019ex322.htm

Scientific Games Earnings 2019-03-31

SGMS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 sgms331201910q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
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)
Nevada
 
81-0422894
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
6601 Bermuda Road, Las Vegas, Nevada 89119
(Address of principal executive offices)
(Zip Code) 
(702) 897-7150
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.001 par value
SGMS
Nasdaq Global Select Market
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of May 6, 2019:
Common Stock: 92,923,552





SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 2019
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.



2




Glossary of Terms
 
 
The following terms or acronyms used in this Quarterly Report on Form 10-Q are defined below:
Term or Acronym
 
Definition
2018 10-K
 
2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019
2020 Notes
 
6.250% senior subordinated notes due 2020 issued by SGI
2021 Notes
 
6.625% senior subordinated notes due 2021 issued by SGI
2022 Secured Notes
 
7.000% senior secured notes due 2022 issued by SGI
2022 Unsecured Notes
 
10.000% senior unsecured notes due 2022 issued by SGI
2025 Secured Notes
 
5.000% senior secured notes due 2025 issued by SGI
2026 Secured Euro Notes
 
3.375% senior secured notes due 2026 issued by SGI
2026 Unsecured Euro Notes
 
5.500% senior unsecured notes due 2026 issued by SGI
2026 Unsecured Notes
 
8.250% senior unsecured notes due 2026 issued by SGI
AEBITDA
 
Adjusted EBITDA, our performance measure of profit or loss for our business segments (see Note 3)
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
B2C
 
business to consumer model
D&A
 
depreciation, amortization and impairments (excluding goodwill)
FASB
 
Financial Accounting Standards Board
Guarantor Subsidiaries
 
substantially all of SGC’s 100%-owned U.S. subsidiaries other than SGC’s 100%-owned U.S. Social gaming subsidiaries
LNS
 
Lotterie Nazionali S.r.l.
Non-Guarantor Subsidiaries
 
SGC’s U.S. subsidiaries that are not Guarantor Subsidiaries and SGC’s foreign subsidiaries
Note
 
a note in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, unless otherwise indicated
Participation
 
with respect to our Gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which we earn revenues and are paid based on: (1) a percentage of the amount wagered less payouts; (2) fixed daily-fees; (3) a percentage of the amount wagered; or (4) a combination of (2) and (3), and with respect to our Lottery business, refers to a contract or arrangement in which we earn revenues and are paid based on a percentage of retail sales
POS
 
percentage of retail sales
PTG
 
proprietary table games
R&D
 
research and development
RFP
 
request for proposal
RMG
 
real-money gaming
RSU
 
restricted stock unit
SEC
 
Securities and Exchange Commission
Secured Notes
 
refers to the 2022 Secured Notes, 2025 Secured Notes, and 2026 Secured Euro Notes, collectively
SG&A
 
selling, general and administrative
SGC
 
Scientific Games Corporation
SGI
 
Scientific Games International, Inc., a wholly-owned subsidiary of SGC
Shufflers
 
various models of automatic card shufflers, deck checkers and roulette chip sorters
Subordinated Notes
 
refers to the 2020 Notes and 2021 Notes, collectively
Unsecured Notes
 
refers to the 2022 Unsecured Notes, 2026 Unsecured Euro Notes and 2026 Unsecured Notes, collecitvely
U.S. GAAP
 
accounting principles generally accepted in the U.S.
VGT
 
video gaming terminal
VLT
 
video lottery terminal
Intellectual Property Rights 
All ® notices signify marks registered in the United States. © 2019 Scientific Games Corporation. All Rights Reserved.



3




FORWARD-LOOKING STATEMENTS
Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:
competition;
U.S. and international economic and industry conditions;
slow growth of new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of gaming machines;
ownership changes and consolidation in the gaming industry;
opposition to legalized gaming or the expansion thereof and potential restrictions on internet wagering;
inability to adapt to, and offer products that keep pace with, evolving technology, including any failure of our investment of significant resources in our R&D efforts;
inability to develop successful products and services and capitalize on trends and changes in our industries, including the expansion of internet and other forms of interactive gaming;
laws and government regulations, both foreign and domestic, including those relating to gaming, data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data, and environmental laws, and those laws and regulations that affect companies conducting business on the internet, including online gambling;
the continuing evolution of the scope of data privacy and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions;
significant opposition in some jurisdictions to interactive social gaming, including social casinos and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casinos specifically, and how this could result in a prohibition on interactive social gaming or social casinos altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations;
legislative interpretation and enforcement, regulatory perception and regulatory risks with respect to gaming, especially internet wagering, social gaming and sports wagering;
reliance on technological blocking systems;
expectations of shift to regulated online gaming or sports wagering;
expectations of growth in total consumer spending on social casino gaming;
dependence upon key providers in our Social gaming business;


4




inability to win, retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts;
protection of our intellectual property, inability to license third-party intellectual property and the intellectual property rights of others;
security and integrity of our products and systems;
reliance on or failures in information technology and other systems;
security breaches and cyber-attacks, challenges or disruptions relating to the implementation of a new global enterprise resource planning system;
failure to maintain adequate internal control over financial reporting;
natural events that disrupt our operations or those of our customers, suppliers or regulators;
inability to benefit from, and risks associated with, strategic equity investments and relationships;
risks related to the initial public offering of a minority interest in our social gaming business, including the possibility that the anticipated benefits of the initial public offering are not realized or that we may not be able to utilize the proceeds of the initial public offering as expected;
incurrence of restructuring costs;
implementation of complex new accounting standards;
changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;
changes in demand for our products;
fluctuations in our results due to seasonality and other factors;
dependence on suppliers and manufacturers;
risks relating to foreign operations, including anti-corruption laws, fluctuations in currency rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the considerable uncertainty around the U.K.’s withdrawal from the European Union (“EU”) and the possibility of the British parliament’s failure to approve the U.K.’s withdrawal from the EU, resulting in a “hard Brexit” or “no deal Brexit”;
possibility that the renewal of LNS’ concession to operate the Italian instant games lottery is not finalized (including as the result of a protest or any right of appeal on a court ruling on a protest);
the impact of the new U.K. legislation approving the reduction of fixed-odds betting terminals maximum stakes limit;
changes in tax laws or tax rulings, or the examination of our tax positions;
difficulty predicting what impact, if any, the shutdown of the U.S. government or new tariffs imposed by and other trade actions taken by the U.S. and foreign jurisdictions could have on our business;
dependence on key employees;
litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property, environmental laws and our strategic relationships;


5




level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs;
inability to reduce or refinance our indebtedness;
restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;
influence of certain stockholders, including decisions that may conflict with the interests of other stockholders; and
stock price volatility.
Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under Part I, Item 1A “Risk Factors” in our 2018 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no and expressly disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
You should also note that this Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning the international gaming, lottery, social and digital gaming industries than the same industries in the U.S.


