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 (see Part I, Item 1 of this Annual Report on Form 10-K) and our Consolidated Financial Statements and Notes (see Part IV, Item 15 of this Annual Report on Form 10-K). This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under "Forward-Looking Statements" and "Risk Factors" at the beginning and in Part I, Item 1A, respectively, of this Annual Report on Form 10-K. As used in this MD&A, the terms "we," "us," "our" and the "Company" mean SGC together with its consolidated subsidiaries. BUSINESS OVERVIEW We are a leading developer of technologybased 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, CMSs and table game products and services to licensed gaming entities; providing instant and drawbased lottery products, lottery systems and lottery content and services to lottery operators; providing social casino and other mobile games to retail customers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services to various gaming entities. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments. We are incorporated inNevada . For more information on our corporate history, please see the General introduction to Part I, Item 1 "Business" of this Annual Report on Form 10-K above. Highlights, including recent developments Caledonia Transaction and Governance Enhancements OnSeptember 14, 2020 , the Company announced that a group 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 was 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 previously 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. Jamie and Toni 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 , former 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 . Impacts 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 remainder of 2020, lifting of restrictions began, 51 -------------------------------------------------------------------------------- including the reopening of the majority of gaming establishments globally and resumption of sporting events. During the fourth quarter of 2020 and in the response to the second wave of the COVID-19 pandemic, certain jurisdictions implemented additional temporary closures. As gaming operations have yet to return to pre-COVID levels, limited international travel, social distancing measures (which in some cases have required our customers to substantially reduce maximum floor capacity in many jurisdictions), decreased operating capacities, high unemployment rates and potential changes in consumer behaviors continued to negatively impact our results of operations, cash flows and financial condition throughout 2020. Additionally, while most of casinos have reopened, it is unknown when mitigation measures (such as capacity limitations) will be lifted, all contributing to continued uncertainty into 2021. Impact on Business Operations and Financial Results Our Gaming business segment was especially impacted due to the widespread temporary closures and restricted reopening of a substantial number of gaming operations establishments coupled with global economic uncertainty. The COVID-19 pandemic remains a rapidly evolving situation. Although businesses impacted by temporary closures during 2020 largely reopened domestically, 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 measures 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 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 have 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. 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 of 2020 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 expanded the use of 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 6 for international locations with significant concentrations of our receivables with terms longer than one year. During the first quarter of 2020, the COVID-19 disruptions resulted in the widespread closures of LBO shops across theU.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 (part of our Gaming business segment), which necessitated performing a quantitative goodwill impairment test during the first quarter of 2020. As a result of this analysis, during the first quarter of 2020 we recognized a partial impairment charge totaling$54 million . See Note 10 for additional goodwill information. We increased our allowance for credit losses by$56 million during the year endedDecember 31, 2020 . These increases were primarily related to certain Gaming customers in LATAM, including some who previously received extended payment terms. In the LATAM region it is often expected that such financing is provided, which extends the collection cycle, and increases our collection risk, especially under the current economic conditions which have been heavily impacted by the ongoing pandemic. Many of our customers in the LATAM region have been particularly affected by macroeconomic factors such as inflation, foreign exchange fluctuations, political instability and others. In addition, the preceding factors have been exacerbated by extended COVID-19 closures of gaming operations establishments. 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 52 -------------------------------------------------------------------------------- establishments and the resulting impact on both their specific financial situations and the general macroeconomic environments in which they operate. During the year endedDecember 31, 2020 , we recorded$48 million in inventory valuation charges (recorded in cost of product sales) related to inventory in our Gaming business segment. The 2020 charges are a result of a strategic revision of product roadmaps, and assessments related to how many and which platforms we will support, when we end service on legacy platforms and when we stop selling such platforms in conjunction with new product launches. The implementation of our strategic revision combined with the rapid erosion of market demand that took place in 2020 (due to COVID-19 disruptions), our increased focus on our go to market approach in LATAM (due to COVID-19 disruptions and the overall macro economic impact on the LATAM region), and our revised outlook on certain markets and customers, required us to reassess our inventory valuation. We determined we had excess or obsolete inventory based on the new strategy, a reduction in demand for legacy platforms, and projections for the disposition of the related inventory. In addition, the continued closures in the LATAM region made it difficult to execute our previous strategy of shipping legacy platforms into that market. The combination of these factors led to the$48 million inventory valuation charge recognized during 2020. Our policy is to continually review and assess these and other factors, and if such factors or our outlook changes, we will record further adjustments to the valuation of inventory. Our Lottery business segment has experienced relative growth and recovery 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 an adverse effect on our results of operations, cash flows and financial condition throughout 2020 and we anticipate will continue to a lesser degree into 2021. 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 (all salaries back to 100% as ofJuly 31, 2020 ), 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. 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. Financings and Capital Markets Transactions •During the year, we borrowed$530 million under SGI's revolving credit facility, and made payments of$190 million , including a voluntary$100 million payment in the fourth quarter of 2020, against the balance drawn on the revolving credit facility. As ofDecember 31, 2020 , our total available liquidity (excluding our SciPlay business segment) was$850 million . In February of 2021, we made another voluntary payment of$100 million on SGI's revolving credit facility. •We amended the consolidated net first lien leverage ratio covenant in the credit agreement with the requisite lenders under SGI's revolving credit facility onMay 8, 2020 (the "Credit Agreement Amendment") and subsequently extended the Credit Agreement Amendment onOctober 8, 2020 (the "Credit Agreement Extension Amendment") to implement a financial covenant relief period, which extends the relief period through the first quarter of 2022. As a result, (a) SGI is not required to maintain compliance with the consolidated net first lien leverage ratio covenant during the Covenant Relief Period, (b) the step down of the consolidated net first lien leverage ratio covenant following the Covenant Relief Period was revised, (c) SGI must maintain liquidity (excluding SciPlay) of at least$275 million during the Covenant Relief Period, (d) SGI is restricted in its ability to further 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) a LIBOR floor of 0.500% was established on borrowings under the revolving credit facility during the Covenant Relief Period. 53 --------------------------------------------------------------------------------
The following table summarizes the revised consolidated net first lien leverage ratio and Consolidated EBITDA calculation for covenant purposes:
Revised ConsolidatedNet First Lien
Leverage Ratio Covenant Calculation
Revised Consolidated Net First Period ending Lien Leverage Ratio Covenant Consolidated EBITDA multiplier1 3/31/2022 6.00x 4x Q1-2022 6/30/2022 6.00x 2x YTD Q2-2022 9/30/2022 5.75x 1.33x YTD Q3-2022 12/31/2022 5.75x 3/31/2023 5.25x N/A - Calculated based on the 6/30/2023 5.25x previous 12 month period 9/30/2023 4.75x including the quarter being 12/31/2023 4.75x tested
3/31/2024 and thereafter
4.50x
(1) Consolidated EBITDA is defined in the Credit Agreement Extension Amendment and is calculated as testing year-to-date period-end consolidated EBITDA times multiplier.
