UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-11693
SCIENTIFIC GAMES CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Nevada | | 81-0422894 |
| (State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
| incorporation or organization) | | |
6601 Bermuda Road, Las Vegas, Nevada 89119
(Address of principal executive offices)
(Zip Code)
(702) 897-7150
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $.001 par value | SGMS | The NASDAQ Stock Market |
| Preferred Stock Purchase Rights | | The NASDAQ Stock Market |
IndicateIndicate 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 ☐¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ý No ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large Accelerated Fileraccelerated filer | ☒ | Accelerated filer | ☐ |
| | | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | |
| Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ý
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of May 5, 2020:4, 2021:
Common Stock: 94,474,87796,078,321
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 20202021
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| Glossary of Terms | | |
| The following terms or acronyms used in this Quarterly Report on Form 10-Q are defined below: | | |
| Term or Acronym | | Definition |
20192020 10-K | | 20192020 Annual Report on Form 10-K filed with the SEC on February 18, 2020 |
2020 Notes | | 6.250% senior subordinated notes issued by SGI and redeemed in December 2019 |
March 1, 2021 Notes | | 6.625% senior subordinated notes due 2021 issued by SGI |
| 2025 Secured Notes | | 5.000% senior secured notes due 2025 issued by SGI |
| 2026 Secured Euro Notes | | 3.375% senior secured notes due 2026 issued by SGI |
| 2026 Unsecured Euro Notes | | 5.500% senior unsecured notes due 2026 issued by SGI |
2022 | | |
| 2025 Unsecured Notes | | | 10.000%8.625% senior unsecured notes due 20222025 issued by SGI |
| 2026 Unsecured Notes | | 8.250% senior unsecured notes due 2026 issued by SGI |
| 2028 Unsecured Notes | | 7.000% senior unsecured notes due 2028 issued by SGI |
| 2029 Unsecured Notes | | 7.250% senior unsecured notes due 2029 issued by SGI |
| AEBITDA | | Adjusted EBITDA, our performance measure of profit or loss for our business segments |
| ASC | | Accounting Standards Codification |
| ASU | | Accounting Standards Update |
| COVID-19 | | Coronavirus disease first identified in 2019 (declared a pandemic by the World Health Organization on March 11, 2020) |
| D&A | | depreciation, amortization and impairments (excluding goodwill) |
| Exchange Act | | Securities Exchange Act of 1934, as amended |
| FASB | | Financial Accounting Standards Board |
| KPIs | | Key Performance Indicators |
| LBO | | licensed betting office |
| LIBOR | | London Interbank Offered Rate |
| | |
| Note | | a note in the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, unless otherwise indicated |
Obligor GroupPOS | | SGC, SGI and guarantor subsidiaries, excludes all SciPlay subsidiariespercentage of retail sales |
| Participation | | with respect to our Gaming business, refers to gaming machines provided to customers through service or leasing arrangements in which we earn revenues and are paid based on: (1) a percentage of the amount wagered less payouts; (2) fixed daily-fees; (3) a percentage of the amount wagered; or (4) a combination of (2) and (3), and with respect to our Lottery business, refers to a contract or arrangement in which we earn revenues and are paid based on a percentage of retail sales |
| R&D | | research and development |
| RMG | | real-money gaming |
| RSU | | restricted stock unit |
| SEC | | Securities and Exchange Commission |
| Secured Notes | | refers to the 2025 Secured Notes and 2026 Secured Euro Notes, collectively |
Securities Act | | Securities Act of 1933, as amended |
| Senior Notes | | the Secured Notes and the Unsecured Notes |
| SciPlay Revolver | | $150 million revolving credit facility agreement entered into by SciPlay Holding Company, LLC, a subsidiary of SciPlay Corporation, that matures in May 2024 |
| SG&A | | selling, general and administrative |
| SGC | | Scientific Games Corporation |
| SGI | | Scientific Games International, Inc., a wholly-owned subsidiary of SGC |
| Shufflers | | various models of automatic card shufflers, deck checkers and roulette chip sorters |
| Unsecured Notes | | refers to the 2026 Unsecured Euro Notes, 2026 Unsecured Notes, 2028 Unsecured Notes and 2029 Unsecured Notes, collectively |
| 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, U.S. Virgin Islands and Puerto Rico |
| VGT | | video gaming terminal |
| VLT | | video lottery terminal |
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Intellectual Property Rights
All ® notices signify marks registered in the United States. © 20202021 Scientific Games Corporation. All Rights Reserved.
FORWARD-LOOKING STATEMENTS
Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal,” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:
•the impact of the COVID-19 pandemic and any resulting unfavorable social, political, economic and financial conditions, including the temporary and potentially recurring closure of casinos and lottery operations on a jurisdiction-by-jurisdiction basis;
•natural eventsslow growth of new gaming jurisdictions, slow addition of casinos in existing jurisdictions and health crises that disrupt our operations or thosedeclines in the replacement cycle of our customers, suppliers or regulators;gaming machines;
•incurrencerisks relating to foreign operations, including anti-corruption laws, fluctuations in currency rates, restrictions on the payment of restructuring costs;dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the continuing uncertainty following the U.K.’s withdrawal from the European Union;
•changes in demand fordifficulty predicting what impact, if any, new tariffs imposed by and other trade actions taken by the U.S. and foreign jurisdictions could have on our products and services;business;
•dependence on suppliersU.S. and manufacturers;
•dependence on key employees;
•goodwill impairment charges including changes in estimates or judgments related to our impairment analysis of goodwill or other intangible assets;international economic and industry conditions;
•level of our indebtedness, higher interest rates, availability or adequacy of cash flows and liquidity to satisfy indebtedness, other obligations or future cash needs;
•the discontinuation or replacement of LIBOR, which may adversely affect interest rates;
•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;
•stock price volatility;
•competition;
•U.S.inability to win, retain or renew, or unfavorable revisions of, existing contracts, and international economic and industry conditions;the inability to enter into new contracts;
•slow growththe impact of new gaming jurisdictions, slow additionU.K. legislation approving the reduction of casinos in existing jurisdictions and declines infixed-odds betting terminals maximum stakes limit on LBO operators, including the replacement cyclerelated closure of gaming machines;
•ownership changes and consolidation in the gaming industry;
•opposition to legalized gaming or the expansion thereof and potential restrictions on internet wagering;certain LBO shops;
•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;
•changes in demand for our products and services;
•inability to develop successfulbenefit from, and risks associated with, strategic equity investments and relationships;
•inability to achieve some or all of the anticipated benefits of SciPlay being a standalone public company;
•dependence on suppliers and manufacturers;
•SciPlay’s dependence on certain key providers;
•ownership changes and consolidation in the gaming industry;
•fluctuations in our results due to seasonality and other factors;
•security and integrity of our products and services and capitalize on trends and changes in our industries,systems, including the expansionimpact of internetany security breaches or cyber-attacks;
•protection of our intellectual property, inability to license third-party intellectual property and the intellectual property rights of others;
•reliance on or failures in information technology and other formssystems;
•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;
•reliance on technological blocking systems;
•challenges or disruptions relating to the completion of interactive gaming;the domestic migration to our enterprise resource planning system;
•laws and government regulations, both foreign and domestic, including those relating to gaming, data privacy and security, including with respect to the collection, storage, use, transmission and protection of personal information and other consumer data, and environmental laws, and those laws and regulations that affect companies conducting business on the internet, including online gambling;
•legislative interpretation and enforcement, regulatory perception and regulatory risks with respect to gaming, especially internet wagering, social gaming and sports wagering;
•changes in tax laws or tax rulings, or the continuing evolutionexamination of our tax positions;
•opposition to legalized gaming or the scope of data privacyexpansion thereof and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions;potential restrictions on internet wagering;
•significant opposition in some jurisdictions to interactive social gaming, including social casino gaming and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casino gaming specifically, and how this could result in a prohibition on interactive social gaming or social casino gaming altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations;
•legislative interpretation and enforcement, regulatory perception and regulatory risks with respect to gaming, especially internet wagering, social gaming and sports wagering;
•reliance on technological blocking systems;
•expectations of shift to regulated online gaming or sports wagering;
•expectationsinability to develop successful products and services and capitalize on trends and changes in our industries, including the expansion of growth in total consumer spending on social casinointernet and other forms of interactive gaming;
•SciPlay’s dependence on certain key providers;the continuing evolution of the scope of data privacy and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions;
•inability to win, retain or renew, or unfavorable revisionsincurrence of existing contracts, and the inability to enter into new contracts;restructuring costs;
•protectiongoodwill impairment charges including changes in estimates or judgments related to our impairment analysis of our intellectual property, inability to license third-party intellectual property and the intellectual property rights of others;goodwill or other intangible assets;
•security and integrity of our products and systems, including the impact of any security breaches or cyber-attacks;
•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;stock price volatility;
•failure to maintain adequate internal control over financial reporting;
•inability to benefit from, and risks associated with, strategic equity investments and relationships;dependence on key executives;
•inability to achieve somenatural events that disrupt our operations, or allthose of the anticipated benefits of SciPlay being a standalone public company;
•implementation of complex new accounting standards;
•fluctuations in our results due to seasonality and other factors;
•risks relating to foreign operations, including anti-corruption laws, fluctuations in currency rates, restrictions on the payment of dividends from earnings, restrictions on the import of products and financial instability, including the potential impact to our business resulting from the continuing uncertainty around the U.K.’s withdrawal from the European Union;customers, suppliers or regulators;
•possibility that the 2018 renewal of the Lotterie Nazionali S.r.l. concession to operate the Italian instant games lottery is not finalized (including as the result of a pendingfinal (pending appeal against existing court rulings relating to third-party protest against the renewal of the concession, or any appeal from existing court rulings relating to such third-party protest)concession);
•the impact of U.K. legislation approving the reduction of fixed-odds betting terminals maximum stakes limit on LBO operators, including the related closure of certain LBO shops;
•changes in tax laws or tax rulings, or the examination of our tax positions;
•difficulty predicting what impact, if any, new tariffs imposed by and other trade actions taken by the U.S. and foreign jurisdictions could have on our business;
•the discontinuation or replacement of LIBOR, which may adversely affect interest rates;
•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; and
•influenceexpectations of certain stockholders, including decisions that may conflict with the interests of other stockholders.growth in total consumer spending on social casino gaming.
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 “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A in our 20192020 10-K. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no and expressly disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
You should also note that this Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning the international gaming, lottery, social and digital gaming industries than the same industries in the U.S.
Due to rounding, certain numbers presented herein may not precisely agree or add up on a cumulative basis to the totals previously reported.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Revenue: | | | | | | | |
| Services | $ | 422 | | | $ | 459 | | | | | |
| Product sales | 168 | | | 238 | | | | | |
| Instant products | 135 | | | 140 | | | | | |
| Total revenue | 725 | | | 837 | | | | | |
| Operating expenses: | | | | | | | |
Cost of services(1) | 130 | | | 133 | | | | | |
Cost of product sales(1) | 91 | | | 107 | | | | | |
Cost of instant products(1) | 73 | | | 67 | | | | | |
| Selling, general and administrative | 198 | | | 186 | | | | | |
| Research and development | 51 | | | 49 | | | | | |
| Depreciation, amortization and impairments | 138 | | | 165 | | | | | |
| Goodwill impairment | 54 | | | — | | | | | |
| Restructuring and other | 22 | | | 7 | | | | | |
| | | | | | | |
| Operating (loss) income | (32) | | | 123 | | | | | |
| Other (expense) income: | | | | | | | |
| Interest expense | (124) | | | (154) | | | | | |
| (Loss) earnings from equity investments | (2) | | | 6 | | | | | |
| Gain on remeasurement of debt | 10 | | | 5 | | | | | |
| Other expense, net | (3) | | | — | | | | | |
| Total other expense, net | (119) | | | (143) | | | | | |
| Net loss before income taxes | (151) | | | (20) | | | | | |
| Income tax expense | (4) | | | (4) | | | | | |
| Net loss | (155) | | | (24) | | | | | |
Less: Net income attributable to noncontrolling interest
| 4 | | | — | | | | | |
Net loss attributable to SGC
| $ | (159) | | | $ | (24) | | | | | |
| | | | | | | |
| Basic and diluted net loss attributable to SGC per share: | | | | | | | |
| Basic | $ | (1.69) | | | $ | (0.26) | | | | | |
| Diluted | $ | (1.69) | | | $ | (0.26) | | | | | |
| | | | | | | |
| Weighted average number of shares used in per share calculations: | | | | | | | |
| Basic shares | 94 | | 92 | | | | |
| Diluted shares | 94 | | 92 | | | | |
| (1) Excludes D&A. | | | | | | | |
| See accompanying notes to condensed consolidated financial statements. | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Revenue: | | | | | | | |
| Services | $ | 463 | | | $ | 422 | | | | | |
| Product sales | 104 | | | 168 | | | | | |
| Instant products | 162 | | | 135 | | | | | |
| Total revenue | 729 | | | 725 | | | | | |
| Operating expenses: | | | | | | | |
Cost of services(1) | 139 | | | 130 | | | | | |
Cost of product sales(1) | 50 | | | 91 | | | | | |
Cost of instant products(1) | 77 | | | 73 | | | | | |
| Selling, general and administrative | 186 | | | 198 | | | | | |
| Research and development | 52 | | | 51 | | | | | |
| Depreciation, amortization and impairments | 123 | | | 138 | | | | | |
| Goodwill impairment | 0 | | | 54 | | | | | |
| Restructuring and other | 21 | | | 22 | | | | | |
| Operating income (loss) | 81 | | | (32) | | | | | |
| Other (expense) income: | | | | | | | |
| Interest expense | (121) | | | (124) | | | | | |
| Earnings (loss) from equity investments | 9 | | | (2) | | | | | |
| | | | | | | |
| Gain on remeasurement of debt | 25 | | | 10 | | | | | |
| Other expense, net | 0 | | | (3) | | | | | |
| Total other expense, net | (87) | | | (119) | | | | | |
| Net loss before income taxes | (6) | | | (151) | | | | | |
| Income tax expense | (3) | | | (4) | | | | | |
| Net loss | (9) | | | (155) | | | | | |
| Less: Net income attributable to noncontrolling interest | 6 | | | 4 | | | | | |
| Net loss attributable to SGC | $ | (15) | | | $ | (159) | | | | | |
| Basic and diluted net loss attributable to SGC per share: | | | | | | | |
| Basic | $ | (0.16) | | | $ | (1.69) | | | | | |
| Diluted | $ | (0.16) | | | $ | (1.69) | | | | | |
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| Weighted average number of shares used in per share calculations: | | | | | | | |
| Basic shares | 95 | | | 94 | | | | | |
| Diluted shares | 95 | | | 94 | | | | | |
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| (1) Excludes D&A. |
| See accompanying notes to condensed consolidated financial statements. |
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMELOSS
(Unaudited, in millions)
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| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 |
| Net loss | $ | (155) | | | | $ | (24) | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation (loss) gain, net of tax | (83) | | | 55 | |
| Pension and post-retirement gain, net of tax | 2 | | | 1 | |
| Derivative financial instruments unrealized loss, net of tax | (16) | | | (5) | |
| Total other comprehensive (loss) income | (97) | | | 51 | |
| Total comprehensive (loss) income | (252) | | | 27 | |
| Less: comprehensive income attributable to noncontrolling interest | 4 | | | — | |
| Comprehensive (loss) income attributable to SGC | $ | (256) | | | $ | 27 | |
| See accompanying notes to condensed consolidated financial statements. | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Net loss | $ | (9) | | | $ | (155) | | | | | |
| Other comprehensive loss: | | | | | | | |
| Foreign currency translation gain (loss), net of tax | 4 | | | (83) | | | | | |
| Pension and post-retirement (loss) gain, net of tax | (1) | | | 2 | | | | | |
| Derivative financial instruments unrealized gain (loss), net of tax | 5 | | | (16) | | | | | |
| Total other comprehensive gain (loss) | 8 | | | (97) | | | | | |
| Total comprehensive loss | (1) | | | (252) | | | | | |
| Less: comprehensive income attributable to noncontrolling interest | 6 | | | 4 | | | | | |
| Comprehensive loss attributable to SGC | $ | (7) | | | $ | (256) | | | | | |
| | | | | | | |
| See accompanying notes to condensed consolidated financial statements. |
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
| | | | | | | | | | | |
| As of | | |
| March 31, 2020 | | December 31, 2019 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 334 | | | $ | 313 | |
| Restricted cash | 55 | | | 51 | |
| Receivables, net of allowance for credit losses of $61 and $36, respectively | 624 | | | 755 | |
| Inventories | 248 | | | 244 | |
| Prepaid expenses, deposits and other current assets | 235 | | | 252 | |
| Total current assets | 1,496 | | | 1,615 | |
| Non-current assets: | | | |
| Restricted cash | 11 | | | 11 | |
| Receivables, net of allowance for credit losses of $9 and $-, respectively | 48 | | | 53 | |
| Property and equipment, net | 474 | | | 500 | |
| Operating lease right-of-use assets | 98 | | | 105 | |
| Goodwill | 3,162 | | | 3,280 | |
| Intangible assets, net | 1,429 | | | 1,516 | |
| Software, net | 248 | | | 258 | |
| Equity investments | 263 | | | 273 | |
| Other assets | 229 | | | 198 | |
| Total assets | $ | 7,458 | | | $ | 7,809 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 45 | | | $ | 45 | |
| Accounts payable | 215 | | | 226 | |
| Accrued liabilities | 475 | | | 495 | |
| Total current liabilities | 735 | | | 766 | |
| Deferred income taxes | 87 | | | 91 | |
| Operating lease liabilities | 81 | | | 88 | |
| Other long-term liabilities | 293 | | | 292 | |
| Long-term debt, excluding current portion | 8,620 | | | 8,680 | |
| Total liabilities | 9,816 | | | 9,917 | |
| Commitments and contingencies (Note 16) |
| |
|
| Stockholders’ deficit: | | | |
| Common stock, par value $0.001 per share: 199 shares authorized; 112 and 111 shares issued and 94 and 94 shares outstanding, respectively | 1 | | | 1 | |
| Additional paid-in capital | 1,216 | | | 1,208 | |
| Accumulated loss | (3,119) | | | (2,954) | |
| Treasury stock, at cost, 17 shares | (175) | | | (175) | |
| Accumulated other comprehensive loss | (389) | | | (292) | |
| Total SGC stockholders’ deficit | (2,466) | | | (2,212) | |
| Noncontrolling interest | 108 | | | 104 | |
| Total stockholders’ deficit | (2,358) | | | (2,108) | |
| Total liabilities and stockholders’ deficit | $ | 7,458 | | | $ | 7,809 | |
| See accompanying notes to condensed consolidated financial statements. | | | |
| | | | | | | | | | | |
| As of |
| March 31, 2021 | | December 31, 2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 967 | | | $ | 1,016 | |
| Restricted cash | 88 | | | 117 | |
| Receivables, net of allowance for credit losses $79 and $81, respectively | 621 | | | 616 | |
| Inventories | 191 | | | 191 | |
| Prepaid expenses, deposits and other current assets | 241 | | | 241 | |
| Total current assets | 2,108 | | | 2,181 | |
| Non-current assets: | | | |
| Restricted cash | 10 | | | 10 | |
| Receivables, net of allowance for credit losses $5 and $5, respectively | 20 | | | 20 | |
| Property and equipment, net | 406 | | | 415 | |
| Operating lease right-of-use assets | 95 | | | 94 | |
| Goodwill | 3,287 | | | 3,292 | |
| Intangible assets, net | 1,243 | | | 1,299 | |
| Software, net | 220 | | | 227 | |
| Equity investments | 265 | | | 262 | |
| Other assets | 202 | | | 184 | |
| Total assets | $ | 7,856 | | | $ | 7,984 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
| Current liabilities: | | | |
| Current portion of long-term debt | $ | 44 | | | $ | 44 | |
| Accounts payable | 280 | | | 203 | |
| Accrued liabilities | 544 | | | 586 | |
| Total current liabilities | 868 | | | 833 | |
| Deferred income taxes | 80 | | | 79 | |
| Operating lease liabilities | 78 | | | 77 | |
| Other long-term liabilities | 229 | | | 260 | |
| Long-term debt, excluding current portion | 9,122 | | | 9,259 | |
| Total liabilities | 10,377 | | | 10,508 | |
| Commitments and contingencies (Note 16) |
| |
0 |
| 0Stockholders’ deficit: | | | |
| Common stock, par value $0.001 per share: 199 shares authorized; 113 shares issued and 96 and 95 shares outstanding, respectively | 1 | | | 1 | |
| Additional paid-in capital | 1,272 | | | 1,268 | |
| Accumulated loss | (3,544) | | | (3,529) | |
| Treasury stock, at cost, 17 shares | (175) | | | (175) | |
| Accumulated other comprehensive loss | (210) | | | (218) | |
| Total SGC stockholders’ deficit | (2,656) | | | (2,653) | |
| Noncontrolling interest | 135 | | | 129 | |
| Total stockholders’ deficit | (2,521) | | | (2,524) | |
| Total liabilities and stockholders’ deficit | $ | 7,856 | | | $ | 7,984 | |
|
| See accompanying notes to condensed consolidated financial statements. |
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2020 | | 2019 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (155) | | | $ | (24) | |
| Adjustments to reconcile net loss to cash provided by operating activities | 243 | | | 179 | |
| Changes in working capital accounts, net of effects of acquisitions | 25 | | | 6 | |
| Changes in deferred income taxes and other | 7 | | | 6 | |
| Net cash provided by operating activities | 120 | | | 167 | |
| | | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (53) | |
| (67) | |
| Distributions of capital from equity investments | — | |
| 3 | |
| | | |
| Proceeds from sale of asset and other | 22 | | | — | |
| Net cash used in investing activities | (31) | | | (64) | |
| | | |
| Cash flows from financing activities: | | | |
| Borrowings under SGI revolving credit facility | 50 | | | 40 | |
| Repayments under SGI revolving credit facility | (90) | | | (175) | |
| Proceeds from issuance of senior notes and term loans | — | |
| 1,100 | |
| | | |
| Payments on long-term debt | (10) | | | (12) | |
| Payments of debt issuance and deferred financing costs | — | | | (14) | |
| Payments on license obligations | (8) | | | (7) | |
| Sale of future revenue and other | (1) | | | 10 | |
| | | |
| Net cash (used in) provided by financing activities | (59) | | | 942 | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5) | | | 1 | |
| Increase in cash, cash equivalents and restricted cash | 25 | | | 1,046 | |
| Cash, cash equivalents and restricted cash, beginning of period | 375 | | | 220 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 400 | | | $ | 1,266 | |
| | | |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 110 | | | $ | 80 | |
| Income taxes paid | 6 | | | 10 | |
| Distributed earnings from equity investments | 4 | | | 4 | |
| Supplemental non-cash transactions: | | | |
| | | |
| | | |
| Non-cash interest expense | $ | 5 | | | $ | 7 | |
| | | |
| | | |
| See accompanying notes to condensed consolidated financial statements. | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2021 | | 2020 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (9) | | | $ | (155) | |
| Adjustments to reconcile net loss to cash provided by operating activities | 122 | | | 243 | |
| Changes in working capital accounts | 9 | | | 25 | |
| Changes in deferred income taxes and other | 1 | | | 7 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Net cash provided by operating activities | 123 | | | 120 | |
| | | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (50) | | | (53) | |
| Acquisitions of businesses | (2) | | | 0 | |
| Additions to equity method investments, net of distributions | (9) | | | 0 | |
| Proceeds from sale of assets and other | 0 | | | 22 | |
| | | |
| Net cash used in investing activities | (61) | | | (31) | |
| | | |
| Cash flows from financing activities: | | | |
| Borrowings under SGI revolving credit facility | 0 | | | 50 | |
| Repayments under SGI revolving credit facility | (100) | | | (90) | |
| | | |
| | | |
| Payments on long-term debt | (10) | | | (10) | |
| | | |
| Payments on license obligations | (13) | | | (8) | |
| Taxes paid related to net share settlement of equity awards and other | (16) | | | (1) | |
| | | |
| | | |
| | | |
| Net cash used in financing activities | (139) | | | (59) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1) | | | (5) | |
| (Decrease) increase in cash, cash equivalents and restricted cash | (78) | | | 25 | |
| Cash, cash equivalents and restricted cash, beginning of period | 1,143 | | | 375 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 1,065 | | | $ | 400 | |
| | | |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 123 | | | $ | 110 | |
| Income taxes paid | 7 | | | 6 | |
| Distributed earnings from equity investments | 4 | | | 4 | |
| | | |
| Supplemental non-cash transactions: | | | |
| | | |
| | | |
| | | |
| Non-cash interest expense | $ | 6 | | | $ | 5 | |
| | | |
| See accompanying notes to condensed consolidated financial statements. |
SCIENTIFIC GAMES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in USD, table amounts in millions, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies
Description of the Business
We are a leading developer of technology-based products and services and associated content for the worldwide gaming, lottery, social and digital gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems and table game products and services to licensed gaming entities; providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; providing social casino gaming solutionsand other mobile games to retail consumers;customers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments. We report our results of operations in four4 business segments—Gaming, Lottery, SciPlay and Digital.Digital—representing our different products and services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of SGC, its wholly owned subsidiaries, and those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of SGC and its management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations, comprehensive (loss) incomeloss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 20192020 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.
