SGMS 9.30.2012 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
{Mark One}
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 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 x 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 x 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 x
 
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of November 2, 2012:
 
Class A Common Stock: 85,077,794
Class B Common Stock: None



Table of Contents

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
 
PART I.
4
 
 
 
Item 1.
4
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
9
 
 
 
Item 2.
32
 
 
 
Item 3.
51
 
 
 
Item 4.
51
 
 
 
PART II.
52
 
 
 
Item 1.
52
 
 
 
Item 1A.
52
 
 
 
Item 2.
53
 
 
 
Item 6.
54

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, 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.


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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)
 
 
 
September 30,
2012(Unaudited)
 
December 31, 2011
ASSETS
 
 
 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
135,954

 
$
104,402

Accounts receivable, net of allowance for doubtful accounts of $9,530 and $4,782 as of September 30, 2012 and December 31, 2011, respectively
 
180,807

 
182,467

Inventories
 
87,792

 
79,742

Deferred income taxes, current portion
 
4,613

 
3,606

Notes receivable
 
10,300

 

Prepaid expenses, deposits and other current assets
 
42,626

 
35,339

Total current assets
 
462,092

 
405,556

Property and equipment, at cost
 
838,556

 
788,529

Less: accumulated depreciation
 
(442,156
)
 
(362,041
)
Net property and equipment
 
396,400

 
426,488

Goodwill
 
797,624

 
768,393

Intangible assets, net
 
87,236

 
86,859

Equity investments
 
321,005

 
340,494

Other assets
 
133,678

 
134,121

Total assets
 
$
2,198,035

 
$
2,161,911

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 

Current liabilities:
 
 
 
 

Debt payments due within one year
 
$
14,978

 
$
26,191

Accounts payable
 
55,632

 
66,221

Accrued liabilities
 
156,294

 
144,681

Total current liabilities
 
226,904

 
237,093

Deferred income taxes
 
62,677

 
56,264

Long-term debt, excluding current installments
 
1,454,088

 
1,364,476

Other long-term liabilities
 
54,229

 
60,364

Total liabilities
 
1,797,898

 
1,718,197

Commitments and contingencies
 


 


Stockholders’ equity:
 
 

 
 

Class A common stock, par value $0.01 per share, 199,300 shares authorized, 98,877 and 98,181 shares issued and 86,707 and 92,433 shares outstanding as of September 30, 2012 and December 31, 2011, respectively
 
989

 
982

Additional paid-in capital
 
710,738

 
693,600

Accumulated loss
 
(181,494
)
 
(143,591
)
Treasury stock, at cost, 12,171 and 5,749 shares held as of September 30, 2012 and December 31, 2011, respectively
 
(121,862
)
 
(74,460
)
Accumulated other comprehensive loss
 
(8,234
)
 
(32,817
)
Total stockholders’ equity
 
400,137

 
443,714

Total liabilities and stockholders’ equity
 
$
2,198,035

 
$
2,161,911

 
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)

 
 
Three Months Ended
 
 
September 30,
 
 
2012
 
2011
Revenue:
 
 

 
 

Instant tickets
 
$
124,434

 
$
126,693

Services
 
82,622

 
81,429

Sales
 
20,421

 
14,617

Total revenue
 
227,477

 
222,739

Operating expenses:
 
 

 
 

Cost of instant tickets (1)
 
73,085

 
71,785

Cost of services (1)
 
42,947

 
42,562

Cost of sales (1)
 
12,784

 
10,332

Selling, general and administrative
 
44,383

 
47,660

Employee termination and restructuring
 
1,830

 
1,030

Depreciation and amortization
 
39,241

 
27,994

Operating income
 
13,207

 
21,376

Other (income) expense:
 
 

 
 

Interest expense
 
25,990

 
26,297

Earnings from equity investments
 
(5,702
)
 
(8,895
)
Loss on early extinguishment of debt
 
15,464

 
4,185

Other (income) expense, net
 
(537
)
 
1,711

     Total other expense
 
35,215

 
23,298

Net loss before income taxes
 
(22,008
)
 
(1,922
)
Income tax expense
 
5,125

 
2,202

Net loss
 
$
(27,133
)

$
(4,124
)
 
 
 
 
 
  Other comprehensive income (loss):
 


 


Foreign currency translation gain (loss)
 
23,419

 
(52,797
)
Pension and post-retirement benefits gain, net of tax
 
3,922

 
400

Derivative financial instruments gain, net of tax
 
168

 
505

Foreign currency forward contracts loss
 
(489
)
 

Other comprehensive income (loss)
 
27,020

 
(51,892
)
Comprehensive loss
 
$
(113
)
 
$
(56,016
)
 
 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

Basic net loss per share
 
$
(0.30
)
 
$
(0.04
)
Diluted net loss per share
 
$
(0.30
)
 
$
(0.04
)
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

Basic shares
 
89,950

 
92,125

Diluted shares
 
89,950

 
92,125

 
(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)

 
 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
Revenue:
 
 

 
 

Instant tickets
 
$
367,385

 
$
370,972

Services
 
261,543

 
237,272

Sales
 
62,431

 
31,399

Total revenue
 
691,359

 
639,643

Operating expenses:
 
 

 
 

Cost of instant tickets (1)
 
211,468

 
211,151

Cost of services (1)
 
134,079

 
122,944

Cost of sales (1)
 
43,949

 
21,383

Selling, general and administrative
 
137,726

 
130,640

Employee termination and restructuring
 
10,751

 
1,030

Depreciation and amortization
 
108,845

 
87,902

Operating income
 
44,541

 
64,593

Other (income) expense:
 
 

 
 

Interest expense
 
75,073


79,161

Earnings from equity investments
 
(21,462
)

