10-K 1 sgms1231201610k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

 
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to
Commission file number: 0-13063
SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
81-0422894
(I.R.S. Employer
Identification No.)

6650 S. El Camino Road
Las Vegas, Nevada 89118
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 897-7150
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Class A Common Stock, $.01 par value
 
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý   No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer o
 
Accelerated filer ý
 
Non-accelerated filer o
 (Do not check if
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
As of June 30, 2016, the market value of voting and non-voting common equity held by non-affiliates of the registrant was $471,153,471(1).
Common shares outstanding as of February 27, 2017 were 88,130,948.
         DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement relating to the 2017 annual meeting of stockholders are incorporated by reference in Part III. The proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the conclusion of the registrant's fiscal year ended December 31, 2016.
________________________________________________________________________________________________________________________________

(1)
For this purpose only, "non-affiliates" excludes directors and executive officers.
         EXHIBIT INDEX APPEARS ON PAGE 130



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TABLE OF CONTENTS
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
Item 15.

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Glossary of Terms
 
 
 
The following terms or acronyms used in this Form 10-K are defined below:
 
 
Term or Acronym
Definition
2018 Notes
8.125% senior subordinated notes due 2018 issued by Scientific Games Corporation
2019 Notes
9.250% senior subordinated notes due 2019 issued by SGI
2020 Notes
6.250% senior subordinated notes due 2020 issued by SGI
2021 Notes
6.625% senior subordinated notes due 2021 issued by SGI
ADS
Technology and Gaming, Ltd.
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Annual Meeting
the annual meeting of stockholders held on June 15, 2016
B2B
business to business model as it relates to Interactive social and real money online gaming
B2C
business to consumer model as it relates to Interactive social gaming
Bally
Bally Technologies, Inc.
Bally acquisition
the acquisition of Bally by the Company on November 21, 2014
Barcrest
Barcrest Group Limited
Coin-in
the amount wagered
Company
refers to Scientific Games Corporation and its consolidated subsidiaries, unless otherwise specified or the context otherwise dictates
CSG
Beijing CITIC Scientific Games Technology Co., Ltd.
CSL
China Sports Lottery
CSP
Cooperative Services Provider
D&A
depreciation, amortization and impairments (excluding goodwill)
ESPP
employee stock purchase plan
EU
European Union
FASB
Financial Accounting Standards Board
F/X
Foreign currency exchange
Global Draw
The Global Draw Limited
GLB
Beijing Guard Libang Technology Co., Ltd.
Guarantor
Subsidiaries
refers to substantially all of SGC’s 100%-owned U.S. subsidiaries other than SGC’s 100%-owned U.S. Interactive social gaming subsidiaries
Hellenic Lotteries
Hellenic Lotteries S.A.
ICFR
internal controls over financial reporting
ITL
International Terminal Leasing
KPIs
Key Performance Indicators
LAP
local-area progressive
LBO
licensed betting office
LNS
Lotterie Nazionali S.r.l.
Net win
Coin-in less payouts
Non-Guarantor Subsidiaries
refers to SGC’s U.S. subsidiaries that are not Guarantor Subsidiaries and SGC’s foreign subsidiaries
Northstar Illinois
Northstar Lottery Group, LLC
Northstar New Jersey
Northstar New Jersey Lottery Group, LLC
Note
refers to a note to our Consolidated Financial Statements in this Annual Report on Form 10-K, unless otherwise indicated
Parspro
PPC hf

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Participation
with respect to our Gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which our revenues are calculated based on: (1) a percentage of Net win; (2) fixed daily fees; (3) a percentage of the Coin-in; or (4) a combination of a fixed daily fee and a percentage of the Coin-in, and with respect to our Lottery business, refers to a contract or arrangement in which the Company is paid based on a percentage of retail sales
PMA
private management agreement
PPU
price-per-unit
Provoloto
SG Provoloto, S. de R.L. de C.V.
PTG
Proprietary table games
R&D
research and development
Racing Business
racing and venue management businesses
RCN
Roberts Communications Network, LLC
RFP
request for proposal
RMG
real-money gaming
RSU
restricted stock unit
SEC
Securities and Exchange Commission
Secured Notes
7.00% senior secured notes due 2022 issued by SGI
Securities Act
Securities Act of 1933, as amended
Senior Notes
the Secured Notes and the Unsecured Notes
SG&A
selling, general and administrative
SGC
Scientific Games Corporation
SGI
Scientific Games International, Inc., a 100%-owned subsidiary of Scientific Games Corporation
SHFL
SHFL entertainment, Inc.
Shufflers
various models of automatic card shufflers, deck checkers and roulette chip sorters
Sportech
Sportech plc
Subordinated Notes
the 2018 Notes, 2020 Notes and 2021 Notes
Unsecured Notes
10.00% senior unsecured notes due 2022 issued by SGI
U.K.
United Kingdom of Great Britain and Northern Ireland
U.S.
United States of America
U.S. GAAP
accounting principles generally accepted in the U.S.
U.S. jurisdictions
the 50 states in the U.S. plus the District of Columbia and Puerto Rico
VGT
video gaming terminal
VLT
video lottery terminal
WAP
wide-area progressive
WMS
WMS Industries, Inc.
WMS acquisition
the acquisition of WMS by the Company on October 18, 2013

Intellectual Property Rights

® and TM indicate U.S. trademarks. Marks are owned by their respective owners.




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PART I
FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K, we make "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as "may," "will," "estimate," "intend," "plan," "continue," "believe," "expect," "anticipate," "target," "should," "could," "potential," "opportunity," "goal" or similar terminology. The forward-looking statements contained in this Annual Report on Form 10-K are generally located in the material set forth under the headings "Business," "Risk Factors" and "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;
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, including those relating to gaming licenses and environmental laws;
dependence upon key providers in our social gaming business;
inability to retain or renew, or unfavorable revisions of, existing contracts, and the inability to enter into new contracts;
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 and reliance on or failures in information technology and other systems;
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;
failure to achieve the intended benefits of our acquisitions;
incurrence of restructuring costs;
implementation of complex revenue recognition standards or other new accounting standards;
changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;



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fluctuations in our results due to seasonality and other factors;
dependence on suppliers and manufacturers;
risks relating to foreign operations, including fluctuations in foreign currency exchange rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the affirmative vote in the U.K. to withdraw from the EU, and the potential impact to our instant lottery game concession or VLT lease arrangements resulting from the recent economic and political conditions in Greece;
changes in tax laws or tax rulings, or the examination of our tax positions;
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 Item 1A "Risk Factors" in this Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
You should also note that this Annual Report on Form 10-K 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 and interactive gaming industries than the same industries in the U.S.


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ITEM 1.    BUSINESS
Unless otherwise specified or the context otherwise indicates, all references to the words "Scientific Games," "we," "us," "our" and the "Company" refer to SGC and its consolidated subsidiaries. Any references to "Notes" refers to the Notes to Consolidated Financial Statements contained in Item 15 for this Report.
General
Scientific Games Corporation was incorporated in the State of Delaware on July 2, 1984. We are a leading developer of technology‑based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio includes gaming machines and game content, casino management systems, table game products and services, instant and draw‑based lottery games, server‑based gaming and lottery systems, sports betting technology, lottery content and services, loyalty and rewards programs, interactive gaming and social casino solutions. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments.
Strategy
We strive to provide high quality products and services to our customers across all three of our business segments -- Gaming, Lottery and Interactive.
To this end, we are focused on the following strategies:
Drive innovation— We place great emphasis on producing innovative and high-performing Gaming, Lottery and Interactive content, products and services that provide differentiated value to our customers. Our goal is to create “must have” products and complete systems and services with unique features and functionality through our innovation-centric corporate culture. We seek to leverage our expansive content library and portfolio of proprietary and licensed intellectual property, and use our extensive player and customer research in order to bring innovation to our products, services and processes. Also, we intend to take advantage of our state-of-the-art operating system development and game development tools to enhance our ideation and development processes and generate greater efficiencies in game production.
Focus on prudent fiscal management to improve financial returns and cash flow from operations— In the fourth quarter of 2016, the Company commenced a global business improvement initiative to create a more efficient and seamless organization which was designed to address our cost structure and is expected to eliminate $75 million in annualized costs. The majority of the actions necessary to implement these cost savings were completed as of December 31, 2016. Setting the right operational and strategic priorities to support our customers, aligning our resources to achieve our targets and tracking our performance is our near term focus. All of these factors, if successful, should increase our cash flow from operations available to reduce our financial leverage above our contractually required payments.

Build a corporate culture open to new ideas and opportunities that help to accelerate deleveraging— We are embarking on a journey to create a culture of discipline that aligns and uses our resources more effectively, and at the same time cultivates open minds willing to capitalize on additional opportunistic situations where we might be able to accelerate our deleveraging efforts.

Segments
We report our operations in three business segments (Gaming, Lottery and Interactive) representing our different products and services. See "Business Segment Results" in Item 7 and Note 2 for additional business segment information.

Gaming Segment
The gaming industry is characterized by the continuous development of new technologies, products and game content. Gaming products and services are used by a diverse group of gaming operators and U.S. and international lotteries which may offer VLTs and other forms of gaming, such as bingo and sports wagering.
Our products are installed in all of the major regulated gaming jurisdictions in the U.S., as well as in approximately 146 international gaming jurisdictions. Growth of gaming in land-based venues is driven by the opening of new casinos in both new and existing jurisdictions and the expansion of existing casinos. In addition, the land-based gaming supply business is significantly impacted by the rate at which casinos and other gaming operators replace their gaming machines, which depends

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upon a number of factors, including their capital budgets. Virtually all sectors of the gaming industry are impacted by changes in economic conditions that impact players’ disposable incomes.
Four large bookmakers operate approximately 88% of the LBOs in the U.K. For the year ended December 31, 2016, our contracts with two of the large U.K. bookmakers represented a significant portion of our U.K. LBO server-based gaming business. Our current contract with Ladbrokes plc (“Ladbrokes”) commenced on October 22, 2013 and is scheduled to expire on March 31, 2019. Our current contract with Gala Coral Group Ltd. (“Gala Coral”) commenced on January 1, 2010 and is set to expire on December 31, 2017. We expect to participate in the bidding process to continue to serve these customers after the expiration of their current contracts, although we cannot predict the outcome of that process. In October 2016, Ladbrokes and Gala Coral merged. The U.K. Competition and Markets Authority ("CMA") has reviewed and approved the merger pending these operators having completed the divestiture of the required number of betting shops. As these two operators are the largest customers of our U.K. gaming business, their merger and any divestitures relating thereto, could negatively impact our business.

Competition
The gaming machine sector is highly competitive and is characterized by the continuous introduction of new games, gaming machines and related technologies. We compete primarily with International Game Technology ("IGT"), a subsidiary of International Game Technology PLC (the successor of Gtech S.p.A), Ainsworth Game Technology, Aristocrat Leisure Ltd,. ("Aristocrat"), Aruze Gaming America, Inc., Franco Gaming Ltd., Inspired Gaming Group Limited, Konami Digital Entertainment, Inc. ("Konami"), Multimedia Games, Inc. (which is a subsidiary of EVERI Inc.) and the Novomatic Group of Companies. Our principal direct competitor in our U.K. LBO business is Inspired Gaming Group Limited.
The casino-management systems business is also highly competitive. Product features and functionality, accuracy, reliability, service level and pricing are among the factors that determine how successful systems providers are in selling their systems. Our principal competitors in casino-management systems include Aristocrat, IGT and Konami. Competition for these products is intense due to the number of providers and the limited number of casinos and jurisdictions in which they operate.
With respect to our table products, we compete on the basis of the breadth of our Shuffler products and services and PTGs, product reliability, service, the strength of our intellectual property and our extensive sales, regulatory and distribution channels. Our automated Shufflers also compete against hand shuffling, which remains the most competitive shuffling option for casino card games around the world. Finally, since the need for our Shuffler products depends upon the casino's use of live table games, our Shufflers also compete against any products that live table games compete against.
Competition for PTG content is based on player appeal, brand recognition, price and the strength of the underlying intellectual property. We compete on this basis, as well as on the strength of our extensive sales, service, marketing and distribution channels. We also compete with non-proprietary table games such as blackjack and baccarat, as well as several companies that primarily develop and license PTGs such as Galaxy Gaming, Inc. and Masque Publishing, Inc. Finally, some of our product lines may compete against each other for space on the casino floor.

Lottery Segment
There are approximately 180 lotteries throughout the world, operated by U.S. and international governmental authorities and their licensees. Governments typically authorize lotteries as a means of generating revenues without imposing additional taxes. Many jurisdictions have come to rely on the proceeds from lottery game sales as a significant source of funding for programs for which net lottery proceeds are designed to fund. Although there are many types of lottery games worldwide, the two principal categories of products offered are draw lottery games and instant lottery games. Currently, 44 U.S. jurisdictions offer instant game lotteries, and 46 U.S. jurisdictions offer draw lotteries. Lottery operations in international jurisdictions can vary widely depending on the number of new lotteries entering the market, the number of lottery licenses issued within each market and the discontinuance of lotteries and operating licenses.
An instant lottery game is typically played by removing a scratch-off protective coating from a preprinted ticket to reveal if it is a winner. Draw lottery games, such as POWERBALL® and MEGA MILLIONS®, are based on a random selection of a series of numbers, and prizes are generally based on the number of winners who share the prize pool, although set prizes are also offered. Draw lottery games are generally provided through a lottery system in which lottery terminals in retail outlets are continuously connected to a central computer system for the sale and validation of lottery games and related functions. A lottery system may also be used to activate, sell and validate instant lottery games to confirm that a ticket is a winner and prevent duplicate payments. In some jurisdictions, separate instant game validation systems may be installed.

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Lotteries may offer a range of other games. In the U.S., some lotteries offer high frequency games such as keno, which is typically played every four to five minutes in restricted social settings, such as bars, and is usually offered as an extension of the lottery system.     
The table below lists our more significant lottery contracts representing approximately 33% of our Lottery revenue. Also included are instant or draw lottery game retail sales (as applicable), if publicly available, for each jurisdiction.
Lottery/Operator
 
Fiscal 2016
State Instant Game
or Lottery Systems
Retail Sales
(in millions)
 
Type of
Contract
 
Commencement
Date of
Current Contract
 
Expiration Date of
Current Contract
(before any exercise
of remaining
renewal options)
 
Current Renewal
Options
Remaining
Florida
 
$
3,960

 
Instant Games - Participation
 
October 2008
 
September 2018
 
None
Georgia
 
$
3,091

 
Instant Games - Participation
 
September 2003
 
September 2025
 
None
Pennsylvania
 
$
4,172

 
Lottery Systems
 
January 2009
 
December 2018
 
None
Pennsylvania
 
$
2,809

 
Instant Games - Participation
 
August 2007
 
August 2017
 
None
Maryland
 
$
1,921

 
Lottery Systems
 
October 2005
 
June 2017
 
None
LNS (Italy)
 
8,978

 
Instant Games - Price-per-unit
 
October 2010
 
September 2019
 
1 nine-year
Camelot Group plc (U.K.)
 
£
2,566

 
Instant Games - Participation
 
November 2013
 
January 2023
 
None

Competition
The instant lottery game sector is highly competitive and continues to be subject to intense price-based competition. Our principal instant games competitors in the U.S. are IGT and Pollard Banknote Limited. Internationally, a number of instant lottery game vendors compete with us including the competitors noted above as well as diversified printers in India, China and Latin America. Our principal competitors in the supply of lottery-related licensed games, promotional entertainment and loyalty or rewards programs are Alchemy3 LLC, ePrize LLC, IGT, Pollard Banknote Limited and Intralot S.A.
The lottery systems business is also highly competitive and continues to be subject to intense price-based competition. Our principal competitors in this business are IGT, Intralot S.A. and Tattersalls Group. We also compete with various suppliers of lottery system components, such as terminals and computer systems, as well as lottery operators that internally develop their own systems.
As countries liberalize gaming regulations, lotteries may expand their scope by offering sports wagering, gaming machines, interactive gaming or other forms of gaming, which may introduce new suppliers that compete with us for lottery customers. In some jurisdictions, the liberalization of gaming regulations has included the privatization or outsourcing of all or a portion of the lottery operations via a competitive bidding process. We believe Camelot Group plc, the Tattersalls Group, IGT and Intralot, S.A. to be among those competitors who may also bid on such opportunities.
Interactive Segment
Our Interactive business segment includes social (non-wagering) gaming and interactive RMG. Through our Interactive segment, we make available WMS®, Bally®, SHFL®, Barcrest™ and third-party branded content directly to players of social gaming, or—in the case of RMG—directly to online casino operators. Our SG UniverseTM service features multiple platforms which enable land-based casinos to increase engagement with their players. Our Interactive gaming business is increasingly focused on products and services that operate on both mobile and desktop products and platforms.
Competition
In our social gaming business, we compete for the leisure time and discretionary spending of consumers with other interactive gaming entertainment companies. Our primary competitors include DoubleDown Interactive, a subsidiary of IGT, Playtika (acquired by a group of investors led by Shanghai Giant Network Technology Co. in 2016), Big Fish Games Inc., a subsidiary of Churchill Downs, Inc., GSN/Bash Gaming, Product Madness, a subsidiary of Aristocrat and Zynga Inc. In our RMG business, our primary competitors are Playtech Limited, Net Entertainment, Microgaming Software Systems Ltd., IGT, NYX Gaming Group and High 5 Games.
Research and Product Development
We believe our ability to attract new gaming, lottery and interactive gaming customers and retain existing customers depends in part on our ability to evolve and continue to develop our product line by continually developing differentiating

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products, hardware and systems technology and functionality to enhance player entertainment and customer profitability. We are also focused on expanding use of the internet and other interactive technologies to increase play. Our gaming machines are usually designed and programmed by our internal engineering staff and internal and external game development studios with the input and cooperation of our customers.
We have Gaming R&D personnel located in our Las Vegas and Chicago facilities. A large portion of our Lottery R&D team is based in our Alpharetta, Georgia facilities. We have Interactive personnel located primarily in Chicago, Illinois; Cedar Falls, Iowa; Austin, Texas; and Tel Aviv, Israel. We also have game development studios in Las Vegas, Nevada, Sydney, Australia, Manchester, England and India (including Bangalore, Chennai and Pune), with additional R&D staff in other locations, including Reno, Nevada and Vienna, Austria. During the years ended December 31, 2016, 2015 and 2014, our R&D expense totaled $204.8 million, $183.9 million and $117.0 million, respectively.

Intellectual Property
Many of our products use intellectual property rights, including trademarks, trade dress, copyrights, patents and trade secrets.  We consider our intellectual property rights to be, in the aggregate, material to our business. We protect our investment in research and development by seeking intellectual property protection as appropriate for our technologies and content. We also acquire and license intellectual property from third parties.

