Brookfield Business Partners (BBU) 6-K Current report (foreign)

Exhibit 99.2

INDEX TO FINANCIAL INFORMATION
		Page
1. Financial Statements:
	Independent Auditors’ Report	2
	Combined Statements of Operations for the years ended December 31, 2020, 2019, and 2018	4
	Combined Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018	5
	Combined Balance Sheets as of December 31, 2020, 2019, and 2018	6
	Combined Statements of Changes in Parent’s Equity for the years ended December 31, 2020, 2019, and 2018	7
	Combined Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018	8
	Notes to Combined Financial Statements	9

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of Scientific Games Corporation

We have audited the accompanying combined financial statements of the Lottery Business (a carve-out of certain operations of Scientific Games Corporation) (the “Company”), which comprise the combined balance sheets as of December 31, 2020, 2019 and 2018, and the related combined statements of operations, comprehensive income, changes in parent’s equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the combined financial statements.

Management’s Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, 2019 and 2018, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2020, in accordance with accounting principles generally accepted in the United States of America.

2 

Other Matter

As described in Note 1, the accompanying combined financial statements have been prepared from the separate records of the Company maintained by Scientific Games Corporation and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Company had been operated as an unaffiliated entity. Portions of certain income and expenses represent allocations made from parent and related affiliates applicable to Scientific Games Corporation as a whole.

/s/ Deloitte & Touche LLP

Las Vegas, Nevada

September 15, 2021

3 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

COMBINED STATEMENTS OF OPERATIONS
(in millions)

	Years Ended December 31,
	2020			2019			2018
Revenue:
Instant products	$	579		$	585		$	592
Lottery systems		340			324			254
Total revenue		919			909			846
Operating expenses:
Cost of instant products (1)		282			288			285
Cost of lottery systems (1)		232			215			164
Selling, general and administrative		79			88			93
Research and development		3			7			8
Depreciation and amortization		62			67			59
Restructuring and other		13			1			1
Operating income		248			243			236
Other (expense) income:
(Loss) earnings from equity investments		(8	)		18			19
Other income (expense), net		1			(5	)		4
Total other (expense) income, net		(7	)		13			23
Net income before income taxes		241			256			259
Income tax expense		(68	)		(60	)		(73	)
Net income	$	173		$	196		$	186

(1) Excludes depreciation and amortization.

See accompanying notes to financial statements.

4 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)

	Years Ended December 31,
	2020			2019			2018
Net income	$	173		$	196		$	186
Other comprehensive income (loss):
Foreign currency translation gain (loss), net of tax		32			(9	)		(14	)
Pension and post-retirement loss and other, net of tax		(4	)		(6	)		(2	)
Total other comprehensive income (loss)		28			(15	)		(16	)
Total comprehensive income	$	201		$	181		$	170

See accompanying notes to financial statements.

5 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

COMBINED BALANCE SHEETS
(in millions)

	As of December 31,
	2020			2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	61		$	35		$	32
Restricted cash		1			1			1
Receivables, net of allowance for credit losses of $4 each year		153			141			122
Inventories		72			84			68
Contract assets		86			88			93
Prepaid expenses, deposits and other current assets		38			32			13
Total current assets		411			381			329
Non-current assets:
Property and equipment, net		169			173			181
Operating lease right-of-use assets		27			31			—
Goodwill		353			348			351
Intangible assets, net		65			77			91
Software, net		63			59			61
Equity investments		259			269			293
Other assets		9			8			8
Total assets	$	1,356		$	1,346		$	1,314
LIABILITIES AND PARENT'S EQUITY
Current liabilities:
Accounts payable	$	51		$	59		$	57
Contract liabilities		47			53			41
Accrued liabilities		109			83			70
Total current liabilities		207			195			168
Deferred income taxes		34			36			50
Operating lease liabilities		21			24			—
Long-term license liabilities		29			30			39
Pension liabilities		31			25			19
Other long-term liabilities		17			19			20
Total liabilities		339			329			296
Parent's equity:
Accumulated net parent investment		1,037			1,065			1,051
Accumulated other comprehensive loss		(20	)		(48	)		(33	)
Total Parent's equity		1,017			1,017			1,018
Total liabilities and Parent's equity	$	1,356		$	1,346		$	1,314

See accompanying notes to financial statements.

6 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)
COMBINED STATEMENTS OF CHANGES IN PARENT’S EQUITY
(in millions)

	Retained Earnings			Accumulated Net Parent Investment			Accumulated Other Comprehensive Loss			Total
January 1, 2018	$	—		$	861		$	(17	)	$	844
Net income		186			—			—			186
Transactions with parent and affiliates, net		(173	)		190			—			17
Adoption impact of ASC 606		(13	)		—			—			(13	)
Other comprehensive loss		—			—			(16	)		(16	)
December 31, 2018	$	—		$	1,051		$	(33	)	$	1,018
Net income		196			—			—			196
Transactions with parent and affiliates, net		(196	)		14			—			(182	)
Other comprehensive loss		—			—			(15	)		(15	)
December 31, 2019	$	—		$	1,065		$	(48	)	$	1,017
Net income		173			—			—			173
Transactions with parent and affiliates, net		(173	)		(28	)		—			(201	)
Other comprehensive income		—			—			28			28
December 31, 2020	$	—		$	1,037		$	(20	)	$	1,017

See accompanying notes to financial statements.

7 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

COMBINED STATEMENTS OF CASH FLOWS
(in millions)

	Years Ended December 31,
	2020			2019			2018
Cash flows from operating activities:
Net income	$	173		$	196		$	186
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		62			67			59
Change in deferred income taxes		(1	)		(13	)		22
Stock-based compensation		5			5			5
Loss (earnings) from equity investments		8			(18	)		(19	)
Distributed earnings from equity investments		19			21			29
Provision for bad debts and inventory charges		11			3			4
Changes in assets and liabilities:
Receivables		(13	)		(19	)		13
Inventories		2			(11	)		5
Contract assets and contract liabilities, net		(8	)		17			(21	)
Accounts payable and accrued liabilities		25			3			(20	)
Other assets and liabilities		(9	)		(28	)		1
Net cash provided by operating activities		274			223			264
Cash flows from investing activities:
Capital expenditures		(43	)		(49	)		(75	)
Contributions to equity method investments		(6	)		(1	)		(180	)
Distributions of capital from equity investments		12			19			25
Net cash used in investing activities		(37	)		(31	)		(230	)
Cash flows from financing activities:
Payments on license obligations		(6	)		(1	)		—
Transfers to Parent and affiliates, net		(207	)		(188	)		(21	)
Net cash used in financing activities		(213	)		(189	)		(21	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		2			-			(1	)
Increase in cash, cash equivalents and restricted cash		26			3			12
Cash, cash equivalents and restricted cash, beginning of period		36			33			21
Cash, cash equivalents and restricted cash, end of period	$	62		$	36		$	33
Supplemental cash flow information
Cash paid for income taxes	$	2		$	11		$	9
Non-cash financing activities:
Non-cash additions to intangible assets related to license agreements	$	-		$	-		$	30

See accompanying notes to financial statements.

8 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

NOTES TO COMBINED FINANCIAL STATEMENTS 

(amounts in USD and in millions)

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

Background and nature of operations

The accompanying combined carve-out financial statements include the historical accounts of the Scientific Games Corporation (the Parent) 100%-owned direct and indirect subsidiaries that hold substantially all of the assets of, and operate, the lottery business, herein collectively referred to as “the Lottery Business”, “we”, "us", and “our.”

The Lottery Business provides instant and draw lottery products and related value-added services including licensed brands used in instant lottery products, loyalty and reward services, and lottery systems products and comprehensive services generally comprised of point-of-sale terminals, a central system, customized computer software, data communication services, support and/or related equipment.