Impact of COVID-19
In MarchAs more fully described in the “Description of the Business and Summary of Significant Accounting Policies - Impact of COVID-19” in Note 1 of our 2020 the World Health Organization declared the rapidly spreading10-K, 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 gaming operations establishments and disruptions to lottery operations, travel restrictions, and cancellation of sporting events, which are affecting our business segments in a number of ways. These disruptions to our business segments as a result of COVID-19 have had and continue to have an adverse impact on our results of operations cash flows and financial condition.
Based onparticularly our current estimates regardingGaming business segment operations. Even though the magnitudemajority of gaming establishments reopened globally, gaming operations have yet to return to pre-COVID levels, as limited international travel, social distancing measures and length of the disruptions to our business, we do not anticipate these disruptions will impact our ability to meet our obligations when due or our ability to maintain compliance with our debt covenants for at least the next 12 months. However, the ultimate magnitudereduced operating capacity restrictions remain in effect in many jurisdictions, and length of time that the disruptions from COVID-19 will continue is highly uncertain. Thisoverall uncertainty will require us to continually assess the situation, including the impact of changes to government imposed restrictions, market by market. Accordingly, our estimates regarding the magnitude and length of time that these disruptions will continue to impact our results of operations, cash flowsbusiness remains unknown and financial condition may change in the future and such changes could be material.
As of March 31, 2020, our total available liquidity (excluding our SciPlay business segment) was $684 million, which included $483 million of undrawn availability under SGI’s revolving credit facility. On April 9, 2020, we borrowed $480 million under SGI’s revolving credit facility, which was substantially all of the remaining availability thereunder. We have implemented a number of measures to proactively reduce operating costs, conserve liquidity and navigate through this unprecedented situation. These include measures such as: reductions in both salaries and workforce, including voluntary 50% or greater reductions in salaries by our executive leadership team (100% as to our President and Chief Executive Officer), 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 are also engaging with our vendors to negotiate concessions on the timing and amount of payments to preserve liquidity through the COVID-19 disruption period. We continue to assess the situation jurisdiction by jurisdiction and actively manage our daily cash flows and continue to evaluate additional measures that will reduce operating costs and conserve cash.cash to preserve liquidity as we execute on our strategic initiatives.
Our only financial maintenance covenant (excluding SciPlay’s Revolver) is contained in SGI’s credit agreement. Prior to the Credit Agreement Amendment (as defined below) dated May 8, 2020, this covenant was tested at the end of each fiscal quarter and required us to not exceed a maximum consolidated net first lien leverage ratio of 5.00x Consolidated EBITDA (as
defined in the credit agreement). Prior to the Credit Agreement Amendment, this ratio stepped down to 4.75x beginning with the fiscal quarter ended December 31, 2020 and to 4.50x beginning with the fiscal quarter ended December 31, 2021. Our consolidated net first lien leverage ratio asAs of March 31, 2020 was 4.38x. Additionally, the SciPlay Revolver requires that SciPlay maintain a maximum2021, our total net leverage ratio not to exceed 2.50x and maintain a minimum fixed charge coverage ratio of no less than 4.00x. We had no amounts drawn onavailable liquidity (excluding our SciPlay Revolver asbusiness segment) was $898 million, which included $203 million of March 31, 2020. We were in compliance with the financial covenants under all debt agreements as of March 31, 2020.
On May 8, 2020, the requisite lendersundrawn availability under SGI’s revolving credit facility agreed to amend the consolidated net first lien leverage ratio covenant in the credit agreement (the “Credit Agreement Amendment”) to (a) implementfacility. In April of 2021, we made a financial covenant relief period through the endvoluntary payment of the first quarter ending March 31, 2021 (the “Covenant Relief Period”), as a result of which SGI is not required to maintain compliance with the consolidated net first lien leverage ratio covenant during the Covenant Relief Period, (b) reset the consolidated net first lien leverage ratio covenant following the Covenant Relief Period, (c) impose a minimum liquidity requirement (excluding SciPlay) of at least $275$150 million during the Covenant Relief Period with a potential step-down to at least $200 million for April and May 2021, (d) further restrict our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject, in some instances, to maintaining minimum liquidity (excluding SciPlay) of at least $400 million and (e) establish a LIBOR floor of 0.500% on borrowings under theSGI’s revolving credit facility during the Covenant Relief Period. The revised consolidated net first lien leverage ratio will be 6.00x Consolidated EBITDA beginning with the fiscal quarter ending June 30, 2021, stepping down as follows: (1) 5.75x beginning with the fourth quarter of 2021, (2) 5.25x beginning with the second quarter of 2022, (3) 4.75x beginning with the fourth quarter of 2022 and (4) 4.50x beginning with the second quarter of 2023 and thereafter. The revised consolidated net first lien leverage ratio will be based on Consolidated EBITDA (as defined in the Credit Agreement Amendment) as follows: (1) for the testing period ending June 30, 2021, Consolidated EBITDA for the fiscal quarter ending June 30, 2021 multiplied by 4, (2) for the testing period ending September 30, 2021, Consolidated EBITDA for the fiscal quarters ending June 30, 2021 and September 30, 2021 multiplied by 2, (3) for the testing period ending December 31, 2021, Consolidated EBITDA for the fiscal quarters ending June 30, 2021, September 30, 2021 and December 31, 2021 multiplied by 4/3 and (4) for all subsequent testing periods, Consolidated EBITDA for the previous twelve months including the quarter for the which the test is performed.
Additionally, changes to estimates related to the COVID-19 disruptions could result in other impacts, including but not limited to, additional goodwill impairments (see Note 8), indefinite-lived intangibles, long-lived asset and equity method investments impairment charges, inventory write downs and receivables credit allowance charges (see Note 5).
Significant Accounting Policies
There have been no changes to our significant accounting policies described within the Notes of our 2019 10-K other than adoption of ASC 326 as described in Note 5.2020 10-K.
Computation of Basic and Diluted Net Loss Per Share
Basic and diluted net loss attributable to SGC per share were the same for all periods presented as all common stock equivalents during those periods would be anti-dilutive. We excluded 12 million and 21 million of stock options from the diluted weighted-average common shares outstanding for the three months ended March 31, 20202021 and 2019,2020, respectively. We excluded 3 million and 2 million of RSUs from the calculation of diluted weighted-average common shares outstanding for each of the three months ended March 31, 2021 and 2020, and 2019.respectively.
New Accounting Guidance - RecentlyNot Yet Adopted
The FASB issued ASU No. 2016-13,2020-04 and subsequently ASU No. 2021-01, Financial Instruments - Credit LossesReference Rate Reform (Topic 326)848) in 2016.March 2020 and January 2021, respectively. The new guidance replaces the incurred loss impairment methodology in legacyprovides optional expedients and exceptions for applying U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we 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 resulted in a $6 million cumulative-effect adjustment increase to accumulated loss. See Note 5 for our credit losses policy and the adoption impact of ASC 326 on our consolidated 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 have a material impact on our financial statement disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes, GAAP to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period,contract modifications and the recognition of deferred tax liabilities for outside basis differences related tohedging relationships, including derivative instruments impacted by changes in ownershipthe interest rates used for discounting cash flows for computing variable margin settlements, subject to meeting certain criteria, that reference LIBOR or other reference rates expected to be discontinued, in 2022 or potentially 2023 (pending possible extension). The ASUs establish certain contract modification principles that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients and exceptions. The ASUs may be applied prospectively. We are currently assessing the impact 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. The adoption of this guidance did not have a material effectthese standards on our consolidated financial statements.
We do not expect that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.
(2) Revenue Recognition
The following table disaggregates revenues by type within each of our business segments:
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
| Gaming | Gaming | | | | | Gaming | | | | |
| Gaming operations | Gaming operations | $ | 119 | | | | $ | 152 | | | Gaming operations | $ | 113 | | | $ | 119 | | |
| Gaming machine sales | Gaming machine sales | 92 | | | | 136 | | | Gaming machine sales | 55 | | | 92 | | |
| Gaming systems | Gaming systems | 55 | | | | 74 | | | Gaming systems | 42 | | | 55 | | |
| Table products | Table products | 52 | | | | 60 | | | Table products | 34 | | | 52 | | |
| Total | Total | $ | 318 | | | $ | 422 | | | Total | $ | 244 | | | $ | 318 | | |
| | Lottery | Lottery | | | Lottery | | |
| Instant products | Instant products | $ | 136 | | | $ | 140 | | | Instant products | $ | 162 | | | $ | 136 | | |
| Lottery systems | Lottery systems | 76 | | | 87 | | | Lottery systems | 86 | | | 76 | | |
| Total | Total | $ | 212 | | | $ | 227 | | | Total | $ | 248 | | | $ | 212 | | |
| | SciPlay | SciPlay | | | SciPlay | | |
| Mobile | Mobile | $ | 101 | | | $ | 97 | | | Mobile | $ | 133 | | | $ | 101 | | |
| Web and other | Web and other | 17 | | | 21 | | | Web and other | 18 | | | 17 | | |
| Total | Total | $ | 118 | | | $ | 118 | | | Total | $ | 151 | | | $ | 118 | | |
| | Digital | Digital | | | Digital | | |
| Sports and platform | Sports and platform | $ | 38 | | | $ | 30 | | | Sports and platform | $ | 33 | | | $ | 38 | | |
| Gaming and other | Gaming and other | 39 | | | 40 | | | Gaming and other | 53 | | | 39 | | |
| Total | Total | $ | 77 | | | $ | 70 | | | Total | $ | 86 | | | $ | 77 | | |
The amount of rental income revenue that is outside the scope of ASC 606 was $74$63 million and $96$74 million for the three months ended March 31, 2021, and 2020, and 2019, respectively.
Contract Liabilities and Other Disclosures
The following table summarizes the activity in our contract liabilities for the reporting period:
| | | | | |
| Three Months Ended March 31, |
| 2020 2021 |
Contract liability balance, beginning of period(1) | $ | 10989 | |
| Liabilities recognized during the period | 3630 | |
| Amounts recognized in revenue from beginning balance | (49)(20) | |
Contract liability balance, end of period(1) | $ | 9699 | |
| (1) Contract liabilities are included within Accrued liabilities and Other long-term liabilities in our consolidated balance sheets. | |
The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on our consolidated balance sheets. Other than contracts with customers with financing arrangements exceeding 12 months, revenue recognition is generally proximal to conversion to cash, except for Lottery instant products sold under percentage of retail sales contracts. Revenue is recognized for
such contracts upon delivery to our customers, while conversion to cash is based on the retail sale of the underlying tickettickets to end consumers. As a result, revenue recognition under ASC 606 does not approximate conversion to cash for such contracts in any periods post-adoption.presented. Total revenue recognized under such contracts was $19 million and $23 million in the three months ended March 31, 20202021 and 2019, respectively.2020. The following table summarizes our balances in these accounts for the periods indicated (other than contract liabilities disclosed above):
| | | Receivables | | Contract Assets(1) | | Receivables | | Contract Assets(1) |
Beginning of period balance(2) | Beginning of period balance(2) | $ | 808 | | | $ | 121 | | Beginning of period balance(2) | $ | 636 | | | $ | 127 | |
| End of period balance, March 31, 2020 | 672 | | | 133 | | |
| End of period balance, March 31, 2021 | | End of period balance, March 31, 2021 | 641 | | | 117 | |
| | | (1) Contract assets are included primarily within Prepaid expenses, deposits and other current assets in our consolidated balance sheets. | (1) Contract assets are included primarily within Prepaid expenses, deposits and other current assets in our consolidated balance sheets. | | (1) Contract assets are included primarily within Prepaid expenses, deposits and other current assets in our consolidated balance sheets. |
| (2) The beginning of period balance excludes the impact of adoption of ASC 326. | | |
As of March 31, 2020,2021, we did not have material unsatisfied performance obligations for contracts expected to be long-term or contracts for which we recognize revenue at an amount other than for which we have the right to invoice for goods or services delivered or performed.
(3) Business Segments
We report our operations in 4 business segments—Gaming, Lottery, SciPlay and Digital—representing our different products and services. A detailed discussion regarding the products and services from which each reportable business segment derives its revenue is included in Notes 2 and 3 in our 20192020 10-K.
In evaluating financial performance, our Chief Operating Decision Maker focuses on AEBITDA as management’s segment measure of profit or loss, which is described in Note 2 in our 20192020 10-K. The accounting policies of our business segments are the same as those described within the Notes in our 20192020 10-K. The following tables present our segment information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | | | | | | | | | |
| Gaming | | Lottery | | SciPlay | | Digital | | Unallocated and Reconciling Items(1) | | Total |
| Total revenue | $ | 318 | | | $ | 212 | | | $ | 118 | | | $ | 77 | | | $ | — | | | $ | 725 | |
| AEBITDA | 96 | | | 78 | | | 35 | | | 23 | | | (32) | | | $ | 200 | |
| Reconciling items to consolidated net loss before income taxes: | | | | | | | | | | | |
| D&A | (89) | | | (14) | | | (2) | | | (21) | | | (12) | | | (138) | |
| Goodwill impairment | (54) | | | — | | | — | | | — | | | — | | | (54) | |
| Restructuring and other | (12) | | | (5) | | | (1) | | | (1) | | | (3) | | | (22) | |
| EBITDA from equity investments | | | | | | | | | (7) | | | (7) | |
| Loss from equity investments | | | | | | | | | (2) | | | (2) | |
| Interest expense | | | | | | | | | (124) | | | (124) | |
| Gain on remeasurement of debt | | | | | | | | | 10 | | | 10 | |
| Other expense, net | | | | | | | | | (4) | | | (4) | |
| Stock-based compensation | | | | | | | | | (10) | | | (10) | |
| Net loss before income taxes | | | | | | | | | | | $ | (151) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| (1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes. | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Gaming | | Lottery | | SciPlay | | Digital | | Unallocated and Reconciling Items(1) | | Total |
| Total revenue | $ | 244 | | | $ | 248 | | | $ | 151 | | | $ | 86 | | | $ | 0 | | | $ | 729 | |
| AEBITDA | 108 | | | 119 | | | 46 | | | 29 | | | (32) | | | $ | 270 | |
| Reconciling items to consolidated net loss before income taxes: |
| D&A | (75) | | | (14) | | | (3) | | | (24) | | | (7) | | | (123) | |
| | | | | | | | | | | |
| Restructuring and other | (3) | | | 0 | | | 0 | | | (1) | | | (17) | | | (21) | |
| EBITDA from equity investments | | | | | | | | | (20) | | | (20) | |
| Earnings from equity investments | | | | | | | | | 9 | | | 9 | |
| Interest expense | | | | | | | | | (121) | | | (121) | |
| | | | | | | | | | | |
| Gain on remeasurement of debt | | | | | | | | | 25 | | | 25 | |
| Other expense, net | | | | | | | | | (2) | | | (2) | |
| Stock-based compensation | | | | | | | | | (23) | | | (23) | |
| Net loss before income taxes | | | | | | | | | | | $ | (6) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| (1) Includes amounts not allocated to the business segments (including corporate costs) and items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | | | | | | | | | | |
| Gaming | | Lottery | | SciPlay | | Digital | | Unallocated and Reconciling Items(1) | | Total |
| Total revenue | $ | 422 | | | $ | 227 | | | $ | 118 | | | $ | 70 | | | $ | — | | | $ | 837 | |
| AEBITDA | 215 | | | 104 | | | 25 | | | 13 | | | (29) | | | $ | 328 | |
| Reconciling items to consolidated net loss before income taxes: | | | | | | | | | | | |
| D&A | (112) | | | (19) | | | (2) | | | (19) | | | (13) | | | (165) | |
| Restructuring and other | (2) | | | — | | | (1) | | | (3) | | | (1) | | | (7) | |
| EBITDA from equity investments | | | | | | | | | (17) | | | (17) | |
| Earnings from equity investments | | | | | | | | | 6 | | | 6 | |
| Interest expense | | | | | | | | | (154) | | | (154) | |
| | | | | | | | | | | |
| Gain on remeasurement of debt | | | | | | | | | 5 | | | 5 | |
| Other expense, net | | | | | | | | | (2) | | | (2) | |
| Stock-based compensation | | | | | | | | | (14) | | | (14) | |
| Net loss before income taxes | | | | | | | | | | | $ | (20) | |
| | | | | | | | | | | |
| (1) Includes amounts not allocated to the business segments (including corporate costs) and reconciling items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes. | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| Gaming | | Lottery | | SciPlay | | Digital | | Unallocated and Reconciling Items(1) | | Total |
| Total revenue | $ | 318 | | | $ | 212 | | | $ | 118 | | | $ | 77 | | | $ | 0 | | | $ | 725 | |
| AEBITDA | 96 | | | 78 | | | 35 | | | 23 | | | (32) | | | $ | 200 | |
| Reconciling items to consolidated net loss before income taxes: |
| D&A | (89) | | | (14) | | | (2) | | | (21) | | | (12) | | | (138) | |
| Goodwill impairment | (54) | | | 0 | | | 0 | | | 0 | | | 0 | | | (54) | |
| Restructuring and other | (12) | | | (5) | | | (1) | | | (1) | | | (3) | | | (22) | |
| EBITDA from equity investments | | | | | | | | | (7) | | | (7) | |
| Loss from equity investments | | | | | | | | | (2) | | | (2) | |
| Interest expense | | | | | | | | | (124) | | | (124) | |
| | | | | | | | | | | |
| Gain on remeasurement of debt | | | | | | | | | 10 | | | 10 | |
| Other expense, net | | | | | | | | | (4) | | | (4) | |
| Stock-based compensation | | | | | | | | | (10) | | | (10) | |
| Net loss before income taxes | | | | | | | | | | | $ | (151) | |
| | | | | | | | | | | |
| (1) Includes amounts not allocated to the business segments (including corporate costs) and items to reconcile the total business segments AEBITDA to our consolidated net loss before income taxes. |
|
(4) Restructuring and other
Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; (v) major litigation; and (vi) acquisition related costs and other unusual items. The following table summarizes pre-tax restructuring and other costs for the periods presented:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Employee severance and related(1) | | $ | 18 | | | $ | 3 | | | | | |
| Restructuring, integration and other | | 4 | | | 4 | | | | | |
| Total | | $ | 22 | | | $ | 7 | | | | | |
| (1) The three months ended March 31, 2020 includes $14 million in severance and other benefits granted to employees as a result of COVID-19 related austerity measures. | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2021 | | 2020 | | | | |
Employee severance and related(1) | | $ | 1 | | | $ | 18 | | | | | |
| | | | | | | | |
Restructuring, integration and other(2) | | 20 | | | 4 | | | | | |
| Total | | $ | 21 | | | $ | 22 | | | | | |
|
| (1) The three months ended March 31, 2020 includes $14 million in severance and other benefits granted to employees as a result of COVID-19 related austerity measures. |
| (2) The three months ended March 31, 2021 includes cost associated with strategic and business optimization initiatives. |
(5) Receivables, Allowance for Credit Losses and Credit Quality of Receivables
Receivables
Receivables are recorded at the invoiced amount less allowance for credit losses and imputed interest, if any. For a portion of our receivables, we have provided extended payment terms with installment payment terms greater than 12 months and in certain international jurisdictions up to 36 months. We have a total of $157 million in gross receivables with extended payment terms as of March 31, 2020. Interest income, if any, is recognized ratably over the life of the receivable, and any related fees or costs to establish the receivables are charged to selling, general and administrative expense as incurred, as they are immaterial. Actual or imputed interest, if any, is determined based on current market rates at the time the receivables with extended payment terms originated and is recorded ratably over the payment period, which approximates the effective interest method. We generally impute interest income on all receivables with payment terms greater than one year that do not contain a stated interest rate. Our general policy is to recognize interest on receivables until a receivable is deemed non-performing, which we define as payments being overdue by 180 days beyond the agreed-upon terms. When a receivable is deemed to be non-performing, the item is placed on non-accrual status and interest income is recognized on a cash basis. Accrued interest, non-performing receivables and interest income were immaterial for all periods presented. Effective January 1, 2020, we changed our receivables presentation and combined accounts receivable and notes receivable into a single line item on our balance sheets due to their similar characteristics and have reclassified the prior period balances to conform to the current year presentation.
The following table summarizes the components of current and long-term receivables, net:
| | | | | | | | | | | |
| As of |
| March 31, 2021 | | December 31, 2020 |
| Current: | | | |
| Receivables | $ | 700 | | | $ | 697 | |
| Allowance for credit losses | (79) | | | (81) | |
| Current receivables, net | 621 | | | 616 | |
| Long-term: | | | |
| Receivables | 25 | | | 25 | |
| Allowance for credit losses | (5) | | | (5) | |
| Long-term receivables, net | 20 | | | 20 | |
| Total receivables, net | $ | 641 | | | $ | 636 | |
| | | | | | | | | | | |
| As of | | |
| March 31, 2020 | | December 31, 2019 |
| Current: | | | |
| Receivables | $ | 685 | | | $ | 791 | |
| Allowance for credit losses | (61) | | | (36) | |
| Current receivables, net | 624 | | | 755 | |
| Long-term: | | | |
| Receivables | 57 | | | 53 | |
| Allowance for credit losses | (9) | | | — | |
| Long-term receivables, net | 48 | | | 53 | |
| Total receivables, net | $ | 672 | | | $ | 808 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Allowance for Credit Losses
As described in Note 1, results for reporting periods effective January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. We recorded a net increase to accumulated loss of $6 million for the cumulative effect of adopting ASC 326, which was primarily related to incremental allowance for credit losses associated with our current receivables and contract assets that were not required under previously applicable U.S. GAAP. The adoption impact of this standard to our consolidated statements of operations, balance sheets, and cash flows during the quarter ended March 31, 2020 was not material.
The receivables allowance for credit losses is 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. We evaluate such receivables on a geographic basis and take into account any relevant available information, which begins with historical credit loss experience and consideration of current and expected conditions and market trends (such as general economic conditions, other microeconomic and macroeconomic considerations, etc.) and reasonable and supportable forecasts that could impact the collectability of such receivables over the contractual term individually or in the aggregate. Changes in circumstances relating to these factors may result in the need to increase or decrease our allowance for credit losses in the future.
We manage our receivable portfolios using both geography and delinquency as key credit quality indicators. The following summarizes geographical delinquencies of total receivables, net:net:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| March 31, 2021 | | Balances over 90 days past due | | December 31, 2020 | | Balances over 90 days past due |
| Receivables: | | | | | | | |
| U.S. and Canada | $ | 478 | | | $ | 96 | | | $ | 443 | | | $ | 88 | |
| International | 247 | | | 50 | | | 279 | | | 52 | |
| Total receivables | 725 | | | 146 | | | 722 | | | 140 | |
| | | | | | | |
| Receivables allowance: | | | | | | | |
| U.S. and Canada | (42) | | | (25) | | | (43) | | | (26) | |
| International | (42) | | | (23) | | | (43) | | | (24) | |
| Total receivables allowance | (84) | | | (48) | | | (86) | | | (50) | |
| Receivables, net | $ | 641 | | | $ | 98 | | | $ | 636 | | | $ | 90 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | | | |
| March 31, 2020 | | Balances over 90 days past due | | December 31, 2019 | | Balances over 90 days past due |
| Receivables: | | | | | | | |
| U.S. and Canada | $ | 456 | | | $ | 82 | | | $ | 534 | | | $ | 65 | |
| International | 286 | | | 63 | | | 310 | | | 55 | |
| Total receivables | 742 | | | 145 | | | 844 | | | 120 | |
| | | | | | | |
| Receivables allowance: | | | | | | | |
| U.S. and Canada | (29) | | | (21) | | | (13) | | | (8) | |
| International | (41) | | | (25) | | | (23) | | | (23) | |
| Total receivables allowance | (70) | | | (46) | | | (36) | | | (31) | |
| Receivables, net | $ | 672 | | | $ | 99 | | | $ | 808 | | | $ | 89 | |
Account balances are charged against the allowances after all internal and external collection efforts have been exhausted and the potential for recovery is considered remote.
