SGMS 6.30.2012 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
{Mark One}
 
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
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)
 
 
 
750 Lexington Avenue, New York, New York 10022
(Address of principal executive offices)
(Zip Code)
 
(212) 754-2233
(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 T 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 T 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 x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

Table of Contents

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No T
 
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of August 3, 2012:
 
Class A Common Stock: 91,502,855
Class B Common Stock: None


Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED JUNE 30, 2012
 
PART I.
4
 
 
 
Item 1.
4
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
Item 2.
29
 
 
 
Item 3.
46
 
 
 
Item 4.
46
 
 
 
PART II.
47
 
 
 
Item 1A.
47
 
 
 
Item 2.
47
 
 
 
Item 6.
48

2
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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,” “continue,” “believe,” “expect,” “anticipate,” “could,” “potential,” “opportunity,” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located 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 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; material adverse changes in economic and industry conditions; technological change; retention and renewal of existing contracts and entry into new or revised contracts; availability and adequacy of cash flows to satisfy obligations and indebtedness or future needs; protection of intellectual property; security and integrity of software and systems; laws and government regulation, including those relating to gaming licenses, permits and operations; inability to identify, complete and integrate future acquisitions; inability to benefit from, and risks associated with, strategic equity investments and relationships; failure of Northstar to meet the net income targets or otherwise realize the anticipated benefits under its private management agreement with the Illinois Lottery; seasonality; inability to identify and capitalize on trends and changes in the lottery and gaming industries, including the potential expansion of regulated gaming via the internet; inability to enhance and develop successful gaming concepts; dependence on suppliers and manufacturers; liability for product defects; fluctuations in foreign currency exchange rates and other factors associated with international operations; influence of certain stockholders; dependence on key personnel; failure to perform on contracts; resolution of pending or future litigation; labor matters; 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 Securities and Exchange Commission (“SEC”), including under the heading “Risk Factors” in our most recent Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
 
You should also note that this Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Similarly, industry forecasts, while we believe them to be accurate, are 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 lottery industry than the lottery industry in the U.S.


3
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)
 
 
 
June 30,
2012(Unaudited)
 
December 31, 2011
ASSETS
 
 
 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
112,431

 
$
104,402

Accounts receivable, net of allowance for doubtful accounts of $7,287 and $4,782 as of June 30, 2012 and December 31, 2011, respectively
 
166,882

 
182,467

Inventories
 
83,584

 
79,742

Deferred income taxes, current portion
 
4,862

 
4,697

Prepaid expenses, deposits and other current assets
 
38,102

 
35,805

Total current assets
 
405,861

 
407,113

Property and equipment, at cost
 
806,817

 
788,529

Less: accumulated depreciation
 
(404,281
)
 
(362,041
)
Net property and equipment
 
402,536

 
426,488

Goodwill
 
777,738

 
768,782

Intangible assets, net
 
87,025

 
86,859

Equity investments
 
309,418

 
340,494

Other assets
 
140,772

 
132,629

Total assets
 
$
2,123,350

 
$
2,162,365

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Debt payments due within one year
 
$
14,783

 
$
26,191

Accounts payable
 
57,832

 
66,221

Accrued liabilities
 
134,744

 
145,135

Total current liabilities
 
207,359

 
237,547

Deferred income taxes
 
57,663

 
56,264

Long-term debt, excluding current installments
 
1,354,920

 
1,364,476

Other long-term liabilities
 
62,355

 
60,364

Total liabilities
 
1,682,297

 
1,718,651

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 98,576 and 98,181 shares issued and 92,602 and 92,433 shares outstanding as of June 30, 2012 and December 31, 2011, respectively
 
986

 
982

Additional paid-in capital
 
706,037

 
693,600

Accumulated loss
 
(154,361
)
 
(143,591
)
Treasury stock, at cost, 5,974 and 5,749 shares held as of June 30, 2012 and December 31, 2011, respectively
 
(76,355
)
 
(74,460
)
Accumulated other comprehensive loss
 
(35,254
)
 
(32,817
)
Total stockholders’ equity
 
441,053

 
443,714

Total liabilities and stockholders’ equity
 
$
2,123,350

 
$
2,162,365

 
See accompanying notes to consolidated financial statements


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Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited, in thousands, except per share amounts)

 
 
Three Months Ended
 
 
June 30,
 
 
2012
 
2011
Revenue:
 
 

 
 

Instant tickets
 
$
119,627

 
$
130,419

Services
 
88,635

 
82,096

Sales
 
21,045

 
7,733

Total revenue
 
229,307

 
220,248

Operating expenses:
 
 

 
 

Cost of instant tickets (1)
 
68,420

 
72,133

Cost of services (1)
 
45,273

 
41,460

Cost of sales (1)
 
14,238

 
5,361

Selling, general and administrative
 
47,171

 
43,426

Employee termination and restructuring
 
6,046

 
—

Depreciation and amortization
 
39,086

 
29,004

Operating income
 
9,073

 
28,864

Other (income) expense:
 
 

 
 

Interest expense
 
24,185

 
26,409

Earnings from equity investments
 
(6,915
)
 
(9,224
)
Other
 
1,108

 
(876
)
 
 
18,378

 
16,309

Net (loss) income before income taxes
 
(9,305
)
 
12,555

Income tax expense
 
3,284

 
5,536

Net (loss) income
 
$
(12,589
)
 
$
7,019

 
 
 
 
 
  Other comprehensive (loss) income:
 


 


Foreign currency translation (loss) gain
 
(29,811
)
 
13,371

Pension and post-retirement benefits gain (loss), net of tax
 
229

 
(29
)
Derivative financial instruments (loss) gain, net of tax
 
(317
)
 
462

Foreign currency forward contracts gain
 
2,040

 
—

Other comprehensive (loss) income
 
(27,859
)
 
13,804

Comprehensive (loss) income
 
$
(40,448
)
 
$
20,823

 
 
 
 
 
Basic and diluted net (loss) income per share:
 