(27,469
)
Loss on early extinguishment of debt
 
15,464


4,185

Other expense (income), net
 
93


(159
)
     Total other expense
 
69,168

 
55,718

Net (loss) income before income taxes
 
(24,627
)
 
8,875

Income tax expense
 
13,276


12,912

Net loss
 
$
(37,903
)

$
(4,037
)
 
 
 
 
 
  Other comprehensive income (loss):
 
 
 
 
Foreign currency translation gain (loss)
 
19,624

 
(4,347
)
Pension and post-retirement benefits gain (loss), net of tax
 
3,780

 
(88
)
Derivative financial instruments (loss) gain, net of tax
 
(29
)
 
1,417

Foreign currency forward contracts gain
 
1,208

 

Other comprehensive income (loss)
 
24,583

 
(3,018
)
Comprehensive loss
 
$
(13,320
)
 
$
(7,055
)
 
 
 
 
 
Basic and diluted net loss per share:
 
 

 
 

Basic net loss per share
 
$
(0.41
)
 
$
(0.04
)
Diluted net loss per share
 
$
(0.41
)
 
$
(0.04
)
 
 
 
 
 
Weighted average number of shares used in per share calculations:
 
 

 
 

Basic shares
 
91,723

 
92,027

Diluted shares
 
91,723

 
92,027


(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 CASH FLOWS
  
(Unaudited, in thousands, except per share amount`s)

 
 
 
Nine Months Ended
 
 
September 30,
 
 
2012
 
2011
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(37,903
)
 
$
(4,037
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
108,845

 
87,902

Change in deferred income taxes
 
4,957

 
2,326

Stock-based compensation
 
17,529

 
15,293

Non-cash interest expense
 
6,090

 
6,122

Earnings from equity investments
 
(21,462
)
 
(27,469
)
Distributed earnings from equity investments
 
26,779

 
30,080

Loss on early extinguishment of debt
 
15,464

 
4,185

Allowance for doubtful accounts
 
4,539

 
45

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

 
 
Accounts receivable
 
4,473

 
9,335

Inventories
 
(9,116
)
 
(827
)
Accounts payable
 
(14,124
)
 
(2,125
)
Accrued liabilities
 
3,828

 
14,671

Other current assets and liabilities
 
4,046

 
16,163

Other
 
(6,017
)
 
963

Net cash provided by operating activities
 
107,928


152,627

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Capital expenditures
 
(9,194
)
 
(5,863
)
Lottery and gaming systems expenditures
 
(30,723
)
 
(33,972
)
Other intangible assets and software expenditures
 
(40,109
)
 
(28,536
)
Equity method investments
 

 
(44,511
)
Distributions of capital on equity investments
 
18,404

 
6,633

Business acquisitions, net of cash acquired
 
(23,989
)
 
(50,177
)
Change in other assets and liabilities, net
 
(1,689
)
 
(11,356
)
Net cash used in investing activities
 
(87,300
)

(167,782
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from issuance of long-term debt
 
311,975

 

Payments on long-term debt
 
(234,148
)
 
(6,232
)
Payments of financing fees
 
(13,497
)
 
(9,186
)
Purchases of treasury stock
 
(47,401
)
 

Net redemptions of common stock under stock-based compensation plans
 
(4,797
)
 
(1,426
)
Net cash provided by (used in) financing activities
 
12,132


(16,844
)
Effect of exchange rate changes on cash and cash equivalents
 
(1,208
)

(5,403
)
Increase (decrease) in cash and cash equivalents
 
31,552

 
(37,402
)
Cash and cash equivalents, beginning of period
 
104,402

 
124,281

Cash and cash equivalents, end of period
 
$
135,954

 
$
86,879

 
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 amount`s)

Non-cash investing and financing activities
 
For the nine months ended September 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.
Our total investment in International Terminal Leasing, which is described in Note 16 of the Notes to Consolidated Financial Statements in our 2011 Annual Report on Form 10-K, was $35,961 as of September 30, 2011, which includes a non-cash investment of $4,859 during the nine months ended September 30, 2011.



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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) Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying consolidated financial statements of the Company 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 September 30, 2012, our results of operations and comprehensive income for the three and nine months ended September 30, 2012 and 2011, and our cash flows for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2012, except as discussed below.

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 market changes that have altered 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 and nine months ended September 30, 2012 but was not material to our consolidated financial position or results of operations as of and for the three and nine months ended September 30, 2012.

Recently Issued Accounting Guidance
In May 2011, the Financial Accounting Standards Board (the "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 non-financial assets, permits certain financial assets and liabilities with offsetting positions in market or counter-party 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. We adopted the guidance on January 1, 2012, resulting in a change in the presentation of comprehensive income for the three and nine months ended September 30, 2012 and 2011.
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

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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. 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.

(2) 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 per share available to common stockholders for the three and nine months ended September 30, 2012 and 2011:
 
    
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Income (numerator)
 
 

 
 

 
 
 
 
Net loss
 
$
(27,133
)
 
$
(4,124
)
 
$
(37,903
)
 
$
(4,037
)
Shares (denominator)
 
 

 
 

 
 
 
 
Weighted average basic common shares outstanding
 
89,950

 
92,125

 
91,723

 
92,027

Effect of dilutive securities-stock rights
 

 

 

 

Weighted average diluted common shares outstanding
 
89,950

 
92,125

 
91,723

 
92,027

Basic and diluted per share amounts
 
 

 
 

 
 
 
 
Basic net loss per share
 
$
(0.30
)
 
$
(0.04
)
 
$
(0.41
)
 
$
(0.04
)
Diluted net loss per share
 
$
(0.30
)
 
$
(0.04
)
 
$
(0.41
)
 
$
(0.04
)
 
For the three and nine months ended September 30, 2012 there were no dilutive stock rights due to the net loss reported for the periods.

