0000750004 sgms:GamingGroupMember 2018-01-01 2018-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2019

¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-13063

SCIENTIFIC GAMES CORPORATION

(Exact name of registrant as specified in its charter)



Nevada		81-0422894
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

6601 Bermuda Road, Las Vegas, Nevada89119

(Address of principal executive offices)

(Zip Code)

~~(702)~~ (702) 897-7150

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	SGMS	Nasdaq Global Select Market

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. Yesý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filerý	☒	Accelerated filer ¨	☐

Non-accelerated filer ¨	☐	Smaller reporting company ¨	☐

Emerging growth company ¨	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý

~~Securities registered pursuant to Section 12(b) of the Act:~~



~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, $.001 par value~~	~~SGMS~~	~~Nasdaq Global Select Market~~

The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of ~~May 6,~~November 4, 2019:

Common Stock: ~~92,923,552~~93,252,392

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION

AND OTHER INFORMATION

THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2019



		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	7

	Consolidated Statements of Operations ~~and Comprehensive Income (Loss)~~ for the Three and Nine Months Ended ~~March 31,~~September 30, 2019 and 2018	7

	Consolidated ~~Balance Sheets as~~Statements of ~~March 31,~~Comprehensive Loss for the Three and Nine Months Ended September, 30, 2019 and ~~December 31,~~ 2018	8

	~~Condensed~~ Consolidated ~~Statements~~Balance Sheets as of ~~Cash Flows for the Three Months Ended March 31,~~September 30, 2019 and December 31, 2018	9

	~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	10

	Notes to Condensed Consolidated Financial Statements	11

Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	3339

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4451

Item 4.	Controls and Procedures	4451

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	4451

Item 1A.	Risk Factors	4451

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4451

Item 3.	Defaults Upon Senior Securities	4451

Item 4.	Mine Safety Disclosures	4451

Item 5.	Other Information	4451

Item 6.	Exhibits	4552



Glossary of Terms
The following terms or acronyms used in this Quarterly Report on Form 10-Q are defined below:
Term or Acronym		Definition
2018 10-K		2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019
2020 Notes		6.250% senior subordinated notes due 2020 issued by SGI
2021 Notes		6.625% senior subordinated notes due 2021 issued by SGI
2022 Secured Notes		7.000% senior secured notes due 2022 issued by SGI
2022 Unsecured Notes		10.000% senior unsecured notes due 2022 issued by SGI
2025 Secured Notes		5.000% senior secured notes due 2025 issued by SGI
2026 Secured Euro Notes		3.375% senior secured notes due 2026 issued by SGI
2026 Unsecured Euro Notes		5.500% senior unsecured notes due 2026 issued by SGI
2026 Unsecured Notes		8.250% senior unsecured notes due 2026 issued by SGI
AEBITDA		Adjusted EBITDA, our performance measure of profit or loss for our business segments (see Note 3)
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
B2C		business to consumer model
D&A		depreciation, amortization and impairments (excluding goodwill)
FASB		Financial Accounting Standards Board
Guarantor Subsidiaries		substantially all of SGC’s 100%-owned U.S. subsidiaries other than SGC’s ~~100%-owned U.S. Social gaming subsidiaries~~82% stake in SciPlay
LNS		Lotterie Nazionali S.r.l.
Non-Guarantor Subsidiaries		SGC’s U.S. subsidiaries that are not Guarantor Subsidiaries and SGC’s foreign subsidiaries
Note		a note in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, unless otherwise indicated
NYX		NYX Gaming Group Limited
Participation		with respect to our Gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which we earn revenues and are paid based on: (1) a percentage of the amount wagered less payouts; (2) fixed daily-fees; (3) a percentage of the amount wagered; or (4) a combination of (2) and (3), and with respect to our Lottery business, refers to a contract or arrangement in which we earn revenues and are paid based on a percentage of retail sales
POS		percentage of retail sales
PTG		proprietary table games
R&D		research and development
RFP		request for proposal
RMG		real-money gaming
RSU		restricted stock unit
SciPlay		SciPlay Corporation, formerly referred to as our Social business segment
SEC		Securities and Exchange Commission
Secured Notes		refers to the 2022 Secured Notes, 2025 Secured Notes, and 2026 Secured Euro Notes, collectively
SG&A		selling, general and administrative
SGC		Scientific Games Corporation
SGI		Scientific Games International, Inc., a wholly-owned subsidiary of SGC
Shufflers		various models of automatic card shufflers, deck checkers and roulette chip sorters
Subordinated Notes		refers to the 2020 Notes and 2021 Notes, collectively
Unsecured Notes		refers to the 2022 Unsecured Notes, 2026 Unsecured Euro Notes and 2026 Unsecured Notes, ~~collecitvely~~collectively
U.S. GAAP		accounting principles generally accepted in the U.S.
VGT		video gaming terminal
VLT		video lottery terminal

Intellectual Property Rights

FORWARD-LOOKING STATEMENTS

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

competition;

U.S. and international economic and industry conditions;

slow growth of new gaming jurisdictions, slow addition of casinos in existing jurisdictions and declines in the replacement cycle of gaming machines;

ownership changes and consolidation in the gaming industry;

opposition to legalized gaming or the expansion thereof and potential restrictions on internet wagering;

inability to adapt to, and offer products that keep pace with, evolving technology, including any failure of our investment of significant resources in our R&D efforts;

inability to develop successful products and services and capitalize on trends and changes in our industries, including the expansion of internet and other forms of interactive gaming;

laws and government regulations, both foreign and domestic, including those relating to gaming, data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data, and environmental laws, and those laws and regulations that affect companies conducting business on the internet, including online gambling;

the continuing evolution of the scope of data privacy and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions;

significant opposition in some jurisdictions to interactive social gaming, including social casinos and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casinos specifically, and how this could result in a prohibition on interactive social gaming or social casinos altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations;

legislative interpretation and enforcement, regulatory perception and regulatory risks with respect to gaming, especially internet wagering, social gaming and sports wagering;

reliance on technological blocking systems;

expectations of shift to regulated online gaming or sports wagering;

expectations of growth in total consumer spending on social casino gaming;

SciPlay’s dependence ~~upon~~on certain key ~~providers in our Social gaming business;~~

providers;

inability to win, retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts;

protection of our intellectual property, inability to license third-party intellectual property and the intellectual property rights of others;

security and integrity of our products and systems;

reliance on or failures in information technology and other systems;

security breaches and cyber-attacks, challenges or disruptions relating to the implementation of a new global enterprise resource planning system;

failure to maintain adequate internal control over financial reporting;

natural events that disrupt our operations or those of our customers, suppliers or regulators;

inability to benefit from, and risks associated with, strategic equity investments and relationships;

risks related to the initial public offering of a minority interest in our ~~social~~Social gaming business via the SciPlay initial public offering, including the possibility that the anticipated benefits of the initial public offering are not ~~realized or that we may not be able to utilize the proceeds of the initial public offering as expected;~~realized;

incurrence of restructuring costs;

implementation of complex new accounting standards;

changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;

changes in demand for our products;

fluctuations in our results due to seasonality and other factors;

dependence on suppliers and manufacturers;

risks relating to foreign operations, including anti-corruption laws, fluctuations in currency rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the considerable uncertainty around the U.K.’s withdrawal from the European Union (“EU”) and the possibility of the British parliament’s failure to approve the U.K.’s withdrawal from the EU, resulting in a “hard Brexit” or “no deal Brexit”;

possibility that the renewal of LNS’ concession to operate the Italian instant games lottery is not finalized (including as the result of a pending third-party protest against the renewal of the concession, or any ~~right of~~ appeal ~~on a~~from existing court ~~ruling on a~~rulings relating to such third-party protest);

the impact of the new U.K. legislation approving the reduction of fixed-odds betting terminals maximum stakes limit;

changes in tax laws or tax rulings, or the examination of our tax positions;

difficulty predicting what impact, if any, ~~the shutdown of the U.S. government or~~ new tariffs imposed by and other trade actions taken by the U.S. and foreign jurisdictions could have on our business;

dependence on key employees;

litigation and other liabilities relating to our business, including litigation and liabilities relating to our contracts and licenses, our products and systems, our employees (including labor disputes), intellectual property, environmental laws and our strategic relationships;

level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs;

inability to reduce or refinance our indebtedness;

restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;

influence of certain stockholders, including decisions that may conflict with the interests of other stockholders; and

stock price volatility.

Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under Part I, Item 1A “Risk Factors” in our 2018 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no and expressly disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

You should also note that this Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from

sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning the international gaming, lottery, social and digital gaming industries than the same industries in the U.S.

Due to rounding, certain numbers presented herein may not precisely agree or add up on a cumulative basis to the totals previously reported.

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE INCOME (LOSS)~~

(Unaudited, in millions, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenue:
Services	$	452		$	439		$	1,368		$	1,315
Product sales	255			240			731			721
Instant products	148			142			438			442
Total revenue	855			821			2,537			2,478
Operating Expenses:
Cost of services⁽¹⁾	133			124			401			371
Cost of product sales⁽¹⁾	115			110			333			335
Cost of instant products⁽¹⁾	69			67			211			208
Selling, general and administrative	175			170			535			515
Research and development	47			50			142			153
Depreciation, amortization and impairments	162			166			497			527
Restructuring and other	11			339			24			424
Operating income (loss)	143			(205		)	394			(55		)
Other (expense) income:
Interest expense	(146		)	(147		)	(447		)	(448		)
Earnings from equity investments	4			4			17			16
Loss on debt financing transactions	—			—			(60		)	(93		)
Gain (loss) on remeasurement of debt	19			(4		)	21			29
Other (expense) income, net	(5		)	—			2			(2		)
Total other expense, net	(128		)	(147		)	(467		)	(498		)
Net income (loss) before income taxes	15			(352		)	(73		)	(553		)
Income tax benefit (expense)	3			—			(8		)	(6		)
Net income (loss)	18			(352		)	(81		)	(559		)
Less: Net income attributable to noncontrolling interest	4			—			6			—
Net income (loss) attributable to SGC	$	14		$	(352	)	$	(87	)	$	(559	)

Basic and diluted net income (loss) attributable to SGC per share:
Basic	$	0.15		$	(3.85	)	$	(0.94	)	$	(6.15	)
Diluted	$	0.15		$	(3.85	)	$	(0.94	)	$	(6.15	)

Weighted average number of shares used in per share calculations:
Basic shares	93			91			93			91
Diluted shares	94			91			93			91
(1) Excludes D&A.
See accompanying notes to condensed consolidated financial statements.

Three Months Ended
March 31,
2019 2018
Revenue:
Services $ 459
$ 438
Product sales 238
224
Instant products 140
150
Total revenue 837
812
Operating expenses:
Cost of services⁽¹⁾
133
122
Cost of product sales⁽¹⁾
107
105
Cost of instant products⁽¹⁾
67
70
Selling, general and administrative 186
172
Research and development 49
54
Depreciation, amortization and impairments 165
188
Restructuring and other 7
52
Operating income 123
49
Other (expense) income:
Interest expense (154 ) (155 )
Earnings from equity investments 6
7
Loss on debt financing transactions —
(93 )
Gain (loss) on remeasurement of debt 5
(1 )
Other expense, net —
(3 )
Total other expense, net (143 ) (245 )
Net loss before income taxes (20 ) (196 )
Income tax expense (4 ) (6 )
Net loss $ (24 ) $ (202 )
Other comprehensive income (loss):
Foreign currency translation gain, net of tax 55
51
Pension and post-retirement gain (loss), net of tax 1
(1 )
Derivative financial instruments unrealized (loss) gain, net of tax (5 ) 2
Other comprehensive income 51
52
Comprehensive income (loss) $ 27
$ (150 )

Basic and diluted net loss per share:
Basic $ (0.26 ) $ (2.24 )
Diluted $ (0.26 ) $ (2.24 )

Weighted average number of shares used in per share calculations:
Basic shares 92
90
Diluted shares 92
90
(1) Excludes D&A.
See accompanying notes to condensed consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in millions)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net income (loss)	$	18		$	(352	)	$	(81	)	$	(559	)
Other comprehensive loss:
Foreign currency translation loss, net of tax	(38		)	(8		)	(22		)	(46		)
Derivative financial instruments unrealized gain (loss), net of tax	3			3			(13		)	9
Total comprehensive loss	(17		)	(357		)	(116		)	(596		)
Less: comprehensive income attributable to noncontrolling interest	4			—			6			—
Comprehensive loss attributable to SGC	$	(21	)	$	(357	)	$	(122	)	$	(596	)
See accompanying notes to condensed consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions, except par value)


	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,213		$	168		$	363		$	168
Restricted cash	41			39			46			39
Accounts receivable, net	621			599			636			599
Notes receivable, net	104			114			123			114
Inventories	229			216			257			216
Prepaid expenses, deposits and other current assets	238			233			226			233
Total current assets	2,446			1,369			1,651			1,369
Non-current assets:
Restricted cash	12			13			12			13
Notes receivable, net	33			40			52			40
Property and equipment, net	517			547			516			547
Operating lease right-of-use assets	118			—			107			—
Goodwill	3,301			3,280			3,251			3,280
Intangible assets, net	1,745			1,809			1,579			1,809
Software, net	277			285			270			285
Equity investments	296			298			266			298
Other assets	92			77			203			77
Total assets	$	8,837		$	7,718		$	7,907		$	7,718

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term debt	$	1,046		$	45		$	288		$	45
Accounts payable	200			225			253			225
Accrued liabilities	540			477			504			477
Total current liabilities	1,786			747			1,045			747
Deferred income taxes	109			108			106			108
Operating lease liabilities	98			—			91			—
Other long-term liabilities	330			334			308			334
Long-term debt, excluding current portion	8,937			8,992			8,482			8,992
Total liabilities	11,260			10,181			10,032			10,181
Commitments and contingencies (see Note 16)
Stockholders’ deficit:
Common stock, par value $0.001 per share: 199 shares authorized; 110 and 109 shares issued and 93 and 92 shares outstanding, respectively	1			1			1			1
Additional paid-in capital	848			835			1,197			835
Accumulated loss	(2,848		)	(2,824		)	(2,911		)	(2,824		)
Treasury stock, at cost, 17 shares	(175		)	(175		)	(175		)	(175		)
Accumulated other comprehensive loss	(249		)	(300		)	(335		)	(300		)
Total SGC stockholders’ deficit							(2,223		)	(2,463		)
Noncontrolling interest							98			—
Total stockholders’ deficit	(2,423		)	(2,463		)	(2,125		)	(2,463		)
Total liabilities and stockholders’ deficit	$	8,837		$	7,718		$	7,907		$	7,718
See accompanying notes to condensed consolidated financial statements.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)


	Three Months Ended						Nine Months Ended
	March 31,						September 30,
	2019			2018			2019			2018
Cash flows from operating activities:
Net loss	$	(24	)	$	(202	)	$	(81	)	$	(559	)
Adjustments to reconcile net loss to cash provided by operating activities	179			309			597			678
Changes in working capital accounts, net of effects of acquisitions	6			(78		)	(120		)	237
Changes in deferred income taxes and other	6			1			7			—
Net cash provided by operating activities	167			30			403			356
Cash flows from investing activities:
Capital expenditures	(67		)	(88		)	(207		)	(293		)
Acquisitions of businesses and assets, net of cash acquired	—			(274		)	—			(274		)
Distributions of capital from equity investments	3			2			18			24
Additions to equity method investments							(1		)	(76		)
Net cash used in investing activities	(64		)	(360		)	(190		)	(619		)
Cash flows from financing activities:
Borrowings under revolving credit facility	40			—			40			185
Repayments under revolving credit facility	(175		)	(295		)	(365		)	(490		)
Proceeds from issuance of senior notes and term loans	1,100			2,512			1,100			2,512
Repayment of senior notes and term loans (inclusive of redemption premium)	—			(2,210		)	(1,050		)	(2,210		)
Repayment of assumed NYX debt	—			(288		)	—			(288		)
Payments on long-term debt	(12		)	(2		)	(33		)	(27		)
Payments of debt issuance and deferred financing costs	(14		)	(39		)	(15		)	(39		)
Payments on license obligations	(7		)	(7		)	(26		)	(22		)
Sale of future revenue	11			—			11			—
Net proceeds from issuance of SciPlay’s common stock							342			—
Payments of deferred SciPlay common stock offering costs							(9		)	—
Net redemptions of common stock under stock-based compensation plans and other	(1		)	(17		)	(6		)	(24		)
Net cash provided by (used in) financing activities	942			(346		)
Net cash used in financing activities							(11		)	(403		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	1			2			(1		)	(2		)
Increase (decrease) in cash, cash equivalents and restricted cash	1,046			(674		)	201			(668		)
Cash, cash equivalents and restricted cash, beginning of period	220			834			220			834
Cash, cash equivalents and restricted cash, end of period	$	1,266		$	160		$	421		$	166

Supplemental cash flow information:
Cash paid for interest	$	80		$	161		$	391		$	442
Income taxes paid	10			7			28			25
Distributed earnings from equity investments	4			1			24			24
Cash paid for contingent consideration included in operating activities							23			—
Supplemental non-cash transactions:
Non-cash rollover and refinancing of Term loans	$	—		$	3,275		$	—		$	3,275
Non-cash interest expense	7			6			19			19
NYX non-cash consideration transferred (inclusive of 2017 acquisition of ordinary shares)	—			93
NYX non-cash consideration transferred (including 2017 acquisition of ordinary shares)							—			93
See accompanying notes to condensed consolidated financial statements.

910

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in USD, table amounts in millions, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies

Description of the Business

We are a leading developer of technology-based products and services and associated content for the worldwide gaming, lottery, social and digital gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems and table game products and services to licensed gaming entities; providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; providing social casino solutions to retail consumers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services. We report our operations in ~~four~~4 business segments—Gaming, Lottery, SciPlay (formerly referred to as our Social business segment) and Digital.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of SGC and those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our condensed consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of SGC and its management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations, ~~and~~ comprehensive loss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2018 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

~~Significant Accounting Policies~~

~~There have been no changes to our significant accounting policies described within the Notes of our 2018 10-K other than adoption of ASC 842 described in Note 15.~~

~~Computation of Basic and Diluted Net Loss Per Share~~

Basic and diluted net loss per share were the same for all periods presented as all common stock equivalents would be anti-dilutive. We excluded 2 million and 3 million of stock options from the diluted weighted-average common shares outstanding for the three months ended March 31, 2019 and 2018, respectively. We excluded 2 million and 3 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three months ended March 31, 2019 and 2018, respectively.

~~New Accounting Guidance - Recently Adopted~~

T~~he FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842~~) in 2016. ASU 2016-02 combined with all subsequent amendments (collectively, “ASC 842”) requires balance sheet recognition for all leases with a lease term greater than one year to be recorded as a lease liability (on a discounted basis) with a corresponding right-of-use asset. This guidance also expands the required quantitative and qualitative disclosures for lease arrangements and gives rise to other changes impacting certain aspects of lessee and lessor accounting. We adopted ASC 842 as of January 1, 2019 using the optional transition method provided by ASU 2018-11, and applied both the lessee package of practical expedients and the available lessor practical

~~expedients. During the first quarter of 2019, the FASB issued ASU 2019-01,~~ ~~Leases (Topic 842) to amend ASU 2016-02. This~~

amendment exempts both lessees and lessors from having to provide certain prior year interim disclosure information in the fiscal year in which a company adopts the new leases standard. We have provided the related transition disclosures as of the beginning of 2019 in accordance with ASU 2019-1. See our 2018 10-K Note 1 for the impact on our consolidated financial statements and Note 15 in this Quarterly Report for our lease accounting policy and the quarterly impact of our adoption of ASC 842.

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

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

~~New Accounting Guidance - Not Yet Adopted~~

~~The FASB issued ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326)~~ in 2016. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of adopting this guidance.

~~In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement~~. The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted. We do not plan to early adopt this ASU, and we are currently evaluating the impact of adopting this guidance.