Basis of presentation

The accompanying combined carve out financial statements of the Lottery Business have been derived from the consolidated financial statements and accounting records of Scientific Games Corporation using the historical results of operations and historical cost basis of the assets and liabilities as if the Lottery Business operated on a stand-alone basis during the periods presented, and were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). For ease of reference the accompanying combined carve out financial statements are herein referred to as "financial statements" unless otherwise stated or the context requires otherwise. All intercompany balances and transactions within the Lottery Business have been eliminated. Transactions between the Lottery Business and the Parent and its other subsidiaries are reflected as affiliate transactions within these financial statements.

The accompanying financial statements include the assets, liabilities, revenues, and expenses that are specifically identifiable to the Lottery Business. In addition, the accompanying financial statements include certain costs that have been allocated from the Parent, which relate to certain corporate functions and shared services performed by the Parent, including but not limited to, finance, human resources, legal, information technology and other. These expenses have been allocated to the Lottery Business on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenues, operating expenses, headcount or other relevant measures.

We believe the assumptions underlying the financial statements, including assumptions regarding the allocations from the Parent, are reasonable. Nevertheless, the financial statements may not include all of the expenses that would have been incurred had the Lottery Business been a stand-alone company during the periods presented and may not reflect the Lottery Business’s financial position, results of operations and cash flows had the Lottery Business been a stand-alone company during the periods presented. Actual costs that would have been incurred if the Lottery Business had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology, infrastructure and acquisition of intellectual property. For additional information related to costs allocated to the Lottery Business by the Parent, see Note 13.

We have two business segments – Instant Products and Lottery Systems – representing our instant and draw-based lottery products and related services and comprehensive lottery system solutions to lottery operators worldwide. We had $54 million, $45 million, and $38 million in Property and equipment, net outside the U.S. as of December 31, 2020, 2019, and 2018, respectively. For additional information related to our business segments, see Note 2.

9 

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could be material.

Impact of COVID-19

In March 2020, the World Health Organization declared the rapidly spreading COVID 19 outbreak a pandemic. In response to the COVID 19 pandemic, governments across the world implemented a number of measures to prevent its spread, including but not limited to, the temporary closure of a substantial number of lottery operations, which had an adverse effect on our 2020 results of operations and cash flows, including the impact on operations and results of our equity method investments. Operations began to recover during the latter half of 2020 as a result of lifting of restrictions and reopening.

During the first half of 2020, we implemented a number of measures to reduce operating costs, conserve liquidity and navigate through this unprecedented situation including permanent reductions in workforce and temporary measures such as: reductions in salaries and workforce (salary reduction measures ceased as of July 31, 2020), unpaid employee furloughs, reductions in hours, temporary elimination of 401(k) matching among other compensation and benefits reductions, and deferral of certain operating and capital expenditures. We continue to assess the situation and actively manage our cash flows and continue to evaluate additional measures that will reduce operating costs and conserve cash as deemed necessary.

Significant Accounting Policies

Additional accounting policy disclosures are provided within the applicable Notes.

Cash and cash equivalents and Restricted cash

Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less. We place our temporary cash investments with high credit quality financial institutions. At times, such investments in U.S. accounts may be in excess of the Federal Deposit Insurance Corporation insurance limit. Restricted cash balances are primarily related to funds contractually held or designated for lottery customers and related reimbursements.

Advertising Costs

Advertising costs are expensed as incurred and included in Selling, general and administrative expenses and were not material to the financial statements for the periods presented.

Research and development (R&D)

R&D relates primarily to software product development costs and is expensed as incurred until technological feasibility has been established. Employee related costs associated with product development are included in R&D.

Restructuring and other

Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; (v) major litigation; and (vi) acquisition related and other unusual items. Restructuring and other charges totaled $13 million, $1 million, and $1 million in 2020, 2019, and 2018, respectively and primarily related to item (i) noted above.

10 

Accounts receivable

Accounts receivable are recorded at the invoiced amount less allowance for credit losses (or doubtful accounts for periods prior to 2020 and adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (ASC 326)), collectively referred to as allowance for credit losses. On January 1, 2020, we adopted ASC 326, which did not have a material impact on our financial statements. We review accounts receivable regularly and make our best estimate of the amount of expected credit losses in our existing receivables over the contractual term. We evaluate our exposure to credit loss on both a collective and individual basis.

Our allowance for credit losses expense recorded for the years ended December 31, 2020, 2019, and 2018 was $1 million, $0 million, and $2 million, respectively, and is included in Selling, general and administrative expenses. We had no significant write-offs or recoveries during these periods.

Equity incentive awards

The Parent maintains an equity incentive awards plan under which the Parent may issue time-based and performance-based stock options and restricted stock units to Lottery Business employees. Although awards under the plan result in the issuance of shares of the Parent, the amounts are a component of the total compensation for Lottery Business employees and are included in our stock-based compensation expense, which is accounted for as a component of Parent’s equity.

Total stock-based compensation expense recorded for the years ended December 31, 2020, 2019, and 2018 was $5 million for each period and is included in Selling, general and administrative expenses.

Fair value measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of our assets and liabilities, when necessary, utilizing an established three-level hierarchy in accordance with ASC 820.

The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximates their recorded values due to the short-term nature of these instruments.

As of December 31, 2020, 2019, and 2018, we did not have other assets and liabilities recorded at fair value on a recurring or nonrecurring basis, other than defined benefit pension plans described in Note 11.

Foreign currency translation

We have significant operations where the local currency is the functional currency, including our operations in the U.K., Europe and Canada. Assets and liabilities of foreign operations are translated at period-end rates of exchange and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive loss in Total Parent’s equity. Gains or losses resulting from foreign currency transactions are included in Other (expense) income, net.

Legal Contingencies

From time to time, we (or our Parent) are subject to various claims, complaints and legal actions in the normal course of business. In addition, we may receive notifications alleging infringement of patent or other IP rights. We do not believe that we (or our Parent) are party to any currently pending litigation, the outcome of which is reasonably likely to have a material adverse effect on our operations, financial position or liquidity.

11 

Recently issued accounting standards

The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) in 2016. The new guidance replaces the incurred loss impairment approach in legacy U.S. GAAP with a methodology that reflects future credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we are required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which reflects losses that are probable. We adopted ASC 326 as of January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost, which did not materially impact our financial statements.

The FASB issued ASU No. 2018-13, Fair Value Measurement, and several subsequent amendments (collectively, Topic 820) in 2018. The standard amends the required quantitative and qualitative disclosure requirements for recurring and nonrecurring fair value measurements. We adopted this standard effective January 1, 2020. The adoption of this standard did not materially impact our financial statement disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes, to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes, enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step- up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. We adopted this standard effective January 1, 2020 on a prospective basis for all relevant adjustments. The adoption of this guidance did not materially impact our financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 combined with all subsequent amendments (collectively, ASC 606) provides guidance outlining a single comprehensive revenue model in accounting for revenue from contracts with customers. ASC 606 supersedes existing revenue recognition guidance, including industry-specific guidance, and replaces it with a five-step revenue model with a core principle that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” We adopted this guidance effective January 1, 2018 using a modified retrospective application approach. See Note 3 for our revenue recognition policy.

The FASB issued ASU No. 2016-02, Leases (Topic 842) in 2016. ASU 2016-02 combined with all subsequent amendments (collectively, ASC 842) requires balance sheet recognition for all leases with a lease term greater than one year to be recorded as a lease liability (on a discounted basis) with a corresponding right-of-use asset. This guidance also expands the required quantitative and qualitative disclosures for lease arrangements and gives rise to other changes impacting certain aspects of lessee and lessor accounting. We adopted ASC 842 as of January 1, 2019 using the optional transition method provided by ASU 2018-11, and applied both the lessee package of practical expedients and the available lessor practical expedients. See Note 10 for additional information.