 

 
 

Basic
 
$
(0.14
)
 
$
0.08

Diluted
 
$
(0.14
)
 
$
0.08

 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

Basic shares
 
92,767

 
92,069

Diluted shares
 
92,767

 
92,565

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


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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited, in thousands, except per share amounts)

 
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
Revenue:
 
 

 
 

Instant tickets
 
$
242,951

 
$
244,279

Services
 
178,921

 
155,843

Sales
 
42,010

 
16,782

Total revenue
 
463,882

 
416,904

Operating expenses:
 
 

 
 

Cost of instant tickets (1)
 
138,383

 
139,366

Cost of services (1)
 
91,132

 
80,382

Cost of sales (1)
 
31,165

 
11,051

Selling, general and administrative
 
93,343

 
82,980

Employee termination and restructuring
 
8,921

 
—

Depreciation and amortization
 
69,604

 
59,908

Operating income
 
31,334

 
43,217

Other (income) expense:
 
 

 
 

Interest expense
 
49,083

 
52,864

Earnings from equity investments
 
(15,760
)
 
(18,574
)
Other
 
630

 
(1,870
)
 
 
33,953

 
32,420

Net (loss) income before income taxes
 
(2,619
)
 
10,797

Income tax expense
 
8,151

 
10,710

Net (loss) income
 
$
(10,770
)
 
$
87

 
 
 
 
 
  Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation (loss) gain
 
(3,795
)
 
48,450

Pension and post-retirement benefits (loss), net of tax
 
(142
)
 
(488
)
Derivative financial instruments (loss) gain, net of tax
 
(197
)
 
912

Foreign currency forward contracts gain
 
1,697

 
—

Other comprehensive (loss) income
 
(2,437
)
 
48,874

Comprehensive (loss) income
 
$
(13,207
)
 
$
48,961

 
 
 
 
 
Basic and diluted net (loss) income per share:
 
 

 
 

Basic
 
$
(0.12
)
 
$
0.00

Diluted
 
$
(0.12
)
 
$
0.00

 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

Basic shares
 
92,625

 
91,978

Diluted shares
 
92,625

 
92,518




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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(Unaudited, in thousands, except per share amounts)

 
 
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
Cash flows from operating activities:
 
 

 
 

Net (loss) income
 
$
(10,770
)
 
$
87

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
69,604

 
59,908

Change in deferred income taxes
 
513

 
768

Stock-based compensation
 
11,622

 
9,702

Non-cash interest expense
 
4,006

 
4,107

Earnings from equity investments
 
(15,760
)
 
(18,574
)
Distributed earnings from equity investments
 
26,179

 
28,760

Changes in current assets and liabilities, net of effects of acquisitions
 
 

 
 

Accounts receivable
 
20,794

 
13,664

Inventories
 
(5,686
)
 
191

Accounts payable
 
(9,876
)
 
(8,587
)
Accrued liabilities
 
(9,118
)
 
1,052

Other current assets and liabilities
 
2,326

 
6,297

Other
 
(478
)
 
208

Net cash provided by operating activities
 
83,356


97,583

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Capital expenditures
 
(4,311
)
 
(3,613
)
Lottery and gaming systems expenditures
 
(19,356
)
 
(22,191
)
Other intangible assets and software expenditures
 
(26,701
)
 
(18,372
)
Equity method investments
 
—

 
(40,066
)
Distributions of capital on equity investments
 
18,404

 
6,267

Business acquisitions, net of cash acquired
 
(12,991
)
 
—

Change in other assets and liabilities, net
 
(1,437
)
 
(9,323
)
Net cash used in investing activities
 
(46,392
)

(87,298
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from issuance of long-term debt
 
11,316

 
—

Payments on long-term debt
 
(32,572
)
 
(4,661
)
Payments of financing fees
 
(57
)
 
(2,623
)
Purchases of treasury stock
 
(1,895
)
 
—

Net redemptions of common stock under stock-based compensation plans
 
(3,595
)
 
(1,353
)
Net cash used in financing activities
 
(26,803
)

(8,637
)
Effect of exchange rate changes on cash and cash equivalents
 
(2,132
)

1,327

Increase in cash and cash equivalents
 
8,029

 
2,975

Cash and cash equivalents, beginning of period
 
104,402

 
124,281

Cash and cash equivalents, end of period
 
$
112,431

 
$
127,256

 
See accompanying notes to consolidated financial statements

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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(Unaudited, in thousands, except per share amounts)

Non-cash investing and financing activities
 
For the six months ended June 30, 2012 and 2011
 
On June 8, 2012, we acquired the equity interests of SG Provoloto, S. de R.L. de C.V. ("Provoloto") for approximately $9,720 (subject to certain adjustments), including an estimated earn-out payable to the sellers of approximately $2,000 contingent on the future performance of the acquired business. The acquisition is described in Note 14 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
During the six months ended June 30, 2011, we contributed approximately $37,000 to International Terminal Leasing (“ITL”), including a non-cash investment of $8,200. Our investment in ITL is described in Note 16 to the Consolidated Financial Statements in our 2011 Annual Report on Form 10-K. As of June 30, 2012, our total investment in ITL was $25,949.


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SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share amounts)
 
Notes to Consolidated Financial Statements
 
(1) Consolidated Financial Statements
 
Basis of Presentation
 
The Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011 and the Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 have been prepared by Scientific Games Corporation and are unaudited. When used in these notes, the terms “we,” “us,” “our” and the “Company” refer to Scientific Games Corporation and all entities included in our consolidated financial statements unless otherwise specified or the context otherwise indicates. In the opinion of management, all adjustments necessary to present fairly our consolidated financial position as of June 30, 2012, our results of operations and comprehensive income for the three and six months ended June 30, 2012 and 2011, and our cash flows for the six months ended June 30, 2012 and 2011 have been made. Such adjustments are of a normal, recurring nature.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2011 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results of operations for the full year.
 