6


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions, except per share amounts)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Revenue:
 
 
 
Services
$
459

 
$
438

Product sales
238

 
224

Instant products
140

 
150

Total revenue
837

 
812

Operating expenses:
 
 
 
Cost of services(1)
133

 
122

Cost of product sales(1)
107

 
105

Cost of instant products(1)
67

 
70

Selling, general and administrative
186

 
172

Research and development
49

 
54

Depreciation, amortization and impairments
165

 
188

Restructuring and other
7

 
52

Operating income
123

 
49

Other (expense) income:
 
 
 
Interest expense
(154
)
 
(155
)
Earnings from equity investments
6

 
7

Loss on debt financing transactions

 
(93
)
Gain (loss) on remeasurement of debt
5

 
(1
)
Other expense, net

 
(3
)
Total other expense, net
(143
)
 
(245
)
Net loss before income taxes
(20
)
 
(196
)
Income tax expense
(4
)
 
(6
)
Net loss
$
(24
)
 
$
(202
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation gain, net of tax
55

 
51

Pension and post-retirement gain (loss), net of tax
1

 
(1
)
Derivative financial instruments unrealized (loss) gain, net of tax
(5
)
 
2

Other comprehensive income
51

 
52

Comprehensive income (loss)
$
27

 
$
(150
)
 
 
 
 
Basic and diluted net loss per share:
 
 
 

Basic
$
(0.26
)
 
$
(2.24
)
Diluted
$
(0.26
)
 
$
(2.24
)
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 
 

Basic shares
92

 
90

Diluted shares
92

 
90

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


7


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,213

 
$
168

Restricted cash
41

 
39

Accounts receivable, net
621

 
599

Notes receivable, net
104

 
114

Inventories
229

 
216

Prepaid expenses, deposits and other current assets
238

 
233

Total current assets
2,446

 
1,369

Non-current assets:
 
 
 
   Restricted cash
12

 
13

   Notes receivable, net
33

 
40

   Property and equipment, net
517

 
547

   Operating lease right-of-use assets
118

 

   Goodwill
3,301

 
3,280

   Intangible assets, net
1,745

 
1,809

   Software, net
277

 
285

   Equity investments
296

 
298

   Other assets
92

 
77

Total assets
$
8,837

 
$
7,718

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
1,046

 
$
45

Accounts payable
200

 
225

Accrued liabilities
540

 
477

Total current liabilities
1,786

 
747

Deferred income taxes
109

 
108

Operating lease liabilities
98

 

Other long-term liabilities
330

 
334

Long-term debt, excluding current portion
8,937

 
8,992

Total liabilities
11,260

 
10,181

Commitments and contingencies (see Note 16)


 


Stockholders’ deficit:
 
 
 
Common stock, par value $0.001 per share: 199 shares authorized; 110 and 109 shares issued and 93 and 92 shares outstanding, respectively
1

 
1

Additional paid-in capital
848

 
835

Accumulated loss
(2,848
)
 
(2,824
)
Treasury stock, at cost, 17 shares
(175
)
 
(175
)
Accumulated other comprehensive loss
(249
)
 
(300
)
Total stockholders’ deficit
(2,423
)
 
(2,463
)
Total liabilities and stockholders’ deficit
$
8,837

 
$
7,718

See accompanying notes to condensed consolidated financial statements.


8


SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(24
)
 
$
(202
)
Adjustments to reconcile net loss to cash provided by operating activities
179

 
309

Changes in working capital accounts, net of effects of acquisitions
6

 
(78
)
Changes in deferred income taxes and other
6

 
1

Net cash provided by operating activities
167

 
30

Cash flows from investing activities:
 
 
 
Capital expenditures
(67
)

(88
)
Acquisitions of businesses and assets, net of cash acquired


(274
)
Distributions of capital from equity investments
3


2

Net cash used in investing activities
(64
)
 
(360
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
40

 

Repayments under revolving credit facility
(175
)
 
(295
)
Proceeds from issuance of senior notes and term loans
1,100


2,512

Repayment of senior notes and term loans (inclusive of redemption premium)

 
(2,210
)
Repayment of assumed NYX debt


(288
)
Payments on long-term debt
(12
)
 
(2
)
Payments of debt issuance and deferred financing costs
(14
)
 
(39
)
Payments on license obligations
(7
)
 
(7
)
  Sale of future revenue
11

 

Net redemptions of common stock under stock-based compensation plans and other
(1
)

(17
)
Net cash provided by (used in) financing activities
942

 
(346
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
1

 
2

Increase (decrease) in cash, cash equivalents and restricted cash
1,046

 
(674
)
Cash, cash equivalents and restricted cash, beginning of period
220

 
834

Cash, cash equivalents and restricted cash, end of period
$
1,266

 
$
160

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
80

 
$
161

Income taxes paid
10

 
7

Distributed earnings from equity investments
4

 
1

Supplemental non-cash transactions:
 
 
 
Non-cash rollover and refinancing of Term loans
$

 
$
3,275

Non-cash interest expense
7


6

NYX non-cash consideration transferred (inclusive of 2017 acquisition of ordinary shares)

 
93

 See accompanying notes to condensed consolidated financial statements.


9




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

(1) Description of the Business and Summary of Significant Accounting Policies
Description of the Business
We are a leading developer of technology-based products and services and associated content for the worldwide gaming, lottery, social and digital gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems and table game products and services to licensed gaming entities; providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; providing social casino solutions to retail consumers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services. We report our operations in four business segments—Gaming, Lottery, Social and Digital.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of SGC and those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our condensed consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of SGC and its management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations and comprehensive loss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2018 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.
Significant Accounting Policies
There have been no changes to our significant accounting policies described within the Notes of our 2018 10-K other than adoption of ASC 842 described in Note 15.
Computation of Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share were the same for all periods presented as all common stock equivalents would be anti-dilutive. We excluded 2 million and 3 million of stock options from the diluted weighted-average common shares outstanding for the three months ended March 31, 2019 and 2018, respectively. We excluded 2 million and 3 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three months ended March 31, 2019 and 2018, respectively.
New Accounting Guidance - Recently Adopted

The FASB issued ASU No. 2016-02, Leases (Topic 842) in 2016. ASU 2016-02 combined with all subsequent amendments (collectively, “ASC 842”) requires balance sheet recognition for all leases with a lease term greater than one year to be recorded as a lease liability (on a discounted basis) with a corresponding right-of-use asset. This guidance also expands the required quantitative and qualitative disclosures for lease arrangements and gives rise to other changes impacting certain aspects of lessee and lessor accounting. We adopted ASC 842 as of January 1, 2019 using the optional transition method provided by ASU 2018-11, and applied both the lessee package of practical expedients and the available lessor practical
expedients. During the first quarter of 2019, the FASB issued ASU 2019-01, Leases (Topic 842) to amend ASU 2016-02. This
amendment exempts both lessees and lessors from having to provide certain prior year interim disclosure information in the fiscal year in which a company adopts the new leases standard. We have provided the related transition disclosures as of the beginning of 2019 in accordance with ASU 2019-1. See our 2018 10-K Note 1 for the impact on our consolidated financial statements and Note 15 in this Quarterly Report for our lease accounting policy and the quarterly impact of our adoption of ASC 842.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows companies to make an election to reclassify from Accumulated Other Comprehensive Income (AOCI) to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017.