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

Subsequent events

We evaluated subsequent events through September 15, 2021, which is the date the financial statements were available to be issued.

On September 3, 2021, we completed the acquisition of Sideplay Entertainment (“Sideplay”), a digital “e-instant” content studio for $10 million cash consideration and contingent acquisition consideration of up to $23 million. The acquisition allows us to expand our iLottery content portfolio and accelerate our iLottery business. We are in the process of completing the preliminary purchase price accounting and expect that a substantial portion of the purchase price will be allocated to acquired intellectual property and goodwill.

12 

(2) Business Segments

Operating segments are components of the Lottery Business for which separate discrete financial information is available to and evaluated regularly by the chief operating decision maker (CODM) in making decisions regarding resource allocation and assessing performance. We report our operations in two business segments – Instant Products and Lottery Systems – representing our different products and services.

Our Instant Products segment generates revenue from the manufacture and sale of instant products, and the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management, warehousing, fulfillment services, and full instant product category management administered through our Scientific Games Enhanced Partnership (SGEP) program. Instant products are sold on either a price per unit (PPK) or a percentage of sales (POS) basis and generally have a single performance obligation – a promise to supply the instant products. Under our SGEP contracts we perform substantially all of the comprehensive services necessary to operate the associated lottery’s integrated instant product operations, other than executing on retail sales, and to a lesser extent, we also provide certain services to retailers.

Our Lottery Systems segment provides lottery terminals in retail outlets that are continuously connected to a central computer system for the sale and validation of lottery games and related functions. Our U.S. arrangements ordinarily include the following: (i) provision of the necessary equipment (including point-of-sale terminals) and (ii) software and maintenance services pursuant to contracts typically with an initial term of five years or more. Internationally, we primarily: (i) sell point-of-sale terminals and/or computer software and hardware to lottery authorities; and (ii) 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 and validation of winning draw and instant lottery products. We also supply our proprietary transaction-processing software, draw lottery games, keno, point-of-sale terminals, central site computers and communication platforms and ongoing operational support and maintenance services. See Note 3 for the products and services from which each reportable segment derives its revenues.

13 

In evaluating financial performance, our CODM focuses on Adjusted EBITDA (AEBITDA) as management’s segment measure of profit or loss, which is described below. The accounting policies for our business segments are the same as those described in these Notes. The following tables present our segment information:

	Year Ended December 31, 2020
								Unallocated and
								Reconciling
		Instant Products			Lottery Systems			Items (1)			Total
Total revenue	$	579		$	340		$	—		$	919
AEBITDA(2)		298			108			(45	)	$	361
Reconciling items to net income before income taxes:
Depreciation and amortization		(26	)		(36	)		—			(62	)
Restructuring and other		(5	)		(6	)		(2	)		(13	)
EBITDA from equity investments (2)								(33	)		(33	)
Loss from equity investments								(8	)		(8	)
Other income, net								1			1
Stock based compensation								(5	)		(5	)
Net income before income taxes										$	241
Assets as of December 31, 2020	$	764		$	588		$	4		$	1,356
Capital expenditures for the year ended December 31, 2020	$	22		$	21		$	—		$	43

(1) Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business segments AEBITDA to our net income before income taxes.

(2) AEBITDA is reconciled to net income before income taxes and includes the following adjustments: (1) restructuring and other, which includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; (v) major litigation; and (vi) acquisition costs and other unusual items; (2) depreciation and amortization expense and impairment charges (including goodwill impairments); (3) interest expense; (4) income tax expense; (5) stock-based compensation; and (6) other expense (income), net, including foreign currency (gains) and losses. In addition to the preceding adjustments, we exclude earnings (loss) from equity method investments and add (without duplication) our pro rata share of EBITDA of our equity investments, which represents our share of earnings (whether or not distributed to us) before income tax expense, depreciation and amortization expense, and interest (income) expense, net of our joint ventures and minority investees. AEBITDA is presented exclusively as our segment measure of profit or loss.

	Year Ended December 31, 2019
							Unallocated and
							Reconciling
	Instant Products			Lottery Systems			Items (1)			Total
Total revenue	$	585		$	324		$	—		$	909
AEBITDA(2)		298			108			(34	)	$	372
Reconciling items to net income before income taxes:
Depreciation and amortization		(27	)		(39	)		(1	)		(67	)
Restructuring and other		(1	)		—			—			(1	)
EBITDA from equity investments (2)								(56	)		(56	)
Earnings from equity investments								18			18
Other expense, net								(5	)		(5	)
Stock based compensation								(5	)		(5	)
Net income before income taxes											256
Assets as of December 31, 2019	$	767		$	568		$	11		$	1,346
Capital expenditures for the year ended December 31, 2019	$	22		$	27		$	—		$	49

(1) Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business segments AEBITDA to our net income before income taxes.

(2) AEBITDA and EBITDA from equity investments are described in footnote (2) to the first table in this Note 2.

14 

	Year Ended December 31, 2018
							Unallocated and
							Reconciling
	Instant Products			Lottery Systems			Items (1)			Total
Total revenue	$	592		$	254		$	—		$	846
AEBITDA(2)		308			90			(36	)	$	362
Reconciling items to net income before income taxes:
Depreciation and amortization		(25	)		(32	)		(2	)		(59	)
Restructuring and other		2			(2	)		(1	)		(1	)
EBITDA from equity investments (2)								(61	)		(61	)
Earnings from equity investments								19			19
Other income, net								4			4
Stock based compensation								(5	)		(5	)
Net income before income taxes										$	259
Assets as of December 31, 2018	$	750		$	554		$	10		$	1,314
Capital expenditures for the year ended December 31, 2018	$	10		$	65		$	—		$	75

(1) Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business segments AEBITDA to our net income before income taxes.

(2) AEBITDA and EBITDA from equity investments are described in footnote (2) to the first table in this Note 2.

(3) Revenue Recognition

The following table disaggregates our revenues by segment, line of business, and geographical location:

	Revenue recognized for Year Ended December 31,
Revenue by segment and line of business	2020		2019		2018
Instant products:
SGEP	$	274	$	242	$	235
POS		104		108		122
PPK		201		235		235
Total instant products	$	579	$	585	$	592
Lottery systems:
Systems and solutions(1)	$	325	$	317	$	247
iLottery		15		7		7
Total lottery systems	$	340	$	324	$	254
Total	$	919	$	909	$	846
Revenue by geography
U.S.	$	614	$	602	$	578
International		305		307		268
Total	$	919	$	909	$	846

(1) Product sales included in lottery systems were $112 million, $110 million, and $49 million for the years ended December 31, 2020, 2019, and 2018 respectively.

General

We evaluate the recognition of revenue primarily based on the criteria set forth in ASC 606. Revenue is recognized net of incentive rebates and discounts when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales taxes and all other items of a similar nature are excluded from the measurement of the transaction price and shipping and handling activities are treated as a fulfillment of our promise to transfer the goods, hence, included in cost of sales.

15 

Lottery Instant Products

Our instant products revenue is primarily generated under long-term contracts to supply instant products and provide related services to our lottery customers. For instant products that are sold on a price per unit (PPK) and percentage of sales basis (POS), we generally have a single performance obligation of a promise to supply the instant products. Control transfers and we recognize revenue from the sale of such instant products when the lotteries have taken delivery of shipments of instant products pursuant to the terms of the contract. For instant products that are sold on a percentage of sales basis, we are compensated based on retail sales, therefore the timing difference between the recognition of revenue, the billing of our customers and the receipt of payments depends on retail sales. Contract assets resulting from these contracts primarily remain until we have the contractual ability to invoice and collect from customers (which occurs upon retail sales). For our SGEP contracts, revenue is recognized when a lottery retailer activates associated instant tickets, which timing corresponds with how we satisfy our performance obligation. We believe that products and services provided under these arrangements are delivered contemporaneously and are not separate units of account; therefore, as the services offered are a comprehensive solution in exchange for participation-based or price-per-unit based compensation, this revenue is recognized under the general revenue recognition policy above.