(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 nine months ended September 30, 2012 was not material.
The condensed combined summary financial information for the nine months ended September 30, 2012 and 2011 presented below represents 100% of the financial results of all of our equity method investees owned during the periods indicated.

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Nine Months Ended
 
 
September 30,
 
 
2012
 
2011

Revenue
 
715,753

 
710,458

Revenue less cost of revenue
 
320,995

 
361,041

Net Income
 
93,414

 
106,805


(4) Inventories
 
Inventories consist of the following:
 
 
September 30, 2012
 
December 31, 2011
Parts and work-in-process
 
$
32,227

 
$
35,444

Finished goods
 
55,565

 
44,298

 
 
$
87,792

 
$
79,742

 
Parts and work-in-process includes costs for equipment expected to be sold. Finished goods include point of sale terminals sold to customers or used to fulfill long-term lottery or gaming contracts. 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

Outstanding Debt
The following reflects outstanding debt as of September 30, 2012 and December 31, 2011:
 
 
September 30, 2012
 
December 31, 2011
Revolver, varying interest rate, due 2015
 
$

 
$

Term Loan, varying interest rate, due 2013 (1)
 

 
13,300

Term Loan, varying interest rate, due 2015 (1)
 
561,122

 
552,331

7.875% Senior Notes, due 2016 ("2016 Notes")
 

 
200,000

8.125% Senior Notes, due 2018 ("2018 Notes")
 
250,000

 
250,000

9.250% Senior Notes, due 2019 ("2019 Notes") (2)
 
345,811

 
345,533

6.250% Senior Notes, due 2020 ("2020 Notes")
 
300,000

 

Chinese Renminbi Yuan ("RMB") denominated loans, due 2014 (the "China Loans") and Other Debt
 
12,133

 
29,503

Total long-term debt outstanding
 
$
1,469,066

 
$
1,390,667

    
(1) Net of unamortized discount of $178 as of September 30, 2012 and $379 as of December 31, 2011.
(2) Net of unamortized discount of $4,189 as of September 30, 2012 and $4,467 as of December 31, 2011.

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 $561,122 of term loan borrowings were outstanding as of September 30, 2012. As of September 30, 2012, there was $39,671 in outstanding letters of credit and $210,329 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

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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 amendment to the Credit Agreement entered into in August 2011, 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 September 30, 2012.
In February 2012, we refinanced approximately $16,400 of the revolving credit facility and term loan commitments that were not extended in connection with the amendment to the Credit Agreement entered into in August 2011 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.
2020 Notes
On August 20, 2012, SGI, a wholly owned subsidiary of the Company, issued the 2020 Notes at a price of 100% of the principal amount thereof in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States under Regulation S under the Securities Act. The 2020 Notes were issued pursuant to an indenture dated as of August 20, 2012 (the “2020 Indenture”) among SGI, as issuer, the Company, as a guarantor, the subsidiary guarantors party thereto and The Bank of Nova Scotia Trust Company of New York, as trustee.

The 2020 Notes bear interest at the rate of 6.250% per annum, which accrues from August 20, 2012 and is payable semiannually in arrears on March 1 and September 1 of each year, commencing on March 1, 2013. The 2020 Notes mature on September 1, 2020, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the 2020 Indenture.

SGI may redeem some or all of the 2020 Notes at any time prior to September 1, 2015 at a price equal to 100% of the principal amount of the 2020 Notes plus accrued and unpaid interest, if any, to the date of redemption plus a ''make-whole'' premium. SGI may redeem some or all of the 2020 Notes at any time on or after September 1, 2015 at the prices specified in the 2020 Indenture. In addition, at any time prior to September 1, 2015, SGI may redeem up to 35% of the initially outstanding aggregate principal amount of the 2020 Notes at a redemption price of 106.250% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds contributed to the capital of SGI from one or more equity offerings of the Company. Additionally, if a holder of the 2020 Notes is required to be licensed, qualified or found suitable under any applicable gaming laws or regulations and that holder does not become so licensed or qualified or is not found to be suitable, then SGI will have the right to, subject to certain notice provisions set forth in the Indenture, (1) require that holder to dispose of all or a portion of those 2020 Notes or (2) redeem the 2020 Notes of that holder at a redemption price calculated as set forth in the 2020 Indenture. If the Company or SGI experiences specific kinds of changes in control or the Company or any of its restricted subsidiaries sells certain of its assets, then SGI must offer to repurchase the 2020 Notes on the terms set forth in the 2020 Indenture.

The 2020 Notes are subordinated to all of SGI's existing and future senior debt, including its indebtedness under its credit agreement, rank equally with all of its existing and future senior subordinated debt, including the 2019 Notes and its guarantee of the 2018 Notes, and rank senior to all of its future subordinated debt that is expressly subordinated to the 2020 Notes. The 2020 Notes are guaranteed on a senior subordinated unsecured basis by the Company and all of its wholly owned domestic subsidiaries (other than SGI). The guarantees of the 2020 Notes are subordinated to all of the guarantors' existing and future senior debt, including their guarantees of the SGI's indebtedness under the credit agreement, rank equally with all of their existing and future senior subordinated debt, including, in the case of the Company, the 2018 Notes and its guarantee of the 2019 Notes and, in the case of the other guarantors, their guarantees of the 2019 Notes and the 2018 Notes, and rank senior to

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all of their future debt that is expressly subordinated to the guarantees of the 2020 Notes. The 2020 Notes are structurally subordinated to all of the liabilities of the Company's non-guarantor subsidiaries.

The 2020 Indenture contains certain covenants that, among other things, limit the Company's ability, and the ability of certain of 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, or sell, transfer, lease or otherwise dispose of all or substantially all assets, or create certain liens and other encumbrances on assets.