Significant Accounting Policies
 
We describe our significant accounting policies in Note 1 of the Notes to Consolidated Financial Statements in our 2011 Annual Report on Form 10-K. There have been no changes to our significant accounting policies during the period ended June 30, 2012, except as discussed below.
In May 2011, the Financial Accounting Standards Board ("FASB") issued guidance to clarify the intent of the application of existing fair value measurement and disclosure requirements and amend certain requirements for measuring fair value or for disclosing information about fair value measurements. The guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts in fair value measurement. Additionally, for fair value measurements categorized within Level 3 of the fair value hierarchy, the new guidance clarifies that quantitative disclosure about unobservable inputs should be disclosed and requires a description of the valuation processes and the sensitivity of the fair value measurements to changes in unobservable inputs and the interrelationships between those inputs. We adopted the guidance on January 1, 2012. The adoption did not have a material impact on our financial statements.
In June 2011, the FASB issued guidance on presentation of comprehensive income. The guidance eliminates the option to report other comprehensive income and its components in the statement of stockholders' equity. Instead, an entity is required to present net income and other comprehensive income either in one continuous statement or in two separate but consecutive statements. The guidance also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. However, the effective date pertaining to this requirement was deferred by an update issued by the FASB in December 2011. We adopted the guidance on January 1, 2012.
In September 2011, the FASB issued guidance on testing goodwill for impairment. The guidance provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not required. We adopted the guidance on January 1, 2012, and will apply the guidance in our next annual goodwill impairment evaluation.
In July 2012, the FASB issued guidance on testing indefinite-lived intangible assets, other than goodwill, for impairment. The guidance is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted. The guidance provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired.

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If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to perform the currently prescribed quantitative impairment test by comparing the fair value of the asset with the carrying amount. We adopted the guidance on July 1, 2012, and will apply the guidance in our next annual indefinite-lived intangible asset impairment evaluation.
Our policy is to periodically review the estimated useful lives of our fixed assets. Our review during the three months ended June 30, 2012 indicated lower estimated useful lives for our gaming terminals deployed to our U.K. licensed betting office ("LBO") customers relative to historical estimates due to changes in the replacement cycle of these terminals. As a result, effective April 1, 2012, we revised the estimated useful lives of our gaming terminals currently deployed to our LBO customers. This change increased depreciation expense for the three months ended June 30, 2012 but was not material to our consolidated financial position or results of operations as of and for the three and six months ended June 30, 2012.

Basic and Diluted Net Income (Loss) Per Share
 
The following represents a reconciliation of the numerator and denominator used in computing basic and diluted net (loss) income per share available to common stockholders for the three and six months ended June 30, 2012 and 2011:
 
    
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012

2011
 
2012
 
2011
Income (numerator)
 
 

 
 

 
 
 
 
Net (loss) income
 
$
(12,589
)
 
$
7,019

 
$
(10,770
)
 
$
87

Shares (denominator)
 
 

 
 

 
 
 
 
Weighted average basic common shares outstanding
 
92,767

 
92,069

 
92,625

 
91,978

Effect of dilutive securities-stock rights
 
—

 
496

 
—

 
540

Weighted average diluted common shares outstanding
 
92,767

 
92,565

 
92,625

 
92,518

Basic and diluted per share amounts
 
 

 
 

 
 
 
 
Basic net (loss) income per share
 
$
(0.14
)
 
$
0.08

 
$
(0.12
)
 
$
0.00

Diluted net (loss) income per share
 
$
(0.14
)
 
$
0.08

 
$
(0.12
)
 
$
0.00

 
The weighted-average diluted common shares outstanding for the three and six months ended June 30, 2012 excludes the effect of approximately 5,913 and 4,308 weighted-average stock rights outstanding, respectively, because their effect would be anti-dilutive. There were no dilutive stock rights for the three and six months ended June 30, 2012 due to the net loss reported for the periods. The weighted-average diluted common shares outstanding for the three and six months ended June 30, 2011 excludes the effect of approximately 7,967 and 7,690 weighted-average stock rights outstanding, respectively, because their effect would be anti-dilutive.

(2) Reportable Segment Information 
We report our operations in three business segments: Printed Products; Lottery Systems and Gaming.
    The following tables set forth financial information for the three and six months ended June 30, 2012 and 2011 by reportable segments. Corporate expenses and corporate depreciation and amortization are not allocated to the reportable segments and are presented as unallocated corporate expenses.


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Three Months Ended June 30, 2012
 

Printed
Products


Lottery
Systems


Gaming

Total
Revenue:

 


 


 


 

Instant tickets

$
119,627

 
$
—

 
$
—


$
119,627

Services

—

 
51,114

 
37,521


88,635

Sales

3,082

 
13,506

 
4,457


21,045

Total revenue

122,709

 
64,620

 
41,978


229,307

Cost of instant tickets (1)

68,420

 
—

 
—


68,420

Cost of services (1)

—

 
26,963

 
18,310


45,273

Cost of sales (1)

1,991

 
8,729

 
3,518


14,238

Selling, general and administrative

11,844

 
6,198

 
7,878


25,920

Employee termination and restructuring

4,507

 
—

 
1,539


6,046

Depreciation and amortization

12,813

 
12,278

 
13,845


38,936

Segment operating income (loss)

$
23,134

 
$
10,452


$
(3,112
)

$
30,474

Unallocated corporate expenses




 


 


(21,401
)
Consolidated operating income

 


 


 


$
9,073


(1) Exclusive of depreciation and amortization.
 