•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 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. See Note 15 for additional long-term debt information. Trends and Uncertainties We have a number of trends and uncertainties that have impacted and may continue to impact our business and results of operations. Such impacts have in some cases been material and could be material in the future should they continue. COVID-19. See above "Impacts of COVID-19" for uncertainties regarding the pandemic that continue to impact our business and results of operations. Our high amount of leverage. We are a highly leveraged company which presents several challenges, including the dedication of a significant portion of our cash flow from operations to service interest and principal payments on our indebtedness. International operations and foreign currency. We face challenges related to expanding our footprint within international markets and the related process of obtaining regulatory approvals to provide services and products within these new and emerging markets. Our LATAM customers operate in a difficult macroeconomic environment that (combined with political instability in the region and further compounded by COVID-19) has resulted in (a) a material reduction in revenue, (b) a reduction in the cash we have collected from these customers on previous sales and (c) charges for estimated credit losses, primarily contributing to our total consolidated charge of$56 million during 2020 (see Critical Accounting Estimates and Note 6). The recovery period in revenue and cash generated in the LATAM region is expected to be longer than in our other geographies and we anticipate lower revenues continuing through at least the first half of 2021. Additionally, our international operations provide a significant portion of our total revenue and expenses. Many of these revenue and expenses are denominated in currencies other than theU.S. Dollar. We also have foreign currency exposure related to certain of our equity investments, cross-currency interest rate swaps, and Euro-denominated debt. As a result, changes in foreign exchange rates may significantly affect our results of operations. A high level of competition, with competitor expansion. Our major competitors are expanding their product and service offerings with integrated products and solutions that compete directly with ours. For example, competition in our Gaming business segment is highly competitive and is characterized by the continuous introduction of new games, gaming machines and related technologies while our Lottery business segment continues to be subject to intense price-based competition. Our Digital business segment is facing challenges related to entering and expanding our market share within new and emerging markets, such asU.S. sports betting, which continues to be very competitive, while our SciPlay business segment continues to be highly competitive with low barriers to entry, rapid evolution, fragmented market and subject to changing technology, shifting needs and frequent introductions of new games, development platforms and services. See Part I, Item 1 of this Annual Report on Form 10-K and Business Segment Results below describing competition and factors impacting each of our business segments. 54 -------------------------------------------------------------------------------- Seasonality. Our results of operations fluctuate due to seasonal trends and other factors impacting all of our business segments, particularly Gaming and SciPlay businesses. See Part I, Item 1 - Seasonality of this Annual Report on Form 10-K. Restructuring charges. We have incurred restructuring charges related to severance for terminated employees in order to align our cost structure with operating cash flow requirements and streamlining our operations. Our most important strategic pillars are to (1) focus on accelerating de-leveraging and improving cash flow from operations and (2) enhancing our corporate culture and developing a high performance organization, all of which is expected to result in increased restructuring charges as we incur optimization expenses to execute and facilitate our strategies. See Note 4 for restructuring charges incurred for the last three years. For additional trends and uncertainties impacting our business segments, refer below to Business Segment Results, specifically the Current Year Update section for each business segment. Reportable Segments We report our operations in four business segments - Gaming, Lottery, SciPlay and Digital - representing our different products and services. See Notes 2 and 3 for additional business segments information. CONSOLIDATED RESULTS (in millions) Year Ended December 31, Variance 2020 2019 2020 vs. 2019 Total revenue$ 2,724 $ 3,400 $ (676) (20) % Total operating expenses 2,702 2,854 (152) (5) % Operating income 22 546 (524) (96) % Net loss before income taxes (544) (108) (436) (404) % Net loss (548) (118) (430) (364) % Net loss attributable to SGC (569) (130) (439) (338) % Revenue [[Image Removed: sgms-20201231_g2.jpg]]
Year Ended