The activity in our allowance for receivable credit losses for each of the three-month periodsthree months ended March 31, 20202021 and 20192020 is as follows:
| | | | 2021 | | 2020 |
| | | Total | | U.S. and Canada | | International | | Total |
| Beginning allowance for credit losses | | Beginning allowance for credit losses | $ | (86) | | | $ | (43) | | | $ | (43) | | | $ | (42) | |
| Provision | | Provision | 0 | | | 0 | | | 0 | | | (28) | |
| Charge-offs and recoveries | | Charge-offs and recoveries | 2 | | | 1 | | | 1 | | | 0 | |
| | | Three Months Ended March 31, | | |
| | 2020 | | | 2019 | |
| | Total | | U.S. and Canada | | International | | Total | |
Beginning allowance for credit losses(1) | $ | (42) | | | $ | (14) | | | $ | (28) | | | $ | (40) | | |
| Provision | (28) | | | (15) | | | (13) | | | (1) | | |
| Charge-offs and recoveries | — | | | — | | | — | | | 3 | | |
| | Ending allowance for credit losses | Ending allowance for credit losses | $ | (70) | | | $ | (29) | | | $ | (41) | | | $ | (38) | | Ending allowance for credit losses | $ | (84) | | | $ | (42) | | | $ | (42) | | | $ | (70) | |
| | (1) Reflects $6 million related to implementation of ASC 326 for the beginning balance of the three months ended March 31, 2020. | | |
At March 31, 2020,2021, 15% of our total receivables, net, were past due by over 90 days compared to 11%14% at December 31, 2019. 2020.
Credit Quality of Receivables
In our Gaming machine sales business, we file UCC-1 financing statements domestically in order to retain a security interest in the gaming machines that underlie a significant portion of our domestic receivables until the receivable balance is fully paid. However, the value of the gaming machines, if repossessed, may be less than the balance of the outstanding receivable. For international customers, depending on the country and our historic collection experience with the customer, we may obtain pledge agreements, bills of exchange, guarantees, post-dated checks or other forms of security agreements designed to enhance our ability to collect the receivables, although a majority of our international receivables do not have these features. In our Gaming operations business, because we own the Participation gaming machines that are leased or otherwise provided to the customer, in a bankruptcy the customer has to generally either accept or reject the lease or other agreement and, if rejected, our gaming machines are returned to us. Our receivables related to revenue earned on Participation gaming machines and all other revenue sources are typically unsecured claims.
Due to the significance of our gaming machines to the ongoing operations of our casino customers, we may be designated as a key vendor in any bankruptcy filing by a casino customer, which can enhance our position above other creditors in the bankruptcy. Due to our successful collection experience and our continuing relationship with casino customers and their businesses, it is infrequent that we repossess gaming machines from a customer in partial settlement of outstanding receivable balances. In those unusual instances where repossession occurs to mitigate our exposure on the related receivable, the repossessed gaming machines are subsequently resold in the used gaming machine market; however, we may not fully recover the receivable from this re-sale.
We have certain concentrations of outstanding receivables in international locations that impact our assessment of the credit quality of our receivables. We monitor the macroeconomic and political environment in each of these locations in our assessment of the credit quality of our receivables. The international locationscustomers with significant concentrations (generally deemed to be exceeding 10%) of our receivables with terms longer than one year are as follows:in the Latin America region (“LATAM”) and are primarily comprised of Mexico, Peru and Argentina. The following table summarizes our LATAM receivables:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2021 | | |
| Total | | | | Current or Not Yet Due | | Balances Over 90 days Past Due | | | | | | |
| Receivables | $ | 110 | | | | | $ | 49 | | | $ | 61 | | | | | | | |
| Allowance for credit losses | (53) | | | | | (14) | | | (39) | | | | | | | |
| Receivables, net | $ | 57 | | | | | $ | 35 | | | $ | 22 | | | | | | | |
•Mexico - Our receivables, net, from certain customers in Mexico at March 31, 2020 was $25 million. We collected $7 million of outstanding receivables from these customers during the three months ended March 31, 2020.
•Peru - Our receivables, net, from certain customers in Peru at March 31, 2020 was $7 million. We collected $1 million of outstanding receivables from these customers during the three months ended March 31, 2020.
•Argentina - Our receivables, net, from customers in Argentina at March 31, 2020 was $12 million, which are denominated in USD. Our customers are required to and have continued to pay us in pesos at the spot exchange rate on the date of payment. We collected $4 million of outstanding receivables from customers in Argentina during the three months ended March 31, 2020.
During the first quarter, we increased our allowance for credit losses by $28 million.million in the first quarter of 2020. This increase was primarily related to Gaming customers in Latin AmericaLATAM (which transact with both domestic and international subsidiaries) as we expect those customers to bewere particularly affected by COVID-19 closures of gaming operations establishments. As noted above, weestablishments with COVID-related closures lasting longer than in other geographic regions. We did not have concentrationsmaterial credit losses during the first quarter of receivables in Latin America, where customers generally take longer to pay us than those from other geographies. In addition, customers in this region expect and have often been granted extended payment terms as described above. Our customers in Argentina, Colombia and Peru have been and are expected to continue to be affected by the2021. We
COVID-19-related closurescontinuously review receivables and as information concerning credit quality arise, reassess our expectations of gaming operations establishmentsfuture losses and record an incremental reserve if warranted at that time. Our current allowance for credit losses represents our current expectation of credit losses; however future expectations could change as the resultingultimate impact on both their specificof the COVID-19 disruption remains uncertain, particularly as to the financial situationsstability of our customers during and after the general macroeconomic environments in which they operate.
The fair value of receivables is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 20202021 and December 31, 2019,2020, the fair value of receivables, net, approximated the carrying value due to contractual terms of receivables generally being underless than 24 months.
(6) Inventories
Inventories consisted of the following as of the dates presented below:following:
| | | As of | | | As of |
| | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Parts and work-in-process | Parts and work-in-process | | $ | 149 | | | $ | 153 | | Parts and work-in-process | | $ | 115 | | | $ | 122 | |
| Finished goods | Finished goods | | 99 | | | 91 | | Finished goods | | 76 | | | 69 | |
| Total inventories | Total inventories | | $ | 248 | | | $ | 244 | | Total inventories | | $ | 191 | | | $ | 191 | |
|
Parts and work-in-process include parts for gaming machines, lottery terminals and instant lottery ticket materials, as well as labor and overhead costs for work-in-process associated with the manufacturing of instant lottery games and lottery terminals. Our finished goods inventory primarily consists of gaming machines for sale, instant products primarily for our Participation arrangements and our licensed branded merchandise.
(7) Property and Equipment, net
Property and equipment, net consisted of the following:
| | | As of | | | As of |
| | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Land | Land | $ | 15 | | | $ | 15 | | Land | $ | 15 | | | $ | 15 | |
| Buildings and leasehold improvements | Buildings and leasehold improvements | 127 | | | 129 | | Buildings and leasehold improvements | 133 | | | 132 | |
| Gaming and lottery machinery and equipment | Gaming and lottery machinery and equipment | 1,005 | | | 1,028 | | Gaming and lottery machinery and equipment | 1,035 | | | 1,026 | |
| Furniture and fixtures | Furniture and fixtures | 29 | | | 31 | | Furniture and fixtures | 32 | | | 32 | |
| Construction in progress | Construction in progress | 29 | | | 30 | | Construction in progress | 53 | | | 43 | |
| Other property and equipment | Other property and equipment | 261 | | | 263 | | Other property and equipment | 277 | | | 277 | |
| Less: accumulated depreciation | Less: accumulated depreciation | (992) | | | (996) | | Less: accumulated depreciation | (1,139) | | | (1,110) | |
| Total property and equipment, net | Total property and equipment, net | $ | 474 | | | $ | 500 | | Total property and equipment, net | $ | 406 | | | $ | 415 | |
| | |
Depreciation expense is excluded from Cost of services, Cost of product sales, Cost of instant products and Other operating expenses and is separately presented within D&A.
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Depreciation expense | $ | 44 | | | $ | 58 | | | | | |
During the first quarter of 2020, we sold certain properties in Chicago that were held for sale as of December 31, 2019 and received total net proceeds of $22 million.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Depreciation expense | $ | 40 | | | $ | 44 | | | | | |
|
(8) Intangible Assets, net and Goodwill
Intangible Assets, net
The following tables present certain information regarding our intangible assets as of March 31, 20202021 and December 31, 2019.2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | December 31, 2019 | | | | |
| Gross Carrying Value | | Accumulated Amortization | | | | Net Balance | | Gross Carrying Value | | Accumulated Amortization | | Net Balance |
| Amortizable intangible assets: | | | | | | | | | | | | | |
| Customer relationships | $ | 1,064 | | | $ | (398) | | | | | $ | 666 | | | $ | 1,086 | | | $ | (383) | | | $ | 703 | |
| Intellectual property | 915 | | | (573) | | | | | 342 | | | 931 | | | (563) | | | 368 | |
| Licenses | 563 | | | (361) | | | | | 202 | | | 548 | | | (329) | | | 219 | |
| Brand names | 120 | | | (73) | | | | | 47 | | | 123 | | | (72) | | | 51 | |
| Trade names | 116 | | | (34) | | | | | 82 | | | 116 | | | (31) | | | 85 | |
| Patents and other | 24 | | | (15) | | | | | 9 | | | 24 | | | (15) | | | 9 | |
| | | | | | | | | | | | | |
| 2,802 | | | (1,454) | | | | | 1,348 | | | 2,828 | | | (1,393) | | | 1,435 | |
| Non-amortizable intangible assets: | | | | | | | | | | | | | |
| Trade names | 83 | | | (2) | | | | | 81 | | | 83 | | | (2) | | | 81 | |
| Total intangible assets | $ | 2,885 | | | $ | (1,456) | | | | | $ | 1,429 | | | $ | 2,911 | | | $ | (1,395) | | | $ | 1,516 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| March 31, 2021 | | December 31, 2020 |
| Gross Carrying Value | | Accumulated Amortization | | | | Net Balance | | Gross Carrying Value | | Accumulated Amortization | | Net Balance |
| Amortizable intangible assets: | | | | | | | | | | | | | |
| Customer relationships | $ | 1,110 | | | $ | (501) | | | | | $ | 609 | | | $ | 1,108 | | | $ | (478) | | | $ | 630 | |
| Intellectual property | 953 | | | (661) | | | | | 292 | | | 958 | | | (648) | | | 310 | |
| Licenses | 558 | | | (415) | | | | | 143 | | | 558 | | | (405) | | | 153 | |
| Brand names | 127 | | | (89) | | | | | 38 | | | 128 | | | (86) | | | 42 | |
| Trade names | 117 | | | (45) | | | | | 72 | | | 117 | | | (42) | | | 75 | |
| Patents and other | 24 | | | (16) | | | | | 8 | | | 24 | | | (16) | | | 8 | |
| 2,889 | | | (1,727) | | | | | 1,162 | | | 2,893 | | | (1,675) | | | 1,218 | |
| Non-amortizable intangible assets: | | | | | | | | | | | | | |
| Trade names | 83 | | | (2) | | | | | 81 | | | 83 | | | (2) | | | 81 | |
| Total intangible assets | $ | 2,972 | | | $ | (1,729) | | | | | $ | 1,243 | | | $ | 2,976 | | | $ | (1,677) | | | $ | 1,299 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following reflects intangible amortization expense included within D&A:
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Amortization expense | $ | 65 | | | $ | 77 | | | | | |
Goodwill
Legacy U.K. Gaming Impairment Charge
We test goodwill for impairment annually as of October 1 of each fiscal year or more frequently if events arise or circumstances change that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value.
A substantial portion of our legacy U.K. Gaming reporting unit revenue comes from Ladbrokes Coral Group (acquired by GVC Holdings PLC in March 2018), which operates LBOs in the U.K. In May 2018, the U.K. government published its decision mandating that the maximum stakes limit on fixed-odds betting terminals be reduced from £100 to £2, which was effective as of April 1, 2019. As a result of this change, LBO operators began to rationalize their retail operations, which among other measures has included closure of certain LBO shops. Consequently, as of October 1, 2019, we concluded that an elevated risk of goodwill impairment existed for our legacy U.K. Gaming reporting unit as adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with investments included in that reporting unit could lead to future goodwill impairments.
During the first quarter of 2020, the COVID-19 disruptions resulted in the widespread closures of LBO shops across the U.K., which, along with global economic uncertainty, contributed to further deterioration in business conditions from our 2019 annual goodwill test date. This had an adverse effect on our legacy U.K. Gaming reporting unit, which necessitated performing a quantitative goodwill impairment test during the first quarter of 2020.
We performed this quantitative impairment test by comparing the fair value of our legacy U.K. Gaming reporting unit to its carrying value, including goodwill. As described in further detail below, the fair value of our legacy U.K. Gaming reporting unit was determined using a combination of both an income approach, based on the present value of discounted cash flows, and a market approach. Due to current market volatility and limited market data points specific to the nature of our legacy U.K. Gaming reporting unit operations, we placed greater weight on the income approach than on the market approach. As a result of this analysis, during the first quarter of 2020 we recognized a partial impairment charge totaling $54 million,
which is the amount by which the carrying value exceeded the estimated fair value. This impairment charge resulted in no tax benefit.
We used projections of revenues, profit margin, operating costs, capital expenditures and cash flows that primarily considered general economic and market conditions and estimated future results including the estimated impact of the COVID-19 disruptions. We used a range of different scenarios and derived estimated fair value based on an equal weighting of these scenarios to reflect the economic uncertainty resulting from the COVID-19 disruptions and the timing and magnitude of the economic recovery following the COVID-19 disruptions coupled with the impact of the regulatory change. The following ranges of the key estimates and assumptions were used in the discounted cash flow analysis:
•Revenue growth for FY 2021 between negative 9% and negative 20%, an average revenue growth for FY 2022 to FY 2027 between positive 3% and positive 5%, and terminal revenue growth rate of positive 2.0%;
•An average profit margin ranging from 13% to 23%;
•Assumptions regarding future capital expenditures reflective of maintaining our current customer contracts; and
•An overall discount rate ranging from 8.5% to 10.0%.
In our market comparable analysis, we considered revenue and EBITDA multiples ranging from 2.1x to 2.7x and 5.7x to 7.5x, respectively, and ultimately selected multiples at the low end of the range.
The legacy U.K. Gaming reporting unit is included in our Gaming business segment.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Amortization expense | $ | 56 | | | $ | 65 | | | | | |
The table below reconciles the change in the carrying value of goodwill by business segment for the period from
December 31, 20192020 to March 31, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gaming(1) | | Lottery | | SciPlay | | Digital | | Totals |
| Balance as of December 31, 2019 | | $ | 2,449 | | | $ | 349 | | | $ | 115 | | | $ | 367 | | | $ | 3,280 | |
| Impairment | | (54) | | | — | | | — | | | — | | | (54) | |
| Foreign currency adjustments | | (33) | | | (5) | | | — | | | (26) | | | (64) | |
| Balance as of March 31, 2020 | | $ | 2,362 | | | | $ | 344 | | | $ | 115 | | | $ | 341 | | | $ | 3,162 | |
| | | | | | | | | | |
| (1) Accumulated goodwill impairment charges for the Gaming segment as of March 31, 2020 were $989 million. | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gaming | | Lottery | | SciPlay | | Digital | | Totals |
| Balance as of December 31, 2020 | | $ | 2,425 | | | $ | 353 | | | $ | 124 | | | $ | 390 | | | $ | 3,292 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Foreign currency adjustments | | (3) | | | (1) | | | (2) | | | 1 | | | (5) | |
| Balance as of March 31, 2021 | | $ | 2,422 | | | $ | 352 | | | $ | 122 | | | $ | 391 | | | $ | 3,287 | |
| | | | | | | | | | |
| (1) Accumulated goodwill impairment charges for the Gaming segment as of March 31, 2021 were $989 million. |
| (1) Accumulated goodwill impairment charges for the Lottery segment as of March 31, 2021 were $137 million. |
(9) Software, net
Software, net consisted of the following:
| | | | | | | | | | | | | | |
| | As of | | |
| | March 31, 2020 | | December 31, 2019 |
| Software | | $ | 1,184 | | | $ | 1,173 | |
| Accumulated amortization | | (936) | | | (915) | |
| Software, net | | $ | 248 | | | $ | 258 | |
| | | | |
| | | | |
| | | | | | | | | | | |
| As of |
| March 31, 2021 | | December 31, 2020 |
| Software | $ | 1,198 | | | $ | 1,197 | |
| Accumulated amortization | (978) | | | (970) | |
| Software, net | $ | 220 | | | $ | 227 | |
| | | |
| | | |
The following reflects amortization of software included within D&A:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
| Amortization expense | | $ | 29 | | | $ | 30 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Amortization expense | $ | 27 | | | $ | 29 | | | | | |
(10) Equity Investments
Equity investments totaled $263$265 million and $273$262 million as of March 31, 20202021 and December 31, 2019,2020, respectively. We received distributions and dividends totaling $4 million and $7$4 million during the three months ended March 31, 20202021 and 2019, respectively.2020.
(11) Long-Term and Other Debt
Outstanding Debt and Finance Leases
The following table reflects our outstanding debt:
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| As of | | | | | | | | | | |
| March 31, 2020 | | | | | | | | | | December 31, 2019 |
| Final Maturity | | Rate(s) | | Face value | | Unamortized debt discount/premium and deferred financing costs, net | | Book value | | Book value |
| Senior Secured Credit Facilities: | | | | | | | | | | | |
| SGI Revolver | 2024 | | variable | | $ | 155 | | | $ | — | | | $ | 155 | | | $ | 195 | |
| SGI Term Loan B-5 | 2024 | | variable | | 4,091 | | | (57) | | | 4,034 | | | 4,042 | |
| SciPlay Revolver | 2024 | | variable | | — | | | — | | | — | | | — | |
| SGI Senior Notes: | | | | | | | | | | | |
2025 Secured Notes(1) | 2025 | | 5.000 | % | | 1,250 | | | (14) | | | 1,236 | | | 1,235 | |
2026 Secured Euro Notes(2) | 2026 | | 3.375 | % | | 356 | | | (4) | | | 352 | | | 359 | |
2026 Unsecured Euro Notes(2) | 2026 | | 5.500 | % | | 274 | | | (4) | | | 270 | | | 276 | |
| 2026 Unsecured Notes | 2026 | | 8.250 | % | | 1,100 | | | (14) | | | 1,086 | | | 1,085 | |
| 2028 Unsecured Notes | 2028 | | 7.000 | % | | 700 | | | | (10) | | | | 690 | | | 690 |
| 2029 Unsecured Notes | 2029 | | 7.250 | % | | 500 | | | | (7) | | | | 493 | | | 493 |
| SGI Subordinated Notes: | | | | | | | | | | | |
| 2021 Notes | 2021 | | 6.625 | % | | 341 | | | (2) | | | 339 | | | 339 | |
Finance lease obligations as of March 31, 2020 payable monthly through 2023 and other(3) | 2023 | | 4.652 | % | | 10 | | | — | | | 10 | | | 11 | |
| Total long-term debt outstanding | | | | | $ | 8,777 | | | $ | (112) | | | $ | 8,665 | | | $ | 8,725 | |
| Less: current portion of long-term debt | | | | | | | | | (45) | | | (45) | |
| Long-term debt, excluding current portion | | | | | | | | | $ | 8,620 | | | $ | 8,680 | |
Fair value of debt(4) | | | | | $ | 6,631 | | | | | | | |
| | | | | | | | | | | |
| (1) In connection with the February 2018 Refinancing (see Note 15 in our 2019 Form 10-K), we entered into certain cross-currency interest rate swap agreements to achieve more attractive interest rates by effectively converting $460 million of the fixed-rate, U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to a fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946%. These cross-currency swaps have been designated as a hedge of our net investment in certain subsidiaries. | | | | | | | | | | | |
| (2) We designated a portion of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the change in foreign currency exchange rates of the Euro relative to the U.S. Dollar (see Note 12 for additional information). The total change in the face value of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes due to changes in foreign currency exchange rates since the issuance was a reduction of $82 million, of which a $10 million gain was recognized on remeasurement of debt in the Consolidated Statements of Operations for the three months ended March 31, 2020. | | | | | | | | | | | |
| (3) Includes $8 million related to certain revenue transactions presented as debt in accordance with ASC 470. | | | | | | | | | | | |
| (4) Fair value of our fixed rate and variable interest rate debt is classified within Level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities. | | | | | | | | | | | |
Debt Maturities
Maturities for our outstanding debt were as follows as of March 31, 2020:
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| Due | | Total Principal Due | | Series of Debt | | Principal Due per Series of Debt | | | | | | |
| Remainder of 2020 | | $ | 31 | | | Term Loan B-5 | | $ | 31 | | | | | | | |
| 2021 | | 383 | | | Term Loan B-5 | | 42 | | | | | | | |
| | | | 2021 Notes | | 341 | | | | | | | |
| 2022 | | 42 | | | Term Loan B-5 | | 42 | | | | | | | |
| 2023 | | 42 | | | Term Loan B-5 | | 42 | | | | | | | |
| 2024 | | 4,089 | | | Term Loan B-5 | | 3,934 | | | | | | | |
| | | | Drawn Revolving Credit Facility | | 155 | | | | | | | |
| 2025 and beyond | | 4,180 | | | 2025 Secured Notes | | 1,250 | | | | | | | |
| | | | 2026 Secured Euro Notes | | 274 | | | | | | | |
| | | | 2026 Unsecured Euro Notes | | 356 | | | | | | | |
| | | | 2026 Unsecured Notes | | 1,100 | | | | | | | |
| | | | 2028 Unsecured Notes | | 700 | | | | | | | |
| | | | 2029 Unsecured Notes | | 500 | | | | | | | |
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| As of |
| March 31, 2021 | | December 31, 2020 |
| Final Maturity | | Rate(s) | | Face value | | Unamortized debt discount/premium and deferred financing costs, net | | Book value | | Book value |
| Senior Secured Credit Facilities: | | | | | | | | | | | |
| SGI Revolver | 2024 | | variable | | $ | 435 | | | $ | 0 | | | $ | 435 | | | $ | 535 | |
| SGI Term Loan B-5 | 2024 | | variable | | 4,050 | | | (46) | | | 4,004 | | | 4,012 | |
| SciPlay Revolver | 2024 | | variable | | 0 | | | 0 | | | 0 | | | 0 | |
| SGI Senior Notes: | | | | | | | | | | | |
2025 Secured Notes(1) | 2025 | | 5.000% | | 1,250 | | | (12) | | | 1,238 | | | 1,237 | |
2026 Secured Euro Notes(2) | 2026 | | 3.375% | | 381 | | | (4) | | | 377 | | | 395 | |
| 2025 Unsecured Notes | 2025 | | 8.625% | | 550 | | | (7) | | | 543 | | | 542 | |
2026 Unsecured Euro Notes(2) | 2026 | | 5.500% | | 293 | | | (3) | | | 290 | | | 303 | |
| 2026 Unsecured Notes | 2026 | | 8.250% | | 1,100 | | | (12) | | | 1,088 | | | 1,088 | |
| 2028 Unsecured Notes | 2028 | | 7.000% | | 700 | | | (9) | | | 691 | | | 691 | |
| 2029 Unsecured Notes | 2029 | | 7.250% | | 500 | | | (6) | | | 494 | | | 493 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Finance lease obligations as of March 31, 2021 payable monthly through 2023 and other(3) | 2023 | | 4.217% | | 6 | | | 0 | | | 6 | | | 7 | |
| Total long-term debt outstanding | | | | | $ | 9,265 | | | $ | (99) | | | $ | 9,166 | | | $ | 9,303 | |
| Less: current portion of long-term debt | | | | | | | | | (44) | | | (44) | |
| Long-term debt, excluding current portion | | | | | | | | | $ | 9,122 | | | $ | 9,259 | |
Fair value of debt(4) | | | | | $ | 9,454 | | | | | | | |
| | | | | | | | | | | |
| (1) In connection with the February 2018 Refinancing (see Note 15 in our 2020 10-K), we entered into certain cross-currency interest rate swap agreements to achieve more attractive interest rates by effectively converting $460 million of the fixed-rate, U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to a fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946%. These cross-currency swaps have been designated as a hedge of our net investment in certain subsidiaries. |
| (2) We designated a portion of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the change in foreign currency exchange rates of the Euro relative to the U.S. Dollar (see Note 12 for additional information). The total change in the face value of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes due to changes in foreign currency exchange rates since the issuance was a reduction of $38 million, of which a $25 million gain was recognized on remeasurement of debt in the Consolidated Statements of Operations for the three months ended March 31, 2021. |
| (3) Includes $6 million related to certain revenue transactions presented as debt in accordance with ASC 470. |
| (4) Fair value of our fixed rate and variable interest rate debt is classified within Level 2 in the fair value hierarchy and has been calculated based on the quoted market prices of our securities. |
We were in compliance with the financial covenants under all debt agreements as of March 31, 2021 (for information regarding our financial covenants of all debt agreements, see Notes 1 and 15 in our 2020 (see Note 1 for more detailed disclosure, including the amendment to SGI’s revolving credit facility)10-K).