The 2020 Indenture contains events of default customary for agreements of its type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company or SGI, all outstanding 2020 Notes will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 25% in principal amount of the then outstanding 2020 Notes may declare all the 2020 Notes to be due and payable immediately.

In connection with the issuance of the 2020 Notes, SGI, the Company, the subsidiary guarantors party thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative for the initial purchasers listed therein, entered into a registration rights agreement dated August 20, 2012 (the “Registration Rights Agreement”). Under the Registration Rights Agreement, SGI and the guarantors agreed, for the benefit of the holders of the 2020 Notes, that they will file with the Securities and Exchange Commission (the “SEC”), and use their commercially reasonable efforts to cause to become effective, a registration statement relating to an offer to exchange the 2020 Notes for an issue of SEC-registered notes (the “Exchange Notes”) with terms identical to the 2020 Notes (except that the Exchange Notes will not be subject to restrictions on transfer or to any increase in the annual interest rate as described below).

Under certain circumstances, including if applicable interpretations of the staff of the SEC do not permit SGI to effect the exchange offer, SGI and the guarantors will use their commercially reasonable efforts to cause to become effective a shelf registration statement relating to resales of the 2020 Notes and to keep that shelf registration statement effective until the first anniversary of the date such shelf registration statement becomes effective, or such shorter period that will terminate when all 2020 Notes covered by the shelf registration statement have been sold. The obligation to complete the exchange offer and/or file a shelf registration statement will terminate on the second anniversary of the date of the Registration Rights Agreement.

If the exchange offer is not completed (or, if required, the shelf registration statement is not declared effective) on or before August 20, 2013 (subject to the right of the Company to extend such date by up to 90 additional days under customary “blackout” provisions if the Company determines in good faith that it is in possession of material, non-public information), the annual interest rate borne by the 2020 Notes will be increased by 0.25% per annum for the first 90-day period immediately following such date and by an additional 0.25% per annum with respect to each subsequent 90-day period, up to a maximum additional rate of 1.00% per annum thereafter until the exchange offer is completed, the shelf registration statement is declared effective or the obligation to complete the exchange offer and/or file the shelf registration statement terminates, at which time the interest rate will revert to the original interest rate on the date the 2020 Notes were originally issued.

2016 Notes

On September 19, 2012, SGI redeemed all outstanding 2016 Notes at a redemption price equal to 103.938% of the aggregate principal amount, plus accrued and unpaid interest up to, but not including, the redemption date. Bondholders received payment in full consisting of principal in the amount of $200,000, redemption premium of $7,876 and accrued interest of $4,113. In connection with the redemption, the Company recorded a loss on early extinguishment of debt of approximately $15,464 comprised primarily of the redemption premium and the write-off of previously deferred financing costs.
Other Debt
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 25,446 as of September 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

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amount of $6,500 was issued to support this term loan.

(6) Derivative Financial Instruments

During the nine months ended September 30, 2012, we have entered into and settled foreign currency forward contracts to hedge a portion of the net investment in one of our subsidiaries that is denominated in Euros. We did not have any derivative instruments as of December 31, 2011. The forward contracts provide for the sale of Euros for U.S. dollars. The forward contracts outstanding as of September 30, 2012 mature on various dates between December 2012 and May 2013. We have designated the forward contracts as qualified hedges in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. During the three and nine months ended September 30, 2012, we recorded a loss associated with the forward contracts of approximately $489 and a gain of $1,208, respectively, in "other comprehensive (loss) income" on our Consolidated Statement of Operations and Comprehensive Income. The following table provides further information relating to the Company's foreign currency forward contracts at September 30, 2012.
 
Location of Balance Sheet
 
Notional Amount
 
Weighted average exchange rate
 
Fair Value Asset (Liability)
 
Valuation Technique
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
Accrued Liabilities
 
€25,000
 
1.2797
 
$(238)
 
Level 2

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 nine months ended September 30, 2012, we recorded a gain, net of tax, associated with our share of this derivative instrument of $168 and a loss, net of tax, of $29, respectively, in "other comprehensive (loss) income" on our Consolidated Statement of Operations and Comprehensive Income and our "Equity Investments" on our Consolidated Balance Sheet as of September 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 $2,040, and an increase in other assets of approximately of approximately $1,490, a decrease in inventory of approximately $1,970, a decrease in the current portion of deferred income taxes of approximately $1,090 and a decrease in prepaid expenses, deposits and other current assets of approximately $470. We have applied the adjustment retrospectively to the Consolidated Balance Sheet as of December 31, 2011.

The following presents certain information regarding our intangible assets as of September 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.

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Intangible Assets
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
Balance as of September 30, 2012
 
 

 
 

 
 

Amortizable intangible assets:
 
 

 
 

 
 

Patents
 
$
13,581

 
$
5,900

 
$
7,681

Customer lists
 
41,268

 
24,000

 
17,268

Licenses
 
83,924

 
64,353

 
19,571

Intellectual property
 
24,154

 
19,692

 
4,462

Lottery contracts
 
1,500

 
1,271

 
229

Non-compete
 
426

 
37

 
389

 
 
164,853

 
115,253

 
49,600

Non-amortizable intangible assets:
 
 

 
 

 
 

Trade name
 
39,754

 
2,118

 
37,636

Total intangible assets
 
$
204,607

 
$
117,371

 
$
87,236

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 nine months ended September 30, 2012 was approximately $4,700 and $13,100, respectively. The intangible amortization expense for the three and nine months ended September 30, 2011 was approximately $3,800 and $11,300, respectively.
 