10




This ASU is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The amendments in this updated guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. corporate federal income tax rate in the Tax Act is recognized. We adopted this standard effective January 1, 2019. We elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings. The adoption of this guidance did not have an effect on our consolidated financial statements.
New Accounting Guidance - Not Yet Adopted

The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) in 2016. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of adopting this guidance.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted. We do not plan to early adopt this ASU, and we are currently evaluating the impact of adopting this guidance.
We do not expect that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.
Subsequent Events - Social Gaming Business Initial Public Offering

On May 7, 2019, our subsidiary SciPlay Corporation (“SciPlay”) completed an initial public offering (“IPO”) of a 17.4% minority interest in our Social gaming business. SciPlay has two classes of common stock - Class A common stock, which is traded on The NASDAQ Global Select Market under the symbol “SCPL,” and Class B common stock. On all matters submitted to a vote of SciPlay stockholders, Class B common stock entitles us to ten votes per share (for so long as the number of shares of SciPlay common stock beneficially owned by us represents at least 10% of SciPlay’s outstanding shares of common stock and, thereafter, one vote per share), and SciPlay Class A common stock entitles its owners to one vote per share. We own all of the outstanding Class B common stock, which represents approximately 82.6% of SciPlay’s total outstanding shares of common stock and approximately 97.9% of the combined voting power of both classes of SciPlay’s outstanding common stock. Accordingly, we continue to control shares representing a majority of the combined voting power in SciPlay and will continue to consolidate our Social gaming business.
The corporate structure of the above transaction is commonly referred to as an “Up‑C” structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up‑C structure allows us to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the IPO. The Company currently maintains a full valuation allowance on its U.S. net deferred tax assets. We will continue to monitor and assess positive and negative evidence with respect to our ability to realize our deferred tax assets, and we recognize that this transaction could have an impact on the overall valuation allowance assessment, but these impacts are still being evaluated. Any taxable gain associated with the IPO transaction is expected to be fully offset by net operating loss carryforwards, resulting in a reduction of our valuation allowance by the same amount.
In connection with the SciPlay IPO we also entered into the following transactions:
A tax receivable agreement (“TRA”), which provides for the payment by SciPlay to us of 85% of the amount of tax benefits, if any, that SciPlay actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of assets of SciPlay Parent Company, LLC (“SciPlay Parent LLC”) (a) in connection with the SciPlay IPO, (b) resulting from any redemptions or exchanges of membership interests of SciPlay Parent LLC pursuant to the SciPlay Parent LLC Operating Agreement or (c) resulting from certain


11




distributions (or deemed distributions) by SciPlay Parent LLC and (ii) certain other tax benefits related to SciPlay’s making of payments under the TRA. 

An Intercompany Services Agreement, under which we provide to the Social gaming business certain corporate level general and administrative services, including but not limited to, finance, corporate development, human resources, legal (which could include liability related to litigation awards related to SciPlay), information technology and rental fees for shared assets. These expenses will be charged to the Social gaming business and settled in cash.

An intellectual property license agreement (“IP License Agreement”), pursuant to which the Social gaming business acquired the following licenses from a restricted subsidiary of SGC for a one-time payment of $255 million: (i) an exclusive (subject to certain limited exceptions), perpetual, non-royalty bearing license to use intellectual property created or acquired by Bally Gaming, Inc. (“Bally Gaming”) or its affiliates on or before the third anniversary of the date of the IP License Agreement (the date of the IP License Agreement, the “Effective Date”), in any of the Covered Games (defined as any of SciPlay’s currently available or future social games that are developed for mobile platforms, social media platforms, internet platforms or other interactive platforms and distributed solely via digital delivery); (ii) an exclusive (subject to certain limited exceptions and payment of royalties owed to third-party licensors for SciPlay's use of third-party licensed property) license to use third-party intellectual property licensed to Bally Gaming or its affiliates on or before the third anniversary of the Effective Date, to the extent permitted to be sublicensed to the Social gaming business, in any of the Covered Games; (iii) a non-exclusive, perpetual, non-royalty bearing license to use intellectual property created or acquired by Bally Gaming or its affiliates after the third anniversary of the Effective Date, but only in the Social gaming business’ currently available games; and (iv) a non-exclusive license to use third-party intellectual property licensed to Bally Gaming or its affiliates after the third anniversary of the Effective Date, to the extent permitted to be sublicensed to the Social gaming business, but only in the Social gaming business’ currently available games.

As a result of IP License Agreement described above, our Social gaming business will no longer be required to pay to Bally Gaming future royalties and or fees for use of intellectual property owned by Bally Gaming or its affiliates for the Social gaming business’ currently available games. Accordingly, and commencing with the effectiveness of the IP License Agreement as of May 7, 2019, our Gaming business segment AEBITDA will no longer benefit from these charges, while our Social gaming business segment AEBITDA will increase proportionately. The total amount of such IP charges for the three months ended March 31, 2019 and 2018 were $7.3 million and $6.2 million, respectively, and for the years ended December 31, 2018 and 2017 were $26 million and $24 million, respectively.
SciPlay Holding Company, LLC (“SciPlay Holding”), a subsidiary of SciPlay, entered into a $150 million revolving credit agreement (the “SciPlay Revolver”) by and among SciPlay Holding, as the borrower, SciPlay Parent LLC, as a guarantor, the subsidiary guarantors party thereto (which are all domestic entities that comprise our Social gaming business), the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent that matures in May 2024. The interest rate is either Adjusted LIBOR (as defined in the SciPlay Revolver) plus 2.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) or ABR (as defined in the SciPlay Revolver) plus 1.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) at the option of SciPlay Holding. SciPlay Holding is required to pay to the lenders a commitment fee of 0.500% per annum on the average daily unused portion of the revolving commitments through maturity, which fee varies based on the total net leverage ratio and is subject to a floor of 0.375%. The SciPlay Revolver provides for up to $15.0 million in letter of credit issuances, which requires customary issuance and administration fees, and a fronting fee of 0.125%.
The SciPlay Revolver contains covenants that, among other things, restrict SciPlay Holding’s, SciPlay Parent LLC’s and the subsidiary guarantors’ ability to incur additional indebtedness; incur liens; sell, transfer or dispose of property and assets; invest; make dividends or distributions or other restricted payments; and engage in affiliate transactions, with the exception of certain payments under the TRA and payments in respect of certain tax distributions under the SciPlay Parent LLC Operating Agreement. We currently do not expect the Social gaming business to declare or pay any cash dividends to us, other than tax distributions and certain cash distributions related to the impact of taxes pursuant to the TRA. If the Social gaming business discontinues the payment of, or is unable to pay, cash dividends to us, this will reduce our available liquidity. Furthermore, the terms of indebtedness incurred by the Social gaming business may, and the terms of the


12




SciPlay Revolver will, limit the ability of the Social gaming business to pay dividends or make other distributions to us, or to amend the agreements between the Social gaming business and us and our other subsidiaries.

In addition, the SciPlay Revolver requires that SciPlay maintain a maximum total net leverage ratio not to exceed 2.50:1.00 and maintain a minimum fixed charge coverage ratio of no less than 4.00:1.00. The SciPlay Revolver is secured by a (i) first priority pledge of the equity securities of SciPlay Holding, SciPlay Parent LLC’s restricted subsidiaries and each subsidiary guarantor party thereto and (ii) first priority security interests in, and mortgages on, substantially all tangible and intangible personal property and material fee-owned real property of SciPlay Parent LLC, SciPlay Holding and each subsidiary guarantor party thereto, in each case, subject to customary exceptions.

The entities that comprise our Social gaming business are unrestricted subsidiaries under our debt agreements and are therefore not subject to the covenants in our debt agreements. Conversely, only the entities that are parties to the SciPlay Revolver (which are all domestic entities that comprise our Social gaming business) and their respective restricted subsidiaries are subject to the covenants in the SciPlay Revolver. As a result, this will reduce our available liquidity and limit the ability of the Social gaming business to pay dividends or make other distributions to us, or to amend the agreements between the Social gaming business and us and our other subsidiaries. In 2018, the amount of dividends declared and paid by the Social gaming business to Bally Gaming, a wholly owned subsidiary of SGC, was $77 million.