For additional information regarding the terms of our credit facilities, Secured Notes Unsecured Notes and the 2021Unsecured Notes, see Note 15 in our 20192020 10-K.
(12) Fair Value Measurements
The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash
equivalents, restricted cash, receivables, other current assets, accounts payable and accrued liabilities, approximates their recorded values. Our assets and liabilities measured at fair value on a recurring basis are described below.
Derivative Financial Instruments
As of March 31, 2020,2021, we held the following derivative instruments that were accounted for pursuant to ASC 815:
Interest Rate Swap Contracts
We currently use interest rate swap contracts as described below to mitigate gains or losses associated with the change in expected cash flows due to fluctuations in interest rates on our variable rate debt.
In February 2018, we entered into interest rate swap contracts to hedge a portion of our interest expense associated with our variable rate debt to effectively fix the interest rate that we pay. These interest rate swap contracts are designated as cash flow hedges under ASC 815. We pay interest at a weighted-average fixed rate of 2.4418% and receive interest at a variable rate equal to one-month LIBOR. The total notional amount of interest rate swaps outstanding was $800 million as of March 31, 2020.2021. These hedges mature in February 2022.
These hedges are highly effective in offsetting changes in our future expected cash flows due to the fluctuation in the one-month LIBOR rate associated with our variable rate debt. We qualitatively monitor the effectiveness of these hedges on a quarterly basis. As a result of the effective matching of the critical terms on our variable rate interest expense being hedged to the hedging instruments being used, we expect these hedges to remain highly effective.
All gains and losses from these hedges are recorded in Other comprehensive income (loss)loss until the future underlying payment transactions occur. Any realized gains or losses resulting from the hedges are recognized (together with the hedged transaction) as interestInterest expense. We estimate the fair value of our interest rate swap contracts by discounting the future cash flows of both the fixed rate and variable rate interest payments based on market yield curves. The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy as established by ASC 820.
The following table shows the gainGain (loss) and interestInterest expense recognized on our interest rate swap contracts:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | | 2020 | | | | |
| Gain (loss) recorded in accumulated other comprehensive loss, net of tax | $ | 5 | | | $ | (16) | | | | | |
| Interest expense recorded related to interest rate swap contracts | 5 | | | 2 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| Loss recorded in accumulated other comprehensive loss, net of tax | $ | (16) | | | $ | (5) | | | | | |
| Interest expense recorded related to interest rate swap contracts | 2 | | | — | | | | | |
We do 0tnot expect to reclassify material amounts from Accumulated other comprehensive loss to interest expense in the next twelve months.
The following table shows the effect of interest rate swap contracts designated as cash flow hedges on the consolidated statements of operations:
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | 2021 | | 2020 | |
| | Interest expense | | | Interest expense | |
| Total interest expense which reflects the effects of cash flow hedges | Total interest expense which reflects the effects of cash flow hedges | $ | (124) | | | $ | (154) | | Total interest expense which reflects the effects of cash flow hedges | $ | (121) | | | $ | (124) | | |
| Hedged item | Hedged item | (5) | | | (5) | | Hedged item | (5) | | | (5) | | |
| Derivative designated as hedging instrument | Derivative designated as hedging instrument | 3 | | | 5 | | Derivative designated as hedging instrument | 0 | | | 3 | | |
Cross-Currency Interest Rate Swaps
In connection with the February 2018 Refinancing described in Note 15 of our 20192020 10-K, we entered into certain cross-currency interest rate swap agreements to achieve more beneficial interest rates by effectively converting $460 million of our fixed-rate U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946%. We have designated these cross-currency interest rate swap agreements as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro relative to the U.S. Dollar.
We use the spot method to measure the effectiveness of our net investment hedge. Under this method, for each reporting period, the change in the fair value of the $460 million cross-currency interest rate swaps is reported in foreignForeign currency translation gain (loss) in Accumulated other comprehensive loss. The cross-currency basis spread (along with other components of the cross-currency swap’s fair value excluded from the spot method effectiveness assessment) are amortized and recorded to interestInterest expense. We evaluate the effectiveness of our net investment hedge at the beginning of each quarter.
The following table shows the fair value of our hedges:
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| | | As of | | |
| Balance Sheet Line Item | | March 31, 2020 | | December 31, 2019 |
Interest rate swaps (1)(3) | Other liabilities | | $ | 32 | | | $ | 16 | |
Cross-currency interest rate swaps (2)(3) | Other assets | | 71 | | | 41 | |
| (1) A loss of $16 million and $6 million for the three months ended March, 31 2020 and 2019, respectively, is reflected in Derivative financial instruments unrealized loss in Other comprehensive (loss) income. | | | | | |
| (2) A gain of $30 million and $16 million for the three months ended March, 31 2020 and 2019, respectively, is reflected in Foreign currency translation (loss) gain in Other comprehensive (loss) income. | | | | | |
| (3) The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy. | | | | | |
| | | | | | | | | | | | | | | | | |
| | | As of |
| Balance Sheet Line Item | | March 31, 2021 | | December 31, 2020 |
Interest rate swaps (1)(3) | Accrued liabilities/Other liabilities | | $ | 17 | | | $ | 22 | |
Cross-currency interest rate swaps (2)(3) | Other assets | | 35 | | | 14 | |
| (1) A gain of $5 million and loss of $16 million for the three months ended March 31, 2021 and 2020, respectively, are reflected in Derivative financial instrument unrealized gain (loss) in Other comprehensive loss. |
| (2) Gains of $21 million and $30 million for the three months ended March 31, 2021 and 2020, respectively, are reflected in Foreign currency translation gain (loss) in Other comprehensive loss. |
| (3) The inputs used to measure the fair value of our interest rate swap contracts are categorized as Level 2 in the fair value hierarchy. |
Net Investment Non-derivative Hedge -— 2026 Secured Euro Notes
For the first quarter of 2020,2021, we designated $190$129 million of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our results caused by the changes in foreign currency exchange rates of the Euro relative to the U.S. Dollar.
We use the spot method to measure the effectiveness of our net investment non-derivative hedge. Under this method, for each reporting period, the change in the hedged portion of the carrying value of the 2026 Secured Euro Notes due to remeasurement is reported in Foreign currency translation gain (loss) in Other comprehensive income,loss, and the remaining
remeasurement change is recognized in Gain (loss)(Loss) gain on remeasurement of debt in our consolidated statements of operations. We evaluate the effectiveness of our net investment non-derivative hedge at the beginning of each quarter, and the inputs used to measure the fair value of this non-derivative hedge are categorized as Level 2 in the fair value hierarchy.
Contingent Acquisition Consideration Liabilities
In connection with our prior acquisitions, we have recorded certain contingent consideration liabilities, of which the values are primarily based on reaching certain earnings-based metrics. The related liabilities were recorded at fair value on the acquisition date as part of the consideration transferred and are remeasured each reporting period. The inputs used to measure the fair value of our liabilities are categorized as Level 3 in the fair value hierarchy.
Contingent acquisition consideration liabilities as of March 31, 20202021 are $10$8 million, of which $3$6 million is included in Accrued liabilities with the remainder included in Other long-term liabilities. Contingent acquisition consideration liabilities as of December 31, 20192020 were $14$13 million, of which $7$11 million was included in Accrued liabilities with the remaining balance included in Other long-term liabilities.
(13) Stockholders’ Deficit
Changes in Stockholders’ Deficit
The following tables present certain information regarding our stockholders'stockholders’ deficit as of March 31, 20202021 and March 31, 2019.2020:
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| Three Months Ended March 31, 2020 | | | | | | | | | | | | |
| | Common Stock | | Additional Paid in Capital | | Accumulated Loss | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling interest | | Total |
| January 1, 2020 | $ | 1 | | | $ | 1,208 | | | $ | (2,954) | | | $ | (175) | | | $ | (292) | | | $ | 104 | | | $ | (2,108) | |
| Net payment in connection with settlement of stock options and RSUs | — | | | (1) | | | — | | | — | | | — | | | — | | | (1) | |
| Stock-based compensation | — | | | 9 | | | — | | | — | | | — | | | — | | | 9 | |
| Net loss | — | | | — | | | (159) | | | — | | | — | | | 4 | | | (155) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (97) | | | — | | | (97) | |
| Impact of ASC 326 adoption | — | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| March 31, 2020 | $ | 1 | | | $ | 1,216 | | | $ | (3,119) | | | $ | (175) | | | $ | (389) | | | $ | 108 | | | $ | (2,358) | |
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| Three Months Ended March 31, 2021 |
| Common Stock | | Additional Paid in Capital | | Accumulated Loss | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total |
| January 1, 2021 | $ | 1 | | | $ | 1,268 | | | $ | (3,529) | | | $ | (175) | | | $ | (218) | | | $ | 129 | | | $ | (2,524) | |
| Vesting of RSUs, net of tax withholdings and other | — | | | (13) | | | — | | | — | | | — | | | — | | | (13) | |
| Stock-based compensation | — | | | 17 | | | — | | | — | | | — | | | — | | | 17 | |
| Net loss | — | | | — | | | (15) | | | — | | | — | | | 6 | | | (9) | |
| Other comprehensive gain | — | | | — | | | — | | | — | | | 8 | | | — | | | 8 | |
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| March 31, 2021 | $ | 1 | | | $ | 1,272 | | | $ | (3,544) | | | $ | (175) | | | $ | (210) | | | $ | 135 | | | $ | (2,521) | |
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| Three Months Ended March 31, 2019 | | | | | | | | | | |
| | Common Stock | | Additional Paid in Capital | | Accumulated Loss | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
| January 1, 2019 | $ | 1 | | | $ | 835 | | | $ | (2,824) | | | $ | (175) | | | $ | (300) | | | $ | (2,463) | |
| Net proceeds of common stock in connection with stock options and RSUs | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Stock-based compensation | — | | | 11 | | | — | | | — | | | — | | | 11 | |
| Net loss | — | | | — | | | (24) | | | — | | | — | | | (24) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 51 | | | 51 | |
| March 31, 2019 | $ | 1 | | | $ | 848 | | | $ | (2,848) | | | $ | (175) | | | $ | (249) | | | $ | (2,423) | |
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| Three Months Ended March 31, 2020 |
| | Common Stock | | Additional Paid in Capital | | Accumulated Loss | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total |
| January 1, 2020 | $ | 1 | | | $ | 1,208 | | | $ | (2,954) | | | $ | (175) | | | $ | (292) | | | $ | 104 | | | $ | (2,108) | |
| Vesting of RSUs, net of tax withholdings and other | — | | | (1) | | | — | | | — | | | — | | | — | | | (1) | |
| Stock-based compensation | — | | | 9 | | | — | | | — | | | — | | | — | | | 9 | |
| Net loss | — | | | — | | | (159) | | | — | | | — | | | 4 | | | (155) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (97) | | | — | | | (97) | |
| Impact of ASC 326 adoption | — | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| March 31, 2020 | $ | 1 | | | $ | 1,216 | | | $ | (3,119) | | | $ | (175) | | | $ | (389) | | | $ | 108 | | | $ | (2,358) | |
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Stock Based Compensation
The following reflects total stock-based compensation expense recognized under all programs:
| | | Three Months Ended | | | | | | | | | | | | |
| | March 31, | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
| Related to SGC stock options | Related to SGC stock options | $ | 1 | | | $ | 2 | | | Related to SGC stock options | $ | 6 | | | $ | 1 | | |
| Related to SGC RSUs | 9 | | | 12 | | | |
Related to SGC RSUs(1) | | Related to SGC RSUs(1) | 15 | | | 9 | | |
| Related to SciPlay RSUs | | Related to SciPlay RSUs | 2 | | | 0 | | |
| Total | Total | $ | 10 | | | $ | 14 | | | Total | $ | 23 | | | $ | 10 | | |
| | (1) As of March 31, 2021 we had $58 million of unrecognized stock-based compensation expense related to unvested RSUs that will be amortized over a weighted-average period of approximately two years. | | (1) As of March 31, 2021 we had $58 million of unrecognized stock-based compensation expense related to unvested RSUs that will be amortized over a weighted-average period of approximately two years. | |
(14) Income Taxes
We consider new evidence (both positive and negative) at each reporting date that could affect our view of the future realization of deferred tax assets. Based upon the evaluation of all available evidence, and considering the projected U.S. pre-tax losses for 2020,2021, we maintain a valuation allowance for certain of our U.S. operations as of March 31, 2020.2021. We also maintain other valuation allowances for certain non-U.S. jurisdictions with cumulative losses.
TheOur effective income tax ratesrate for the three months ended March 31, 2021 and 2020 were (50)%, and 2019 were (3)% and (18)%, respectively, and were determined using an estimated annual effective tax rate after considering any discrete items for such periods. Due to the aforementioned valuation allowance against certain of our U.S. net deferred tax assets, the effective tax rates for the three months ended March 31, 20202021 and 20192020 generally do not include the benefits of the U.S. tax losses. We recorded an overall tax expense in both periods due to pre-tax earnings in jurisdictions without valuation allowances. The change in effective tax rates relatedrelates primarily to the overall mix of income (loss) in our foreign jurisdictions without valuation allowances and the increase in unbenefited U.S. pre-tax losses. Additionally, the effective tax rate for the three months ended March 31, 2020 included an unfavorable adjustment for the legacy U.K. Gaming reporting unit goodwill impairment of $54 million recorded in the first quarter of 2020, which iswas not deductible for tax purposes. The tax structure of our SciPlay business was altered as a result of SciPlay’s initial public offering, which was completed on May 7, 2019. For the three months ended March 31, 2020, we recorded a tax provision for our 18% noncontrolling interest in SciPlay.
As discussed in Note 1, the COVID-19 disruptions significantly impacted certain segments of our business during 2020 and through the first quarter of 2020.2021. 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, including a provision to ease the limitation on deductible interest expense in 2019 and 2020, which will reduce our interest limitation for these years, preserving U.S. net operating losses. WeAdditionally, we continue to monitor and evaluate the tax implications resulting from the CARES Actany existing and any newforthcoming legislation passed in response to COVID-19 in the federal, state, and foreign jurisdictions where we have an income tax presence.
(15) Leases
Our total operating lease expensesexpense for the three months ended March 31, 20202021 and 20192020 were $8 million and $9 million, respectively.million. The total amount of variable and short termshort-term lease payments incurred during the three months ended March 31, 2020 are immaterial.
Supplemental balance sheet and cash flow information related to operating leases is as follows:
| | | As of | | | As of | |
| | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 | |
Operating lease right-of-use assets(1) | Operating lease right-of-use assets(1) | $ | 98 | | | $ | 105 | | | Operating lease right-of-use assets(1) | $ | 95 | | | $ | 94 | | |
| Accrued liabilities | Accrued liabilities | 25 | | | 26 | | | Accrued liabilities | 25 | | | 26 | | |
| Operating lease liabilities | Operating lease liabilities | 81 | | | 88 | | | Operating lease liabilities | 78 | | | 77 | | |
| Total operating lease liabilities | Total operating lease liabilities | $ | 106 | | | $ | 114 | | | Total operating lease liabilities | $ | 103 | | | $ | 103 | | |
| Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases for the three month period ended March 31, 2020 and 2019, respectively | $ | 8 | | | $ | 8 | | | |
| Weighted average remaining lease term, years | 5 | | 5 | | |
| Operating cash flows for operating leases for the three month period ended March 31, 2021 and 2020, respectively | | Operating cash flows for operating leases for the three month period ended March 31, 2021 and 2020, respectively | $ | 8 | | | $ | 8 | | |
| Weighted average remaining lease term, units in years | | Weighted average remaining lease term, units in years | 5 | | 5 | |
| Weighted average discount rate | Weighted average discount rate | 5 | % | | 5 | % | | Weighted average discount rate | 5 | % | | 5 | % | |
| (1) Operating lease right-of use assets obtained in exchange for lease obligations were immaterial. | | |
| (1) Operating lease right-of-use assets obtained in exchange for lease obligations were immaterial. | | (1) Operating lease right-of-use assets obtained in exchange for lease obligations were immaterial. | |
|
Lease liability maturities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Less Imputed Interest | | Total |
| Operating leases | $ | 23 | | | $ | 26 | | | $ | 21 | | | $ | 18 | | | $ | 12 | | | $ | 16 | | | $ | (13) | | | $ | 103 | |
24
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Less Imputed Interest | | Total |
| Operating leases | $ | 22 | | | $ | 26 | | | $ | 21 | | | $ | 16 | | | $ | 13 | | | $ | 23 | | | $ | (15) | | | $ | 106 | |
As of March 31, 2020,2021, we did not have material additional operating leases that have not yet commenced.
(16) Litigation
We are involved in various routine and other specific legal proceedings, including the following which are described in Note 21 within our 2019 10-K: the Colombia litigation, SNAI litigation, Washington State Matter and Raqqa Matter.2020 10-K. There have been no material changes to these matters since the 20192020 10-K was filed with the SEC on March 1, 2021, except as described below.
We record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss can be reasonably estimated (although, as discussed below, there may be an exposure to loss in excess of the accrued liability). We evaluate our accruals for legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect (1) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings and other relevant events and developments, (2) the advice and analyses of counsel and (3) the assumptions and judgment of management. Legal costs associated with our legal proceedings are expensed as incurred. We had accrued liabilities of $11 million and $3 million for all of our legal matters that were contingencies as of March 31, 20202021 and December 31, 2019.
Substantially all of our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss involves a series of complex judgments about future events. Consequently, the ultimate outcomes of our legal contingencies could result in losses in excess of amounts we have accrued. We may be unable to estimate a range of possible losses for some matters pending against us or our subsidiaries, even when the amount of damages claimed against us or our subsidiaries is stated because, among other things: (1) the claimed amount may be exaggerated or unsupported; (2) the claim may be based on a novel legal theory or involve a large number of parties; (3) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (4) there may be uncertainty as to the outcome of pending appeals or motions; (5) the matter may not have progressed sufficiently through discovery or there may be significant factual or legal issues to be resolved or developed; and/or (6) there may be uncertainty as to the enforceability of legal judgments and outcomes in certain jurisdictions. Other matters have progressed sufficiently that we are
able to estimate a range of possible loss. For those legal contingencies disclosed in Note 21 in our 20192020 10-K and this Note 16 as well as those related to the previously disclosed settlement agreement entered into in February 2015 with SNAI S.p.a., as to which a loss is reasonably possible, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a range of possible loss, the current estimated range is up to approximately $13$14 million in excess of the accrued liabilities (if any) related to those legal contingencies. This aggregate range represents management’s estimate of additional possible loss in excess of the accrued liabilities (if any) with respect to these matters based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, management may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co-defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that management had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which we are not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent our maximum loss exposure. Any such losses could have a material adverse impact on our results of operations, cash flows or financial condition. The legal proceedings underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate.
TCS John HuxleyWashington State Matter
Casino Queen Matter
On March 15, 2019, TCS John Huxley America,April 2, 2021, Casino Queen, Inc., TCS John Huxley Europe Ltd., TCS John Huxley Asia Ltd., and Taiwan Fulgent Enterprise Co., Ltd. broughtCasino Queen Marquette, Inc. filed a civilputative class action complaint in the United States District Court for the Northern District of Illinois against SGC, Bally Technologies, Inc. and SG Gaming.Gaming, f/k/a Bally Gaming, Inc. In the complaint, the plaintiffs assert federal antitrust claims arising from the defendants’ procurement of particular U.S. and South African patents. The plaintiffs allege that the defendants used those patents to create an allegedly illegal monopoly in the market for automatic card shufflers sold to regulated casinosor leased in the United States. On April 10, 2019,The plaintiffs seek to represent a putative class of all persons and entities that directly purchased or leased automatic card shufflers within the United States from the defendants, filed a motion to dismiss the plaintiffs’ complaint with prejudice. Onor any predecessor, subsidiary, or affiliate thereof, at any time between April 25, 2019, the district court denied the defendants’ motion to dismiss without prejudice pursuant to the court’s local rules, after the plaintiffs advised that they intended to file an amended complaint. The plaintiffs filed their amended complaint on May 3, 2019,
and on May 22, 2019, the defendants filed a motion to dismiss the plaintiffs’ amended complaint with prejudice. On March 20, 2020, the district court denied the defendants’ motion to dismiss the plaintiffs’ amended complaint,1, 2009, and the case is proceeding.present. The complaint seeks unspecified money damages, which the complaint asks the court to treble, the award of plaintiffs’ costs of suit, including attorneys’ fees, and the award of pre-judgment and post-judgment interest. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss.losses, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.
Colombia litigation
Our subsidiary, SGI, owned a minority interest in Wintech de Colombia S.A., or Wintech (now liquidated), which formerly operated the Colombian national lottery under a contract with Empresa Colombiana de Recursos para la Salud, S.A. (together with its successors, “Ecosalud”), an agency of the Colombian government. The contract provided for a penalty against Wintech, SGI and the other shareholders of Wintech of up to $5.0 million if certain levels of lottery sales were not achieved. In addition, SGI delivered to Ecosalud a $4.0 million surety bond as a further guarantee of performance under the contract. Wintech started the instant lottery in Colombia but, due to difficulties beyond its control, including, among other factors, social
and political unrest in Colombia, frequently interrupted telephone service and power outages, and competition from another lottery being operated in a province of Colombia that we believe was in violation of Wintech’s exclusive license from Ecosalud, the projected sales level was not met for the year ended June 30, 1993.
In 1993, Ecosalud issued a resolution declaring that the contract was in default. In 1994, Ecosalud issued a liquidation resolution asserting claims for compensation and damages against Wintech, SGI and other shareholders of Wintech for, among other things, realization of the full amount of the penalty, plus interest, and the amount of the bond. SGI filed separate actions opposing each resolution with the Tribunal Contencioso of Cundinamarca in Colombia (the “Tribunal”), which upheld both resolutions. SGI appealed each decision to the Council of State. In May 2012, the Council of State upheld the contract default resolution, which decision was notified to us in August 2012. In October 2013, the Council of State upheld the liquidation resolution, which decision was notified to us in December 2013.
In July 1996, Ecosalud filed a lawsuit against SGI in the U.S. District Court for the Northern District of Georgia asserting many of the same claims asserted in the Colombia proceedings, including breach of contract, and seeking damages. In March 1997, the District Court dismissed Ecosalud’s claims. Ecosalud appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit. The Court of Appeals affirmed the District Court’s decision in 1998.
In June 1999, Ecosalud filed a collection proceeding against SGI to enforce the liquidation resolution and recover the claimed damages. In May 2013, the Tribunal denied SGI’s merit defenses to the collection proceeding and issued an order of payment of approximately 90 billion Colombian pesos, or approximately $30.2 million, plus default interest (potentially accrued since 1994 at a 12% statutory interest rate). SGI filed an appeal to the Council of State, and on December 10, 2020, the Council of State issued a ruling affirming the Tribunal’s decision. On December 16, 2020, SGI filed a motion for clarification of the Council of State’s ruling, which the Council of State denied on April 15, 2021. On April 22, 2021, SGI filed a motion for reconsideration of that decision by the Council of State.
SGI believes it has various defenses, including on the merits, against Ecosalud’s claims. Although we believe these claims will not result in a material adverse effect on our consolidated results of operations, cash flows or financial position, it is not feasible to predict the final outcome, and we cannot assure that these claims will not ultimately be resolved adversely to us or result in material liability.
SciPlay IPO Matter (New York)
On or about October 14, 2019, the Police Retirement System of St. Louis filed a putative class action complaint in New York state court against SciPlay, certain of its executives and directors, and SciPlay’s underwriters with respect to its initial public offeringIPO (the “PRS Action”). The complaint was amended on November 18, 2019. The plaintiff seeks to represent a class of all persons or entities who acquired Class A common stock of SciPlay pursuant and/or traceable to the Registration Statement filed and issued in connection with SciPlay’s initial public offering,the SciPlay IPO, which commenced on or about May 3, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages of at least $146 million, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action.
On or about December 9, 2019, Hongwei Li filed a putative class action complaint in New York state court asserting substantively similar causes of action under the Securities Act of 1933 and substantially similar factual allegations as those alleged in the PRS Action (the “Li Action”). On December 18, 2019, the New York state court entered a stipulated order consolidating the PRS Action and the Li Action into a single lawsuit. On December 23, 2019, the defendants moved to dismiss the consolidated action.