The table below reconciles the change in the carrying amount of goodwill, by reporting segment, from December 31, 2011 to September 30, 2012.
Goodwill
 
Printed
Products

 
Lottery
Systems

 

Gaming

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

 
$
186,620

 
$
247,653

 
$
768,393

Acquisitions
 
5,118

 
9,913

 
3,490

 
18,521

Foreign currency adjustments
 
1,169

 
(434
)
 
9,975

 
10,710

Balance as of September 30, 2012
 
$
340,407

 
$
196,099

 
$
261,118

 
$
797,624


(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 generally based on an employee’s average compensation over the two years preceding retirement. In the third quarter, we remeasured the U.K. Plan valuation as a result of a plan amendment which resulted in a decrease to our pension benefit obligation of $5,825. As a result of the amendment, the U.K. Plan is closed to new participants and pensionable earnings used to calculate retirement benefits are limited to a 2% annual increase, while the plan is less than 100% funded. 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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The following table sets forth the combined amount of net periodic benefit cost recognized for the three and nine months ended September 30, 2012 and 2011:
    
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Components of net periodic pension benefit cost:
 
 

 
 

 
 
 
 
Service cost
 
$
428

 
$
589

 
$
1,564

 
$
1,512

Interest cost
 
1,135

 
1,114

 
3,429

 
3,461

Expected return on plan assets
 
(1,436
)
 
(1,161
)
 
(3,890
)
 
(3,485
)
Amortization of actuarial gains
 
135

 
95

 
637

 
284

Amortization of prior service costs
 
(113
)
 
(54
)
 
(151
)
 
(59
)
Net periodic cost
 
$
149

 
$
583

 
$
1,589

 
$
1,713

 
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 (23.3)% and (114.6)%, respectively, for the three months ended September 30, 2012 and 2011 and the effective tax rates of (53.9)% and 145.5%, respectively, for the nine months ended September 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 nine months ended September 30, 2012 and 2011 does not include the benefit of the current year U.S. tax loss. Income tax expense for the three and nine months ended September 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 nine months ended September 30, 2012 and during the fiscal year ended December 31, 2011:
 
 
Nine Months Ended
 
Twelve Months Ended
 
 
September 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 restricted stock units ("RSUs")
 
696

 
708

Shares repurchased into treasury stock
 
(6,422
)
 

Shares outstanding as of end of period
 
86,707

 
92,433


During the nine months ended September 30, 2012, the Company repurchased 6,422 shares under its previously announced repurchase program for $47,401. From October 1, 2012 to November 2, 2012, the Company repurchased an additional 1,670 shares for $13,266.

(11) Stock-Based Compensation and Other Incentive Compensation
 
We offer stock-based compensation through the use of stock options and RSUs. We also offer an 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 equity-based compensation plan.



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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 pre-existing 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 are not required to be 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 and the applicable vesting schedule.
The Company may grant certain awards with respect to which vesting 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 nine months ended September 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

Granted
 
10

 
 
 
7.27

 

Exercised
 

 
 
 

 

Canceled
 

 
 
 

 

Options outstanding as of September 30, 2012
 
3,884

 
7.6

 
$
9.67

 
$
699

Options exercisable as of September 30, 2012
 
938

 
5.5

 
$
12.42

 
$
317

 
The weighted average grant date fair value of options granted during the three months ended September 30, 2012 was $3.80. No options were granted during the three months ended June 30, 2012 and 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 nine months ended September 30, 2012, we recognized stock-based compensation expense of approximately $900 and $2,900, respectively, related to the vesting of stock options and the related tax benefit of approximately $340 and $1,100, respectively, prior to consideration of any valuation allowance recorded against the tax benefit. For the three and nine months ended September 30, 2011, we recognized stock-based compensation expense of approximately $1,500 and $4,900, respectively, related to the vesting of stock options and the related tax benefit of approximately $600 and $1,800, respectively, prior to consideration of any valuation allowance recorded against the tax benefit.
 
As of September 30, 2012, we had unrecognized compensation expense of approximately $8,900 relating to stock

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option awards that will be amortized over a weighted average period of approximately two years.


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Restricted Stock Units
 
A summary of the changes in RSUs outstanding during the nine months ended September 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

Granted
 
17

 
7.44

Vested
 
(483
)
 
8.72

Canceled
 
(2
)
 
12.62

Unvested units as of September 30, 2012
 
5,216

 
$
10.70

 
For the three and nine months ended September 30, 2012, we recognized stock-based compensation expense of approximately $4,900 and $14,500, respectively, related to the vesting of RSUs and the related tax benefit of approximately $1,860 and $5,520, respectively, prior to consideration of any valuation allowance recorded against the tax benefit. For the three and nine months ended September 30, 2011, we recognized stock-based compensation expense of approximately $4,100 and $10,300 related to the vesting of RSUs and the related tax benefit of approximately $1,600 and $3,900, respectively, prior to consideration of any valuation allowance recorded against the tax benefit.
 
As of September 30, 2012, we had unrecognized compensation expense of approximately $43,100 relating to RSUs that will be amortized over a weighted average period of approximately two years.