 

Three Months Ended June 30, 2011
 

Printed
Products

Lottery
Systems


Gaming

Total
Revenue:

 


 


 


 

Instant tickets

$
130,419

 
$
—

 
$
—


$
130,419

Services

—

 
51,196

 
30,900


82,096

Sales

2,087

 
5,634

 
12


7,733

Total revenue

132,506

 
56,830

 
30,912


220,248

Cost of instant tickets (1)

72,133

 
—

 
—


72,133

Cost of services (1)

—

 
26,220

 
15,240


41,460

Cost of sales (1)

1,238

 
4,123

 
—


5,361

Selling, general and administrative

13,112

 
5,524

 
3,636


22,272

Depreciation and amortization

8,208

 
11,879

 
8,789


28,876

Segment operating income

$
37,815


$
9,084

 
$
3,247


$
50,146

Unallocated corporate expenses

 


 


 


(21,282
)
Consolidated operating income

 


 


 


$
28,864


(1) Exclusive of depreciation and amortization.



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Six Months Ended June 30, 2012
 
 
Printed
Products
 
Lottery
Systems
 
Gaming
 
Total
Revenue:
 
 

 
 

 
 

 
 

Instant tickets
 
$
242,951

 
$
—

 
$
—

 
$
242,951

Services
 
—

 
104,120

 
74,801

 
178,921

Sales
 
5,245

 
24,977

 
11,788

 
42,010

Total revenue
 
248,196

 
129,097

 
86,589

 
463,882

Cost of instant tickets (1)
 
138,383

 
—

 
—

 
138,383

Cost of services (1)
 
—

 
56,322

 
34,810

 
91,132

Cost of sales (1)
 
3,401

 
16,684

 
11,080

 
31,165

Selling, general and administrative
 
22,859

 
13,251

 
13,986

 
50,096

Employee termination and restructuring
 
4,507

 
—

 
4,414

 
8,921

Depreciation and amortization
 
20,816

 
24,076

 
24,413

 
69,305

Segment operating income (loss)
 
$
58,230

 
$
18,764

 
$
(2,114
)
 
$
74,880

Unallocated corporate expenses
 
 

 
 

 
 

 
(43,546
)
Consolidated operating income
 
 

 
 

 
 

 
$
31,334


(1) Exclusive of depreciation and amortization.

 
 
Six Months Ended June 30, 2011
 
 
Printed
Products
 
Lottery
Systems
 
Gaming
 
Total
Revenue:
 
 

 
 

 
 

 
 

Instant tickets
 
$
244,279

 
$
—

 
$
—

 
$
244,279

Services
 
—

 
100,412

 
55,431

 
155,843

Sales
 
3,857

 
12,807

 
118

 
16,782

Total revenue
 
248,136

 
113,219

 
55,549

 
416,904

Cost of instant tickets (1)
 
139,366

 
—

 
—

 
139,366

Cost of services (1)
 
—

 
52,188

 
28,194

 
80,382

Cost of sales (1)
 
2,244

 
8,772

 
35

 
11,051

Selling, general and administrative
 
23,492

 
9,796

 
6,562

 
39,850

Depreciation and amortization
 
16,568

 
23,246

 
19,837

 
59,651

Segment operating income
 
$
66,466

 
$
19,217

 
$
921

 
$
86,604

Unallocated corporate expenses
 
 

 
 

 
 

 
(43,387
)
Consolidated operating income
 
 

 
 

 
 

 
$
43,217


(1) Exclusive of depreciation and amortization.













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The following table provides a reconciliation of reportable segment operating income to net (loss) income before income taxes for each period:
 
    
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Reported segment operating income
 
$
30,474

 
$
50,146

 
$
74,880

 
$
86,604

Unallocated corporate expenses
 
(21,401
)
 
(21,282
)
 
(43,546
)
 
(43,387
)
Consolidated operating income
 
9,073

 
28,864

 
31,334

 
43,217

Interest expense
 
24,185

 
26,409

 
49,083

 
52,864

Earnings from equity investments
 
(6,915
)
 
(9,224
)
 
(15,760
)
 
(18,574
)
Other
 
1,108

 
(876
)
 
630

 
(1,870
)
Net (loss) income before income taxes
 
$
(9,305
)
 
$
12,555

 
$
(2,619
)
 
$
10,797

 
In evaluating financial performance, we focus on operating income as a segment’s measure of profit or loss. Segment operating income is income before unallocated corporate expenses, interest expense, earnings from equity investments, other income (expense) and income taxes. The accounting policies of the reportable segments are the same as those described in our summary of significant accounting policies.
 

(3) Equity Method Investments
 
Our equity method investments are described in Note 16 of the Notes to Consolidated Financial Statements of our 2011 Annual Report on Form 10-K.
On January 21, 2010, we entered into a joint venture with Playtech Services (Cyprus) Limited (“Playtech”), a subsidiary of Playtech Limited, in which we and Playtech each had a 50% interest in two entities, Sciplay International S.a.r.l. and Sciplay (Luxembourg) S.a.r.l. (collectively “Sciplay”). Sciplay focuses on providing end-to-end offerings of products and services that enable lotteries and certain other gaming operators to offer internet gaming solutions in a manner that is consistent with applicable regulatory regimes. On January 23, 2012, we entered into an agreement with Playtech that restructured this strategic relationship from a joint venture arrangement to a license arrangement. Under the agreement, Playtech will license its internet gaming software to us on a non-exclusive basis for use by certain categories of our current and prospective customers, including U.S. casinos and lotteries worldwide. As part of the restructuring the Sciplay-related entities became wholly owned subsidiaries of Scientific Games. The impact on our consolidated balance sheet and consolidated results of operations and comprehensive income as of and for the three and six months ended June 30, 2012 was not material.
The condensed combined summary financial information for the six months ended June 30, 2012 and 2011 presented below represents 100% of the financial results of all of our equity method investees owned during the periods indicated.
 
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011

Revenue
 
$
494,400

 
$
461,983

Revenue less cost of revenue
 
226,736

 
250,775

Net Income
 
67,030

 
74,067












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Table of Contents

(4) Inventories
 
Inventories consist of the following:
 
 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
 
Parts and work-in-process
 
$
34,403

 
$
35,444

Finished goods
 
49,181

 
44,298

 
 
$
83,584

 
$
79,742

 
Parts and work-in-process includes costs for equipment expected to be sold. Costs incurred for equipment associated with specific lottery and gaming contracts not yet placed in service are classified as construction in progress in property and equipment and are not depreciated.
 

