The following discussion is intended to enhance the reader's understanding of our operations and current business environment and should be read in conjunction with the description of our business 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," Item 1A "Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 10-K. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under "Forward-Looking Statements" and "Risk Factors" included in this Quarterly Report on Form 10-Q and "Risk Factors" included in our 2019 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 solutions to retail consumers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services. Recent Events Caledonia Transaction and Governance Enhancements OnSeptember 14, 2020 , the Company announced that a number of long-term institutional investors, including highly credentialed gaming industry investor Caledonia Investments, reached an agreement to acquire a 34.9% stake in SGC fromMacAndrews & Forbes Incorporated ("MacAndrews & Forbes") at a price of$28.00 per share. This transaction was completed onOctober 27, 2020 , with no investor owning more than 9.9% of the Company's shares as a result. In connection with the transaction, the Company implemented a series of governance changes and enhancements, including refreshment of our board of directors. The existing stockholders' agreement withMacAndrews & Forbes is terminated in connection with the transaction and all rights held byMacAndrews & Forbes, other than registration rights, are no longer in effect. As a result,MacAndrews and Forbes no longer holds any rights to appoint directors to our board. The reconstituted board now consists of all existing directors, other than theMacAndrews & Forbes representatives, as well as four new directors. Former Aristocrat Chief Executive OfficerJamie Odell , along with former Aristocrat Chief Financial OfficerToni Korsanos , were elected to the board as Executive Chair and Executive Vice Chair, respectively, and are joined on the board by the former Chief Executive Officer of Barclays Bank Plc. and President ofBarclays International ,Tim Throsby , and Chairman of REA Group Limited, HT&E Limited, andRugby Australia Limited and Deputy Chairman of Magellan Financial Group,Hamish McLennan , as new independent directors effectiveOctober 1, 2020 andOctober 29, 2020 , respectively. The reconstituted board plans to focus on accelerating de-leveraging through a renewed focus on working capital management and will continue to review all strategic options to improve and maximize stockholder value.Ronald Perelman , current Executive Chairman of the Scientific Games Board andMacAndrews &Forbes Chairman and CEO, as well asBarry Schwartz andFrances Townsend , the two otherMacAndrews & Forbes representatives, resigned from the Board effectiveSeptember 16, 2020 . Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the rapidly spreading COVID-19 outbreak a pandemic. In response to the COVID-19 pandemic, governments across the world implemented a number of measures to prevent its spread, including but not limited to, the temporary closure of a substantial number of 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. During the latter part of the second quarter and throughout the third quarter of 2020, lifting of restrictions began, including the reopening of the majority of gaming establishments globally and resumption of sporting events. As gaming operations have yet to return to pre-COVID -levels, limited international travel, social distancing measures, decreased operating capacities, high unemployment rates and potential changes in consumer behaviors continue to negatively impact our results of operations, cash flows and financial condition through the third quarter of 2020. Additionally, some casinos have yet to reopen 34 --------------------------------------------------------------------------------
and for those that have opened, it is unknown when mitigation measures (such as
capacity limitations) will be lifted, all contributing to continued uncertainty
through the remainder of the year and potentially into 2021.
Impact on Business Operations and Financial Results
Our Gaming business segment is especially impacted due to the widespread
temporary closures and restricted re-opening of a substantial number of gaming
operations establishments coupled with global economic uncertainty. The COVID-19
pandemic remains a rapidly evolving situation. Although businesses began
reopening during the latter part of the second quarter of 2020, our
Participation gaming business revenue and cash flows continued to be
significantly negatively affected, as they are largely driven by players'
disposable incomes and level of gaming activity. Social distancing requirements
that were implemented in many jurisdictions have and are expected to continue to
have a negative impact on the amount of customer traffic within gaming
establishments. The COVID-19 disruptions continue to cause prolonged periods of
closures and modified operating schedules and may result in changes in customer
behaviors, including a reduction in consumer discretionary spending as a result
of the uncertainty caused by the pandemic and unemployment levels. Additionally,
our gaming machine and table product sales largely depend on our customers'
liquidity and operating results, which has negatively impacted 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. Since March when the COVID-19
disruptions became widespread, gaming machine sales revenues have been and
continue to be particularly negatively impacted. We believe this negative trend
could reduce the capital expenditures of casino operators and continue to
lengthen the replacement cycles of their existing gaming machines.