The terms of our patents vary based on the date and jurisdiction of filing. The term of U.S. patents generally expires 20 years from the date of filing of the first non-provisional patent application in a family of patents. The actual protection afforded by a patent depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the applicable country. Certain technologies, which are material to our businesses, are the subject of patents issued and patent applications currently pending in the U.S. and certain other countries. Our Lottery business uses our patented and patent-pending technologies in the production, secure printing, validation and distribution of instant lottery games. Our Gaming and Interactive businesses use our patented and patent-pending technologies in games and associated platforms and systems.
We market many of our products under trademarks and copyrights that provide product differentiation and recognition and promote our portfolio of product offerings. All of our games feature elements subject to copyright rights and protection. In addition, we generally obtain trademark protection and often seek to register trademarks for the names and designs under which we market and license our products and games. Protections for trademarks exist in many countries, including the U.S., for as long as the trademark is registered and/or used. Registrations are generally issued for fixed, but renewable terms, although trademark rights may exist whether or not a mark is registered and the duration of the registrations varies by country.
We believe that our use of both our own and third party licensed brand names and related intellectual property contributes to the appeal and success of our products, and that our future ability to license, acquire or develop new brand names is important to our continued success. Therefore, we continue to invest in the recognition of our brands and brands that we license. Certain of our games are based on popular brands licensed from third parties, such as Hasbro International, Inc., Fremantle Media North America, CBS Studios Inc., Turner Entertainment Co., Warner Bros. Consumer Products Inc., Harley-Davidson, Playboy Enterprises International, Inc., Paramount Pictures Corporation, Hearst Holdings Inc., King Features Syndicate Division, Twentieth Century Fox Licensing and Merchandising, Major League Baseball and National Basketball Association.
IGT administers a pool of patents relating to "ticket-in ticket-out" technology that enables casino patrons to cash out from a gaming machine and receive a printed ticket instead of coins. This technology is used in substantially all of our gaming machines. We have a license for certain patents related to this technology through the expiration date of the relevant patents.
From time to time we become aware of potential infringement of our intellectual property by competitors and other third parties and consider what action, if any, to take in that regard, including litigation where appropriate. We are also subject to threatened or actual intellectual property-related claims by third parties from time to time.
Production Processes, Sources and Availability of Components
We currently produce substantially all of our gaming machines at our facilities in Las Vegas, Nevada and Sydney, Australia. We also have finishing lines in our Barcelona, Spain facility, as well as in Midrand, South Africa, Buenos Aires, Argentina and Manchester, England. These finishing lines allow for the completion and testing of our gaming machine assemblies from our facilities in Las Vegas. We also refurbish used gaming machines primarily at our Las Vegas facilities.
Manufacturing commitments are generally based on expected quarterly sales orders from customers. Due to uneven order flow from customers, component parts common to all gaming machines are purchased and assembled into partial

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products that are scheduled for just in time delivery to allow final assembly lead time to meet agreed customer delivery dates. Our gaming machine manufacturing processes generally consist of assembling component parts and sub-assemblies into a complete gaming machine.
Shufflers are assembled in one of our Las Vegas facilities and by a third party near Salzburg, Austria.
Hardware and component parts associated with our casino-management systems are purchased directly from the Contract Manufacturers and flow through our Las Vegas facilities with some assembly and testing. These parts do not require a significant amount of assembly and are used primarily in systems implementations, which take place at customer locations.
Our dedicated computer-controlled printing process is specifically designed to produce secure instant lottery games. We also have the capability to track instant games from the point of production through delivery to retailers. Instant lottery games are delivered finished and ready for distribution by the lottery authority (or by us under certain contracts). An instant lottery game that has been removed at any point in the distribution chain in an unauthorized manner can be flagged and invalidated in the event that it is used to claim winnings.
Production of our lottery terminals (and related component products) primarily involves the assembly of electronic and mechanical components into more complex systems and products. Third-party vendors generally manufacture and assemble our lottery terminals. We normally have sufficient lead time between reaching an agreement and the commencement of operations so that we are able to provide our Lottery customers with a fully functioning system that is customized to meet their requirements. We believe that this is consistent with our competitors' lead times and is also consistent with the needs of our customers. We place advance orders for those components that have long lead times in anticipation of firm purchase orders from our customers, provided that the investment in inventory and the risk of the customer order not materializing are deemed acceptable.
We believe we have an adequate supply of component parts and raw materials used in manufacturing our gaming machines and lottery terminals.

Seasonality
Our results of operations can fluctuate due to seasonal trends and other factors. Sales of our gaming machines to casinos are generally strongest in the spring and slowest in the summer, while revenue from our Participation gaming machines is generally highest in the spring and summer. Player activity in our Interactive business is generally slower in the second and third quarters of the year, particularly during the summer months. See the risk factor captioned "Our results of operations fluctuate due to seasonality and other factors, and, therefore, our periodic operating results are not guarantees of future performance" under the heading "Risk Factors" in Item 1A of this Annual Report on Form 10-K for additional information.

Employees
As of December 31, 2016, we employed approximately 8,400 persons worldwide, with approximately 4,600 employed domestically and 3,800 employed internationally.

Government Regulation
General
The gaming and lottery industries are generally subject to extensive and evolving regulation that customarily includes some form of licensing or regulatory screening of operators, suppliers, manufacturers and distributors and their applicable affiliates, as well as their major shareholders, officers, directors and key employees. In addition, certain of our gaming products and technologies must be certified or approved in certain jurisdictions in which we operate. Regulators review many facets of an applicant or holder of a license, including its financial stability, integrity and business experience. Any failure to receive a license or the loss of a license that we currently hold could have a material adverse effect on us or on our results of operations, cash flow or financial condition.

While we believe that we are in compliance with all material gaming and lottery laws and regulatory requirements applicable to us, we cannot assure that our activities or the activities of our customers will not become the subject of any regulatory or law enforcement proceeding or that any such proceeding would not have a material adverse impact on us or our results of operations, cash flow or financial condition.

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We have developed and implemented a rigorous internal compliance program in an effort to ensure that we comply with legal requirements imposed in connection with our Gaming and Lottery activities, as well as legal requirements generally applicable to all publicly traded companies. The compliance program is run on a day-to-day basis by our chief compliance officer with legal advice provided by attorneys in our legal and compliance departments as well as outside experts. The compliance program is overseen by the compliance committee of our board of directors, which is comprised of employee and non-employee directors and a non-employee gaming law expert. While we are firmly committed to full compliance with all applicable laws, we cannot assure that our compliance program will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine or suspension or revocation of one or more of our licenses.

In the EU, various judgments by the Court of Justice of the European Union ("CJEU") have addressed the approaches adopted by certain member states to restrict and/or regulate gaming. Topics addressed in those judgments include the ability of member states to grant, or to maintain, monopolies for gaming and lottery activities and the power of member states to limit access by gaming and/or lottery providers established elsewhere in the EU. Several cases on these subjects are currently pending in the CJEU.

While we believe that we have developed appropriate procedures and policies to comply with the requirements of these evolving laws and legal pronouncements, we cannot assure that our activities or the activities of our customers will not become the subject of law enforcement proceedings or that any such proceedings would not have a material adverse impact on us or our business plans. Furthermore, laws and regulations applicable to lotteries and gaming in U.S. and international jurisdictions are subject to change and the effect of such changes on our ongoing and potential operations cannot be predicted with certainty.

From time to time, we retain government affairs representatives in various U.S. and international jurisdictions to advise elected and appointed officials and the public concerning our views on gaming and lottery-related legislation, as well as to monitor such legislation and to advise us in our relations with gaming and lottery authorities.

Gaming
We provide our games, gaming machines, gaming systems, table products and related products and services in legal gaming jurisdictions worldwide. The manufacture, distribution, provision and operation of our gaming products and services is subject to regulation and approval by various city, county, state, provincial, federal, tribal and foreign agencies. The primary purposes of these rules are to (1) ensure the responsibility, financial stability and character of the parties involved in these activities through licensing requirements, (2) ensure the integrity and compliance of our gaming products and services and (3) prohibit the use of gaming products and services at unauthorized locations or for the benefit of undesirable parties.
Typically, gaming regulations in the jurisdictions in which we operate are established by statute and are administered by a regulatory agency with broad authority to interpret gaming regulations and to regulate gaming activities. Among other things, gaming authorities in the various jurisdictions in which we are licensed:
adopt additional rules and regulations under the implementing statutes;
investigate violations of gaming regulations;
enforce gaming regulations and impose disciplinary sanctions for violations of such laws, including fines, penalties and revocation of gaming licenses;
review the character and fitness of manufacturers, distributors and operators of gaming products and services and make determinations regarding their suitability or qualification for licensure;
grant licenses for the manufacture, distribution and operation of gaming products and services;
review and approve transactions (such as acquisitions, material commercial transactions, securities offerings and debt transactions); and
establish and collect related fees and/or taxes.
We believe we hold all of the licenses and permits necessary to conduct our business. We are authorized to sell, lease or operate our gaming products and services in approximately 450 jurisdictions worldwide (including jurisdictions that do not require licensing), including approximately 170 international gaming jurisdictions.

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In addition, a number of U.S. states authorize wagering on VLTs at state regulated and licensed facilities. Although some states restrict VLTs to already existing wagering facilities, others permit these machines to be placed at venues such as bars, restaurants, truck stops and other specifically licensed gaming facilities. In addition, all of the Canadian provinces and various other international jurisdictions have authorized VLTs.

Regulatory requirements vary among jurisdictions, but the majority of jurisdictions require licenses, permits or findings of suitability for our company, individual officers, directors, major stockholders and key employees. Our gaming hardware and software also must be approved either by a gaming authority laboratory or a private laboratory authorized by the gaming authority.

Lottery

Currently, 44 U.S. jurisdictions offer instant game lotteries, and 46 U.S. jurisdictions offer draw lotteries. The operation of lotteries in the U.S. and internationally is subject to extensive regulation. Although certain features of a lottery, such as the percentage of gross revenues that must be paid back to players in prize money, are usually set by legislation, lottery regulatory authorities generally exercise significant discretion, including with respect to the determination of the types of games played, the price of each wager, the manner in which the lottery is marketed and the selection of suppliers of equipment, technology and services and retailers of lottery products.

To ensure the integrity of contract awards and lottery operations, most jurisdictions require detailed background disclosure on a continuous basis from, and conduct background investigations of, vendors and their officers, directors, subsidiaries, affiliates and principal stockholders. Background investigations of the vendors' employees who will be directly responsible for the operation of lottery systems are also generally conducted and most states reserve the right to require the removal of employees who they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Certain jurisdictions also require extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically five percent or more) of a vendor's securities. The failure of such beneficial owners of our securities to submit to background checks and provide such disclosure could result in the imposition of penalties upon these beneficial owners and could jeopardize the award of a lottery contract to us or provide grounds for termination of an existing lottery contract.

The award of lottery contracts and ongoing operations of lotteries in international jurisdictions are also extensively regulated, although international regulations typically vary from those prevailing in the U.S. Restrictions are frequently imposed on foreign companies seeking to do business in such jurisdictions and, as a consequence, we have in a number of instances allied ourselves with local companies when seeking international lottery contracts.

Interactive

In the United States, the Unlawful Internet Gambling Enforcement Act of 2006 ("UIGEA") prohibits among other things, the acceptance by a business of a wager by means of the internet where such wager is prohibited by any applicable law where initiated, received or otherwise made. Under UIGEA severe criminal and civil sanctions may be imposed on the owners and operators of such systems and on financial institutions that process wagering transactions. The law contains a safe harbor for wagers placed within a single state (disregarding intermediate routing of the transmission) where the method of placing the bet and receiving the bet is authorized by that state's law, provided the underlying regulations establish appropriate age and location verification.

Within the past few years, state-authorized internet casino gaming has been launched in Delaware and New Jersey and state authorized online poker has been launched in Nevada. A number of other states are also considering adopting legislation to specifically authorize interactive gaming or online poker. Additionally, two state lotteries offer (and other lotteries are considering offering) internet instant game sales to in-state lottery customers and a number of other states allow subscription sales of draw games over the internet.
There have been various bills proposed recently in the U.S. to restrict or prohibit interactive gaming and lottery sales. Very significant resources are being devoted to supporting these efforts. Although these efforts have generally not been successful, we cannot assure that laws restricting interactive gaming or lottery sales will not be passed at either the federal or state level. For instance, in May 2015, the Minnesota legislature passed an amendment to the state’s lottery law prohibiting the sale of instant win lottery tickets over the internet. Furthermore, changes in the executive branches of government at the state and federal level could affect federal and state policies on gaming as well.


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To varying degrees, a number of European governments have taken steps to change the regulation of internet wagering through the implementation of new or revised licensing and taxation regimes, some of which include the imposition of sanctions on unlicensed providers. Countries outside Europe and the U.S. have also begun evaluating interactive gaming regulation and an increase in regulated markets outside of the U.S. and Europe is likely to continue. Some of our competitors may be more willing to provide internet wagering in countries where the relevant laws and regulations are unclear or not uniformly enforced, putting us at a competitive disadvantage if we do not provide services related to internet wagering in such countries.

We continue to devote significant attention to monitoring these developments. However, we cannot predict the timing, scope or terms of any state, federal or foreign regulations relating to Interactive gaming and Lottery sales.

Additional Information Regarding Government Regulations

We are subject to specific gaming requirements in the different jurisdictions in which we operate. For additional information, we have filed a summary of the gaming regulations that govern our businesses as an exhibit to this Annual Report on Form 10-K. See Exhibit 99.12 (Gaming Regulations). In addition, see "Risk Factors" in Item 1A of this Annual Report on Form 10-K for a discussion of risk factors related to gaming, lottery and RMG regulations to which we may be subject.

Executive Officers of the Company
Certain information regarding each of our executive officers is set forth below.
Name
 
Age
 
Position
Kevin Sheehan
 
63
 
Chief Executive Officer
Karin-Joyce Tjon
 
54
 
Chief Operating Officer and President
Michael A. Quartieri
 
48
 
Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary
Michael F. Winterscheidt
 
46
 
Chief Accounting Officer
David W. Smail
 
51
 
Executive Vice President and Chief Legal Officer
James C. Kennedy
 
60
 
Executive Vice President and Group Chief Executive, Lottery
Derik J. Mooberry
 
44
 
Executive Vice President and Group Chief Executive, Gaming
Larry A. Potts
 
69
 
Senior Vice President, Chief Compliance Officer and Director of Security
Kevin Sheehan has served as Chief Executive Officer since August 2016. Previously he served as Chief Executive Officer and President of Norwegian Cruise Line Holding Ltd. Prior to that, Mr. Sheehan served as Chief Executive Officer of Vehicle Services, which included global responsibilities of Avis, Budget, PHH Vehicle Management Services and Wright Express. Earlier in his career, Mr. Sheehan served as President of STT Video Partners and was instrumental in the creation and launch of Telemundo.
Karin-Joyce Tjon has served as Chief Operating Officer and President since February 2017. Previously she served as Executive Vice President and Chief Financial Officer at Epiq Systems, Inc., a worldwide provider of legal services and technology. Prior to that, Ms. Tjon served as Chief Financial Officer of Hawker Beechcraft Corporation, an international manufacturer of business and special mission aircraft. Earlier in her career, Ms. Tjon served as Director, Senior Director and Managing Director at Alvarez & Marsal, LLC, a leading independent global professional services firm specializing in business turnaround and performance improvement.

Michael A. Quartieri serves as Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary. Previously he served as the Company’s Vice President and Corporate Controller. Prior to joining SGC, Mr. Quartieri served nine years with Las Vegas Sands Corp., ending his tenure as Senior Vice President, Chief Accounting Officer and Global Controller. Prior to that, he had a 13‑year tenure at Deloitte & Touche LLP, rising to the position of Director of Audit and Assurance Services and specializing in gaming and hospitality clients.    

Michael F. Winterscheidt has served as Chief Accounting Officer since February 2017. Previously he served as the Company's Vice President and Corporate Controller. Prior to joining SGC, Mr. Winterscheidt served three years with Caesars Entertainment Corporation, ending his tenure as Vice President and Corporate Controller. Prior to that, he had leadership roles leading the corporate accounting and financial reporting organizations of Delta Airlines, Inc. and Microsoft Corporation. He was previously a manager in the audit practice of the global accounting firm of Arthur Andersen LLP.

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David W. Smail has served as Executive Vice President and Chief Legal Officer since August 2015. Prior to this role, he served as Executive Vice President and General Counsel of Morgans Hotel Group Co., an international hospitality company. Prior to that, he was Executive Vice President and Group General Counsel at Havas S.A., a Paris-based global advertising and communications services company. Earlier in his career, he was a partner with the international law firm Hogan Lovells, where he worked in Paris, France and Washington D.C. 
James C. Kennedy has served as Executive Vice President and Group Chief Executive of Lottery since September 2013. Prior to this role, Mr. Kennedy served as President of Printed Products and Chief Marketing Officer. From 2005 to 2011, Mr. Kennedy served as Senior Vice President of SGI, and prior to that, Mr. Kennedy served as Vice President of U.S. Sales for SGI. Prior to joining SGC in 1985, Mr. Kennedy was a Systems Engineer for Computer Task Group.
Derik Mooberry serves as Executive Vice President and Group Chief Executive of Gaming. Mr. Mooberry joined SGC from Bally in November 2014. Previously, he served as Senior Vice President of Games, Table Game Products and Interactive Research & Development for Bally. He has also held roles as Bally’s Vice President of Systems Operations, Vice President of Strategic Planning, Vice President of System Sales-Western North America, Vice President of North America Game Sales, as well as Vice President of Sales-Americas since joining Bally in 2001.
Larry A. Potts has served as Senior Vice President, Chief Compliance Officer and Director of Corporate Security since March 2015. Previously he served as Vice President, Chief Compliance Officer and Director of Security since February 2006. Mr. Potts joined SGC in September 2004 as Vice President, Security and Compliance. Previously, he was the Chief Operating Officer of an international consulting and investigative company in Washington, D.C. Prior to that, he served as a Special Agent of the Federal Bureau of Investigation for over 23 years, where he served in a number of management positions, including Deputy Director.
    
Access to Public Filings
We file annual reports, quarterly reports, current reports, proxy statements and other documents with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Copies of any materials we file with the SEC are also available at the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
We make the following information available free of charge through the Investors link on our website at www.scientificgames.com:
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed electronically with or furnished to the SEC;
Section 16 ownership reports filed by our executive officers, directors and 10% stockholders on Forms 3, 4 and 5 and amendments to those reports as soon as reasonably practicable after they are filed electronically with the SEC; and
our code of business conduct, which applies to all of our officers, directors and employees.

ITEM 1A.    RISK FACTORS
The risks described below are not the only risks facing us. Please be aware that additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also materially and adversely affect our business operations. You should also refer to the other information contained in our periodic reports, including the Forward-Looking Statements section, our consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for a further discussion of the risks, uncertainties and assumptions relating to our business. Except where the context otherwise indicates, references below to the "Company," "we," "our," "ours" and "us" include all of our subsidiaries.

Risks Relating to our Business and our Industries

We operate in highly competitive industries, and our success depends on our ability to effectively compete with numerous domestic and foreign businesses.

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Gaming
Our Gaming business faces significant competition, not only from traditional gaming suppliers, but also from a number of other domestic and foreign providers, some of which have substantially greater financial resources and/or experience than we do. In some cases, we compete against gaming operators, including illegal operators. Additionally, we face competition from an increased number of small gaming companies that have emerged in recent years and are able to focus their resources on developing a smaller number of high‑performing products.

We compete on the basis of the content, features, quality, functionality, accuracy, reliability, price and financing terms of our products and services, and the responsiveness of our services. We also compete based on the extent of our sales, service, marketing and distribution channels. We on occasion provide extended payment term financing for product purchases, and we expect to continue to provide extended payment term financing until the global economy and industry conditions improve and demand for such financing abates. We have also offered customers discounts and other offers and modified pricing and other contractual terms in connection with the sale or placement of our products and services. Our competitors may provide a greater amount of financing or better offers and terms than we do, and this may impact demand for our Gaming products and services. We cannot assure that competitive pressure will not cause us to increase the incentives that we offer to our customers or agree to modify contractual terms in ways that are unfavorable to us, which could adversely impact our results of operations, cash flows and financial condition.

We also compete to obtain space and favorable placement on casino gaming floors, and some of our product lines may compete against each other for this space. Consolidation of casino and other operators, increased competition among operators and reductions in capital expenditures by operators have significantly increased the level of competition among gaming suppliers. Casino operators focus on performance, longevity, player appeal and price when making their purchasing decisions. Competitors with a larger installed base of gaming machines and more game themes than ours may have an advantage in obtaining and retaining placements in casinos. Our Shufflers also compete against hand shuffling, which remains the most competitive shuffling option for casino card games around the world.
We also face high levels of competition in the supply of products and services for newly legalized gaming jurisdictions and for openings of new or expanded casinos. Our success depends on our ability to successfully enter new markets and compete successfully for new business, especially in the face of declining demand for gaming machine replacements.

Lottery

Our Lottery business faces competition from a number of domestic and foreign businesses, some of which have substantially greater financial resources than we do, which impacts our ability to win new contracts and renew existing contracts. In addition, the U.S. lottery industry has matured such that we believe the number of states conducting lotteries is unlikely to increase materially in the near‑term. As some jurisdictions seek to privatize or outsource lottery operations (including partial privatizations through private management agreements or otherwise), we face competition from both traditional and new competitors with respect to these opportunities. In some cases, we may find it necessary or desirable to enter into strategic relationships with third parties, including competitors, and may be required to commit significant sums of money in order to pursue these opportunities.