The guidance in ASC 606 requires that we apply judgment to determine the timing of control transfer of performance obligations in our instant products contracts. For instant products that are sold under percentage of sales contracts, we generally have a single performance obligation of a promise to supply the instant products. The determination of when control transfers requires significant judgment because lotteries take delivery of shipments of instant products, but we retain the risk of such inventory until retail sales of such tickets take place. We have determined control transfers upon delivery to a lottery-controlled warehouse, because we do not have the ability to direct the use of such instant products subsequent to delivery.

Lottery Systems

We also offer our customers a number of related, value-added services as part of an integrated product offering. These services include lottery systems, including point-of-sale terminals and other equipment, software, data communication services and support and instant game validation systems, and software, hardware and related services for sports wagering and keno systems.

For our integrated lottery systems service contracts, our single performance obligation is a promise to perform a series of stand-ready services to operate a fully-functional draw lottery and/or iLottery. Revenue is recognized over time in an amount generally based on a percentage of sales of the related games, which represents our measure of progress toward satisfying our performance obligation.

For our perpetual licensing of customized lottery software contracts, we generally recognize revenue over time using costs incurred to date relative to total estimated completion costs to measure progress toward satisfying our performance obligations, which we believe best depicts the transfer of control to the customer.

Maintenance on lottery software and lottery terminals is considered a stand-ready obligation, with control transferring and revenue being recognized ratably over the maintenance and support period.

Lottery systems also includes revenue related to the sale of point-of-sale terminals, hardware, and other equipment associated with the lottery systems segment. We transfer control and recognize revenue from the sale of lottery systems solutions at a point in time upon delivery of the related equipment to our customers pursuant to the terms of the contract.

16 

Contract Liabilities and Other Disclosures

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

		Contract Liabilities
Contract liability balance as of December 31, 2018(1)	$	48
Liabilities recognized during the period		40
Amounts recognized in revenue from beginning balance		(30	)
Contract liability balance as of December 31, 2019(1)	$	58
Liabilities recognized during the period		28
Amounts recognized in revenue from beginning balance		(36	)
Contract liability balance as of December 31, 2020(1)	$	50

(1) Long-term contract liabilities are included within Other long-term liabilities.

The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). Revenue recognition is generally proximal to conversion to cash, except for the POS instant product revenue. Revenue is recognized for such contracts upon delivery to our customers, while conversion to cash is based on the retail sale of the underlying tickets to end consumers. As a result, revenue recognition under ASC 606 does not approximate conversion to cash for such contracts in any periods presented. The following table summarizes our opening and closing balances in these accounts (other than contract liabilities disclosed above):

	Receivables		Contract Assets
End of period balance, December 31, 2018	$	122	$	93
End of period balance, December 31, 2019		141		88
End of period balance, December 31, 2020		153		86

(4) Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out or weighted moving average method. Our inventory primarily consists of instant products and our licensed brand merchandise. We determine the lower of cost or net realizable value of our inventory based on estimates of potentially excess and obsolete inventories after considering historical and forecasted demand and average selling prices.

Inventories consisted of the following:

	As of December 31,
	2020		2019		2018
Parts and work-in-process	$	35	$	42	$	35
Finished goods		37		42		33
Total inventories	$	72	$	84	$	68

Parts and work-in-process include parts for terminals and instant ticket materials, as well as labor and overhead costs for work-in-process associated with the manufacturing of instant tickets and lottery terminals. Our finished goods inventory primarily consists of instant products.

17 

(5) Property and Equipment, net

Property and equipment are stated at cost, and when placed into service, are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

Item	Estimated Life in Years
Lottery and other machinery and equipment	3-15
Furniture and fixtures	5-10
Buildings and improvements	15-40

Costs incurred for equipment associated with specific lottery contracts not yet placed into service are classified as construction in progress and are not depreciated until placed into service. Leasehold improvements are amortized over the lesser of the term of the corresponding lease or their useful life.

We periodically review the estimated useful lives of our fixed assets and assess the recoverability of long-lived assets (or asset groups) whenever events or changes in circumstances indicate that the carrying value of such an asset (or asset groups) may not be recoverable.

Property and equipment, net consisted of the following:

	As of December 31,
	2020			2019			2018
Land	$	9		$	9		$	9
Buildings and leasehold improvements		70			69			69
Lottery machinery and equipment		511			494			480
Furniture and fixtures		6			6			6
Construction in progress		37			22			12
Less: accumulated depreciation		(464	)		(427	)		(395	)
Total property and equipment, net	$	169		$	173		$	181

Depreciation expense is excluded from Cost of instant products, Cost of lottery systems, and Other operating expenses and is separately presented within depreciation and amortization.

	Year Ended December 31,
	2020		2019		2018
Depreciation expense	$	33	$	37	$	35

Capitalized installation costs

Certain participation contracts require us to perform installation activities. Direct installation activities, which include costs for installing terminals, facilities wiring, computers, internal labor and travel, are performed at the inception of the contract to enable us to perform under the terms of the contract. Such activities do not represent a separate earnings process and, therefore, the installation costs are capitalized and amortized over the estimated contract term. We had $14 million, and $21 million, and $27 million of capitalized installation costs, net of accumulated depreciation, included within lottery machinery and equipment as of December 31, 2020, and 2019, and 2018, respectively.

18 

(6) Intangible Assets, net and Goodwill

Intangible assets, net

The following tables present certain information regarding our intangible assets as of December 31, 2020, 2019, and 2018 that originated in connection with the Parent’s historical acquisitions of lottery businesses and licenses, at which time they were allocated to the Lottery Business. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual values, which materially approximates the expected pattern of use.

	December 31, 2020							December 31, 2019							December 31, 2018
	Gross Carrying Value		Accumulated Amortization			Net Balance		Gross Carrying Value		Accumulated Amortization			Net Balance		Gross  Carrying Value		Accumulated Amortization			Net Balance
Amortizable intangible assets:
Customer relationships	$	14	$	(14	)	$	—	$	14	$	(13	)	$	1	$	14	$	(13	)	$	1
Intellectual property		11		(6	)		5		11		(4	)		7		11		(3	)		8
Licenses		87		(61	)		26		83		(48	)		35		86		(39	)		47
Patents and other		12		(9	)		3		12		(9	)		3		12		(8	)		4
		124		(90	)		34		120		(74	)		46		123		(63	)		60
Non-amortizable intangible assets:
Trade names		33		(2	)		31		33		(2	)		31		33		(2	)		31
Total intangible assets	$	157	$	(92	)	$	65	$	153	$	(76	)	$	77	$	156	$	(65	)	$	91

The following reflects intangible amortization expense included within depreciation and amortization:

	Year Ended December 31,
	2020		2019		2018
Amortization expense	$	15	$	15	$	12

Estimated intangible asset amortization expense for the year ending December 31, 2021 and each of the subsequent four years:

	Year Ended December 31,
	2021		2022		2023		2024		2025		Thereafter
Amortization expense	$	8	$	7	$	7	$	5	$	5	$	2

Goodwill

Goodwill reflected in these financial statements was recorded to the respective reporting units based on an estimate of the relative fair value that existed at the time of origination of goodwill in connection with the Parent’s acquisitions of various lottery businesses. We account for goodwill in accordance with ASC 350, Intangibles—Goodwill and Other ("ASC 350"). We test goodwill for impairment annually as of October 1 of each fiscal year, or whenever events or circumstances make it more likely than not that the fair value of the reporting unit is less than its carrying value. Impairment testing for goodwill is performed at the reporting unit level. We have identified three reporting units based on our management structure. The fair value of goodwill for all of our reporting units is in excess of its carrying value.