55 -------------------------------------------------------------------------------- disruptions. Gaming business segment 2020 revenue also reflects$36 million lower system revenues due to completion of certain Canadian systems launches that we benefited from in the prior year comparable period. Lottery revenue for 2020 was also negatively impacted by COVID-19 disruptions primarily impacting instant ticket sales, particularly during the first half of 2020. SciPlay revenue increased by$116 million or 25 percent primarily due to continued growth in our mobile platform business and increased player engagement as a result of the stay at home measures acrossNorth America and other countries coupled with the ongoing popularity ofJackpot Party Casino ,Gold Fish Casino , Quick Hits Slots, and MONOPOLY Slots. Digital revenue increased by$23 million or 8 percent primarily due to increased Gaming revenue that benefited from increased free time and stay at home measures as a result of COVID-19 disruptions coupled with growth in Sports due to higher license revenue from key customer renewals and growth in the U.S. market. Our 2020 consolidated revenues were impacted by$7 million of favorable F/X impact compared to$36 million of unfavorable impact in the prior year. Operating expenses Year Ended December 31, Variance (in millions) 2020 2019 2020 vs. 2019 Operating expenses: Cost of services(1)$ 531 $ 538 $ (7) (1) % Cost of product sales(1) 349 457 (108) (24) % Cost of instant products(1) 280 289 (9) (3) % SG&A 701 707 (6) (1) % R&D 166 188 (22) (12) % D&A 554 647 (93) (14) % Goodwill impairment 54 - 54 100 % Restructuring and other 67 28 39 139 % Total operating expenses$ 2,702 $ 2,854 $ (152) (5) % (1) Excludes D&A. Cost of revenue Cost of revenue for the year endedDecember 31, 2020 decreased primarily due to the COVID-19 disruptions described above resulting in Gaming machine sales revenue decreasing by 49% or$297 million . Additionally, the year endedDecember 31, 2020 Cost of product sales includes approximately$48 million , in Gaming segment inventory valuation charges, due to a decrease in demand for certain platforms as we believe that our customers will continue to extend replacement cycles to preserve their liquidity following their return to full operations combined with a reassessment of our Gaming product strategy, which was implemented during the year (see Note 7). SG&A SG&A decreased primarily due to the company-wide austerity measures implemented in response to the COVID-19 disruptions described above, which resulted in lower SG&A compensation and benefit expenses of$56 million for 2020. The decrease in SG&A was partially offset by an increase of$54 million in the Gaming business segment allowance for credit losses, that reflect forecasted credit deterioration due to the COVID-19 disruptions generally and credit weakness in ourLatin America receivables portfolio specifically (see Note 6). R&D R&D decreased primarily due to company-wide austerity measures in response to the COVID-19 disruptions described above resulting in lower R&D compensation and benefit expenses of$15 million for 2020. D&A D&A decreased primarily due to certain Gaming intangible assets and software becoming fully amortized in the prior year.Goodwill impairment 56 --------------------------------------------------------------------------------Goodwill impairment increase was related to our legacy U.K. Gaming reporting unit, which was recorded during the first quarter of 2020. See Note 10 for additional details onGoodwill impairment charges. Restructuring and other The increase is primarily due to severance and related charges associated with COVID-19 disruptions. See Note 4 for additional details on Restructuring and other charges. Other Factors Affecting 2020 and 2019 Net Loss Attributable to SGC Comparability (in millions) Year Ended December 31, Factors Affecting Net Loss 2020 2019 2020 vs. 2019 Interest expense$ (503) $ (589)
The decrease in interest expense for the year ended December 31, 2020 reflects the favorable impact of 2019 refinancing activities resulting in lower interest costs (refinancing activities for 2020 are further discussed in "Liquidity, Capital Resources and Working Capital" and for both periods in Note 15). Loss on debt financing (1) (100) Loss on debt financing transactions consummated transactions during 2019 includes$80 million in premium charges associated with redemptions of the 2022 Unsecured Notes (see Note 15) in the second and fourth quarters of 2019. (Loss) gain on remeasurement (51) 9 (Losses) and gains are attributable to of debt remeasurement of the 2026 Secured Euro Notes and 2026 Unsecured Euro Notes and primarily reflect changes in the Euro vs. the U.S. Dollar foreign exchange rates between the periods. In 2019 the USD strengthened vs. the Euro by 3% and in 2020 the USD weakened by 9%. Income tax expense(1) (4) (10) The decrease is primarily due to the decrease in worldwide income due to COVID-19 and the overall worldwide mix of income (loss).
(1) For additional information regarding the changes in our effective tax rates and the variance in our income tax expense, see Note 20.