~~We do not expect that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.~~

~~Subsequent Events - Social Gaming Business~~SciPlay Initial Public Offering and Noncontrolling Interest

On May 7, 2019, ~~our subsidiary~~ SciPlay ~~Corporation (“SciPlay”)~~ completed an initial public offering (“IPO”) ~~of a 17.4%~~for an 18.0% minority interest in our Social gaming ~~business.~~business, after giving effect to the underwriters’ partial exercise of their over-allotment option on June 4, 2019. SciPlay has two classes of common stock - Class A common stock, which is traded on The NASDAQ Global Select Market under the symbol “SCPL,” and Class B common stock. On all matters submitted to a vote of SciPlay stockholders, Class B common stock entitles usSGC to ten votes per share (for so long as the number of shares of SciPlay common stock beneficially owned by usSGC represents at least 10% of SciPlay’s outstanding shares of common stock and, thereafter, one vote per share), and SciPlay Class A common stock entitles its owners to one vote per share. ~~We own~~As of September 30, 2019, SGC owned all of the outstanding Class B common stock, which represents approximately ~~82.6%~~82.0% of SciPlay’s total outstanding shares of common stock and approximately 97.9% of the combined voting power of both classes of SciPlay’s outstanding common stock. Accordingly, ~~we continue~~SGC continues to control shares representing a majority of the combined voting power in SciPlay and ~~will continue~~continues to have a controlling financial interest in and consolidate ~~our Social gaming business.~~SciPlay, subsequent to the IPO.

The corporate structure of the above transaction is commonly referred to as an “Up‑C” structure, which is often used by partnerships and limited liability companies when they undertake an ~~initial public offering~~IPO of their business. The Up‑C structure allows us to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for income tax purposes following the IPO. ~~The Company currently maintains~~We continue to maintain a full valuation allowance on ~~its~~certain of our U.S. net deferred tax ~~assets. We will~~assets, and we continue to monitor and assess positive and negative evidence with respect to our ability to realize our deferred tax assets, and we recognize that this transaction could have an impact on the overall valuation allowance assessment, but these impacts are still being evaluated. Any taxable gain associated with the IPO transaction is expected to be fully offset by net operating loss carryforwards, resulting in a reduction of our valuation allowance by the same amount.assets.

In connection with the SciPlay IPO we also entered into the following transactions:

A tax receivable agreement (“TRA”), which provides for the payment by SciPlay to usSGC of 85% of the amount of tax benefits, if any, that SciPlay actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of assets of SciPlay Parent Company, LLC (“SciPlay Parent LLC”) (a) in connection with the SciPlay IPO, (b) resulting from any redemptions or exchanges of membership interests of SciPlay Parent LLC pursuant to the SciPlay Parent LLC Operating Agreement or (c) resulting from certain

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

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

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

As a result of the IP License Agreement described above, ~~our Social gaming business will~~SciPlay is no longer be required to pay to Bally Gaming future royalties and or fees for use of intellectual property owned by Bally Gaming or its affiliates for ~~the Social gaming business’~~SciPlay’s currently available games. Accordingly, and commencing with the effectiveness of the IP License Agreement as of May 7, 2019, our Gaming business segment AEBITDA ~~will~~ no longer ~~benefit~~benefited from these charges, while our ~~Social gaming~~SciPlay business segment AEBITDA ~~will increase~~increased proportionately. ~~The total amount of~~There were no such IP charges for the three months ended ~~March 31,~~September 30, 2019, and the IP charges for the nine months ended September 30, 2019 were $10 million. Such IP charges for the three and nine months ended September 30, 2018 were ~~$7.3~~$7 million and ~~$6.2~~$19 million, ~~respectively, and~~respectively. The total amount of such IP charges for the years ended December 31, 2018 and 2017 were $26 million and $24 million, respectively.

SciPlay Holding Company, LLC (“SciPlay Holding”), a subsidiary of SciPlay, entered into a $150 million revolving credit agreement (the “SciPlay Revolver”) that matures in May 2024 (see Note 11).

As a result of these transactions, we received $312 million in net proceeds from the offering (net of $30 million used by SciPlay to pay the offering fees and balance retained for general corporate purposes), which enables us to make substantial payments to reduce our debt.

The noncontrolling interest share of equity in SciPlay is reflected as a component of the noncontrolling interest in the accompanying consolidated balance sheets and was $98 million as of September 30, 2019.

Significant Accounting Policies

There have been no changes to our significant accounting policies described within the Notes of our 2018 10-K other than adoption of ASC 842 described in Note 15.

Computation of Basic and Diluted Net Income (Loss) Per Share

Basic and diluted net income per share for the three months ended September 30, 2019 were computed by dividing net income attributable to SGC by the weighted average number of shares outstanding, and the weighted average number of shares outstanding adjusted to give effect to all potentially dilutive securities using the treasury stock method, respectively.

Basic and diluted net loss per share were the same for the three months ended September 30, 2018 and the nine months ended September 30, 2019 and 2018 as all common stock equivalents during those periods would be anti-dilutive. We excluded 2 million of stock options from the diluted weighted-average common shares outstanding for the nine months ended September 30, 2019 and 3 million of stock options from the diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2018. We excluded 3 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three months ended September 30, 2018 and both the nine months ended September 30, 2019 and 2018.

New Accounting Guidance - Recently Adopted

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

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows companies to make an election to reclassify from Accumulated Other Comprehensive Income (AOCI) to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The amendments in this updated guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. corporate federal income tax rate in the Tax Act is recognized. We adopted this standard effective January 1, 2019. We elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings. The adoption of this guidance did not have an effect on our consolidated financial statements.

New Accounting Guidance - Not Yet Adopted

The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) in 2016. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of adopting this guidance.

In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact of adopting this guidance.

We do not expect that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.

(2) Revenue Recognition

The following table disaggregates revenues by type within each of our business segments:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Gaming
Gaming operations	$	149	$	159	$	451	$	481
Gaming machine sales	168		167		452		480
Gaming systems	77		70		218		229
Table products	60		52		182		172
Total	$	454	$	448	$	1,303	$	1,362

Lottery
Instant products	$	150	$	142	$	440	$	442
Lottery systems	70		65		238		174
Total	$	220	$	207	$	678	$	616

SciPlay
Mobile	$	97	$	83	$	293	$	232
Web and other	19		22		60		70
Total	$	116	$	105	$	353	$	302

Digital
Sports and platform	$	29	$	21	$	85	$	67
Gaming and other	36		40		118		131
Total	$	65	$	61	$	203	$	198

The amount of rental income revenue that is outside the scope of ASC 606 was $91 million and $282 million for the three and nine months ended September 30, 2019, respectively, and $66 million and $202 million for the three and nine months ended September 30, 2018, respectively.

Contract Liabilities and Other Disclosures

The following table summarizes the activity in our contract liabilities for the reporting period:



	Nine Months Ended September 30,
	2019
Contract liability balance, beginning of period⁽¹⁾	$	97
Liabilities recognized during the period	51
Amounts recognized in revenue from beginning balance	(30		)
Contract liability balance, end of period⁽¹⁾	$	118
(1) Contract liabilities are included within Accrued liabilities and Other long-term liabilities in our consolidated balance sheets.

The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on our consolidated balance sheets. Other than contracts with customers with financing arrangements exceeding 12 months, revenue recognition is generally proximal to conversion to cash, except for Lottery instant products sold under POS contracts. Revenue is recognized for such contracts upon delivery to our customers, while conversion to cash is based on the retail sale of the underlying ticket to end consumers. As a result, for such contracts revenue recognition under ASC 606 does not approximate conversion to cash. Total revenue recognized under such contracts for the three and nine months ended September 30, 2019 was $20 million and $69 million, respectively, and was $26 million and $84 million for the three and nine months ended September 30, 2018, respectively. The following table summarizes our receivables and contract asset balances for the periods indicated:



	Receivables		Contract Assets⁽¹⁾
Beginning of period balance	$	753	$	114
End of period balance, September 30, 2019	811		136
(1) Contract assets are included primarily within Prepaid expenses, deposits and other current assets in our consolidated balance sheets.

As of September 30, 2019, we did not have material unsatisfied performance obligations for contracts expected to be long-term or contracts for which we recognize revenue at an amount other than for which we have the right to invoice for goods or services delivered or performed.

(3) Business Segments

We report our operations in 4 business segments—Gaming, Lottery, SciPlay and Digital—representing our different products and services. A detailed discussion regarding the products and services from which each reportable business segment derives its revenue is included in Notes 2 and 3 in our 2018 10-K.

In evaluating financial performance, our Chief Operating Decision Maker focuses on AEBITDA as management’s segment measure of profit or loss, which is described in Note 3 in our 2018 10-K. As a result of the IPO of a minority interest in our Social gaming business, which was completed on May 7, 2019, we now refer to our Social business segment as our SciPlay business segment, and we also changed our calculation of SciPlay business segment AEBITDA beginning with the first quarter of 2019. SciPlay business segment AEBITDA now reflects intercompany charges settled in cash for corporate services and certain royalties paid for by our SciPlay business segment to other segments or to Corporate (included in the “Unallocated and Reconciling Items” column in the tables below). Business segment information for the three and nine months ended September 30, 2018 has been recast to reflect these changes. Additionally, see Note 1for a description of the IP License Agreement executed in conjunction with the SciPlay IPO that impacts our Gaming business segment and SciPlay business segment AEBITDA commencing with the effectiveness of the IP License Agreement as of May 7, 2019. The accounting policies of our business segments are the same as those described within the Notes in our 2018 10-K. The following tables present our segment information:



	Three Months Ended September 30, 2019
	Gaming			Lottery			SciPlay			Digital			Unallocated and Reconciling Items⁽¹⁾			Total
Total revenue	$	454		$	220		$	116		$	65		$	—		$	855
AEBITDA	226			99			32			17			(30		)	$	344
Reconciling items to consolidated net income before income taxes:
D&A	(110		)	(14		)	(1		)	(18		)	(19		)	(162		)
Restructuring and other	(5		)	—			—			(5		)	(1		)	(11		)
EBITDA from equity investments													(15		)	(15		)
Earnings from equity investments													4			4
Interest expense													(146		)	(146		)
Gain on remeasurement of debt													19			19
Other expense, net													(9		)	(9		)
Stock-based compensation													(9		)	(9		)
Net income before income taxes																$	15
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net income before income taxes.



	Three Months Ended September 30, 2018
	Gaming			Lottery			SciPlay			Digital			Unallocated and Reconciling Items⁽¹⁾			Total
Total revenue	$	448		$	207		$	105		$	61		$	—		$	821
AEBITDA	233			92			24			12			(35		)	$	326
Reconciling items to consolidated net loss before income taxes:
D&A	(120		)	(15		)	(2		)	(16		)	(13		)	(166		)
Restructuring and other	(4		)	(3		)	(9		)	(4		)	(319		)	(339		)
EBITDA from equity investments													(14		)	(14		)
Earnings from equity investments													4			4
Interest expense													(147		)	(147		)
Loss on remeasurement of debt													(4		)	(4		)
Other expense, net													(2		)	(2		)
Stock-based compensation													(10		)	(10		)
Net loss before income taxes																$	(352	)
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.



	Nine Months Ended September 30, 2019
	Gaming			Lottery			SciPlay			Digital			Unallocated and Reconciling Items⁽¹⁾			Total
Total revenue	$	1,303		$	678		$	353		$	203		$	—		$	2,537
AEBITDA⁽²⁾	656			306			90			42			(87		)	$	1,007
Reconciling items to consolidated net loss before income taxes:
D&A	(336		)	(53		)	(5		)	(56		)	(47		)	(497		)
Restructuring and other	(9		)	(1		)	(2		)	(9		)	(3		)	(24		)
EBITDA from equity investments													(50		)	(50		)
Earnings from equity investments													17			17
Interest expense													(447		)	(447		)
Loss on debt refinancing transactions													(60		)	(60		)
Gain on remeasurement of debt													21			21
Other expense, net													(7		)	(7		)
Stock-based compensation													(33		)	(33		)
Net loss before income taxes																$	(73	)
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.
(2) Gaming AEBITDA decreased and SciPlay AEBITDA increased compared to prior periods as IP charges are no longer charged to SciPlay per the IP License Agreement discussed in Note 1. The nine months ended September 30, 2019 includes $10 million in such IP charges paid by the SciPlay business segment.



	Nine Months Ended September 30, 2018
	Gaming			Lottery			SciPlay			Digital			Unallocated and Reconciling Items⁽¹⁾			Total
Total revenue	$	1,362		$	616		$	302		$	198		$	—		$	2,478
AEBITDA	686			286			70			42			(98		)	$	986
Reconciling items to consolidated net loss before income taxes:
D&A	(380		)	(43		)	(15		)	(49		)	(40		)	(527		)
Restructuring and other	(7		)	—			(28		)	(14		)	(375		)	(424		)
EBITDA from equity investments													(49		)	(49		)
Earnings from equity investments													16			16
Interest expense													(448		)	(448		)
Loss on debt financing transactions													(93		)	(93		)
Gain on remeasurement of debt													29			29
Other expense, net													(9		)	(9		)
Stock-based compensation													(34		)	(34		)
Net loss before income taxes																$	(553	)
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.

(4) Restructuring and other

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Employee severance⁽¹⁾	$	3	$	11	$	8	$	32
Acquisitions and related costs	—		—		—		7
Contingent consideration adjustment	—		8		2		26
Legal and related	—		310		—		336
Restructuring, integration and other	8		10		14		23
Total	$	11	$	339	$	24	$	424
(1) Includes employee severance and termination costs associated with restructuring and integration activities.

(5) Accounts and Notes Receivable and Credit Quality of Receivables

Accounts and Notes Receivable

The following table summarizes the components of current and long-term accounts and notes receivable, net:



	September 30, 2019			December 31, 2018
Current:
Accounts receivable	$	650		$	615
Notes receivable	146			138
Allowance for doubtful accounts and notes	(37		)	(40		)
Current accounts and notes receivable, net	$	759		$	713
Long-term:
Notes receivable, net of allowance	52			40
Total accounts and notes receivable, net	$	811		$	753

Credit Quality of Receivables

The interest rates on our outstanding receivables bearing interest ranged from 3% to 10% at September 30, 2019 and December 31, 2018.

We have certain concentrations of outstanding accounts and notes receivable in international locations that impact our assessment of the credit quality of those receivables. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our receivables. We have not identified changes in the aforementioned factors during the nine months ended September 30, 2019 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our notes receivable are as follows:


•	Mexico - Our notes receivable, net, from certain customers in Mexico at September 30, 2019 was $26 million. We collected $23 million of outstanding receivables from these customers during the nine months ended September 30, 2019.


•	Peru - Our notes receivable, net, from certain customers in Peru at September 30, 2019 was $12 million. We collected $5 million of outstanding receivables from these customers during the nine months ended September 30, 2019.


•	Argentina - Our notes receivable, net, from customers in Argentina at September 30, 2019 was $17 million denominated in USD. Our customers are required to, and have continued to, pay us in pesos at the spot exchange rate on the date of payment. We collected $15 million of outstanding receivables from customers in Argentina during the nine months ended September 30, 2019.

In addition to the macroeconomic and political factors noted above, we also evaluated recent payments, receivables aging, any additional security or collateral we had (bills of exchange, pledge agreements, etc.) and other facts and circumstances relevant to our customers’ ability to pay.

The following summarizes the components of total notes receivable, net:



	September 30, 2019			Balances over 90 days past due			December 31, 2018			Balances over 90 days past due
Notes receivable:
Domestic	$	84		$	13		$	55		$	6
International	114			19			123			25
Total notes receivable	198			32			178			31

Notes receivable allowance
Domestic	(5		)	(5		)	(6		)	(6		)
International	(18		)	(18		)	(18		)	(18		)
Total notes receivable allowance	(23		)	(23		)	(24		)	(24		)
Notes receivable, net	$	175		$	9		$	154		$	7

At September 30, 2019, 5% of our total notes receivable, net, was past due by over 90 days, compared to 4% at December 31, 2018.

We evaluate our exposure to credit loss on notes receivable on both a collective and individual basis. In addition, we evaluate such notes receivable on a geographic basis and take into account any other factors (such as general economic conditions, other macroeconomic considerations, etc.) that could impact our collectability of notes receivable individually or in the aggregate. Accordingly, notes receivable may be evaluated under multiple methodologies, and the resulting allowance is not determined based on one specific methodology, but takes all factors into consideration. The activity in our allowance for notes receivable for each of the nine month periods ended September 30, 2019 and 2018 is as follows:



	Nine Months Ended September 30,
	2019			2018
Beginning allowance for notes receivable	$	(24	)	$	(21	)
Provision	(3		)	(4		)
Charge-offs and recoveries	4			2
Ending allowance for notes receivable	$	(23	)	$	(23	)

The fair value of notes receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of September 30, 2019 and December 31, 2018, the fair value of notes receivable, net, approximated the carrying value due to contractual terms of notes receivable generally being under 24 months.

(6) Inventories

Inventories consisted of the following as of the dates presented below:



	September 30, 2019		December 31, 2018
Parts and work-in-process	$	154	$	131
Finished goods	103		85
Total inventories	$	257	$	216

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

(7) Property and Equipment, net

Property and equipment, net consisted of the following:



	September 30, 2019			December 31, 2018
Land	$	20		$	15
Buildings and leasehold improvements	152			128
Gaming and lottery machinery and equipment	1,023			1,041
Furniture and fixtures	29			27
Construction in progress	25			17
Other property and equipment	257			240
Less: accumulated depreciation	(990		)	(921		)
Total property and equipment, net	$	516		$	547

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018⁽¹⁾
Depreciation expense	$	51	$	51	$	173	$	178
(1) Includes assets held for sale impairment charges of $19 million.

During the second quarter of 2019, we reclassified $27 million of assets held for sale to assets held and used due to the assets no longer meeting the assets held for sale criteria. We recorded a $9 million impairment charge during the second quarter of 2019 on these assets.

(8) Intangible Assets, net and Goodwill

Intangible Assets, net

The following tables present certain information regarding our intangible assets as of September 30, 2019 and December 31, 2018.



	September 30, 2019							December 31, 2018
	Gross Carrying Value		Accumulated Amortization			Net Balance		Gross Carrying Value		Accumulated Amortization			Net Balance
Amortizable intangible assets:
Customer relationships	$	1,077	$	(360	)	$	717	$	1,084	$	(299	)	$	785
Intellectual property	924		(537		)	387		931		(453		)	478
Licenses	553		(315		)	238		546		(253		)	293
Brand names	123		(68		)	55		123		(59		)	64
Trade names	106		(28		)	78		108		(23		)	85
Patents and other	24		(14		)	10		23		(13		)	10
	2,807		(1,322		)	1,485		2,815		(1,100		)	1,715
Non-amortizable intangible assets:
Trade names	96		(2		)	94		96		(2		)	94
Total intangible assets	$	2,903	$	(1,324	)	$	1,579	$	2,911	$	(1,102	)	$	1,809

The following reflects intangible amortization expense included within D&A:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Amortization expense	$	78	$	73	$	230	$	226

Goodwill

In conjunction with integrating our Digital acquisitions, the implementation of ERP systems in the Digital segment and management changes during the first quarter of 2019, in our Digital business segment, we reviewed our Digital operating segment in accordance with ASC 350 to determine if additional reporting units exist based on the availability of discrete financial information that is regularly reviewed by segment management. We determined that in our Digital operating segment we now have 2 reporting units: (1) Digital sports and platform and (2) Digital gaming and other. The change in the Digital business segment reporting units resulted in the allocation of the previous Digital reporting unit goodwill balance as follows: $230 million to the new Digital sports and platform reporting unit and $134 million to the new Digital gaming and other reporting unit, which allocation was determined based on the relative fair value approach prescribed by ASC 350. As a result of this change we now have 10 reporting units: Instant Products, U.S. Lottery Systems, International Lottery Systems, SG Gaming, legacy U.K. Gaming, Casino Management Systems, Table Products, SciPlay, Digital sports and platform and Digital gaming and other.

The table below reconciles the change in the carrying value of goodwill by business segment for the period from

December 31, 2018 to September 30, 2019.



Goodwill	Gaming			Lottery			SciPlay		Digital			Totals
Balance as of December 31, 2018	$	2,449		$	352		$	115	$	364		$	3,280
Foreign currency adjustments	(14		)	(4		)	—		(11		)	(29		)
Balance as of September 30, 2019	$	2,435		$	348		$	115	$	353		$	3,251

(9) Software, net

Software, net consisted of the following:



	September 30, 2019			December 31, 2018
Software	$	1,184		$	1,101
Accumulated amortization	(914		)	(816		)
Software, net	$	270		$	285

The following reflects amortization of software included within D&A:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Amortization expense	$	33	$	42	$	94	$	123

(10) Equity Investments

Equity investments totaled $266 million and $298 million as of September 30, 2019 and December 31, 2018, respectively. We received distributions and dividends totaling $43 million and $49 million during the nine months ended September 30, 2019 and 2018, respectively, primarily related to our LNS equity investment.