We continue to operate in a period of intense price‑based competition, which has affected and could continue to affect the number and the profitability of the lottery contracts we win. We believe our principal competitors in the instant lottery game business have increased, and are expected to continue to increase, their production capacity, resulting in pricing pressures in the instant lottery game business. This may adversely affect our ability to win or renew instant lottery game contracts or may reduce the profitability of instant lottery game contracts that we do win. We also compete in the international instant lottery game business with low-price printers whose quality we believe is lower than ours in regulated environments where laws are being reinterpreted to create competition from non‑traditional lottery vendors and products. Our U.S. instant lottery game business could be adversely affected if additional foreign competitors operating in Canada export their lottery products to the U.S. or if other foreign competitors establish printing facilities in the U.S. or Canada to supply the U.S.
We face increased price competition in our lottery systems business from our three principal competitors in that business. Since the beginning of 2013, we have lost lottery systems contracts in Colorado and Indiana to our competitors following the expiration or termination of our contracts.
Any future success of our Lottery business will also depend, in part, on the success of the lottery industry in attracting and retaining players in the face of increased competition for these players’ entertainment dollars, as well as our own success in

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developing innovative products and systems to achieve this goal. Our failure to achieve this goal could reduce our revenue from our Lottery operations. Additionally, pressure on state and other government budgets could lead to other forms of gaming being legalized, which could adversely impact our Lottery business.

Interactive

Our Interactive social gaming and RMG businesses are also subject to significant competition. Our RMG business focuses on the supply of game content to online casino operators, and there are a number of competitors in that industry, including from illegal or unregulated operators. Additionally, we provide Interactive social gaming products and services, as do several of our competitors and our customers. This also causes us to compete with social gaming companies that have no connection to regulated RMG, and many of those companies have a base of existing users that is larger than ours. In order to stay competitive in both our Interactive social gaming and RMG businesses, we will need to continue to create and market game content that attracts players and invest in new and emerging technologies. Some of our competitors may be more willing to provide internet wagering in countries where the relevant laws and regulations are unclear or not uniformly enforced, putting us at a competitive disadvantage if we do not provide services related to internet wagering in such countries.

We have offered customers discounts, free trials and free spins in connection with the Interactive social gaming and RMG businesses. We cannot assure that competitive pressure will not cause us to increase the incentives that we offer to our customers, which could adversely impact our results of operations, cash flows and financial condition.

Unfavorable U.S. and international economic conditions may adversely affect our business, results of operations, cash flows or financial condition.

Unfavorable economic conditions, including recession, economic slowdown, decreased liquidity in the financial markets, decreased availability of credit and relatively high rates of unemployment, have had, and may continue to have, a negative effect on our business. We cannot fully predict the effects that unfavorable economic conditions and economic uncertainty will have on us as they also impact our customers, suppliers and business partners.

In our Gaming business, especially our Participation gaming business, our revenue is driven in large part by players’ disposable incomes and level of gaming activity. Unfavorable economic conditions have reduced the disposable incomes of casino patrons and resulted in fewer patrons visiting casinos, whether land‑based or online, and lower amounts spent per casino visit. A further or extended decline in disposable income could result in reduced play levels on our Participation gaming machines, causing our results of operations and cash flows from these products to decline. Additionally, higher airfares and other costs may adversely affect the number of players visiting our customers’ casinos. A decline in play levels may also negatively impact the results of operations, cash flows and financial condition of our casino customers and their ability to purchase or lease our products and services.

Unfavorable economic conditions have impacted, and could continue to impact, the ability of our Gaming customers to make timely payments to us. In addition, unfavorable economic conditions have caused, and could continue to cause, some of our Gaming customers to close gaming venues or ultimately declare bankruptcy, which would adversely affect our business. In recent years, our Gaming business has expanded the use of extended payment term financing for gaming machine purchases, and we expect to continue to provide a higher level of extended payment term financing in this business until demand from our customers for such financings abates. These financing arrangements may increase our collection risk, and if customers are not able to pay us, whether as a result of financial difficulties, bankruptcy or otherwise, we may incur provisions for bad debt related to our inability to collect certain receivables. In addition, both extended payment term financing and operating leases result in a delay in our receipt of cash, which reduces our cash balance, liquidity and financial flexibility to respond to changing economic events. Unfavorable economic conditions may also result in volatility in the credit and equity markets. The difficulty or inability of our customers to generate or obtain adequate levels of capital to finance their ongoing operations may reduce their ability to purchase our products and services.

In our Lottery business, we believe that the difficult economic conditions have contributed to reductions in spending on marketing by our customers and, in certain instances, less favorable terms under our contracts, as many of our customers face significant budget shortfalls and seek to cut costs.

There are ongoing concerns regarding the debt burden of certain countries, particularly in Europe and South America, and their ability to meet their future financial obligations, which have resulted in downgrades of the debt ratings for these countries. We currently operate in, and our growth strategy may involve pursuing expansion or business opportunities in certain of these jurisdictions, such as Argentina, Greece, Italy, Puerto Rico and the Ukraine. These sovereign debt concerns, whether

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real or perceived, could result in a recession, prolonged economic slowdown, or otherwise negatively impact the general health and stability of the economies in these countries or more broadly. In more severe cases, this could result in a limitation on the availability or flow of capital, thereby restricting our liquidity and negatively impacting our results of operations, cash flows and financial condition. In March 2015, we signed a contract to provide OPAP S.A. ("OPAP") with 5,000 VLTs pursuant to OPAP's ten-year license to operate a network of 16,500 VLTs across Greece. While deployment was expected to begin in the second quarter of 2015 and conclude by the end of 2015, political and economic issues in Greece delayed the launch of the VLTs. In 2016, conditions stabilized and VLTs began to be deployed to OPAP in January 2017.

Our future results of operations may be negatively impacted by declines in the replacement cycle of gaming machines and by the slow growth of new gaming jurisdictions or slow addition of casinos in existing jurisdictions.

Demand for our Gaming products and services is driven by the replacement of existing gaming machines in existing casinos, the establishment of new jurisdictions, the opening of additional casinos in existing jurisdictions and the expansion of existing casinos. The replacement cycle of gaming machines has grown longer in recent years, which could reduce the demand for our products and negatively impact our results of operations, cash flows and financial condition.

The opening of new casinos and expansion of existing casinos fluctuate with demand, economic conditions, regulatory approvals and the availability of financing. In addition, the expansion of gaming into new jurisdictions can be a protracted process. In the U.S., governments usually require a public referendum and legislative action before establishing or expanding gaming. Any of these factors could delay, restrict or prohibit the expansion of our business and negatively impact our results of operations, cash flows and financial condition.


Our future results of operations may be negatively impacted by ownership changes and consolidation in the gaming industry, including by casino operators.

As repeat customers represent a substantial part of our revenue in our casino Gaming business, our business, results of operations, cash flow and financial condition could be negatively affected if our casino customers are sold to or merge with other entities. Such entities may purchase more products and services of our competitors, reduce spending on our products or cause downward pricing pressures. Consolidation among casino operators could result in order cancellations or a slowing in the replacement cycle for existing gaming machines, or could require our current customers to purchase our competitors’ products, any of which could negatively impact our Gaming business.

In October 2016, two of the largest betting shop operators in the U.K., Ladbrokes and Gala Coral, merged to form Ladbrokes Coral Plc. The U.K. Competition and Markets Authority required that these operators divest a certain number of betting shops prior to consummating the merger. As these two operators are the largest customers of our U.K. gaming business, if we are not able to continue to supply our products and services to the purchasers of the divested betting shops, it could negatively impact our business.

Gaming opponents persist in their efforts to curtail the expansion of legalized gaming, which, if successful, could limit the growth of our operations.

There is significant debate over, and opposition to, land‑based and interactive real money gaming. We cannot assure that this opposition will not succeed in preventing the legalization of gaming in jurisdictions where it is presently prohibited, prohibiting or limiting the expansion of gaming where it is currently permitted or causing the repeal of legalized gaming in any jurisdiction. Any successful effort to curtail the expansion of, or limit or prohibit, legalized gaming could have an adverse effect on our results of operations, cash flows and financial condition.

In addition, there is significant opposition to interactive social gaming. Some states or countries could introduce a regulatory framework to govern interactive social gaming. These regulations could result in a prohibition on interactive social gaming altogether or substantially increase our costs to comply with these regulations, all of which could have an adverse effect on our results of operations, cash flows and financial condition.

Our success depends upon our ability to adapt to, and offer products and services that keep pace with, changing technology and evolving industry standards.

Our ability to anticipate or respond to changing technology and evolving industry standards and to develop and introduce new and enhanced products and services, including, but not limited to, gaming and lottery content, gaming machines,

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casino-management systems, table products and interactive gaming products and services, on a timely basis or at all is a significant factor affecting our ability to remain competitive, retain existing contracts or business and expand and attract new customers and players. We cannot assure that we will achieve the necessary technological advances or have the financial resources needed to introduce new products or services on a timely basis or at all.

Introducing new and innovative products and services requires us to adapt and refine our manufacturing, operations and delivery capabilities to meet the needs of our product innovation. If we cannot efficiently adapt our manufacturing infrastructure to meet the needs associated with our product innovations, or if we are unable to upgrade our production capacity in a timely manner, our business could be negatively impacted. In the past, we have experienced delays in launching new products and services due to the complex or innovative technologies embedded in our products and services. Such delays can adversely impact our results of operations, cash flows and financial condition.
We invest significant resources in our R&D efforts, which may not lead to successful or commercially viable new technologies or products.
We have invested, and intend to continue to invest, significant resources in R&D efforts. We invest in a number of areas, including product development for game and system‑based hardware, software and game content. In addition, because of the sophistication of our newer products and the resources committed to their development, they are generally more expensive to produce and, for our interactive products, to maintain. If our new products do not gain market acceptance or the increase in the average selling price of these new products is not proportionate to the increase in production cost, in each case as compared to our prior products, or if the average cost of production does not go down over time, whether by reason of long-term customer acceptance, our ability to find greater efficiencies in the manufacturing process as we refine our production capabilities or a general decrease in the cost of the technology, our margins will suffer and could negatively impact our business, results of operations, cash flows and financial condition. We cannot assure that our investment in R&D will lead to successful new technologies or products. If a new product is not successful, we may not recover our development, regulatory approval or promotion costs.
Our success depends on our ability to produce new and innovative products and services that respond to customer demand and create strong and sustained player appeal.
Our success depends upon our ability to respond to dynamic customer demand by producing new and innovative products and services. The process of developing new products and services is inherently complex and uncertain. If we fail to accurately anticipate customer needs and end user preferences through the development of new products and services, we could lose business to our competitors, which would adversely affect our results of operations, cash flows and financial condition.

Our businesses develop and source game content both internally and through third‑party suppliers. We also seek to secure third‑party brands for incorporation into our game content. We believe that creative and appealing game content produces more revenue for our gaming machine customers and provides them with a competitive advantage, which in turn enhances our revenue and our ability to attract new business and to retain existing business. In our Lottery business, we believe that innovative game concepts and game content, such as multiplier games and game content that incorporates licensed brands, can enhance the revenue of our lottery customers and distinguish us from our competitors. We cannot assure that we will be able to sustain the success of our existing game content or effectively develop or obtain from third parties game content or licensed brands that will be widely accepted both by our customers and players.
Our success also depends on creating products and services with strong and sustained player appeal. We are under continuous pressure to anticipate player reactions to, and acceptance of, our new products, avoid declining play levels on smaller jackpots and continue to provide successful products that generate a high level of play. In some cases, a new game or gaming machine will only be accepted by our casino or interactive gaming customers if we can demonstrate that it is likely to produce more revenue and Net win and/or has more player appeal than our existing products and services or our competitors’ products and services. WAP, premium and daily fee Participation gaming machines are replaced on short notice by casino operators if they do not meet and sustain revenue and profitability expectations. Customers may cancel pending orders with us if our products are not performing to expectations at other casinos.
In addition, the social gaming landscape is rapidly evolving and is characterized by major fluctuations in the popularity of social products and platforms, such as the dramatic increase in the popularity of mobile platforms. We may be unable to develop products at a rate necessary to respond to these changes, or at all, or that anticipate the interests of social players. Likewise, our social gaming offerings operate largely through Facebook, Google Play for Android devices, Apple iOS platform, Amazon Kindle platform and Microsoft Windows. If alternative platforms increase in popularity, we could be adversely impacted if we fail to timely create compatible versions of our products.

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We and our industries are subject to strict government regulations that may limit our existing operations and have an adverse impact on our ability to grow.
In the U.S. and many other countries, the provision of Gaming and Lottery products and services is subject to extensive and evolving regulation. These regulatory requirements vary from jurisdiction to jurisdiction. Therefore, we are subject to a wide range of complex laws and regulations in the jurisdictions in which we are licensed or operate. Most jurisdictions require that we be licensed, that our key personnel and certain of our security holders be found suitable or be licensed, and that our products be reviewed and approved before placement. Licenses, approvals or findings of suitability may be revoked, suspended or conditioned. If a license, approval or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary approval, license or finding of suitability, or if it is granted and subsequently revoked, then we may be prohibited from providing our products or services for use in the particular jurisdiction. In addition, the loss of a license in one jurisdiction could trigger the loss of a license, or affect our eligibility for a license, in other jurisdictions. We may also become subject to regulation in any new jurisdictions in which we decide to operate in the future, including due to expansion of a customer’s operations. Gaming authorities may levy fines against us or seize certain of our assets if we violate gaming regulations. We cannot assure that we will be able to obtain or maintain the necessary licenses or approvals or that the licensing process will not result in delays or adversely affect our operations. The failure to obtain or retain a required license or approval in any jurisdiction would decrease the geographic areas where we are permitted to operate and generate revenue, may limit our ability to obtain a license in other jurisdictions and may put us at a disadvantage relative to our competitors.
We cannot assure that authorities will not seek to restrict our business in their jurisdictions or institute enforcement proceedings against us. We cannot assure that any instituted enforcement proceedings will be favorably resolved, or that such proceedings will not have a material adverse impact on our ability to retain and renew existing licenses or to obtain new licenses in other jurisdictions. Our reputation may also be damaged by any legal or regulatory investigation, regardless of whether or not we are ultimately accused of, or found to have committed, any violation.
Often, our games, Gaming product hardware and software and our Interactive RMG products and services must be approved in the jurisdictions in which they are operated, and we cannot assure you that such products or services will be approved in any jurisdiction. Our networked gaming technology requires regulatory approval in gaming jurisdictions prior to the shipment or implementation of any gaming machines, products or services and, although we have received approvals from the jurisdictions in which we currently operate this technology, we cannot assure you that we will receive the approvals necessary to offer it in additional gaming jurisdictions. Many of our customers are required to be licensed, and delays in approvals of our customers’ operations or expansions may adversely affect our results of operations, cash flows and financial condition. In addition, current regulations in a number of jurisdictions where our customers operate, such as Macau SAR and Singapore, limit the amount of space allocated to our products or limit the amount of new product available to operators to an amount that has been pre-approved by regulators. Substantial changes in any such regulations could adversely affect demand for our products.
The regulatory review process and licensing requirements also may preclude us from using technologies owned or developed by third parties if those parties are unwilling to subject themselves to regulatory review or do not meet regulatory requirements. Some gaming authorities require gaming manufacturers to obtain approval before engaging in certain transactions, such as acquisitions, mergers, reorganizations, financings, stock offerings and share repurchases. Obtaining such approvals can be costly and time consuming, and we cannot assure that such approvals will be granted or that the approval process will not result in delays or disruptions to our strategic objectives.

The U.K. government is currently in the process of undertaking a review of stakes and prizes for all gaming terminals, which may lead to additional regulations. Any changes to stakes and prizes could negatively impact our customers or our U.K. gaming business.

We and certain of our affiliates, major stockholders (generally persons and entities beneficially owning a specified percentage (typically 5% or more) of our equity securities), directors, officers and key employees are subject to extensive background investigations and suitability standards in our businesses. In some jurisdictions, these investigations may require extensive personal and financial disclosure from major stockholders, directors, officers and key employees. The failure of any such individuals or entities to submit to such background checks and provide the required disclosure could jeopardize the award of a contract or license to us or provide grounds for termination of an existing contract or license. Regulatory authorities generally have broad discretion when granting, renewing or revoking these approvals and licenses. Gaming and lottery authorities may require the removal of any of our directors or employees who are deemed to be unsuitable, and these authorities are generally empowered to disqualify us from receiving a Gaming or Lottery contract or offering our Gaming or Lottery products and services in that jurisdiction as a result of any such investigation. Our failure, or the failure of any of our major stockholders, directors, officers, key employees, products or technology, to obtain or retain a required license or approval

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in one jurisdiction could negatively impact our ability (or the ability of any of our major stockholders, directors, officers, key employees, products or technology) to obtain or retain required licenses and approvals in other jurisdictions.

In light of these regulations and the potential impact on our business, our restated certificate of incorporation allows for the restriction of stock ownership by persons or entities who fail to comply with informational or other regulatory requirements under applicable gaming laws, who are found unsuitable to hold our stock by gaming authorities or whose stock ownership adversely affects our ability to obtain, maintain, renew or qualify for a license, contract, franchise or other regulatory approval from a gaming authority. The licensing procedures and background investigations of the authorities that regulate our businesses and the restriction in our certificate of incorporation may inhibit potential investors from becoming significant stockholders or inhibit existing stockholders from retaining or increasing their ownership.

There are instances where a state in which a Native American tribe conducts Class III gaming activities disagrees with such tribe regarding the regulation of gaming, including the regulation of gaming suppliers. In those instances, we make every effort to comply with both state and tribal regulation and fulfill our contractual obligations. However, there may be situations where any such disagreement impedes or creates uncertainty with respect to our ability to supply gaming products and services to such tribal customer or otherwise negatively impacts our relationship with such customer or gaming regulators. There are additional complexities that may impact disputes or other interactions with Native American tribe customers. For example, Native American tribes generally enjoy sovereign immunity from lawsuits, similar to the sovereign immunity enjoyed by the individual states and the U.S. In addition, certain commercial agreements with Native American tribes are subject to review by regulatory authorities such as the National Indian Gaming Commission, and, among other things, any such review could require substantial modifications to any such agreement we enter into with a Native American tribe customer.

Our businesses are subject to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data. In particular, the EU has adopted strict data privacy regulations. Following recent developments such as the European Court of Justice’s 2015 ruling that the transfer of personal data from the EU to the U.S. under the EU/U.S. Safe Harbor was an invalid mechanism of personal data transfer, the adoption of the EU-U.S. Privacy Shield as a replacement for the Safe Harbor, and the upcoming effective date of the EU’s General Data Protection Regulation, data privacy and security compliance in the EU are increasingly complex and challenging. The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions. Compliance with data privacy and security restrictions could increase the cost of our operations and failure to comply with such restrictions could subject us to criminal and civil sanctions as well as other penalties.

We are subject to the provisions of the Foreign Corrupt Practices Act and other anti‑corruption laws that generally prohibit U.S. persons and companies and their agents from offering, promising, authorizing or making improper payments to foreign government officials for the purpose of obtaining or retaining business. Certain of these anti‑corruption laws also contain provisions that require accurate record keeping and further require companies to devise and maintain an adequate system of internal accounting controls. Although we have policies and controls in place that are designed to ensure compliance with these laws, if those controls are ineffective or an employee or intermediary fails to comply with the applicable regulations, we may be subject to criminal and civil sanctions as well as other penalties. Any such violation could disrupt our business and adversely affect our reputation, results of operations, cash flows and financial condition.

We have developed and implemented an internal compliance program in an effort to ensure that we comply with legal requirements imposed in connection with our Gaming and Lottery activities, as well as legal requirements generally applicable to all publicly traded companies. The compliance program is run on a day‑to‑day basis by our chief compliance officer with legal advice provided by attorneys in our legal and compliance departments and outside experts. The compliance program is overseen by the compliance committee of our board of directors, consisting of our chief executive officer, three non-employee directors and a non-employee gaming law expert. We cannot assure that such steps will prevent the violation of one or more laws or regulations, or that a violation by us or an employee will not result in the imposition of a monetary fine, suspension or revocation of one or more of our licenses or other penalties.

