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
On September 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 from
MacAndrews & Forbes Incorporated ("MacAndrews & Forbes") at a price of $28.00
per share. This transaction was completed on October 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 with MacAndrews & Forbes is
terminated in connection with the transaction and all rights held by MacAndrews
& 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 the
MacAndrews & Forbes representatives, as well as four new directors. Former
Aristocrat Chief Executive Officer Jamie Odell, along with former Aristocrat
Chief Financial Officer Toni 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 of Barclays
International, Tim Throsby, and Chairman of REA Group Limited, HT&E Limited, and
Rugby Australia Limited and Deputy Chairman of Magellan Financial Group, Hamish
McLennan, as new independent directors effective October 1, 2020 and October 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
and MacAndrews & Forbes Chairman and CEO, as well as Barry Schwartz and Frances
Townsend, the two other MacAndrews & Forbes representatives, resigned from the
Board effective September 16, 2020.
Impact of COVID-19
In March 2020, the World Health Organization declared the rapidly spreading
COVID-19 outbreak a pandemic. In response to the COVID-19 pandemic, governments
across the world implemented a number of measures to prevent its spread,
including but not limited to, the temporary closure of a substantial number of
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

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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 $1 million and $41 million for the three and nine month periods ended September 30, 2020. The increase was primarily related to Gaming customers in LATAM as those customers were particularly affected by COVID-19 closures of gaming operations establishments along with other macroeconomic considerations. In addition, customers in this region expect and have often been granted extended payment terms. As described above, our customers in LATAM have been and are expected to continue to be affected by the COVID-19-related closures of gaming operations establishments and the resulting impact on both their specific financial situations and the general macroeconomic environments in which they operate. During the three and nine months ended September 30, 2020, we recorded $15 million and $45 million, respectively, in inventory valuation charges (recorded in Cost of product sales) related to inventory in our Gaming business segment. Our Gaming leadership team continues to improve and expand upon the strategic plan initiated in the first half of the year. This strategic plan includes revising product roadmaps and an assessment of how many and which platforms we will support, when we end service on legacy platforms and when we stop selling on such platforms in conjunction with new product launches. This plan, combined with the rapid demand reduction that took place at the beginning of the year through the remainder of the year, our increased focus on our go to market approach in LATAM (both largely as a result of the COVID-19 disruptions) and our view on certain markets and customers, requires us to reassess our inventory valuation, including whether we had excess or obsolete inventory based on this new strategic plan, a reduction in demand for legacy platforms, and plans for disposition of the related inventory. In addition, the continued closures in the LATAM region make it difficult to execute our previous strategy of shipping legacy platforms into that market. The combination of these factors led to the $15 million inventory valuation charge recognized during the second quarter of 2020 and $45 million inventory valuation charge recognized through the third quarter of 2020. Our policy is to continue to review and assess these and other factors, especially during the COVID-19 disruptions, and if such factors or our outlook changes, we record adjustments to the valuation of inventory.


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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 the U.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 of July 31, 2020), unpaid employee furloughs,
reductions in hours, temporary elimination of 401(k) matching among other
compensation and benefits reductions and deferral of certain operating and
capital expenditures. 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
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 "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 on October
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.
On April 9, 2020, we borrowed $480 million under SGI's revolving credit
facility. As of September 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.
On July 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 on July 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:

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