As a result of these transactions, we received net proceeds of $301 million, which enables us to make substantial payments to reduce our debt.

(2) Revenue Recognition

The following table disaggregates revenues by type within each of our business segments:
 
Three Months Ended March 31,
 
2019

2018
Gaming
 
 
 
  Gaming operations
$
152

 
$
161

  Gaming machine sales
136

 
145

Gaming systems
74

 
75

  Table products
60

 
62

    Total
$
422

 
$
443

 
 
 
 
Lottery
 
 
 
  Instant products
$
140

 
$
150

  Lottery systems
87

 
52

    Total
$
227

 
$
202

 
 
 
 
Social
 
 
 
  Mobile
$
97


$
73

  Web and other
21


24

    Total
$
118

 
$
97

 
 
 
 
Digital
 
 
 
Sports and platform
$
30

 
$
26

Gaming and other
40

 
44

    Total
$
70

 
$
70


The amount of rental income revenue that is outside the scope of ASC 606 was $96 million and $67 million for the three months ended March 31, 2019 and 2018, respectively.



13




Contract Liabilities and Other Disclosures

The following table summarizes the activity in our contract liabilities for the reporting period:
 
Three Months Ended March 31,
 
2019
Contract liability balance, beginning of period(1)
$
97

Liabilities recognized during the period
26

Amounts recognized in revenue from beginning balance
(22
)
Contract liability balance, end of period(1)
$
101

(1) Contract liabilities are included within Accrued liabilities and Other long-term liabilities in our March 31, 2019 consolidated balance sheet.

The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on our consolidated balance sheet. Other than contracts with customers with financing arrangements exceeding 12 months, revenue recognition is generally proximal to conversion to cash, except for Lottery instant products sold under POS contracts. Revenue is recognized for such contracts upon delivery to our customers, while conversion to cash is based on the retail sale of the underlying ticket to end consumers. As a result, revenue recognition under ASC 606 does not approximate conversion to cash in any periods post-adoption. Total revenue recognized under such contracts was $23 million and $34 million in the three months ended March 31, 2019 and 2018, respectively. The following table summarizes our balances in these accounts for the periods indicated (other than contract liabilities disclosed above):
 
Receivables
 
Contract Assets(1)
Beginning of period balance
$
753

 
$
114

End of period balance, March 31, 2019
758

 
114

(1) Contract assets are included primarily within Prepaid expenses, deposits and other current assets in our March 31, 2019 consolidated balance sheet.
As of March 31, 2019, we did not have material unsatisfied performance obligations for contracts expected to be long-term or contracts for which we recognize revenue at an amount other than for which we have the right to invoice for goods or services delivered or performed.

(3) Business Segments
We report our operations in four business segments—Gaming, Lottery, Social and Digital—representing our different products and services. A detailed discussion regarding the products and services from which each reportable business segment derives its revenue is included in Notes 2 and 3 in our 2018 10-K.
In evaluating financial performance, our Chief Operating Decision Maker focuses on AEBITDA as management’s segment measure of profit or loss, which is described in Note 3 in our 2018 10-K. As a result of the on-going initial public offering of a minority interest in our Social gaming business, which was subsequently completed during the second quarter of 2019, we changed our calculation of Social business segment AEBITDA beginning with the first quarter of 2019. Social business segment AEBITDA now reflects intercompany charges settled in cash for corporate services and certain royalties paid for by our Social business segment to other segments or to Corporate (included in the “Unallocated and Reconciling Items” column in the tables below). Business segment information for the three months ended March 31, 2018 has been recast to reflect these changes. Additionally, see Note 1 for a description of the IP License Agreement executed in conjunction with the SciPlay IPO that will impact our Gaming business segment and Social business segment AEBITDA commencing with the effectiveness of the IP License Agreement as of May 7, 2019. The accounting policies of our business segments are the same as those described within the Notes in our 2018 10-K. The following tables present our segment information:


14


 
Three Months Ended March 31, 2019
 
Gaming
 
Lottery
 
Social(2)
 
Digital
 
Unallocated and Reconciling Items(1)
 
Total
Total revenue
$
422

 
$
227

 
$
118

 
$
70

 
$

 
$
837

AEBITDA
215

 
104

 
25

 
13

 
(29
)
 
$
328

Reconciling items to consolidated net loss before income taxes:
D&A
(112
)
 
(19
)
 
(2
)
 
(19
)
 
(13
)
 
(165
)
Restructuring and other
(2
)
 

 
(1
)
 
(3
)
 
(1
)
 
(7
)
EBITDA from equity investments
 
 
 
 
 
 
 
 
(17
)
 
(17
)
Earnings from equity investments
 
 
 
 
 
 
 
 
6

 
6

Interest expense
 
 
 
 
 
 
 
 
(154
)
 
(154
)
Gain on remeasurement of debt
 
 
 
 
 
 
 
 
5

 
5

Other expense, net
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Stock-based compensation
 
 
 
 
 
 
 
 
(14
)
 
(14
)
Net loss before income taxes
 
 
 
 
 
 
 
 
 
 
$
(20
)
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.
(2) Our Social business segment information represents SciPlay operations (see Note 1), and starting with the second quarter of 2019 we will refer to our Social business segment as SciPlay.

 
Three Months Ended March 31, 2018
 
Gaming
 
Lottery
 
Social(2)
 
Digital
 
Unallocated and Reconciling Items(1)
 
Total
Total revenue
$
443

 
$
202

 
$
97

 
$
70

 
$

 
$
812

AEBITDA
218

 
94

 
23

 
17

 
(32
)
 
$
320

Reconciling items to consolidated net loss before income taxes:
D&A
(139
)
 
(14
)
 
(7
)
 
(16
)
 
(12
)
 
(188
)
Restructuring and other
(1
)
 
(1
)
 
(18
)
 
(6
)
 
(26
)
 
(52
)
EBITDA from equity investments
 
 
 
 
 
 
 
 
(19
)
 
(19
)
Earnings from equity investments
 
 
 
 
 
 
 
 
7

 
7

Interest expense
 
 
 
 
 
 
 
 
(155
)
 
(155
)
Loss on debt financing transactions
 
 
 
 
 
 
 
 
(93
)
 
(93
)
Loss on remeasurement of debt
 
 
 
 
 
 
 
 
(1
)
 
(1
)
Other expense, net
 
 
 
 
 
 
 
 
(6
)
 
(6
)
Stock-based compensation
 
 
 
 
 
 
 
 
(9
)
 
(9
)
Net loss before income taxes
 
 
 
 
 
 
 
 
 
 
$
(196
)
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.
(2) Our Social business segment information represents SciPlay operations (see Note 1), and starting with the second quarter of 2019 we will refer to our Social business segment as SciPlay.