The regulatory environment in any particular jurisdiction may change in the future, including changes that limit some or all of our existing operations in that jurisdiction, and any such change could materially and adversely affect our results of operations, cash flow, financial condition, business or prospects. Moreover, we cannot assure that our activities will be approved by additional jurisdictions or that those jurisdictions in which these activities are currently permitted will continue to permit such activities. Laws and regulations relating to our Interactive gaming businesses are evolving. For additional discussion regarding risks associated with the evolving interactive gaming regulatory landscape, see the risk factor below captioned "We may not be able to capitalize on the expansion of internet or other forms of interactive gaming or other trends and changes in the gaming and lottery industries, including due to laws and regulations governing these industries."

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See Exhibit 99.12 (Gaming Regulations) for additional information regarding certain of the regulations that govern our Gaming business.

We may not be able to capitalize on the expansion of internet or other forms of interactive gaming or other trends and changes in the gaming and lottery industries, including due to laws and regulations governing these industries.

We participate in the new and evolving interactive gaming and lottery industries through our social, RMG and other interactive gaming and lottery products. Part of our strategy is to take advantage of the liberalization of interactive gaming, both within the U.S. and internationally. These industries involve significant risks and uncertainties, including legal, business and financial risks. The success of these industries and of our interactive gaming and lottery products and services may be affected by future developments in social networks, including Facebook, mobile platforms, regulatory developments, data privacy laws and other factors that we are unable to predict and are beyond our control. This fast‑changing environment can make it difficult to plan strategically and can provide opportunities for competitors to grow their businesses at our expense. Consequently, our future results of operations, cash flows and financial condition relating to our Interactive gaming and Lottery products and services are difficult to predict and may not grow at the rates we expect, and we cannot assure that these products and services will be successful in the long term.

In general, our ability to successfully pursue our interactive gaming and lottery strategy depends in part on the laws and regulations relating to wagering through interactive channels. Until 2011, there was uncertainty as to whether the Federal Wire Act of 1961 prohibited states from conducting intrastate lottery transactions via the internet if such transactions crossed state lines. In late 2011, the Office of Legal Counsel of the DOJ issued an opinion to the effect that state lottery ticket sales over the internet to in‑state adults do not violate the Wire Act. The opinion provided an impetus for some states to authorize forms of interactive gaming or interactive lottery in order to generate additional revenue. However, to the extent states wish to pursue interactive gaming or interactive lottery, such states may be required or otherwise deem it advisable to enact enabling legislation or new regulations addressing the sale of lottery tickets or the offering of other forms of gaming through interactive channels, such as the actions taken by Delaware, Nevada and New Jersey to authorize various forms of internet gaming. Despite the 2011 DOJ opinion, there are still very significant forces working to limit or prohibit interactive gaming and interactive lottery in the U.S. Although these efforts have generally not been successful, we cannot assure that laws restricting interactive gaming or interactive lottery sales will not be passed at either the federal or state level. For instance, in May 2015, the Minnesota legislature passed an amendment to the state’s lottery law prohibiting the sale of instant win lottery tickets over the internet. Furthermore, changes in the executive branches of government at the state and federal level could affect federal and state policies on interactive gaming and interactive lottery as well, including a reversal of the 2011 DOJ opinion. The enactment of internet gaming legislation that federalizes significant aspects of the regulation of internet gaming and/or limits the forms of internet wagering that are permissible at the state or federal level could have an adverse impact on our ability to pursue our interactive strategy in the U.S.

Internationally, laws relating to internet gaming are evolving, particularly in Europe. To varying degrees, a number of European governments have taken steps to change the regulation of internet wagering through the implementation of new or revised licensing and taxation regimes, including the possible imposition of sanctions on unlicensed providers. We cannot predict the timing, scope or terms of any such state, federal or foreign laws and regulations, or the extent to which any such laws and regulations will facilitate or hinder our interactive strategy.

With respect to our social gaming business, although largely unregulated at this time, there are movements in some jurisdictions to review social gaming and possibly implement social gaming regulations. We cannot predict the likelihood, timing, scope or terms of any such regulation or the extent to which they may affect our social gaming business. Both the social and RMG businesses are subject to evolving regulations and the status of any particular jurisdiction may change at any time. The regulatory structure surrounding certain aspects of these businesses is currently in flux in some jurisdictions.

In jurisdictions that authorize internet gaming, we cannot assure that we will be successful in offering our technology, content and services to internet gaming operators as we expect to face intense competition from our traditional competitors in the gaming and lottery industries as well as a number of other domestic and foreign providers (or, in some cases, the operators themselves), some of which have substantially greater financial resources and/or experience in this area than we do. In addition, there is a risk that the authorization of the sale of gaming and lottery offerings via interactive channels in a particular jurisdiction could, under certain circumstances, adversely impact our Gaming and Lottery offerings through traditional channels in such jurisdiction. Any such adverse impact would be magnified to the extent we are not involved in, and generating revenue from, the provision of interactive gaming and lottery products or services in such jurisdiction. Know-your-customer and geo-location programs and technologies supplied by third parties are an important aspect of certain internet and mobile gaming products and services because they confirm certain information with respect to players and prospective players, such as

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age, identity and location. Payment processing programs and technologies, typically provided by third parties, are also a necessary feature of interactive wagering products and services. These programs and technologies are costly and may have an adverse impact on our results of operations, cash flows and financial condition. Additionally, we cannot assure that products containing these programs and technologies will be available to us on commercially reasonable terms, if at all, or that they will perform accurately or otherwise in accordance with our required specifications.

Our social gaming business largely depends upon our relationships with key providers, and changes in those relationships could negatively impact our social gaming business.

In our social gaming business, our services operate largely through Facebook, Google Play for Android devices, Apple iOS platform, Kindle platform and Microsoft Windows. Consequently, our expansion and prospects of our social gaming offerings depend on our continued relationships with these providers (and any emerging app store providers). Our relationships with Facebook, Google and Apple are not governed by contracts but rather by the provider’s standard terms and conditions for application developers. Our social gaming business will be adversely impacted if we are unable to continue these relationships in the future or if the terms and conditions offered by these providers are altered to our disadvantage. For instance, if any of these providers were to increase their fees, our results of operations, cash flows and financial condition would suffer. Likewise, if Facebook, Google or Apple were to alter their operating platforms, we could be adversely impacted as our offerings may not be compatible with the altered platforms or may require significant and costly modifications in order to become compatible. If Facebook, Google or Apple were to develop competitive offerings, either on their own or in cooperation with one or more competitors, our growth prospects would be negatively impacted.

We heavily depend on our ability to maintain and renew our customer contracts, including our longterm lottery contracts, and we could lose substantial revenue and profits if we are unable to renew certain of our contracts on substantially similar terms or at all.

Generally, our Lottery contracts contain initial multi‑year terms, with optional renewal periods at the discretion of the customer. Upon the expiration of any such contract, including any extensions thereof, a new contract may be awarded through a competitive bidding process. Conversely, in some instances, Lottery customers are authorized to extend contracts beyond the term initially agreed in the applicable contract without subjecting the contract to competitive bidding, thereby eliminating the possibility of obtaining that new business. Since the beginning of 2013, we have lost lottery systems contracts in Colorado and Indiana to our competitors following the expiration or termination of our contracts.

We cannot assure that our current contracts will be extended or that we will be awarded new contracts as a result of competitive bidding processes or otherwise in the future. The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenue and profits, which could have an adverse effect on our ability to win or renew other contracts or pursue growth initiatives. We cannot assure that new or renewed contracts will contain terms that are as favorable as our current terms or will contemplate the same scope of products and services as our current contracts, and any less favorable contract terms or diminution in scope could negatively impact our results of operations, cash flows and financial condition. For additional information regarding the potential expiration dates of certain of our more significant Lottery contracts, see the table in "Business Segments-Lottery Segment" in Item 1 of this Annual Report on Form 10-K.

We are also required by certain of our customers to provide surety or performance bonds in connection with our contracts. As of December 31, 2016, we had $231.0 million of outstanding performance bonds. We cannot assure that we will continue to be able to obtain surety or performance bonds on commercially reasonable terms or at all. Our inability to provide such bonds would materially and adversely affect our ability to renew existing, or obtain new, Lottery contracts.

A substantial portion of our gaming revenue depends on repeat customers. In certain regions, our business may be concentrated with a small number of customers, such as our U.K. LBO business.

Our business depends on the protection of our intellectual property and proprietary information.

We believe that our success depends, in part, on protecting our intellectual property in the U.S. and in foreign countries. Our intellectual property includes certain patents, trademarks and copyrights relating to our products and services (including gaming machines, interactive gaming products, table games, Shufflers and accessories, instant lottery games and gaming and lottery systems), as well as proprietary or confidential information that is not subject to patent or similar protection. Our success may depend, in part, on our ability to obtain protection for the trademarks, names, logos or symbols under which we market our products and to obtain copyright and patent protection for our proprietary technologies, intellectual property and innovations. We cannot assure that we will be able to build and maintain consumer value in our trademarks, obtain patent, trademark or copyright protection or that any trademark, copyright or patent will provide us with competitive advantages. In

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particular, a recent U.S. Supreme Court decision tightened the standard for patent eligibility of software patents, and other court decisions in recent years have trended towards a narrowing of patentable subject matter. These and similar decisions in the future may negatively impact the validity or enforceability of certain of our patents, our ability to protect our inventions, innovations and new technology and the value of our substantial patent portfolio.

Our intellectual property protects the integrity of our games, systems, products and services. For example, our intellectual property is designed to ensure the security of the printing of our instant lottery games and to provide simple and secure validation of our lottery tickets. Competitors may independently develop similar or superior products, software or systems, which could negatively impact our results of operations, cash flows and financial condition. In cases where our technology or product is not protected by enforceable intellectual property rights, such independent development may result in a significant diminution in the value of such technology or product.

We also rely on trade secrets and proprietary know‑how. We enter into confidentiality agreements with our employees and independent contractors regarding our trade secrets and proprietary information, but we cannot assure that the obligation to maintain the confidentiality of our trade secrets and proprietary information will be honored.

We are currently making, and in the future may make, claims of infringement, invalidity or enforceability against third parties. For example, with the emergence of interactive gaming, we have increased enforcement against parties that infringe our intellectual property. This enforcement could:

cause us to incur greater costs and expenses in the protection of our intellectual property;

potentially negatively impact our intellectual property rights;
    
cause one or more of our patents, trademarks, copyrights or other intellectual property interests to be ruled or rendered unenforceable or invalid; or
    
divert management’s attention and our resources.

We rely on the ability to use the intellectual property rights of third parties.

We rely on products, technologies and intellectual property that we license from third parties, including from our competitors, for use in our Gaming, Lottery and Interactive businesses. Substantially all of our Gaming machines and our Interactive products and services use intellectual property licensed from third parties. The future success of our business may depend, in part, on our ability to obtain, retain and/or expand licenses for popular technologies and games in a competitive market. We cannot assure that these third‑party licenses, or support for such licensed products and technologies, will continue to be available to us on commercially reasonable terms, if at all. In the event that we cannot renew and/or expand existing licenses, we may be required to discontinue or limit our use of the products that include or incorporate the licensed intellectual property.

Some of our license agreements contain minimum guaranteed royalty payments to the third party. If we are unable to generate sufficient revenue to offset the minimum guaranteed royalty payments, it could have a material adverse effect on our results of operations, cash flows and financial condition. Our license agreements typically contain restrictions on our ability to use or transfer the licensed rights in connection with certain strategic transactions. Certain of our license agreements grant the licensor rights to audit our use of their intellectual property. Disputes with licensors over uses or terms could result in the payment of additional royalties or penalties by us, cancellation or non‑renewal of the underlying license or litigation.

The intellectual property rights of others may prevent us from developing new products and services, entering new markets or may expose us to liability or costly litigation.

Our success depends in part on our ability to continually adapt our products and systems to incorporate new technologies and to expand into markets that may be created by new technologies. If technologies are protected by the intellectual property rights of others, including our competitors, we may be prevented from introducing products based on these technologies or expanding into markets created by these technologies. If the intellectual property rights of others prevent us from taking advantage of innovative technologies, our prospects, results of operations, cash flows and financial condition may be adversely affected.

We cannot assure that our business activities, games, products, services and systems will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us. In addition to infringement

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claims, third parties may allege claims of invalidity or unenforceability against us or against our licensees or manufacturers in connection with their use of our technology. A successful challenge to, or invalidation of, one of our intellectual property interests, a successful claim of infringement by a third party against us, our products or services, or one of our licensees in connection with the use of our technologies, or an unsuccessful claim of infringement made by us against a third party or its products or services could adversely affect our business or cause us financial harm. Any such claim and any resulting litigation, should it occur, could:

be expensive and time consuming to defend or require us to pay significant amounts in damages;
        
invalidate our proprietary rights;

cause us to cease making, licensing or using products or services that incorporate the challenged intellectual property;

require us to redesign, reengineer or rebrand our products or services or limit our ability to bring new products and services to the market in the future;

require us to enter into costly or burdensome royalty, licensing or settlement agreements in order to obtain the right to use a product, process or component;

impact the commercial viability of the products and services that are the subject of the claim during the pendency of such claim; or
    
require us by way of injunction to remove products or services on lease or stop selling or leasing new products or services.

We depend on the security and integrity of the systems and products we offer, and security breaches or other disruptions could compromise our information or the information of our customers and expose us to liability, which would cause our business and reputation to suffer.

We believe that our success depends, in large part, on providing secure products, services and systems to our customers. Despite our security measures, our products, services and systems may be vulnerable to attacks by hackers, customers, retailers, vendors or employees or breached due to malfeasance or other disruptions. Our ability to prevent anomalies and monitor and ensure the quality and integrity of our products and services is periodically reviewed and enhanced, but may not be sufficient to prevent future attacks, breaches or disruptions. Similarly, we regularly assess the adequacy of our security systems to protect against any material loss to any of our customers and the integrity of our products and services to end users. Expanded use of the internet and other interactive technologies may result in increased security risks for us and our customers. We cannot assure that our business will not be affected by a security breach or lapse, which could have a material adverse impact on our results of operations, cash flows and financial condition.

Our success depends on our ability to avoid, detect, replicate and correct software and hardware anomalies and fraudulent manipulation of our products and services. All of our products and services are designed with security features to prevent fraudulent activity. However, we cannot guarantee that these security features will effectively stop all fraudulent activities. If our security features do not prevent fraud, we could be adversely affected.
Our gaming machines have experienced anomalies and fraudulent manipulation in the past. Games and gaming machines may be replaced by casinos and other gaming machine operators if they do not perform according to expectations or they may be shut down by regulators. The occurrence of anomalies in, or fraudulent manipulation of, our gaming machines or our other Gaming and Lottery products and services (including our Interactive gaming products and services), may give rise to claims from players and claims for lost revenue and profits and related litigation by our customers and may subject us to investigation or other action by regulatory authorities, including suspension or revocation of our licenses or other disciplinary action. Additionally, in the event of the occurrence of any such issues with our products and services, substantial engineering and marketing resources may be diverted from other projects to correct these issues, which may delay other projects and the achievement of our strategic objectives.

We rely on information technology and other systems, and any failures in our systems could disrupt our business and adversely impact our results.

We rely on information technology systems that are important to the operation of our business, some of which are managed by third parties. These systems are used to process, transmit and store electronic information, to manage and support

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our business operations and to maintain internal controls over our financial reporting. We could encounter difficulties in developing new systems, maintaining and upgrading current systems and preventing security breaches. Among other things, our systems are susceptible to outages due to fire, floods, power loss, break‑ins, cyber‑attacks, network penetration, denial of service attacks and similar events. While we have and will continue to implement network security measures and data protection safeguards, our servers and other computer systems are vulnerable to viruses, malicious software, hacking, break‑ins or theft, data privacy or security breaches, third‑party security breaches, employee error or malfeasance and similar events. Failures in our systems or services or unauthorized access to or tampering with our systems and databases could have a material adverse effect on our business, reputation, results of operations, cash flows and financial condition. Any failures in our computer systems or telecommunications services could affect our ability to operate our linked games or otherwise conduct business.

Portions of our information technology infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource‑intensive. Such disruptions could materially and adversely impact our ability to deliver products to customers and interrupt other processes. If our information systems do not allow us to transmit accurate information, even for a short period of time, to key decision makers, the ability to manage our business could be disrupted and our results of operations, cash flows and financial condition could be materially and adversely affected. Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could materially and adversely affect our reputation, competitive position, results of operations, cash flows and financial condition.

If we are unable to successfully implement our new global enterprise resource planning system, it could disrupt our business or have a material adverse effect on our results of operations, cash flows and financial condition.

We are engaged in a multi-year implementation of a new global enterprise resource planning system (“ERP”). The ERP system is designed to accurately maintain the Company’s books and records and provide information on our operations to the Company’s management. The Company’s ERP system implementation will continue to require significant investment of human and financial resources. There are inherent risks associated with upgrading or changing systems, including inaccurate data or reporting. The process of upgrading and standardizing our ERP system is complex, time‑consuming and expensive. Although we believe we are taking appropriate action to mitigate these risks through, among other things, testing, training and staging implementations, we cannot assure that we will not experience data loss, disruptions, delays or negative business impacts from the upgrades. Any operational disruptions during the course of this process and any delays or deficiencies in the design and implementation of the new ERP system or in the performance of our legacy systems could materially and adversely affect our ability to operate our businesses. Additionally, while we have spent considerable efforts to plan and budget for the implementation of the new ERP system, changes in scope, timeline or cost could have a material adverse effect on our results of operations, cash flows and financial condition.

If we are not able to maintain adequate internal control over our financial reporting, it could adversely affect our reputation and business.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. If we cannot maintain and execute adequate internal control over financial reporting or when necessary implement new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we may suffer harm to our reputation, fail to meet our public reporting requirements on a timely basis or be unable to properly report on our business and our results of operations, cash flows and financial condition. Additionally, the inherent limitations of internal controls over financial reporting may not prevent or detect all misstatements or fraud, regardless of the adequacy of those controls. We have previously reported material weaknesses; for instance in our 2015 Form 10-K, we concluded that our disclosure controls and procedures were not effective due to a material weakness in our goodwill impairment testing. As of the date of this Annual Report on Form 10-K, we have completed measures which successfully remediated this material weakness. However, we are currently undertaking an ERP implementation in our largest business segment which will materially change our controls. We therefore cannot assure that additional material weaknesses will not be identified in the future. Please refer to Item 9A “Controls and Procedures.”

Our results of operations, cash flows and financial condition could be affected by natural events in the locations in which we or our customers, suppliers or regulators operate.

We may be impacted by severe weather and other geological events, including hurricanes, earthquakes, floods or tsunamis that could disrupt our operations or the operations of our customers, suppliers, data service providers and regulators. Natural disasters or other disruptions at any of our facilities or our suppliers’ facilities may impair or delay delivery of our

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products and services. Additionally, disruptions experienced by our regulators due to natural disasters or otherwise could delay our introduction of new products or entry into new jurisdictions where regulatory approval is necessary. While we insure against certain business interruption risks, we cannot assure that such insurance will compensate us for any losses incurred as a result of natural or other disasters. Any serious disruption to our operations, or those of our customers, our suppliers or our regulators, could have a material adverse effect on our results of operations, cash flows and financial condition.

We may not succeed in realizing the anticipated benefits of our strategic equity investments and relationships.

Under certain circumstances we pursue growth through strategic equity investments, including joint ventures, as a means to, among other things, gain access to new and important geographies, business opportunities and technical expertise, while simultaneously offering the potential for reducing capital requirements.
Our strategic equity relationships currently include investments in LNS, Northstar Illinois, Northstar New Jersey, Hellenic Lotteries, GLB, ITL, CSG and RCN. For additional information regarding our equity investments, see Note 13.
We may not realize the anticipated benefits of these strategic equity investments and relationships and other strategic investments and relationships that we may make or enter into, or may not realize them in the timeframes expected. These arrangements pose significant risks that could have a negative effect on our operations, including: the potential diversion of our management’s attention from our core business; the potential failure to realize anticipated synergies, economies of scale or other value associated with these arrangements; unanticipated costs and other unanticipated events or circumstances, including losses for which we may be responsible for our pro rata portion; possible adverse effects on our operating results during any integration process; impairment charges if our strategic equity investments or relationships are not as successful as we originally anticipate; and our potential inability to achieve the intended objectives of these arrangements.
Furthermore, our strategic equity investments and other strategic relationships pose risks arising from our reliance on our partners and our lack of sole decision‑making authority, which may give rise to disputes between us and our partners. For instance, our investments in LNS, Northstar Illinois and Northstar New Jersey are minority investments in ventures whose largest equity holder is Gtech and, although certain corporate actions require our prior consent, we do not unilaterally control decisions relating to the governance of these entities. We are party to strategic agreements with a subsidiary of Playtech Limited relating to gaming machines that contemplate our license of, and reliance on, the subsidiary’s back‑end technology platform in certain jurisdictions, particularly in the U.K. Our equity partners, licensors and other third parties with which we have strategic relationships may have economic or business interests or goals that are inconsistent with our interests and goals, take actions contrary to our objectives or policies, undergo a change of control, experience financial and other difficulties or be unable or unwilling to fulfill their obligations under our arrangements.