(5) Long-Term Debt

Credit Agreement

We are party to a credit agreement, dated as of June 9, 2008, as amended and restated as of August 25, 2011 (as so amended, the “Credit Agreement”), among Scientific Games International, Inc. ("SGI"), as borrower, the Company, as a guarantor, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A., as administrative agent.
The Credit Agreement provides for a $250,000 senior secured revolving credit facility and senior secured term loan credit facilities under which $562,625 of term loan borrowings were outstanding as of June 30, 2012, including an unamortized discount of $245. As of June 30, 2012, there were $37,687 in outstanding letters of credit and $212,313 available for borrowing or additional letter of credit issuances under the revolving credit facility. Amounts under the revolving credit facility may be borrowed, repaid and re-borrowed by SGI from time to time until maturity. Voluntary prepayments and commitment reductions under the Credit Agreement are permitted at any time in whole or in part, without premium or penalty (other than break-funding costs), upon proper notice and subject to a minimum dollar requirement. Pursuant to the August 2011 amendment to the Credit Agreement, the scheduled maturity date of the revolving credit facility commitments and the outstanding term loans was extended from June 9, 2013 to June 30, 2015.
The Credit Agreement contains customary covenants, including negative covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make distributions or certain other restricted payments, purchase or redeem capital stock, make investments or extend credit, engage in certain transactions with affiliates, engage in sale-leaseback transactions, consummate certain asset sales, effect a consolidation or merger, sell, transfer, lease or otherwise dispose of all or substantially all assets, prepay or modify certain indebtedness, or create certain liens and other encumbrances on assets.
Our ability to borrow under the Credit Agreement will depend on us remaining in compliance with the covenants contained in the Credit Agreement, including the maintenance of the applicable financial ratios. A summary of the terms of the Credit Agreement, including the financial ratios that the Company is required to maintain under the terms of the Credit Agreement, is included in Note 8 of the Notes to Consolidated Financial Statements in our 2011 Annual Report on Form 10-K.
We were in compliance with the covenants under the Credit Agreement as of June 30, 2012.
In February 2012, we refinanced the approximately $16,400 of revolving credit facility and term loan commitments that were not extended in connection with the August 2011 amendment and extended the maturity dates of these commitments to June 30, 2015. In connection with the refinancing, we paid $57 of fees and expenses to the new lenders.





14
Table of Contents

Outstanding Debt
As of June 30, 2012, our total debt was comprised principally of $562,625 outstanding under our term loan facilities under the Credit Agreement, including an unamortized discount of $245, $345,714 in aggregate principal amount of SGI's 9.25% senior subordinated notes due 2019 (the “2019 Notes”), including an unamortized discount of $4,286, $200,000 in aggregate principal amount of SGI's 7.875% senior subordinated notes due 2016 (the “2016 Notes”), $250,000 in aggregate principal amount of the Company's 8.125% senior subordinated notes due 2018 (the “2018 Notes”) and loans denominated in Chinese Renminbi Yuan (“RMB”) totaling RMB 71,312 (the "China Loans").
In the first quarter of 2012, we repaid RMB 12,500 in aggregate principal amount of a China Loan and the outstanding letter of credit in support of this debt was reduced by $1,000. In the second quarter of 2012, we repaid the remaining RMB 166,000 in aggregate principal amount of this China Loan and the outstanding letter of credit of $28,200 in support of this debt was returned.
In May 2012, we entered into a new RMB 60,000 lending facility with a Chinese bank under which we have borrowed RMB 21,312 as of June 30, 2012. The facility requires graduated semi-annual principal payments through November 2014. In June 2012, we entered into a one-year RMB 50,000 term loan with another Chinese bank. A letter of credit in the amount of $6,500 was issued to support this term loan.

(6) Derivative Financial Instruments

In January 2012, we entered into foreign currency forward contracts with an aggregate notional amount of €23,500 to hedge a portion of the net investment in one of our subsidiaries that is denominated in Euros. The forward contracts provided for the sale of Euros for U.S. dollars at a weighted average exchange rate of 1.3194 with scheduled delivery between April and December 2012. In April 2012, a portion of the forward contracts settled and was replaced with new forward contracts to maintain the €23,500 aggregate notional amount. In June 2012, a portion of the remaining forward contracts settled and was not replaced. The remaining forward contract has a notional amount of €5,000 and provides for the sale of Euros for U.S. dollars at an exchange rate of 1.3225. We have designated the forward contracts as qualified hedges in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. The fair value of the forward contracts, and subsequent changes to the fair value, are recorded on the Consolidated Balance Sheet in "accrued liabilities" or "other assets", depending on the position of the forward contract, and in "accumulated other comprehensive loss" and are recorded on the Consolidated Statement of Operations and Comprehensive Income in "other comprehensive (loss) income". During the three and six months ended June 30, 2012, we recorded a gain associated with the forward contracts of approximately $2,040 and $1,697, respectively, in "other comprehensive (loss) income".  

In accordance with ASC 323, Investments - Equity Method and Joint Ventures, we record our share of a derivative instrument held by Lotterie Nazionali S.r.l., the operator of the Gratta e Vinci instant ticket lottery in Italy ("LNS") in which we have a 20% equity investment. Changes in the fair value of the derivative instrument are recorded by LNS within Other comprehensive income in LNS' statement of comprehensive income. During the three and six months ended June 30, 2012, we recorded a loss, net of tax, associated with our share of this derivative instrument of $317 and $197, respectively, in "other comprehensive (loss) income" on our Consolidated Statement of Operations and Comprehensive Income and in "other assets" on our Consolidated Balance Sheet as of June 30, 2012.