Unfavorable economic conditions caused by COVID-19 have caused and could
continue to impact the timing of cash receipts from our Gaming customers. In
addition, unfavorable economic conditions have caused, and could continue to
cause, some of our Gaming customers to temporarily close gaming venues or
ultimately declare bankruptcy, which would adversely affect our business. In
recent years, our Gaming business has granted extended payment term financing
for gaming machine purchases primarily in the LATAM region, 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 5 for international locations
with significant concentrations of our receivables with terms longer than one
year.
We increased our allowance for credit losses by
35 -------------------------------------------------------------------------------- Our Lottery business segment has experienced relative growth and recovery in the third quarter as the shelter in place orders and lockdowns have been eased back resulting in increased foot traffic and more spending by end players, coupled with international retail establishments that have now substantially re-opened. Lottery sales were down meaningfully initially as a result of the pandemic, but have since largely recovered in theU.S. and international markets. The temporary closure of gaming operations, disruptions to lottery operations, travel restrictions, cancellation of sporting events, lower disposable incomes of consumers and the adverse impact on our casino and gaming customers' liquidity and financial results caused by the COVID-19 pandemic, had and continue to have an adverse effect on our results of operations, cash flows and financial condition during the first three quarters of 2020 and into the fourth quarter of 2020 and potentially beyond. Although the majority of gaming and lottery operations have re-opened, with encouraging initial results, we are unable to determine the ultimate magnitude and the length of time that the pandemic disruptions will continue to impact our results of operations, cash flows 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 continue to be imposed in response to the pandemic, change in customer behaviors, social distancing measures, decreased gaming establishments operating capacity, high unemployment rates, and the pace of overall recovery of gaming and lottery operations globally. We implemented a number of measures to reduce operating costs and conserve liquidity including permanent reductions in workforce and temporary measures such as: reductions in salaries and workforce (salary reduction measures ceased as ofJuly 31, 2020 ), unpaid employee furloughs, reductions in hours, temporary elimination of 401(k) matching among other compensation and benefits reductions and deferral of certain operating and capital expenditures. These measures, combined with the above, have resulted in substantial cost savings in 2020. Additionally, reduced capital expenditures and the above measures are expected to result in an overall lower future cost structure. Impact on Liquidity OnMay 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 "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, 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 . The Covenant Relief Period was extended for an additional three quarters onOctober 8, 2020 when SGC and the requisite lenders under SGI's revolving credit facility entered into the Credit Agreement Extension Amendment. See Note 1 for additional details regarding the Credit Agreement Amendment and Credit Agreement Extension Amendment. OnApril 9, 2020 , we borrowed$480 million under SGI's revolving credit facility. As ofSeptember 30, 2020 , our total available liquidity (excluding our SciPlay business segment) was$838 million . We continue to actively manage our daily cash flows and continue to evaluate additional measures that will reduce operating costs and conserve cash. We believe that, based on our current projections, we will have sufficient liquidity for a period of at least one year. OnJuly 1, 2020 , we completed the issuance of$550 million in aggregate principal amount of 8.625% senior unsecured notes due 2025 in a private offering, for which we received the total net proceeds of$543 million . We used a portion of the net proceeds to redeem all$341 million of our outstanding 2021 Notes and paid accrued and unpaid interest thereon plus related premiums, fees and costs, which redemption was completed onJuly 17, 2020 , and are using the remaining net proceeds to fund working capital and general corporate purposes. This refinancing transaction extends our significant debt maturities until 2024. 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: 36
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