The failure to avoid or mitigate the risks described above or other risks associated with such arrangements could have a material adverse effect on our results of operations, cash flows and financial condition.

Our inability to complete acquisitions and integrate those businesses successfully could limit our growth or disrupt our plans and operations.

From time to time, we pursue strategic acquisitions. Our ability to succeed in implementing our strategy will depend to some degree upon our ability to identify and complete commercially viable acquisitions. We cannot assure that acquisition opportunities will be available on acceptable terms or at all, or that we will be able to obtain necessary financing or regulatory approvals to complete potential acquisitions.

We may not be able to successfully integrate any businesses that we acquire, or do so within the intended timeframes. We could face significant challenges in managing and integrating our acquisitions and our combined operations, including acquired assets, operations and personnel. In addition, the expected cost synergies associated with such acquisitions may not be fully realized in the anticipated amounts or within the contemplated timeframes or cost expectations, which could result in increased costs and have an adverse effect on our prospects, results of operations, cash flows and financial condition. We expect to incur incremental costs and capital expenditures related to our contemplated integration activities.

Acquisition transactions may disrupt our ongoing business. The integration of acquisitions will require significant time and focus from management and may divert attention from the day‑to‑day operations of the combined business or delay the achievement of our strategic objectives.

We have incurred, and may continue to incur, restructuring costs, the benefits of which are unpredictable and may not be achieved.


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On November 3, 2016, we announced that we began implementing a new business improvement initiative, which we expect will streamline our organization, increase our efficiencies, and significantly reduce our operating costs. These expected cost savings will encompass a combination of headcount reductions, facilities streamlining, and reductions in other operating costs. We may also engage in additional restructuring initiatives in the future. Because we are not able to predict with certainty when we will reorganize portions of our business, we cannot predict the extent, timing and magnitude of additional restructuring charges. We may also not realize the anticipated reduction in operating costs.

Our products and services may be subject to complex revenue recognition standards, which could materially affect our financial results.

We may enter into transactions that include multiple‑element arrangements and/or software components and applicable accounting principles or regulatory product approval delays could impact when we recognize revenue with respect to such transactions and could adversely affect our financial results for any given period. In addition, fluctuations may occur in our revenue and related deferred revenue as a result of multiple‑element arrangements that include both hardware and software. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates- Revenue recognition for multiple-element arrangements" in Item 7 of this Annual Report on Form 10-K and Note 3 for additional information.

We may be required to recognize additional impairment charges.

We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We test goodwill and other indefinite-lived intangible assets for impairment at least annually. Factors that may indicate a change in circumstances, such that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in industry segments in which we participate. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined, which would negatively affect our results of operations. For example, during fiscal year 2016 we recorded a charge of $69.0 million, and during fiscal 2015 we recorded charges of $1,002.6 million and $128.6 million for the impairment of goodwill and trade name assets, respectively. We cannot predict the occurrence of impairments, and we cannot assure that we will not have to record additional impairment charges in the future.

Our results of operations fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees of future performance.

                Our results of operations can fluctuate due to seasonal trends and other factors. Sales of our gaming machines to casinos are generally strongest in the spring and slowest in the summer, while revenue from our Participation gaming machines is generally strongest in the spring and summer. Player activity in our Interactive business is generally slower in the second and third quarters of the year, particularly during the summer months. Certain other seasonal trends and factors that may cause our results to fluctuate include: the geographies where we operate; holiday and vacation seasons; climate; weather; economic and political conditions; timing of the release of new products; significant equipment sales or the introduction of gaming or lottery activities in new jurisdictions or to new customers; the size and duration of draw lottery game jackpots; and other factors.

In light of the foregoing, results for any quarter are not necessarily indicative of the results that may be achieved in another quarter or for the full fiscal year. We cannot assure that the seasonal trends and other factors that have impacted our historical results will repeat in future periods as we cannot influence or forecast many of these factors.

We depend on our suppliers and contract manufacturers, and any failure of these parties to meet our performance and quality standards or requirements could cause us to incur additional costs or lose customers.

Our production of instant lottery games, in particular, depends upon a continuous supply of raw materials, supplies, power and natural resources. Our operating results could be adversely affected by an interruption or cessation in the supply of these items or a serious quality assurance lapse, including as a result of the insolvency of any of our key suppliers.

Similarly, the operation of our instant ticket printing presses and the manufacture and maintenance of our gaming machines and gaming and lottery systems are dependent upon a regular and continuous supply of raw materials and components, many of which are manufactured or produced outside of the U.S. Certain of the components we use are customized for our products. The assembly of certain of our products and other hardware is performed by third parties. Any interruption or cessation in the supply of these items or services or any material quality assurance lapse with respect thereto could materially adversely affect our ability to fulfill customer orders, results of operations, cash flows and financial condition.

29


We may be unable to find adequate replacements for our suppliers within a reasonable time frame, on favorable commercial terms or at all. The impact of the foregoing may be magnified as we continue to seek to streamline our gaming supply chain by reducing the number of our suppliers. Further, manufacturing costs may unexpectedly increase and we may not be able to successfully recover any or all of such cost increases.

In our lottery systems business, we transmit certain wagering data using satellite transponders, generally pursuant to long‑term contracts. The technical failure of any of these satellites would require us to obtain other communication services, including other satellite access. In some cases, we employ backup systems to limit our exposure in the event of such a failure. We cannot assure access to such other satellites or, if available, the ability to obtain the use of such other satellites on favorable terms or in a timely manner. While satellite failures are infrequent, the operation of satellites is outside of our control.

In addition, in our Gaming business, we rely upon a number of significant third‑party suppliers and vendors delivering parts, equipment and services on schedule in order for us to meet our contractual commitments. Furthermore, we outsource the manufacturing of certain of our sub-assemblies to third parties in the U.S., Europe, Central America and Asia. Failure of these third parties to meet their delivery commitments could result in us being in breach of, and subsequently losing, the affected customer orders, which loss could have a material adverse effect on our results of operations, cash flows and financial condition. We rely on network and/or telecommunications services for certain of our products. For instance, any disruption to our network or telecommunications could impact our linked or networked games, which could reduce our revenue.

In our Interactive gaming business, we often rely on third-party data center providers to, among other things, host our remote game servers. Our Interactive gaming businesses could be adversely impacted by breaches of or disruptions to these third-party data centers, including through disruptions in our RMG business, potential service level penalties with respect to our customers, reputational harm, the disclosure of proprietary information or the information of our customers or the theft of our or our customers assets, and to the extent any such data center provider was unable or unwilling to continue to provide services to us.

In certain regions, we enter into agreements with local distributors for the distribution of our land-based gaming products to one or more customers. Changes to these distributor relationships, including modification or termination of our agreements or difficulties with any such distributor could prevent us from delivering products or services to our customers on a timely basis, or at all, and could negatively impact our business.

We have foreign operations, which subjects us to foreign currency exchange rate fluctuations and other risks.

We are a global business and derive a substantial portion of our revenue and profits from operations outside of the United States. For the year ended December 31, 2016, we derived approximately 32% of our revenue from sales to customers outside of the United States.

Our consolidated financial results are affected by foreign currency exchange rate fluctuations. We are exposed to currency exchange rate fluctuations because portions of our revenue and expenses are denominated in currencies other than the U.S. dollar, particularly the British Pound Sterling, the Australian dollar and the Euro. Exchange rate fluctuations have in the past adversely affected our results of operations, cash flows and financial condition and may adversely affect our results of operations, cash flows and financial condition and the value of our assets outside the U.S. in the future. If a foreign currency is devalued in a jurisdiction in which we are paid in such currency, we may require our customers to pay higher amounts for our products, which they may be unable or unwilling to pay.

Our operations in foreign jurisdictions subject us to additional risks customarily associated with such operations, including: the complexity of foreign laws, regulations and markets; the uncertainty of enforcement of remedies in foreign jurisdictions; the impact of foreign labor laws and disputes; the economic, tax and regulatory policies of local governments; compliance with applicable anti‑corruption laws; and the ability to attract and retain key personnel in foreign jurisdictions. In addition, our international business operations could be interrupted and negatively affected by terrorist activity, political unrest or other economic or political uncertainties. For example, recent government actions and challenges affecting the gaming industry in Mexico have increased the credit quality risk with respect to certain of our current Mexico customers. In addition, foreign jurisdictions could impose tariffs, quotas, trade barriers and other similar restrictions on our international sales.

In addition, our ability to expand successfully in foreign jurisdictions involves other risks, including difficulties in integrating foreign operations, risks associated with entering jurisdictions in which we may have little experience and the day‑to‑day management of a growing and increasingly geographically diverse company. Our investment in foreign

30


jurisdictions within the Lottery segment often entails entering into joint ventures or other business relationships with locally based entities, which can involve additional risks arising from our lack of sole decision‑making authority, our reliance on a partner’s financial condition, inconsistency between our business interests or goals and those of our partners and disputes between us and our partners.

We may not realize the operating efficiencies, competitive advantages or financial results that we anticipate from our investments in foreign jurisdictions and our failure to effectively manage the risks associated with our operations in foreign jurisdictions could have a material adverse effect on our business prospects, results of operations, cash flows and financial condition.

The affirmative vote in the U.K. to withdraw from the EU may adversely affect our business.

On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the EU, commonly referred to as "Brexit". As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.'s future relationship with the EU. The Brexit vote may result in regulatory uncertainty throughout the region and could adversely affect business activity, restrict the movement of capital and the mobility of personnel, and otherwise impair political stability and economic conditions in the U.K., the EU and elsewhere. Any of these developments could have a material adverse effect on business activity in the U.K. or the EU. Given that we conduct a substantial portion of our business in continental Europe and the U.K. any of these developments could have a material adverse effect on our business prospects, results of operations, cash flows and financial condition.

The uncertainty concerning the timing and terms of the Brexit could have a negative impact on the growth of the U.K. and EU economies and cause greater volatility in the British Pound Sterling, the Euro and other currencies. Changes in currency exchange rates may reduce the reported value of our revenues outside the U.S. The announcement of Brexit has caused significant volatility in global stock markets and currency exchange rate fluctuations, including the strengthening of the U.S. dollar against foreign currencies.

Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace or replicate. Additionally, Brexit could allow the U.K. to significantly alter its regulations affecting our industry, which may result in significant costs and potentially lost opportunities for us. It may also be time-consuming and expensive for us to alter our internal operations in order to comply with new regulations. Changes to U.K. border and immigration policy could likewise occur as a result of Brexit, affecting our ability to recruit and retain employees from outside the U.K.
Changes in tax laws or tax rulings, or the examination of our tax positions, could materially affect our financial condition and results of operations.
The U.S. Congress and the current administration have expressed a desire to reform current U.S. corporate income tax laws. Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws. However, the tax benefits that we intend to eventually derive could be undermined due to potential U.S. tax reform. Certain contemplated changes to U.S. tax laws, if enacted, including a reduction to the 35 percent corporate income tax rate, limitations on the deductibility of interest expense, and changes to taxation of currently accumulated and/or future foreign earnings, could materially affect the U.S. tax treatment of both our domestic and foreign earnings. At this time, it is not possible to measure the potential impact on the value of our deferred tax assets, business, prospects or results of operations that might result upon enactment of any changes to these tax laws.
In addition, the taxing authorities in the U.S. and other jurisdictions where we do business regularly examine our income and other tax returns. The ultimate outcome of these examinations cannot be predicted with certainty. Should the IRS or other taxing authorities assess additional taxes as a result of examinations, we may be required to record charges to our operations, which could harm our business, results of operations and financial condition. 
We depend on our key employees.

We depend on the continued performance of our executive officers and key personnel, including Kevin Sheehan, our president and chief executive officer. If we lose the services of any of our executive officers or key personnel and cannot find suitable replacements for such persons in a timely manner, it could have an adverse impact on our business. Our ability to expand is dependent on our ability to recruit and retain talented employees in the U.S. and internationally who are capable of leading our employees to achieve our strategic objectives.


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We also rely on our highly skilled, technically trained and creative employees to develop new technologies and create innovative products. A lack of skilled technical workers could delay or negatively impact our business plans, ability to compete, results of operations, cash flows and financial condition.

We could incur costs in the event of violations of, or liabilities under, environmental laws, which may adversely affect our business and our results of operations, cash flows and financial condition.

Our operations and real property are subject to U.S. and foreign environmental laws and regulations, including those relating to air emissions, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites. We could incur costs, including cleanup costs, fines or penalties, and third‑party claims as a result of violations of, or liabilities under, environmental laws. Some of our operations require environmental permits and controls to prevent or reduce environmental pollution, and these permits are subject to review, renewal and modification by issuing authorities.

Litigation may adversely affect our business and our results of operations, cash flows and financial condition.

We may become subject to litigation claims in the operation of our business, including, but not limited to, with respect to employee matters, alleged product and system malfunctions, alleged intellectual property infringement and claims relating to our contracts, licenses and strategic investments. We may incur significant expense defending or settling any such litigation. Additionally, adverse judgments that may be decided against us could result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business and our results of operations, cash flows and financial condition.

Litigation is pending in Colombia arising out of the termination of certain Colombian lottery contracts in 1993. An agency of the Colombian government has asserted claims against certain parties, including the Company, which owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), the former operator of the Colombian national lottery. The claims are for, among other things, contract penalties, interest and the amount of a bond issued by a Colombian surety. For additional information regarding this or other litigation, see "Legal Proceedings" in Item 3 of this Annual Report on Form 10-K. We cannot assure that this litigation will not be finally resolved adversely to us or result in material liability.

Failure to perform under our contracts may result in substantial monetary liquidated damages and contract termination.

Our contracts, including our Lottery contracts and our Gaming contracts relating to the provision of VLTs, typically permit a counterparty to terminate the contract at any time for a material failure to perform, other specified reasons and, in many cases, for no reason at all. Upon such a termination or failure to perform, we may be required to refund fees paid to us for services performed or allow our customers to return our products to us for a full refund. Lottery contracts to which we are a party also frequently contain exacting implementation schedules and performance requirements, and the failure to meet these schedules and requirements may result in substantial monetary liquidated damages, as well as possible contract termination. We are also required by certain of our Lottery customers to provide surety or performance bonds. In the past, we have paid or incurred liquidated damages and have been required to allow the return of VLTs for a full refund under our contracts, and material amounts of liquidated damages could be imposed on us in the future, which could, if imposed, have a material adverse effect on our business prospects, results of operations, cash flows and financial condition.

We may be liable for product defects or other claims relating to our products.

Our products could be defective, fail to perform as designed or otherwise cause harm to our customers, their equipment or their products. If any of our products are defective, we may be required to recall the products and/or repair or replace them, which could result in substantial expenses and affect our profitability. Any problem with the performance of our products, such as an instant lottery game misprint or false jackpot or other prize, could harm our reputation, which could result in a loss of sales to customers and/or potential customers. In addition, the occurrence of errors in, or fraudulent manipulation of, our products or software may give rise to claims by our customers or by our customers’ patrons, including claims by our customers for lost revenues and related litigation that could result in significant liability. Any claims brought against us by customers may result in diversion of management’s time and attention, expenditure of large amounts of cash on legal fees and payment of damages, lower demand for our products or services, or injury to our reputation. Our insurance may not sufficiently cover a judgment against us or a settlement payment and is subject to customary deductibles, limits and exclusions. In addition, a judgment against us or a settlement could make it difficult for us to obtain insurance in the coverage amounts necessary to adequately insure our businesses, or at all, and could materially increase our insurance premiums and deductibles. In addition, software bugs or malfunctions, errors in distribution or installation of our software, failure of our products to perform as approved by the appropriate regulatory bodies or other errors or malfunctions, may subject us to investigation or other action by gaming regulatory authorities, including fines.

32



Labor disputes and union organizing activities may have an adverse effect on our operations.
Certain of our employees are represented by unions or works councils, including employees in Europe, South America and Canada. In particular, the majority of our employees at our printing facilities in the U.K., Chile and Quebec and a small number of employees in the U.S. are represented by unions. While we believe our relations with our employees are satisfactory, we cannot predict whether we will be successful in negotiating new collective bargaining agreements without any disruptions in our operations or higher labor costs.
We cannot assure that we will not encounter conflicts or strikes with any labor unions that represent our employees or union organizing activities at our non-unionized facilities. Any of the foregoing could adversely impact our results of operations, cash flows and financial condition or our customers’ operations, could cause us to lose customers, or could increase our labor costs.
Risks Relating to our Capital Structure

Our level of indebtedness could adversely affect our results of operations, cash flows and financial condition.

We are a highly leveraged company. As of December 31, 2016, we had total indebtedness of $8,074.2 million, consisting primarily of borrowings under our credit agreement, Senior Notes and Subordinated Notes, net of unamortized discounts and deferred financing costs. In addition, as of December 31, 2016, there was approximately $516.5 million of availability under our revolving credit agreement.

Our level of indebtedness could affect our ability to obtain financing or refinance existing indebtedness; require us to dedicate a significant portion of our cash flow from operations to interest and principal payments on our indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures and other general corporate purposes; increase our vulnerability to adverse general economic, industry or competitive developments or conditions; and limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate or in pursuing our strategic objectives. In addition, we are exposed to the risk of higher interest rates as a significant portion of our borrowings are at variable rates of interest. If interest rates increase, the interest payment obligations under our non‑hedged variable rate indebtedness would increase even if the amount borrowed remained the same, and our results of operations, cash flows and financial condition would be negatively impacted. All of these factors could place us at a competitive disadvantage compared to competitors that may have less debt than we do.

We may not have sufficient cash flows from operating activities, cash on hand and available borrowings under our credit agreement to finance required capital expenditures under new contracts and meet our other cash needs. These obligations require a significant amount of cash.

Our Gaming Participation and Lottery systems businesses generally require significant upfront capital expenditures for gaming machine or lottery terminal assembly, software customization and implementation, systems and equipment installation and telecommunications configuration. In connection with a renewal or bid of a Gaming machine or Lottery systems contract, a customer may seek to obtain new equipment or impose new service requirements, which may require additional capital expenditures in order to retain or win the contract. Historically, we have funded these upfront costs through cash flows generated from operations, available cash on hand and borrowings under our credit agreement. In addition, we have seen an increase in lottery RFPs, some involving PMAs, which include economic terms that expose the Company to increased risk, such as requiring the guarantee of specific income thresholds or significant upfront payments. Our ability to generate revenue and to continue to procure new contracts will depend on, among other things, our then present liquidity levels or our ability to obtain additional financing on commercially reasonable terms.

If we do not have adequate liquidity or are unable to obtain financing for these upfront costs and our other cash needs on favorable terms or at all, we may not be able to bid on certain contracts, which could result in our losing business or restrict our ability to grow which could have a material adverse effect on our results of operations, cash flows and financial condition. Moreover, we may not realize the return on investment that we anticipate on new or renewed contracts due to a variety of factors, including lower than anticipated retail sales or amounts wagered, higher than anticipated capital or operating expenses and unanticipated regulatory developments or litigation. We may not have adequate liquidity to pursue other aspects of our strategy, including bringing our products and services to new customers or new or underpenetrated geographies (including through equity investments) or pursuing strategic acquisitions. In the event we pursue significant acquisitions or other expansion opportunities, conduct significant repurchases of our outstanding securities, or refinance or repay existing debt, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through

33


additional borrowings under our existing financing arrangements, which sources of funds may not necessarily be available on terms acceptable to us, if at all.

We may not have sufficient cash flows from operating activities to service all of our indebtedness and other obligations, and may be forced to take other actions to satisfy our obligations, which may not be successful.

Our ability to make payments on and to refinance our indebtedness and other obligations depends on our results of operations, cash flows and financial condition, which in turn are subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness as well as our other obligations.