(7) Intangible Assets and Goodwill
 
Subsequent to the filing of our 2011 Annual Report on Form 10-K, we adjusted the estimated fair values of certain of the assets acquired as part of our acquisition of Barcrest Group Limited ("Barcrest") on September 23, 2011 to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date. The adjustments resulted in an increase in goodwill of approximately $2,400, a decrease in inventory of approximately $2,000 and an increase in current liabilities of approximately of $400. We have applied the adjustment retrospectively to the Consolidated Balance Sheet as of December 31, 2011.

    







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Table of Contents

The following presents certain information regarding our intangible assets as of June 30, 2012 and December 31, 2011. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual values.
Intangible Assets
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
Balance as of June 30, 2012
 
 

 
 

 
 

Amortizable intangible assets:
 
 

 
 

 
 

Patents
 
$
13,379

 
$
5,686

 
$
7,693

Customer lists
 
40,160

 
22,464

 
17,696

Licenses
 
80,689

 
61,398

 
19,291

Intellectual property
 
23,546

 
18,895

 
4,651

Lottery contracts
 
1,500

 
1,246

 
254

Non-compete
 
235

 
7

 
228

 
 
159,509

 
109,696

 
49,813

Non-amortizable intangible assets:
 
 

 
 

 
 

Trade name
 
39,330

 
2,118

 
37,212

Total intangible assets
 
$
198,839

 
$
111,814

 
$
87,025

Balance as of December 31, 2011
 
 

 
 

 
 

Amortizable intangible assets:
 
 

 
 

 
 

Patents
 
$
12,941

 
$
5,260

 
$
7,681

Customer lists
 
35,742

 
20,511

 
15,231

Licenses
 
78,556

 
56,706

 
21,850

Intellectual property
 
23,335

 
18,102

 
5,233

Lottery contracts
 
1,500

 
1,195

 
305

Non-compete
 
—

 
—

 
—

 
 
152,074

 
101,774

 
50,300

Non-amortizable intangible assets:
 
 

 
 

 
 

Trade name
 
38,677

 
2,118

 
36,559

Total intangible assets
 
$
190,751

 
$
103,892

 
$
86,859

 
The intangible amortization expense for the three and six months ended June 30, 2012 was approximately $4,400 and $8,400, respectively. The intangible amortization expense for the three and six months ended June 30, 2011 was approximately $3,700 and $7,500, respectively.
 
The table below reconciles the change in the carrying amount of goodwill, by reporting segment, from December 31, 2011 to June 30, 2012. For the six months ended June 30, 2012, we recorded an increase in goodwill of approximately $8,600 as a result of acquisitions and an increase of approximately $300 as a result of foreign currency translation.
Goodwill
 
Printed
Products

 
Lottery
Systems

 

Gaming

 
Totals
Balance as of December 31, 2011
 
$
334,120

 
$
186,620

 
$
248,042

 
$
768,782

Adjustments
 
4,863

 
(1,956
)
 
6,049

 
8,956

Balance as of June 30, 2012
 
$
338,983

 
$
184,664

 
$
254,091

 
$
777,738


(8) Pension and Other Post-Retirement Plans
 
We have defined benefit pension plans for our U.K.-based union employees and certain Canadian-based employees (the “U.K. Plan” and the “Canadian Plan,” respectively). Retirement benefits under the U.K. Plan are based on an employee’s average compensation over the two years preceding retirement. Retirement benefits under the Canadian Plan are generally based on the number of years of credited service. Our policy is to fund the minimum contribution permissible by the applicable regulatory authorities.


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Table of Contents


The following table sets forth the combined amount of net periodic benefit cost recognized for the three and six months ended June 30, 2012 and 2011:
    
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
Components of net periodic pension benefit cost:
 
 

 
 

 
 
 
 
Service cost
 
$
568

 
$
462

 
$
1,136

 
$
923

Interest cost
 
1,147

 
1,173

 
2,294

 
2,347

Expected return on plan assets
 
(1,227
)
 
(1,162
)
 
(2,454
)
 
(2,324
)
Amortization of actuarial gains
 
251

 
95

 
502

 
189

Amortization of prior service costs
 
(19
)
 
(3
)
 
(38
)
 
(5
)
Net periodic cost
 
$
720

 
$
565

 
$
1,440

 
$
1,130

 
We have a 401(k) plan for U.S.-based employees. We contribute $37.5 cents on the dollar for the first 6% of participant contributions for a match of up to 2.25% of eligible compensation.


(9) Income Taxes
The effective tax rates of (35.3)% and 44.1%, respectively, for the three months ended June 30, 2012 and 2011 and the effective tax rates of (311.2)% and 99.2%, respectively, for the six months ended June 30, 2012 and 2011 were determined using an estimated annual effective tax rate and after considering any discrete items for such periods. Due to a valuation allowance against our U.S. deferred tax assets, the effective tax rate for the three and six months ended June 30, 2012 and 2011 does not include the benefit of the current year U.S. tax loss. Income tax expense for the three and six months ended June 30, 2012 and 2011 is primarily due to income tax expense in foreign jurisdictions.

(10) Stockholders’ Equity
 
The following table sets forth the change in the number of shares of our Class A common stock outstanding during the six months ended June 30, 2012 and during the fiscal year ended December 31, 2011:
 
 
Six Months Ended
 
Twelve Months Ended
 
 
June 30,
2012
 
December 31,
2011
Shares outstanding as of beginning of period
 
92,433

 
91,725

Shares issued as part of equity-based compensation plans and the Employee
   Stock Purchase Plan (“ESPP”), net of RSUs surrendered
 
394

 
708

Shares repurchased into treasury stock
 
(225
)
 
—

Shares outstanding as of end of period
 
92,602

 
92,433


During the six months ended June 30, 2012, the Company repurchased 225 shares under its previously announced repurchase program for approximately $1,900. As of August 3, 2012, the Company has repurchased 1,336 shares for approximately $11,139 during 2012.