Other Incentive Compensation

In December 2010, the Company adopted a performance-based incentive compensation plan relating to our Asia-Pacific business ("the Asia-Pacific Plan"). The purpose of the Asia Pacific Plan is to provide an equitable and competitive compensation opportunity to certain key employees and consultants of the Company who are involved in the Company's operations in China (and potentially other jurisdictions in the Asia-Pacific region) (the "Asia-Pacific Business") and to promote the creation of long-term value for the Company's stockholders by directly linking Asia-Pacific Plan participants' compensation under the plan to the appreciation in value of such business. Each participant will be eligible to receive a cash payment following the end of 2014 equal to a pre-determined share of an Asia-Pacific Business incentive compensation pool. The incentive compensation pool will equal a certain percentage of the growth in the value of the Asia-Pacific Business over four years, calculated in the manner provided under the Asia-Pacific Plan and subject to a cap of (1) $35 million, in the event an Asia-Pacific Business liquidity event does not occur by December 31, 2014 or (2) $50 million, in the event an Asia-Pacific Business liquidity event occurs by December 31, 2014. An "Asia-Pacific Business liquidity event" means an initial public offering of at least 20% of the Asia-Pacific Business or a strategic investment by a third-party to acquire at least 20% of the Asia-Pacific Business, in each case, that is approved by the Company. As of September 30, 2012, we have recorded an accrual included in Other long-term liabilities of $2,652 related to the Asia-Pacific Plan.

(12) Reportable Segment Information 
We report our operations in three business segments: Printed Products, Lottery Systems and Gaming. In evaluating financial performance of our reportable segments, 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, loss on early extinguishment of debt, 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.
    The following tables set forth financial information for the three and nine months ended September 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.

 

Three Months Ended September 30, 2012
 

Printed
Products


Lottery
Systems


Gaming

Total
Revenue:

 


 


 


 

Instant tickets

$
124,434

 
$

 
$


$
124,434

Services


 
49,391

 
33,231


82,622

Sales

2,932

 
12,469

 
5,020


20,421

Total revenue

127,366

 
61,860

 
38,251


227,477

Cost of instant tickets (1)

73,085

 

 


73,085

Cost of services (1)


 
27,852

 
15,095


42,947

Cost of sales (1)

1,844

 
6,997

 
3,943


12,784

Selling, general and administrative

11,430

 
6,241

 
8,629


26,300

Employee termination and restructuring

287

 

 
1,543


1,830

Depreciation and amortization

10,426

 
11,877

 
16,788


39,091

Segment operating income (loss)

$
30,294

 
$
8,893


$
(7,747
)

$
31,440

Unallocated corporate expenses




 


 


(18,233
)
Consolidated operating income

 


 


 


$
13,207


(1) Exclusive of depreciation and amortization.
 
 

Three Months Ended September 30, 2011
 

Printed
Products

Lottery
Systems


Gaming

Total
Revenue:

 


 


 


 

Instant tickets

$
126,693

 
$

 
$


$
126,693

Services


 
49,944

 
31,485


81,429

Sales

2,953

 
9,640

 
2,024


14,617

Total revenue

129,646

 
59,584

 
33,509


222,739

Cost of instant tickets (1)

71,785

 

 


71,785

Cost of services (1)


 
26,899

 
15,663


42,562

Cost of sales (1)

1,906

 
6,813

 
1,613


10,332

Selling, general and administrative

13,029

 
6,626

 
4,238


23,893

Employee termination and restructuring
 

 

 
1,030

 
1,030

Depreciation and amortization

8,177

 
11,939

 
7,744


27,860

Segment operating income

$
34,749


$
7,307

 
$
3,221


$
45,277

Unallocated corporate expenses

 


 


 


(23,901
)
Consolidated operating income

 


 


 


$
21,376


(1) Exclusive of depreciation and amortization.



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Nine Months Ended September 30, 2012
 
 
Printed
Products
 
Lottery
Systems
 
Gaming
 
Total
Revenue:
 
 

 
 

 
 

 
 

Instant tickets
 
$
367,385

 
$

 
$

 
$
367,385

Services
 

 
153,511

 
108,032

 
261,543

Sales
 
8,177

 
37,446

 
16,808

 
62,431

Total revenue
 
375,562

 
190,957

 
124,840

 
691,359

Cost of instant tickets (1)
 
211,468

 

 

 
211,468

Cost of services (1)
 

 
84,174

 
49,905

 
134,079

Cost of sales (1)
 
5,245

 
23,681

 
15,023

 
43,949

Selling, general and administrative
 
34,289

 
19,492

 
22,615

 
76,396

Employee termination and restructuring
 
4,794

 

 
5,957

 
10,751

Depreciation and amortization
 
31,242

 
35,953

 
41,201

 
108,396

Segment operating income (loss)
 
$
88,524

 
$
27,657

 
$
(9,861
)
 
$
106,320

Unallocated corporate expenses
 
 

 
 

 
 

 
(61,779
)
Consolidated operating income
 
 

 
 

 
 

 
$
44,541


(1) Exclusive of depreciation and amortization.

 
 
Nine Months Ended September 30, 2011
 
 
Printed
Products
 
Lottery
Systems
 
Gaming
 
Total
Revenue:
 
 

 
 

 
 

 
 

Instant tickets
 
$
370,972

 
$

 
$

 
$
370,972

Services
 

 
150,356

 
86,916

 
237,272

Sales
 
6,810

 
22,447

 
2,142

 
31,399

Total revenue
 
377,782

 
172,803

 
89,058

 
639,643

Cost of instant tickets (1)
 
211,151

 

 

 
211,151

Cost of services (1)
 

 
79,087

 
43,857

 
122,944

Cost of sales (1)
 
4,150

 
15,585

 
1,648

 
21,383

Selling, general and administrative
 
36,521

 
16,422

 
10,800

 
63,743

Employee termination and restructuring
 

 

 
1,030

 
1,030

Depreciation and amortization
 
24,745

 
35,185

 
27,581

 
87,511

Segment operating income
 
$
101,215

 
$
26,524

 
$
4,142

 
$
131,881

Unallocated corporate expenses
 
 

 
 

 
 

 
(67,288
)
Consolidated operating income
 
 

 
 

 
 

 
$
64,593


(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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2012
 
2011
 
2012
 
2011
Reportable segment operating income
 
$
31,440

 
$
45,277

 
$
106,320

 
$
131,881

Unallocated corporate expenses
 
(18,233
)
 