We are required to make scheduled payments of principal on the term loans borrowed under our credit agreement, and our credit agreement requires that a portion of our excess cash flow be applied to prepay amounts borrowed under our credit agreement. We may also, from time to time, repurchase, or otherwise retire or refinance our debt, through our subsidiaries or otherwise. Such activities, if any, will depend on prevailing market conditions, contractual restrictions and other factors, and the amounts involved may or may not be material. If we need to refinance all or part of our indebtedness at or before maturity, we cannot assure that we will be able to obtain new financing or to refinance any of our indebtedness on commercially reasonable terms or at all.

Our lenders, including the lenders participating in our revolving credit facility under our credit agreement, may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility or to obtain other financing on favorable terms or at all. Our results of operations, cash flows and financial condition would be adversely affected if we were unable to draw funds under our revolving credit facility because of a lender default or to obtain other cost‑effective financing. Any default by a lender in its obligation to fund its commitment under our revolving credit facility (or its participation in letters of credit) could limit our liquidity to the extent of the defaulting lender’s commitment. If we are unable to generate sufficient cash flow in the future to meet our commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. We cannot assure that any of these actions could be completed on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital requirements. Moreover, our existing debt agreements contain, and our future debt agreements may contain, restrictive covenants that may prohibit us from adopting these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Agreements governing our indebtedness impose certain restrictions that may affect our ability to operate our business. Failure to comply with any of these restrictions could result in the acceleration of the maturity of our indebtedness and require us to make payments on our indebtedness. Were this to occur, we would not have sufficient cash to pay our accelerated indebtedness.

Agreements governing our indebtedness, including our credit agreement and the indentures governing our Senior Notes and Subordinated Notes, impose, and future financing agreements are likely to impose, operating and financial restrictions on our activities that may adversely affect our ability to finance future operations or capital needs or to engage in new business activities. In some cases, these restrictions require us to comply with or maintain certain financial tests and ratios. Subject to certain exceptions, our credit facilities and/or indentures restrict our ability to, among other things:
    
declare dividends or redeem or repurchase capital stock;
    
prepay, redeem or purchase other debt;
    
incur liens;
    
make loans, guarantees, acquisitions and investments;
    
incur additional indebtedness;
    
engage in sale and leaseback transactions;
    
amend or otherwise alter debt and other material agreements;
    

34


engage in mergers, acquisitions or asset sales;
    
engage in transactions with affiliates;
    
enter into arrangements that would prohibit us from granting liens or restrict our ability to pay dividends, make loans or transfer assets among our subsidiaries; and

alter the business we conduct.

In addition, our credit agreement contains a covenant that is tested at the end of each fiscal quarter and requires us to not exceed a maximum consolidated net first lien leverage ratio of 5.5x Consolidated EBITDA (as defined in the credit agreement) for the quarter ended December 31, 2016, with this ratio stepping up to 6.0x for the quarter ended March 31, 2017, then stepping down to 5.5x for the quarter ended June 30, 2018 and 5.0x for the quarter ended June 30, 2019. As a result of these covenants, we will be limited in the manner in which we can conduct our business, and may be unable to engage in favorable business activities or finance future operations or capital needs.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross‑default provisions. Such a default would permit lenders to accelerate the maturity of the debt under these agreements and other agreements containing cross-default provisions and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have, or be able to obtain, sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.

We cannot assure that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these obligations or that we will be able to refinance our debt on terms acceptable to us, or at all.

Certain holders of our common stock exert significant influence over the Company and may make decisions that conflict with the interests of other stockholders.

In August 2004, MacAndrews & Forbes Incorporated (formerly known as MacAndrews & Forbes Holdings Inc.) was issued approximately 25% of our outstanding common stock in connection with its conversion of our then outstanding Series A Convertible Preferred Stock. According to a Form 4 filed with the SEC on November 24, 2015, this holder beneficially owns 34,575,737 shares of our common stock, or approximately 39.2% of our outstanding common stock as of February 27, 2017. Pursuant to a stockholders’ agreement with us, which we originally entered into with holders of the Series A Convertible Preferred Stock, such holder is entitled to appoint up to four members of our board of directors and certain actions of our Company require the approval of such holder. As a result, this holder has the ability to exert significant influence over our business and may make decisions with which other stockholders may disagree, including, among other things, delaying, discouraging or preventing a change of control of our Company or a potential merger, consolidation, tender offer, takeover or other business combination.    

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.






35

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


ITEM 2.    PROPERTIES
We occupy approximately 2,735,000 square feet of space in the U.S. Internationally, we occupy approximately 1,591,000 square feet of space. Set forth below is an overview of the principal owned and leased real estate properties that support our Gaming, Lottery and Interactive segments.
Location
 Sq. Ft
Supports
Tenancy
Las Vegas, Nevada(1)
493,000

Gaming
Lease/Own
Chicago, Illinois(2)
451,000

Gaming, Interactive
Own
Alpharetta, Georgia
355,000

Gaming, Lottery
Own
India (Bangalore, Chennai, Pune)
198,000

Gaming, Lottery, Interactive
Lease
(1) Lease 213,000 sq. ft and own 280,000 sq. ft.
(2) 58,000 sq. ft held for sale.

Our owned Alpharetta, Chicago and Las Vegas facilities listed above are encumbered by mortgages securing indebtedness under our credit agreement and Secured Notes. In addition to those listed above, we own or lease a number of additional less significant properties in the U.S. and internationally that support our operations.

ITEM 3.    LEGAL PROCEEDINGS
For discussion of the Company's legal proceedings, see Note 22, which is incorporated by reference into this Item 3 of this Annual Report on Form 10-K.

ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Our Common Stock
Our outstanding common stock is listed for trading on the Nasdaq Global Select Market under the symbol "SGMS." The following table sets forth, for the periods indicated, the range of high and low sales prices of our Class A common stock:
        
 
 
Sales Price of
SGC
Common Stock
 
 
High
 
Low
Fiscal Year 2016 (January 1, 2016 - December 31, 2016)
 
 
 
 
First Quarter
 
$
10.24

 
$
4.56

Second Quarter
 
$
10.75

 
$
7.90

Third Quarter
 
$
11.42

 
$
8.07

Fourth Quarter
 
$
16.10

 
$
10.90

Fiscal Year 2015 (January 1, 2015 - December 31, 2015)
 
 
 
 
First Quarter
 
$
14.96

 
$
9.96

Second Quarter
 
$
17.12

 
$
10.47

Third Quarter
 
$
16.78

 
$
9.57

Fourth Quarter
 
$
12.83

 
$
7.06

On February 27, 2017, the last reported sale price for our common stock on the Nasdaq Global Select Market was $20.85 per share. There were 771 holders of record of our common stock as of February 27, 2017.

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Dividend Policy
We have never paid any cash dividends on our Class A common stock and do not presently intend to pay cash dividends on our Class A common stock in the foreseeable future. Further, under the terms of certain of our debt agreements, we are limited in our ability to pay cash dividends or make certain other restricted payments (other than stock dividends) on our Class A common stock. For further discussion related to dividend restrictions, see Note 16.


Stockholder Return Performance Graph
The following graph compares the cumulative total stockholder return over the five-year period ended December 31, 2016 of our common stock, the Nasdaq Composite Index and indices of our peer group companies that operate in industries or lines of business similar to ours.
Our peer group companies consist of Aristocrat Leisure Limited (Australian Securities Exchange: ALL), International Games Technology Plc (New York Stock Exchange: IGT), Intralot, S.A (Athens Stock Exchange: IRLTY), Pollard Banknote Limited (Toronto Stock Exchange: PBL.UN-TO) and Everi Holdings Inc. (New York Stock Exchange: EVRI).
The companies in each peer group have been weighted based on their relative market capitalization each year. The graph assumes that $100 was invested in our common stock, the Nasdaq Composite Index and the peer group indices at the beginning of the five-year period and that all dividends were reinvested. The comparisons are not intended to be indicative of future performance of our common stock.




37


sgms2016a04a01.jpg

 
 
12/11
 
12/12
 
12/13
 
12/14
 
12/15
 
12/16
Scientific Games Corporation
 
$
100.00

 
$
89.38

 
$
174.54

 
$
131.24

 
$
92.47

 
$
144.33

NASDAQ Composite
 
$
100.00

 
$
116.41

 
$
165.47

 
$
188.69

 
$
200.32

 
$
216.54

Peer Group
 
$
100.00

 
$
165.64

 
$
210.78

 
$
234.58

 
$
303.51

 
$
460.98



38


ITEM 6.    SELECTED FINANCIAL DATA
Selected financial data presented below as of and for each of the five years ended December 31, 2016 have been derived from our historical consolidated financial statements. The information below reflects the acquisitions and dispositions of certain businesses from 2012 through 2016, including the Bally acquisition in November 2014, the WMS acquisition in October 2013, the disposition of our equity investment in Sportech in January 2014, the disposition of our pub business in March 2013, the acquisition of substantially all of the assets of Parspro in July 2012, the acquisition of Provoloto in June 2012 and the exit of that business in February 2014, the acquisition of ADS in June 2012. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K and our Consolidated Financial Statements and the Notes thereto included in Item 8 of this Annual Report on Form 10-K.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in millions, except per share amounts)
 
 
 
 
As of and for the Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
Total revenue
 
$
2,883.4

 
$
2,758.8

 
$
1,786.4

 
$
1,090.9

 
$
928.6

Net loss from continuing operations
 
$
(353.7
)
 
$
(1,394.3
)
 
$
(234.3
)
 
$
(25.6
)
 
$
(43.9
)
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share from continuing operations
 
$
(4.05
)
 
$
(16.23
)
 
$
(2.77
)
 
$
(0.30
)
 
$
(0.49
)
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total assets (1)
 
$
7,087.4

 
$
7,732.2

 
$
9,721.1

 
$
4,109.6

 
$
2,161.4

Total long-term debt, including current portion
 
$
8,074.2

 
$
8,207.0

 
$
8,312.9

 
$
3,109.2

 
$
1,442.7

(1)  
Total assets as of December 31, 2012 does not reflect the adoption of ASU No. 2015-17.  

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to enhance the reader's understanding of our operations and current business environment and should be read in conjunction with the description of our business (Item 1 of this Annual Report on Form 10-K) and our Consolidated Financial Statements and Notes (Item 8 of this Annual Report on Form 10-K).
            This “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" at the beginning and in Item 1A, respectively, of this Annual Report on Form 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.

BUSINESS OVERVIEW
We are a leading developer of technology‑based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio includes gaming machines and game content, casino management systems, table game products and services, instant and draw‑based lottery games, lottery systems, lottery content and services, interactive gaming and social casino solutions as well as other products and services. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments.
Highlights:
On August 5, 2016, we announced that Kevin M. Sheehan joined Scientific Games as the Company's Chief Executive Officer, previously having served as Chief Executive Officer and President of Norwegian Cruise Line Holding Ltd. for seven years.

39


In our Gaming segment, total annual worldwide new gaming machine shipments increased 10% to 31,610, and included the launch of the next-generation TwinStarTM Dual-Screen and J43 Video gaming machines, while we also introduced the innovative new GameScapeTM gaming machine dedicated exclusively for use in our gaming operations line of business.
In our Lottery segment, we successfully launched our latest-generation lottery gaming system for the Arizona Lottery, displacing a competitor, and launched five innovative multi-channel cross-over lottery instant games, such as our Jackpot Party® instant game, which capitalizes on our extensive proprietary games library.
In our Interactive segment, annual revenues grew 58% year over year, primarily from the popularity and increased play of our B2C social gaming apps, while successfully expanding our portfolio of social games with Blazing 7s® Slots.
On November 3, 2016, we announced that we began implementing a new business improvement initiative, which we expect will streamline our organization, increase our efficiencies, and significantly reduce our operating costs once the initiative is fully implemented.
During the second quarter of 2016, we voluntarily repurchased and cancelled $56.5 million and $9.4 million of principal amount of our 2020 Notes and 2021 Notes, respectively.
Subsequent to December 31, 2016, we successfully completed a series of refinancing transactions, including a private offering of $1.15 billion in aggregate principal amount of 7.000% senior secured notes due 2022 and amended our credit agreement which extended the maturity of our term loans and revolving credit facility, and reduced the applicable interest rate on the term loans. These actions reduced the total principal value of our debt by $45.0 million, including payment of the remaining $45.0 million on our revolving credit facility, lowered annual cash interest cost, extended the maturity out to 2021 and 2022 for 95 percent of our debt, and significantly reduced our interest rate exposure to floating rates.
Trends and Uncertainties
We continue to experience challenges that are representative of trends and uncertainties that may affect our business and results of operations. We are a highly leveraged company which presents several challenges, including the dedication of a significant portion of our cash flow from operations to service interest and principal payments on our indebtedness. Additional challenges we face relate to expanding our footprint within international markets and the related process of obtaining regulatory approvals to provide services and products within these new and emerging markets. A third set of challenges relates to changes in the competitive landscape. Our major competitors are expanding their product and service offerings with integrated products and solutions. We are also faced with challenges related to foreign currency risk. Our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than the U.S. dollar. As a result, changes in foreign exchange rates may significantly affect revenue and expenses. The strengthening of the U.S. dollar relative to certain foreign currencies throughout fiscal year 2016 negatively impacted reported revenue and reduced reported expenses from our international operations.
Reportable Segments
The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. Segment information appearing in Note 2 is also presented on this basis. As of December 31, 2016, we had three segments for financial reporting purposes - Gaming, Lottery and Interactive.


40


CONSOLIDATED RESULTS
 (in millions)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Total revenue
 
$
2,883.4

 
$
2,758.8

 
$
1,786.4

 
$
124.6

 
5
 %
 
$
972.4

 
54
%
Operating expenses
 
2,752.8

 
3,783.4

 
1,959.1

 
(1,030.6
)
 
(27
)%
 
1,824.3

 
93
%
Operating income (loss)
 
130.6

 
(1,024.6
)
 
(172.7
)
 
1,155.2

 
(113
)%
 
(851.9
)
 
493
%
Net loss before income tax
 
(478.7
)
 
(1,694.2
)
 
(494.9
)
 
1,215.5

 
(72
)%
 
(1,199.3
)
 
242
%
Net loss
 
(353.7
)
 
(1,394.3
)
 
(234.3
)
 
1,040.6

 
(75
)%
 
(1,160.0
)
 
495
%
Revenue
 
 
Year Ended December 31,
 
Variance
 
Variance
(in millions)
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Gaming
 
$
1,772.7

 
$
1,773.6

 
$
806.4

 
$
(0.9
)
 

 
$
967.2

 
120
 %
Lottery
 
777.9

 
775.2

 
835.5

 
2.7

 

 
(60.3
)
 
(7
)%
Interactive
 
332.8

 
210.0

 
144.5

 
122.8

 
58
%
 
65.5

 
45
 %
Total revenue
 
$
2,883.4

 
$
2,758.8

 
$
1,786.4

 
$
124.6

 
5
%
 
$
972.4

 
54
 %
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Gaming revenue slightly decreased in 2016, primarily due to a decrease in WAP and premium game revenue and lower systems hardware and software sales, which was offset by higher gaming machine sales. The gaming revenue decrease included the negative impact of $22.4 million from foreign currency.
Lottery revenue increased in 2016 primarily due to higher U.S revenue, mostly driven by an increase in U.S. instant game sales revenue with particular strength in Participation contracts and from CSP customers for whom we provide our integrated CSP offerings as well as increased retail sales of multi-state games including sales leading up to the record $1.6 billion POWERBALL jackpot in January 2016. These increases were offset by an unfavorable $21.7 million impact from the expiration of the CSL validation contract in January 2016 and a negative $9.1 million impact from foreign currency.

Interactive revenue increased in 2016 primarily due to 60.8% growth in our social gaming B2C business reflecting the ongoing popularity of Jackpot Party Social Casino and the success of our recently launched Quick Hit® Slots, Hot Shot CasinoTM and Blazing 7s Slots social gaming apps.

Operating expenses
 
Year Ended December 31,
 
Variance
 
Variance
(in millions)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Cost of services(1)
$
396.5

 
$
372.7

 
$
283.7

 
$
23.8

 
6
 %
 
$
89.0

 
31
 %
  Cost of product sales(1)
424.6

 
405.5

 
274.3

 
19.1

 
5
 %
 
131.2

 
48
 %
  Cost of instant games(1)
285.2

 
325.9

 
291.4

 
(40.7
)
 
(12
)%
 
34.5

 
12
 %
Selling, general and administrative
577.0

 
567.7

 
507.7

 
9.3

 
2
 %
 
60.0

 
12
 %
Research and development
204.8

 
183.9

 
117.0

 
20.9

 
11
 %
 
66.9

 
57
 %
Depreciation, amortization and impairments
738.7

 
903.2

 
454.3

 
(164.5
)
 
(18
)%
 
448.9

 
99
 %
Goodwill impairments
69.0

 
1,002.6

 

 
(933.6
)
 
(93
)%
 
1,002.6

 
nm

Restructuring and other
57.0

 
21.9

 
30.7

 
35.1

 
160
 %
 
(8.8
)
 
(29
)%
Total operating expenses
$
2,752.8

 
$
3,783.4

 
$
1,959.1

 
$
(1,030.6
)
 
(27
)%
 
$
1,824.3

 
93
 %

(1) Exclusive of D&A. 
nm = not meaningful 

41



Cost of revenue
Consolidated cost of revenue increased by $2.2 million in 2016, including (1) a $26.7 million increase in cost of unit shipments in Gaming resulting from the introduction of the TwinStar Dual-Screen and J43 Video gaming machines which generally carry higher costs at launch and trend lower as they mature; (2) a $48.9 million increase in the cost of Interactive services primarily related to volume-driven increase in the third party platform fees on the $122.8 million increase in Interactive revenues, which was offset by; (3) a decrease of $25.1 million in gaming costs primarily associated with placement of WAP, premium and other leased machines as operators have removed more of these machines from their gaming floors; (4) an $11.0 million decrease in costs related to systems and hardware sales; and (5) a $40.7 million reduction in cost of instant games primarily due to the cancellation of the MONOPOLYTM MILLIONAIRES' CLUB (MMC) game.
SG&A
The increase in SG&A of $9.3 million in 2016 was primarily due to the following: (1) a $34.9 million increase in marketing primarily driven by Interactive marketing and player acquisition costs related to new games launched in 2016 and the increased marketing related to our Jackpot Party Social Casino app; (2) a $9.9 million increase in stock-based compensation, primarily attributable to the accelerated recognition of certain stock based compensation, which was offset by (3) a $15.4 million decrease in salaries and benefits resulting from headcount actions; and (4) a $21.2 million decrease in professional and legal fees, which includes a $7.5 million credit related to insurance proceeds received during the second quarter of 2016 in connection with the settlement of a legal matter.
R&D
R&D increased by $20.9 million in 2016, primarily driven by higher investments in new product and app development across each of our business segments.
Depreciation, amortization and impairments
D&A decreased by $164.5 million in 2016 and was primarily due to the following: (1) the non-recurrence of $128.6 million of intangible asset impairment charges recognized in 2015 which reduced the carrying value of two trade name assets to their fair value; (2) the impact from the expiration of the CSL validation contract in January 2016; and (3) an $11.9 million impairment of the MMC game studio recognized in 2015 which did not recur in 2016.
Goodwill impairments

During 2016, we recorded an impairment charge of $69.0 million to reduce the carrying value of our International Lottery Systems reporting unit's goodwill balance to its implied fair value. During 2015, we recorded an aggregate goodwill impairment charges of $1,002.6 million to reduce the carrying value of our SG Gaming and U.S. Lottery Systems reporting units' goodwill balances to their implied fair value. See Note 11 for additional information.

Restructuring and other
Restructuring and other costs increased $35.1 million in 2016 primarily associated with the business improvement initiative which was announced on November 3, 2016. See Note 4 for additional information.

Other Factors Affecting 2016 Net Loss

Gain on early extinguishment of debt
    
During the second quarter of 2016, we repurchased and cancelled an aggregate principal amount of $65.9 million of our 2020 Notes and 2021 Notes for $39.9 million in cash, which resulted in a $25.2 million gain on early extinguishment of debt.