Foreign exchange (F/X) Our results are impacted by changes in foreign currency exchange rates used in the translation of foreign functional currencies into USD and the re-measurement of foreign currency transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. Our exposure to foreign currency volatility on revenue is as follows: (in millions) Year Ended December 31, 2020 2019 % Consolidated F/X Impact on % Consolidated F/X Impact on Revenue Revenue Revenue Revenue Revenue Revenue Foreign Currency: British Pound Sterling$ 323 12 % $ 3$ 331 10 %$ (18) Euro (1) 237 9 % 3 248 7 % (13)
(1) Our earnings from our Euro-denominated equity investment in LNS were
See "Business Segment Results" below for a more detailed explanation of the significant changes in our components of revenue and expenses within the individual segment results of operations. For 2019 and 2018 consolidated, business segment and cash flow results comparisons, see Part II, Item 7 of our 2019 Annual Report on Form 10-K. BUSINESS SEGMENT RESULTS The types of products and services from which our segments derive their revenues are further discussed in Notes 2 and 3. Certain financial information relating to our segments, including segment revenue, AEBITDA and total assets for the last three fiscal years and certain financial information relating to our revenue derived from and assets located in theU.S. and other geographic areas is included in Note 2. GAMING 57 -------------------------------------------------------------------------------- Our Gaming business segment designs, develops, manufactures, markets and distributes a comprehensive portfolio of gaming products and services. We provide our Gaming portfolio of products and services to commercial casinos, Native American casinos, wide-area gaming operators such as LBOs, arcade and bingo operators in theU.K. and continentalEurope , and government agencies and their affiliated operators. Our equity investment in RCN is included in our Gaming business segment. The following table summarizes the primary business activities included in our Gaming business segment. Services Product sales Gaming operations Service revenues from gaming N/A operations are derived from WAP, premium and daily-fee Participation gaming machines and other leased gaming machines (including VLTs and ETSs) and licensing arrangements. Gaming machine sales N/A
Sale of new and used gaming machines, ETSs and VLTs, conversion game kits and spare parts. Gaming systems We provide services which include We offer CMSs that help our customers installation and support of CMSs, improve communication with players, including ongoing hardware add excitement to the gaming floor maintenance and ongoing software and enhance operating efficiencies. maintenance and upgrade services of customer CMSs. Table products Revenue is generated from supplied Sale of table products (including table products and services Shufflers) and PTG licensing. (including Shufflers). Gaming Operations Our services revenue includes revenue earned from Participation games, other gaming machine services and table product service arrangements. We categorize our Participation gaming machines as (1)U.S. andCanada units and (2) International units. The following are different types of Participation games from which we derive our revenue: •WAP Participation games: WAP Participation games are electronically linked gaming machines that are located across multiple casinos within both single and multiple gaming jurisdictions or across Native American gaming jurisdictions. Players across linked gaming machines contribute to and compete for system-wide progressive jackpots that are designed to increase gaming machine play for participating casinos by giving the players the opportunity to win a larger jackpot than on a non-WAP gaming machine. We are responsible for funding WAP jackpots. We create WAP games using our proprietary brands and also using licensed brands. We operate our WAP systems in five states throughout theU.S. and in certain Native American casinos. •Premium and daily fee Participation games: We offer two categories of non-WAP premium and daily fee Participation games: LAP and standalone. LAP games are gaming machines that are located within a single casino and are electronically linked to a progressive jackpot for that specific casino. Our LAP gaming machines feature games including those offered as WAP and our proprietary brands such as Ultimate Fire Link®, Dragon Spin®, Ultra Hot Mega Link®, 88 Fortunes, Invaders from the Planet Moolah®, 5 Treasures®, Cash SpinTM and Dancing Drums Explosion®. Our LAP products leverage both exclusive brand names and game play intellectual property, and typically offer players the chance to win multiple progressive jackpots, all of which tend to result in higher play volumes. We also provide certain standalone Participation games that are not linked to other gaming machines. Our standalone games feature titles under both licensed brands and our proprietary brands. Our standalone Participation gaming machines generally feature larger, more elaborate top-boxes and provide game play experiences not possible on a single screen game or on gaming machines that we sell. •Server-based gaming: We provide wide-area gaming operators, such as LBOs, bingo halls and arcades, a comprehensive package of server-based products and services under long term contracts that typically include gaming machines, remote management of game content and management information, central computer systems, secure data communication and field support services. We are typically paid a fee based on the Net win generated by these gaming machines (subject to certain adjustments as may be specified in a particular contract, including adjustments for taxes and other fees). Our business in this category is primarily based in theU.K. •VLTs: For certain customers, we provide our multi-game and single-game VLTs, which include video gaming machines, mechanical reel gaming machines and video poker games. Our VLTs may be operated as standalone units or may interface with central monitoring systems operated by government agencies. Our VLTs are typically located in places where casino-style gaming is not the only attraction, such as racetracks, bars and restaurants. 58 -------------------------------------------------------------------------------- •Class II and centrally determined systems: We offer video and mechanical-reel gaming machines and VLTs for Class II and certain VLT jurisdictions where the game outcome is determined by a central server system that we provide. These Class II and centrally determined systems primarily operate in Native American casinos inWashington ,Florida ,Alabama andOklahoma . We receive either a fixed daily fee or a percentage of the Net win generated by the gaming machines or VLTs connected to the central determination system and a small daily fee for the central determination system. Gaming Machine Sales The majority of our product sales are derived from sales of gaming machines and VLTs that use a combination of advanced graphics, mechanical reels, digital music and sounds and secondary bonus games. We also sell ETSs to either meet the needs of particular locations where live tables are not allowed or as productivity-enhancing solutions for other jurisdictions. Gaming Systems Our comprehensive suite of technology solutions provides gaming operations of every size with a wide range of marketing, data management and analysis, accounting, player tracking, security and other applications and