(11) Long-Term and Other Debt

2026 Unsecured Notes

On March 19, 2019, SGI issued $1,100 million in aggregate principal amount of its new 2026 Unsecured Notes at an issue price of 100.000% in a private offering. We used the net proceeds of the 2026 Unsecured Notes offering to redeem $1,000 million of our outstanding 2022 Unsecured Notes and pay accrued and unpaid interest thereon plus related premiums, fees, and costs, which redemption was completed on April 4, 2019, and paid related fees and expenses of the 2026 Unsecured Notes offering.

The 2026 Unsecured Notes were issued pursuant to an indenture dated as of March 19, 2019 (the “2026 Unsecured Notes Indenture”). SGI may redeem some or all of the 2026 Unsecured Notes at any time prior to March 15, 2022 at a redemption price equal to 100% of the principal amount of the 2026 Unsecured Notes plus accrued and unpaid interest, if any, to the date of the redemption plus a “make whole” premium. SGI may redeem some or all of the 2026 Unsecured Notes at any time on or after March 15, 2022 at the prices specified in the 2026 Unsecured Notes Indenture.

The 2026 Unsecured Notes are senior unsecured obligations of SGI, rank equally to all SGI’s existing and future senior debt and rank senior to all of SGI’s existing and future senior subordinated debt. The 2026 Unsecured Notes are guaranteed on a senior unsecured basis by SGC and all of its wholly owned U.S. subsidiaries (other than SGI, the unrestricted business entities comprising our SciPlay business segment and certain immaterial subsidiaries). The 2026 Unsecured Notes are structurally subordinated to all of the liabilities of our non-guarantor subsidiaries.

In connection with the 2026 Unsecured Notes offering, we reflected $16 million in financing costs presented primarily as a reduction to long-term debt.

SciPlay Revolver

SciPlay Holding, a subsidiary of SciPlay, entered into the SciPlay Revolver, a $150 million revolving credit agreement that matures in May 2024, by and among SciPlay Holding, as the borrower, SciPlay Parent LLC, as a guarantor, the subsidiary guarantors party thereto (which are all domestic entities that comprise our ~~Social gaming business)~~SciPlay business segment), the lenders party thereto

and Bank of America, N.A., as administrative agent and collateral ~~agent that matures in May 2024.~~agent. The interest rate is either Adjusted LIBOR (as defined in the SciPlay Revolver) plus 2.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) or ABR (as defined in the SciPlay Revolver) plus 1.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) at the option of SciPlay Holding. SciPlay Holding is required to pay to the lenders a commitment fee of 0.500% per annum on the average daily unused portion of the revolving commitments through maturity, which fee varies based on the total net leverage ratio and is subject to a floor of 0.375%. The SciPlay Revolver provides for up to ~~$15.0~~$15 million in letter of credit issuances, which requires customary issuance and administration fees, and a fronting fee of 0.125%.

The SciPlay Revolver contains covenants that, among other things, ~~restrict SciPlay Holding’s, SciPlay Parent LLC’s and the subsidiary guarantors’~~restricts SciPlay’s ability to incur additional indebtedness; incur liens; sell, transfer or dispose of property and assets; invest; make dividends or distributions or other restricted payments; and engage in affiliate transactions, with the exception of certain payments under the TRA and payments in respect of certain tax distributions and intercompany services under the SciPlay Parent LLC Operating Agreement.We currently do not expect the Social gaming business to declare or pay any cash dividends to us, other than tax distributions and certain cash distributions related to the impact of taxes pursuant to the TRA. If the Social gaming business discontinues the payment of, or is unable to pay, cash dividends to us, this will reduce our available liquidity. Furthermore, the terms of indebtedness incurred by the Social gaming business may, and the terms of the

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

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

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

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

~~(2) Revenue Recognition~~

~~The following table disaggregates revenues by type within each of our business segments:~~

Three Months Ended March 31,
2019
2018
Gaming
  Gaming operations $ 152
$ 161
  Gaming machine sales 136
145
Gaming systems 74
75
  Table products 60
62
    Total $ 422
$ 443

Lottery
  Instant products $ 140
$ 150
  Lottery systems 87
52
    Total $ 227
$ 202

Social
  Mobile $ 97

$ 73
  Web and other 21

24
    Total $ 118
$ 97

Digital
Sports and platform $ 30
$ 26
Gaming and other 40
44
    Total $ 70
$ 70

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

~~Contract Liabilities and Other Disclosures~~

~~The following table summarizes the activity in our contract liabilities for the reporting period:~~

Three Months Ended March 31,
2019
Contract liability balance, beginning of period⁽¹⁾
$ 97
Liabilities recognized during the period 26
Amounts recognized in revenue from beginning balance (22 )
Contract liability balance, end of period⁽¹⁾
$ 101
(1) Contract liabilities are included within Accrued liabilities and Other long-term liabilities in our March 31, 2019 consolidated balance sheet.

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

Receivables
Contract Assets⁽¹⁾
Beginning of period balance $ 753
$ 114
End of period balance, March 31, 2019 758
114
(1) Contract assets are included primarily within Prepaid expenses, deposits and other current assets in our March 31, 2019 consolidated balance sheet.

As of March 31, 2019, we did not have material unsatisfied performance obligations for contracts expected to be long-term or contracts for which we recognize revenue at an amount other than for which we have the right to invoice for goods or services delivered or performed.

~~(3) Business Segments~~

We report our operations in four business segments—Gaming, Lottery, Social and Digital—representing our different products and services. A detailed discussion regarding the products and services from which each reportable business segment derives its revenue is included in Notes 2 and 3 in our 2018 10-K.

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

Three Months Ended March 31, 2019
Gaming Lottery
Social⁽²⁾
Digital
Unallocated and Reconciling Items⁽¹⁾
Total
Total revenue $ 422
$ 227
$ 118
$ 70
$ —
$ 837
AEBITDA 215
104
25
13
(29 ) $ 328
Reconciling items to consolidated net loss before income taxes:
D&A (112 ) (19 ) (2 ) (19 ) (13 ) (165 )
Restructuring and other (2 ) —
(1 ) (3 ) (1 ) (7 )
EBITDA from equity investments (17 ) (17 )
Earnings from equity investments 6
6
Interest expense (154 ) (154 )
Gain on remeasurement of debt 5
5
Other expense, net (2 ) (2 )
Stock-based compensation (14 ) (14 )
Net loss before income taxes $ (20 )
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.
(2) Our Social business segment information represents SciPlay operations (see Note 1), and starting with the second quarter of 2019 we will refer to our Social business segment as SciPlay.

Three Months Ended March 31, 2018
Gaming Lottery
Social⁽²⁾
Digital
Unallocated and Reconciling Items⁽¹⁾
Total
Total revenue $ 443
$ 202
$ 97
$ 70
$ —
$ 812
AEBITDA 218
94
23
17
(32 ) $ 320
Reconciling items to consolidated net loss before income taxes:
D&A (139 ) (14 ) (7 ) (16 ) (12 ) (188 )
Restructuring and other (1 ) (1 ) (18 ) (6 ) (26 ) (52 )
EBITDA from equity investments (19 ) (19 )
Earnings from equity investments 7
7
Interest expense (155 ) (155 )
Loss on debt financing transactions (93 ) (93 )
Loss on remeasurement of debt (1 ) (1 )
Other expense, net (6 ) (6 )
Stock-based compensation (9 ) (9 )
Net loss before income taxes $ (196 )
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.
(2) Our Social business segment information represents SciPlay operations (see Note 1), and starting with the second quarter of 2019 we will refer to our Social business segment as SciPlay.

~~(4) Restructuring and other~~

Three Months Ended March 31,
2019 2018
Employee severance⁽¹⁾
$ 3
$ 5
Acquisitions and related costs —
8
Contingent consideration adjustment —
18
Legal and related —
16
Restructuring, integration and other 4
5
Total $ 7
$ 52
(1) Includes employee severance and termination costs associated with restructuring and integration activities.

~~(5) Accounts and Notes Receivable and Credit Quality of Receivables~~

~~Accounts and Notes Receivable~~

~~The following table summarizes the components of current and long-term accounts and notes receivable, net:~~

March 31, 2019 December 31, 2018
Current:
Accounts receivable $ 636
$ 615
Notes receivable 127
138
Allowance for doubtful accounts and notes (38 ) (40 )
Current accounts and notes receivable, net $ 725
$ 713
Long-term:
Notes receivable, net of allowance 33
40
Total accounts and notes receivable, net $ 758
$ 753

~~Credit Quality of Receivables~~

~~The interest rates on our outstanding receivables bearing interest ranged from~~ 3% to ~~10%~~ ~~at March 31, 2019 and December 31, 2018.~~

We have certain concentrations of outstanding accounts and notes receivable in international locations that impact our assessment of the credit quality of those receivables. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our receivables. We have not identified changes in the aforementioned factors during the three months ended March 31, 2019 that require a reassessment of our receivable balances. The international locations with significant concentrations (generally deemed to be exceeding 10%) of our accounts and notes receivable are as follows:

~~Mexico - Our notes receivable, net, from certain customers in Mexico at March 31, 2019 was~~ ~~$24 million. We collected~~ ~~$8 million~~ ~~of outstanding receivables from these customers during the three months ended March 31, 2019.~~

~~Peru - Our notes receivable, net, from certain customers in Peru at March 31, 2019 was~~ ~~$15 million. We collected~~ ~~$2 million~~ ~~of outstanding receivables from these customers during the three months ended March 31, 2019.~~

~~Argentina - Our notes receivable, net, from customers in Argentina at March 31, 2019 was~~ ~~$16 million~~ ~~denominated in USD. Our customers are required to, and have continued to, pay us in pesos at the spot exchange rate on the date of payment. We collected~~ ~~$6 million~~ ~~of outstanding receivables from customers in Argentina during the three months ended March 31, 2019.~~

~~The following summarizes the components of total notes receivable, net:~~

March 31, 2019 Balances over 90 days past due December 31, 2018 Balances over 90 days past due
Notes receivable:
Domestic $ 61
$ 8
$ 55
$ 6
International 99
26
123
25
Total notes receivable 160
34
178
31

Notes receivable allowance
Domestic (6 ) (6 ) (6 ) (6 )
International (17 )
(17 ) (18 ) (18 )
Total notes receivable allowance (23 ) (23 ) (24 ) (24 )
Notes receivable, net $ 137
$ 11
$ 154
$ 7

~~At March 31, 2019, 8% of our total notes receivable, net, was past due by over 90 days, compared to 4% at December 31, 2018.~~

We evaluate our exposure to credit loss on notes receivable on both a collective and individual basis. In addition, we evaluate such notes receivable on a geographic basis and take into account any other factors (such as general economic conditions, other macroeconomic considerations, etc.) that could impact our collectability of notes receivable individually or in the aggregate. Accordingly, notes receivable may be evaluated under multiple methodologies, and the resulting allowance is not determined based on one specific methodology taking all factors into consideration. The activity in our allowance for notes receivable for each of the ~~three month periods ended March 31, 2019 and 2018 is as follows:~~

Three Months Ended March 31,
2019 2018
Beginning allowance for notes receivable $ (24 ) $ (21 )
Provision (2 ) (3 )
Charge-offs and recoveries 3
1
Ending allowance for notes receivable $ (23 ) $ (23 )

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

~~(6) Inventories~~

~~Inventories consisted of the following as of the dates presented below:~~

March 31, 2019 December 31, 2018
Parts and work-in-process $ 139
$ 131
Finished goods 90
85
Total inventories $ 229
$ 216

~~(7) Property and Equipment, net~~

~~Property and equipment, net consisted of the following:~~

March 31, 2019 December 31, 2018
Land $ 15
$ 15
Buildings and leasehold improvements 130
128
Gaming and lottery machinery and equipment 1,034
1,041
Furniture and fixtures 28
27
Construction in progress 15
17
Other property and equipment 245
240
Less: accumulated depreciation (950 ) (921 )
Total property and equipment, net $ 517
$ 547

~~Depreciation expense is excluded from Cost of services, Cost of product sales, Cost of instant products and Other operating expenses and is separately presented within D&A.~~

Three Months Ended
March 31,
2019
2018
Depreciation expense $ 58
$ 53

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

~~(8) Intangible Assets, net and Goodwill~~

~~Intangible Assets, net~~

~~The following tables present certain information regarding our intangible assets as of March 31, 2019 and December 31, 2018.~~

March 31, 2019 December 31, 2018
Gross Carrying Value Accumulated Amortization Net Balance Gross Carrying Value Accumulated Amortization Net Balance
Amortizable intangible assets:
Customer relationships $ 1,092
$ (321 ) $ 771
$ 1,084
$ (299 ) $ 785
Intellectual property 935
(485 ) 450
931
(453 ) 478
Licenses 549
(273 ) 276
546
(253 ) 293
Brand names 124
(62 ) 62
123
(59 ) 64
Trade names 108
(25 ) 83
108
(23 ) 85
Patents and other 23
(14 ) 9
23
(13 ) 10
2,831
(1,180 ) 1,651
2,815
(1,100 ) 1,715
Non-amortizable intangible assets:
Trade names 96
(2 ) 94
96
(2 ) 94
Total intangible assets $ 2,927
$ (1,182 ) $ 1,745
$ 2,911
$ (1,102 ) $ 1,809

~~The following reflects intangible amortization expense included within D&A:~~

Three Months Ended
March 31,
2019
2018
Amortization expense $ 77
$ 77

~~Goodwill~~

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

~~The table below reconciles the change in the carrying value of goodwill by business segment for the period from~~

~~December 31, 2018 to March 31, 2019.~~

Goodwill Gaming Lottery Social Digital Totals
Balance as of December 31, 2018 $ 2,449
$ 352
$ 115
$ 364
$ 3,280
Foreign currency adjustments 13
(1 ) —
9
21
Balance as of March 31, 2019 $ 2,462

$ 351

$ 115
$ 373
$ 3,301

~~(9) Software, net~~

~~Software, net consisted of the following:~~

March 31, 2019 December 31, 2018
Software $ 1,126
$ 1,101
Accumulated amortization (849 ) (816 )
Software, net $ 277
$ 285

~~The following reflects amortization of software included within D&A:~~

Three Months Ended
March 31,
2019
2018
Amortization expense $ 30
$ 39

~~(10) Equity Investments~~

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

~~(11) Long-Term and Other Debt~~

~~2026 Unsecured Notes~~

On March 19, 2019, SGI issued $1,100 million in aggregate principal amount of its new 2026 Unsecured Notes at an issue price of 100.000% in a private offering. We used the net proceeds of the 2026 Unsecured Notes offering to redeem $1,000 million of our outstanding 2022 Unsecured Notes and pay accrued and unpaid interest thereon plus related premiums, fees, and costs, which redemption was completed on April 4, 2019, and pay related fees and expenses of the 2026 Unsecured Notes offering. The redemption of the 2022 Unsecured Notes will result in an approximate $60 million loss on debt financing transactions during the second quarter of 2019.

to the date of the redemption plus a “make whole” premium. SGI may redeem some or all of the 2026 Unsecured Notes at any time on or after March 15, 2022 at the prices specified in the 2026 Unsecured Notes Indenture.

The 2026 Unsecured Notes are senior unsecured obligations of SGI, rank equally to all SGI’s existing and future senior debt and rank senior to all of SGI’s existing and future senior subordinated debt. The 2026 Unsecured Notes are guaranteed on a senior unsecured basis by SGC and all of its wholly owned U.S. subsidiaries (other than SGI, the unrestricted social gaming business entities and certain immaterial subsidiaries). The 2026 Unsecured Notes are structurally subordinated to all of the liabilities of our non-guarantor subsidiaries.

~~In connection with the 2026 Unsecured Notes offering, we reflected $16 million in financing costs presented primarily as a reduction to long-term debt.~~

Outstanding Debt and Finance Leases

The following table reflects our outstanding debt:


	As of														As of
	March 31, 2019											December 31, 2018			September 30, 2019										December 31, 2018
	Final Maturity	Rate(s)		Face value		Unamortized debt discount/premium and deferred financing costs, net			Book value			Book value			Final Maturity	Rate(s)	Face value		Unamortized debt discount/premium and deferred financing costs, net			Book value			Book value
Senior Secured Credit Facilities:
Revolver, varying interest rate	2020	variable		$	190	$	—		$	190		$	325
Revolver															2020	variable	$	—	$	—		$	—		$	325
Term Loan B-5	2024	variable		4,133		(69		)	4,064			4,071			2024	variable	4,112		(63		)	4,049			4,071
SciPlay Revolver															2024	variable	—		—			—			—
Senior Notes:
2025 Secured Notes⁽²⁾	2025	5.000	%	1,250		(17		)	1,233			1,233
2026 Secured Euro Notes⁽³⁾	2026	3.375	%	367		(5		)	362			367
2022 Unsecured Notes⁽⁴⁾	2022	10.000	%	2,200		(22		)	2,178			2,176
2026 Unsecured Euro Notes⁽³⁾	2026	5.500	%	282		(4		)	278			282
2025 Secured Notes⁽¹⁾															2025	5.000%	1,250		(16		)	1,234			1,233
2026 Secured Euro Notes⁽²⁾															2026	3.375%	355		(5		)	350			367
2022 Unsecured Notes															2022	10.000%	1,200		(10		)	1,190			2,176
2026 Unsecured Euro Notes⁽²⁾															2026	5.500%	273		(4		)	269			282
2026 Unsecured Notes	2026	8.250	%	1,100		(16		)	1,084			—			2026	8.250%	1,100		(15		)	1,085			—
Subordinated Notes:
2020 Notes	2020	6.250	%	244		(1		)	243			242			2020	6.250%	244		(1		)	243			242
2021 Notes	2021	6.625	%	341		(3		)	338			337			2021	6.625%	341		(2		)	339			337
Finance lease obligations as of March 31, 2019 payable monthly through 2019 and other⁽⁵⁾	2019	3.900	%	13		—			13			4
Finance lease obligations as of September 30, 2019 payable monthly through 2019 and other⁽³⁾															2019	3.900%	11		—			11			4
Total long-term debt outstanding				$	10,120	$	(137	)	$	9,983		$	9,037				$	8,886	$	(116	)	$	8,770		$	9,037
Less: current portion of long-term debt⁽⁴⁾									(1,046		)	(45		)
Less: current portion of long-term debt																						(288		)	(45		)
Long-term debt, excluding current portion									$	8,937		$	8,992									$	8,482		$	8,992
Fair value of debt⁽¹⁾				$	10,197
Fair value of debt⁽⁴⁾																	$	9,056

(1) ~~Fair value of our fixed rate and variable interest rate debt is classified within level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities.~~

~~(2)~~ Includes cross-currency interest rate swap agreements that we entered into in 2018, ~~in the amount of~~which converted $460 million of U.S. Dollar-denominated 2025 Secured Notes to a fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946% (see Note 16 in our 2018 10-K).

~~(3)~~(2) We designated a portion of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the change in foreign currency exchange rates of the Euro relative to the U.S. Dollar (see Note 12 for additional information). The total change in the face value of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes due to changes in foreign currency exchange rates since the issuance was a reduction of ~~$63~~$85 million, of which ~~a $5~~gains of $19 million ~~gain was~~and $21 million were recognized on remeasurement of debt in the Consolidated Statements of Operations ~~and Comprehensive Loss~~ for the three and nine months ended ~~March 31, 2019.~~September 30, 2019, respectively.

~~(4)~~(3) Includes ~~$1,000 million of the principal balance of the 2022 Unsecured Notes that were redeemed on April 4, 2019.~~

~~(5) Includes $11~~$9 million related to certain revenue transactions presented as debt in accordance with ASC ~~470-10-25.~~470.

(4) Fair value of our fixed rate and variable interest rate debt is classified within level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities.

We were in compliance with the financial covenants under all debt agreements as of ~~March 31, 2019.~~September 30, 2019.

For additional information regarding the terms of our credit agreements, Secured Notes, Unsecured Notes and Subordinated Notes, see Note 16 in our 2018 10-K.