(4) Restructuring and other
Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; (v) major litigation; and (vi) acquisition costs and other unusual items. The following table summarizes pre-tax restructuring and other costs for the periods presented:


15




 
 
Three Months Ended March 31,
 
 
2019
 
2018
Employee severance(1)
 
$
3

 
$
5

Acquisitions and related costs
 

 
8

Contingent consideration adjustment
 

 
18

Legal and related
 

 
16

Restructuring, integration and other
 
4

 
5

Total
 
$
7

 
$
52

(1) Includes employee severance and termination costs associated with restructuring and integration activities.
(5) Accounts and Notes Receivable and Credit Quality of Receivables
Accounts and Notes Receivable
The following table summarizes the components of current and long-term accounts and notes receivable, net:
 
March 31, 2019
 
December 31, 2018
Current:
 
 
 
Accounts receivable
$
636

 
$
615

Notes receivable
127

 
138

Allowance for doubtful accounts and notes
(38
)
 
(40
)
Current accounts and notes receivable, net
$
725

 
$
713

Long-term:
 
 
 
Notes receivable, net of allowance
33

 
40

  Total accounts and notes receivable, net
$
758

 
$
753

Credit Quality of Receivables
The interest rates on our outstanding receivables bearing interest ranged from 3% to 10% at March 31, 2019 and December 31, 2018.
We have certain concentrations of outstanding accounts and notes receivable in international locations that impact our assessment of the credit quality of those receivables. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our receivables. We have not identified changes in the aforementioned factors during the three months ended March 31, 2019 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our accounts and notes receivable are as follows:
Mexico - Our notes receivable, net, from certain customers in Mexico at March 31, 2019 was $24 million. We collected $8 million of outstanding receivables from these customers during the three months ended March 31, 2019.
Peru - Our notes receivable, net, from certain customers in Peru at March 31, 2019 was $15 million. We collected $2 million of outstanding receivables from these customers during the three months ended March 31, 2019.
Argentina - Our notes receivable, net, from customers in Argentina at March 31, 2019 was $16 million denominated in USD. Our customers are required to, and have continued to, pay us in pesos at the spot exchange rate on the date of payment. We collected $6 million of outstanding receivables from customers in Argentina during the three months ended March 31, 2019.
In addition to the macroeconomic and political factors noted above, we also evaluated recent payments, receivables aging, any additional security or collateral we had (bills of exchange, pledge agreements, etc.) and other facts and circumstances relevant to our customers' ability to pay.
The following summarizes the components of total notes receivable, net:


16


 
March 31, 2019
 
Balances over 90 days past due
 
December 31, 2018
 
Balances over 90 days past due
Notes receivable:
 
 
 
 
 
 
 
Domestic
$
61

 
$
8

 
$
55

 
$
6

International
99

 
26

 
123

 
25

     Total notes receivable
160

 
34

 
178

 
31

 
 
 
 
 
 
 
 
Notes receivable allowance
 
 
 
 
 
 
 
Domestic
(6
)
 
(6
)
 
(6
)
 
(6
)
International
(17
)

(17
)
 
(18
)
 
(18
)
     Total notes receivable allowance
(23
)
 
(23
)
 
(24
)
 
(24
)
Notes receivable, net
$
137

 
$
11

 
$
154

 
$
7

At March 31, 2019, 8% of our total notes receivable, net, was past due by over 90 days, compared to 4% at December 31, 2018.
We evaluate our exposure to credit loss on notes receivable on both a collective and individual basis. In addition, we evaluate such notes receivable on a geographic basis and take into account any other factors (such as general economic conditions, other macroeconomic considerations, etc.) that could impact our collectability of notes receivable individually or in the aggregate. Accordingly, notes receivable may be evaluated under multiple methodologies, and the resulting allowance is not determined based on one specific methodology taking all factors into consideration. The activity in our allowance for notes receivable for each of the three month periods ended March 31, 2019 and 2018 is as follows:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Beginning allowance for notes receivable
 
$
(24
)
 
$
(21
)
Provision
 
(2
)
 
(3
)
Charge-offs and recoveries
 
3

 
1

Ending allowance for notes receivable
 
$
(23
)
 
$
(23
)

The fair value of notes receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 2019 and December 31, 2018, the fair value of notes receivable, net, approximated the carrying value due to contractual terms of notes receivable generally being under 24 months.

(6) Inventories
Inventories consisted of the following as of the dates presented below:
 
 
March 31, 2019
 
December 31, 2018
Parts and work-in-process
 
$
139

 
$
131

Finished goods
 
90

 
85

Total inventories
 
$
229

 
$
216

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

(7) Property and Equipment, net    

Property and equipment, net consisted of the following:


17


 
March 31, 2019
 
December 31, 2018
Land
$
15

 
$
15

Buildings and leasehold improvements
130

 
128

Gaming and lottery machinery and equipment
1,034

 
1,041

Furniture and fixtures
28

 
27

Construction in progress
15

 
17

Other property and equipment
245

 
240

Less: accumulated depreciation
(950
)
 
(921
)
Total property and equipment, net
$
517

 
$
547

Depreciation expense is excluded from Cost of services, Cost of product sales, Cost of instant products and Other operating expenses and is separately presented within D&A.
 
Three Months Ended
 
March 31,
 
2019

2018
Depreciation expense
$
58

 
$
53

As of March 31, 2019 and December 31, 2018, we had $36 million of assets held for sale, which are included within Prepaid expense, deposits and other current assets.

(8) Intangible Assets, net and Goodwill
Intangible Assets, net
The following tables present certain information regarding our intangible assets as of March 31, 2019 and December 31, 2018.
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Balance
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
1,092

 
$
(321
)
 
$
771

 
$
1,084

 
$
(299
)
 
$
785

Intellectual property
935

 
(485
)
 
450

 
931

 
(453
)
 
478

Licenses
549

 
(273
)
 
276

 
546

 
(253
)
 
293

Brand names
124

 
(62
)
 
62

 
123

 
(59
)
 
64

Trade names
108

 
(25
)
 
83

 
108

 
(23
)
 
85

Patents and other
23

 
(14
)
 
9

 
23

 
(13
)
 
10

 
2,831

 
(1,180
)
 
1,651

 
2,815

 
(1,100
)
 
1,715

Non-amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade names
96

 
(2
)
 
94

 
96

 
(2
)
 
94

Total intangible assets
$
2,927

 
$
(1,182
)
 
$
1,745

 
$
2,911

 
$
(1,102
)
 
$
1,809

 

The following reflects intangible amortization expense included within D&A:
 
Three Months Ended
 
March 31,
 
2019

2018
Amortization expense
$
77

 
$
77

Goodwill


18


In conjunction with integrating our recent Digital acquisitions, the implementation of ERP systems in the Digital segment and recent management changes, during the first quarter of 2019, in our Digital business segment, we reviewed our Digital operating segment in accordance with ASC 350 to determine if additional reporting units exist based on the availability of discrete financial information that is regularly reviewed by segment management. We determined that in our Digital operating segment we now have two reporting units: (1) Digital sports and platform and (2) Digital gaming and other. The change in the Digital business segment reporting units resulted in the allocation of the previous Digital reporting unit goodwill balance as follows: $230 million to the new Digital sports and platform reporting unit and $134 million to the new Digital gaming and other reporting unit, which allocation was determined based on the relative fair value approach prescribed by ASC 350. As a result of this change we now have ten reporting units: Instant Products, U.S. Lottery Systems, International Lottery Systems, SG Gaming, legacy U.K. Gaming, Casino Management Systems, Table Products, Social Gaming, Digital Sports and Platform and Digital Gaming and Other.