We are currently unable On August 28, 2020, the court issued an oral ruling granting in part and denying in part the defendants’ motion to determine the likelihood of an outcome or estimate a range of reasonably possible loss, if any. We believe that the claimsdismiss. On December 14, 2020, plaintiffs in the lawsuit are without merit, and intend to vigorously defend against them.
Sylebra Matter
On October 23, 2019, Sylebra Capital Partners Master Fund, Limited and P Sylebra, Limited (together, “Sylebra”) filed a complaint in Delaware Chancery Court against SGC, SG Gaming, Inc., and certain of SGC’s current and former executives and directors. The complaint asserts claims for alleged breaches of fiduciary duty and alleged aiding and abetting of such alleged breaches of fiduciary duty; for alleged unjust enrichment; for alleged anticipatory breach of Sylebra’s alleged rights under SGC’s prior Restated Certificate of Incorporation (“prior Charter”) and for alleged breach of that prior Charter; for alleged violations of certain Delaware statutes; and for alleged tortious interference with contract. The complaint seeks injunctive relief, declaratory relief, money damages, and the award of the plaintiffs’ costs and expenses incurred in the action. On December 20, 2019, the defendantsconsolidated action filed a motion to dismiss Sylebra’s complaint. In response, on January 27, 2020, Sylebra filed an amended complaint, and on February 28, 2020,certify the defendants filed a motion to dismiss Sylebra’s amended complaint. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible losses, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.
SciPlay IPO Matter (Nevada)
On or about November 4, 2019, plaintiff John Good filed a putative class action complaint in Nevada state court against SciPlay, certain of its executives and directors, SGC, and SciPlay’s underwriters with respect to SciPlay’s initial public offering.the SciPlay IPO. The plaintiff seeks to represent a class of all persons who purchased Class A common stock of SciPlay in or traceable to SciPlay’s initial public offeringthe SciPlay IPO that it completed on or about May 7, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action. On February 27, 2020, the trial court entered a stipulated order that, among other things, stayed the lawsuit pending entry of an order resolving the motion to dismiss that iswas pending in the SciPlay initial public offeringIPO matter in New York state court. We are currently unable to determineOn September 29, 2020, the likelihood of an outcome or estimatetrial court entered a range of reasonably possible losses, if any. We believestipulated order that extended the claimsstay pending a ruling on class certification in the lawsuit are without merit,SciPlay IPO matter in New York state court.
Based on our assessment under ASC 410 and intend to vigorously defend against them.ASC 450 and consideration of the SciPlay IPO matters pending in New York and Nevada described above, we determined that both loss and insurance proceeds loss recovery, which we believe is
recoverable under our insurance policy, are deemed probable and reasonably estimable. As a result, we recorded approximately $8 million in Accrued liabilities and Prepaid expenses and other current assets as of March 31, 2021, with no material impact on our statement of operations income for the three month period ended March 31, 2021.
For additional information regarding our pending litigation matters, see Note 21 in our 20192020 10-K.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to enhance the reader'sreader’s understanding of our operations and current business environment from management’s perspective and should be read in conjunction with the description of our business included under Part I, Item 1 “Condensed Consolidated Financial Statements” and Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and under Part I, Item 1 “Business,” and Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20192020 10-K.
This “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under “Forward-Looking Statements” and “Risk Factors” included in this Quarterly Report on Form 10-Q and “Risk Factors” included in our 20192020 10-K. As used in this MD&A, the terms “we,” “us,” “our” and the “Company” mean SGC 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, social and digital gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems and table game products and services to licensed gaming entities; providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; providing social casino solutionsand other mobile games to retail consumers;customers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services.
Recent Events — Impact of COVID-19
In March 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak a pandemic. In response We also gain access to the COVID-19 pandemic, governments across the world implemented measures to prevent its spread including the temporary closure of all non-essential businessestechnologies and travel restrictions, which are affecting our business segments in a number of ways. These measures include, but are not limited to, the temporary closure of a substantial amount of gaming operations establishmentspursue global expansion through strategic acquisitions and disruptions to lottery operations on a jurisdiction-by-jurisdiction basis.
Impact on Business Operations and Financial Results
Our Gaming business is especially impacted due to the widespread temporary closures of a substantial number of gaming operations establishments coupled with the global economic uncertainty. Our Participation gaming business revenue and cash flows have been significantly affected, as they are largely driven by players’ disposable incomes and level of gaming activity, along with an impact on short-term rentals of both gaming equipment and table products. As the level of play declines due to casino closures or quarantines (whether self-imposed or imposed by governments), there is a directly correlated decline in our Participation gaming business. Additionally, our gaming machine and table product sales largely depend on our customers’ liquidity and operating results, which could significantly impact the replacement cycle and demand for gaming machines, table products and opportunities from new or expanded markets. Further, we have granted customer concessions for a portion of the time for which such customers’ operations were impacted by closures or quarantines. Also, based on historical gaming customers’ orders and our manufacturing capacity, a substantial portion of gaming machine sales are fulfilled in the third month of each quarter. Accordingly gaming machine sales revenues were particularly impacted beginning in the later part of the first quarter.
Our Lottery business was also affected as certain lottery retail establishments are temporarily closed and others are experiencing the general slowdown due to lower foot traffic and reduced spending by end players, resulting in a lower level of lottery ticket purchases, which most immediately impacts certain of our European markets due to lock-down and our SGEP revenue and cash flows and also our cash flows from POS instant tickets arrangements as such amounts are not payable to us until the ticket sells through the retail channel.
The temporary closure of gaming operations, disruptions to lottery operations, travel restrictions, cancellation of sporting events, expected lower disposable incomes of consumers and adverse impact on our casino and gaming customers’ liquidity and financial results caused by the COVID-19 pandemic, had and continues to have an adverse effect onequity investments. We report our results of operations cash flowsin four business segments—Gaming, Lottery, SciPlay and financial condition intoDigital—representing our different products and services.
Recent Events
Impacts of COVID-19
As more fully described in the second quarter“Description of the Business and potentially intoSummary of Significant Accounting Policies - Impact of COVID-19” in Note 1 of our 2020 10-K, COVID-19 disruptions continue to impact our results of operations and particularly our Gaming business segment operations. Even though the second halfmajority of 2020gaming establishments reopened globally, gaming operations have yet to return to pre-COVID levels, as limited international travel, social distancing measures and beyond.
We are unable to determinereduced operating capacity restrictions remain in effect in many jurisdictions, and overall uncertainty regarding the ultimate magnitude and the length of time that these disruptions will continue to impact our future results of operations, cash flowsbusiness remains unknown and financial condition, which will depend, among other factors, on the currently unknowable duration of the COVID-19 pandemic, the impact of governmental regulations and actions that might be imposed in response to the pandemic and the pace of overall recovery of gaming and lottery operations globally. We have
implemented a number of measures to reduce operating costs and conserve liquidity. These include measures such as: reductions in both salaries and workforce, including voluntary 50% or greater reductions in salaries by our executive leadership team (100% as to our President and Chief Executive Officer), unpaid employee furloughs, temporary elimination of 401(k) matching among other compensation and benefits reductions and deferral of all non-essential operating and capital expenditures. We are also engaging with our vendors to negotiate concessions on the timing and amount of payments to preserve liquidity through the COVID-19 disruption period. These measures are expected to result in more than $50 million in cost savingsmay change in the second quarter of 2020, while capital expenditures in the second quarter of 2020 are expected tofuture and such changes could be approximately $50 million lower than previously planned, with many of these actions resulting in a lower future cost structure.
Impact on Liquidity
On May 8, 2020, SGC and the requisite lenders under SGI’s revolving credit facility entered into the Credit Agreement Amendment that, among other things, implements a financial covenant relief period through the end of the first quarter ending March 31, 2021 (the “Covenant Relief Period”), as a result of which SGI is not required to maintain compliance with the consolidated net first lien leverage ratio covenant during the Covenant Relief Period, imposes a minimum liquidity requirement (excluding SciPlay) of at least $275 million during the Covenant Relief Period, with a potential step-down to at least $200 million for April and May 2021, and further restricts our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject, in some instances, to maintaining minimum liquidity (excluding SciPlay) of at least $400 million. See Note 1 for additional details regarding the Credit Agreement Amendment.
As of March 31, 2020, our total available liquidity (excluding our SciPlay business segment) was $684 million, which included $483 million of undrawn availability under SGI’s revolving credit facility. On April 9, 2020, we borrowed $480 million under SGI’s revolving credit facility, which was substantially all of the remaining availability thereunder.material. We continue to assess the situation jurisdiction by jurisdiction, actively manage our daily cash flows and continue to evaluate additional measures that will reduce operating costs and conserve cash. We believe that, basedcash to preserve liquidity as we execute on our current projections,strategic initiatives.
Impact on Business Operations and Financial Results
Throughout 2020 and the first quarter of 2021, the Gaming business segment was especially impacted by the COVID-19 disruptions due to the widespread closures and restricted reopening of a substantial number of gaming operations establishments coupled with global economic uncertainty. Many of these closures and restrictions have since been lifted and businesses have begun to see more activity given the recent expansion of capacity limits, increased travel, and distribution of vaccines, however, the impact of the COVID-19 pandemic remains uncertain and ongoing.
For more information on the effects of COVID-19 on each of our business segments, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Impact on Business Operations and Financial Results” and Note 1 of our 2020 10-K.
Impact on Liquidity
Our only financial maintenance covenant (excluding SciPlay’s Revolver) is contained in SGI’s credit agreement. For information regarding the impact on liquidity and other requirements, please refer to the “Description of the Business and Summary of Significant Accounting Policies” in Note 1 and “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the “Business Overview” along with the “Liquidity, Capital Resources and Working Capital” sections of our 2020 10-K. In April 2021, we will have sufficient liquidity formade a periodvoluntary payment of at least one year.$150 million on SGI’s revolving credit facility.
Segments
We report our operations in four business segments - Gaming, Lottery, SciPlay and Digital - representing our different products and services. See “- Business Segments Results” below and Note 3 for additional business segment information.
Foreign Exchange
Our results are impacted by changes in foreign currency exchange rates used in the translation of foreign functional currencies into USD and the remeasurement of foreign currency transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. Our exposure to foreign currency volatility on revenue is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | |
| 2021 | | 2020 | | | | |
| ($ in millions) | Revenue | | % Consolidated Revenue | | Revenue | | % Consolidated Revenue | | | | | | | | |
| Foreign Currency: | | | | | | | | | | | | | | | |
| British Pound Sterling | $ | 71 | | | 10 | % | | $ | 85 | | | 12 | % | | | | | | | | |
| Euro | 52 | | | 7 | % | | 63 | | | 9 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | | | | | | | | | | | |
| 2020 | | | | 2019 | | | | | | | | | | |
| ($ in millions) | Revenue | | % Consolidated Revenue | | Revenue | | % Consolidated Revenue | | | | | | | | |
| Foreign Currency: | | | | | | | | | | | | | | | |
| British Pound Sterling | $ | 85 | | | 12 | % | | $ | 85 | | | 10 | % | | | | | | | | |
| Euro | 63 | | | 9 | % | | 56 | | | 7 | % | | | | | | | | |
| Australian Dollar | 19 | | | 3 | % | | 16 | | | 2 | % | | | | | | | | |
We also have foreign currency exposure related to certain of our equity investments, cross-currency interest rate swaps, and Euro-denominated debt. See “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and Part I, Item 1A in our 20192020 10-K, and “Consolidated Results — Other Factors Affecting 20192020 and 20182019 Net Loss Comparability— Foreign exchange”Attributable to SGC Comparability” under Item 7 in our 20192020 10-K and Item 3 “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.
CONSOLIDATED RESULTS
| | | Three Months Ended
March 31, | | | Variance | | | Three Months Ended March 31, | | Variance | |
| ($ in millions) | ($ in millions) | 2020 |
| 2019 | | 2020 vs. 2019 | | ($ in millions) | 2021 |
| 2020 | | 2021 vs. 2020 | |
| Total revenue | Total revenue | $ | 725 | | | $ | 837 | | | $ | (112) | | | (13) | % | | Total revenue | $ | 729 | | | $ | 725 | | | $ | 4 | | | 1 | % | |
| Total operating expenses | Total operating expenses | 757 | | | 714 | | | 43 | | | 6 | % | | Total operating expenses | 648 | | | 757 | | | (109) | | | (14) | % | |
| Operating (loss) income | (32) | | | 123 | | | (155) | | | (126) | % | | |
| Operating income (loss) | | Operating income (loss) | 81 | | | (32) | | | 113 | | | (353) | % | |
| Net loss before income taxes | Net loss before income taxes | (151) | | | (20) | | | (131) | | | 655 | % | | Net loss before income taxes | (6) | | | (151) | | | 145 | | | 96 | % | |
| Net loss | Net loss | (155) | | | (24) | | | (131) | | | 546 | % | | Net loss | (9) | | | (155) | | | 146 | | | 94 | % | |
Net loss attributable to SGC
| Net loss attributable to SGC
| $ | (159) | | | $ | (24) | | | $ | (135) | | | 563 | % | | Net loss attributable to SGC | $ | (15) | | | $ | (159) | | | $ | 144 | | | 91 | % | |
Revenue
| | | | |
| Consolidated Revenue by Business Segment |
| (in millions) |
| | |
| Three Months Ended March 31, 2021 and 2020 | | |
As described in the “Recent Events – Impact of COVID-19” section above, our total revenue, specificallyprimarily revenues for the Gaming business segment, was adversely impactedcontinue to reflect the unfavorable economic conditions caused by the COVID-19 disruptions. Additionally, Gaming revenue reflects lower system revenues primarily due to completiondisruptions despite the scaling back of certain Canadian systems launches that we benefited from in the prior year, while LotteryCOVID-19 restrictions and measures. SciPlay revenue reflects approximately $9increased by $33 million in lower equipment sales in the current year period.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Variance | | | | | | | | | | |
| ($ in millions) | 2020 |
| 2019 | | 2020 vs. 2019 | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | |
| Cost of services | $ | 130 | | | $ | 133 | | | $ | (3) | | | (2) | % | | | | | | | | |
| Cost of product sales | 91 | | | 107 | | | (16) | | | (15) | % | | | | | | | | |
| Cost of instant products | 73 | | | 67 | | | 6 | | | 9 | % | | | | | | | | |
| SG&A | 198 | | | 186 | | | 12 | | | 6 | % | | | | | | | | |
| R&D | 51 | | | 49 | | | 2 | | | 4 | % | | | | | | | | |
| D&A | 138 | | | 165 | | | (27) | | | (16) | % | | | | | | | | |
| Goodwill impairment | 54 | | | — | | | 54 | | | nm | | | | | | | | | |
| Restructuring and other | 22 | | | 7 | | | 15 | | | 214 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total operating expenses | $ | 757 | | | $ | 714 | | | $ | 43 | | | 6 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| nm = not meaningful. | | | | | | | | | | | | | | | |
Costdue to increased Mobile platform revenue, which reflects a continued trend of Revenueplayers migrating from web to mobile platforms to play our games and the popularity of our games. Lottery instant ticket sales revenue increased primarily due to the impact of COVID-19 on the prior year and the return to normal operations in 2021, coupled with the large lottery jackpots in the first quarter of 2021, driving both instant product sales and system increases.
CostGiven the impact of the beginning of the COVID-19 pandemic on the prior year period, we also present below certain sequential comparisons to the quarter ended December 31, 2020, in order to provide additional context for our results of operations. During the three months ended March 31, 2021, total revenue, compared to the three months ended December 31, 2020, decreased from $762 million to $729 million, representing a 4% percent decrease, primarily driven by lower Gaming business segment revenue and particularly lower Gaming machine sales due to completion of orders during 2020 that were delayed as a result of lower Gaming and LotteryCOVID-19 business disruptions, which resulted in 5,737 more units sold in the three months ended December 31, 2020, primarily related to international shipments.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance | | | | |
| ($ in millions) | 2021 |
| 2020 | | 2021 vs. 2020 | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | |
| Cost of services | $ | 139 | | | $ | 130 | | | $ | 9 | | | 7 | % | | | | | | | | |
| Cost of product sales | 50 | | | 91 | | | (41) | | | (45) | % | | | | | | | | |
| Cost of instant products | 77 | | | 73 | | | 4 | | | 5 | % | | | | | | | | |
| SG&A | 186 | | | 198 | | | (12) | | | (6) | % | | | | | | | | |
| R&D | 52 | | | 51 | | | 1 | | | 2 | % | | | | | | | | |
| D&A | 123 | | | 138 | | | (15) | | | (11) | % | | | | | | | | |
| Goodwill impairment | — | | | 54 | | | (54) | | | (100) | % | | | | | | | | |
| Restructuring and other | 21 | | | 22 | | | (1) | | | (5) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total operating expenses | $ | 648 | | | $ | 757 | | | $ | (109) | | | (14) | % | | | | | | | | |
Cost of Revenue
Total cost of revenue correlated withdecreased as a decrease indirect result of lower revenue due to the continued COVID-19 disruptions described above. Additionally,impact on our Gaming business segment coupled with the prior year period’s $9 million Gaming products inventory charge for excess and obsolete inventory. The total decrease is partially offset by the increased cost of product sales includes approximately $9 million in Gamingrevenue related to our SciPlay segment inventory write down primarily due to a forecasted decrease in demand for certain platforms as we believe that our customers will extend replacement cycles to preserve their liquidity following their return to operations post COVID-19.correlated with revenue growth.
SG&A
SG&A increaseddecreased primarily due to athe prior year period’s $28 million increasecharge in Gaming business segment allowance for credit losses that reflects forecastedreflected credit deterioration due to the COVID-19 disruptions generally and credit weakness specifically in our Latin America receivables portfolio, which was partially offset by $7increased stock based compensation expenses of $9 million in lower incentive compensation and $6 million in lower SciPlay SG&A due to lower marketing and advertising costs associated with player acquisitions.acquisition cost of $5 million.
D&A
The decrease in D&A wasis primarily due to certain Gaminggaming equipment, intangible assets and software primarily associated with historical acquisitions becoming fully depreciated and amortized during 2019.in the prior year period.
Goodwill Impairment
Goodwill impairment recorded during the prior year quarter was related to our legacy U.K. Gaming reporting unit (see Note 8).unit.
Restructuring and Other
The increasedecrease in restructuring and other is primarily due to severancehigher COVID-19 business disruption charges in the prior year period, partially offset by charges related to strategic and related charges associated with COVID-19 disruptions (see Note 4).business optimization initiatives in the current year period.
Other FactorsFactor Affecting Net Loss Attributable to SGC
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | Factors Affecting Net Loss Attributable to SGC |
| (in millions) | 2020 | | 2019 | | | | | | 2020 vs. 2019 |
| | | | | | | | | |
| Interest expense | $ | 124 | | | $ | 154 | | | | | | | A decrease in interest expense for the three months ended March 31, 2020 reflects lower cash interest costs due to the latest refinancing activities. | |
| | | | | | | | | |
| Net income attributable to noncontrolling interest | 4 | | | — | | | | | | | The three-month period ended March 31, 2020 reflects SciPlay noncontrolling interest. | |
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Factor Affecting Net Loss Attributable to SGC |
| (in millions) | 2021 | | 2020 | | | | | | 2021 vs. 2020 |
| | | | | | | | | |
| | | | | | | | | |
| Gain on remeasurement of debt | 25 | | | 10 | | | | | | | Gains are attributable to remeasurement of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes and reflect changes in the Euro vs. the U.S. Dollar foreign exchange rates between the comparable periods. 81% of our Euro Notes were not treated as a net investment hedge in the first quarter of 2021 compared to 70% in the first quarter of 2020. |
| | | | | | | | | |
| | | | | | | | | |
See “Business Segments Results” below for a more detailed explanation of the significant changes in our components of revenue within the individual segment results of operations.
BUSINESS SEGMENTS RESULTS (for the three months ended March 31, 2021 compared to the three months ended March 31, 2020)
GAMING
Our Gaming business segment designs, develops, manufactures, markets and distributes a comprehensive portfolio of gaming products and services. We provide our Gaming portfolio of products and services to commercial casinos, Native American casinos, wide-area gaming operators such as licensed betting offices,LBOs, arcade and bingo operators in the U.K. and continental Europe, and government agencies and their affiliated operators. Our equity investment in Roberts Communications Network, LLC is included in our Gaming business segment.
We generate Gaming revenue from both services and product sales. Our services revenue includes revenue earned from Participation gaming machines, other leased gaming machines (including VLTs and electronic table games), supplied table products and services (including Shufflers), casino management technology solutions and systems, and other services revenues. Our product sales revenue includes the sale of new and used gaming machines, electronic table games, VLTs and VGTs, casino-management technology solutions and systems, table products, proprietary table game licensing, conversion kits (including game, hardware or operating system conversions) and spare parts.
For additional information, refer to the Gaming primary business activities summary included within “Business Segment Results” under Item 7 of our 20192020 10-K.
Current Year Update
See the ““Business Overview – Recent Events – Impact of COVID-19”COVID-19” section above for a description of the COVID-19 impact on our Gaming business segment, which hadcontinued to have an adverse effect on our results of operations and cash flows in the first quarter of 2021 and is continuingexpected to continue into the second quarter of 2021 and potentially intobeyond as social distancing mitigation measures, which are slowly being rolled back, continue to be enforced. In the second halfnear term, we also expect to see a decrease in the demand for our Gaming products as gaming operators continue to operate at limited capacity. We continue to monitor consumer behaviors for any increase in traffic to gaming establishments as a result of easing restrictions. See also “Description of the Business and Summary of Significant Accounting Policies - Impact of COVID-19” in Note 1 of our 2020 and beyond. In addition to the adverse effect of COVID-19, we anticipate challenges in our gaming operations as corporate consolidations continue and decline in our gaming systems products and services due to certain large Canadian contracts that were completed in 2019.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Results of Operations and Key Performance IndicatorsKPIs
Revenue | | | | | | |
| Three Months Ended March 31, 2021 and 2020 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Variance | | | | | | | | | | |
| ($ in millions) | 2020 | | 2019 | | 2020 vs. 2019 | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Gaming operations | $ | 119 | | | $ | 152 | | | $ | (33) | | | (22) | % | | | | | | | | |
| Gaming machine sales | 92 | | | 136 | | | (44) | | | (32) | % | | | | | | | | |
| Gaming systems | 55 | | | 74 | | | (19) | | | (26) | % | | | | | | | | |
| Table products | 52 | | | 60 | | | (8) | | | (13) | % | | | | | | | | |
| Total revenue | $ | 318 | | | $ | 422 | | | $ | (104) | | | (25) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| F/X impact on revenue | $ | (1) | | | $ | (4) | | | $ | 3 | | | (75) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| KPIs: | | | | | | | | | | | | | | | |
| U.S. and Canada units: | | | | | | | | | | | | | | | |
| Installed base at period end | 30,469 | | | 32,958 | | | (2,489) | | | (8) | % | | | | | | | | |
| Average daily revenue per unit | $ | 31.28 | | | $ | 38.46 | | | $ | (7.18) | | | (19) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
International units(1): | | | | | | | | | | | | | | | |
| Installed base at period end | 34,372 | | | 33,950 | | | 422 | | | 1 | % | | | | | | | | |
| Average daily revenue per unit | $ | 8.23 | | | $ | 11.43 | | | $ | (3.20) | | | (28) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Gaming machine unit sales: | | | | | | | | | | | | | | | |
| U.S. and Canada new unit shipments | 2,890 | | | 4,801 | | | (1,911) | | | (40) | % | | | | | | | | |
| International new unit shipments | 2,003 | | | 2,083 | | | (80) | | | (4) | % | | | | | | | | |
| Total new unit shipments | 4,893 | | | 6,884 | | | (1,991) | | | (29) | % | | | | | | | | |
| Average sales price per new unit | $ | 15,872 | | | $ | 17,140 | | | $ | (1,268) | | | (7) | % | | | | | | | | |
| (1) Excludes the impact of game content licensing revenue. | | | | | | | | | | | | | | | |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance | | | | |
| ($ in millions) | 2021 | | 2020 | | 2021 vs. 2020 | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Gaming operations | $ | 113 | | | $ | 119 | | | $ | (6) | | | (5) | % | | | | | | | | |
| Machine sales | 55 | | | 92 | | | (37) | | | (40) | % | | | | | | | | |
| Systems | 42 | | | 55 | | | (13) | | | (24) | % | | | | | | | | |
| Table products | 34 | | | 52 | | | (18) | | | (35) | % | | | | | | | | |
| Total revenue | $ | 244 | | | $ | 318 | | | $ | (74) | | | (23) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| F/X impact on revenue | $ | 2 | | | $ | (1) | | | $ | 3 | | | (300) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Gaming KPIs: | | | | | | | | | | | | | | | |
| U.S. and Canada units: | | | | | | | | | | | | | | | |
| Installed base at period end | 29,809 | | | 30,469 | | | (660) | | | (2) | % | | | | | | | | |
| Average daily revenue per unit | $ | 35.45 | | | $ | 31.28 | | | $ | 4.17 | | | 13 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
International units(1): | | | | | | | | | | | | | | | |
| Installed base at period end | 31,703 | | | 34,372 | | | (2,669) | | | (8) | % | | | | | | | | |
| Average daily revenue per unit | $ | 3.03 | | | $ | 8.23 | | | $ | (5.20) | | | (63) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Gaming machine unit sales: | | | | | | | | | | | | | | | |
| U.S. and Canada new unit shipments | 1,943 | | | 2,890 | | | (947) | | | (33) | % | | | | | | | | |
| International new unit shipments | 656 | | | 2,003 | | | (1,347) | | | (67) | % | | | | | | | | |
| Total new unit shipments | 2,599 | | | 4,893 | | | (2,294) | | | (47) | % | | | | | | | | |
| Average sales price per new unit | $ | 16,622 | | | $ | 15,872 | | | $ | 750 | | | 5 | % | | | | | | | | |
| (1) Excludes the impact of game content licensing revenue. |
All of ourWhile we continue to see increased demand, Gaming revenue was negativelycontinues to be impacted by the COVID-19 disruptions, that resulted in temporary closures of a substantial number of gaming operations establishments in various jurisdictions globally, as described above, and as the continuation of social distancing requirements (including reduced floor capacities, table play customer limitations and reduction of slot machines available for play), implemented in the “Recent Events – Impactfirst half of COVID-19”section above.2020, are still being enforced in certain jurisdictions. Even as the restrictions are being eased, the mitigation measures are expected to continue for an indeterminate amount of time, these will continue to affect consumer behavior and thus we expect to continue to see the impact on our gaming segment through 2021 and potentially beyond.