~~For additional information regarding the SciPlay Revolver that we entered into on May 7, 2019 in connection with the SciPlay IPO, see Note 1.~~

Loss on Debt Financing Transactions

The following are components of the loss on debt financing transactions resulting from debt extinguishment and modification accounting for ~~three~~the nine months ended ~~March 31,~~September 30, 2019 and ~~2018:~~2018, none of which were incurred during the three-month periods:

Three Months Ended March 31,
2019 2018
Repayment and cancellation of principal balance at premium $ —
$ 110
Unamortized debt (premium) discount and deferred financing costs, net —
(30 )
Third party debt issuance fees —
13
Total loss on debt financing transactions $ —
$ 93



	Nine Months Ended September 30,
	2019		2018
Repayment and cancellation of principal balance at premium	$	50	$	110
Unamortized debt (premium) discount and deferred financing costs, net	10		(30		)
Third party debt issuance fees	—		13
Total loss on debt financing transactions	$	60	$	93

(12) Fair Value Measurements

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

Derivative Financial Instruments

We record derivative financial instruments on the balance sheet at their respective fair values. As of ~~March 31,~~September 30, 2019, we held the following derivative instruments that were accounted for pursuant to ASC 815:

Interest Rate Swap Contracts

We currently use interest rate swap contracts as described below to mitigate gains or losses associated with the change in expected cash flows due to fluctuations in interest rates on our variable rate debt.

In February 2018, we entered into interest rate swap contracts to hedge a portion of our interest expense associated with our variable rate debt to effectively fix the interest rate that we pay. These interest rate swap contracts are designated as cash flow hedges under ASC 815. We pay interest at a weighted-average fixed rate of 2.4418% and receive interest at a variable rate equal to one-month LIBOR. The total notional amount of interest rate swaps outstanding was $800 million as of ~~March 31,~~September 30, 2019. These hedges mature in February 2022.

These hedges are highly effective in offsetting changes in our future expected cash flows due to the fluctuation in the one-month LIBOR rate associated with our variable rate debt. We qualitatively monitor the effectiveness of these hedges on a quarterly basis. As a result of the effective matching of the critical terms on our variable rate interest expense being hedged to the hedging instruments being used, we expect these hedges to remain highly effective.

All gains and losses from these hedges are recorded in Other comprehensive income (loss) until the future underlying payment transactions occur. Any realized gains or losses resulting from the hedges are recognized (together with the hedged transaction) as interest expense. We estimate the fair value of our interest rate swap contracts by discounting the future cash flows of both the fixed rate and variable rate interest payments based on market yield curves. The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.

The following table shows the gains (loss) and interest expense recognized on our interest rate swap contracts:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019			2018
Gain (loss) recorded in accumulated other comprehensive loss, net of tax	$	3	$	3	$	(13	)	$	9
Interest expense recorded related to interest rate swap contracts	—		—		—			2

Three Months Ended
March 31,
2019 2018
(Loss) gain recorded in accumulated other comprehensive income (loss), net of tax $ (5 ) $ 2
Interest expense recorded related to interest rate swap contracts —
1

We do ~~not~~0t expect to reclassify material amounts from Accumulated other comprehensive ~~loss~~income (loss) to interest expense in the next twelve months.

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

Three Months Ended March 31,
2019 2018
Interest expense
Total amounts of expense line item presented in the statements of operations and comprehensive loss in which the effects of cash flow hedges are recorded $ (154 ) $ (155 )
Hedged item (5 ) (2 )
Derivative designated as hedging instrument 5
1



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
	Interest expense						Interest expense
Total interest expense which reflects the effects of cash flow hedges	$	(146	)	$	(147	)	$	(447	)	$	(448	)
Hedged item	(5		)	(5		)	(15		)	(12		)
Derivative designated as hedging instrument	5			4			15			9

Cross-Currency Interest Rate Swaps

In connection with the February 2018 Refinancing described in Note 16 of our 2018 10-K, we entered into certain cross-currency interest rate swap agreements to achieve more beneficial interest rates by effectively converting $460 million of our fixed-rate U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946%. We have designated these cross-currency interest rate swap agreements as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro relative to the U.S. Dollar.

We use the spot method to measure the effectiveness of our net investment hedge. Under this method, for each reporting period, the change in the fair value of the $460 million cross-currency interest rate swaps is reported in foreign currency translation gain (loss) in Accumulated other comprehensive ~~loss.~~income (loss). The cross-currency basis spread (along with other components of the cross-currency swap’s fair value excluded from the spot method effectiveness assessment) are amortized and recorded to interest expense. We evaluate the effectiveness of our net investment hedge at the beginning of each quarter.

The following table shows the fair value of our hedges:



	Balance Sheet Line Item	September 30, 2019		December 31, 2018
Interest rate swaps ⁽¹⁾⁽³⁾	Other liabilities	$	19	$	—
Cross-currency interest rate swaps ⁽²⁾⁽³⁾	Other assets	55		18
(1) Losses of $2 million and $19 million for the three and nine months ended September 30, 2019, respectively, are reflected in Derivative financial instrument unrealized (loss) gain in Other comprehensive loss.
(2) Gain of $26 million and $37 million for the three and nine months ended September 30, 2019, respectively, are reflected in Foreign currency translation gain (losses) in Other comprehensive loss.
(3) Inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy.

Balance Sheet Line Item March 31, 2019 December 31, 2018
Interest rate swaps ⁽¹⁾⁽³⁾
Other liabilities $ 6
$ —
Cross-currency interest rate swaps ⁽²⁾⁽³⁾
Other assets 34
18
(1) The loss of $6 million for the three months ended March, 31 2019 is reflected in Derivative financial instrument unrealized gross loss in Other comprehensive income.
(2) The gain of $16 million for the three months ended March, 31 2019 is reflected in Foreign currency translation loss in Other comprehensive income.
(3) The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy.

Net Investment Non-derivative Hedge - 2026 Secured Euro Notes

~~For the first quarter of 2019, we~~We designated ~~$255~~$180 million of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our results caused by the changes in foreign currency exchange rates of the Euro relative to the U.S. Dollar.

We use the spot method to measure the effectiveness of our net investment non-derivative hedge. Under this method, for each reporting period, the change in the hedged portion of the carrying value of the 2026 Secured Euro Notes due to remeasurement is reported in Foreign currency translation gain (loss) in Other comprehensive ~~income,~~loss, and the remaining

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

Contingent Consideration Liabilities

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

Contingent consideration liabilities as of ~~March 31,~~September 30, 2019 ~~and~~ are $19 million of which $9 million is included in Accrued liabilities with the remainder included in Other long-term liabilities. Contingent consideration liabilities as of

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

We did not have assets and liabilities measured at fair value on a non-recurring basis as of ~~March 31, 2019.~~September 30, 2019 other than disclosed in Note 7.

(13) Stockholders’ Deficit

Changes in Stockholders’ Deficit

The following tables present certain information regarding our ~~stockholders'~~stockholders’ deficit as of ~~March 31,~~September 30, 2019 and ~~March 31, 2018.~~September 30, 2018:


	Three Months Ended March 31, 2019
	Common Stock		Additional Paid in Capital		Accumulated Loss			Treasury Stock			Accumulated Other Comprehensive Loss			Total			Common Stock		Additional Paid in Capital		Accumulated Loss			Treasury Stock			Accumulated Other Comprehensive Loss			Noncontrolling Interest		Total
January 1, 2019	$	1	$	835	$	(2,824	)	$	(175	)	$	(300	)	$	(2,463	)	$	1	$	835	$	(2,824	)	$	(175	)	$	(300	)	$	—	$	(2,463	)
Net proceeds of common stock in connection with stock options and RSUs	—		2		—			—			—			2			—		2		—			—			—			—		2
Stock-based compensation	—		11		—			—			—			11			—		11		—			—			—			—		11
Net loss	—		—		(24		)	—			—			(24		)	—		—		(24		)	—			—			—		(24		)
Other Comprehensive income	—		—		—			—			51			51
Other comprehensive income																	��		—		—			—			51			—		51
March 31, 2019	$	1	$	848	$	(2,848	)	$	(175	)	$	(249	)	$	(2,423	)	$	1	$	848	$	(2,848	)	$	(175	)	$	(249	)	$	—	$	(2,423	)
Net proceeds of common stock in connection with stock options and RSUs and other																	—		2		—			—			—			—		2
Sale of SciPlay common stock and related transactions																	—		328		—			—			—			91		419
Stock-based compensation																	—		9		—			—			—			1		10
Net loss																	—		—		(77		)	—			—			2		(75		)
Other comprehensive loss																	—		—		—			—			(51		)	—		(51		)
June 30, 2019																	$	1	$	1,187	$	(2,925	)	$	(175	)	$	(300	)	$	94	$	(2,118	)
Net proceeds of common stock in connection with stock options, RSUs and other																	—		1		—			—			—			—		1
Stock-based compensation																	—		9		—			—			—			—		9
Net income																	—		—		14			—			—			4		18
Other comprehensive loss																	—		—		—			—			(35		)	—		(35		)
September 30, 2019																	$	1	$	1,197	$	(2,911	)	$	(175	)	$	(335	)	$	98	$	(2,125	)

Three Months Ended March 31, 2018
Common Stock Additional Paid in Capital Accumulated Loss Treasury Stock Accumulated Other Comprehensive Loss Total
January 1, 2018 $ 1
$ 808
$ (2,461 ) $ (175 ) $ (200 ) $ (2,027 )
Net redemption of common stock in connection with stock options and RSUs —
(15 ) —
—
—
(15 )
Stock-based compensation —
7
—
—
—
7
Net loss —
—
(202 ) —
—
(202 )
Adoption impact of ASC 606 —
—
(11 ) —
—
(11 )
Other Comprehensive income —
—
—
—
52
52
March 31, 2018 $ 1
$ 800
$ (2,674 ) $ (175 ) $ (148 ) $ (2,196 )



	Common Stock		Additional Paid in Capital			Accumulated Loss			Treasury Stock			Accumulated Other Comprehensive Loss			Total
January 1, 2018	$	1	$	808		$	(2,461	)	$	(175	)	$	(200	)	$	(2,027	)
Net proceeds of common stock in connection with stock options and RSUs	—		(15		)	—			—			—			(15		)
Stock-based compensation	—		7			—			—			—			7
Net loss	—		—			(202		)	—			—			(202		)
Adoption impact of ASC 606	—		—			(11		)	—			—			(11		)
Other comprehensive income	—		—			—			—			52			52
March 31, 2018	$	1	$	800		$	(2,674	)	$	(175	)	$	(148	)	$	(2,196	)
Net proceeds of common stock in connection with stock options and RSUs	—		2			—			—			—			2
Stock-based compensation	—		15			—			—			—			15
Net loss	—		—			(6		)	—			—			(6		)
Other comprehensive loss	—		—			—			—			(83		)	(83		)
June 30, 2018	$	1	$	817		$	(2,680	)	$	(175	)	$	(231	)	$	(2,268	)
Net proceeds of common stock in connection with stock options and RSUs	—		(3		)	—			—			—			(3		)
Stock-based compensation	—		9			—			—			—			9
Net loss	—		—			(352		)	—			—			(352		)
Other comprehensive loss	—		—			—			—			(5		)	(5		)
September 30, 2018	$	1	$	823		$	(3,032	)	$	(175	)	$	(236	)	$	(2,619	)

SciPlay Stock Based Compensation

During the second quarter of 2019, SciPlay adopted the SciPlay Long-Term Incentive Plan (“SciPlay LTIP”). The SciPlay LTIP authorizes the issuance of up to 6.5 million shares of SciPlay’s Class A common stock to be granted in connection with awards of incentive and nonqualified stock options, restricted stock and stock units, stock appreciation rights and performance-based awards. As of September 30, 2019, there were 4.0 million of total time-based and performance-based SciPlay restricted stock units issued with an average grant price of $15.30 per share.

The following reflects total stock-based compensation expense recognized under all programs:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Related to SGC stock options	$	1	$	3	$	4	$	11
Related to SGC RSUs	6		7		23		23
Related to SciPlay RSUs	2		—		6		—
Total	$	9	$	10	$	33	$	34

Three Months Ended
March 31,
2019 2018
Related to stock options $ 2
$ 2
Related to RSUs 12
7
Total $ 14
$ 9

(14) Income Taxes

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

~~tax~~pre-tax losses for 2019, we maintain a valuation allowance for certain of our U.S. operations as of ~~March 31,~~September 30, 2019. We ~~maintained~~also maintain other valuation allowances for certain non-U.S. jurisdictions with cumulative losses.

The effective income tax rates for the three and nine months ended ~~March 31,~~September 30, 2019 were (20)% and ~~2018 were (18%~~(11)%, respectively, and 0% and (1%) for the three and ~~(3%),~~nine months ended September 30, 2018, respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. Due to the aforementioned valuation allowance against ~~our~~certain U.S. net deferred tax assets, the effective tax rates for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018 generally do not include the benefits of the U.S. tax ~~losses, and~~losses; however, we recorded an overall tax benefit in continuing operations for the three months ended September 30, 2019 primarily as a result of other comprehensive income gains in certain of our U.S. operations, which continues to generate losses in continuing operations and maintain a full

valuation allowance. The tax benefit in continuing operations is offset by a tax expense booked in ~~both periods~~other comprehensive income, pursuant to applicable intraperiod allocation rules. We recorded an overall tax expense for the nine months ended September 30, 2019 and 2018 due to foreign pre-tax ~~earnings. The~~earnings, and the change in ~~the~~ effective tax rates ~~relates~~related primarily to the overall mix of income in our foreign jurisdictions.

(15) Leases

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

Our total operating lease expenses for the three and nine months ended ~~March 31,~~September 30, 2019 ~~and 2018~~ were $9 million and $7$28 million, respectively, and were $8 million and $23 million for the three and nine months ended September 30, 2018, respectively. The total amount of variable and short term lease payments ~~incurred during the three months ended March 31, 2019 are immaterial.~~were immaterial for all periods presented.

Supplemental balance sheet and cash flow information related to operating leases is as follows:



	September 30, 2019
Operating lease right-of-use assets	$	107
Accrued liabilities	25
Operating lease liabilities	91
Total operating lease liabilities	$	116
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	7
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases for the nine months period	$	25
Weighted average remaining lease term, years	5
Weighted average discount rate	5		%

March 31, 2019
Operating lease right-of-use assets⁽¹⁾
$ 118
Accrued liabilities 26
Operating lease liabilities 98
Total operating lease liabilities $ 124
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 8
Weighted average remaining lease term, years 6
Weighted average discount rate 5 %
(1) Right-of use assets obtained in exchange for lease obligations during the first quarter of 2019 were immaterial.

Lease liability maturities:



	Remainder of 2019		2020		2021		2022		2023		Thereafter		Less Imputed Interest			Total
Operating leases	$	8	$	30	$	26	$	20	$	15	$	33	$	(16	)	$	116

2019 2020 2021 2022 2023 Thereafter Less Imputed Interest Total
Operating leases $ 24
$ 28
$ 24
$ 19
$ 15
$ 34
$ (20 ) $ 124

As of ~~March 31,~~September 30, 2019, we did not have material additional operating leases that have not yet commenced.

(16) Litigation

We are involved in various routine and other specific legal proceedings, including the following which are described in Note 22 within our 2018 10-K: Colombia litigation, SNAI litigation, Washington State Matter, and the Raqqa Matter. There have been no material changes to these matters since the 2018 10-K was filed with the SEC, except as described below.

We record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss can be reasonably estimated (although, as discussed below, there may be an exposure to loss in excess of the accrued liability). We evaluate our accruals for legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect (1) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments, (2) the advice and analyses of counsel and (3) the assumptions and judgment of management. Legal costs associated with our legal proceedings are expensed as incurred. We had accrued liabilities of $3 million and $4 million for all of our legal matters that were contingencies as of ~~March 31,~~September 30, 2019 and December 31, ~~2018.~~

2018, respectively.

Substantially all of our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss involves a series of complex judgments about future events. Consequently, the ultimate outcomes of our legal contingencies could result in losses in excess of amounts we have accrued.

We may be unable to estimate a range of possible losses for some matters pending against us or our subsidiaries, even when the amount of damages claimed against us or our subsidiaries is stated because, among other things: (1) the claimed amount may be exaggerated or unsupported; (2) the claim may be based on a novel legal theory or involve a large number of parties; (3) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (4) there may be uncertainty as to the outcome of pending appeals or motions; (5) the matter may not have progressed sufficiently through discovery or there may be significant factual or legal issues to be resolved or developed; and/or (6) there may be uncertainty as to the enforceability of legal judgments and outcomes in certain jurisdictions. Other matters have progressed sufficiently that we are able to estimate a range of possible loss. For those legal contingencies disclosed in Note 22 in our 2018 10-K and this Note 16 as well as those related to the previously disclosed settlement agreement entered into in February 2015 with SNAI S.p.a., as to which a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a range of possible loss, the current estimated range is up to approximately ~~$14~~$13 million in excess of the accrued liabilities (if any) related to those legal contingencies. This aggregate range represents management’s estimate of additional possible loss in excess of the accrued liabilities (if any) with respect to these matters based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, management may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co‑defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that management had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which we are not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent our maximum loss exposure. Any such losses could have a material adverse impact on our results of operations, cash flows or financial condition. The legal proceedings underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.

TCS John Huxley Matter

On March 15, 2019, TCS John Huxley America, Inc., TCS John Huxley Europe Ltd., TCS John Huxley Asia Ltd., and Taiwan Fulgent Enterprise Co., Ltd. brought a civil action in the United States District Court for the Northern District of Illinois against SGC, Bally Technologies, Inc. and Bally Gaming, Inc. In the complaint, the plaintiffs assert federal antitrust claims arising from ~~defendants'~~the defendants’ procurement of particular U.S. and South African patents. ~~Plaintiffs~~The plaintiffs allege that the defendants used those patents to create an allegedly illegal monopoly in the market for automatic card shufflers sold to regulated casinos in the United States. On April 10, 2019, the defendants filed a motion to dismiss the plaintiffs’ complaint with prejudice. On April 25, 2019, the district court denied the defendants’ motion to dismiss without prejudice pursuant to the court’s local rules, after the plaintiffs advised that they intended to file an amended complaint. ~~Plaintiffs~~The plaintiffs filed their amended complaint on May 3, 2019, and on May 22, 2019, the defendants filed a motion to dismiss the plaintiffs’ amended complaint with prejudice, which has not yet been ruled upon by the district ~~court has set a status hearing for May 8, 2019 to discuss the matter further. Due to the early nature of this litigation, we~~court. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss.

SciPlay IPO Matter (New York)

On or about October 14, 2019, the Police Retirement System of St. Louis filed a putative class action complaint in New York state court against SciPlay, certain of its executives and directors, and SciPlay’s underwriters with respect to its initial public offering. The plaintiff seeks to represent a class of all persons or entities who acquired Class A common stock of SciPlay pursuant and/or traceable to the Registration Statement filed and issued in connection with SciPlay’s initial public offering on or about May 3, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages of at least $144.7 million, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.

Sylebra Matter

On October 23, 2019, Sylebra Capital Partners Master Fund, Limited and P Sylebra, Limited (together, “Sylebra”) filed a complaint in Delaware Chancery Court against SGC, Bally Gaming, Inc., and certain of SGC’s current and former executives and directors. The complaint asserts claims for alleged breaches of fiduciary duty and alleged aiding and abetting of such alleged breaches of fiduciary duty; for alleged unjust enrichment; for alleged anticipatory breach of Sylebra’s alleged rights under SGC’s prior Restated Certificate of Incorporation (“prior Charter”) and for alleged breach of that prior Charter; for alleged violations of certain Delaware statutes; and for alleged tortious interference with contract. The complaint seeks injunctive relief, declaratory relief, money damages, and the award of the plaintiffs’ costs and expenses incurred in the action.

We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible losses, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.

SciPlay IPO Matter (Nevada)

On or about November 4, 2019, plaintiff John Good filed a putative class action complaint in Nevada state court against SciPlay, certain of its executives and directors, SGC, and SciPlay’s underwriters with respect to SciPlay’s initial public offering. The plaintiff seeks to represent a class of all persons who purchased Class A common stock of SciPlay in or traceable to SciPlay’s initial public offering that it completed on or about May 7, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible losses, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.