Under the qualitative assessment option, we first assess qualitative factors to determine whether the fair value of a reporting unit is not “more than likely” less than its carrying value, which is commonly referred to as “Step 0”. If the fair value of the reporting unit is greater or if it is more likely than not that the fair value of the reporting unit is greater than its carrying value, goodwill is not considered impaired. For reporting units where we perform the quantitative process, we are required to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows and a market approach, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit’s fair value determined based on a quantitative test, not to exceed the total amount of goodwill allocated to that reporting unit.

Our annual goodwill impairment tests as of October 1, 2020 indicated estimated fair values were in excess of their carrying values for each of our reporting units that have goodwill balances. We conduct impairment tests of our indefinite-lived assets annually in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying value or when circumstances no longer continue to support an indefinite useful life.

19 

Our annual impairment tests as of October 1, 2020 indicated estimated fair values were more likely than not in excess of the carrying values for all of our remaining indefinite-lived intangible assets.

The table below reconciles the change in the carrying value of goodwill, for the period from December 1, 2018 to December 31, 2020.

	Instant Products			Lottery Systems(1)			Total
Balance as of December 1, 2018	$	333		$	22		$	355
Foreign currency adjustments		(3	)		(1	)		(4	)
Balance as of December 31, 2018	$	330		$	21		$	351
Foreign currency adjustments		(3	)		—			(3	)
Balance as of December 31, 2019	$	327		$	21			348
Foreign currency adjustments		3			2			5
Balance as of December 31, 2020	$	330		$	23		$	353

(1) Accumulated goodwill impairment charges as of December 31, 2020 were $137 million.

Long-lived assets and intangible assets with finite useful lives

Intangible assets with finite useful lives are amortized over two to fifteen years using the straight-line method, which materially approximates the pattern of the assets’ use. Factors considered when assigning useful lives include legal, regulatory and contractual provisions, product obsolescence, demand, competition, and other economic factors.

We assess the recoverability of long-lived assets and intangible assets with finite useful lives whenever events arise or circumstances change that indicate the carrying value of an asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured by a comparison of the carrying value of the asset (or asset group) to the expected net future undiscounted cash flows to be generated by that asset (or asset group). The amount of impairment of long-lived assets and intangible assets with finite lives is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset.

(7) Software, net

We capitalize direct costs used in the development of internal-use software. Amounts capitalized are amortized over a period of two to ten years on a straight-line basis.

We purchase, license, and incur costs to develop external use software to be used in the products we sell, lease, or market to customers. Costs incurred in creating software are expensed when incurred as R&D until technological feasibility has been established, after which costs are capitalized up to the date the software is available for general release to customers. Generally, the software we develop reaches technological feasibility when a working model of the software is available. We capitalize the payments made for software that we purchase or license for use in our products that have previously met the technological feasibility criteria prior to our purchase or license. Amortization of capitalized software costs is recorded over the estimated economic life, which is typically eight to ten years.

Software, net consisted of the following:

	As of December 31,
	2020			2019			2018
Software	$	172		$	159		$	154
Accumulated amortization		(109	)		(100	)		(93	)
Software, net	$	63		$	59		$	61

20 

In the years ended December 31, 2020, 2019, and 2018, we capitalized $16 million, $14 million, and $25 million, respectively, of development expenditures.

The following reflects amortization of software included within depreciation and amortization:

	Year Ended December 31,
	2020		2019		2018
Amortization expense	$	14	$	15	$	12

(8) Equity Investments

We account for our equity investments where we own a non-controlling interest, but exercise significant influence, under the equity method of accounting. Under the equity method of accounting, our original cost of the investment is adjusted for our share of equity in the earnings of the equity investee and reduced by dividends and distributions of capital received.

We evaluate our investments in unconsolidated affiliates, for impairment whenever events or changes in circumstances indicate that the carrying value of the investment may have experienced an “other-than-temporary” decline in value. If such conditions exist, we compare the estimated fair value of the investment to its carrying value to determine if an impairment is indicated and determine whether the impairment is “other-than-temporary” based on an assessment of all relevant factors, including consideration of our intent and ability to retain our investment until the recovery of the unrealized loss. We estimate fair value using a discounted cash flow analysis based on estimated future results of, or cash distributions from, the investee. Impairment charges, if any, are recorded in Earnings (loss) from equity investments.

See the tables below for details of our more significant equity investments:

Equity Investment	Purpose	Concession and/ or Supplier Agreement Term	Ownership Interest
Lotterie Nazionali S.r.l. ("LNS")	Exclusive operator of Italian instant game lottery	Initial term of nine years beginning October 2010, which was subsequently extended for up to nine years (September 2028)	20	%
Northstar New Jersey Lottery Group, LLC ("Northstar NJ")	Provision of marketing and sales services to New Jersey Lottery	October 1, 2013 through 2029	18	%
Northstar SupplyCo New Jersey LLC ("NJ SupplyCo")	Separate agreement under which we provide instant games to Northstar NJ	October 1, 2013 through 2029	30	%
Hellenic Lotteries (“Greece”)	The operator of the Greek state lotteries	Initial term of nine years beginning May 2014	17	%
Beijing Guard Libang Technology Co., Ltd. ("GLB")	Provider of instant lottery game validation and inventory management systems to all of the China Welfare Lottery provincial jurisdictions	N/A	50	%
Beijing CITIC Scientific Games Technology Co., Ltd. ("CSG")	Instant game manufacturing facility that produces instant lottery games for sale to the China Sports Lottery	Initial term of fifteen years beginning 2009	49	%

21 

	Equity investment Balance as of December 31,						Equity (loss) earnings recognized for the Year Ended December 31,								Cash distributions and dividends received for the Year Ended December 31,
Equity Investment	2020		2019		2018		2020			2019			2018		2020		2019		2018
LNS	$	201	$	201	$	222	$	8		$	15		$	15	$	27	$	33	$	37
GLB(1) and CSG		26		26		23		(2	)		3			1		—		—		11
Greece		17		20		22		(4	)		1			1		—		2		6
Northstar NJ and NJ Supply Co		14		21		25		(11	)		—			2		3		5		—
Other		1		1		1		1			(1	)		—		1		—		—
Total under equity method	$	259	$	269	$	293	$	(8	)	$	18		$	19	$	31	$	40	$	54

(1)   GLB equity loss for 2020 includes $5 million impairment charge.                                              

	Revenue recognized from sales to investee for the Year Ended December 31,
Equity Investment	2020		2019		2018
LNS	$	39	$	46	$	40
Northstar NJ and NJ Supply Co		24		24		23
Other		3		6		7
Total	$	66	$	76	$	70

LNS

On December 4, 2017, we announced that LNS had accepted a contract extension of up to nine years for the Italian Scratch and Win concession. As a part of the contract extension, LNS was required to pay an upfront fee of €800 million in three installments. The first installment of €50 million was paid as of December 31, 2017; payments of the second installment of €300 million and third installment of €450 million were made in April 2018 and October 2018, respectively. Our pro-rata concession funding payments to LNS were €10 million ($12 million), €60 million ($74 million) and €90 million ($104 million), respectively, and were treated as contributions to our equity method investment as contributions were made.

As of December 31, 2020 we had accounts receivable of $14 million from LNS.

Northstar New Jersey

Northstar New Jersey is entitled to receive annual incentive compensation payments from the State of New Jersey to the extent the lottery’s net income for the applicable year exceeds specified target levels, subject to a cap of 3% of the applicable year’s net income. Northstar New Jersey is responsible for payments to the State of New Jersey to the extent certain net income targets are not achieved by the New Jersey Lottery, subject to a cap of 2% of the applicable year’s net income.