(11) Stock-Based Compensation
 
We offer stock-based compensation through the use of stock options and restricted stock units (“RSUs”). We also offer the ESPP.
We grant stock options to employees and directors under our equity-based compensation plans with exercise prices that are not less than the fair market value of our common stock on the date of grant. The terms of the stock option and RSU awards, including the vesting schedule of such awards, are determined at our discretion subject to the terms of the applicable

17
Table of Contents

equity-based compensation plan.
Options granted over the last several years have generally been exercisable in four or five equal installments beginning on the first anniversary of the date of grant with a maximum term of ten years. RSUs typically vest in four or five equal installments beginning on the first anniversary of the date of grant or when certain performance targets are met. There are 13,500 shares of common stock authorized for awards under our 2003 Incentive Compensation Plan (the “Plan”) plus available shares from a preexisting equity-based compensation plan, which plans were approved by our stockholders. We also have outstanding stock options granted as part of inducement stock option awards that were not approved by stockholders, as permitted by applicable stock exchange rules. We record compensation expense for all stock options and RSUs based on the fair value of the award at the grant date.
The Company may grant certain awards the vesting of which is contingent upon the Company achieving certain performance targets. Upon determining that the performance target is probable, the fair value of the award is recognized over the service period, subject to potential adjustment.
On February 22, 2012, the Company granted approximately 494 RSUs to certain executives, which awards have a four-year vesting schedule, with 25% scheduled to vest each year if specified performance targets are met subject to certain “carryover” vesting provisions. The performance targets and carryover vesting provisions are consistent with those applicable to the performance-conditioned sign-on RSUs and options awarded to our Chief Executive Officer in December 2010, which are described in Note 12 of the Notes to Consolidated Financial Statements in our 2011 Annual Report on Form 10-K. The performance-conditioned RSUs will be forfeited on March 15, 2016 to the extent that such awards remain unvested on such date.
Stock Options
 
A summary of the changes in stock options outstanding during the six months ended June 30, 2012 is presented below:
 
 
Number of
Options
 
Weighted
Average
Remaining
Contract Term
(Years)
 
Weighted
Average
Exercise
Price Per
Share
 
Aggregate
Intrinsic
Value
Options outstanding as of December 31, 2011
 
3,868

 
8.3

 
$
9.67

 
$
3,876

Granted
 
10

 
 
 
11.10

 
—

Exercised
 
(4
)
 
 
 
6.16

 
20

Canceled
 
—

 
 

 
—

 
—

Options outstanding as of March 31, 2012
 
3,874

 
8.1

 
$
9.68

 
$
10,735

Granted
 
—

 
 

 
—

 
—

Exercised
 
—

 
 
 
—

 
—

Canceled
 
—

 
 
 
—

 
—

Options outstanding as of June 30, 2012
 
3,874

 
7.9

 
$
9.68

 
$
1,050

Options exercisable as of June 30, 2012
 
911

 
5.7

 
$
12.50

 
$
354

 
No options were granted during the three months ended June 30, 2012. The weighted average grant date fair value of options granted during the three months ended March 31, 2012 was $5.81. For the three and six months ended June 30, 2012, we recognized stock-based compensation expense of approximately $1,000 and $2,000, respectively, related to the vesting of stock options and the related tax benefit of approximately $380 and $760, respectively, prior to consideration of any valuation allowance recorded against the tax benefit. For the three and six months ended June 30, 2011, we recognized stock-based compensation expense of approximately $1,700 and $3,400, respectively, related to the vesting of stock options and the related tax benefit of approximately $630 and $1,260, respectively, prior to consideration of any valuation allowance recorded against the tax benefit.
 
As of June 30, 2012, we had unrecognized compensation expense of approximately $9,800 relating to stock option awards that will be amortized over a weighted-average period of approximately two years.





18
Table of Contents




Restricted Stock Units
 
A summary of the changes in RSUs outstanding during the six months ended June 30, 2012 is presented below:
 
 
Number of
RSUs
 
Weighted
Average Grant
Date Fair
Value Per
RSU
Unvested units as of December 31, 2011
 
4,771

 
$
10.49

Granted
 
1,534

 
12.62

Vested
 
(660
)
 
13.92

Canceled
 
(20
)
 
12.02

Unvested units as of March 31, 2012
 
5,625

 
$
10.66

Granted
 
130

 
8.80

Vested
 
(41
)
 
19.91

Canceled
 
(30
)
 
11.66

Unvested units as of June 30, 2012
 
5,684

 
10.55

 
For the three and six months ended June 30, 2012, we recognized stock-based compensation expense of approximately $4,900 and $9,600, respectively, related to the vesting of RSUs and the related tax benefit of approximately $1,870 and $3,660, respectively, prior to consideration of any valuation allowance recorded against the tax benefit. For the three and six months ended June 30, 2011, we recognized stock-based compensation expense of approximately $3,300 and $6,200 related to the vesting of RSUs and the related tax benefit of approximately $1,240 and $2,240, respectively, prior to consideration of any valuation allowance recorded against the tax benefit.
 
As of June 30, 2012, we had unrecognized compensation expense of approximately $48,000 relating to RSUs that will be amortized over a weighted-average period of approximately two years.

(12) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries
 
We conduct substantially all of our business through our domestic and foreign subsidiaries. SGI’s obligations under the Credit Agreement, the 2016 Notes and the 2019 Notes are fully and unconditionally and jointly and severally guaranteed by Scientific Games Corporation (the “Parent Company”) and our 100%-owned domestic subsidiaries other than SGI (the “Guarantor Subsidiaries”). Our 2018 Notes, which were issued by the Parent Company, are fully and unconditionally and jointly and severally guaranteed by our 100% owned domestic subsidiaries, including SGI.
 
Presented below is condensed consolidating financial information for (i) the Parent Company, (ii) SGI, (iii) the Guarantor Subsidiaries and (iv) our 100%-owned foreign subsidiaries and our non-100%-owned domestic and foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) as of June 30, 2012 and December 31, 2011 and for the three and six months ended June 30, 2012 and 2011. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries reflecting the guarantee structures of our obligations as disclosed in Note 8 of the Notes to Consolidated Financial Statements in our 2011 Annual Report on Form 10-K for all periods presented.
 
The condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting. Corporate interest and administrative expenses have not been allocated to the subsidiaries.



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Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2012

 
 
 
Parent 
Company
 
SGI
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
35,800

 
$
1,092

 
$
—

 
$
77,547

 
$
(2,008
)
 
$
112,431

Accounts receivable, net
 
—

 
48,193

 
34,100

 
84,589

 
—

 
166,882

Inventories
 
—

 
25,681

 
16,024

 
41,879

 
—

 
83,584

Other current assets
 
6,655

 
4,104

 
4,666

 
27,539

 
—

 
42,964

Property and equipment, net
 
4,238

 
163,026

 
31,285

 
203,987

 
—

 
402,536

Investment in subsidiaries
 
522,824

 
768,570

 
—

 
842,791

 
(2,134,185
)
 
—

Goodwill
 
—

 
273,656

 
78,618

 
425,464

 
—

 
777,738

Intangible assets
 
—

 
41,296

 
22,745

 
22,984

 
—

 
87,025

Intercompany balances
 
75,950

 
—

 
263,852

 
—

 
(339,802
)
 
—

Other assets
 
74,665

 
19,872

 
14,590

 
343,677

 
(2,614
)
 
450,190

Total assets
 
$
720,132

 
$
1,345,490

 
$
465,880

 
$
2,070,457

 
$
(2,478,609
)
 
$
2,123,350

Liabilities and stockholders’ equity
 
 

 
 

 
 

 
 

 
 

 
 

Current installments of long-term debt
 
$
—

 
$
6,280

 
$
—

 
$
8,503

 
$
—

 
$
14,783

Other current liabilities
 
24,101

 
50,604

 
28,292

 
91,580

 
(2,001
)
 
192,576

Long-term debt, excluding current installments
 
250,000

 
1,102,059

 
—

 
2,861

 
—

 
1,354,920

Other non-current liabilities
 
4,978

 
38,856

 
11,941

 
64,243

 
—

 
120,018

Intercompany balances
 
—

 
112,671

 
—

 
227,148

 
(339,819
)
 
—

Stockholders’ equity
 
441,053

 
35,020

 
425,647

 
1,676,122

 
(2,136,789
)
 
441,053

Total liabilities and stockholders’ equity
 
$
720,132

 
$
1,345,490

 
$
465,880

 
$
2,070,457

 
$
(2,478,609
)
 
$
2,123,350

 

20
Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2011
 
 
 
Parent 
Company
 
SGI
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
24,042

 
$
56

 
$
—

 
$
81,482

 
$
(1,178
)
 
$
104,402

Accounts receivable, net
 
—

 
53,531

 
41,238

 
87,698

 
—

 
182,467

Inventories
 
—

 
23,714

 
16,884

 
39,144

 
—

 
79,742

Other current assets
 
8,699

 
3,409

 
5,117

 
23,277

 
—

 
40,502

Property and equipment, net
 
3,522

 
166,637

 
36,028

 
220,301

 
—

 
426,488

Investment in subsidiaries
 
551,256

 
721,909

 
—

 
909,379

 
(2,182,544
)
 
—

Goodwill
 
—

 
273,656

 
78,618

 
416,508

 
—

 
768,782

Intangible assets
 
—

 
41,520

 
25,849

 
19,490

 
—

 
86,859

Intercompany balances
 
125,440

 
—

 
231,357

 
—

 
(356,797
)
 
—

Other assets
 
17,002

 
82,748

 
12,265

 
367,209

 
(6,101
)
 
473,123

Total assets
 
$
729,961

 
$
1,367,180

 
$
447,356

 
$
2,164,488

 
$
(2,546,620
)
 
$
2,162,365

Liabilities and stockholders’ equity
 
 

 
 

 
 

 
 

 
 

 
 

Current installments of long-term debt
 
$
—

 
$
6,280

 
$
—

 
$
19,911

 
$
—

 
$
26,191

Other current liabilities
 
31,231

 
56,050

 
30,140

 
95,146

 
(1,211
)
 
211,356

Long-term debt, excluding current installments
 
250,000

 
1,104,884

 
—

 
9,592

 
—

 
1,364,476

Other non-current liabilities
 
5,016

 
38,772

 
13,427

 
59,413

 
—

 
116,628

Intercompany balances
 
—

 
71,603

 
—

 
285,162

 
(356,765
)
 
—

Stockholders’ equity
 
443,714

 
89,591

 
403,789

 
1,695,264

 
(2,188,644
)
 
443,714

Total liabilities and stockholders’ equity
 
$
729,961

 
$
1,367,180

 
$
447,356

 
$
2,164,488

 
$
(2,546,620
)
 
$
2,162,365


21
Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended June 30, 2012
 
 
 
Parent
Company
 
SGI
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Consolidated
Revenue
 
$
—

 
$
104,177

 
$
10,601

 
$
116,174

 
$
(1,645
)
 
$
229,307

Cost of instant ticket revenue, cost of services and cost of sales (1)
 
—

 
33,115

 
34,533

 
63,009

 
(2,726
)
 
127,931

Selling, general and administrative
 
15,126

 
14,170

 
2,937

 
15,705

 
(767
)
 
47,171

Employee termination and restructuring
 
—

 
—

 
—

 
6,046

 
—

 
6,046

Depreciation and amortization
 
150

 
7,568

 
7,916

 
23,452

 
—

 
39,086

Operating income (loss)
 
(15,276
)
 
49,324

 
(34,785
)
 
7,962

 
1,848

 
9,073

Interest expense
 
5,305

 
18,605

 
—

 
275

 
—

 
24,185

Other (income) expense, net
 
(1,027
)
 
42,589

 
(44,392
)
 
(4,825
)
 
1,848

 
(5,807
)
Income (loss) before equity in income of subsidiaries, and income taxes
 
(19,554
)
 
(11,870
)
 
9,607

 
12,512

<