During the three months ended March 31, 2021, Gaming revenues, compared to the three months ended December 31, 2020, decreased from $286 million to $244 million driven by lower Gaming machine sales (see Consolidated Results – Revenue above).
Gaming Operations
Gaming operations revenue decreased due to a 2,489-unit decrease in the installed base in the U.S. and Canada coupled with decreases in both U.S. and Canada and International average daily revenues of $7.18 per unit and $3.20 per unit, respectively, largelyprimarily due to the COVID-19 disruptions described above. These decreases were partially offset byabove causing a 422-unit increase660-unit decrease in the U.S. and Canada ending installed base and a 2,669-unit decrease in the International ending installed base primarily due to higher installed units in the Latin America and Europe regions, which was partially offset bycoupled with a decrease in the U.K. installed units due to the closure of the LBO shops.
Gaming Machine Sales
Gaming machine sales revenue decreased due to a 1,911-unit decrease in U.S. and Canada new unit shipments coupled with a $1,268 decrease in the average sales price per unit primarily due to the impact of COVID-19 as described above.
above, driving lower unit shipments primarily in replacement unit sales, which was partially offset by an increase in average sales price per unit. The following table summarizes Gaming machine sales changes:
| | | Three Months Ended March 31, | | | Variance | | | Three Months Ended March 31, | | Variance | |
| | 2020 | | 2019 | | 2020 vs. 2019 | | | 2021 | | 2020 | | 2021 vs. 2020 | |
| U.S. and Canada unit shipments: | U.S. and Canada unit shipments: | | | | | | | U.S. and Canada unit shipments: | | | | | | |
| Replacement units | Replacement units | 1,744 | | | 3,194 | | | (1,450) | | | (45) | % | | Replacement units | 1,623 | | | 1,744 | | | (121) | | | (7) | % | |
| Casino opening and expansion units | Casino opening and expansion units | 1,146 | | | 1,607 | | | (461) | | | (29) | % | | Casino opening and expansion units | 320 | | | 1,146 | | | (826) | | | (72) | % | |
| Total unit shipments | Total unit shipments | 2,890 | | | 4,801 | | | (1,911) | | | (40) | % | | Total unit shipments | 1,943 | | | 2,890 | | | (947) | | | (33) | % | |
| | | | | | |
| International unit shipments: | International unit shipments: | | | | | International unit shipments: | | |
| Replacement units | Replacement units | 1,827 | | | 2,083 | | | (256) | | | (12) | % | | Replacement units | 656 | | | 1,827 | | | (1,171) | | | (64) | % | |
| Casino opening and expansion units | Casino opening and expansion units | 176 | | | — | | | 176 | | | nm | | | Casino opening and expansion units | — | | | 176 | | | (176) | | | (100) | % | |
| Total unit shipments | Total unit shipments | 2,003 | | | 2,083 | | | (80) | | | (4) | % | | Total unit shipments | 656 | | | 2,003 | | | (1,347) | | | (67) | % | |
| nm = not meaningful. | | |
Operating Expenses and AEBITDA
Operating expenses decreased by $162 million primarily due to the first quarter of 2020 including a number of charges which did not recur in 2021. Notably, the three months ended March 31, 2020 included: (1) a $54 million goodwill impairment charge related to our U.K. Gaming unit; (2) a $28 million increase in allowance for credit losses; and (3) a $9 million charge for excess and obsolete inventory. Combined, these three items in 2020 represent $91 million or 56% of the decrease from the prior year period, with the latter two charges decreasing the prior year period’s AEBITDA by $37 million. The increaseremaining $71 million year over year decrease in operating expenses andis due to $36 million in lower cost of revenue driven by the decrease in AEBITDArevenue as described above along with $14 million in lower D&A due to certain gaming equipment, intangible assets and software primarily associated with historical acquisitions becoming fully depreciated and amortized in the prior year period, $9 million in lower restructuring charges and $12 million in other operating expenses.
AEBITDA as a percentage of revenue (“AEBITDA margin”) areincreased by 14 percentage points, to 44% which is primarily attributabledue to $37 million related to allowance for credit loss and inventory charges in the prior year period.
AEBITDA for the three months ended March 31, 2021 compared to the COVID-19 disruptions described in the “Recent Events – Impact of COVID-19” section, resulting in a significant decrease in revenue. Operating expenses for the current period also reflect a $54three months ended December 31, 2020, increased from $105 million goodwill impairment charge, a $28to $108 million increase inprimarily due to allowance for credit losses that reflects forecasted credit deterioration due torecognized in the COVID-19 disruptions and in particular the worsening of the expected credit position in our Latin America receivables portfolio, a $9 million charge to cost of products due to a decrease in anticipated demand for certain platforms, and a $10 million increase in restructuring and other charges, which wasprior year period partially offset by a $23 million reduction in Dincreased SG&A as a result of certain acquired intangible assets becoming fully depreciated during 2019.compensation and benefit expenses.
AEBITDA margin decreased by 21 percentage points to 30%.
LOTTERY
Our Lottery business segment is primarily comprised of our instant products business, and our systems-based services and product sales business. Our systems-based services and product sales business provide customized enterprise systems computer software, software support, equipment and data communication services, game content, and related products for retail and digital lottery draw and instant games, sports and virtual sports, and keno to lotteries. In the U.S., we typically provide the necessary POS terminals and equipment, internet and mobile solutions, software and maintenance services on a Participation basis under contracts that typically have an initial term of up to ten years. Internationally, we typically sell POS terminals and mobile lottery wagering platforms, related computer software and products, and technical operations services to lottery authorities and may provide ongoing fee-based systems maintenance and software support services.
Our instant products business generates revenue from the manufacture and sale of instant products, as well asand 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 asand full instant product category management.management administered through our SGEP program. In addition, we provide licensed games, promotional entertainment and internet-based marketing services to the lottery industry. These revenues are presented as instantInstant products revenue.
Our systems-based services and product sales business provides customized computer software, software support, equipment and data communication services, and keno to lotteries. In the U.S., we typically provide the necessary point-of-sale terminals and equipment, software and maintenance services For further details on a Participation basis under long-term contracts that typically have an initial term of at least five years. Internationally, we typically sell our point-of-sale terminals and/or computer software to lottery authorities and may provide ongoing fee-based systems maintenance and software support services. Refer to the Lottery segment’s primary business activities summary included withinrefer to the “Business Segment Results” under Item 7 of our 20192020 10-K.
Current Year Update
See ““Business Overview – Recent Events – ImpactImpacts of COVID-19”COVID-19” section above for a description of the COVID-19 impact on our Lottery business segment, which hadhas shown overall growth as our current period results reflect both higher Instant products and will have an adverse effect on our results of operations and cash flows continuing into the second quarter and potentially into the second half of 2020 and beyond. In addition to the adverse effect of COVID-19, weSystems revenues. We believe we will continue to face intense price-based competition in our Lottery business in 2020through the remainder of 2021 and potentially beyond. 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, weWe anticipate that lottery requests for proposals, specifically those for private management agreements and certain of our international customers, could increasingly include terms that expose us to increased risk, such as requiring the guarantee of specific income thresholds or significant upfront payments.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Results of Operations and Key Performance IndicatorsKPIs
| | | | |
| Three Months Ended March 31, 2021 and 2020 | | |
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | Variance | | | | | | | | | | |
| ($ in millions) | | 2020 | | 2019 | | 2020 vs. 2019 | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | |
| Instant products | | $ | 136 | | | $ | 140 | | | $ | (4) | | | (3) | % | | | | | | | | |
| Lottery systems | | 76 | | | 87 | | | (11) | | | (13) | % | | | | | | | | |
| Total revenue | | $ | 212 | | | $ | 227 | | | $ | (15) | | | (7) | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| F/X impact on revenue | | $ | (1) | | | $ | (2) | | | $ | 1 | | | (50) | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance | | | | |
| ($ in millions) | 2021 | | 2020 | | 2021 vs. 2020 | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Instant products | $ | 162 | | | $ | 136 | | | $ | 26 | | | 19 | % | | | | | | | | |
| Lottery systems | 86 | | | 76 | | | 10 | | | 13 | % | | | | | | | | |
| Total revenue | $ | 248 | | | $ | 212 | | | $ | 36 | | | 17 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| F/X impact on revenue | $ | 3 | | | $ | (1) | | | $ | 4 | | | 400 | % | | | | | | | | |
The decreaseincrease in instantInstant products revenue is primarily due to the negative impact fromof COVID-19 disruptions, which resultedon the prior year results along with the large lottery jackpots in a lower levelthe first quarter of lottery ticket2021 driving both instant products sales and to a lesser extent a less profitable revenue mix among our different lottery instant ticket programs. system increases.
Operating Expenses and AEBITDA
The decreaseincrease in lottery systems revenueoperating expenses is primarily due to increased cost of sales and SG&A, partially offset by lower domestic equipment sales.restructuring and other costs. The increase in AEBITDA is directly correlated with increased revenues (as described above) coupled with higher EBITDA from equity investments.
AEBITDA and AEBITDA margin decreases are correlated with the decrease of lottery ticket retail sales not only on its impact on revenue described above, but also with the impact COVID-19 disruptions had on our joint ventures (particularly LNS our Italy joint venture), coupled with the less profitable revenue mix. AEBITDA margin decreasedincreased by 911 percentage points, to 37%.48%, which is primarily driven by the higher revenue as described above, coupled with higher EBITDA from equity investments reflective of continuing recovery from COVID-19 disruptions.
SCIPLAY
Our SciPlay business segment is a leading developer and publisher of social games on mobile and web platforms. SciPlay currently offers seven core games, including social casino games Jackpot Party Casino, Gold Fish Casino, Hot Shot Casino® and Quick Hit® Slots, and casual games MONOPOLY Slots, Bingo Showdown® and 88 Fortunes® Slots and recently added a solitaire social game as a part of the Come2Play acquisition. SciPlay’s social casino games typically include slots-style game play and occasionally include table games-style game play, while SciPlay’s casual games blend slots-style or bingo game play with adventure game features. All of SciPlay’s games are offered and played on multiple platforms, including Apple, Google, Facebook, Amazon, and the Microsoft platform. In addition to SciPlay’s internally created games, SciPlay’s content library includes recognizable, real-world slot and table games content from SGC. This content allows players who like playing land-based slot machines to enjoy some of those same titles in SciPlay’s free-to-play games. SciPlay has access to SGC’s library of more than 1,500 iconic casino titles, including titles and content from third-party licensed brands such as MONOPOLY, JAMES BOND™, THE FLINTSTONES™, MICHAEL JACKSON™, and PLAYBOY™.
We generate revenue insubstantially all of our SciPlay business segmentrevenue from the sale of virtual coins, chips and bingo cards (collectively referred to as “coins, chips and cards”), which players can use to play casino-style slotour games. Players who install our games table gamesreceive free coins, chips and bingo games (i.e., spin incards upon the caseinitial launch of casino-style slot games, bet in the case of table gamesgame and use of bingoadditional free coins, chips and cards at specific time intervals. Players may exhaust the coins, chips and cards that they receive for free and may choose to purchase additional coins, chips and cards in the caseorder to extend their time of bingo games).game play. Once obtained, coins, chips and cards (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play within our apps. We distribute our games through various global social web and mobile platforms such as Facebook,, Apple,, Google, and Amazon,, with some of our games available on Microsoft, and other web and mobile platforms. The games are primarily our WMS®, Bally®, Barcrest®, and SHFL® branded games. We offer both third-party branded games and original content.
Our apps include Jackpot Party® Casino, Gold Fish®Casino, Quick Hit® Slots, Hot Shot Casino®, Bingo ShowdownTM, 88 Fortunes®, and MONOPOLY Slots on various platforms referenced above.
Current Year Update
WhileIn March 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak a pandemic. In response to the COVID-19 disruptions did not materially affect SciPlay’s first quarter 2020 results (seepandemic, governments across the “Recent Events – Impactworld have implemented measures to prevent its spread, including the temporary closure of COVID-19”section above), sustained consumer unease, lower discretionary spendingall non-essential businesses and shelter-in-place orders may impact SciPlay’s resultstravel restrictions. As a result of operations in the second quarterCOVID-19 pandemic and resulting stay at home measures, many of 2020 and beyond. Many of SciPlay’sour current and potential players may have significantly more free time to play our games, however they may also experience sustained consumer unease and have lower discretionary income. Beginning late March, we have experiencedWhile the increased player engagement we experienced during the first half of 2020 as a result of the stay at home measures across the U.S. has begun to recede, we are still seeing a higher number of paying players compared to the three months ended March 31, 2020. We are not able to predict and quantify the ultimate impact of further COVID-19 developments on our results of operations in future periods.
Results of Operations and KPIs
| | | | |
| Three Months Ended March 31, 2021 and 2020 | | |
Revenue
During the first quarter of 2020, SciPlay deployed significant updates across a number of its portfolio games, and SciPlay continues testing in certain international markets in order to position itself for international expansion. SciPlay expects to begin deployment of updates across the rest of the games starting in the third quarter of 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance | | | | |
| ($ in millions) | 2021 | | 2020 | | 2021 vs. 2020 | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Mobile | $ | 133 | | $ | 101 | | $ | 32 | | | 32 | % | | | | | | | | |
| Web and other | 18 | | 17 | | 1 | | | 6 | % | | | | | | | | |
| Total revenue | $ | 151 | | $ | 118 | | $ | 33 | | | 28 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| SciPlay KPIs: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Mobile Penetration(1) | 88 | % | | 85 | % | | 3pp | | nm | | | | | | | | |
Average MAU(2) | 6.7 | | 7.5 | | (0.8) | | (11) | % | | | | | | | | |
Average DAU(3) | 2.5 | | 2.6 | | (0.1) | | (4) | % | | | | | | | | |
ARPDAU(4) | $ | 0.67 | | $ | 0.49 | | $ | 0.18 | | | 37 | % | | | | | | | | |
nm = not meaningful.
pp = percentage points.
(1) Mobile penetration is defined as the percentage of business to consumer SciPlay revenue generated from mobile platforms.
(2) MAU = Monthly Active Users is a count of visitors to our sites during a month. An individual who plays multiple games or from multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the occurrence of multiple counting.
(3) DAU = Daily Active Users is a count of visitors to our sites during a day. An individual who plays multiple games or from multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the occurrence of multiple counting.
(4) ARPDAU = Average revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period. |
Three Months Ended March 31, 2020 ComparedThe increase in mobile penetration percentage primarily reflects a continued trend of players migrating from web to Three Months Ended March 31, 2019
Results of Operations and Key Performance Indicators
Revenue
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| | Three Months Ended March 31, | | | | Variance | | | | | | | | | | |
| ($ in millions) | | 2020 | | 2019 | | 2020 vs. 2019 | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | |
| Mobile | | $ | 101 | | | $ | 97 | | | $ | 4 | | | 4 | % | | | | | | | | |
| Web and other | | 17 | | | 21 | | | (4) | | | (19) | % | | | | | | | | |
| Total revenue | | $ | 118 | | | $ | 118 | | | $ | — | | | — | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| KPIs: | | | | | | | | | | | | | | | | |
| SciPlay business segment: | | | | | | | | | | | | | | | | |
Mobile Penetration(1) | | 85 | % | | 82 | % | | 3pp | | | nm | | | | | | | | | |
Average MAU(2) | | 7.5 | | | 8.4 | | | (0.9) | | (11) | % | | | | | | | | |
Average DAU(3) | | 2.6 | | | 2.7 | | | (0.1) | | (4) | % | | | | | | | | |
ARPDAU(4) | | $ | 0.49 | | | $ | 0.48 | | | $ | 0.01 | | | 2 | % | | | | | | | | |
| nm = not meaningful. | | | | | | | | | | | | | | | | |
| pp = percentage points. | | | | | | | | | | | | | | | | |
| (1) Mobile penetration is defined as the percentage of business to consumer SciPlay gaming revenue generated from mobile platforms. | | | | | | | | | | | | | | | | |
| (2) MAU = Monthly Active Users is a count of visitors to our sites during a month. An individual who plays multiple games or from multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the occurrence of multiple counting. | | | | | | | | | | | | | | | | |
| (3) DAU = Daily Active Users is a count of visitors to our sites during a day. An individual who plays multiple games or from multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the occurrence of multiple counting. | | | | | | | | | | | | | | | | |
| (4) ARPDAU = Average revenue per DAU is calculated by dividing revenue for a period by the DAU for the period by the number of days for the period. | | | | | | | | | | | | | | | | |
Mobile platform revenue increased primarily duemobile platforms to the ongoing popularity of Jackpot Party Casino and MONOPOLYSlotsplay our games. Web platform revenue decreased due to a decline in player levels as a result of player migration to mobile platforms.
Average MAU and average DAU decreased due to the turnover in users while paying users stayed consistent. Consequently,users. ARPDAU increased due to decreased average MAUintroduction of new content and average DAU base.features, and ongoing popularity of our games.
Operating Expenses and AEBITDA
The decreaseincrease in operating expenses is primarily correlated with the increase in revenues (as described above) coupled with an increase in salaries and benefits as a result of increased headcount.
AEBITDA increased primarily due to a $7 million decreasean increase in IP charges paid torevenue, partially offset by the Gaming business segment and a $6 million decrease in marketing and advertising costs, which are reflected in increases in AEBITDA and AEBITDA margin.operating expenses, as described above. AEBITDA margin increased 8by 1 percentage points to 29%.point for the three months ended March 31, 2021 as a result of the above stated drivers.
DIGITAL
Our Digital segment provides a comprehensive suite of digital gaming,iGaming, iLottery and sports betting solutions and services, including digital RMG and sports wagering solutions, distribution platforms, content, products and services. A portion of our Digital revenue consists of professional services related to highly customized software design, development, licensing, maintenance and support services, which are derived from a comprehensive suite of technology solutions. These technology solutions allow our customers to operate sports books, which can offer sport (or non-sport) events and betting markets across both fixed-odds and pari-mutuel betting styles. We also provide the Open Platform System which offers a wide range of reporting and administrative functions and tools providing operators full control over all areas of digital gaming operations. Additionally, we derive revenue from our content aggregation platforms, including Open Gaming System (OGS), remote gaming servers, SG Universe® platform and various other platforms, which can deliver a wide spectrum of internally developed and branded casino-style games and popular third-party provider casino-style games to gaming operators. Generally, we host the play of our game content on our centrally-located servers that are integrated with the online casino operators’ websites.
Current Year Update
•WhileGaming and other revenue increased, which was partially offset by a decrease in Sports and platform revenue primarily due to a cancellation fee of $7 million associated with certain legacy agreements that were modified in the impact of the COVID-19 disruptions was not material on our first quarter 2020 revenue, continued closure of gaming facilities, cancellations of sporting events, consumer unease and lower discretionary spending will have a greater negative impact on our customers’ operations and consequently our results of operations as a significant portion of our gaming and sports revenue is based on the volume of wagers generated by our customers.
•prior year period. We continue to expand our customer base and capitalize on both iGaming and sports opportunities in the U.S. by leveraging our industry leading platforms, content and solutions.
Three Months Ended March 31, 2020 Compared While we believe that we are well positioned and continue to Three Months Ended March 31, 2019
Results of Operations and Key Performance IndicatorsKPIs
Revenue and AEBITDA | | | | |
| Three Months Ended March 31, 2021 and 2020 | | |
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| | Three Months Ended March 31, | | | | Variance | | | | | | | | | | |
| ($ in millions) | | 2020 | | 2019 | | 2020 vs. 2019 | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | |
| Sports and platform | | $ | 38 | | | $ | 30 | | | $ | 8 | | | 27 | % | | | | | | | | |
| Gaming and other | | 39 | | | 40 | | | (1) | | | (3) | % | | | | | | | | |
| Total revenue | | $ | 77 | | | $ | 70 | | | $ | 7 | | | 10 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| F/X impact on revenue | | $ | — | | | $ | (4) | | | $ | 4 | | | (100) | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
| KPIs: | | | | | | | | | | | | | | | | |
| Gaming - Key Performance Indicators: | | | | | | | | | | | | | | | | |
| Wagers processed through OGS (in billions) | | $ | 9.9 | | | $ | 8.9 | | | $ | 1.0 | | | 11 | % | | | | | | | | |
Revenue
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| Three Months Ended March 31, | | Variance | | | | |
| ($ in millions) | 2021 | | 2020 | | 2021 vs. 2020 | | | | | | |
| Revenue: | | | | | | | | | | | | | | | |
| Sports and platform | $ | 33 | | | $ | 38 | | | $ | (5) | | | (13) | % | | | | | | | | |
| Gaming and other | 53 | | | 39 | | | 14 | | | 36 | % | | | | | | | | |
| Total revenue | $ | 86 | | | $ | 77 | | | $ | 9 | | | 12 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| F/X impact on revenue | $ | 4 | | | $ | — | | | $ | 4 | | | nm | | | | | | | | |
| | | | | | | | | | | | | | | |
| Gaming KPI: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Wagers processed through OGS (in billions) | $ | 16.9 | | | $ | 9.9 | | | $ | 7.0 | | | 71 | % | | | | | | | | |
The increase in Gaming and other revenue and AEBITDA is primarily due to increased free time and stay at home measures as a result of COVID-19 disruptions. The decrease in Sports and platform revenue and Digital AEBITDA was primarily due to a cancellation feefees associated with certain legacy agreements that were modified and recognized in the current period andprior year period.
AEBITDA margin increased by 4 percentage points to a lesser extent lower compensation costs as Digital continues to execute on scaling its business.34%.
RECENTLY ISSUED ACCOUNTING GUIDANCE
We do not expect that any recently issued accounting guidance will have a significant effect on our consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
For a description of our policies regarding our critical accounting estimates, see “Critical Accounting Estimates” in “Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 20192020 10-K.
Goodwill Impairment Assessment Update
As disclosed in our 2019 10-K, goodwill is tested for impairment at the reporting unit level annually on October 1 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of a reporting unit or a sustained decrease in stock price.
As described in the “Recent Events – Impact of COVID-19” section above, the COVID-19 pandemic had and continues to have an adverse effect on our results of operations, cash flows and financial condition and has resulted in significant volatility in global markets, including our stock price. While we do not believe these trends are long lasting nor that the magnitude of the decrease in our stock price and fair value of our debt during the first quarter is indicative of the fair values of our reporting units decreasing below their carrying values, we are unable to determine the ultimate magnitude and the length of time that these disruptions will continue to impact our future results of operations, cash flows and financial condition.