Combined summary financial information

The combined summary financial information for the years ended December 31, 2020, 2019, and 2018 is presented for all equity method investments owned during the respective periods.

	Years Ended December 31,
	2020			2019		2018
Revenue	$	487		$	621	$	669
Revenue less cost of revenue		86			267		279
Net (loss) income		(15	)		91		102

22 

	As of December 31,
	2020		2019		2018
Current assets	$	908	$	823	$	682
Non-current assets		1,125		1,131		1,302
Current liabilities		742		606		492
Non-current liabilities		79		60		59

(9) Accrued Liabilities

Accrued liabilities consisted of the following:

		As of December 31,
		2020		2019		2018
Compensation and benefits	$	24	$	21	$	27
Taxes, other than income		21		15		4
Accrued licenses		—		6		—
Operating lease liabilities		7		7		—
Accrued state contract requirement		13		9		10
Other		44		25		29
Total	$	109	$	83	$	70

(10) Leases

On January 1, 2019, we adopted ASC 842 using the optional transition method provided by ASU 2018-11. Our operating leases primarily consist of real estate leases such as offices, warehouses, and research and development facilities. Our leases have remaining lease terms ranging from 1 year to 10 years, some of which include options to extend the leases for up to 5 years or to terminate the leases within 1 year. Our finance leases are immaterial.

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

	As of December 31,
	2020			2019
Operating lease right-of-use assets(1)	$	27		$	31
Accrued liabilities		7			7
Operating lease liabilities		21			24
Total operating lease liabilities	$	28		$	31
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases for the twelve month period	$	9		$	9
Weighted average remaining lease term, years		5			5
Weighted average discount rate		5	%		5	%

(1) Operating lease right-of-use assets obtained in exchange for lease obligations were immaterial.

Lease liability maturities:

	2021		2022		2023		2024		2025		Thereafter		Less Imputed Interest			Total
Operating leases	$	8	$	6	$	6	$	4	$	4	$	4	$	(4	)	$	28

Our total operating lease expenses were $9 million, $10 million, and $10 million for the years ended December 31, 2020, 2019, and 2018, respectively. The total amount of variable and short-term lease payments was immaterial for all periods presented.

As of December 31, 2020, we did not have material additional operating leases that have not yet commenced.

23 

(11) Pension and Other Post-Retirement benefits

We have defined benefit pension plans for our U.K.-based union employees (the “U.K. Plan”) and certain Canadian-based employees (the “Canadian Plan”). Collectively these two plans are referred to as the “Pension Plans”. Retirement benefits under the U.K. Plan are generally based on an employee’s average compensation over the two years preceding retirement. Retirement benefits under the Canadian Plan are generally based on the number of years of credited service. Our policy is to fund the minimum contributions permissible by the applicable authorities. We estimate that $9 million will be contributed to the Pension Plans in fiscal year 2021.

Our pension benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, inflation, compensation increase rates, expected returns on plan assets, mortality rates and other factors. The assumptions used in recording the obligations under our plans represent our best estimates, and we believe that they are reasonable, based on information as to historical experience and performance and other factors that might cause future expectations to differ from past trends. Differences in actual experience or changes in assumptions may affect our pension obligations and future expense. The primary factors contributing to actuarial gains and losses each year are (1) changes in the discount rate used to value pension benefit obligations as of the measurement date and (2) differences between the expected and the actual return on plan assets.

The following table sets forth the funded status of the Pension Plans and their reconciliation to the related amounts recognized in our financial statements at our December 31, 2020, 2019, and 2018 measurement dates:

	December 31,
	2020									2019									2018
Change in benefit obligation:	U.K. Plan			Canadian Plan			Total			U.K. Plan			Canadian Plan			Total			U.K. Plan			Canadian Plan			Total
Benefit obligation at beginning of year	$	92		$	62		$	154		$	74		$	51		$	125		$	80		$	54		$	134
Service cost		1			2			3			1			1			2			2			1			3
Interest cost		2			2			4			2			2			4			2			2			4
Participant contributions		1			—			1			1			—			1			1			—			1
Actuarial gain (loss)		13			4			17			13			8			21			(5	)		(2	)		(7	)
Benefits paid		(2	)		(2	)		(4	)		(1	)		(2	)		(3	)		(2	)		(2	)		(4	)
Other, principally foreign exchange		3			1			4			2			2			4			(4	)		(2	)		(6	)
Benefit obligation at end of year	$	110		$	69		$	179		$	92		$	62		$	154		$	74		$	51		$	125
Change in plan assets:
Fair value of plan assets at beginning of year	$	75		$	54		$	129		$	62		$	44		$	106		$	66		$	49			115
Actual gain (loss) on plan assets		9			6			15			10			8			18			(3	)		(1	)		(4	)
Employer contributions		3			1			4			3			1			4			2			1			3
Participant contributions		1			—			1			1			—			1			1			—			1
Benefits paid		(2	)		(2	)		(4	)		(2	)		(1	)		(3	)		(2	)		(2	)		(4	)
Other, principally foreign exchange		3			—			3			1			2			3			(2	)		(3	)		(5	)
Fair value of assets at end of year	$	89		$	59		$	148		$	75		$	54		$	129		$	62		$	44		$	106
Amounts recognized on balance sheet:
Funded status (current)	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Funded status (non-current)		(21	)		(10	)		(31	)		(17	)		(8	)		(25	)		(12	)		(7	)		(19	)
Accumulated other comprehensive income:
Unrecognized actuarial loss		29			11			40			24			10			34			16			9			25
Unrecognized prior service cost		(2	)		—			(2	)		—			—			—			1			—			1
Deferred taxes		—			2			2			—			1			1			—			(5	)		(5	)
Net amount recognized	$	6		$	3		$	9		$	7		$	3		$	10		$	5		$	(3	)	$	2

24 

The following table presents the components of our net periodic pension benefit cost:

	Year Ended December 31,
	2020									2019												2018
Components of net periodic pension benefit cost:	U.K. Plan			Canadian Plan			Total			U.K. Plan			Canadian Plan			Total			U.K. Plan			Canadian Plan			Total
Service cost	$	1		$	2		$	3		$	1		$	1		$	2		$	2		$	1		$	3
Interest cost		2			2			4			2			2			4			2			2			4
Expected return on plan assets		(3	)		(3	)		(6	)		(3	)		(2	)		(5	)		(3	)		(3	)		(6	)
Amortization of actuarial losses		2			—			2			1			—			1			1			—			1
Net periodic cost	$	2		$	1		$	3		$	1		$	1		$	2		$	2		$	—		$	2

The accumulated benefit obligation for the Pension Plans was $179 million, $154 million, and $125 million as of December 31, 2020, 2019, and 2018, respectively. The underfunded status of the Pension Plans recorded as a long-term liability as of December 31, 2020, 2019, and 2018 was $31 million, $25 million, and $19 million, respectively.

The amounts included in accumulated other comprehensive loss as of December 31, 2020 are expected to be recognized as components of net periodic pension benefit cost during the fiscal year ending December 31, 2021 are presented below:

Unrecognized loss	$	2
Unrecognized prior service cost		(2	)
Net amount expected to be recognized	$	—

The U.K. Plan is closed to new participants and pensionable earnings used to calculate retirement benefits are limited to a 2% annual increase while the plan is less than 100% funded.

The investment policy is to maximize long-term financial return commensurate with security and minimizing risk. This is achieved by holding a portfolio of marketable investments that avoids over-concentration of investment and spreads assets both over industries and geographies. In setting investment strategy, we considered the lowest risk strategy that it could adopt in relation to the plan’s liabilities and designed the asset allocation to achieve a higher return while maintaining a cautious approach to meeting the plan’s liabilities. We considered a full range of asset classes, the risks and rewards of a range of alternative asset allocation strategies, the suitability of each asset class and the need for appropriate diversification.