tools to more effectively manage their operations. Gaming systems products include the iVIEW® touch screen display, which facilitates the player experience, bonus features, customer service, and employee functions. Gaming systems revenues related to core system solutions are highly dependent on new installations. Gaming system revenues are also generated through ongoing hardware and software maintenance services and upgrades. Table Products Our table product sales are generated primarily from the sale of products designed to enhance table game speed, productivity, profitability and security. Our product offerings include various models of Shufflers to suit specific games. We also offer Shuffler products under month-to-month arrangements that primarily contain fixed monthly rates or to a lesser extent Participation rates. These arrangements include service of the product with back-up and replacement products available at the customer's request. We license our PTG content to commercial, tribal and governmental casino operators typically under month to month arrangements based on fixed monthly rates. PTGs, which are designed to enhance operators' table-game operations, include our internally developed and acquired PTGs, side bets, add-ons and progressive features. Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker, craps and blackjack table games and to electronic platforms. Current year update See the "Recent Events - Impacts of COVID-19" section above for a description of the COVID-19 impact on our Gaming business segment, which continues to have an adverse effect on our results of operations and cash flows into 2021 and as COVID-19 mitigation measures continue to be implemented and enforced. In addition to the adverse effect of COVID-19, we anticipate further declines in our gaming operations, systems, products and services revenues due to certain large Canadian contracts that were completed in 2019. Further challenges include: (1) a replacement market that remains unpredictable given several large customer consolidations; (2) fewer casino openings and expansions; (3) continued competition for new systems, gaming operations, gaming machines and table products businesses; and (4) other economic and regulatory pressures that affect our business operations globally. Additionally, our Gaming operations installed base at period end has declined for bothU.S. andCanada and International markets from 33,585 and 33,744 in 2018 to 30,105 and 32,061 in 2020, respectively. Gaming operations generated 36%, 34% and 35% of total Gaming segment revenues for 2020, 2019 and 2018, respectively. While our new Gaming business segment leadership team has developed a strategy to reverse this trend, the implementation of such strategy and reversal of this trend and decline in our Gaming operations installed base at period end is expected take longer than a year. Our 2021 Gaming revenues are expected to benefit from a rebate of value added tax in theU.K. from a tax ruling made in 2020 ("U.K. VAT rebate"). We believe we will be entitled to such rebates as the previous tax position impacted our historical contractual gaming revenue for certain of ourU.K. LBO server-based gaming customers. While the total amount and timing of the U.K. VAT rebate is currently uncertain and dependent on claim submissions by our customers and government approvals, all of which are outside of our control, we estimate that we could be entitled to up to$60 million . Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Results of Operations and Key Performance Indicators 59 -------------------------------------------------------------------------------- [[Image Removed: sgms-20201231_g3.jpg]][[Image Removed: sgms-20201231_g4.jpg]][[Image Removed: sgms-20201231_g5.jpg]] 1 - The year endedDecember 31, 2019 includes$10 million in IP charges paid by the SciPlay business segment, which are no longer being paid as ofMay 7, 2019 in connection with the IP License Agreement. Revenue (in millions) Year Ended December 31, Variance 2020 2019 2020 vs. 2019 Revenue: Gaming operations $ 332$ 597 $ (265) (44) % Gaming machine sales 312 609 (297) (49) % Gaming systems 171 295 (124) (42) % Table products 111 247 (136) (55) % Total revenue $ 926$ 1,748 $ (822) (47) % F/X impact on revenue $ 3$ (14) $ 17 121 % Year Ended December 31, Variance 2020 2019 2020 vs. 2019 KPIs:U.S. andCanada units: Installed base at period end 30,105 31,486 (1,381) (4) % Average daily revenue per unit$ 23.57 $ 38.67 $ (15.10) (39) % International units(1): Installed base at period end 32,061 34,370 (2,309) (7) % Average daily revenue per unit$ 5.07 $ 10.57 $ (5.50) (52) % Gaming machine sales: U.S. and Canada new unit shipments 9,987 19,512 (9,525) (49) % International new unit shipments 12,591 10,810 1,781 16 % Total new unit shipments 22,578 30,322 (7,744) (26) % Average sales price per new unit$ 12,178 $ 17,343 $ (5,165) (30) %
(1) Excludes the impact of game content licensing revenue.
All of our 2020 Gaming revenue was negatively impacted by the COVID-19 disruptions that resulted in temporary closures and/or reduced operating capacity of a substantial number of gaming operations establishments in various jurisdictions globally, as described in the "Recent Events - Impact of COVID-19" section above. As gaming establishments began to reopen in June and openings have continued through the year, demand has steadily increased and is expected to continue into 2021. The continuation of social distancing measures that were implemented and still being enforced in many jurisdictions (including substantial reductions of maximum floor capacities, table play customer limitations and reduction of slot machines available for 60 -------------------------------------------------------------------------------- play) have had and are expected to continue to have a negative impact on our Gaming revenue until casino operators are able to return to normal operations. The mitigation measures are expected to continue for an indeterminate amount of time and we expect to continue to see the impacts on our Gaming segment into 2021. During the three months endedDecember 31, 2020 , Gaming revenues compared to the three months endedSeptember 30, 2020 , increased in Gaming operations from$92 million to$105 million representing a 14 percent increase, in Gaming machine sales from$71 million to$96 million representing a 35 percent increase, and in Gaming systems from$43 million to$56 million representing a 30 percent increase due to continued opening of gaming operations from previous shutdowns and increased customer traffic demonstrating the significant fluctuations caused by COVID-19 business disruptions during the year. Gaming Operations Gaming operations revenue decreased compared to the prior year primarily due to the COVID-19 disruptions (including fixed fee arrangement concessions granted) described above which was the driving factor in a 1,381-unit decrease in theU.S. andCanada ending installed base and a 2,309-unit decrease in the International ending installed base and both domestic and International average daily revenues per unit. Gaming Machine Sales Gaming machine sales revenue decreased compared to the prior year primarily due to the impact of COVID-19 as described above driving lower unit shipments primarily in replacement unit sales, coupled with decreases in the average sales price per unit reflecting a less favorable mix of Gaming machine sales. The following table summarizes Gaming machine sales changes: Year EndedDecember 31 ,
Variance
2020 2019