For additional information regarding our pending litigation matters, see Note 22 in our 2018 10-K.

(17) Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries

We conduct substantially all of our business through our U.S. and foreign subsidiaries. As of ~~March 31,~~September 30, 2019, SGI’s obligations under the Secured Notes (other than the 2022 Secured Notes, which were redeemed in March 2018), the Unsecured Notes and the Subordinated Notes were fully and unconditionally and jointly and severally guaranteed by SGC and the Guarantor Subsidiaries other than SGI, and certain immaterial subsidiaries of SGC. The guarantees of our Secured Notes (other than the 2022 Secured Notes, which were redeemed in March 2018), Unsecured Notes and Subordinated Notes will terminate under the following customary circumstances: (1) the sale or disposition of the capital stock of the guarantor (including by consolidation or merger of the guarantor into another person); (2) the liquidation or dissolution of the guarantor; (3) the defeasance or satisfaction and discharge of the notes; (4) the release of the guarantor from any guarantees of indebtedness of SGC and SGI; and (5) the proper designation of the guarantor as an unrestricted subsidiary pursuant to the indenture governing the respective notes.

Presented below is condensed consolidating financial information for (1) SGC, (2) SGI, (3) the Guarantor Subsidiaries and (4) the Non-Guarantor Subsidiaries as of ~~March 31,~~September 30, 2019 and December 31, 2018 and for the three and nine months ended ~~March 31,~~September 30, 2019 and 2018. The condensed consolidating financial information has been presented to show the nature

of assets held, results of operations and cash flows of SGC, SGI, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming the current guarantee structures of the Secured Notes (other than the 2022 Secured Notes, which were redeemed in March 2018), the Unsecured Notes and the Subordinated Notes were in effect at the beginning of the periods presented.

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

2630

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

As of ~~March 31,~~September 30, 2019


		SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated			SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated
Assets
Cash and cash equivalents		$	1,119		$	1		$	—	$	95	$	(2	)	$	1,213		$	194		$	—		$	—	$	170	$	(1	)	$	363
Restricted cash		—			1			33		7		—			41			—			1			37		8		—			46
Accounts receivable, net		—			102			204		315		—			621			—			105			193		338		—			636
Notes receivable, net		—			—			89		15		—			104			—			—			110		13		—			123
Inventories		—			45			89		109		(14		)	229			—			53			114		103		(13		)	257
Prepaid expenses, deposits and other current assets		3			60			95		79		1			238			6			57			70		92		1			226
Property and equipment, net		31			99			208		215		(36		)	517			32			95			223		197		(31		)	516
Operating lease right-of-use asset		1			24			35		58		—			118			1			24			32		50		—			107
Investment in subsidiaries		2,896			959			1,216		—		(5,071		)	—			3,147			992			1,162		—		(5,301		)	—
Goodwill		—			240			1,897		1,164		—			3,301			—			240			1,897		1,114		—			3,251
Intangible assets, net		40			34			1,239		432		—			1,745			34			34			1,137		374		—			1,579
Intercompany balances		—			7,096			74		—		(7,170		)	—			—			5,871			70		—		(5,941		)	—
Software, net		53			37			118		69		—			277			59			36			98		77		—			270
Other assets⁽²⁾		113			412			37		309		(438		)	433			105			436			45		385		(438		)	533
Total assets		$	4,256		$	9,110		$	5,334	$	2,867	$	(12,730	)	$	8,837		$	3,578		$	7,944		$	5,188	$	2,921	$	(11,724	)	$	7,907
Liabilities and stockholders’ (deficit) equity
Current portion of long-term debt		$	—		$	1,042		$	3	$	1	$	—		$	1,046		$	—		$	285		$	2	$	1	$	—		$	288
Other current liabilities		58			224			235		258		(35		)	740			79			215			250		246		(33		)	757
Long-term debt, excluding current portion		—			8,928			8		1		—			8,937			—			8,474			8		—		—			8,482
Operating lease liabilities		1			20			30		47		—			98			1			20			27		43		—			91
Other long-term liabilities		104			13			637		176		(491		)	439			92			25			593		174		(470		)	414
Intercompany balances		6,516			—			—		654		(7,170		)	—			5,629			—			—		312		(5,941		)	—
Stockholders’ (deficit) equity		(2,423		)	(1,117		)	4,421		1,730		(5,034		)	(2,423		)
Total liabilities and stockholders’ (deficit) equity		$	4,256		$	9,110		$	5,334	$	2,867	$	(12,730	)	$	8,837

Total SGC stockholders’ (deficit) equity																		(2,223		)	(1,075		)	4,308		2,047		(5,280		)	(2,223		)
Noncontrolling interest																		—			—			—		98		—			98
Total liabilities and total stockholders’ (deficit) equity																		$	3,578		$	7,944		$	5,188	$	2,921	$	(11,724	)	$	7,907
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Includes $11 million and $1 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.	(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Includes $11 million and $1 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.																	(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Includes $11 million and $1 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.

2731

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2018



	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated
Assets
Cash and cash equivalents	$	74		$	1		$	—	$	94	$	(1	)	$	168
Restricted cash	—			1			32		6		—			39
Accounts receivable, net	—			79			205		315		—			599
Notes receivable, net	—			—			101		13		—			114
Inventories	—			40			82		111		(17		)	216
Prepaid expenses, deposits and other current assets	6			63			92		72		—			233
Property and equipment, net	31			112			219		218		(33		)	547
Investment in subsidiaries	2,836			975			1,093		—		(4,904		)	—
Goodwill	—			240			1,897		1,143		—			3,280
Intangible assets, net	43			34			1,291		441		—			1,809
Intercompany balances	—			6,054			—		—		(6,054		)	—
Software, net	58			39			128		60		—			285
Other assets⁽²⁾	110			404			46		308		(440		)	428
Total assets	$	3,158		$	8,042		$	5,186	$	2,781	$	(11,449	)	$	7,718
Liabilities and stockholders’ (deficit) equity
Current portion of long-term debt	$	—		$	42		$	—	$	3	$	—		$	45
Other current liabilities	64			162			248		254		(26		)	702
Long-term debt, excluding current portion	—			8,991			—		1		—			8,992
Other long-term liabilities	106			8			637		172		(481		)	442
Intercompany balances	5,451			—			49		554		(6,054		)	—
Total SGC stockholders’ (deficit) equity	(2,463		)	(1,161		)	4,252		1,797		(4,888		)	(2,463		)
Total liabilities and total stockholders’ (deficit) equity	$	3,158		$	8,042		$	5,186	$	2,781	$	(11,449	)	$	7,718
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until March 2019) and the Secured Notes.
(2) Includes $12 million and $1 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.

SGC (Parent)
SGI (Issuer¹)

Guarantor
Subsidiaries

Non-Guarantor
Subsidiaries

Eliminating
Entries
Consolidated
Assets
Cash and cash equivalents $ 74
$ 1
$ —
$ 94
$ (1 ) $ 168
Restricted cash —
1
32
6
—
39
Accounts receivable, net —
79
205
315
—
599
Notes receivable, net —
—
101
13
—
114
Inventories —
40
82
111
(17 ) 216
Prepaid expenses, deposits and other current assets 6
63
92
72
—
233
Property and equipment, net 31
112
219
218
(33 ) 547
Investment in subsidiaries 2,836
975
1,093
—
(4,904 ) —
Goodwill —
240
1,897
1,143
—
3,280
Intangible assets, net 43
34
1,291
441
—
1,809
Intercompany balances —
6,054
—
—
(6,054 ) —
Software, net 58
39
128
60
—
285
Other assets⁽²⁾
110
404
46
308
(440 ) 428
Total assets $ 3,158
$ 8,042
$ 5,186
$ 2,781
$ (11,449 ) $ 7,718
Liabilities and stockholders’ (deficit) equity
Current portion of long-term debt $ —
$ 42
$ —
$ 3
$ —
$ 45
Other current liabilities 64
162
248
254
(26 ) 702
Long-term debt, excluding current portion —
8,991
—
1
—
8,992
Other long-term liabilities 106
8
637
172
(481 ) 442
Intercompany balances 5,451
—
49
554
(6,054 ) —
Stockholders’ (deficit) equity (2,463 ) (1,161 ) 4,252
1,797
(4,888 ) (2,463 )
Total liabilities and stockholders’ (deficit) equity $ 3,158
$ 8,042
$ 5,186
$ 2,781
$ (11,449 ) $ 7,718

(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until February 2019) and the Secured Notes.
(2) Includes $12 million and $1 million in non-current restricted cash for Guarantor Subsidiaries and Non-Guarantor Subsidiaries, respectively.

2832

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF

OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

Three Months Ended ~~March 31,~~September 30, 2019


	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated			SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated
Revenue	$	—		$	158		$	358		$	385		$	(64	)	$	837		$	—		$	139		$	376		$	419		$	(79	)	$	855
Cost of services, cost of product sales and cost of instant products⁽²⁾	—			101			102			152			(48		)	307			—			93			119			170			(65		)	317
SG&A	35			11			59			94			(13		)	186			34			9			55			88			(11		)	175
R&D	—			1			23			25			—			49			—			1			22			24			—			47
D&A	12			12			99			47			(5		)	165			16			8			99			44			(5		)	162
Restructuring and other	1			—			2			4			—			7			—			1			2			8			—			11
Operating (loss) income	(48		)	33			73			63			2			123			(50		)	27			79			85			2			143
Interest expense	—			(154		)	—			—			—			(154		)	—			(146		)	—			—			—			(146		)
Gain on remeasurement of debt	—			5			—			—			—			5			—			19			—			—			—			19
Other income (expense), net	20			132			(124		)	(22		)	—			6			14			129			(117		)	(27		)	—			(1		)
Net (loss) income before equity in income of subsidiaries and income taxes	(28		)	16			(51		)	41			2			(20		)	(36		)	29			(38		)	58			2			15
Equity in income of subsidiaries	6			7			11			—			(24		)	—			36			9			22			—			(67		)	—
Income tax (expense) benefit	(2		)	(5		)	13			(10		)	—			(4		)
Net (loss) income	$	(24	)	$	18		$	(27	)	$	31		$	(22	)	$	(24	)

Other comprehensive income	51			9			2			71			(82		)	51
Comprehensive income (loss)	$	27		$	27		$	(25	)	$	102		$	(104	)	$	27

(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Exclusive of D&A.
Income tax benefit (expense)																			14			(8		)	8			(11		)	—			3
Net income (loss)																			14			30			(8		)	47			(65		)	18
Less: Net income attributable to noncontrolling interest																			—			—			—			4			—			4
Net income (loss) attributable to SGC																			$	14		$	30		$	(8	)	$	43		$	(65	)	$	14
Net income (loss)																			$	14		$	30		$	(8	)	$	47		$	(65	)	$	18
Other comprehensive (loss) income																			(35		)	30			(1		)	(61		)	32			(35		)
Total comprehensive (loss) income																			(21		)	60			(9		)	(14		)	(33		)	(17		)
Less: comprehensive income attributable to noncontrolling interest																			—			—			—			4			—			4
Comprehensive (loss) income attributable to SGC																			$	(21	)	$	60		$	(9	)	$	(18	)	$	(33	)	$	(21	)
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Excludes D&A.																			(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Excludes D&A.

2933

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF

OPERATIONS AND COMPREHENSIVE (LOSS) INCOME ~~(LOSS)~~

Three Months Ended ~~March 31,~~September 30, 2018



	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated
Revenue	$	—		$	138		$	404		$	361		$	(82	)	$	821
Cost of services, cost of product sales and cost of instant products⁽²⁾	—			90			119			160			(68		)	301
SG&A	38			12			57			76			(13		)	170
R&D	—			—			21			29			—			50
D&A	11			9			106			45			(5		)	166
Restructuring and other	320			3			4			12			—			339
Operating (loss) income	(369		)	24			97			39			4			(205		)
Interest expense	—			(147		)	—			—			—			(147		)
Gain on remeasurement of debt	—			(4		)	—			—			—			(4		)
Other income (expense), net	16			130			(123		)	(19		)	—			4
Net (loss) income before equity in income of subsidiaries and income taxes	(353		)	3			(26		)	20			4			(352		)
Equity in income (loss) of subsidiaries	—			4			(10		)	—			6			—
Income tax benefit (expense)	1			(1		)	6			(6		)	—			—
Net (loss) income	$	(352	)	$	6		$	(30	)	$	14		$	10		$	(352	)
Other comprehensive (loss) income	(5		)	11			(10		)	(2		)	1			(5		)
Comprehensive (loss) income	$	(357	)	$	17		$	(40	)	$	12		$	11		$	(357	)
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until March 2019) and the Secured Notes. (2) Excludes D&A.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF

OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

Nine Months Ended September 30, 2019


	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated			SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated
Revenue	$	—		$	130		$	387		$	369		$	(74	)	$	812		$	—		$	444		$	1,092		$	1,211		$	(210	)	$	2,537
Cost of services, cost of product sales and cost of instant products ⁽²⁾	—			86			118			154			(61		)	297			—			288			329			498			(170		)	945
SG&A	38			11			58			79			(14		)	172			100			29			162			276			(32		)	535
R&D	—			—			23			31			—			54			—			3			64			75			—			142
D&A	9			8			126			48			(3		)	188			40			33			302			136			(14		)	497
Restructuring and other	26			1			1			24			—			52			2			2			5			15			—			24
Operating (loss) income	(73		)	24			61			33			4			49			(142		)	89			230			211			6			394
Interest expense	—			(155		)	—			—			—			(155		)	—			(447		)	—			—			—			(447		)
Loss on debt financing transactions	—			(93		)	—			—			—			(93		)	—			(60		)	—			—			—			(60		)
Gain on remeasurement of debt																			—			21			—			—			—			21
Other income (expense), net	15			136			(133		)	(15		)	—			3			50			392			(360		)	(63		)	—			19
Net (loss) income before equity in income of subsidiaries and income taxes	(58		)	(88		)	(72		)	18			4			(196		)	(92		)	(5		)	(130		)	148			6			(73		)
Equity in (loss) income of subsidiaries	(84		)	4			10			—			70			—
Equity in income of subsidiaries																			12			18			45			—			(75		)	—
Income tax (expense) benefit	(60		)	33			25			(4		)	—			(6		)	(7		)	1			30			(32		)	—			(8		)
Net (loss) income	$	(202	)	$	(51	)	$	(37	)	$	14		$	74		$	(202	)	(87		)	14			(55		)	116			(69		)	(81		)

Other comprehensive income (loss)	52			(17		)	22			73			(78		)	52
Comprehensive income (loss)	$	(150	)	$	(68	)	$	(15	)	$	87		$	(4	)	$	(150	)

(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until March 2019) and the Secured Notes. (2) Exclusive of D&A.
Less: Net income attributable to noncontrolling interest																			—			—			—			6			—			6
Net (loss) income attributable to SGC																			$	(87	)	$	14		$	(55	)	$	110		$	(69	)	$	(87	)
Net (loss) income																			$	(87	)	$	14		$	(55	)	$	116		$	(69	)	$	(81	)
Other comprehensive (loss) income																			(35		)	24			(2		)	(56		)	34			(35		)
Total comprehensive (loss) income																			(122		)	38			(57		)	60			(35		)	(116		)
Less: comprehensive income attributable to noncontrolling interest																			—			—			—			6			—			6
Comprehensive (loss) income attributable to SGC																			$	(122	)	$	38		$	(57	)	$	54		$	(35	)	$	(122	)
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Excludes D&A.																			(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes. (2) Excludes D&A.

3035

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF

OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

Nine Months Ended September 30, 2018



	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated
Revenue	$	—		$	404		$	1,196		$	1,107		$	(229	)	$	2,478
Cost of services, cost of product sales and cost of instant products⁽²⁾	—			263			369			472			(190		)	914
SG&A	119			32			166			238			(40		)	515
R&D	—			1			66			85			1			153
D&A	32			24			339			143			(11		)	527
Restructuring and other	375			—			8			42			(1		)	424
Operating (loss) income	(526		)	84			248			127			12			(55		)
Interest expense	—			(448		)	—			—			—			(448		)
Loss on debt financing transactions	—			(93		)	—			—			—			(93		)
Gain on remeasurement of debt	—			29			—			—			—			29
Other income (expense), net	49			399			(375		)	(59		)	—			14
Net (loss) income before equity in income of subsidiaries and income taxes	(477		)	(29		)	(127		)	68			12			(553		)
Equity in (loss) income of subsidiaries	(60		)	22			(17		)	—			55			—
Income tax (expense) benefit	(22		)	7			27			(18		)	—			(6		)
Net (loss) income	$	(559	)	$	—		$	(117	)	$	50		$	67		$	(559	)
Other comprehensive (loss) income	(37		)	23			(23		)	(48		)	48			(37		)
Comprehensive (loss) income	$	(596	)	$	23		$	(140	)	$	2		$	115		$	(596	)
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until March 2019) and the Secured Notes. (2) Excludes D&A.

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

~~Three~~Nine Months Ended ~~March 31,~~September 30, 2019


	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated			SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated
Net cash (used in) provided by operating activities	$	(15	)	$	55		$	63		$	65		$	(1	)	$	167		$	(36	)	$	77		$	146		$	216		$	—		$	403
Cash flows from investing activities:
Capital expenditures	(3		)	(10		)	(25		)	(29		)	—			(67		)	(17		)	(22		)	(85		)	(83		)	—			(207		)
Distributions of capital from equity investments	—			—			—			3			—			3			—			—			—			18			—			18
Additions to equity method investments																			—			(1		)	—			—			—			(1		)
Other, principally change in intercompany investing activities	—			(986		)	(47		)	—			1,033			—			—			268			(61		)	—			(207		)	—
Net cash used in investing activities	(3		)	(996		)	(72		)	(26		)	1,033			(64		)
Net cash (used in) provided by investing activities																			(17		)	245			(146		)	(65		)	(207		)	(190		)
Cash flows from financing activities:
Proceeds from long-term debt, net of payments	—			955			—			(2		)	—			953
Payments of long-term debt, net of proceeds																			—			(306		)	—			(2		)	—			(308		)
Payments of debt issuance and deferred financing costs	—			(14		)	—			—			—			(14		)	—			(14		)	—			(1		)	—			(15		)
Payments on license obligations	(7		)	—			—			—			—			(7		)	(20		)	(1		)	(5		)	—			—			(26		)
Sale of future revenue	—			—			11			—			—			11			—			—			11			—			—			11
Net proceeds from the sale of SciPlay common stock																			—			—			—			342			—			342
Payments of deferred SciPlay common stock offering costs																			—			—			—			(9		)	—			(9		)
Net redemptions of common stock under stock-based compensation plans and other	1			—			(2		)	—			—			(1		)	—			(2		)	(2		)	(2		)	—			(6		)
Other, principally change in intercompany financing activities	1,069			—			—			(36		)	(1,033		)	—			193			—			—			(400		)	207			—
Net cash provided by (used in) financing activities	1,063			941			9			(38		)	(1,033		)	942			173			(323		)	4			(72		)	207			(11		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			—			—			1			—			1			—			—			—			(1		)	—			(1		)
Increase in cash, cash equivalents and restricted cash	1,045			—			—			2			(1		)	1,046
Increase (decrease) in cash, cash equivalents and restricted cash																			120			(1		)	4			78			—			201
Cash, cash equivalents and restricted cash, beginning of period	74			2			44			101			(1		)	220			74			2			44			101			(1		)	220
Cash, cash equivalents and restricted cash end of period	$	1,119		$	2		$	44		$	103		$	(2	)	$	1,266

Cash, cash equivalents and restricted cash, end of period																			$	194		$	1		$	48		$	179		$	(1	)	$	421
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes and the Secured Notes.