(23,901
)
 
(61,779
)
 
(67,288
)
Consolidated operating income
 
13,207

 
21,376

 
44,541

 
64,593

Interest expense
 
25,990

 
26,297

 
75,073

 
79,161

Earnings from equity investments
 
(5,702
)
 
(8,895
)
 
(21,462
)
 
(27,469
)
Loss on early extinguishment of debt
 
15,464

 
4,185

 
15,464

 
4,185

Other (income) expense, net
 
(537
)
 
1,711

 
93

 
(159
)
Net (loss) income before income taxes
 
$
(22,008
)
 
$
(1,922
)
 
$
(24,627
)
 
$
8,875

  

(13) Restructuring Plans

Gaming segment
    
In January 2012, following a comprehensive strategic review, we announced our exit from the Barcrest analog terminal business in order to focus our game design and other resources solely on our digital server-based supply model. We also reorganized the Games Media Limited business to more effectively capitalize on the Barcrest acquisition. We recorded approximately $1,500 of employee termination and restructuring costs associated with the reorganization in the three months ended September 30, 2012, including approximately $1,100 resulting from vacating additional facilities. We recorded approximately $6,000 of employee termination and restructuring costs associated with the reorganization in the nine months ended September 30, 2012. We currently do not expect to incur additional material costs or accelerated depreciation related to this reorganization.

Printed Products segment
Following a strategic review of our Printed Products business, we commenced a reorganization plan on April 18, 2012 to cease all printing and finishing activities at our Australia facility during the second half of 2012 and begin printing instant tickets for customers in this region at our other manufacturing plants. During the third quarter of 2012, we migrated printing for our customers in this region to our other manufacturing facilities. We recorded approximately $300 and $4,800 of employee termination and other restructuring costs associated with the reorganization for the three and nine months ended September 30, 2012, respectively. In addition, we recorded approximately $1,900 and $3,400 of accelerated depreciation for equipment related to this reorganization for the three and nine months ended September 30, 2012, respectively. We currently do not expect to incur additional material costs or accelerated depreciation related to this reorganization.

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A summary of the employee termination and other restructuring costs recognized for the nine months ended September 30, 2012 is set forth below:

 
 
Employee termination costs
 
Other restructuring costs
 
Total
Balance as of December 31, 2011
 
$

 
$

 
$

Restructuring costs additions
 
2,797

 
78

 
2,875

Cash Payments
 
(1,901
)
 

 
(1,901
)
Balance as of March 31, 2012
 
896

 
78

 
974

 
 
 
 
 
 
 
Restructuring cost additions
 
4,098

 
1,948

 
6,046

Cash Payments
 
(1,899
)
 
(388
)
 
(2,287
)
Balance as of June 30, 2012
 
$
3,095

 
$
1,638

 
$
4,733

 
 
 
 
 
 
 
Restructuring cost additions
 
485

 
1,345

 
1,830

Cash Payments
 
(70
)
 
(206
)
 
(276
)
Balance as of September 30, 2012
 
$
3,510

 
$
2,777

 
$
6,287


(14) Acquisitions
On June 7, 2012, we acquired ADS/Technology and Gaming, Ltd. ("ADS") for £3,450, subject to certain adjustments. ADS provides maintenance and other services for licensed betting offices in the U.K. We have integrated ADS into our existing Gaming business. We expect that the acquisition will allow us to expand our service offering. Approximately £2,200 of the £3,450 purchase price was in excess of the preliminary fair value of the acquired net assets and has been allocated to Goodwill. The operating results of ADS have been included in our Gaming segment and have been consolidated in our results of operations since the date of acquisition. Had the operating results of ADS been included as if the transaction was consummated on January 1, 2012, our pro forma results of operations for the nine months ended September 30, 2012 would not have been materially different.
On June 8, 2012, we acquired the equity interests of 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. Provoloto develops and distributes instant lottery tickets and manages instant ticket lotteries for Mexican charities. We expect this acquisition to strengthen our presence in Latin America and create a platform for further expansion in the region. Approximately $5,100 of the $9,720 purchase price was in excess of the preliminary fair value of the acquired net assets and has been allocated to Goodwill. The operating results of Provoloto have been included in our Printed Products segment and have been consolidated in our results of operations since the date of acquisition. Had the operating results of Provoloto been included as if the transaction was consummated on January 1, 2012, our pro forma results of operations for the nine months ended September 30, 2012 would not have been materially different.
On July 19, 2012, we acquired substantially all of the assets of Parspro.com ehf ("Parspro") for approximately $11,800, subject to certain adjustments. Parspro is a provider of sports betting systems and related products via point of sale terminals, the internet and mobile devices. Approximately $9,900 of the $11,800 purchase price was in excess of the preliminary fair value of the acquired net assets and has been allocated to Goodwill. The acquired assets include technology that we expect to integrate into our Lottery Systems business and our interactive games platform as part of an expanded service offering to lottery customers. Had the operating results of Parspro been included as if the transaction was consummated on January 1, 2012, our pro forma results of operations for the nine months ended September 30, 2012 would not have been materially different.

(15) Litigation

From time to time, in the normal course of its operations, we are a party to litigation matters and claims. The results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as the litigation and events related thereto unfold. We expense legal fees as incurred. We record a provision for contingent losses when it is both probable that a liability will be incurred and the amount or range of the loss can be reasonably estimated.