We assessed our estimated fair values of the reporting units as of October 1, 2019 compared to the total enterprise value using the average stock price and the fair value of our debt as of March 31, 2020 (prior to and during the COVID-19 disruptions), and concluded that such analysis does not indicate that estimated fair values for all of our reporting units, other than for our legacy U.K. Gaming reporting unit, more likely than not decreased below those reporting units’ carrying values. Accordingly, we determined the COVID-19 disruptions do not trigger an impairment at March 31, 2020 for reporting units other than our legacy U.K. Gaming reporting unit; however this could change in the future depending on prevailing conditions and changes in our current estimates of the timing and magnitude of the economic recovery following the COVID-19 disruptions.
As noted above and as described in Note 8, we determined that our legacy U.K. Gaming reporting unit’s goodwill was impaired during the first quarter. We believe the COVID-19 disruptions impacting our Gaming segment reporting units necessitated a supplemental analysis of the underlying goodwill carrying amounts to determine whether a full quantitative assessment was warranted. We believe the impact of the COVID-19 disruptions on our reporting units outside our Gaming segment does not reach a level that triggers a quantitative test at this time as there was significant cushion calculated as of our
latest full quantitative valuation in the 2019 annual impairment test and the supplemental sensitivity analysis described below corroborated that there continued to be sufficient cushion as of March 31, 2020.
The supplemental analysis of the likelihood of impairment in the Gaming segment reporting units described in the preceding paragraph leveraged the full quantitative valuations prepared in the fourth quarter of 2019 as the base, and included a sensitivity analysis eliminating all cash flows from 2020 and reduced 2021 cash flows by 50%, with operations returning to a normal level in 2022. This sensitivity analysis indicated a fair value cushion exceeding 20% in each of our Gaming segment reporting units other than our legacy U.K. Gaming reporting unit. As a result, we believe that it is not more likely than not that impairment exists in the reporting units in our Gaming segment (other than our legacy U.K. Gaming reporting unit). We also believe there to be an elevated risk of goodwill impairment for the unimpaired Gaming segment reporting units if the adverse impact of the COVID-19 disruptions or overall recovery for these reporting units sustains over an extended period of time.
The following table summarizes goodwill balances and cushions based on the latest annual goodwill test for all of our Gaming segment reporting units other than our legacy U.K. Gaming reporting unit:
| | | | | | | | | | | |
| Reporting Unit: | March 31, 2020 Goodwill Balance (in millions) | | FY 2019 Goodwill Testing Percentage Cushion |
| SG Gaming | $ | 1,568 | | | 51 | % |
| Casino Management Systems | 388 | | | 49 | % |
| Table Products | 297 | | | 102 | % |
As disclosed in Note 8, based on the results of our interim goodwill impairment test for our legacy U.K. Gaming reporting unit, we recorded a partial goodwill impairment charge of $54 million. We estimated the fair value of the legacy U.K. Gaming reporting unit using both an income approach that analyzed a range of projected discounted cash flows and a market approach that considered comparable public companies.
Performing a discounted cash flow analysis requires the use of significant judgments, including: (1) estimation of future cash flows dependent on internal forecasts, (2) estimation of the long-term rate of growth for our business, (3) the relative risk of achieving those cash flows, and (4) determination of our weighted average cost of capital, all of which are subject to overall uncertainty about the magnitude and duration of the COVID-19 disruptions. When using the market approach, we make judgments about the comparability of publicly traded companies engaged in similar businesses or public transactions information for similar businesses. We base our judgments on factors such as size, growth rates, profitability, risk, and return on investment. We also make judgments when adjusting market multiples of revenue, and earnings for these companies to reflect their relative similarity to our business. Refer to Note 8 for key estimates and assumptions used in the discounted cash flow analysis for our legacy U.K. Gaming reporting unit.
The remaining Goodwill balance for our legacy U.K. Gaming reporting unit as of March 31, 2020 was $109 million. Any future adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with investments included in our estimation of fair value for our legacy U.K. Gaming reporting unit could lead to additional future goodwill impairments, which could be material.
Other than our update to the goodwill impairment assessment above, thereThere have been no significant changes in our critical accounting estimate policies or the application or the results of the application of those policies to our condensed consolidated financial statements from those presented in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our 20192020 10-K.
LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL
Cash and Available Liquidity
As of March 31, 2020,2021, our principal sources of liquidity, other than cash flows provided by operating activities, were cash and cash equivalents, including SciPlay cash and cash equivalents (for our SciPlay business segment), and amounts available under the SGI revolving credit facility and the SciPlay Revolver (for our SciPlay business segment) discussed below under “Credit Agreement and Other Debt”.
Cash and Available Revolver Capacity
| | | (in millions) | (in millions) | | Cash and cash equivalents | | Revolver capacity | | Revolver capacity drawn or committed to letters of credit | | Total | (in millions) | | Cash and cash equivalents | | Revolver capacity | | Revolver capacity drawn or committed to letters of credit | | Total |
| SGC (excluding SciPlay) | SGC (excluding SciPlay) | | $ | 201 | | | $ | 650 | | | $ | (167) | | | $ | 684 | | SGC (excluding SciPlay) | | $ | 695 | | | $ | 650 | | | $ | (447) | | | $ | 898 | |
| SciPlay | SciPlay | | 133 | | | 150 | | | — | | | 283 | | SciPlay | | 272 | | | 150 | | | — | | | 422 | |
| Total as of March 31, 2020 | | $ | 334 | | | $ | 800 | | | $ | (167) | | | | $ | 967 | | |
| Total as of March 31, 2021 | | Total as of March 31, 2021 | | $ | 967 | | | $ | 800 | | | $ | (447) | | | $ | 1,320 | |
| | SGC (excluding SciPlay) | SGC (excluding SciPlay) | | $ | 202 | | | $ | 650 | | | $ | (207) | | | | $ | 645 | | SGC (excluding SciPlay) | | $ | 747 | | | $ | 650 | | | $ | (547) | | | $ | 850 | |
| SciPlay | SciPlay | | 111 | | | 150 | | | — | | | | 261 | | SciPlay | | 269 | | | 150 | | | — | | | 419 | |
| Total as of December 31, 2019 | | $ | 313 | | | $ | 800 | | | $ | (207) | | | $ | 906 | | |
| Total as of December 31, 2020 | | Total as of December 31, 2020 | | $ | 1,016 | | | $ | 800 | | | $ | (547) | | | $ | 1,269 | |
On April 9, 2020, we borrowed $480 million under SGI’s revolving credit facility, which was substantially all of the remaining availability thereunder.
On May 8, 2020, the Company and the requisite lenders under SGI’s revolving credit facility entered into the Credit Agreement Amendment that, among other things, implements a financial covenant relief period through the end of the first quarter ending March 31, 2021 (the “Covenant Relief Period”), as a result of which SGI is not required to maintain compliance with the consolidated net first lien leverage ratio covenant during the Covenant Relief Period, imposes a minimum liquidity requirement (excluding SciPlay) of at least $275 million during the Covenant Relief Period, with a potential step-down to at least $200 million for April and May 2021, and further restricts our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject in some instances to maintaining minimum liquidity (excluding SciPlay) of at least $400 million. See Note 1 for additional details regarding the Credit Agreement Amendment.
Total cash held by our foreign subsidiaries was $128$180 million and $112$173 million as of March 31, 20202021 and December 31, 2019,2020, respectively. We believe that substantially all cash held outside the U.S. is free from legal encumbrances or similar restrictions that would prevent it from being available to meet our global liquidity needs.
Our Gaming operations and Lottery systems businesses generally require significant upfront capital expenditures, and we may need to incur additional capital expenditures in order to retain or win new contracts. Our ability to make payments on and to refinance our indebtedness and other obligations depends on our ability to generate cash in the future. We may also, from time to time, repurchase or otherwise retire or refinance our debt, through our subsidiaries or otherwise. In the event we pursue significant acquisitions or other expansion opportunities, we may need to raise additional capital. If we do not have adequate liquidity to support these activities, we may be unable to obtain financing for these cash needs on favorable terms or at all. For additional information regarding our cash needs and related risks, see “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and under Part I, Item 1A in our 20192020 10-K.
In addition, Lottery customers in the U.S. generally require service providers to provide performance bonds in connection with the relevant contract. As of March 31, 20202021 our outstanding performance bonds totaled $261$253 million. Our ability to obtain performance bonds on commercially reasonable terms is subject to our financial condition and to prevailing market conditions, which may be impacted by economic and political events. Although we have not experienced difficulty in obtaining such bonds to date, we cannot assure that we will continue to be able to obtain performance bonds on commercially reasonable terms, or at all. For additional information regarding our surety or performance bonds in connection with our contracts, see “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and under Part I, Item 1A in our 20192020 10-K.
As described in Note 1 in our 2019 10-K,In April 2021, we made a voluntary payment of $150 million on May 7, 2019 we received $312 million in proceeds from the SciPlay offering (net of $30 million used by SciPlay to pay the initial public offering related expenses with the balance being retained by SciPlay for general corporate purposes). The ability of SciPlay to pay dividends or make other distributions to us, or to amend the agreements between SciPlay and us and our other subsidiaries, may be limited by the terms of the SciPlay Revolver or the terms of any future indebtedness that SciPlay may incur. For additional details see “Liquidity, Capital Resources and Working Capital” section in our 2019 10-K.
Cash Flow Summary
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| Three Months Ended March 31, | | | | Variance |
| ($ in millions) | 2020 | | 2019 | | 2020 vs. 2019 |
| Net cash provided by operating activities | $ | 120 | | | $ | 167 | | | $ | (47) | |
| Net cash used in investing activities | (31) | | | (64) | | | 33 | |
| Net cash (used in) provided by financing activities | (59) | | | 942 | | | (1,001) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5) | | | 1 | | | (6) | |
| Increase in cash, cash equivalents and restricted cash | $ | 25 | | | $ | 1,046 | | | $ | (1,021) | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance |
| ($ in millions) | 2021 | | 2020 | | 2021 vs. 2020 |
| Net cash provided by operating activities | $ | 123 | | | $ | 120 | | | $ | 3 | |
| Net cash used in investing activities | (61) | | | (31) | | | (30) | |
| Net cash used in financing activities | (139) | | | (59) | | | (80) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1) | | | (5) | | | 4 | |
| (Decrease) increase in cash, cash equivalents and restricted cash | $ | (78) | | | $ | 25 | | | $ | (103) | |
Cash Flows from Operating Activities
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| Three Months Ended March 31, | | | | Variance |
| ($ in millions) | 2020 | | 2019 | | 2020 vs. 2019 |
| Net loss | $ | (155) | | | $ | (24) | | | $ | (131) | |
| Adjustments to reconcile net loss to cash flows from operations | 243 | | | 179 | | | 64 | |
| | | | | |
| Changes in working capital accounts | 25 | | | 6 | | | 19 | |
| Changes in deferred income taxes and other | 7 | | | 6 | | | 1 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Variance |
| ($ in millions) | 2021 | | 2020 | | 2021 vs. 2020 |
| Net loss | $ | (9) | | | (155) | | | $ | 146 | |
| Adjustments to reconcile net loss to cash provided by operating activities | 122 | | | 243 | | | (121) | |
| | | | | |
| Changes in working capital accounts | 9 | | | 25 | | | (16) | |
| Changes in deferred income taxes and other | 1 | | | 7 | | | (6) | |
| | | | | |
Net cash provided by operating activities decreasedincreased primarily due to a $67$25 million decreaseincrease in earnings (after adjustments to reconcile net loss to cash flows from operations) as certain restrictions due to COVID-19 have been lifted, which was partially offset by a $20$22 million favorableunfavorable change in working capital accounts and other. Changes in working capital
accounts for the three months ended March 31, 20202021 were primarily driven by strong receivables collections on our fourth quarter 2019 sales and lowerhigher billings after the closures as a result ofrecovery from the COVID-19 pandemic.pandemic continues to gain momentum, coupled with cash management and timing of expenditures.
Cash Flows from Investing Activities
Net cash used in investing activities decreased primarily dueincreased as the prior year period included $22 million in proceeds from sale of assets, which was partially offset by higher contributions to equity method investments and lower capital expenditures coupled with the proceeds from the sale of certain properties in Chicago.expenditures. Capital expenditures are composed of investments in systems, equipment and other assets related to contracts, property and equipment, intangible assets and software.
Cash Flows from Financing Activities
Net cash provided byused in financing activities decreasedincreased primarily due to the proceedsrepayment of $1,100$100 million related to 2026 Unsecured Notes during the first quarter of 2019.under SGI’s revolving credit facility made on February 18, 2021.
Summarized Financial Information of the Obligor Group
We conduct substantially all of our business through our U.S. and foreign subsidiaries. As of March 31, 2020, our obligations under the 2021 Notes, the 2025 Secured Notes, the 2026 Secured Euro Notes, the 2026 Unsecured Euro Notes, the 2026 Unsecured Notes, the 2028 Unsecured Notes, and the 2029 Unsecured Notes were fully and unconditionally and jointly and severally guaranteed by the SGC and the Guarantors subsidiaries other than SGI, of which the 2021 Notes are a registered security. The guarantees of our 2021 Notes, 2025 Secured Notes, 2026 Secured Euro Notes, 2026 Unsecured Euro Notes, 2026 Unsecured Notes, 2028 Unsecured Notes, and 2029 Unsecured Notes will terminate under the following customary circumstances: (1) the sale or disposition of the capital stock of the guarantor (including by consolidation or merger of the guarantor into another person); (2) the liquidation or dissolution of the guarantor; (3) the defeasance or satisfaction and discharge of the notes; (4) the release of the guarantor from any guarantees of indebtedness; and (5) the proper designation of the guarantor as an unrestricted subsidiary pursuant to the indenture governing the respective Notes.
During the first quarter of 2020, the SEC amended the financial disclosure requirements for guarantors and issuers of guaranteed securities registered or being registered as set forth in Rule 3-10 of Regulation S-X. The amendment is effective on January 4, 2021; however, voluntary compliance with the amended rules is permitted in advance of the effective date. We elected to voluntarily comply with the amended regulation effective with this Form 10-Q.
In accordance with the amended regulation, the tables below represent the parent company, issuer and guarantor subsidiaries (collectively referred to as the Obligor Group) combined summarized financial information as of March 31, 2020 and December 31, 2019 and for the three and twelve months ended March 31, 2020 and December 31, 2019, respectively. The summarized financial information was derived from the same internal accounting records used to prepare SGC’s consolidated financial statements and are presented on a cost basis. All intercompany balances have been eliminated.
| | | | | | | | | | | | | | |
| OBLIGOR GROUP SUMMARIZED BALANCE SHEET | | | | |
| | As of | | |
| | March 31, 2020 | | December 31, 2019 |
| Assets: | | | | |
| Current Assets | | $ | 743 | | | | $ | 860 | |
Non-current assets(1) | | 3,898 | | | | 3,941 | |
| Total assets | | $ | 4,641 | | | | $ | 4,801 | |
| Liabilities: | | | | |
| Current liabilities | | $ | 506 | | | | $ | 529 | |
| Non-current liabilities | | 8,944 | | | | 9,003 | |
| Total liabilities | | $ | 9,450 | | | | $ | 9,532 | |
| (1) Includes $2,137 of Goodwill as of March 31, 2020 and December 31, 2019. | | | | |
| | | | | | | | | | | | | | |
| OBLIGOR GROUP SUMMARIZED STATEMENT OF OPERATIONS | | | | |
| | Three months ended March 31, 2020 | | Year ended
December 31, 2019 |
| Revenue | | $ | 335 | | | | $ | 1,688 | |
Cost of services, cost of product sales and cost of instant products(1) | | 138 | | | | 462 | |
| Operating (loss) income | | (40) | | | | 313 | |
| Net loss | | (157) | | | | (357) | |
| (1) Excludes D&A. | | | | | | | |
Credit Agreement and Other Debt
For additional information regarding our credit agreement and other debt, interest rate risk and interest rate hedging instruments, see Notes 15 and 16 and Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our 20192020 10-K and Item 3 below.
Off-Balance Sheet Arrangements
As of March 31, 2020,2021, we did not have any significant off-balance sheet arrangements.
Contractual Obligations
There have been no material changes to our contractual obligations disclosed under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity, Capital Resources and Working Capital — Contractual Obligations” in our 20192020 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and commodity prices. The following are our primary exposures to market risks:
Interest Rate Risk
As of March 31, 2020,2021, the face value of long termlong-term debt was $8,777$9,265 million, including $4,246$4,485 million of variable-rate obligations. Assuming a constant outstanding balance for our variable-rate long term debt, a hypothetical 1% change in interest rates would decrease/increase interest expense by approximately $42$45 million. All of our interest rate sensitive financial instruments are held for other than trading purposes.
We currently use interest rate swap contracts to mitigate interest rate risk associated with a portion of our variable rate debt instruments. The objective of our interest rate swap contracts, which are designated as cash flow hedges of the future
interest payments, is to eliminate the variability of cash flows attributable to the LIBOR component of interest expense to be paid on a portion of our variable rate debt.
Cross-Currency Interest Rate Swaps
In connection with the February 2018 Refinancing (see Note 15 in our 2019 Form2020 10-K), we entered into certain cross-currency interest rate swap agreements to achieve more attractive interest rates by effectively converting $460 million of our fixed-rate U.S. Dollar-denominated 2025 Secured Notes, including the semi-annual interest payments through October 2023, to a fixed-rate Euro-denominated debt, with a fixed annual weighted average interest rate of approximately 2.946%. We have designated these cross-currency interest rate swap agreements as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. Dollar.
As of March 31, 2020,2021, if these cross-currency interest rate swap agreements were ineffective, the fluctuations in the exchange rates between the Euro and the U.S. Dollar would impact the amount of U.S. Dollars that we would require to settle the Euro-denominated debt at maturity of these agreements. A hypothetical 10% change in the U.S. Dollar in comparison to the Euro exchange rate upon inception of the cross-currency interest rate swap would have increased/decreased our obligation to cash settle the exchanged principal portion in U.S. Dollars by approximately $46 million.
Net Investment Non-derivative Hedge - 2026 Secured Euro Notes
In February 2018, we designated a portion of our 2026 Secured Euro Notes as a net investment non-derivative hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in our operating results caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. Dollar.
Fluctuations in the exchange rates between the Euro and the U.S. Dollar will impact the amount of U.S. Dollars that we will require to settle the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes at maturity. A hypothetical 10% change in U.S. Dollar in comparison to the Euro as of March 31, 2020,2021, would have increased/decreased our obligation to cash settle the principal portion of the 2026 Secured and Unsecured Euro Notes in U.S. Dollars by approximately $63$67 million.
For additional information regarding interest rate swap contracts, cross-currency interest rate swaps and net investment non-derivative hedges, see Note 12.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b)3a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.effective as of March 31, 2021.
During the first quarter of 2020, thereThere were no changes in our internal control over financial reporting during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 16 in this Quarterly Report on Form 10-Q and Note 21 in our 20192020 10-K.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed under Item 1A “Risk Factors” included in our 20192020 10-K, except as noted below.
The recent COVID-19 pandemicprovisions of our bylaws requiring exclusive forum in the Eighth Judicial District Court of Clark County, Nevada for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and similar health epidemics, contagious disease outbreaksofficers.
Our bylaws provide that, to the fullest extent permitted by law, and public perception thereof, could significantly disrupt our operationsunless we consent in writing to the selection of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada, will be the sole and adversely affect our business, results of operations, cash flowsexclusive forum for any actions, suits or financial condition.
The recent outbreak of a novel strain of coronavirus, COVID-19, and public perception thereof, have contributed to consumer unease and decreased discretionary spending and consumer travel, which have had, and will continue to have, a negative effect on us, especiallyproceedings, whether civil, administrative or investigative or that assert any claim or counterclaim (i) brought in our Gaming and Lottery businesses. Other future health epidemicsname or contagious disease outbreaks could do the same. We cannot predict the ultimate effects that the outbreakright or on our behalf, (ii) asserting a claim for breach of COVID-19, any resulting unfavorable social, political and economic conditions and decrease in discretionary spending or travel would have on us, as they would be expected to impact our customers, suppliers and business partners in varied ways in different communities. In our Gaming business, especially our Participation gaming business, our Digital business, and our Lottery business, our revenue is largely drivenfiduciary duty owed by players’ disposable incomes and level of gaming activity and lottery purchases. The recent outbreak of COVID-19 has led to economic and financial uncertainty for many consumers and has reduced, and may continue to reduce, the disposable incomes of players across allany of our business units. This may result in fewer patrons visiting casinos and fewer players purchasing lottery products, whether land-baseddirectors, officers, employees or online, and lower amounts spent per casino visit or lottery purchase, or reduced spend on online gambling activities, which negatively impact the results of operations, cash flows and financial condition of our casino customers, their abilityagents to purchase or lease our products and services, revenues to lotteries and, therefore, our Lottery business revenue, and revenues to our online casino and sportsbook partners and, therefore, our Digital business revenue.
The outbreak of COVID-19 and the resulting unfavorable economic conditions have also impacted, and could continue to impact, the ability of our customers to make timely payments to us. These unfavorable conditions have caused, and could continue to or may cause, some of our Gaming and Lottery customers to close gaming venues and lottery operations, decrease spending on marketing of or purchases of Lottery products or 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 abatesus or our business model changes. These arrangements may increase our collection risk, and if customers are not ablestockholders, (iii) arising or asserting a claim arising pursuant to pay us, whether as a resultany provision of financial difficulties, bankruptcyNevada Revised Statutes (“NRS”), Chapters 78 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. The recent outbreak also resulted in significant volatility in both the credit and equity markets, potentially leading to an economic downturn. The difficulty92A 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 difficult economic conditions have contributed, or may contribute, 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 budget shortfalls and seek to cut costs. In our Digital business, the suspension or cancellation of the majority of sporting events which has and could continue to negatively impact the financial condition of our sportsbook customers, their ability to purchase development and other services, their risk of payment default, or their spending levels as they seek to reduce costs, each of which could negatively impact our Digital business revenue. In addition, suppliers to our Digital business may suffer financial difficulties and may not be able to offer their services and products, which could restrict theany provision of our servicesarticles of incorporation or our bylaws or (iv) asserting a claim governed by the internal affairs doctrine. Our bylaws further provide that, in the event that the Eighth Judicial District Court of Clark County, Nevada does not have jurisdiction over any such action, suit or proceeding, then any other state district court located in the State of Nevada will be the sole and negatively impact our business, resultsexclusive forum therefor and in the event that no state district court in the State of operations, cash flowsNevada has jurisdiction over any such action, suit or financial condition.
Various gambling regulators have implemented additional responsibleproceeding, then a federal court located within the State of Nevada will be the sole and safer gambling measures relating to our Digital casino business as a resultexclusive forum therefor. Application of the COVID-19 outbreak, includingchoice of forum provisions may be limited in some instances by law. Section 27 of the implementationExchange Act establishes exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. In addition, Section 22 of bet limits, spin speeds, deposit limitsthe Securities Act provides that federal and bonusing,state courts have concurrent jurisdiction over lawsuits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. To the extent our bylaws restrict the courts in which claims arising under the federal securities laws may be brought, there is uncertainty as to whether a court would enforce such a provision and we note that our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.
Although we believe these provisions benefit us by providing increased consistency in the application of Nevada law in the types of lawsuits to which they apply, these provisions may have the effect of increasing the costs to bring a claim and limiting a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors and officers, which may havediscourage lawsuits against us or our directors and officers. The enforceability of similar choice of forum provisions in other companies’ articles of incorporation and bylaws has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a negative impact on our business, resultscourt could find the choice of operations, cash flows or financial condition, particularly if additional gambling regulators follow suit.