The current strategy in the U.K. Plan is to hold approximately 37% in a global return fund, approximately 4% in U.K. equities, approximately 10% in real estate, approximately 15% in non-U.K. equities, approximately 19% in Liability Driven Investments (LDI), and approximately 15% in corporate bonds and other. The current strategy in the Canadian Plan is to hold approximately 23% in Canadian equities, approximately 44% in non-Canadian equities and approximately 33% in bonds and other.

25 

The fair value of the plan assets for the U.K. Plan at December 31, 2020 by asset category is presented below:

Asset Category	Market Value at 12/31/2020		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities(a)	$	17	$	—	$	17	$	—
Global return fund(a)		33		—		33		—
Corporate bonds(a)		11		—		11		—
Real estate		9		—		—		9
LDI		17		—		17		—
Cash and cash equivalents(b)		2		2		—		—
Total pension assets	$	89	$	2	$	78	$	9

(a) The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.

(b) The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

The fair value of the plan assets for the Canadian Plan at December 31, 2020 by asset category is presented below:

Asset Category	Market Value at 12/31/2020		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities(a)	$	40	$	40	$	—	$	—
Corporate bonds(a)		14		—		14		—
Government bonds		5		—		5		—
Total pension assets	$	59	$	40	$	19	$	—

(a) The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.

The fair value of the plan assets for the U.K. Plan at December 31, 2019 by asset category is presented below:

Asset Category	Market Value at 12/31/2019		Quoted Prices in Active  Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Equity securities(a)	$	28	$	—	$	28	$	—
Global return fund(a)		19		—		19		—
Corporate bonds(a)		9		—		9		—
Real estate		5		—		—		5
LDI		14		—		14		—
Total pension assets	$	75	$	—	$	70	$	5

(a) The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.

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The fair value of the plan assets for the Canadian Plan at December 31, 2019 by asset category is presented below:

	Market		Quoted Prices in Active Markets for		Significant		Significant
	Value at		Identical		Observable Inputs		Unobservable Inputs
Asset Category	12/31/2019		Assets (Level 1)		(Level 2)		(Level 3)
Equity securities(a)	$	34	$	34	$	—	$	—
Corporate bonds(a)		4		—		4		—
Government bonds		12		—		12		—
Cash and cash equivalents(b)		4		4		—		—
Total pension assets	$	54	$	38	$	16	$	—

(a) The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.

(b) The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

The fair value of the plan assets for the U.K. Plan at December 31, 2018 by asset category is presented below:

			Quoted
			Prices in
			Active
	Market		Markets for		Significant		Significant
	Value at		Identical		Observable Inputs		Unobservable Inputs
Asset Category	12/31/2018		Assets (Level 1)		(Level 2)		(Level 3)
Equity securities(a)	$	23	$	—	$	23	$	—
Global return fund(a)		15		—		15		—
Corporate bonds(a)		9		—		9		—
Real estate		4		—		—		4
LDI (Liability Driven Investment)		11		—		11		—
Total pension assets	$	62	$	—	$	58	$	4

(a) The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.

The fair value of the plan assets for the Canadian Plan at December 31, 2018 by asset category is presented below:

			Quoted
			Prices in
			Active
	Market		Markets for		Significant		Significant
	Value at		Identical		Observable Inputs		Unobservable Inputs
Asset Category	12/31/2018		Assets (Level 1)		(Level 2)		(Level 3)
Equity securities(a)	$	28	$	28	$	—	$	—
Corporate bonds(a)		5		—		5		—
Government bonds		10		—		10		—
Cash and cash equivalents(b)		1		1		—		—
Total pension assets	$	44	$	29	$	15	$	—

(a) The assets are invested through managed funds that are valued using inputs derived principally from quoted prices in active markets for the underlying assets in the fund.

(b) The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.

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The change in fair value of the Pension Plan assets valued using significant unobservable inputs (Level 3) is presented below:

		2020		2019	2018
Significant unobservable inputs (Level 3), beginning of period	$	5	$	4	$	4
Unrealized gain on asset still held		4		1		—
Significant unobservable inputs (Level 3), end of period	$	9	$	5	$	4

The table below presents the weighted-average actuarial assumptions used to determine the benefit obligation and net periodic benefit cost for the Pension Plans.

	U.K. Plan									Canadian Plan
	2020			2019			2018			2020			2019			2018
Discount rates:
Benefit obligation		1.4	%		2.0	%		2.9	%		3.1	%		3.1	%		3.9	%
Net periodic pension cost		1.4	%		2.0	%		2.6	%		3.1	%		3.9	%		3.6	%
Rate of compensation increase		1.0	%		1.0	%		1.0	%		3.0	%		3.0	%		1.0	%
Expected return on assets		3.6	%		5.1	%		5.0	%		5.2	%		5.5	%		5.7	%

The overall expected long-term rate of return on assets assumption for the U.K. Plan has been determined as a weighted-average of the expected returns on the above asset classes for the U.K. Plan. The expected return on bonds is taken as the current redemption yield on the appropriate index. The expected return on equities and property is determined by assuming a measure of our performance over the gilt-yield. The expected return on cash is related to the Bank of England base rate. Returns so determined are reduced to allow for investment manager expenses.

The overall expected long-term rate of return on assets assumption for the Canadian Plan has been determined by consideration of the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class based on our active management of certain portfolio classes.

We expect benefit payments between $2 million and $3 million annually, for each the U.K. Plan and Canadian Plan, which reflect expected future service for each of the next five years. Additionally, we expect benefit payments of $15 million for the U.K. Plan and $17 million for the Canadian Plan for benefit payments during the five years from 2026 to 2030.

U.S. plan

The Parent has a 401(k) plan for U.S.-based employees. Those employees who participate in our 401(k) plan are eligible to receive matching contributions from us for the first 6% of participant contributions (as defined in the plan document). During 2020, as part of austerity measures implemented as a result of COVID-19, we temporarily eliminated 401(k) matching contributions, which were reinstated in 2021. Contribution expense for the years ended December 31, 2020, 2019, and 2018 amounted to $1 million, $3 million, and $3 million, respectively.

(12) Income Taxes

Income taxes are determined using the liability method of accounting for income taxes, under which deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. If, based upon all available evidence, both positive and negative, it is more likely than not that such deferred tax assets will not be realized, a valuation allowance is recorded.

Management assessed the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of existing deferred tax assets in each taxpaying jurisdiction. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2020 in certain jurisdictions. Such strong objective evidence puts less emphasis on other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2020, a valuation allowance of $11 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized; however, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth.

28 

Income taxes are presented using historical results of operations and cost basis of the assets and liabilities as if we operated on a standalone basis during those periods, and the tax provision is calculated as if we completed separate tax returns apart from our Parent ("Separate-return Method"). Certain legal entities that are included in these financial statements under the Separate-Return Method were included in tax filings of affiliated entities that are not part of these financial statements.

As discussed in Note 1, the COVID-19 disruptions significantly impacted our business during the first half of 2020 but began to recover during the latter half of 2020. We considered the COVID-19 disruptions in our ability to realize deferred tax assets in the future and determined that such conditions did not change our overall valuation allowance positions. The U.S. signed into law on March 27, 2020 the CARES Act, which includes various income tax provisions to help stabilize U.S. businesses; however, it did not have a material impact on our provision for income taxes. We continue to monitor and evaluate the tax implications resulting from the CARES Act and any new legislation passed in response to COVID-19 in the federal, state, and foreign jurisdictions where we have an income tax presence.