3137

SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

~~Three~~Nine Months Ended ~~March 31,~~September 30, 2018



	SGC (Parent)			SGI (Issuer¹)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated
Net cash (used in) provided by operating activities	$	(56	)	$	30		$	153		$	231		$	(2	)	$	356
Cash flows from investing activities:
Capital expenditures	(30		)	(57		)	(122		)	(84		)	—			(293		)
Acquisitions of businesses and assets, net of cash acquired	—			—			(10		)	(264		)	—			(274		)
Distributions of capital from equity investments	—			—			—			24			—			24
Additions to equity method investments	—			(2		)	—			(74		)	—			(76		)
Other, principally change in intercompany investing activities	—			91			(15		)	—			(76		)	—
Net cash (used in) provided by investing activities	(30		)	32			(147		)	(398		)	(76		)	(619		)
Cash flows from financing activities:
Proceeds net of payments on long-term debt	—			(24		)	—			(6		)	—			(30		)
Repayment of assumed NYX debt	—			—			—			(288		)	—			(288		)
Payments of debt issuance and deferred financing costs	—			(39		)	—			—			—			(39		)
Payments on license obligations	(20		)	—			(2		)	—			—			(22		)
Net redemptions of common stock under stock-based compensation plans and other	(22		)	—			(2		)	—			—			(24		)
Other, principally change in intercompany financing activities	(565		)	—			—			489			76			—
Net cash (used in) provided by financing activities	(607		)	(63		)	(4		)	195			76			(403		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			—			—			(2		)	—			(2		)
(Decrease) increase in cash, cash equivalents and restricted cash	(693		)	(1		)	2			26			(2		)	(668		)
Cash, cash equivalents and restricted cash, beginning of period	732			1			44			60			(3		)	834
Cash, cash equivalents and restricted cash end of period	$	39		$	—		$	46		$	86		$	(5	)	$	166
(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until March 2019) and the Secured Notes.

SGC (Parent)
SGI (Issuer¹)
Guarantor
Subsidiaries Non-Guarantor
Subsidiaries Eliminating
Entries Consolidated
Net cash (used in) provided by operating activities $ (32 ) $ (25 ) $ 34
$ 55
$ (2 ) $ 30
Cash flows from investing activities:

Capital expenditures (8 ) (17 ) (45 ) (18 ) —
(88 )
Acquisitions of businesses and assets, net of cash acquired —
—
(9 ) (265 ) —
(274 )
Distributions of capital from equity investments —
—
—
2
—
2
Other, principally change in intercompany investing activities —
74
—
—
(74 ) —
Net cash (used in) provided by investing activities (8 ) 57
(54 ) (281 ) (74 ) (360 )
Cash flows from financing activities:
Proceeds net of payments on long-term debt —
7
—
(2 ) —
5
Repayment of assumed NYX debt —
—
—
(288 ) —
(288 )
Payments of debt issuance and deferred financing costs —
(39 ) —
—
—
(39 )
Payments on license obligations (7 ) —
—
—
—
(7 )
Net redemptions of common stock under stock-based compensation plans and other (15 ) —
(2 ) —
—
(17 )
Other, principally change in intercompany financing activities (630 ) —
22
534
74
—
Net cash (used in) provided by financing activities (652 ) (32 ) 20
244
74
(346 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash —
—
—
2
—
2
(Decrease) increase in cash, cash equivalents and restricted cash (692 ) —
—
20
(2 ) (674 )
Cash, cash equivalents and restricted cash, beginning of period 732
1
44
60
(3 ) 834
Cash, cash equivalents and restricted cash end of period $ 40
$ 1
$ 44
$ 80
$ (5 ) $ 160

(1) Issuer of obligations under the Subordinated Notes, the Unsecured Notes (other than the 2026 Unsecured Notes, which were not issued until March 2019) and the Secured Notes.

3238

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to enhance the ~~reader's~~reader’s understanding of our operations and current business environment and should be read in conjunction with the description of our business included under Part I, Item 1 “Condensed Consolidated Financial Statements” and Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and under Part I, Item 1 “Business,” and Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 10-K.

This ~~“Management's~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under “Forward-Looking Statements” and “Risk Factors” included in this Quarterly Report on Form 10-Q and “Risk Factors” included in our 2018 10-K. As used in this MD&A, the terms “we,” “us,” “our” and the “Company” mean Scientific Games Corporation together with its consolidated subsidiaries.

You can access our filings with the SEC through the SEC website at www.sec.gov or through our website, and we strongly encourage you to do so. We routinely post information that may be important to investors on our website at www.scientificgames.com/investors/, and we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC’s Regulation Fair Disclosure (Reg FD). The contents of our website are not incorporated by reference in this Form 10-Q and shall not be deemed “filed” under the Securities Exchange Act of 1934, as amended.

BUSINESS OVERVIEW

Recent Events

~~On March 19,~~In November 2019, we ~~completed a private offering of $1,100~~received commitments from certain revolving lenders to, among other things, extend approximately $600 million of commitments under the ~~2026 Unsecured Notes.~~existing revolving credit facility for a five-year period and provide for step-downs in the consolidated net first lien leverage ratio covenant to 4.75x of Consolidated EBITDA (as defined in the credit agreement) beginning with the fiscal quarter ended December 31, 2020 and 4.50x beginning with the fiscal quarter ended December 31, 2021 (the “Credit Agreement Amendment”), subject to definitive documentation. We ~~used~~are still in discussions with other lenders regarding potential additional extended revolver commitments. We anticipate that we will enter into the ~~net proceeds of~~Credit Agreement Amendment in mid-November 2019, subject to customary closing conditions. However, we cannot assure whether, when, and on what terms, we will be able to ultimately enter in the 2026 Unsecured Notes offering to redeem $1,000 million of our outstanding 2022 Unsecured Notes, which redemption was completed on April 4, 2019. The 2026 Unsecured Notes offering allowed us to extend the maturity of $1,000 million of our debt from 2022 to 2026 and reduce expected future cash paid for interest.

On May 7, 2019, we completed an initial public offering of a 17.4% minority interest in our Social gaming business, the “SciPlay IPO”, which we believe will provide greater flexibility to pursue additional growth initiatives specifically designed for our Social gaming business. SGC received $301 million in proceeds from the offering, which enables us to make substantial payments to reduce our debt.Credit Agreement Amendment.

Segments

We report our operations in four business segments-—Gaming, Lottery, ~~Social~~SciPlay and Digital-—representing our different products and services. As a result of the SciPlay IPO and starting with the first quarter of 2019, we changed the calculation of ~~Social~~SciPlay business segment AEBITDA, which now reflects corporate services obtained under ~~an intercompany services agreement~~the Intercompany Services Agreement and certain ~~royalties~~IP charges paid by the ~~Social~~SciPlay business segment to ~~other segments or to Corporate~~the Gaming business segment under ~~an intercompany intellectual property license agreement.~~the IP License Agreement. Business segment information for the three and nine months ended ~~March 31,~~September 30, 2018 has been recast to reflect these changes. See "- “— Business Segments ~~Results"~~Results” below and Note 3 for additional business segment information.

Foreign Exchange

Our results are impacted by changes in foreign currency exchange rates used in the translation of foreign functional currencies into USD and the remeasurement of foreign currency transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. Our exposure to foreign currency volatility on revenue is as follows:

3339


	Three Months Ended								Three Months Ended								Nine Months Ended
	March 31,								September 30,								September 30,
	2019				2018				2019				2018				2019				2018
($ in millions)	Revenue		% Consolidated Revenue		Revenue		% Consolidated Revenue		Revenue		% Consolidated Revenue		Revenue		% Consolidated Revenue		Revenue		% Consolidated Revenue		Revenue		% Consolidated Revenue
Foreign Currency:
British Pound Sterling	$	85	10	%	$	83	10	%	$	82	10	%	$	72	9	%	$	245	10	%	$	235	10	%
Euro	56		7	%	54		7	%	58		7	%	55		7	%	175		7	%	169		7	%
Australian Dollar	16		2	%	25		3	%	25		3	%	27		3	%	67		3	%	80		3	%

We also have foreign currency exposure related to certain of our equity investments, cross-currency interest rate swaps, and Euro-denominated debt. See “Risk Factors” under Item 1A and “Consolidated Results — Other Factors Affecting 2018, 2017 and 2016 Net Loss Comparability— Foreign exchange” under Item 7 in our 2018 10-K and Item 3 “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.

CONSOLIDATED RESULTS


	Three Months Ended March 31,						Variance					Three Months Ended September 30,					Variance					Nine Months Ended September 30,						Variance
($ in millions)	2019			2018			2019 vs. 2018					2019		2018			2019 vs. 2018					2019			2018			2019 vs. 2018
Total revenue	$	837		$	812		$	25		3	%	$	855	$	821		$	34		4	%	$	2,537		$	2,478		$	59		2	%
Total operating expenses	714			763			(49		)	(6	)%	712		1,026			(314		)	(31	)%	2,143			2,533			(390		)	(15	)%
Operating income	123			49			74			151	%
Net loss before income taxes	(20		)	(196		)	176			(90	)%
Net loss	$	(24	)	$	(202	)	$	178		(88	)%
Operating income (loss)												143		(205		)	348			nm		394			(55		)	449			nm
Net income (loss) before income taxes												15		(352		)	367			nm		(73		)	(553		)	480			(87	)%
Net income (loss)												18		(352		)	370			nm		(81		)	(559		)	478			(86	)%
Net income (loss) attributable to SGC												$	14	$	(352	)	$	366		nm		$	(87	)	$	(559	)	$	472		(84	)%
nm = not meaningful.												nm = not meaningful.

~~Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018~~

Revenue


	Three Months Ended March 31,				Variance					Three Months Ended September 30,				Variance				Nine Months Ended September 30,				Variance
($ in millions)	2019		2018		2019 vs. 2018					2019		2018		2019 vs. 2018				2019		2018		2019 vs. 2018
Gaming	$	422	$	443	$	(21	)	(5	)%	$	454	$	448	$	6	1	%	$	1,303	$	1,362	$	(59	)	(4	)%
Lottery	227		202		25			12	%	220		207		13		6	%	678		616		62			10	%
Social	118		97		21			22	%
SciPlay										116		105		11		11	%	353		302		51			17	%
Digital	70		70		—			—	%	65		61		4		7	%	203		198		5			3	%
Total revenue	$	837	$	812	$	25		3	%	$	855	$	821	$	34	4	%	$	2,537	$	2,478	$	59		2	%

Gaming revenue increased for the three-month period primarily due to increases in table products and gaming systems revenue, partially offset by lower gaming operations revenue. Gaming revenue decreased for the nine-month period primarily due to lower gaming operations revenue coupled with ~~lower~~decreases in gaming machine ~~sales.~~sales and gaming systems revenue. The decrease in gaming operations revenue was primarily due to the lower U.S. and ~~Canadian~~Canada ending installed base units coupled with lower average daily ~~revenue for International units, while the~~revenue. The decrease in gaming machine sales was primarily due to lower ~~international~~U.S. and Canada new unit sales coupled with lower average sales price per new ~~unit.~~unit, while the decrease in gaming systems revenue for the nine-month period is due to lower system and iVIEW^® installations due to certain Canadian contracts that are nearing completion of systems launches.

Lottery revenue increased for both periods primarily due to higher lottery systems revenue driven by ~~domestic~~ equipment sales and organic domestic growth coupled with ~~organic domestic growth.~~an increase in instant products revenue for the three-month period.

~~Social~~

SciPlay revenue increased for both periods primarily due to continued growth in our mobile platform business, reflecting the ongoing popularity of Jackpot Party^®Casino, MONOPOLYSlots, Bingo Showdown^®, 88 Fortunes^®, and Quick Hit^® Slots.

Digital revenue increased for both periods primarily due to increases in sports and platform revenue driven by growth in sports and iLottery offerings, which were partially offset by lower gaming and other revenue.

Operating expenses


	Three Months Ended March 31,				Variance					Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance
($ in millions)	2019		2018		2019 vs. 2018					2019		2018		2019 vs. 2018					2019		2018		2019 vs. 2018
Operating expenses:
Cost of services	$	133	$	122	$	11		9	%	$	133	$	124	$	9		7	%	$	401	$	371	$	30		8	%
Cost of product sales	107		105		2			2	%	115		110		5			5	%	333		335		(2		)	(1	)%
Cost of instant products	67		70		(3		)	(4	)%	69		67		2			3	%	211		208		3			1	%
SG&A	186		172		14			8	%	175		170		5			3	%	535		515		20			4	%
R&D	49		54		(5		)	(9	)%	47		50		(3		)	(6	)%	142		153		(11		)	(7	)%
D&A	165		188		(23		)	(12	)%	162		166		(4		)	(2	)%	497		527		(30		)	(6	)%
Restructuring and other	7		52		(45		)	(87	)%	11		339		(328		)	(97	)%	24		424		(400		)	(94	)%
Total operating expenses	$	714	$	763	$	(49	)	(6	)%	$	712	$	1,026	$	(314	)	(31	)%	$	2,143	$	2,533	$	(390	)	(15	)%

Cost of revenue

~~Total~~The increase in cost of revenue ~~increased primarily~~for the three and nine months is due to ~~a $9 million increase~~increases in ~~Social business~~ cost of services ~~which is correlated~~primarily driven by revenue growth in the SciPlay business segment coupled with ~~Social business revenue growth.~~increases in cost of instant product sales driven by higher Lottery revenue.

SG&A

The increase in~~SG&A~~for the nine months is primarily due to higher ~~Social business~~SciPlay SG&A primarily driven by ~~higher~~$24 million in marketing and player acquisition costs coupled with an increase in stock-based compensation, partially offset by higher legal fees in the prior year related to ~~support ongoing growth initiatives.~~the Shuffle Tech Matter.

D&A

The decrease ~~in D&A was primarily~~for the nine months is due to certain Gaming segment acquired intangible assets becoming fully depreciated during the first quarter of 2018, ~~and~~ a ~~$19~~$10 million higher impairment charge related to assets held for sale ~~recorded during~~in the ~~first quarter of 2018.~~prior year period and higher Lottery segment D&A associated with certain lottery system contracts.

Restructuring and other

The decrease ~~in Restructuring and other~~for both periods is primarily due ~~to: (1)~~to the nonrecurring nature of the Shuffle Tech Matter related charge recorded in the prior year. Additionally, the prior year nine months included an ~~$18~~$26 million non-cash fair value contingent consideration remeasurement charge ~~in 2018 (see Note 12); (2) a $15 million legal reserve for the Shuffle Tech legal matter in 2018; and (3) $8~~compared to $2 million in ~~NYX related acquisition costs in 2018, with no such comparable expenses in~~ the ~~current-year~~current year nine-month period. See Note 4 for additional details on Restructuring and other charges.

Other Factors Affecting Net ~~Loss Comparability~~Income (Loss) Attributable to SGC


	Three Months Ended March 31,					Factors Affecting Net Loss	Three Months Ended September 30,					Nine Months Ended September 30,						Factors Affecting Net Income (Loss) Attributable to SGC
(in millions)	2019		2018			2019 vs. 2018	2019		2018			2019			2018			2019 vs. 2018
Loss on debt financing transactions	$	—	$	(93	)	Loss on debt financing transactions from our refinancing transactions consummated during the 2018 first quarter, including a $110 million premium charge associated with the redemption of the 2022 Secured Notes (see Note 11).	$	—	$	—		$	(60	)	$	(93	)	Loss on debt financing transactions consummated during the second quarter of 2019 includes a $50 million premium charge associated with the redemption of $1,000 million of the 2022 Unsecured Notes (see Note 11). Loss on debt financing transactions from our refinancing transactions consummated during the first quarter of 2018 includes a $110 million premium charge associated with the redemption of the 2022 Secured Notes.
Gain (loss) on remeasurement of debt	5		(1		)	The three-month period gain is attributable to remeasurement of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes and reflects weakening of the Euro vs. the U.S. Dollar since December 31, 2018 (1.14 exchange rate at December 31, 2018 vs. 1.13 as of March 31, 2019).	19		(4		)	21			29			Gains and (losses) are attributable to remeasurement of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes and primarily reflect changes in the Euro vs. the U.S. Dollar foreign exchange rates between the periods.
Income tax benefit (expense)							3		—			(8		)	(6		)	The change is primarily due to the overall mix of income in our foreign jurisdictions (see Note 14).
Net income attributable to noncontrolling interest							4		—			6			—			The three and nine month periods ended September 30, 2019 reflect SciPlay noncontrolling interest (see Note 1).

See “Business Segments Results” below for a more detailed explanation of the significant changes in our components of revenue within the individual segment results of operations.

BUSINESS SEGMENTS RESULTS

GAMING

Our Gaming business segment designs, develops, manufactures, markets and distributes a comprehensive portfolio of gaming products and services. We provide our Gaming portfolio of products and services to commercial casinos, Native

American casinos, wide-area gaming operators such as licensed betting offices, ~~(“LBOs”),~~ arcade and bingo operators in the U.K. and continental Europe, and government agencies and their affiliated operators.

We generate Gaming revenue from both services and product sales. Our services revenue includes revenue earned from Participation gaming machines, other leased gaming machines (including VLTs and electronic table games), supplied table products and services (including Shufflers), casino management technology solutions and systems, and other services revenues. Our product sales revenue includes the sale of new and used gaming machines, electronic table games, VLTs and VGTs, casino-management technology solutions and systems, table products, PTG licensing, conversion kits (including game, hardware or operating system conversions) and spare parts. For additional information, refer to the Gaming primary business activities summary included within “Business Segment Results” under Item 7 of our 2018 10-K.

Current Year Update

We expect to continue to face pricing pressure in our Gaming business segment. We anticipate that replacement demand for gaming machines and constraints on capital spending by gaming operators will continue at current levels. We anticipate that demand for our gaming systems products and services will ~~remain at a constant level~~continue to decline due to several Canadian systems contracts ~~and related new systems implementations anticipated to continue throughout 2019; however, timing can fluctuate based on timing of installations of the systems.~~nearing their completion. We believe we have begun to stabilize the erosion in the installed base of our Participation gaming machines. During the first quarter of 2019, we deployed the Twinstar^® Wave XL as an addition to our Gaming ~~Operations~~operations platform.

Results of Operations and Key Performance Indicators for Gaming

Three Months Ended March 31, Variance
($ in millions) 2019 2018 2019 vs. 2018
Total revenue $ 422
$ 443
$ (21 ) (5 )%
Total operating expenses 329
371
(42 ) (11 )%
AEBITDA 215
218
(3 ) (1 )%

~~Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018~~

~~Revenue~~

3642

Three Months Ended March 31, Variance
($ in millions) 2019 2018 2019 vs. 2018
Revenue:
Gaming operations $ 152
$ 161
$ (9 ) (6 )%
Gaming machine sales 136
145
(9 ) (6 )%
Gaming systems 74
75
(1 ) (1 )%
Table products 60
62
(2 ) (3 )%
Total revenue $ 422
$ 443
$ (21 ) (5 )%

F/X impact on revenue $ (4 ) $ 9

KPIs:
U.S. and Canadian units⁽¹⁾:

Installed base at period end 32,958
35,336
(2,378 ) (7 )%
Average daily revenue per unit $ 38.46
$ 38.39
$ 0.07
— %

International units⁽¹⁾:

Installed base at period end 33,950
33,075
875
3 %
Average daily revenue per unit $ 11.43
$ 12.33
$ (0.9 ) (7 )%

Gaming machine unit sales:
U.S. and Canadian new unit shipments 4,801
4,667
134
3 %
International new unit shipments 2,083
2,201
(118 ) (5 )%
Total new unit shipments 6,884
6,868
16
— %
Average sales price per new unit $ 17,140
$ 17,722
$ (582 ) (3 )%
(1) Effective the first quarter of 2019, we changed our gaming operations KPIs, which now reflect installed base and average daily revenue per unit by geography, as we believe this presentation presents gaming operations units in categories that are more similar than previous presentations and aligns more closely with how management evaluates the operating performance of the business segment.



	Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance
($ in millions)	2019		2018		2019 vs. 2018					2019		2018		2019 vs. 2018
Total revenue	$	454	$	448	$	6		1	%	$	1,303	$	1,362	$	(59	)	(4	)%
Total operating expenses	349		345		4			1	%	1,012		1,078		(66		)	(6	)%
AEBITDA⁽¹⁾	226		233		(7		)	(3	)%	656		686		(30		)	(4	)%
(1) The nine months ended September 30, 2019 includes $10 million in IP charges paid by the SciPlay business segment, which are no longer being paid as of May 7, 2019 in connection with the IP License Agreement described in Note 1. The IP charges for the three and nine months ended September 30, 2018 were $7 million and $19 million, respectively.