2020 vs. 2019
Replacement units 5,957 14,290
(8,333) (58) %
Casino opening and expansion units 4,030 5,222
(1,192) (23) %
Total unit shipments 9,987 19,512
(9,525) (49) %
International unit shipments:
Replacement units 12,010 10,616
1,394 13 %
Casino opening and expansion units 581 194 387 199 % Total unit shipments 12,591 10,810 1,781 16 % Gaming Systems Gaming systems revenue decreased primarily due to the COVID-19 disruptions described above resulting in fewer installations of new CMSs on fewer casino openings and expansions, lower hardware sales, lower systems maintenance revenue reflective of customer concessions granted during the COVID-19 shutdowns, and lower iVIEW installations due to certain Canadian contracts that were completed in the prior year. Operating Expenses The decrease in operating expenses is primarily due to lower cost of revenue correlated with the decrease in total revenue (as described above), which was partially offset by: (1) a$48 million increase of inventory valuation charges to Cost of product sales, (as described above and in Note 7), and (2)$20 million increase in Restructuring and other charges. Additionally, the year endedDecember 31, 2020 includes a$54 million in goodwill impairment charge and a$54 million charge related to allowance for credit losses, which reflects actual and forecasted credit deterioration primarily due to the COVID-19 disruptions coupled with the impacts of foreign exchange and the worsening of the expected credit position in ourLatin America receivables portfolio specifically (see Note 6). AEBITDA AEBITDA decreased by$618 million or 71 percent primarily due to lower revenues as a result of COVID-19 disruptions, coupled with charges to allowance for credit losses and inventory during the year ended 2020 described above. AEBITDA margin for the year ended 2020 comparable period decreased by 22.8 percentage points to 27%. 61 -------------------------------------------------------------------------------- AEBITDA for the three months endedDecember 31, 2020 compared to the three months endedSeptember 30, 2020 , increased from$77 million to$105 million representing an increase of 36 percent due to continued opening of gaming operations from previous shutdowns and increased customer spending coupled with lower operating expenses. LOTTERY The Lottery segment is primarily comprised of our instant product business, systems-based services and product sales business. Our systems-based services and product sales business provide customized computer software, software support, equipment and data communication services, sports wagering systems and keno to lotteries. In theU.S. , we typically provide the necessary POS terminals and equipment, software and maintenance services on a Participation basis under contracts that typically have an initial term of at least five years. Internationally, we typically sell POS terminals and/or computer software 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, and the provision of value-added services such as game design, sales and marketing support, specialty games and promotions, inventory management, warehousing, fulfillment services, and full instant product category management administered through our SGEP program. In addition, we provide licensed games, promotional entertainment and internet-based marketing services to the lottery industry. These revenues are presented as instant products revenue. Our equity investments in LNS,Northstar New Jersey , CSG, Hellenic Lotteries and GLB are included in the Lottery segment. The following table summarizes the primary business activities included in the Lottery business segment. Services Product Sales Instant Products Instant products - N/A N/A Designing, printing and Participation (POS and selling instant lottery SGEP) and PPU(1) products and providing the comprehensive services necessary to operate integrated instant product operations that enable lotteries to enhance instant product retail sales, including: (i) design and manufacturing of instant games tickets, (ii) instant products planning, monitoring and management systems functions, (iii) warehousing, inventory management and distribution functions, and (iv) marketing and game support functions. Instant products - N/A N/A Supplying player loyalty licensing and player programs, merchandising loyalty services and interactive marketing campaigns. Sublicensing brands for lottery products and providing lottery-related promotional products. Lottery systems - Providing software, Sale of ancillary lottery N/A services hardware and related systems hardware to services for lottery customers where we have an operations, including draw ongoing services systems, instant ticket arrangement validation systems, sports wagering and keno systems Lottery systems - Lottery systems software Providing lottery systems, N/A sales maintenance and support including hardware, software, and instant product validation systems (1) See Instant Lottery Products below. Instant Lottery Products We generate revenue from the sale of instant lottery products under our POS and PPU contracts. Under our SGEP contracts we perform substantially all of the comprehensive services necessary to operate the associated lottery's integrated instant product operations, other than executing on retail sales, and to a lesser extent we provide certain services to retailers. We believe these integrated services help lotteries effectively manage and support their operations and achieve higher retail sales. For SGEP arrangements, we are typically paid on a Participation basis. We also provide licensed games and promotional and interactive marketing services to the lottery industry. 62 -------------------------------------------------------------------------------- We market instant lottery products and related services toU.S. and international lotteries and commercial customers. We supply instant lottery products to 40 of the 46 U.S. jurisdictions that sell instant lottery products and have sold instant lottery products to customers in approximately 50 countries. OurU.S. instant lottery product contracts customarily have an initial term of three to five years and frequently include multiple renewal options for additional periods ranging from one to five years, which our customers have generally exercised in the past. We usually sell our instant lottery products on a PPU (meaning instant products sold to customer at a fixed price per unit) or Participation basis. Certain of our international customers purchase instant lottery products as needed rather than under multi-game supply contracts. We provide lotteries with access to some of the world's most popular entertainment brands on lottery products, which we believe helps increase our customers' instant product sales. Our licensed entertainment brands includeJAMES BOND , WILLY WONKATM, MONOPOLY, LOTERIATM, and SLINGO®. We also provide branded merchandise, advertising, promotional support, drawing management services and prize fulfillment programs. In addition, we offer lotteries interactive marketing services through our Loyalty Plus program which features players clubs, reward programs, second chance promotional websites, interactive games and subscription systems that enable players to purchase lottery games securely over the internet. Lottery Systems We are a leading provider of lottery systems including customized computer software, software support, equipment, and data communication services, to lotteries worldwide. OurU.S. arrangements ordinarily include the following: (1) provision of the necessary equipment (including POS terminals) and (2) software and maintenance services pursuant to contracts typically with an initial term of five years or more under which we are generally paid a fee equal to a percentage of the lottery's total retail sales. OurU.S. contracts commonly include multiple renewal options that generally have been exercised by our customers in the past. Internationally, we primarily sell: (1) POS terminals and/or computer software and hardware to lottery authorities; and (2) provide ongoing fee-based systems and software support services. Our lottery systems use proprietary technology that facilitates high-speed processing of draw lottery game wagers and validation of winning draw and instant lottery products. We also supply our proprietary transaction-processing software, draw lottery games, keno, point-of-sale terminals, central site computers and communication platforms and ongoing operational support and maintenance services. We have contracts to operate lottery systems for 11 of the 47 U.S. jurisdictions that operate draw lotteries. Internationally, we have lottery systems operating in 14 countries includingCanada andChina . We have equity investments in LNS,Northstar New Jersey , Hellenic Lotteries, CSG and GLB, which entities operate or assist in the operation of lotteries. We are also the primary provider of instant lottery products to LNS andNorthstar New Jersey and the exclusive provider of instant lottery products toCamelot Illinois, LLC and Hellenic Lotteries. Additional information regarding certain of our equity investments is included in Note 12. Current year update See "Business Overview - Highlights, including recent developments - Impacts of COVID-19" section above for a description of the COVID-19 impact on our Lottery business segment, which had an adverse effect on our 2020 results of operations and cash flows, but began to recover during the latter half of 2020 as results began to reflect increased revenues in our Lottery system sales. In addition to the adverse effects of COVID-19, we believe we will continue to face intense price-based competition in our Lottery business in 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. We 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. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Results of Operations and Key Performance Indicators 63 --------------------------------------------------------------------------------
[[Image Removed: sgms-20201231_g6.jpg]][[Image Removed: sgms-20201231_g7.jpg]][[Image Removed: sgms-20201231_g8.jpg]]
Revenue (in millions) Year Ended December 31, Variance 2020 2019 2020 vs. 2019 Revenue: Instant products $ 579$ 588 $ (9) (2) % Lottery systems 339 323 16 5 % Total revenue $ 918$ 911 $ 7 1 % F/X impact on revenue $ 2$ (10) $ 12 120 % The increase in total revenue is due to higher Lottery systems equipment sales of$16 million primarily due to increased international systems sales, partially offset by decreased Instant ticket sales revenue of$9 million due to the negative impact from COVID-19 disruptions on the first half of the year. Operating Expenses Operating expenses remained constant primarily due to increased costs of sales of$8 million correlated with increased equipment sales offset by lower operating expenses as a result of austerity measures implemented to reduce costs. AEBITDA AEBITDA decreased by$15 million or 4 percent primarily due to the impact of COVID-19 disruptions on our joint ventures driven byNorthStar New Jersey and LNS, partially offset by austerity measures implemented to reduce costs. AEBITDA margin decrease was 2 percentage points. Lower joint venture EBITDA contributed 3 percentage points of the decline while lower operating expenses increased the AEBITDA margin by 1 percentage. 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 gamesJackpot 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 , andPLAYBOY . We generate substantially all of our revenue from the sale of virtual coins, chips and bingo cards which players can use to play our games. Players who install our games receive free virtual coins, chips and bingo cards upon the initial launch of the game and additional free virtual coins, chips and bingo cards at specific time intervals. Players may exhaust the virtual coins, 64 -------------------------------------------------------------------------------- chips and bingo cards that they receive for free and may choose to purchase additional virtual coins, chips and bingo cards in order to extend their time of game play. Once obtained, virtual coins, chips and bingo 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, Amazon, 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. Current year update While the COVID-19 disruptions did not negatively affect SciPlay's results (see the "Business Overview - Highlights, including recent developments - Impacts of COVID-19" section above), sustained consumer unease, lower discretionary spending and shelter-in-place orders may impact SciPlay's results of operations in 2021. SciPlay experienced an increase in nearly all key performance indicators and revenue beginning inMarch 2020 and continuing through the end of 2020, which is partially due to the stay at home measures and increased player free time. The increase in paying players is also a result of significant game enhancements that have enabled SciPlay to attract and retain new players. The new players are highly engaged, and could continue to drive increases in key performance indicators, as they continue to be active paying players following the easing of COVID-19 restrictions. Many of SciPlay's current and potential players may have more free time to play games, however, they could also experience sustained consumer unease and have lower discretionary income. During the first half of 2020, SciPlay deployed significant updates across a number of portfolio games, and continued testing in certain international markets. SciPlay expects to deploy further updates to games in future periods and to continue testing in international markets. We also continue to see the trend of players migrating from web to mobile platforms, which is expected to continue through 2021 and beyond. OnJune 22, 2020 , SciPlay completed the acquisition of the privately held mobile and social game company Come2Play (see Note 9), which expanded and diversified SciPlay's existing portfolio of social games. As a result of this acquisition we now offer a solitaire social game targeted towards casual game players on the same platforms in which we currently offer our existing games. We currently plan to launch an additional casual game in 2022. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Results of Operations and Key Performance Indicators [[Image Removed: sgms-20201231_g9.jpg]][[Image Removed: sgms-20201231_g10.jpg]][[Image Removed: sgms-20201231_g11.jpg]]
1 - The year ended
Gaming business segment, which are no longer being paid as of
Agreement. Revenue 65