Income tax benefit

We recorded an income tax benefit of $125.0 million for the year ended December 31, 2016 compared to an income tax benefit of $299.9 million in 2015. The Company’s 2016 effective tax rate was impacted by the recording of valuation allowances totaling $37.1 million against domestic (federal and state) net deferred tax assets. For additional information regarding the changes in our effective tax rates and the variance in our income tax benefit, see Note 21.


42


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 re-measurement 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:
 
Year Ended December 31,
 
2016
 
2015
(in millions)
Revenue
% Consolidated Revenue
 
Revenue
% Consolidated Revenue
Foreign Currency:
 
 
 
 
 
British Pound Sterling
$
237.8

8.2
%
 
$
235.9

9.0
%
Euro
131.6

4.6
%
 
115.8

4.0
%
Australian Dollar
134.0

4.6
%
 
123.0

4.0
%
Other income (expense), net increased due to a $31.1 million change in foreign currency transaction gains and losses as 2016 results reflect a $2.2 million gain compared to a $28.9 million loss in 2015, primarily due to the weakening of the British Pound Sterling and the Euro.
We also have foreign currency exposure related to certain of our equity investments. Our earnings from our Euro-denominated equity investment in LNS were $14.0 million and $14.9 million for the years ended December 31, 2016 and 2015, respectively.
See "--Business Segment Results--" below for a more detailed explanation of the significant changes in our components of revenue and expenses within the individual segment results of operations.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenue
Consolidated revenue increased in each of our categories of revenues (services, product sales and instant games) resulting in total revenues increasing by $972.4 million in 2015, despite an $83.2 million unfavorable foreign currency translation impact. Services and product sales revenue increased by $961.4 million in 2015, primarily due to $1,100.3 million from the incremental impact of the Bally acquisition reflecting a full year of results as compared to the 40 days in 2014 and a $16.7 million increase in legacy services revenue (service revenues which existed before the Bally acquisition), partially offset by a decrease of $155.6 million in legacy product sales revenue in our Gaming and Lottery segments. Instant games revenue increased by $11.0 million from 2014 to 2015.
Services revenue increased by $563.3 million in 2015, primarily reflecting a $546.6 million increase in Bally services revenue (including a full year of results as compared to 40 days in 2014) combined with a net increase of $16.7 million in services revenue primarily related to increases in our legacy Interactive gaming business partially offset by decreases in our legacy Gaming business. The impact of Bally service revenue was $63.2 million for the 40-day post-acquisition period in 2014. Product sales revenue increased by $398.1 million in 2015, primarily reflecting a $553.7 million increase in Bally product sales revenue (including a full year of results as compared to 40 days in 2014), partially offset by a $100.2 million decrease in our legacy Gaming business primarily due to lower overall demand for gaming machines and a $55.4 million decrease in our Lottery business primarily due to lower international product sales demand and an unfavorable foreign currency impact. The impact of Bally product sales revenue was $88.3 million for the 40-day post-acquisition period in 2014. Instant games revenue increased by $11.0 million in 2015, reflecting higher revenue from our U.S. and international Participation contracts and higher revenue from our international price-per-unit contracts.

Cost of revenue
Consolidated cost of revenue increased by $254.7 million in 2015, including $332.4 million attributable to Bally (reflecting a full year of results as compared to 40 days in 2014), which was partially offset by a decrease of $77.7 million from our Lottery and legacy Gaming businesses primarily due to decreased revenues. Cost of revenue attributable to Bally was $52.9 million for the 40-day post-acquisition period in 2014.
Cost of services revenue increased by $89.0 million in 2015 including an incremental $102.0 million attributable to Bally (reflecting a full year of results as compared to 40 days in 2014) and an increase in our legacy Interactive gaming business of $10.2

43


million, partially offset by a decrease of $23.2 million primarily due to the lower revenues generated by our Lottery and legacy Gaming businesses. Cost of services revenue attributable to Bally was $11.0 million for the 40-day post-acquisition period in 2014. Cost of product sales increased by $131.2 million in 2015, including an incremental $230.3 million attributable to Bally (reflecting a full year of results as compared to 40 days in 2014), partially offset by a decrease of $99.1 million attributable to our Lottery and legacy Gaming businesses, primarily related to the same items that caused the reduction in revenues as described above. Cost of product sales attributable to Bally was $41.9 million for the 40-day post-acquisition period in 2014. Cost of instant games increased by $34.5 million in 2015, primarily due to a $35.5 million charge related to other asset impairments and contract cancellation costs.
SG&A
SG&A increased by $60.0 million in 2015, including an incremental $169.5 million increase attributable to Bally (reflecting a full year of SG&A as compared to 40 days in 2014), which was partially offset by $109.5 million of lower SG&A, primarily attributable to the legacy Gaming business, which reflected the impact of lower legacy revenues, certain acquisition and legal costs incurred in 2014 and the realization of cost synergies from our acquisitions. The 2014 period included $25.8 million of additional acquisition-related charges related to the Bally acquisition, $24.8 million related to legal contingencies and settlements and $4.0 million for the write-down of certain receivables from international customers. SG&A attributable to Bally was $81.2 million for the 40-day post-acquisition period in 2014 (including $41.0 million related to the acceleration of Bally equity awards in connection with the acquisition).
R&D
R&D increased by $66.9 million in 2015, including an incremental $81.8 million increase attributable to Bally (reflecting a full year of R&D as compared to 40 days in 2014), which was partially offset by $14.9 million of lower R&D primarily attributable to the legacy Gaming business which reflected the realization of cost synergies from acquisitions. R&D attributable to Bally was $13.0 million for the 40-day post-acquisition period in 2014.
D&A
D&A increased by $448.9 million in 2015, including an incremental $413.5 million increase attributable to Bally (reflecting a full year of D&A as compared to 40 days in 2014). D&A in the 2014 period included $37.0 million attributable to Bally for the 40-day post-acquisition period in 2014. D&A also reflected charges of $169.7 million related to the impact of impairment charges for certain long-term assets, including $128.6 million in D&A to reduce the carrying values of two trade name assets to their fair values, $11.5 million in D&A to adjust the carrying value of certain of our facilities to their fair value less expected selling costs, $12.9 million in accelerated D&A related to gaming operations equipment, $11.9 million in accelerated D&A of property and equipment related to our instant games business and $4.8 million of other accelerated D&A. For additional information regarding these charges, see Note 11.
Goodwill impairments
During 2015, we recorded an aggregate goodwill impairment charge of $1,002.6 million, consisting of a $935.0 million non-cash impairment charge to reduce the carrying value of our SG Gaming reporting unit goodwill to its implied fair value and a $67.6 million non-cash impairment charge to write off the recorded amount of our U.S. Lottery Systems reporting unit goodwill. For additional information regarding these charges, see Note 11.

Restructuring and other
Restructuring and other costs decreased $8.8 million in 2015 to $21.9 million, including $16.9 million related to employee termination costs following the Bally acquisition and the WMS acquisition, $2.0 million in facility termination costs and $3.0 million of additional corporate costs unrelated to the Bally acquisition and the WMS acquisition.
Other income and expense

Interest expense increased by $357.7 million in 2015, due primarily to the additional indebtedness that we incurred to finance the Bally acquisition, reflecting a full year of interest expense as compared to 40 days in 2014. For additional information regarding our indebtedness, see Note 16.
Earnings (loss) from equity investments increased by $24.5 million in 2015, due primarily to the non-recurrence of a $19.7 million non-cash impairment charge we recorded during the year ended December 31, 2014 to write down our Northstar Illinois equity investment and higher overall performance from our equity investments. For additional information regarding our equity investments, see Note 13.

44


Loss on early extinguishment in 2014 related primarily to the tender and redemption premiums and related write-off of deferred financing costs in connection with the refinancing of our 2019 Notes in June 2014.
Other expense increased by $25.6 million in 2015, due primarily to $21.2 million of incremental losses on foreign currency translation during the year.
Income tax benefit
We recorded an income tax benefit of $299.9 million for the year ended December 31, 2015, compared to an income tax benefit of $260.6 million for the year ended December 31, 2014. The effective income tax rates for the years ended December 31, 2015 and 2014 were 17.7% and 52.6% respectively. The U.S. federal tax impact of the non-deductibility of $935.0 million of our goodwill impairment charges in 2015 was 19.4%.
Our 2015 effective income tax rate on foreign earnings was impacted by the mix of income and the statutory tax rates in our foreign jurisdictions, which ranged from a low of 0% to a high of 48%. The foreign jurisdictions that had the most impact on our foreign income tax benefit in 2015 included Australia, Bermuda, Canada, India, Ireland and the U.K.
Our income tax benefit may change from period to period based on, among other factors, the mix of earnings between U.S. and foreign jurisdictions and among foreign jurisdictions, the effect of any valuation allowance related to any of our deferred tax assets (or the release thereof), state and local taxes, specific events such as the settlement of income tax audits and changes in tax law, and the effects of our global income tax strategies. Based on our existing net deferred tax liability position at December 31, 2015 and anticipated net operating losses in 2016, we expect to have to provide a valuation allowance against our deferred tax assets in 2016 which will mostly offset the tax benefit we otherwise would record in our Consolidated Statements of Operations and Comprehensive Loss. Refer to Note 21 for additional information regarding our foreign and domestic pre-tax income (loss), our foreign and domestic income tax benefit (expense), deferred tax assets and liabilities and the effect foreign taxes have on our overall effective tax rate.
See "--Business Segment Results--" below for a more detailed explanation of the significant changes in our components of revenue within the individual segment results of operations.
BUSINESS SEGMENT RESULTS
The types of products and services from which our segments derive their revenues are further discussed in Notes 2 and 3. Certain financial information relating to our segments, including segment revenue, operating income (loss) and total assets for the last three fiscal years and certain financial information relating to our revenue derived from and assets located in the U.S. and other geographic areas is included in Note 2.
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 LBOs, arcade and bingo operators in the U.K. and continental Europe, and government agencies and their affiliated operators. Our equity investments in RCN and ITL are part of our Gaming business segment.
The following table summarizes the primary business activities included in our Gaming business segment.

45


 
 
Services
 
Product sales
 
 
 
 
 
Gaming operations
 
Service revenues from gaming operations are derived from WAP, premium and daily-fee Participation gaming machines and other leased gaming machines (including VLTs and electronic table games) and other services revenue from leasing game themes or other licensing arrangements
 
N/A
Gaming machine sales
 
N/A
 
Sale of new and used gaming machines, electronic table systems ("ETS") and VLTs, conversion game kits and spare parts
Gaming systems
 
We provide services which include installation and support of casino management systems, including ongoing hardware maintenance and software upgrade services
 
We offer core slot, casino and table-management systems (collectively, "casino-management systems") that help our customers improve communication with players, add excitement to the gaming floor and enhance operating efficiencies. We also provide ongoing software maintenance of customer casino management systems
Table products
 
Revenue is generated from leased table products and services (including Shufflers) and proprietary table game licensing
 
Sale of table products (including Shufflers) and perpetual licenses to proprietary table games
Gaming Machine Sales
The majority of our product sales are derived from sales of gaming machines and VLTs that use a combination of advanced graphics, mechanical reels, digital music and sounds and secondary bonus games. We also sell electronic table systems ("ETS") to either meet the needs of particular locations where live tables are not allowed or as productivity-enhancing solutions for other jurisdictions.
Our services revenue includes revenue earned from Participation games, other gaming machine services and table product leasing and licensing. We categorize our Participation gaming machines as (1) WAP, premium and daily fee Participation games and (2) other leased and Participation games.    
WAP, premium and daily fee Participation games
WAP Participation games: WAP Participation games are electronically linked gaming machines that are located across multiple casinos within a single gaming jurisdiction or across Native American gaming jurisdictions. Players across linked gaming machines contribute to and compete for system-wide progressive jackpots that are designed to increase gaming machine play for participating casinos by giving the players the opportunity to win a larger jackpot than on a non-WAP gaming machine. We are responsible for funding WAP jackpots. We create WAP games using our proprietary brands and also using licensed brands. We operate our WAP systems in six states throughout the U.S. as well as in certain Native American casinos.
Premium and daily fee Participation games: We offer two categories of non-WAP premium and daily fee Participation games: LAP and standalone. LAP games are gaming machines that are located within a single casino and are electronically linked to a progressive jackpot for that specific casino. Our LAP gaming machines feature games including those offered as WAP as well as our proprietary brands such as Jackpot Party Progressive®, Life of Luxury® Progressive, 88 Fortunes®, 5 Treasures®, and Cash Spin. Our LAP products leverage both exclusive brand names and game play intellectual property, and typically offer players the chance to win multiple progressive jackpots, all of which tend to result in higher play volumes. We also provide certain standalone Participation games that are not linked to other gaming machines. Our standalone games feature titles, among others, under the licensed MONOPOLY brand and our proprietary brands, as well as other licensed brands in those jurisdictions where we do not operate a WAP system. Our standalone Participation gaming machines generally feature larger, more elaborate top-boxes and provide game play experiences not possible on a single screen game or on gaming machines that we sell.
Other leased and Participation games
Server-based gaming: We provide wide-area gaming operators, such as LBOs, bingo halls and arcades, a comprehensive package of server-based products and services under long term contracts that typically include gaming machines, remote management of game content and management information, central computer systems, secure data communication and field support services. We are typically paid a fee based on the Net win generated by

46


these gaming machines (subject to certain adjustments as may be specified in a particular contract, including adjustments for taxes and other fees). Our business in this category is primarily based in the U.K.
VLTs: Certain customers lease our multi-game and single-game VLTs, which include video gaming machines, mechanical reel gaming machines and video poker games. Our VLTs may be operated as standalone units or may interface with central monitoring systems operated by government agencies. Our VLTs are typically located in places where casino-style gaming is not the only attraction, such as racetracks, bars and restaurants.
Class II and centrally determined systems: We offer video and mechanical-reel gaming machines and VLTs for Class II and certain VLT jurisdictions where the game outcome is determined by a central server system that we provide. These Class II and centrally determined systems primarily operate in Native American casinos in Washington, Florida, Alabama and Oklahoma. We receive either a fixed daily fee or a percentage of the Net win generated by the gaming machines or VLTs connected to the central determination system and a small daily fee for the central determination system.    
Gaming Systems
Our comprehensive suite of technology solutions provides gaming operations of every size with a wide range of marketing, data management and analysis, accounting, player tracking, security and other applications and tools to more effectively manage their operations. Gaming systems revenues are highly dependent on new installations.
Table Products
Our table product sales are generated primarily from the sale of products designed to enhance table game speed, productivity, profitability and security. Our product offerings include various models of Shufflers to suit specific games.
We offer Shuffler products under month-to-month lease arrangements that contain Participation rates or fixed monthly lease rates. These arrangements include service of the product with back-up and replacement products available at the customer’s request.
We license our PTG content to commercial, tribal and governmental casino operators typically under month to month lease arrangements based on fixed monthly rates. PTGs which are designed to enhance operators' table-game operations, include our internally developed and acquired PTGs, side bets, add-ons and progressive features. Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker, craps and blackjack table games and to electronic platforms.    
Revenues from our Gaming products and services to external customers accounted for 61%, 64% and 45% of our total revenues in 2016, 2015 and 2014, respectively.

Current year update

We believe that challenging market conditions impacted our Gaming results during 2016 and could continue in the near term. These challenges included: (1) restrained investment in new replacement gaming machines by our existing customers; (2) increased competition for new systems, gaming operations, gaming machines and table products businesses; (3) political and economic conditions in various locations, including Greece, resulting in a delay in the deployment of our VLTs; and (4) other economic and regulatory pressures that affect our business operations globally.

For 2017, we expect to continue to face pricing pressure in our Gaming segment. We anticipate that replacement demand for gaming machines and constraints on capital spending by gaming operators will continue at current levels and that demand for gaming machines will continue to be negatively impacted by the continued consolidation of casino and other gaming operators. We anticipate that demand for our gaming systems products and services will continue at current levels due to fewer large, multi-site installation opportunities, system replacements and new casino openings anticipated in 2017. We have experienced a decrease in our installed base of WAP gaming machines but anticipate that our installed base of WAP, premium and daily-fee Participation gaming machines will begin to stabilize, benefiting from the release of a number of new games, including the launch of our new GameScape™ cabinet in the third quarter of 2016. The GameScape cabinet, a dedicated Participation platform, features a player-favorite branded WILLY WONKAWORLD OF WONKA game.




    

47


Results of Operations and Key Performance Indicators for Gaming
(in millions)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
 
$
921.8

 
$
956.3

 
$
442.6

 
$
(34.5
)
 
(4
)%
 
$
513.7

 
116
%
Product sales
 
850.9

 
817.3

 
363.8

 
33.6

 
4
 %
 
453.5

 
125
%
Total revenue
 
1,772.7

 
1,773.6

 
806.4

 
(0.9
)
 

 
967.2

 
120
%
Total operating expenses
 
1,560.7

 
2,675.1

 
974.7

 
(1,114.4
)
 
(42
)%
 
1,700.4

 
174
%
Operating income (loss)
 
$
212.0

 
$
(901.5
)
 
$
(168.3
)
 
$
1,113.5

 
(124
)%
 
$
(733.2
)
 
436
%
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
(in millions, except for unit and per unit revenue information)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gaming operations
 
$
725.3

 
$
763.2

 
$
414.0

 
$
(37.9
)
 
(5
)%
 
$
349.2

 
84
 %
Gaming machine sales
 
618.2

 
571.1

 
335.0

 
47.1

 
8
 %
 
236.1

 
70
 %
Gaming systems
 
240.8

 
273.0

 
37.4

 
(32.2
)
 
(12
)%
 
235.6

 
630
 %
Table products
 
188.4

 
166.3

 
20.0

 
22.1

 
13
 %
 
146.3

 
732
 %
Total revenue
 
$
1,772.7

 
$
1,773.6

 
$
806.4

 
$
(0.9
)
 

 
$
967.2

 
120
 %
F/X impact on revenue
 
$
(22.4
)
 
$
(47.7
)
 
$
7.1

 
$
25.3

 
(53
)%
 
$
(54.8
)
 
(772
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KPIs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WAP, premium and daily fee Participation units:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Installed base at period end
 
21,465

 
22,252

 
23,554

 
(787
)
 
(4
)%
 
(1,302
)
 
(6
)%
Average daily revenue per unit
 
$
51.73

 
$
55.21

 
$
68.25

 
$
(3.48
)
 
(6
)%
 
$
(13.04
)
 
(19
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Participation and leased units:
 
 
 
 
 
 
 


 


 


 


Installed base at period end
 
47,474

 
47,949

 
45,867

 
(475
)
 
(1
)%
 
2,082

 
5
 %
Average daily revenue per unit
 
$
15.29

 
$
15.78

 
$
12.95

 
$
(0.49
)
 
(3
)%
 
$
2.83

 
22
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gaming machine sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. and Canadian new unit shipments
 
18,180

 
17,417

 
10,573

 
763

 
4
 %
 
6,844

 
65
 %
International new unit shipments
 
13,430

 
11,365

 
6,439

 
2,065

 
18
 %
 
4,926

 
77
 %
Total new unit shipments
 
31,610

 
28,782

 
17,012

 
2,828

 
10
 %
 
11,770

 
69
 %
Average sales price per new unit
 
$
16,647

 
$
16,349

 
$
15,127

 
$
298

 
2
 %
 
$
1,222

 
8
 %
Gaming Operations
Gaming operations revenue decreased in 2016 in part due to: (1) a 787 unit decrease in the installed base of WAP, premium and daily-fee Participation gaming machines; (2) a decrease in the average daily revenue per WAP, premium and daily-fee Participation units primarily reflecting a lower mix of high-yielding WAP games; (3) a 475 unit decrease in the ending installed base for Other Participation and leased units; and (4) a decrease in the average daily revenue per Other Participation and leased units. As a result of the third quarter release of our GameScape cabinet, our WAP installed base at the end of the fourth quarter of 2016 was up approximately 1% on a sequential quarter basis.