Revenue



	Three Months Ended September 30,					Variance					Nine Months Ended September 30,					Variance
($ in millions)	2019			2018		2019 vs. 2018					2019			2018		2019 vs. 2018
Revenue:
Gaming operations	$	149		$	159	$	(10	)	(6	)%	$	451		$	481	$	(30	)	(6	)%
Gaming machine sales	168			167		1			1	%	452			480		(28		)	(6	)%
Gaming systems	77			70		7			10	%	218			229		(11		)	(5	)%
Table products	60			52		8			15	%	182			172		10			6	%
Total revenue	$	454		$	448	$	6		1	%	$	1,303		$	1,362	$	(59	)	(4	)%

F/X impact on revenue	$	(3	)	$	—						$	(11	)	$	13

KPIs:
U.S. and Canada units⁽¹⁾:
Installed base at period end	31,509			33,530		(2,021		)	(6	)%	31,509			33,530		(2,021		)	(6	)%
Average daily revenue per unit	$	38.85		$	39.44	$	(0.59	)	(1	)%	$	38.75		$	38.86	$	(0.11	)	—	%

International units⁽¹⁾:
Installed base at period end	33,663			33,567		96			—	%	33,663			33,567		96			—	%
Average daily revenue per unit	$	9.73		$	10.50	$	(0.77	)	(7	)%	$	10.80		$	11.53	$	(0.73	)	(6	)%

Gaming machine unit sales:
U.S. and Canada new unit shipments	5,530			5,038		492			10	%	15,002			15,454		(452		)	(3	)%
International new unit shipments	2,731			2,625		106			4	%	7,544			7,318		226			3	%
Total new unit shipments	8,261			7,663		598			8	%	22,546			22,772		(226		)	(1	)%
Average sales price per new unit	$	17,500		$	18,199	$	(699	)	(4	)%	$	17,369		$	17,874	$	(505	)	(3	)%
(1) Effective the first quarter of 2019, we changed our gaming operation KPIs, which now reflect the installed base and average daily revenue broken down into two categories: U.S. and Canada and International. This change reflects how the management team views the business and provides a clear representation of what drives our operating results.

Gaming Operations

Gaming operations revenue decreased ~~primarily~~for the three and nine months due to a ~~2,378-unit~~2,021-unit decrease in the ending installed base ofin the U.S. and ~~Canadian units~~Canada coupled with a decrease in U.S. and Canada average daily revenue of $0.59 per unit for the three-month period and $0.11 per unit for the nine-month period primarily due to a strategic long-term relationship entered into during 2018 that converted a number of units to sale in Oklahoma. International ~~units. This decrease~~average daily revenue per unit for the three- and nine-month periods decreased by $0.77 and $0.73, respectively, which was partially offset by ~~an 875-unit~~a 96-unit increase in ~~the~~International ending installed ~~base for International units and an increase in the average daily revenue for U.S. and Canadian units.~~base.

Gaming Machine Sales

Gaming machine sales revenue decreased ~~primarily~~for the nine-month period due to ~~lower international units~~a decrease in U.S. and Canada new unit shipments ~~resulting from fewer casino openings and expansions during the period~~ coupled with a decrease in the average sales price per ~~unit, reflecting~~unit. The prior year three- and nine-month periods include sales resulting from a ~~less favorable mix of gaming machines. This decrease was partially offset by the increase in U.S. and Canadian new unit shipments, which were largely driven by the Encore Boston Harbor opening.~~ strategic long-term relationship described above.

The following table summarizes Gaming machine sales changes:


	Three Months Ended March 31,		Variance				Three Months Ended September 30,		Variance				Nine Months Ended September 30,		Variance
	2019	2018	2019 vs. 2018				2019	2018	2019 vs. 2018				2019	2018	2019 vs. 2018
U.S. and Canadian unit shipments:
U.S. and Canada unit shipments:
Replacement units	3,194	3,743	(549	)	(15	)%	4,152	4,266	(114	)	(3	)%	10,789	12,397	(1,608	)	(13	)%
Casino opening and expansion units	1,607	924	683		74	%	1,378	772	606		78	%	4,213	3,057	1,156		38	%
Total unit shipments	4,801	4,667	134		3	%	5,530	5,038	492		10	%	15,002	15,454	(452	)	(3	)%

International unit shipments:
Replacement units	2,083	1,940	143		7	%	2,631	2,414	217		9	%	7,388	6,846	542		8	%
Casino opening and expansion units	—	261	(261	)	(100	)%	100	211	(111	)	(53	)%	156	472	(316	)	(67	)%
Total unit shipments	2,083	2,201	(118	)	(5	)%	2,731	2,625	106		4	%	7,544	7,318	226		3	%

Gaming Systems

Gaming systems revenue increased for the three months primarily due to service revenue and the timing of software installations related to certain Canadian contracts, which were partially offset by a decrease in hardware revenue related to both domestic and international customers.

Gaming systems revenue decreased for the nine months primarily due to fewer installations of new systems in casinos as a result of fewer casino openings and expansions, and lower iVIEW installations due to certain Canadian contracts that are nearing completion of systems launches.

Table Products

Table products revenue increased for both periods primarily due to increased Shuffler sales.

Operating Expenses

~~Operating~~The decrease in operating expenses ~~decreased~~for the nine months is primarily due to ~~a $15 million decrease in~~lower cost of revenue ~~correlated with~~on the lower unit ~~shipments~~sales, coupled with ~~a $27 million reduction in~~lower D&A as a result of certain Gaming segment acquired intangible assets becoming fully depreciated during the first quarter of 2018 and a ~~$19~~$10 million higher impairment charge related to assets held for sale ~~impairment charge recorded during~~in the ~~first quarter of 2018.~~prior year period.

AEBITDA

The decrease in AEBITDA ~~decreased~~for the three months is primarily due to a reduction of IP charges paid by the SciPlay business segment, which ended as ~~a result~~ of May 7, 2019 in connection with the IP License Agreement described in Note 1. The decrease in AEBITDA for the nine months is primarily due to lower revenue ~~while~~ coupled with the reduction of IP charges paid by the SciPlay business segment.

AEBITDA as a percentage of revenue (“AEBITDA margin”) ~~increased~~for the nine-month period was flat while the three-month period AEBITDA margin decreased by 2 percentage points ~~as a result of a more profitable business mix~~due to the reduction in IP charges and ~~improved operating leverage.~~change in overall revenue mix.

LOTTERY

Our Lottery business segment is primarily comprised of our instant products business and our systems-based services and product sales business. Our instant products business generates revenue from the manufacture and sale of instant products, as well as the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management, warehousing, fulfillment services, as well as full instant product category management. In

addition, we provide licensed games, promotional entertainment and internet-based marketing services to the lottery industry. These revenues are presented as instant products revenue.

Our systems-based services and product sales business provides customized computer software, software support, equipment and data communication services, and keno to lotteries. In the U.S., we typically provide the necessary point-of-sale terminals and equipment, software and maintenance services on a Participation basis under long-term contracts that typically have an initial term of at least five years. Internationally, we typically sell our ~~point of sale~~point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based systems maintenance and software support services. Refer to the Lottery primary business activities summary included within “Business Segment Results” under Item 7 of our 2018 10-K.

Current Year Update

We believe we will continue to face intense price-based competition in our Lottery ~~business in 2019.~~business. In the near term, we also expect to see an increase in the number of jurisdictions that seek ~~to privatize or outsource~~ lottery operations managed services and to face strong competition from both traditional and new competitors with respect to these opportunities. In addition, we anticipate that lottery RFPs, specifically those for ~~private management agreements and~~ certain of our international customers, could increasingly include terms that expose us to increased risk, such as requiring the guarantee of specific income thresholds or significant upfront payments.

On March 4, 2019, we won a 10-year sports betting joint-venture contract to be the primary supplier and service provider to Turkey, Europe’s second largest state-sponsored sports betting market and among the top ~~three~~four in the world in sales.


•	On July 22, 2019, we entered into an agreement with a joint venture comprised of SISAL and Demiroren to act as the joint venture’s exclusive provider of instant tickets, an instant ticket validation system, our next generation of WAVE^TM retail lottery terminals, and associated services in support of the Turkey national lottery.


•	We entered into an agreement with SISAL that became effective on September 18, 2019, the day SISAL won the GNTN pari-mutuel games tender in Italy, which provides for the exclusive supply of our next generation of WAVE retail lottery terminals and associated services.

Results of Operations and Key Performance Indicators for Lottery


	Three Months Ended March 31,				Variance				Three Months Ended September 30,				Variance				Nine Months Ended September 30,				Variance
($ in millions)	2019		2018		2019 vs. 2018				2019		2018		2019 vs. 2018				2019		2018		2019 vs. 2018
Total revenue	$	227	$	202	$	25	12	%	$	220	$	207	$	13	6	%	$	678	$	616	$	62	10	%
Total operating expenses	158		141		17		12	%	151		146		5		3	%	473		421		52		12	%
AEBITDA	104		94		10		11	%	99		92		7		8	%	306		286		20		7	%

~~Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018~~

Revenue


	Three Months Ended March 31,					Variance					Three Months Ended September 30,					Variance				Nine Months Ended September 30,					Variance
($ in millions)	2019			2018		2019 vs. 2018					2019			2018		2019 vs. 2018				2019			2018		2019 vs. 2018
Revenue:
Instant products	$	140		$	150	$	(10	)	(7	)%	$	150		$	142	$	8	6	%	$	440		$	442	$	(2	)	0	%
Lottery systems	87			52		35			67	%	70			65		5		8	%	238			174		64			37	%
Total revenue	$	227		$	202	$	25		12	%	$	220		$	207	$	13	6	%	$	678		$	616	$	62		10	%

F/X impact on revenue	$	(2	)	$	3						$	(2	)	$	—					$	(8	)	$	6

~~Primary factors driving~~Instant products revenue increased in the three-month period primarily due to organic growth in domestic and international sales, and Lottery systems grew principally from international terminals and software sales. Lottery systems drove the nine-month revenue increase ~~were a $35 million increase in lottery systems revenue driven by domestic equipment sales coupled with organic domestic growth, partially offset by a $10 million decrease in instant product revenue,~~ primarily ~~driven by lower domestic revenue as a result of a change in the mix shipment volumes among our contract types.~~due to global hardware and software sales.

Operating Expenses

Operating expenses for both periods increased primarily due to ~~higher cost~~the costs of revenue ~~on hardware sales, which drove~~associated with the lottery systems revenue ~~increase.~~growth.

AEBITDA

AEBITDA ~~increased~~improved for the three-month period primarily due to ~~higher~~an increase in instant products revenue ~~(as described above),~~ and for the nine-month period primarily due to systems revenue. AEBITDA margin ~~decreased~~for the three-month period improved by 1 percentage point ~~as a result of~~and decreased for the ~~lower margin on hardware sales.~~nine-month period by 1 percentage point.

~~SOCIAL~~

SCIPLAY

In our ~~Social~~SciPlay business segment, we generate substantially all of our revenue from the sale of virtual coins, chips and bingo cards, which players can use to play slot, table games or bingo games (i.e., spin in the case of slot games, bet in the case of table games and use of bingo cards in the case of bingo games). The games are primarily our WMS^®, Bally^®, Barcrest^®, SHFL^®, Dragonplay^® and Bingo Showdown branded games. We offer both third-party branded games and original content. Substantially all of our ~~Social~~SciPlay revenue is comprised of B2C transactions.

Our apps include Jackpot Party Casino, Gold Fish^®Casino,Quick Hit Slots, Hot Shot Casino^®, Bingo Showdown, 88 Fortunes, and MONOPOLY Slots on various platforms which include Facebook, Apple, Google, and Amazon.

Current Year Update

We continue to pursue our multi-product strategy in our ~~Social gaming business.~~SciPlay business segment. On May 7, 2019, we completed the IPO for an ~~initial public offering of a 17.4%~~18.0% minority interest in our Social gaming business, after giving effect to the underwriters’ partial exercise of their over-allotment option on June 4, 2019 (see ~~Business Overview section and~~ Note 1).

Results of Operations and Key Performance Indicators for ~~Social~~

SciPlay


	Three Months Ended March 31,				Variance					Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance
($ in millions)	2019		2018		2019 vs. 2018					2019		2018		2019 vs. 2018					2019		2018		2019 vs. 2018
Total revenue	$	118	$	97	$	21		22	%	$	116	$	105	$	11		11	%	$	353	$	302	$	51	17	%
Operating expenses	98		100		(2		)	(2	)%	88		93		(5		)	(6	)%	278		276		3		1	%
AEBITDA(1)	25		23		2			9	%	32		24		8			35	%	90		70		21		30	%
(1) The nine months ended September 30, 2019 includes a charge of $10 million for IP charges paid to the Gaming business segment. These payments are no longer being paid as of May 7, 2019 in connection with the IP License Agreement described in Note 1. The IP charges for the three and nine months ended September 30, 2018 were $7 million and $19 million, respectively.										(1) The nine months ended September 30, 2019 includes a charge of $10 million for IP charges paid to the Gaming business segment. These payments are no longer being paid as of May 7, 2019 in connection with the IP License Agreement described in Note 1. The IP charges for the three and nine months ended September 30, 2018 were $7 million and $19 million, respectively.

~~Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018~~

Revenue


	Three Months Ended March 31,						Variance					Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance
($ in millions)	2019			2018			2019 vs. 2018					2019			2018			2019 vs. 2018					2019			2018			2019 vs. 2018
Revenue:
Mobile	$	97		$	73		$	24		33	%	$	97		$	83		$	14		18	%	$	293		$	232		$	61		26	%
Web and other	21			24			(3		)	(13	)%	19			22			(3		)	(17	)%	60			70			(10		)	(15	)%
Total revenue	$	118		$	97		$	21		22	%	$	116		$	105		$	11		11	%	$	353		$	302		$	51		17	%

KPIs:
Social gaming:
SciPlay business segment:
Mobile Penetration⁽¹⁾	82		%	75		%	7pp			nm		84		%	79		%	5 pp			nm		83		%	77		%	6 pp			nm
Average MAU⁽²⁾	8.4			8.1			0.3			4	%	7.8			8.4			(0.6)			(7	)%	8.1			8.2			(0.1)			(1	)%
Average DAU⁽³⁾	2.7			2.6			0.1			4	%	2.7			2.7			—			—	%	2.7			2.6			0.1			4	%
ARPDAU⁽⁴⁾	$	0.48		$	0.42		$	0.06		14	%	$	0.47		$	0.43		$	0.04		9	%	$	0.48		$	0.42		$	0.06		14	%
nm = not meaningful. pp = percentage points. (1) Mobile penetration is defined as the percentage of B2C social gaming revenue generated from mobile platforms. (2) MAU = Monthly Active Users is a count of visitors to our sites during a month. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data to limit the occurrence of double counting. (3) DAU = Daily Active Users is a count of visitors to our sites during a day. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data to limit the occurrence of double counting. (4) ARPDAU = Average revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period.
nm = not meaningful. pp = percentage points. (1) Mobile penetration is defined as the percentage of B2C SciPlay business segment revenue generated from mobile platforms. (2) MAU = Monthly Active Users is a count of visitors to our sites during a month. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data to limit the occurrence of double counting. (3) DAU = Daily Active Users is a count of visitors to our sites during a day. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data to limit the occurrence of double counting. (4) ARPDAU = Average revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period.												nm = not meaningful. pp = percentage points. (1) Mobile penetration is defined as the percentage of B2C SciPlay business segment revenue generated from mobile platforms. (2) MAU = Monthly Active Users is a count of visitors to our sites during a month. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data to limit the occurrence of double counting. (3) DAU = Daily Active Users is a count of visitors to our sites during a day. An individual who plays two different games or from two different devices may, in certain circumstances, be counted twice. However, we use third-party data to limit the occurrence of double counting. (4) ARPDAU = Average revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period.

Mobile platform revenue increased for both periods primarily due to the ongoing popularity of Jackpot PartyCasino ~~MONOPOLYSlots,~~ , Bingo Showdown, MONOPOLY Slots, and88 ~~Fortunes,~~ ~~and~~ ~~Quick Hit Slots,~~ ~~which collectively represented substantially all of the revenue increase.~~Fortunes. Web platform and other revenue decreased and mobile penetration percentage increased for both periods due to a ~~decline in~~continued player ~~levels as a result of player preferences causing a continued~~ migration to mobile ~~platforms~~platforms.

Operating Expenses

~~Operating~~While operating expenses remained relatively flat for the nine-month period, they decreased for the three-month period primarily due to ~~lower contingent consideration remeasurement~~a decrease of $7 million in IP charges ~~recorded in 2019 ($18 million~~paid to the Gaming business segment. This decrease was ~~recorded in the first quarter of 2018),~~ partially offset by ~~higher cost~~an increase of ~~revenue~~$3 million in platform fees, which is correlated with ~~the~~ revenue ~~growth, coupled with higher marketing and player acquisition costs to support ongoing growth initiatives.~~growth.

AEBITDA

AEBITDA increased for both periods primarily due to continued growth in ~~revenue partially offset by higher SG&A~~mobile revenue. Additionally, for both periods, the AEBITDA increases reflect $7 million and $9 million, respectively, of savings from termination of the IP charges paid to the Gaming business segment as ~~described above.~~of May 7, 2019, in connection with the IP License Agreement (See Note 1). As a result of these factors, AEBITDA margin ~~declined~~for the three- and nine-month periods improved by 25 percentage points ~~primarily due to higher marketing~~ and ~~player acquisition costs described above.~~3 percentage points, respectively.

DIGITAL

Our Digital segment provides a comprehensive suite of digital gaming and sports betting solutions and services, including digital RMG and sports wagering solutions, distribution platforms, content, products and services. A portion of our

Digital revenue consists of professional services related to highly customizable software design, development, licensing, maintenance and support services, which are derived from a comprehensive suite of technology solutions. These technology solutions allow our customers to operate sports books, which can offer sport (or non-sport) events and betting markets across both fixed-odds and pari-mutuel betting styles. We also provide the Open Platform System which offers a wide range of reporting and administrative functions and tools providing operators full control over all areas of digital gaming operations. Additionally, we derive revenue from our content aggregation platforms, including Open Gaming System (OGS), remote gaming servers, SG Universe^® platform and various other platforms, which can deliver a wide spectrum of internally developed and branded casino-style games and popular third-party provider casino-style games to gaming operators. Generally, we host the play of our game content on our centrally-located servers that are integrated with the online casino operators’ websites.

Current Year Update

~~In January 2019, New Zealand Racing Board launched a sportsbook with our~~ ~~OpenBet~~ ~~platform.~~


•	In January 2019, New Zealand Racing Board launched a sportsbook with our OpenBet^TM platform.

In April 2019, we announced a partnership with Wynn Resorts to support their launch of both iGaming and sports in the U.S.


•	In May 2019, we announced a partnership with Big Time Gaming to combine our growing portfolio of games with the popular Megaways^TM mechanic.


•	In October 2019, we announced OpenGaming^TM, the end-to-end digital ecosystem for operators which provides player account management along with over 2,500 games from a global network of in-house and third-party game studios.

Results of Operations for Digital



	Three Months Ended September 30,				Variance				Nine Months Ended September 30,				Variance
($ in millions)	2019		2018		2019 vs. 2018				2019		2018		2019 vs. 2018
Total revenue	$	65	$	61	$	4	7	%	$	203	$	198	$	5	3	%
Operating expenses	72		70		2		3	%	228		219		9		4	%
AEBITDA	17		12		5		42	%	42		42		—		—

Revenue


	Three Months Ended March 31,				Variance					Three Months Ended September 30,					Variance					Nine Months Ended September 30,					Variance
($ in millions)	2019		2018		2019 vs. 2018					2019			2018		2019 vs. 2018					2019			2018		2019 vs. 2018
Revenue:
Sports and platform										$	29		$	21	$	8		38	%	$	85		$	67	$	18		27	%
Gaming and other										36			40		(4		)	(10	)%	118			131		(13		)	(10	)%
Total revenue	$	70	$	70	$	—		—	%	$	65		$	61	$	4		7	%	$	203		$	198	$	5		3	%
Operating expenses	78		74		4			5	%
AEBITDA	13		17		(4		)	(24	)%

F/X impact on revenue										$	(2	)	$	—						$	(10	)	$	2

KPIs:
Gaming and other - Key Performance Indicators:
Wagers processed through OGS (in billions)										$	9.0		$	8.6	$	0.4		5	%	$	27.2		$	26.6	$	0.6		2	%

~~Three Months Ended March 31, 2019 Compared~~Digital revenue increased for both periods primarily due to ~~Three Months Ended March 31, 2018~~continued strength in sports and platform due to an increased customer base both domestically and internationally, which was partially offset by lower gaming and other revenue.