The table below reconciles the change in the carrying value of goodwill by business segment for the period from
December 31, 2018 to March 31, 2019.
Goodwill
 
Gaming
 
Lottery
 
Social
 
Digital
 
Totals
Balance as of December 31, 2018
 
$
2,449

 
$
352

 
$
115

 
$
364

 
$
3,280

Foreign currency adjustments
 
13

 
(1
)
 

 
9

 
21

Balance as of March 31, 2019
 
$
2,462


$
351


$
115

 
$
373

 
$
3,301


(9) Software, net
Software, net consisted of the following:
 
 
March 31, 2019
 
December 31, 2018
Software
 
$
1,126

 
$
1,101

Accumulated amortization
 
(849
)
 
(816
)
Software, net
 
$
277

 
$
285

The following reflects amortization of software included within D&A:
 
 
Three Months Ended
 
 
March 31,
 
 
2019

2018
Amortization expense
 
$
30

 
$
39


(10) Equity Investments
Equity investments totaled $296 million and $298 million as of March 31, 2019 and December 31, 2018, respectively. We received distributions and dividends totaling $7 million and $3 million during the three months ended March 31, 2019 and 2018, respectively.

(11) Long-Term and Other Debt
2026 Unsecured Notes

On March 19, 2019, SGI issued $1,100 million in aggregate principal amount of its new 2026 Unsecured Notes at an issue price of 100.000% in a private offering. We used the net proceeds of the 2026 Unsecured Notes offering to redeem $1,000 million of our outstanding 2022 Unsecured Notes and pay accrued and unpaid interest thereon plus related premiums, fees, and costs, which redemption was completed on April 4, 2019, and pay related fees and expenses of the 2026 Unsecured Notes offering. The redemption of the 2022 Unsecured Notes will result in an approximate $60 million loss on debt financing transactions during the second quarter of 2019.
The 2026 Unsecured Notes were issued pursuant to an indenture dated as of March 19, 2019 (the “2026 Unsecured Notes Indenture”). SGI may redeem some or all of the 2026 Unsecured Notes at any time prior to March 15, 2022 at a redemption price equal to 100% of the principal amount of the 2026 Unsecured Notes plus accrued and unpaid interest, if any,


19


to the date of the redemption plus a “make whole” premium. SGI may redeem some or all of the 2026 Unsecured Notes at any time on or after March 15, 2022 at the prices specified in the 2026 Unsecured Notes Indenture.
The 2026 Unsecured Notes are senior unsecured obligations of SGI, rank equally to all SGI’s existing and future senior debt and rank senior to all of SGI’s existing and future senior subordinated debt. The 2026 Unsecured Notes are guaranteed on a senior unsecured basis by SGC and all of its wholly owned U.S. subsidiaries (other than SGI, the unrestricted social gaming business entities and certain immaterial subsidiaries). The 2026 Unsecured Notes are structurally subordinated to all of the liabilities of our non-guarantor subsidiaries.
In connection with the 2026 Unsecured Notes offering, we reflected $16 million in financing costs presented primarily as a reduction to long-term debt.
Outstanding Debt and Finance Leases
The following table reflects our outstanding debt:
 
As of
 
March 31, 2019
 
December 31, 2018
 
Final Maturity
 
Rate(s)
 
Face value
 
Unamortized debt discount/premium and deferred financing costs, net
 
Book value
 
Book value
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
 
 
 
Revolver, varying interest rate
2020
 
variable

 
$
190

 
$

 
$
190

 
$
325

Term Loan B-5
2024
 
variable

 
4,133

 
(69
)
 
4,064

 
4,071

Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
2025 Secured Notes(2)
2025
 
5.000
%
 
1,250

 
(17
)
 
1,233

 
1,233

2026 Secured Euro Notes(3)
2026
 
3.375
%
 
367

 
(5
)
 
362

 
367

2022 Unsecured Notes(4)
2022
 
10.000
%
 
2,200

 
(22
)
 
2,178

 
2,176

2026 Unsecured Euro Notes(3)
2026
 
5.500
%
 
282

 
(4
)
 
278

 
282

    2026 Unsecured Notes
2026
 
8.250
%
 
1,100

 
(16
)
 
1,084

 

Subordinated Notes:
 
 
 
 
 
 
 
 
 
 
 
2020 Notes
2020
 
6.250
%
 
244

 
(1
)
 
243

 
242

2021 Notes
2021
 
6.625
%
 
341

 
(3
)
 
338

 
337

Finance lease obligations as of March 31, 2019 payable monthly through 2019 and other(5)
2019
 
3.900
%
 
13

 

 
13

 
4

Total long-term debt outstanding
 
 
 
 
$
10,120

 
$
(137
)
 
$
9,983

 
$
9,037

Less: current portion of long-term debt(4)
 
 
 
 
 
 
 
 
(1,046
)
 
(45
)
Long-term debt, excluding current portion
 
 
 
 
 
 
 
 
$
8,937

 
$
8,992

Fair value of debt(1)
 
 
 
 
$
10,197

 
 
 
 
 
 
(1) Fair value of our fixed rate and variable interest rate debt is classified within level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities.
(2) Includes cross-currency interest rate swap agreements that we entered into in 2018 in the amount of $460 million U.S. Dollar-denominated 2025 Secured Notes to a fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946% (see Note 16 in our 2018 10-K).
(3) We designated a portion of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the change in foreign currency exchange rates of the Euro relative to the U.S. Dollar (see Note 12 for additional information). The total change in the face value of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes due to changes in foreign currency exchange rates since the issuance was a reduction of $63 million, of which a $5 million gain was recognized on remeasurement of debt in the Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019.
(4) Includes $1,000 million of the principal balance of the 2022 Unsecured Notes that were redeemed on April 4, 2019.
(5) Includes $11 million related to certain revenue transactions presented as debt in accordance with ASC 470-10-25.


20




We were in compliance with the financial covenants under all debt agreements as of March 31, 2019.
For additional information regarding the terms of our credit agreements, Secured Notes, Unsecured Notes and Subordinated Notes, see Note 16 in our 2018 10-K.
For additional information regarding the SciPlay Revolver that we entered into on May 7, 2019 in connection with the SciPlay IPO, see Note 1.
Loss on Debt Financing Transactions

The following are components of the loss on debt financing transactions resulting from debt extinguishment and modification accounting for three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Repayment and cancellation of principal balance at premium
$

 
$
110

Unamortized debt (premium) discount and deferred financing costs, net

 
(30
)
Third party debt issuance fees

 
13

Total loss on debt financing transactions
$

 
$
93


(12) Fair Value Measurements
The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and accrued liabilities, approximates their recorded values. Our assets and liabilities measured at fair value on a recurring basis are described below.
Derivative Financial Instruments

We record derivative financial instruments on the balance sheet at their respective fair values. As of March 31, 2019, we held the following derivative instruments that were accounted for pursuant to ASC 815:

Interest Rate Swap Contracts

We currently use interest rate swap contracts as described below to mitigate gains or losses associated with the change in expected cash flows due to fluctuations in interest rates on our variable rate debt.
In February 2018, we entered into interest rate swap contracts to hedge a portion of our interest expense associated with our variable rate debt to effectively fix the interest rate that we pay. These interest rate swap contracts are designated as cash flow hedges under ASC 815. We pay interest at a weighted-average fixed rate of 2.4418% and receive interest at a variable rate equal to one-month LIBOR. The total notional amount of interest rate swaps outstanding was $800 million as of March 31, 2019. These hedges mature in February 2022.
These hedges are highly effective in offsetting changes in our future expected cash flows due to the fluctuation in the one-month LIBOR rate associated with our variable rate debt. We qualitatively monitor the effectiveness of these hedges on a quarterly basis. As a result of the effective matching of the critical terms on our variable rate interest expense being hedged to the hedging instruments being used, we expect these hedges to remain highly effective.
All gains and losses from these hedges are recorded in Other comprehensive income (loss) until the future underlying payment transactions occur. Any realized gains or losses resulting from the hedges are recognized (together with the hedged transaction) as interest expense. We estimate the fair value of our interest rate swap contracts by discounting the future cash flows of both the fixed rate and variable rate interest payments based on market yield curves. The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.
The following table shows the gains (loss) and interest expense recognized on our interest rate swap contracts:


21


 
Three Months Ended
 
March 31,
 
2019
 
2018
(Loss) gain recorded in accumulated other comprehensive income (loss), net of tax
$
(5
)
 
$
2

Interest expense recorded related to interest rate swap contracts

 
1

We do not expect to reclassify material amounts from Accumulated other comprehensive loss to interest expense in the next twelve months.