Furthermore, this outbreak of COVID-19 has caused, and may continue to cause us and certain of our suppliers, to implement temporary adjustment of work schemes allowing employees to work from home and collaborate remotely. We haveforum provisions
taken measurescontained in our bylaws to monitor and reducebe inapplicable or unenforceable in such action. If a court were to find the impactchoice of the outbreak, including puttingforum provisions contained in place a global crisis monitoring team, protocols for responding when employees are infected and enhanced cleaning procedures at all sites, but we cannot assure these willour bylaws to be sufficient to mitigate the risks faced by our and our partners’ work forces. We have also taken measures to reduce operating costs and ensure liquidity given the uncertain impact of COVID-19 on revenue, deferred all non-critical capital expenditures, have implemented a number of employee-related actions and are actively considering further actions. However,inapplicable or unenforceable in an action, we may still experience lower work efficiency and productivity,incur additional costs associated with resolving such action in other jurisdictions, which may adversely affect our service quality, and our business operations could be disrupted if any of our employees is suspected of infection, since this may cause our employees to be quarantined and/or our offices to be temporarily shut down. We will continue to incur costs for our operations, and our revenues during this period are difficult to predict. As a result of any of the above developments, our business, results of operations, cash flows or financial condition for the full fiscal year of 2020, especially in the second quarter, have been and will be adversely affected by the COVID-19 outbreak. The extent to which this outbreak impacts our results of operations, cash flows and financial condition will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity and duration of this outbreak and the actions taken by governmental authorities and us to contain it or treat its impact. For more information on the impact of COVID-19 pandemic on each of our business segments and measures taken by us in response to COVID-19, see section captioned “Recent Events- Impact of COVID-19” in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Unfavorable U.S. and international economic conditions, or decreased discretionary spending or travel due to other factors such as terrorist activity or threat thereof, civil unrest, health epidemics, contagious disease outbreaks, or public perception thereof or other economic or political uncertainties, 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. Socio-political factors such as terrorist activity or threat thereof, civil unrest or other economic or political uncertainties, or health epidemics, contagious disease outbreaks, or public perception thereof that contribute to consumer unease may also result in decreased discretionary spending or travel by consumers and have a negative effect on our businesses. We cannot fully predict the effects that unfavorable social, political and economic conditions, economic uncertainties and public health crises and any resulting decrease in discretionary spending or travel would have on us, as they would be expected to impact our customers, suppliers and business partners in varied ways. For a description of the impact of the outbreak of COVID-19 and other public health crises, see the risk factor captioned “The recent COVID-19 pandemic and similar health epidemics, contagious disease outbreaks and public perception thereof, could significantly disrupt our operations and adversely affect our business, results of operations, cash flows or financial condition.”
In our Gaming business, especially our Participation gaming business, our revenue is largely driven by players’ disposable incomes and level of gaming activity. Unfavorable economic conditions have reduced, or may reduce, the disposable incomes of casino patrons and resulted, or may result, 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 travel and other costs may adversely affect the number of players visiting our customers’ casinos. Adverse changes in discretionary consumer spending or consumer preferences, resulting in fewer patrons visiting casinos and reduced play levels, could also be driven by factors such as an unstable job market, outbreaks of contagious diseases or public perception thereof or fears of terrorism or other violence. A decline in play levels may 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 also 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 or our business model changes. 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. Refer to Note 6 for international locations with significant concentrations of our receivables with terms longer than one year.
In our Lottery business, we believe that difficult economic conditions have contributed, or may contribute, 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 budget shortfalls and seek to cut costs.
In our Digital business based on a Participation model, our revenue is largely driven by disposable incomes and level of player activity. Unfavorable economic conditions may reduce the disposable incomes of end users consuming the services which may in turn negatively impact revenues for the Digital business. The outbreak of COVID-19 has resulted in the suspension or cancellation of the majority of sporting events which has and could continue to negatively impact the financial condition of our sportsbook customers, their ability to purchase development and other services, their risk of payment default, or their spending levels as they seek to reduce costs, each of which could negatively impact our Digital business revenue. In addition, suppliers to our Digital business may suffer financial difficulties and may not be able to offer their services and products, which could restrict the provision of our services and negatively impact our revenues. Various gambling regulators have implemented additional responsible and safer gambling measures relating to our Digital casino business as a result of the COVID-19 outbreak, including the implementation of bet limits, spin speeds, deposit limits and bonusing, which may have a negative impact on our revenues, particularly if additional gambling regulators follow suit.
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, Brazil, Greece, Italy, Puerto Rico, Turkey and Ukraine among others. These sovereign debt concerns, whether 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.
Our future results of operations may be negatively impacted by slow growth or 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. Slow growth or declines in the replacement cycle of gaming machines have reduced and will continue to reduce the demand for our products and negatively impact our results of operations, cash flows and financial condition. In 2019 and in the first three months of 2020, our gaming machine sales were affected by fewer casino openings and expansions.
The opening of new casinos, expansion of existing casinos and replacement of existing gaming machines in existing casinos fluctuate with demand, economic conditions, regulatory approvals and the availability of financing and have been negatively affected by the recent COVID-19 pandemic. In addition, the expansion of gaming into new jurisdictions can be a protracted process. In the U.S., U.K. and other international jurisdictions in which we operate, 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.
We heavily depend on our ability to win, maintain and renew our customer contracts, including our long-term Lottery contracts, and we could lose substantial revenue 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.
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. In addition, it is common for competitors to protest the award of Lottery contracts to us and any such protest could delay or prevent our ability to enter into a new contract. For example, there is a pending third-party protest against the renewal of the LNS concession to operate the Italian instant games lottery. In addition, the recent outbreak of COVID-19 has caused some lotteries to delay the competitive bidding process, which in turn may delay awards of new contracts. The termination, expiration or failure to renew one or more of our contracts could cause us to lose substantial revenue, 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 “Lottery Segment” in Part I, Item 1 of our 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 March 31, 2020, we had $261 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, and during the second quarter of 2018, we signed a new up to seven-year agreement with Ladbrokes Coral Group (which was acquired by GVC Holdings PLC in March 2018) to continue to supply terminals, content and related services, which represent a significant portion of our U.K. LBO business. We cannot assure that our current contracts will be extended or that we will be awarded new contracts.
Given the increased competition in the sports wagering landscape due to the 2018 Supreme Court decision overturning PASPA, it is crucial that we remain innovative in this field in order to preserve our first-mover advantage, maintain current contracts and gain new contracts.
We have incurred, and may continue to incur, restructuring costs, the benefits of which are unpredictable and may not be achieved.
In the past, we have implemented various business improvement, optimization and restructuring initiatives in an effort to streamline our organization, leverage our resources more efficiently, and reduce our operating costs. These initiatives encompassed a combination of headcount reductions, facilities streamlining, and reductions in other operating costs. We have engaged, and may continue to engage, in similar or additional restructuring initiatives, including in response to the COVID-19 pandemic and 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.
We may incur 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, amortizable intangible assets or other non-amortizing 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 the first quarter of 2020 we recorded a charge of $54 million, in 2016 we recorded a charge of $69 million and in 2015 we recorded charges of $935 million and $68 million for the impairment of goodwill. In light of the COVID-19 pandemic and the resulting unfavorable social, political, economic and financial conditions, we performed an interim goodwill impairment assessment, which resulted in a $54 million goodwill impairment charge for our legacy U.K. Gaming reporting unit further discussed below. For our other reporting units, we concluded that as of March 31, 2020 it was not more likely than not that the fair value of these reporting units is below their carrying values and that the COVID-19 disruptions do not trigger an impairment. However, this could change in the future depending on prevailing conditions that could result in additional impairment charges. For more information on the assessment and the goodwill impairment charge, see section captioned “Goodwill Impairment Assessment Update- COVID-19 Impact” in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 8.
As discussed above and further detailed in Note 8, the COVID-19 disruptions resulted in the widespread closures of LBO shops across the U.K., which, along with global economic uncertainty, contributed to further deterioration in business conditions from our 2019 annual goodwill test date, which resulted in a goodwill impairment charge of $54 million during the first quarter of 2020. Any future adverse changes to our projections, could negatively impact the recoverability of the remaining carrying value of our goodwill and other assets for our legacy U.K. Gaming reporting unit, which might result in additional material impairment charges.
We believe there to be an elevated risk of goodwill impairment for the unimpaired Gaming segment reporting units if the adverse impact of the COVID-19 disruptions or overall recovery of the casino industry globally sustains over an extended period of time. The remaining goodwill balance for our legacy U.K. Gaming reporting unit as of March 31, 2020 was $109 million. Any future adverse changes in projections for future operating results or other key assumptions, such as projected
revenue, profit margin, capital expenditures or cash flows associated with investments included in our estimation of fair value for our legacy U.K. Gaming reporting unit could lead to additional future goodwill impairments, which could be material.
Moreover, application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We cannot predict the occurrence of impairments, and we cannot assure that we will not have to record additional impairment charges in the future.
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 products, 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. 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 cellular technology and satellite transponders, generally pursuant to long- term contracts. The technical failure of any of these cellular or satellite services would require us to obtain other communication services, including other cellular or satellite access. In some cases, we employ backup systems to limit our exposure in the event of such a failure. While these networks are inherently highly redundant, we cannot assure access to such other cellular services or satellites or, if available, the ability to obtain the use of such other cellular services or satellites on favorable terms or in a timely manner. While cellular and satellite failures are infrequent, the operation of each is outside of our control.
In addition, in all of our businesses, 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. The willingness of such third parties to provide their services to us may be affected by various factors. Changes in law or regulation in any jurisdiction in which we operate may make the provision of key services to us unlawful in such jurisdictions. To the extent that third parties are unwilling or unable to provide services to us, this may have an adverse impact on our operations, financial performance and prospects. 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 Digital sports business, we rely on providers of third party sports data feeds. The outbreak of COVID-19 has resulted in the suspension or cancellation of the majority of sporting events which has and could continue to negatively impact the financial condition of our sportsbook customers, their ability to purchase development and other services, their risk of payment default, or their spending levels as they seek to reduce costs, each of which could negatively impact our Digital business revenue.
In our Lottery, SciPlay and Digital businesses, we often rely on third-party data center providers to, among other things, host our remote game servers. Our Lottery, SciPlay and Digital businesses could be adversely impacted by breaches of or disruptions to these third-party data centers, including through disruptions in our RMG and lottery businesses, 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. Additionally, the outbreak of COVID-19 and any resulting
unfavorable social, political and economic conditions have negatively impacted our suppliers and contract manufacturers in varied ways in different communities, which could lead to interruption or cessation of services provided to us. For more information on the impact of the outbreak of COVID-19, see the risk factor captioned “The recent COVID-19 pandemic and similar health epidemics, contagious disease outbreaks and public perception thereof, could significantly disrupt our operations and adversely affect our business, results of operations, cash flows or financial condition.”
We depend on our key employees and rely on skilled employees with creative and technical backgrounds.
We depend on the continued performance of our executive officers and key personnel, including Barry Cottle, our President and Chief Executive Officer. Our ability to recruit and retain our key employees and skilled technical workers has been impaired due to the recent COVID-19 pandemic (see Note 1). 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.
We also rely on our highly skilled, technically trained and creative employees to develop new technologies and create innovative products. Such employees, particularly game designers, engineers and project managers with desirable skill sets are in high demand, and we devote significant resources to identifying, hiring, training, successfully integrating and retaining these employees. 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.
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, 2019 and March 31, 2020, we had total indebtedness of $8,725 million and $8,665 million, respectively, consisting primarily of borrowings under our credit agreement, Senior Notes and 2021 Notes, net of unamortized discounts and deferred financing costs. As of March 31, 2020, our total available liquidity (excluding our SciPlay business segment) was $684 million, which included $483 million of undrawn revolving credit facility availability. On April 9, 2020, we borrowed $480 million under SGI’s revolving credit facility, which was substantially all of the remaining availability thereunder.
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 became more severe given the unfavorable economic conditions and uncertainties and decrease in discretionary spending and consumer travel as a result of the outbreak of COVID-19 and could place us at a competitive disadvantage compared to competitors that may have less debt than we do.
Certain of our variable rate debt, including debt under our credit agreement and the SciPlay Revolver, relies on LIBOR as a benchmark for establishing the interest rate. The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact the cost of our variable rate debt. We may in the future pursue amendments to the agreements underlying this debt to provide for a transition mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As a result, additional financing to replace our LIBOR-based debt may be unavailable, more expensive or restricted by the terms of our outstanding indebtedness.
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 or satisfy our minimum liquidity covenant. These obligations require a significant amount of cash, which would reduce our available liquidity.
Our Gaming operations 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 operations 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. In connection with the renewal of LNS’ exclusive concession to operate the Italian instant games lottery, we paid our pro rata share, or €160 million (€10 million paid in 2017 and the remaining €150 million paid in 2018), of the €800 million payment LNS was required to make to obtain the concession.
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 us to increased risk, such as requiring the guarantee of specific income thresholds or significant upfront payments. In addition, to the extent we are compensated under any of our contractual arrangements based on a share of our customers’ revenue rather than payment for our expenses and services, we may incur upfront costs (which may be significant) prior to receipt of any revenue under such arrangements. 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, which are negatively affected by the recent COVID-19 pandemic.
If we do not have adequate liquidity or are unable to obtain financing for these upfront costs and 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 additional borrowings under our existing financing arrangements, which sources of funds may not necessarily be available on terms acceptable to us, if at all, especially under the current unfavorable economic conditions and uncertainties as a result of the COVID-19 pandemic.
On May 8, 2020, the Company and the requisite lenders under SGI’s revolving credit facility entered into the Credit Agreement Amendment that, among other things, imposes a minimum liquidity requirement (excluding SciPlay) of at least $275 million during the Covenant Relief Period, with a potential step-down to at least $200 million for April and May 2021, and further restricts our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject, in some instances, to maintaining minimum liquidity (excluding SciPlay) of at least $400 million. See Note 1 for additional details regarding the Credit Agreement Amendment. Therefore, even if we do have liquidity available to support our current cash needs, we may not be able to access that liquidity while still remaining in compliance with the minimum liquidity covenant. We cannot assure that we will be granted waivers or amendments to the minimum liquidity covenant, or will be able to obtain additional liquidity to cure such a violation, if for any reason we are unable to comply with that obligation.
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 and our other obligations. Our results of operations and general economic and financial conditions have been negatively affected by the recent COVID-19 pandemic, which made it more difficult for us to meet our debt obligations from cash flows from operating activities.
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 are also required to repay the entire principal amount of our Senior Notes and 2021 Notes at their maturity (see Note 11). We have also, from time to time, repurchased or otherwise retired or refinanced our debt, through our subsidiaries or otherwise and may continue to do so in the future. 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, especially under the current unfavorable economic conditions and uncertainties as a result of the COVID-19 pandemic.
Our lenders, including the lenders participating in our revolving credit facility under our credit agreement or in the SciPlay Revolver, may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility or the SciPlay Revolver 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 or the SciPlay Revolver 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 the SciPlay Revolver (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 SciPlay Revolver and the indentures governing our Senior Notes and 2021 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. 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;
•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 subsidiaries’ ability to pay dividends, make loans or transfer assets; and
•alter the business we conduct.
In addition, prior to the Credit Agreement Amendment, the SGI credit agreement contained a covenant that was tested at the end of each fiscal quarter and required us to not exceed a maximum consolidated net first lien leverage ratio of 5.00x Consolidated EBITDA (as defined in the credit agreement), with this ratio stepping down to 4.75x beginning with the fiscal quarter ended December 31, 2020 and 4.50x beginning with the fiscal quarter ended December 31, 2021. On May 8, 2020, SGC and the requisite lenders entered into the Credit Agreement Amendment to (a) implement a financial covenant relief period through the end of the first quarter ending March 31, 2021 (the “Covenant Relief Period”), as a result of which SGI is not required to maintain compliance with the consolidated net first lien leverage ratio covenant during the Covenant Relief Period, (b) reset the consolidated net first lien leverage ratio covenant following the Covenant Relief Period, (c) impose a minimum liquidity requirement (excluding SciPlay) of at least $275 million during the Covenant Relief Period with a potential step-down to at least $200 million for April and May 2021, (d) further restrict our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject in some instances to maintaining minimum liquidity (excluding SciPlay) of at least $400 million and (e)
establish a LIBOR floor of 0.500% on borrowings under the revolving credit facility during the Covenant Relief Period. The revised consolidated net first lien leverage ratio will be 6.00x Consolidated EBITDA beginning with the fiscal quarter ending June 30, 2021, stepping down as follows (1) 5.75x beginning with the fourth quarter of 2021, (2) 5.25x beginning with the second quarter of 2022, (3) 4.75x beginning with the fourth quarter of 2022 and (4) 4.50x beginning with the second quarter of 2023 and thereafter. The revised consolidated net first lien leverage ratio will be based on Consolidated EBITDA (as defined in the Credit Agreement Amendment) as follows: (1) for the testing period ending June 30, 2021, Consolidated EBITDA for the fiscal quarter ending June 30, 2021 multiplied by 4, (2) for the testing period ending September 30, 2021, Consolidated EBITDA for the fiscal quarters ending June 30, 2021 and September 30, 2021 multiplied by 2, (3) for the testing period ending December 31, 2021, Consolidated EBITDA for the fiscal quarters ending June 30, 2021, September 30, 2021 and December 31, 2021 multiplied by 4/3 and (4) for all subsequent testing periods, Consolidated EBITDA for the previous twelve months including the quarter for the which the test is performed. Under the SciPlay Revolver, SciPlay is required to maintain a maximum total net leverage ratio not to exceed 2.50x and maintain a minimum fixed charge coverage ratio of no less than 4.00x. Future financing arrangements may impose similar requirements.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. The recent outbreak of COVID-19 has had, and will continue to have, a negative effect on us, especially in our Gaming and Lottery businesses. Accordingly, we cannot assure that we will continue to maintain liquidity sufficient to satisfy our current obligations or comply with the minimum liquidity requirement set forth in SGC’s credit agreement or return to compliance with the consolidated net first lien leverage ratio covenant following the Covenant Relief Period.
We also cannot assure that we will be granted waivers or amendments to the agreements governing our indebtedness 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There was no stock repurchase activity during the three months ended March 31, 2020.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On May 8, 2020, we entered into Amendment No. 6 to that certain Credit Agreement, dated as of October 18, 2013 (as amended, supplemented, amended and restated or otherwise modified from time to time, including without limitation, by that certain Amendment No. 1, dated as of October 1, 2014, Amendment No. 2, dated as of February 14, 2017, Amendment No. 3, dated as of August 14, 2017, Amendment No. 4 dated as of February 14, 2018 and Amendment No. 5, dated as of November 20, 2019, (the “Credit Agreement’), by and among SGC, SGI, the several banks and other financial institutions or entities from time to time party thereto and Bank of America, N.A., as administrative agent, collateral agent, issuing lender and swingline lender (such amendment, “Amendment No. 6”).
Amendment No. 6 amends the consolidated net first lien leverage ratio covenant in the Credit Agreement to (i) implement a financial covenant relief period through the end of the first quarter ending March 31, 2021 (the “Covenant Relief Period”), as a result of which SGI is not required to maintain compliance with the consolidated net first lien leverage ratio covenant during the Covenant Relief Period, (ii) reset the consolidated net first lien leverage ratio covenant following the Covenant Relief Period, (iii) impose a minimum liquidity requirement (excluding SciPlay) of at least $275 million during the Covenant Relief Period with a potential step-down to at least $200 million for April and May 2021, (iv) further restrict our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject, in some instances, to maintaining minimum liquidity (excluding SciPlay) of at least $400 million and (v) establish a LIBOR floor of 0.500% on borrowings under the revolving credit facility during the Covenant Relief Period. The revised consolidated net first lien leverage ratio will be 6.00x Consolidated EBITDA (as defined in the Credit Agreement) beginning with the fiscal quarter ending June 30, 2021, stepping down as follows: (1) 5.75x beginning with the fourth quarter of 2021, (2) 5.25x beginning with the second quarter of 2022, (3) 4.75x beginning with the fourth quarter of 2022 and (4) 4.50x beginning with the second quarter of 2023 and thereafter.
The foregoing description of the Credit Agreement, as amended by Amendment No. 6, does not purport to be complete and is qualified in its entirety by the full text of Amendment No. 6, a copy of which is attached hereto as Exhibit 10.11, which is incorporated herein by reference.None.
Item 6. Exhibits
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Exhibit
Number | | Description |
| 3.1(a) | | |
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| 3.1(b) | | |
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| 3.1(c) | | |
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| 3.2 | | |
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| 4.1 | | Supplemental Indenture, dated as of January 23, 2020,5, 2021, by and among Scientific Games International, Inc., as issuer, Scientific Games Corporation, NYX Digital Gaming (USA),SGI Lottery LLC and the other guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee, relating to the Indenture, dated as of June 4, 2014,July 1, 2020, as amended and supplemented, relating to the 6.625%8.625% Senior SubordinatedUnsecured Notes due 2021 (incorporated2025 (incorporated by reference to Exhibit 4.184.48 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18,for the year ended December 31, 2020). |
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4.2 | | Supplemental Indenture, dated as of January 23, 2020, by and among Scientific Games International, Inc., as issuer, Scientific Games Corporation, NYX Digital Gaming (USA), LLC and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee and collateral agent, relating to the Indenture, dated as of October 17, 2017, as amended and supplemented, relating to the 5.000% Senior Secured Notes due 2025 (incorporated by reference to Exhibit 4.35 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18, 2020). |
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4.3 | | Supplemental Indenture, dated as of January 23, 2020, by and among Scientific Games International, Inc., as issuer, Scientific Games Corporation, NYX Digital Gaming (USA), LLC and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, collateral agent, registrar and transfer agent, relating to the Indenture, dated as of February 14, 2018, as amended and supplemented, relating to the 3.375% Senior Secured Notes due 2026 (incorporated by reference to Exhibit 4.40 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18, 2020). |
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4.4 | | Supplemental Indenture, dated as of January 23, 2020, by and among Scientific Games International, Inc., as issuer, Scientific Games Corporation, NYX Digital Gaming (USA), LLC and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, registrar and transfer agent, relating to the Indenture, dated as of February 14, 2018, as amended and supplemented, relating to the 5.500% Senior Unsecured Notes due 2026 (incorporated by reference to Exhibit 4.43 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18, 2020). |
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4.5 | | Supplemental Indenture, dated as of January 23, 2020, by and among Scientific Games International, Inc. as issuer, Scientific Games Corporation, NYX Digital Gaming (USA), LLC and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, relating to the Indenture, dated as of March 19, 2019, among Scientific Games International, Inc., as issuer, Scientific Games Corporation and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, relating to the 8.250% Senior Unsecured Notes due 2026 (incorporated by reference to Exhibit 4.45 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18, 2020). |
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4.6 | | Supplemental Indenture, dated as of January 23, 2020, by and among Scientific Games International, Inc. as issuer, Scientific Games Corporation, NYX Digital Gaming (USA), LLC and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, relating to the Indenture, dated as of November 26, 2019, among Scientific Games International, Inc., as issuer, Scientific Games Corporation, the other guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee, relating to the 7.000% Senior Unsecured Notes due 2028 (incorporated by reference to Exhibit 4.47 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18, 2020). |
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4.7 | | Supplemental Indenture, dated as of January 23, 2020, by and among Scientific Games International, Inc. as issuer, Scientific Games Corporation, NYX Digital Gaming (USA), LLC and the other guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, relating to the Indenture, dated as of November 26, 2019, among Scientific Games International, Inc., as issuer, Scientific Games Corporation, the other guarantors party thereto and Deutsche Bank Trust Company Americas, as trustee, relating to the 7.250% Senior Unsecured Notes due 2029 (incorporated by reference to Exhibit 4.49 to Scientific Games Corporation’s Annual Report on Form 10-K filed on February 18, 2020). |
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| 10.1 | | |
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| 10.2 | | |
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10.3 | | |
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10.4 | | |
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10.5 | | |
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10.6 | | |
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10.7 | | |
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10.8 | | |
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10.9 | | |
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10.10 | | |
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10.11 | | Amendment No. 6, dated as of May 8, 2020, among Scientific Games International, Inc., as the borrower, Scientific Games Corporation, as a guarantor, the several banks and other financial institutions or entities from time to time party thereto and Bank of America, N.A., as administrative agent, collateral agent, issuing lender and swingline lender, which amended and restated the Credit Agreement, dated as of October 18, 2013 (as amended, supplemented, amended and restated or otherwise modified from time to time, including without limitation, by that certain Amendment No. 1, dated as of October 1, 2014, Amendment No. 2, dated as of February 14, 2017, Amendment No. 3, dated as of August 14, 2017, Amendment No. 4, dated as of February 14, 2018 and Amendment No. 5, dated as of November 20, 2019). (†) |
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22.1 | | |
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| 31.1 | | |
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| 31.2 | | |
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| 32.1 | | |
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| 32.2 | | |
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| 99.1 | | |
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| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Label Linkbase Document |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 104 | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
(†) Filed herewith.
** Furnished herewith.
*Management contracts and compensation plans and arrangements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | SCIENTIFIC GAMES CORPORATION | |
| | (Registrant) | |
| | | |
| | By: | /s/ Michael A. QuartieriC. Eklund |
| | Name: | Michael A. QuartieriC. Eklund |
| | Title: | Executive Vice President, Chief Financial Officer, Treasurer and Corporate Secretary |
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| | By: | /s/ Michael F. Winterscheidt |
| | Name: | Michael F. Winterscheidt |
| | Title: | Senior Vice President and Chief Accounting Officer |
| Dated: | May 11, 202010, 2021 | | |