~~Revenue~~

Three Months Ended March 31, Variance
($ in millions) 2019 2018 2019 vs. 2018
Revenue:
Sports and platform $ 30
$ 26
$ 4
15 %
Gaming and other 40
44
(4 ) (9 )%
Total revenue $ 70
$ 70
$ —
— %

F/X impact on revenue $ (4 ) $ 2

KPIs:
Gaming - Key Performance Indicators:
Wagers processed through OGS (in billions) $ 8.9
$ 8.9
$ —
— %

Operating Expenses and AEBITDA

The increase in operating expenses for both periods is due to higher cost of revenue from third-party platforms coupled with higher D&A from previously launched platforms and ~~enhancements developed in 2018.~~enhancements. AEBITDA ~~and AEBITDA margin decreased~~increased for the three month period primarily due to the ~~prior year including the sale~~timing of certain ~~intellectual property.~~

sports betting software license’s multi-year renewals that generally yield a high margin coupled with continued growth in sports and platform revenue. AEBITDA margin for the three-months increased by 6 percentage points primarily due to high margin software license renewals noted above, while AEBITDA margin for the nine months declined by 1 percentage point.

RECENTLY ISSUED ACCOUNTING GUIDANCE

For a description of recently issued accounting pronouncements, see Note 1.

CRITICAL ACCOUNTING ESTIMATES

For a description of our policies regarding our critical accounting estimates, see “Critical Accounting Estimates” in “Item 7. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 10-K.

Legacy U.K. Gaming Reporting Unit - Goodwill Impairment Assessment Update

As disclosed in our 2018 10-K, a substantial portion of our legacy U.K. Gaming reporting unit revenue is concentrated with Ladbrokes Coral Group, which operates LBOs in the U.K. In May 2018, the U.K. government published its decision concluding that the maximum stakes limit on fixed-odds betting terminals should be reduced from £100 to £2, which was effective April 2019. As a result of this change, LBO operators began to rationalize their retail operations, which among other measures has included closure of certain LBO shops. Although the impacts of these factors have been taken into consideration for our goodwill impairment assessment each reporting period, there is uncertainty as to the ultimate long-term impact of the regulatory change on our customers and the future cash flows of our U.K. gaming business.

Due to uncertainty as to the ultimate impact of the regulatory change described above, we believe that an elevated risk of goodwill impairment exists for our legacy U.K. Gaming reporting unit as future adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with investments included in that reporting unit could lead to future goodwill impairments, which could be material.

As of September 30, 2019, the carrying amount of goodwill related to our legacy U.K Gaming reporting unit was $169 million. Based on our qualitative assessment as of September 30, 2019, we determined that the fair value of our legacy U.K. Gaming reporting unit has not, more likely than not, declined to a level below its carrying value. We are currently in the process of performing our annual goodwill impairment test as of October 1, 2019.

Other than legacy U.K. Gaming reporting unit goodwill impairment assessment update and our update to the Digital business segment reporting units during the first quarter of 2019 described in Note 8, there have been no significant changes in

our critical accounting estimate policies or the application or the results of the application of those policies to our condensed consolidated financial statements from those presented in “Item 7. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 10-K.

LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL

Sources of Liquidity

As of ~~March 31,~~September 30, 2019, our principal sources of liquidity, other than cash flows provided by operating activities were cash and cash equivalents and amounts available under our revolving credit facility and the SciPlay Revolver (for our SciPlay business segment) discussed below under “Credit Agreement and Other Debt.”

On ~~March 19,~~April 4, 2019, we ~~completed a private offering of $1,100 million of the 2026 Unsecured Notes at an issue price of 100.000%. We used the net proceeds of the 2026 Unsecured Notes offering to redeem~~redeemed $1,000 million of our outstanding 2022 Unsecured Notes and ~~pay~~paid accrued and unpaid interest thereon plus ~~any~~ related premiums, fees and ~~costs, which redemption was completed on April 4,~~costs.

In November 2019, ~~and pay related fees and expenses of the 2026 Unsecured Notes offering.~~we received commitments from certain revolving lenders to amend our credit agreement (see Business Overview section).

Cash and Available Revolver Capacity


	As of						As of
($ in millions)	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Cash and cash equivalents⁽¹⁾	$	1,213		$	168		$	363		$	168
Revolver capacity(2)	621			621			771			621
Revolver capacity drawn or committed to letters of credit	(215		)	(350		)	(13		)	(350		)
Total	$	1,619		$	439		$	1,121		$	439
(1) Includes $1,084 million that was used for the 2022 Unsecured Notes redemption on April 4, 2019.
(1) Includes $81 million of SciPlay cash and cash equivalents as of September 30, 2019.							(1) Includes $81 million of SciPlay cash and cash equivalents as of September 30, 2019.
(2) Includes $150 million of SciPlay Revolver capacity as of September 30, 2019.							(2) Includes $150 million of SciPlay Revolver capacity as of September 30, 2019.

~~The amount of our~~Our available cash and cash equivalents ~~fluctuates~~fluctuate principally based on borrowings or repayments under our credit facilities, investments, acquisitions and changes in our working capital position. The amount of our cash and cash equivalents as of March 31, 2019 includes $1,084 million of cash that was used to complete the redemption of $1,000 million of 2022 Unsecured Notes and pay accrued and unpaid interest thereon plus any related premiums, fees and costs on April 4, 2019. Thetotal borrowing capacity under our revolving credit facility will depend on the amount of outstanding borrowings and letters of credit issued and ~~on us~~ remaining in compliance with the covenants under ~~our~~the credit ~~agreement,~~facility, including a maintenance covenant based on consolidated net first lien ~~leverage.~~leverage ratio. The total borrowing capacity under the SciPlay Revolver will depend on the amount of outstanding borrowings and letters of credit issued and remaining in compliance with the covenants under the SciPlay Revolver, including maintenance covenants based on total net leverage and fixed charge coverage ratios. We were in compliance with the covenants under all of our credit ~~agreement~~agreements as of ~~March 31,~~September 30, 2019.

We believe that our cash flow from operations, available cash and cash equivalents and available borrowing capacity under our existing financing arrangements will be sufficient to meet our liquidity needs for the foreseeable future; however, we cannot assure that this will be the case. We believe that substantially all cash held outside the U.S. is free from legal encumbrances or similar restrictions that would prevent it from being available to meet our global liquidity needs.

Total cash held by our foreign subsidiaries was ~~$87~~$96 million and $92 million as of ~~March 31,~~September 30, 2019 and December 31, 2018, respectively.

Our Gaming operations and Lottery systems businesses generally require significant upfront capital expenditures, and we may need to incur additional capital expenditures in order to retain or win new contracts. Our ability to make payments on and to refinance our indebtedness and other obligations depends on our ability to generate cash in the future. We may also, from time to time, repurchase or otherwise retire or refinance our debt, through our subsidiaries or otherwise. In the event we pursue significant acquisitions or other expansion opportunities, we may need to raise additional capital. If we do not have adequate liquidity to support these activities, we may be unable to obtain financing for these cash needs on favorable terms or at all. For additional information regarding our cash needs and related risks, see Item 1A “Risk Factors” in our 2018 10-K.

In addition, Lottery customers in the U.S. generally require service providers to provide performance bonds in connection with the relevant contract. As of ~~March 31,~~September 30, 2019 our outstanding performance bonds totaled ~~$237~~$231 million. Our

ability to obtain performance bonds on commercially reasonable terms is subject to our financial condition and to prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced difficulty in obtaining such bonds to date, we cannot assure that we will continue to be able to obtain performance bonds on commercially

reasonable terms, or at all. For additional information regarding our surety or performance bonds in connection with our contracts, see Item 1A “Risk Factors” in our 2018 10-K.

As described in Note 1, on May 7, 2019, ~~our subsidiary~~ SciPlay ~~Corporation (“SciPlay”)~~ completed an ~~initial public offering of a 17.4%~~IPO for an 18.0% minority interest in our Social gaming business. ~~SGC~~We received ~~$301~~$312 million in proceeds from the offering, ~~which enables~~(net of $30 million used by SciPlay to pay the offering fees and balance retained for general corporate purposes). These proceeds will enable us to make substantial payments to reduce our debt. During the third quarter of 2019, we paid down $45 million of our revolving credit facility. We currently do not expect ~~the Social gaming business~~SciPlay to declare or pay any cash dividends, other than tax distributions and certain cash distributions related to the impact of taxes pursuant to ~~a tax receivable agreement.~~the TRA. If ~~the Social gaming business~~SciPlay discontinues the payment of, or is unable to pay, such distributions to us, this will reduce our available liquidity. Furthermore, the terms of indebtedness incurred by ~~the Social gaming business~~SciPlay may, and the terms of the SciPlay Revolver will, limit the ability of ~~the Social gaming business~~SciPlay to pay dividends or make other distributions to us, or to amend the agreements between ~~the Social gaming business~~SciPlay and us and our other subsidiaries. In 2018, the amount of dividends declared and paid by ~~the Social gaming business~~SciPlay to Bally Gaming ~~Inc., a wholly owned subsidiary of SGC,~~ was $77 million. ~~No such dividends have been declared or paid by our Social gaming business during the first quarter of 2019.~~

The consummation of the ~~offering~~IPO resulted in ~~a 17.4%~~an 18.0% reduction of our economic interest in ~~the Social gaming business,~~SciPlay, and as a result, we will only benefit from a portion of any profits and growth of that business, and from a portion of any dividends and other distributions from that business.

~~Three~~Nine Months Ended ~~March 31,~~September 30, 2019 Compared to ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2018

Cash Flow Summary


	Three Months Ended March 31,						Variance			Nine Months Ended September 30,						Variance
($ in millions)	2019			2018			2019 vs. 2018			2019			2018			2019 vs. 2018
Net cash provided by operating activities	$	167		$	30		$	137		$	403		$	356		$	47
Net cash used in investing activities	(64		)	(360		)	296			(190		)	(619		)	429
Net cash provided by (used in) financing activities	942			(346		)	1,288
Net cash used in financing activities										(11		)	(403		)	392
Effect of exchange rates on cash, cash equivalents and restricted cash	1			2			(1		)	(1		)	(2		)	1
Increase (decrease) in cash, cash equivalents and restricted cash	$	1,046		$	(674	)	$	1,720		$	201		$	(668	)	$	869

Cash flows from operating activities


	Three Months Ended March 31,						Variance			Nine Months Ended September 30,						Variance
($ in millions)	2019			2018			2019 vs. 2018			2019			2018			2019 vs. 2018
Net loss	$	(24	)	$	(202	)	$	178		$	(81	)	$	(559	)	$	478
Adjustments to reconcile net loss to cash flows from operations	179			309			(130		)	597			678			(81		)
Changes in working capital accounts	6			(78		)	84			(120		)	237			(357		)
Changes in deferred income taxes and other	6			1			5			7			—			7

Net cash provided by operating activities increased primarily due to ~~favorable~~higher cash earnings partially offset by unfavorable changes in working capital ~~accounts coupled with a lower net loss.~~accounts. The changes in our working capital accounts for ~~the three months ended March 31,~~ 2019 were primarily driven by unfavorable timing of receivable collections and billing and increase in inventory balances due to the timing of orders and shipments, partially offset by a ~~$66 million~~ favorable change in ~~interest~~accounts payable ~~which was partially offset~~due to the timing of expenditures. The 2019 results also include an approximate $22 million payment by ~~changes in other working capital accounts, primarily accounts receivable and accounts payable.~~SciPlay on contingent consideration liabilities.

Cash flows from investing activities

Net cash used in investing activities decreased primarily due to ~~2018~~ business acquisitions in prior year periods and the concession funding payment to LNS of $74 million with no comparable activities in 2019 coupled with lower capital expenditures. ~~Capital expenditures are composed of investments in systems, equipment and other assets related to contracts, property and equipment, intangible assets and software.~~

Cash flows from financing activities

Net cash ~~provided by~~used in financing activities ~~increased~~decreased primarily due to SciPlay IPO net proceeds of $342 million in the ~~private offering of $1,100 million of 2026 Unsecured Notes during the first~~second quarter of 2019, lower debt issuance and deferred financing and offering costs, ~~and lower revolving credit facility payments.~~partially offset by higher net payments of long-term debt.

Credit Agreement and Other Debt

For additional information regarding our credit agreement and other debt, interest rate risk and interest rate hedging instruments, see Notes 1, 16 and 17 and Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our 2018 10-K, ~~as well as~~and Note 11 and Note 12 in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

As of ~~March 31,~~September 30, 2019, we did not have any significant off-balance sheet arrangements.

Contractual Obligations

Other than: (i) the private offering of $1,100 million of 2026 Unsecured Notes ~~described in~~and redemption of $1,000 million of our outstanding 2022 Unsecured Notes (see Note ~~11,~~11) and (ii) a $27 million payment on contingent consideration liabilities, there have been no material changes to our contractual obligations disclosed under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity, Capital Resources and Working Capital — Contractual Obligations” in our 2018 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and commodity prices. The following are our primary exposures to market risks:

Interest Rate Risk

As of ~~March 31,~~September 30, 2019, the face value of long term debt was ~~$10,120~~$8,886 million, including ~~$4,323~~$4,112 million of variable-rate obligations. Assuming a constant outstanding balance for our variable-rate long term debt, a hypothetical 1% change in interest rates would decrease/increase interest expense by approximately ~~$43~~$41 million. All of our interest rate sensitive financial instruments are held for purposes other than trading purposes.

We have attempted to limit our exposure to interest rate risk by using interest rate swap contracts to mitigate interest rate risk associated with a portion of our variable rate debt instruments. The objective of our interest rate swap contracts, which are designated as cash flow hedges of the future interest payments, is to eliminate the variability of cash flows attributable to the LIBOR component of interest expense to be paid on a portion of our variable rate debt.

Cross-Currency Interest Rate Swaps

In connection with the February 2018 Refinancing (see Note 16 in our 2018 Form 10-K), we entered into certain cross-currency interest rate swap agreements to achieve more attractive interest rates by effectively converting $460 million of our fixed-rate U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to a fixed-rate Euro-denominated debt, with a fixed annual weighted interest rate of approximately 2.946%. We have designated these cross-currency interest rate swap agreements as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. Dollar.

As of ~~March 31,~~September 30, 2019, if these cross-currency interest rate swap agreements were ineffective, the fluctuations in the exchange rates between the Euro and the U.S. Dollar would impact the amount of U.S. Dollars that we would require to settle the Euro-denominated debt at maturity of these agreements. A hypothetical 10% change in the U.S. Dollar in comparison to the Euro exchange rate upon inception of the cross-currency interest rate swap would have increased/decreased our obligation to cash settle the exchanged principal portion in U.S. Dollars by approximately $46 million.

Net Investment Non-derivative Hedge - 2026 Secured Euro Notes

In February 2018, we designated a portion of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. Dollar.

Fluctuations in the exchange rates between the Euro and the U.S. Dollar will impact the amount of U.S. Dollars that we will require to settle the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes at maturity. A hypothetical 10% change in U.S. Dollar in comparison to the Euro as of ~~March 31,~~September 30, 2019, would have increased/decreased our obligation to cash settle the principal portion of the 2026 Secured and Unsecured Euro Notes in U.S. Dollars by approximately ~~$65~~$63 million.

For additional information regarding interest rate swap contracts, cross-currency interest rate swaps and net investment non-derivative hedges, see Note 12.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

During the first quarter of 2019, we implemented changes to our internal controls to address the adoption of ASC 842, including controls to enable the preparation of financial information.

~~Except as noted above, there~~There were no changes in our internal control over financial reporting during the quarter ended ~~March 31,~~September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our legal proceedings, see Note 16 in this Quarterly Report on Form 10-Q and Note 22 in our 2018 10-K.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed under Item 1A “Risk Factors” included in our 2018 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There was no stock repurchase activity during the three and nine months ended ~~March 31,~~September 30, 2019.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

4451

Item 6. Exhibits



Exhibit Number		Description
3.1(a)		Articles of Merger filed with the Secretary of State of the State of Nevada on January 10, 2018 (incorporated by reference to Exhibit 3.3 to Scientific Games Corporation’s Current Report on Form 8-K filed on January 10, 2018).

3.1(b)		Certificate of Merger filed with the Secretary of State of the State of Delaware on January 10, 2018 (incorporated by reference to Exhibit 3.4 to Scientific Games Corporation's Current Report on Form 8-K filed on January 10, 2018).

3.1(c)		Amended and Restated Articles of Incorporation of Scientific Games Corporation, filed with the Secretary of State of the State of Nevada on January 10, 2018 (incorporated by reference to Exhibit 3.1 to Scientific Games Corporation’s Current Report on Form 8-K filed on January 10, 2018).

3.2		Amended and Restated Bylaws of Scientific Games Corporation, effective as of January 10, 2018 (incorporated by reference to Exhibit 3.2 to Scientific Games Corporation’s Current Report on Form 8-K filed on January 10, 2018).

~~4.1~~		Indenture, dated as of March 19, 2019, among Scientific Games International, Inc., as issuer, Scientific Games Corporation and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, relating to the 8.250% Senior Unsecured Notes due 2026 (incorporated by reference to Exhibit 4.1 to Scientific Games Corporation’s Current Report on Form 8-K filed on March 19, 2019).

~~10.1~~		Amended and Restated Employment Agreement, dated as of January 1, 2019, by and between Scientific Games Corporation and Patrick J. McHugh (incorporated by reference to Exhibit 10.55 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 28, 2019).*

~~10.2~~		Amendment to Consulting Agreement, dated as of January 11, 2019 (effective as of January 1, 2019), by and between Scientific Games Corporation and Richard Haddrill (incorporated by reference to Exhibit 10.48 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 28, 2019).*

~~10.3~~		Amendment to Employment Agreement, dated as of February 21, 2019 (effective as of February 25, 2019), by and between Scientific Games Corporation and Michael Winterscheidt (incorporated by reference to Exhibit 10.56 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 28, 2019).*

~~10.4~~		~~Second Amendment to Consulting Agreement, dated as of April 29, 2019, by and between Scientific Games Corporation and Richard Haddrill.*(†)~~

31.1		Certification of the Chief Executive Officer of Scientific Games Corporation pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (†)

31.2		Certification of the Chief Financial Officer of Scientific Games Corporation pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (†)

32.1		Certification of the Chief Executive Officer of Scientific Games Corporation pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (†)

32.2		Certification of the Chief Financial Officer of Scientific Games Corporation pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (†)

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(†) Filed herewith.

*Management contracts and compensation plans and arrangements.

4552

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SCIENTIFIC GAMES CORPORATION
		(Registrant)

		By:	/s/ Michael A. Quartieri
		Name:	Michael A. Quartieri
		Title:	Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary

		By:	/s/ Michael F. Winterscheidt
		Name:	Michael F. Winterscheidt
		Title:	Senior Vice President and Chief Accounting Officer
Dated:	~~May~~November 7, 2019

4653



	Three Months Ended March 31, 2018
	Gaming			Lottery			Social⁽²⁾			Digital			Unallocated and Reconciling Items⁽¹⁾			Total
Total revenue	$	443		$	202		$	97		$	70		$	—		$	812
AEBITDA	218			94			23			17			(32		)	$	320
Reconciling items to consolidated net loss before income taxes:
D&A	(139		)	(14		)	(7		)	(16		)	(12		)	(188		)
Restructuring and other	(1		)	(1		)	(18		)	(6		)	(26		)	(52		)
EBITDA from equity investments													(19		)	(19		)
Earnings from equity investments													7			7
Interest expense													(155		)	(155		)
Loss on debt financing transactions													(93		)	(93		)
Loss on remeasurement of debt													(1		)	(1		)
Other expense, net													(6		)	(6		)
Stock-based compensation													(9		)	(9		)
Net loss before income taxes																$	(196	)
(1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes.
(2) Our Social business segment information represents SciPlay operations (see Note 1), and starting with the second quarter of 2019 we will refer to our Social business segment as SciPlay.



	March 31, 2019
Operating lease right-of-use assets⁽¹⁾	$	118
Accrued liabilities	26
Operating lease liabilities	98
Total operating lease liabilities	$	124
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8
Weighted average remaining lease term, years	6
Weighted average discount rate	5		%
(1) Right-of use assets obtained in exchange for lease obligations during the first quarter of 2019 were immaterial.