The following table shows the effect of interest rate swap contracts designated as cash flow hedges on the consolidated statements of operations and comprehensive loss:

 
Three Months Ended March 31,
 
2019
 
2018
 
Interest expense
Total amounts of expense line item presented in the statements of operations and comprehensive loss in which the effects of cash flow hedges are recorded
$
(154
)
 
$
(155
)
Hedged item
(5
)
 
(2
)
Derivative designated as hedging instrument
5

 
1


Cross-Currency Interest Rate Swaps
In connection with the February 2018 Refinancing described in Note 16 of our 2018 10-K, we entered into certain cross-currency interest rate swap agreements to achieve more beneficial interest rates by effectively converting $460 million of our fixed-rate U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946%. We have designated these cross-currency interest rate swap agreements as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro relative to the U.S. Dollar.
We use the spot method to measure the effectiveness of our net investment hedge. Under this method, for each reporting period, the change in the fair value of the $460 million cross-currency interest rate swaps is reported in foreign currency translation gain (loss) in Accumulated other comprehensive loss. The cross-currency basis spread (along with other components of the cross-currency swap’s fair value excluded from the spot method effectiveness assessment) are amortized and recorded to interest expense. We evaluate the effectiveness of our net investment hedge at the beginning of each quarter.

The following table shows the fair value of our hedges:
 
Balance Sheet Line Item
 
March 31, 2019
 
December 31, 2018
Interest rate swaps (1)(3)
Other liabilities
 
$
6

 
$

Cross-currency interest rate swaps (2)(3)
Other assets
 
34

 
18

(1) The loss of $6 million for the three months ended March, 31 2019 is reflected in Derivative financial instrument unrealized gross loss in Other comprehensive income.
(2) The gain of $16 million for the three months ended March, 31 2019 is reflected in Foreign currency translation loss in Other comprehensive income.
(3) The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy.

Net Investment Non-derivative Hedge - 2026 Secured Euro Notes
For the first quarter of 2019, we designated $255 million of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our results caused by the changes in foreign currency exchange rates of the Euro relative to the U.S. Dollar.
We use the spot method to measure the effectiveness of our net investment non-derivative hedge. Under this method, for each reporting period, the change in the hedged portion of the carrying value of the 2026 Secured Euro Notes due to remeasurement is reported in Foreign currency translation gain (loss) in Other comprehensive income, and the remaining


22


remeasurement change is recognized in Gain (loss) on remeasurement of debt in our consolidated statements of operations and comprehensive loss. We evaluate the effectiveness of our net investment non-derivative hedge at the beginning of each quarter, and the inputs used to measure the fair value of this non-derivative hedge are categorized as Level 2 in the fair value hierarchy.
Contingent Consideration Liabilities

In connection with our 2017 acquisitions, we have recorded certain contingent consideration liabilities, of which the values are primarily based on reaching certain earnings-based metrics, with a maximum payout of up to $39 million. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and are remeasured each reporting period. The inputs used to measure the fair value of our liabilities are categorized as Level 3 in the fair value hierarchy.

Contingent consideration liabilities as of March 31, 2019 and December 31, 2018 were $45 million of which $22 million as of March 31, 2019 is included in Accrued liabilities with the remaining balance included in Other long-term liabilities.

We did not have assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2019.
(13) Stockholders’ Deficit
Changes in Stockholders’ Deficit
The following tables present certain information regarding our stockholders' deficit as of March 31, 2019 and March 31, 2018.
 
Three Months Ended March 31, 2019
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Loss
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total
January 1, 2019
$
1

 
$
835

 
$
(2,824
)
 
$
(175
)
 
$
(300
)
 
$
(2,463
)
Net proceeds of common stock in connection with stock options and RSUs

 
2

 

 

 

 
2

Stock-based compensation

 
11

 

 

 

 
11

Net loss

 

 
(24
)
 

 

 
(24
)
Other Comprehensive income

 

 

 

 
51

 
51

March 31, 2019
$
1

 
$
848

 
$
(2,848
)
 
$
(175
)
 
$
(249
)
 
$
(2,423
)
 
Three Months Ended March 31, 2018
 
Common Stock
 
Additional Paid in Capital
 
Accumulated Loss
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total
January 1, 2018
$
1

 
$
808

 
$
(2,461
)
 
$
(175
)
 
$
(200
)
 
$
(2,027
)
Net redemption of common stock in connection with stock options and RSUs

 
(15
)
 

 

 

 
(15
)
Stock-based compensation

 
7

 

 

 

 
7

Net loss

 

 
(202
)
 

 

 
(202
)
Adoption impact of ASC 606

 

 
(11
)
 

 

 
(11
)
Other Comprehensive income

 

 

 

 
52

 
52

March 31, 2018
$
1

 
$
800

 
$
(2,674
)
 
$
(175
)
 
$
(148
)
 
$
(2,196
)
Stock Based Compensation
The following reflects total stock-based compensation expense recognized under all programs:
 
Three Months Ended
 
March 31,
 
2019
 
2018
Related to stock options
$
2

 
$
2

Related to RSUs
12

 
7

   Total
$
14

 
$
9


(14) Income Taxes
We consider new evidence (both positive and negative) at each reporting date that could affect our view of the future realization of deferred tax assets. Based upon the evaluation of all available evidence, and considering the projected U.S. pre-


23




tax losses for 2019, we maintain a valuation allowance for our U.S. operations as of March 31, 2019. We maintained other valuation allowances for certain non-U.S. jurisdictions with cumulative losses.

The effective income tax rates for the three months ended March 31, 2019 and 2018 were (18%) and (3%), respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. Due to the aforementioned valuation allowance against our U.S. deferred tax assets, the effective tax rates for the three months ended March 31, 2019 and 2018 do not include the benefits of the U.S. tax losses, and we recorded an overall tax expense in both periods due to foreign pre-tax earnings. The change in the effective tax rates relates primarily to the overall mix of income in our foreign jurisdictions.

(15) Leases
On January 1, 2019, we adopted ASC 842 using the optional transition method provided by ASU 2018-11. Our operating leases primarily consist of real estate leases such as offices, warehouses, and research and development facilities. Our leases have remaining lease terms ranging from 1 year to 11 years, some of which include options to extend the leases for up to 5 years or to terminate the leases within 1 year. Our finance leases are immaterial.

Our total operating lease expenses for the three months ended March 31, 2019 and 2018 were $9 million and $7 million, respectively. The total amount of variable and short term lease payments incurred during the three months ended March 31, 2019 are immaterial.