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Table of Contents

Our subsidiary, SGI, owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), which formerly operated the Colombian national lottery under contract with Empresa Colombiana de Recursos para la Salud, S.A. (together with its successor agencies, "Ecosalud"), an agency of the Colombian government. The contract provided for a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5,000 if certain levels of lottery sales were not achieved. In addition, SGI delivered to Ecosalud a $4,000 surety bond as a further guarantee of performance under the contract. Wintech started the instant lottery in Colombia, but, due to difficulties beyond its control, including, among other factors, social and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia that we believe was in violation of Wintech's exclusive license from Ecosalud, the projected sales level was not met for the year ended June 30, 1993.
In 1993, Ecosalud issued a resolution declaring that the contract was in default. In 1994, Ecosalud issued a liquidation resolution asserting claims for compensation and damages against Wintech, SGI and other shareholders of Wintech for, among other things, realization of the full amount of the penalty, plus interest, and the amount of the bond. SGI filed separate actions opposing each resolution with the Tribunal Contencioso of Cundinamarca in Colombia (the “Tribunal”), which upheld both resolutions. SGI appealed each decision to the Council of State. On May 25, 2012, the Council of State upheld the authority of Ecosalud to issue the resolutions, which decision was published on August 28, 2012. As a result of such decision, the Council of State will consider the merits of the claims set forth in the liquidation resolution in due course.
On June 4, 1999, Ecosalud filed a collection proceeding against SGI to enforce the liquidation resolution and recover the claimed damages. In July 2002, the Tribunal denied SGI's preliminary motion to dismiss the collection proceeding and the decision was upheld on appeal. SGI's procedural defense motion was also denied. As a result of these decisions, the collection proceeding will be heard in due course on its merits by the Tribunal and an appeal stage will be available.
SGI believes it has various defenses on the merits against Ecosalud's claims. Although we believe these claims will not result in a material adverse effect on our consolidated financial position or results of operations, it is not feasible to predict the final outcome, and there can be no assurance that these claims will not ultimately be resolved adversely to us or result in material liability.
On April 16, 2012, certain video lottery terminals operated by SNAI S.p.a. ("SNAI") in Italy and supplied by Barcrest erroneously printed what appeared to be winning jackpot and other tickets. SNAI has stated, and system data confirms, that no jackpots were actually won on that day. The terminals were deactivated pending a review by the Italian regulatory authority of the cause of the incident. We understand that the Italian regulatory authority has decided to revoke the certification of the version of the gaming system that Barcrest provided to SNAI, and has initiated proceedings, but not yet rendered a decision, to revoke the concession SNAI relies upon to operate video lottery terminals in Italy. We also understand that there is a right to appeal the Italian regulatory authority's decision.
In October 2012, SNAI filed a lawsuit in Italy against Barcrest and The Global Draw Limited, our subsidiary which acquired Barcrest from IGT-UK Group Limited, claiming liability based on breach of contract and tort. The lawsuit seeks to terminate SNAI's agreement with Barcrest and damages arising from the deactivation of the terminals, including among other things, lost profits, expenses and costs, potential awards to players who have sought to enforce what appeared to be winning jackpot and other tickets, compensation sought by managers of the gaming locations where SNAI video lottery terminals supplied by Barcrest were installed, damages to commercial reputation and any future damages arising from SNAI's potential loss of its concession or inability to obtain a new concession. While we believe we have meritorious defenses and potential third party recoveries, we are still in the process of evaluating the lawsuit and cannot currently predict the outcome of this matter.

(16) 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 2020 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 consolidated 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 September 30, 2012 and December 31, 2011 and for the three and nine months ended September 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

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Table of Contents

Subsidiaries and the Non-Guarantor Subsidiaries assuming the guarantee structures of the Credit Agreement, the 2020 Notes, the 2019 Notes and the 2018 Notes were in effect at the beginning of the periods presented.
 
The condensed consolidated 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.

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

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

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
60,907

 
$
137

 
$

 
$
76,560

 
$
(1,650
)
 
$
135,954

Accounts receivable, net
 

 
53,100

 
39,351

 
88,356

 

 
180,807

Inventories
 

 
24,748

 
15,695

 
47,349

 

 
87,792

Notes receivable
 
10,300

 

 

 

 

 
10,300

Other current assets
 
8,366

 
5,592

 
6,078

 
27,203

 

 
47,239

Property and equipment, net
 
4,894

 
160,490

 
34,011

 
197,005

 

 
396,400

Investment in subsidiaries
 
545,641

 
782,243

 

 
816,416

 
(2,144,300
)
 

Goodwill
 

 
273,656

 
78,618

 
445,350

 

 
797,624

Intangible assets
 

 
41,168

 
22,963

 
23,105

 

 
87,236

Intercompany balances
 

 

 
274,434

 

 
(274,434
)
 

Other assets
 
64,792

 
19,905

 
13,804

 
358,797

 
(2,615
)
 
454,683

Total assets
 
$
694,900

 
$
1,361,039

 
$
484,954

 
$
2,080,141

 
$
(2,422,999
)
 
$
2,198,035

Liabilities and stockholders’ equity
 
 

 
 

 
 

 
 

 
 

 
 

Current installments of long-term debt
 
$

 
$
6,280

 
$

 
$
8,698

 
$

 
$
14,978

Other current liabilities
 
25,872

 
55,576

 
33,470

 
98,650

 
(1,642
)
 
211,926

Long-term debt, excluding current installments
 
250,000

 
1,200,653

 

 
3,435

 

 
1,454,088

Other non-current liabilities
 
5,101

 
42,971

 
11,890

 
56,944

 

 
116,906

Intercompany balances
 
13,790

 
36,990

 

 
223,673

 
(274,453
)
 

Stockholders’ equity
 
400,137

 
18,569

 
439,594

 
1,688,741

 
(2,146,904
)
 
400,137

Total liabilities and stockholders’ equity
 
$
694,900

 
$
1,361,039

 
$
484,954

 
$
2,080,141

 
$
(2,422,999
)
 
$
2,198,035

 

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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