48



Gaming Machine Sales
Gaming machine unit sales increased due to higher global unit shipments primarily resulting from sales of the Pro Series WAVE (released in 2014), and the TwinStar and Dualos cabinets, both released in 2015.
U.S. and Canadian shipments encompassed 13,969 replacement units including 1,271 Oregon VLT units (which completed the contract), and 4,211 units for new casino openings and expansions, including 1,700 Illinois VGT units. International shipments encompassed 11,956 replacement units and 1,474 units for new casino openings and expansions. The average sales price increased to $16,647 per unit reflecting a greater mix of higher-performing premium gaming machines sold during the period.
Gaming Systems
Gaming systems sales decreased in 2016 due to lower hardware, software and services sales resulting from fewer large, multi-site opportunities, system replacements and new casino openings in 2016. The decreases were partially offset by a 5% increase in systems maintenance revenue.
Table Products
Table products revenue increased due to increased Shuffler sales driven by sales into Asian markets and a 5% increase in revenue from leased Shufflers, PTGs and progressives primarily due to the success of the Blazing 7s BlackjackTM Progressive.

Operating income
The increase in operating income was primarily attributable to the following: (1) the non-recurrence of a 2015 goodwill impairment charge; (2) a decrease in overall operating expenses primarily due to realized integration cost synergies largely implemented in prior periods, including lower SG&A expense of $37.1 million for the year which benefited from $7.5 million of insurance proceeds received in connection with the settlement of a legal matter; and (3) lower D&A expense of $143.3 million, driven by the non-recurrence of 2015 intangible asset impairments which totaled $128.6 million; partially offset by (4) a less profitable revenue mix, which was due to an increase in lower-margin Gaming machine sales revenue and a decline in higher-margin Gaming systems and Gaming operations revenue.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
All results for 2015 referenced below reflect the results of operations of Bally for the full period. All results for 2014 referenced below reflect the results of operations of Bally following the November 21, 2014 closing of the Bally acquisition.
Impact of 2014 Bally acquisition on Gaming revenue
Year Ended December 31,
Variance
 
2015(2)
 
2014(1)
2015 vs. 2014
Revenue:
 
 
 
 
 
Gaming operations
$
396.2

 
$
43.9

$
352.3

803
%
Gaming machine sales
397.7

 
61.0

336.7

552
%
Gaming systems
257.3

 
23.9

233.4

977
%
Table products
166.3

 
20.0

146.3

732
%
Total revenue
$
1,217.5

 
$
148.8

$
1,068.7

718
%
(1) 40 days following the Bally acquisition. 
(2) Results are for a full year. 

Revenue
Total revenue increased by $967.2 million reflecting $1,068.7 million from the Bally acquisition as set forth above, partially offset by a reduction in legacy Gaming revenues of $101.5 million primarily due to lower new gaming machine unit demand. This change in revenue includes an unfavorable foreign currency impact of $47.7 million.

49


The $513.7 million increase in services revenue consisted of incremental revenue of $515.0 million from Bally growth in our legacy gaming service revenue and also reflects $18.3 million of unfavorable foreign currency impact. Bally revenue was $60.3 million for the 2014 post-acquisition period. Our average installed base of WAP, premium and daily-fee Participation units increased 127% to 22,720 units in 2015, due to the impact of the Bally units for a full year of results as compared to 40 days in 2014, partially offset by a reduction in the legacy Gaming average installed base of 751 units. The average daily revenue per WAP, premium and daily-fee Participation units decreased 19% due primarily to the impact of the inclusion of the Bally leased units, which have a lower leased rate and reflect a full year of results as compared to 40 days in 2014. Our average installed base of other Participation and leased units rose 15,898 units to 45,791 units, reflecting the addition of 17,991 other Participation and leased units within the Bally footprint, partially offset by a decline mostly in the U.K. gaming installed base. The ending installed base as of December 31, 2015 increased by 2,082 units from December 31, 2014, due primarily to previously excluded installed units in 2014 for one customer that are now included in the installed base total given that the customer has resumed consistent payments. Average daily revenue for our other leased and Participation units increased 22% compared to the prior-year period, primarily due to the addition of the Bally units which have a higher average daily rate.

The $453.5 million increase in product sales revenue reflected $553.7 million of incremental Bally revenue partially offset by a reduction in legacy Gaming revenues of $100.2 million. Bally product sales revenue was $88.3 million for the 40-day post-acquisition period in 2014. The decrease in legacy Gaming revenue was due primarily to abated demand for our dual screen video cabinets, which we believe resulted from our customers' knowledge of our intention to launch new dual screen video cabinets in the second half of 2015. The 69% increase in new unit sales reflected 18,234 of new unit sales of Bally units (reflecting a full year of results as compared to 40 days in 2014) partially offset by a decrease of 6,464 in legacy Gaming new unit sales. Bally had 3,101 new unit sales for the 40-day post-acquisition period in 2014.
Operating loss     
The operating loss of $901.5 million increased by $733.2 million in 2015, primarily reflecting a goodwill impairment charge of $935.0 million, and trade name asset impairment charges of $128.6 million. This was partially offset by the impact from the inclusion of Bally results for a full year in 2015 (as compared to 40 days in 2014) and benefits from cost synergies realized from our integration initiatives, which reduced our operating expenses. For additional information regarding these charges, see Note 11.
LOTTERY

The Lottery segment is primarily comprised of our systems-based services and product sales business and our instant games business. Our systems-based services and product sales business provides customized computer software, software support, equipment and data communication services, sports wagering systems 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 point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based systems maintenance and software support services.
Our instant games business generates revenue from the manufacture and sale of instant games, 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 game 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 games revenue.
Our equity investments in LNS, Northstar Illinois, Northstar New Jersey, CSG, Hellenic Lotteries and GLB are included in the Lottery segment.
The following table summarizes the primary business activities included in the Lottery business segment.

50


 
 
Services
 
Product Sales
 
Instant Games
 
 
 
 
 
 
 
Instant products - participation and price-per-unit(1)
 
N/A
 
N/A
 
Designing, printing and selling instant lottery games
                                              Providing instant game-related services, such as game design, sales and marketing support and inventory management

Instant products - licensing and player loyalty
 
N/A
 
N/A
 
Supplying player loyalty programs, merchandising services and interactive marketing campaigns

Sublicensing brands for lottery products and providing lottery-related promotional products

Lottery systems - services
 
Providing software, hardware and related services for lottery operations: including draw systems, instant ticket validation systems, sports wagering and keno systems
 
Providing lottery systems hardware to customers where we have an ongoing services arrangement
 
N/A
Lottery systems - sales
 
Lottery systems software maintenance and support
 
Providing lottery systems, including hardware, software, and instant game validation systems
 
N/A
(1) See Instant Lottery Games below. 
Instant Lottery Games    
We generate revenue from the sale of instant lottery games. Some of our contracts bundle the design and manufacturing of instant lottery games, instant game management systems and marketing and other services, such as the design and installation of game management software, inventory and distribution, sales, accounting, training and advisory services, market research and retailer training and recruitment. We are typically paid on a Participation basis under these contracts. We believe these services help lotteries effectively manage and support their operations, achieve higher retail sales and lower operating costs. We also provide licensed games and promotional and interactive marketing services to the lottery industry.
We market instant lottery games and related services to U.S. and international lotteries and commercial customers. We supply instant lottery games to 38 of the 44 U.S. jurisdictions that sell instant lottery games and have sold instant lottery games to customers in approximately 50 countries. Our U.S. instant lottery game contracts customarily have an initial term of three to five years and frequently include multiple renewal options for additional periods ranging from one to five years, which our customers have generally exercised in the past. We usually sell our instant lottery games on a price-per-unit (meaning instant games sold to customer at a fixed price per unit) or Participation basis. Certain of our international customers purchase instant lottery games as needed rather than under multi-game supply contracts.        
We provide lotteries with access to some of the world's most popular entertainment brands on lottery products, which we believe helps increase our customers' instant game sales. Our licensed entertainment brands include AMC®- THE WALKING DEAD®, HARLEY-DAVIDSON®, LOTERIATM, MAJOR LEAGUE BASEBALL®, MARGARITAVILLE®, MONOPOLY, NATIONAL BASKETBALL ASSOCIATION®, THE PRICE IS RIGHT® and SLINGO®. We also provide branded merchandise, advertising, promotional support, drawing management services and prize fulfillment programs. In addition, we offer lotteries interactive marketing services through our Properties Plus® program which features players clubs, reward programs, second chance promotional websites, interactive games and subscription systems that enable players to purchase lottery games securely over the internet.
Lottery Systems
We are a leading provider of lottery systems including customized computer software, software support, equipment, and data communication services, to lotteries in the U.S. and internationally. In the U.S., our arrangements ordinarily include the following: (1) provision of the necessary equipment (including point-of-sale terminals) and (2) software and maintenance services pursuant to long-term contracts that typically have an initial term of at least five years under which we are generally paid a fee equal to a percentage of the lottery's total retail sales. Our U.S. contracts commonly include multiple renewal options that generally have been exercised by our customers in the past. Internationally, we primarily sell: (1) point-of-sale terminals and/or computer software and hardware to lottery authorities; and (2) provide ongoing fee-based systems and software support services.
Our lottery systems use proprietary technology that facilitates high-speed processing of draw lottery game wagers as well as validation of winning draw and instant lottery games. This business includes the supply of proprietary transaction-processing

51


software, draw lottery games, keno, point-of-sale terminals, central site computers and communication platforms as well as ongoing operational support and maintenance services. We have contracts to operate lottery systems for 10 of the 46 U.S. jurisdictions that operate draw lotteries. Internationally, we have lottery systems operating in 14 countries including Canada and China.
The fees we earn under our lottery systems contracts are generally included in our services revenue. Revenue from the sale of our point-of-sale terminals and/or computer software is included in our product sales revenue, while the fees we generate from ongoing systems and software support are generally included in our services revenue.
We have equity investments in LNS, Northstar Illinois, Northstar New Jersey, Hellenic Lotteries, CSG and GLB, which entities operate or assist in the operation of lotteries. We are also the primary provider of instant lottery games to LNS and Northstar New Jersey and the exclusive provider of instant lottery games to Northstar Illinois and Hellenic Lotteries. Additional information regarding these equity investments is included in Note 13.
Revenues from our Lottery products and services to external customers accounted for 27%, 28% and 47% of our total revenues in 2016, 2015 and 2014, respectively.

Current year update

We were the exclusive instant game validation network provider to the CSL under an agreement that expired in January 2016 and was subsequently not renewed or extended. We have also seen a decline in the instant game printing revenue of CSG, our printing joint venture in China, which continues to service the CSL. We believe a decrease in retail sales is due in part to competition from other wagering products. We continue to actively seek multiple opportunities to continue to provide value-added services to the CSL, as well as developing additional business initiatives to replace our revenue and profits previously generated by the CSL validation agreement. Until we are able to achieve these other opportunities and initiatives, or to the extent we are not able to do so, our operating results relating to our China lottery business will continue to be adversely affected.
In April, we signed a lottery instant games CSP agreement with the North Carolina lottery, which is anticipated to begin in March 2017 and has a term of eight years. The contract may be extended by the lottery for up to two additional years.

During the first quarter of 2016, we also launched innovative, multi-channel cross-over games, such as our Jackpot Party instant game, for several customers. These new launches capitalize on our extensive proprietary games library and our expertise in mobile applications and second-chance promotional games and activities.

During the second quarter of 2016, we were awarded a new agreement by the Georgia Lottery that provided for a seven-year extension of the current instant games contract.

During the third quarter of 2016, we were awarded a new three-year contract by the South Dakota Lottery as primary instant game provider and a one-year contract extension by the Massachusetts Lottery to continue as the primary instant game provider.

We believe we will continue to face intense price-based competition in our Lottery business in 2017. In the near term, we also expect to see an increase in the number of jurisdictions that seek to privatize or outsource lottery operations 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 PMA arrangements 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.    

Results of Operations and Key Performance Indicators for Lottery
(in millions)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Total revenue
 
$
777.9

 
$
775.2

 
$
835.5

 
2.7

 

 
$
(60.3
)
 
(7
)%
Operating expenses
 
655.0

 
708.0

 
669.5

 
(53.0
)
 
(7
)%
 
38.5

 
6
 %
Operating income
 
$
122.9

 
$
67.2

 
$
166.0

 
$
55.7

 
83
 %
 
$
(98.8
)
 
(60
)%




52


Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
(in millions)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Instant products
 
$
573.7

 
$
557.2

 
$
546.3

 
$
16.5

 
3
 %
 
$
10.9

 
2
 %
Lottery systems
 
204.2

 
218.0

 
289.2

 
(13.8
)
 
(6
)%
 
(71.2
)
 
(25
)%
Total revenue
 
$
777.9

 
$
775.2

 
$
835.5

 
$
2.7

 

 
$
(60.3
)
 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
F/X impact on revenue
 
$
(9.1
)
 
$
(31.8
)
 
$
(0.9
)
 
$
22.7

 
(71
)%
 
$
(30.9
)
 
3,433
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KPIs:(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in retail sales of U.S. lottery
instant games customers(1)(2)
 
4
 %
 
8
 %
 
6
 %
 
(4)pp

 
nm

 
2pp

 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in retail sales of U.S. lottery
systems contract customers(1)(3)
 
7
 %
 
(2
)%
 
(2
)%
 
9pp

 
nm

 
-pp

 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in Italy retail sales of instant
games(1)
 
(1
)%
 
(4
)%
 
(2
)%
 
3pp

 
nm

 
(2)pp

 
nm

nm = not meaningful
pp = percentage points
(1) Information provided by third-party lottery operators.
(2) U.S. instant games customers' retail sales include only sales of instant games.
(3) U.S. lottery systems customers' retail sales primarily include sales of draw games, keno and instant games validated by the relevant system.
(4) Retail sales may not have a direct correlation to our revenue due to terms of our contracts, the impact of changes in our contracts or other factors.


Primary factors affecting the slight increase in total Lottery revenue in 2016 were: (1) continued strength in Participation and PPU contracts (especially with customers having a CSP contract) which increased instant games revenue by $27.4 million; and (2) U.S. revenue from retail sales of multi-state games which increased total revenue by $6.6 million, which were partially offset by; (3) the expiration of the CSL validation contract which had a negative $21.7 million impact on services revenue; (4) an unfavorable impact on revenue from foreign currency (primarily in the U.K.) totaling $9.1 million; and (5) a decrease of $2.7 million in other product sales revenues.
Operating income
Operating income increased primarily due to: (1) a more profitable revenue mix and the non-recurrence of a $35.5 million charge related to other asset impairments and certain cancellation costs of MMC included in cost of instant games sales in 2015, which reduced cost of sales by $42.0 million; and (2) a decrease in D&A totaling $29.5 million. The decreases in cost of sales and D&A are primarily attributable to the cancellation of the MONOPOLY MILLIONAIRES' CLUB TV game show in 2015.
Earnings from equity investments
The decrease in earnings from equity investments of $5.1 million was primarily due to an $11.3 million impairment charge recorded during the year ended December 31, 2016 related to an equity investment in China.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Revenue
Total revenue decreased by $60.3 million reflecting $55.4 million in lower U.S. and international product sales of hardware and software due to lower demand and a lower level of requests for bids by international lotteries as compared to the prior year, a decline in service revenue due to lower instant lottery game validation revenue from the CSL and lower services revenue from U.S. customers due to lower retail sales and unfavorable contract revisions. This was partially offset by $11.0 million in higher instant game revenues in 2015. Lottery revenues also reflect an unfavorable foreign currency translation impact on revenue of $31.8 million.

53


Services revenue decreased by $15.9 million in 2015, primarily due to a decline in instant lottery game validation revenue from the CSL and lower revenue from U.S. customers, reflecting lower retail sales and unfavorable contract revisions. Services revenue also reflected an unfavorable foreign currency translation impact of $5.8 million. The $55.4 million decrease in product sales revenue primarily reflected lower U.S. and international sales of hardware and software due to lower demand and a lower level of requests for bids by international lotteries as compared to the prior year. Product sales revenue is inclusive of an unfavorable foreign currency translation impact of $12.3 million. The $11.0 million increase in instant games revenue reflected higher revenue from our U.S. and international Participation contracts driven by an increase in retail sales and conversions from price-per-unit contracts to Participation contracts and higher revenue from our international price-per-unit contracts due primarily to new customers and the mix of orders. This was partially offset by lower revenue from our U.S. price-per-unit contracts due to conversions to Participation contracts. Instant game revenue also reflected an unfavorable foreign currency translation impact of $13.7 million.
Operating income
Operating income decreased by $98.8 million in 2015, primarily due to a $67.6 million non-cash impairment charge to write off the recorded amount of our U.S. Lottery Systems reporting unit goodwill, $35.5 million charge related to other asset impairments and certain cancellation costs included in cost of instant games sales and $11.9 million in accelerated D&A of property and equipment, partially offset by a more favorable mix of business and lower SG&A.
Earnings from equity investments
The increase in earnings from equity investments of $24.3 million was primarily due to the non-recurrence of the $19.7 million non-cash impairment charge we recorded during the year ended December 31, 2014 to write down our Northstar Illinois equity investment coupled with higher performance of equity investments.


INTERACTIVE

The following table summarizes the primary business activities included in the Interactive business segment.
 
 
Services
 
 
 
  Social
 
Operating social casino-style, slot-based games through Facebook, iOS, Android and various other desktop and mobile platforms
  RMG
 
Provision of content, via remote game server technology, to licensed online casino operators on both desktop and mobile platforms
  SG Universe
 
Provision of play-for-fun and play-for-free white-label gaming for traditional land-based casinos through SG Universe
Social Gaming

In our social gaming business, we generate revenue from the sale of virtual coins or chips, which players can use to play slot and table games (i.e., spin in the case of slot games, bet in the case of table games). The games are primarily our WMS, Bally, Barcrest™, SHFL and Dragonplay® branded games. In addition, we also offer third-party branded games as well as original content.

Our apps include Jackpot Party Social Casino ("JPSC"), Gold Fish Casino Slots ("GFC"), Quick Hit Slots (“QHS”) and Hot Shot Casino (“HSC”), Dragonplay Slots® (“DPS”), Dragonplay Poker® (“DPP”) and Blazing 7s Slots ("BHS") on various platforms which include: Facebook, Apple, Google Play, Amazon Kindle, Yahoo (through March 2016) and Microsoft Windows.
    
RMG
In our RMG business, we provide game content to real-money online casino operators, primarily in Europe. We host the play of our game content on our centrally-located servers (often referred to as remote game servers) that are integrated with the online casino operators' websites and mobile applications. We typically earn a percentage of the operator's net gaming revenue generated by the games we host.





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SG Universe

SG Universe includes Play4Fun NetworkTM interactive services for land based casino operators under which we provide our customers the ability to customize marketing to players while giving players access to their loyalty reward credits and the ability to make on-property reservations. We host play-for-fun and play-for-free services for traditional land-based casinos and earn revenue based on fixed fees, a share of the proceeds from the sale of virtual coins, or a mix of fixed fees and a share of such proceeds. We also earn revenue from fees for hosting on-premises interactive gaming. We provide a social casino platform delivered through a land based casino operator’s branded website and mobile application.

We believe that growth in our Interactive gaming business is driven largely through new channels of distribution, such as the various types of mobile gaming platforms, the expansion of legal interactive RMG jurisdictions, the addition of social gaming products, such as our newest social games Blazing 7s Slots, the number and quality of our proprietary and third-party branded games released and available to players, the addition of traditional land-based casino operators and RMG operators that are not currently customers, the effectiveness of our marketing efforts designed to engage new players and re-engage existing players, and the prominence of our offerings on operators’ websites, which we do not control.
Revenues from our Interactive services to external customers accounted for 12%, 8% and 8% of our total revenues in 2016, 2015 and 2014, respectively.

Current year update

In early 2016, our Hot Shot Casino became one of the top 30 grossing apps on Facebook and, in the third quarter of 2016, we launched the mobile version of this product worldwide. We have continued to expand our RMG business with the launch of RMG products at 18 additional online casino operators in 2016.
Results of Operations and Key Performance Indicators for Interactive
(in millions)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Total revenue
 
$
332.8

 
$
210.0

 
$
144.5

 
$
122.8

 
58
%
 
$
65.5

 
45
%
Operating expenses
 
284.3

 
182.9

 
143.3

 
101.4

 
55
%
 
39.6

 
28
%
Operating income
 
$
48.5

 
$
27.1

 
$
1.2

 
$
21.4

 
79
%
 
$
25.9

 
2,158
%
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
(in millions, except ARPDAU)
 
Year Ended December 31,
 
Variance
 
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Social Gaming B2C
 
$
274.4

 
$
170.6

 
$
125.5

 
$
103.8