Supplemental balance sheet and cash flow information related to operating leases is as follows:
 
March 31, 2019
Operating lease right-of-use assets(1)
$
118

   Accrued liabilities
26

   Operating lease liabilities
98

Total operating lease liabilities
$
124

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
8

Weighted average remaining lease term, years
6

Weighted average discount rate
5
%
(1) Right-of use assets obtained in exchange for lease obligations during the first quarter of 2019 were immaterial.

Lease liability maturities:
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Less Imputed Interest
 
Total
Operating leases
$
24

 
$
28

 
$
24

 
$
19

 
$
15

 
$
34

 
$
(20
)
 
$
124


As of March 31, 2019, we did not have material additional operating leases that have not yet commenced.

(16) Litigation
We are involved in various routine and other specific legal proceedings, including the following which are described in Note 22 within our 2018 10-K: Colombia litigation, SNAI litigation, Washington State Matter, and the Raqqa Matter. There have been no material changes to these matters since the 2018 10-K was filed with the SEC, except as described below.
We record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss can be reasonably estimated (although, as discussed below, there may be an exposure to loss in excess of the accrued liability). We evaluate our accruals for legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect (1) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments, (2) the advice and analyses of counsel and (3) the assumptions and judgment of management. Legal costs associated with our legal proceedings are expensed as incurred. We had accrued liabilities of $4 million for all of our legal matters that were contingencies as of March 31, 2019 and December 31, 2018.


24


Substantially all of our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss involves a series of complex judgments about future events. Consequently, the ultimate outcomes of our legal contingencies could result in losses in excess of amounts we have accrued. We may be unable to estimate a range of possible losses for some matters pending against us or our subsidiaries, even when the amount of damages claimed against us or our subsidiaries is stated because, among other things: (1) the claimed amount may be exaggerated or unsupported; (2) the claim may be based on a novel legal theory or involve a large number of parties; (3) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (4) there may be uncertainty as to the outcome of pending appeals or motions; (5) the matter may not have progressed sufficiently through discovery or there may be significant factual or legal issues to be resolved or developed; and/or (6) there may be uncertainty as to the enforceability of legal judgments and outcomes in certain jurisdictions. Other matters have progressed sufficiently that we are able to estimate a range of possible loss. For those legal contingencies disclosed in Note 22 in our 2018 10-K and this Note 16 as well as those related to the previously disclosed settlement agreement entered into in February 2015 with SNAI S.p.a., as to which a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a range of possible loss, the current estimated range is up to approximately $14 million in excess of the accrued liabilities (if any) related to those legal contingencies. This aggregate range represents management’s estimate of additional possible loss in excess of the accrued liabilities (if any) with respect to these matters based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, management may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co‑defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that management had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which we are not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent our maximum loss exposure. Any such losses could have a material adverse impact on our results of operations, cash flows or financial condition. The legal proceedings underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
TCS John Huxley Matter
On March 15, 2019, TCS John Huxley America, Inc., TCS John Huxley Europe Ltd., TCS John Huxley Asia Ltd., and Taiwan Fulgent Enterprise Co., Ltd. brought a civil action in the United States District Court for the Northern District of Illinois against SGC, Bally Technologies, Inc. and Bally Gaming, Inc. In the complaint, plaintiffs assert federal antitrust claims arising from defendants' procurement of particular U.S. and South African patents. Plaintiffs allege that defendants used those patents to create an allegedly illegal monopoly in the market for automatic card shufflers sold to regulated casinos in the United States. On April 10, 2019, the defendants filed a motion to dismiss the plaintiffs’ complaint with prejudice. On April 25, 2019, the district court denied the defendants’ motion to dismiss without prejudice pursuant to the court’s local rules, after plaintiffs advised that they intended to file an amended complaint. Plaintiffs filed their amended complaint on May 3, 2019, and the district court has set a status hearing for May 8, 2019 to discuss the matter further. Due to the early nature of this litigation, we are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss.
For additional information regarding our pending litigation matters, see Note 22 in our 2018 10-K.

(17) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
We conduct substantially all of our business through our U.S. and foreign subsidiaries. As of March 31, 2019, SGI’s obligations under the Secured Notes (other than the 2022 Secured Notes, which were redeemed in March 2018), the Unsecured Notes and the Subordinated Notes were fully and unconditionally and jointly and severally guaranteed by SGC and the Guarantor Subsidiaries other than SGI, and certain immaterial subsidiaries of SGC. The guarantees of our Secured Notes (other than the 2022 Secured Notes, which were redeemed in March 2018), Unsecured Notes and Subordinated Notes will terminate under the following customary circumstances: (1) the sale or disposition of the capital stock of the guarantor (including by consolidation or merger of the guarantor into another person); (2) the liquidation or dissolution of the guarantor; (3) the defeasance or satisfaction and discharge of the notes; (4) the release of the guarantor from any guarantees of indebtedness of SGC and SGI; and (5) the proper designation of the guarantor as an unrestricted subsidiary pursuant to the indenture governing the respective notes.
Presented below is condensed consolidating financial information for (1) SGC, (2) SGI, (3) the Guarantor Subsidiaries and (4) the Non-Guarantor Subsidiaries as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of SGC, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the current guarantee structures of the Secured Notes (other than the 2022 Secured Notes, which were redeemed in March 2018), the Unsecured Notes and the Subordinated Notes were in effect at the beginning of the periods presented.


25


     The condensed consolidating financial information reflects the investments of SGC in SGI and in the Guarantor Subsidiaries and Non-Guarantor Subsidiaries using the equity method of accounting. They also reflect the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries. Net changes in intercompany due from/due to accounts are reported in the accompanying Supplemental Condensed Consolidating Statements of Cash Flows as investing activities if the applicable entities have a net investment (asset) in intercompany accounts and as a financing activity if the applicable entities have a net intercompany borrowing (liability) balance.    


26



SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 2019
 
 
SGC (Parent)
 
SGI (Issuer1)
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,119

 
$
1

 
$

 
$
95

 
$
(2
)
 
$
1,213

Restricted cash
 

 
1

 
33

 
7

 

 
41

Accounts receivable, net
 

 
102

 
204

 
315

 

 
621

Notes receivable, net
 

 

 
89

 
15

 

 
104

Inventories
 

 
45

 
89

 
109

 
(14
)
 
229

Prepaid expenses, deposits and other current assets
 
3

 
60

 
95

 
79

 
1

 
238

Property and equipment, net
 
31

 
99

 
208

 
215

 
(36
)
 
517

Operating lease right-of-use asset
 
1

 
24

 
35

 
58

 

 
118

Investment in subsidiaries
 
2,896

 
959

 
1,216

 

 
(5,071
)
 

Goodwill
 

 
240

 
1,897

 
1,164

 

 
3,301

Intangible assets, net
 
40

 
34

 
1,239

 
432

 

 
1,745

Intercompany balances
 

 
7,096

 
74

 

 
(7,170
)
 

Software, net
 
53

 
37

 
118

 
69

 

 
277

Other assets(2)
 
113

 
412

 
37

 
309

 
(438
)
 
433

Total assets
 
$
4,256

 
$
9,110

 
$
5,334

 
$
2,867

 
$
(12,730
)
 
$
8,837

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

 
$
1,042

 
$
3

 
$
1

 
$

 
$
1,046