We apply a recognition threshold and measurement attribute related to uncertain tax positions taken or expected to be taken on our tax returns. We recognize a tax benefit for financial reporting of an uncertain income tax position when it has a greater than 50% likelihood of being sustained upon examination by the taxing authorities. We measure the tax benefit of an uncertain tax position based on the largest benefit that has a greater than 50% likelihood of being ultimately realized including evaluation of settlements.

The components of net income before income taxes are as follows:

	Year Ended December 31,
	2020		2019		2018
United States	$	183	$	183	$	206
Foreign		58		73		53
Net income before income tax expense	$	241	$	256	$	259

The components of income tax expense are as follows:  

	Year Ended December 31,
	2020			2019			2018
Current
U.S. Federal	$	41		$	46		$	33
U.S. State		14			14			11
Foreign		14			12			9
Total		69			72			53
Deferred
U.S. Federal		(2	)		(9	)		16
U.S. State		(1	)		(2	)		3
Foreign		2			(1	)		1
Total		(1	)		(12	)		20
Total income tax expense	$	68		$	60		$	73

The reconciliation of the U.S. federal statutory tax rate to the actual tax rate is as follows:

	Year Ended December 31,
	2020			2019			2018
Statutory U.S. federal income tax rate		21.0	%		21.0	%		21.0	%
State Taxes		4.7	%		3.9	%		4.3	%
Foreign earnings at rates different than U.S. federal rate		1.1	%		0.9	%		1.2	%
Permanent items		0.1	%		(2.0	)%		(0.2	)%
Increase of UTBs(1)		—	%		—	%		2.7	%
Other		1.0	%		(0.5	)%		(0.8	)%
Effective income tax rate		27.9	%		23.3	%		28.2	%

(1) UTB = Unrecognized tax benefit

29 

Our effective tax rates for 2020, 2019, and 2018 were impacted by state income tax expense of $11 million, $10 million and $11 million, respectively. In 2018, we recorded a $7 million UTB liability after completion of our accounting for the Deemed Repatriation Transition Tax under IRC Section 965, which resulted in a rate impact of 2.7% in 2018.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred income tax balances are established using the enacted statutory tax rates and are adjusted for changes in such rates in the period of change.

	As of December 31,
	2020			2019			2018
Deferred tax assets:
Reserves and other accrued expenses	$	16		$	17		$	2
Compensation not currently deductible		2			2			4
Net operating loss carry forwards		12			8			8
Inventory valuation		7			4			4
Pension		8			6			5
Differences in financial reporting and tax basis for:
Other		4			3			3
Valuation allowance		(11	)		(6	)		(6	)
Realizable deferred tax assets		38			34			20
Deferred tax liabilities:
Differences in financial reporting and tax basis for:
Identifiable intangible assets		(30	)		(29	)		(29	)
Property and equipment		(20	)		(16	)		(19	)
Deferred costs and prepaid expenses		(11	)		(14	)		(10	)
Other		(5	)		(5	)		(5	)
Total deferred tax liabilities		(66	)		(64	)		(63	)
Net deferred tax liability	$	(28	)	$	(30	)	$	(43	)

At December 31, 2020, we had the following NOL carry forwards:

	December 31, 2020
	Federal		State		Foreign
NOL carry forwards	$	—	$	—	$	50

The foreign NOL carryforwards can be carried forward for periods that vary from five years to indefinitely. Because these financial statements are prepared on a separate-return basis, the ending deferred tax asset balances reflected within the carve-out may not ultimately reflect the actual tax attributes available for use after the carve-out. Depending on the ultimate structure of the transaction, legal entities that comprise the carve-out group may have NOLs or interest expense limitation carryforward attributes available.

At December 31, 2020 and 2019, and 2018, we had the following valuation allowances:

	December 31,
	2020		2019		2018
Foreign	$	11	$	6	$	6

30 

Undistributed earnings of subsidiaries are accounted for as a temporary difference, except that DTLs are not recorded for undistributed earnings of foreign subsidiaries that are deemed to be indefinitely reinvested in foreign jurisdictions. The Tax Act required the Company to compute a tax on previously undistributed earnings and profits of its foreign subsidiaries upon transition from a worldwide tax system to a territorial tax system during the year ended December 31, 2017. The repatriation of such amounts in the future should generally be exempt from income taxes in the U.S. (as a result of the Tax Act) and in those jurisdictions that have a similar territorial system of taxation. Substantially all of our current year foreign earnings are not intended to be indefinitely reinvested offshore, and therefore the tax effects of repatriation (including applicable withholding taxes) of such cash flows are provided for in our financial reporting.

Unrecognized Tax Benefits

The total amount of unrecognized tax benefits as of December 31, 2020 was $7 million. Of this amount, $7 million, if recognized, would be included in our Combined Statements of Operations and Comprehensive Income and have an impact on our effective tax rate. We do not expect any material changes in unrecognized tax benefits before December 31, 2021.

We recognize interest and penalties for unrecognized tax benefits in income tax expense. The amounts recognized for interest and penalties during the years ended December 31, 2020, 2019 and 2018 were not material.

We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. We are generally not subject to examination for periods prior to December 31, 2016; however as we utilize available net operating losses, prior periods can be subject to examination. There are no ongoing material U.S. federal, state, local or non-U.S. examinations by tax authorities.

The Company had the following activity for unrecognized tax benefits:

	Year Ended December 31,
		2020	2019		2018
Balance at beginning of period	$	7	$	7	$	—
Tax positions related to current year additions		—		—		7
Balance at end of period(1)	$	7	$	7	$	7

(1) Unrecognized tax benefits are included within Other long-term liabilities.

(13) Related Party Transactions

Parent Services

Parent services represent allocations of corporate level general and administrative expenses, including but not limited to, finance, corporate development, human resources, legal, information technology, as well as rental fees for shared assets. These expenses have been allocated to the Lottery Business on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenues, operating expenses, headcount or other relevant measures, which we believe to be the most meaningful allocation methodologies.

Total parent services expense recorded for the years ended December 31, 2020, 2019, and 2018 was $30 million, $31 million, and $28 million respectively, and is included in Selling, general and administrative expenses. These charges are not cash settled but allocated for purposes of these financial statements and as such are accounted for as a component of Parent's equity.

31 

IP Licensing

The Parent frequently licenses intellectual property (IP) from third parties, which is utilized by the Lottery Business in developing the instant games. These IP licenses are generally pushed down to the Lottery Business at the origination of these agreements based upon agreed usage commitment. We account for these minimum guaranteed obligations within accrued and other long-term liabilities at the onset of the license arrangement and record a corresponding license asset within intangible assets, net. The total liability associated with these agreements as of December 31, 2020, 2019, and 2018 was $31 million, $37 million, and $46 million respectively.

Amortization expense related to these licenses and recorded in depreciation and amortization for the years ended December 31, 2020, 2019, and 2018 was $12 million, $12 million, and $8 million, respectively.

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 that are subject to copyrights 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.

(14) Accumulated Other Comprehensive Loss

The accumulated balances for each classification of other comprehensive (loss) income are presented below:

	Foreign			Unrecognized			Accumulated Other
	Currency			pension benefit and other			Comprehensive
	Items			costs, net of taxes(1)			Loss
January 1, 2018	$	—		$	(17	)		(17	)
Change during period		(14	)		(3	)		(17	)
Reclassifed to operations		—			1			1
December 31, 2018	$	(14	)	$	(19	)		(33	)
Change during period		(9	)		(7	)		(16	)
Reclassifed to operations		—			1			1
December 31, 2019	$	(23	)	$	(25	)		(48	)
Change during period		32			(4	)		28
Reclassifed to operations		—			—			—
December 31, 2020	$	9		$	(29	)		(20	)

(1) The change during the period is net of income taxes of $0 million, $1 million and $1 million in 2020, 2019 and 2018, respectively.

32