-------------------------------------------------------------------------------- (in millions, except ARPDAU) Year Ended December 31, Variance 2020 2019 2020 vs. 2019 Revenue: Mobile$ 506 $ 391 $ 115 29 % Web and other 76 75 1 1 % Total$ 582 $ 466 $ 116 25 % KPIs: Mobile Penetration(1) 87 % 83 % 4 pp nm Average MAU(2) 7.4 8.0 (0.6) (8) % Average DAU(3) 2.7 2.7 - - % ARPDAU(4)$ 0.60 $ 0.48 $ 0.12 25 % 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. Mobile platform revenue increased$115 million or 29 percent primarily due to increased player engagement as a result of the stay at home measures acrossNorth America and other regions and ongoing popularity ofJackpot Party Casino ,Gold Fish Casino , Quick Hits Slots, and MONOPOLY Slots. The increase in mobile penetration percentage primarily reflects a continued trend of players migrating from web to mobile platforms to play our games. Average MAU decreased and average DAU stayed relatively flat due to the turnover in users while paying users stayed consistent. Consequently, ARPDAU increased due to stay at home measures acrossNorth America and other regions, introduction of new content and features, and ongoing popularity of our games. Operating Expenses Operating expenses increased by$38 million primarily due to a$36 million increase primarily related to salaries and benefits, stock-based incentive compensation related to the attainment of higher performance metrics and professional services fees coupled with a$27 million increase in cost of revenue correlated with revenue growth which were partially offset by a$10 million decrease in IP charges paid to the Gaming business segment, which ended as ofMay 7, 2019 in connection with the IP License Agreement. AEBITDA AEBITDA increased by$67 million or 55 percent primarily due to continued growth in revenue (as described above) and improved operating leverage while AEBITDA margin increased by 6.1 percentage points to 32.4%. DIGITAL Our Digital segment provides a comprehensive suite of digital 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, 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 66 -------------------------------------------------------------------------------- The initial negative impacts of COVID-19 on Sports and platform revenue were fully offset by increases in license revenue associated with license renewals of certain existing key customers and Gaming revenue that benefited from increased free time and stay at home measures. We continue to expand our customer base and capitalize on both iGaming and sports opportunities in theU.S. by leveraging our industry leading platforms, content and solutions. While we believe that we are well positioned and continue to successfully expand our customer base and capitalize onU.S. sports-betting markets, we see increased level of competition and expect that such competition will intensify. Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Results of Operations [[Image Removed: sgms-20201231_g12.jpg]][[Image Removed: sgms-20201231_g13.jpg]][[Image Removed: sgms-20201231_g14.jpg]] Revenue (in millions) Year Ended December 31, Variance 2020 2019 2020 vs. 2019 Revenue: Sports and platform $ 127$ 119 $ 8 7 % Gaming and other 171 156 15 10 % Total revenue $ 298$ 275 $ 23 8 % F/X impact on revenue $ 1$ (12) $ 13 nm KPI: Gaming
Wagers processed through OGS (in billions) $ 51
$ 15 42 % nm = not meaningful. Overall Digital revenue increased by$23 million or 8 percent primarily due to a cancellation fee associated with certain legacy agreements that were modified in the first quarter of 2020, higher license revenue from key customer renewals related to Sports and platform ($10 million which will not be recurring in 2021 as all key customer contracts are not due to renew until 2022 and after) and increase in Gaming and other revenues. The increase in Gaming and other revenue was partially offset by exiting certain legacy service lines, which resulted in a decrease of$11 million . Operating Expenses and AEBITDA Operating expenses increased primarily due to higher costs of revenue correlated with the increase in revenue. AEBITDA increased by$25 million or 40 percent primarily due to the increase in Gaming and other revenue which was driven by increased free time and stay at home measures, as noted above, coupled with increased Sports and platform revenue which was partially driven by the impact of license revenue associated with license renewals of certain existing customers. AEBITDA margin for the year endedDecember 31, 2020 increased by 6.6 percentage points to 30%. RECENTLY ISSUED ACCOUNTING GUIDANCE For a description of recently issued accounting pronouncements, see Note 1. 67 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING ESTIMATES Information regarding significant accounting policies is included in Note 1 and in the relevant sections of applicable Notes. As stated in Note 1, the preparation of financial statements in accordance withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe that the estimates, assumptions, and judgments involved in the following accounting policies have the greatest potential impact on our consolidated financial statements: •Business combinations; •Revenue recognition; •Inventory valuation; •Allowance for credit losses; •Goodwill and other indefinite-lived intangibles, long-lived assets and finite-lived intangible assets - impairment assessment; •Income taxes; and •Legal contingencies. Business Combinations As described in Note 9, we account for business combinations in accordance with ASC 805. This standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Determining the fair value of assets acquired and liabilities assumed requires management judgment, the utilization of independent valuation experts and often involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. Any changes in the underlying assumptions can impact the estimates of fair value by material amounts, which can in turn materially impact our results of operations. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these fair values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate D&A expense. If our estimates of the economic lives change, D&A expense could be accelerated or slowed. Revenue Recognition Our revenue recognition policies described in Note 3 require us to make significant judgments and estimates. The guidance requires that we apply judgments or estimates to determine the performance obligations, the stand-alone selling prices of our performance obligations to customers, and the timing of transfer of control of the respective performance obligations. The evaluation of each of these criteria in light of contract specific facts and circumstances is inherently judgmental, but certain judgments could significantly affect the timing or amount of revenue recognized if we were to reach a different conclusion than we have. The critical judgments we are required to make in our assessment of contracts with customers that could significantly affect the timing or amount of revenue recognized are: •Contracts with Multiple Promised Goods and Services - because we enter into contracts with customers that involve promises to transfer multiple products and services, the determination of the distinct performance obligations in contracts with multiple promises requires significant judgment. Our total gaming systems, lottery systems and Digital revenue that often contain multiple promised goods and services was$433 million for the year endedDecember 31, 2020 , or approximately 16 percent of consolidated revenue, a portion of which would not be recognized if we had reached a different conclusion. •Determination of stand-alone selling prices - the guidance requires that we determine the stand-alone selling price for our goods and services as a basis for allocating the transaction price to the identified distinct performance obligations in our contracts with customers. Because we often bundle the selling price for multiple promised goods or services or we may license systems for which the solutions we provide are highly customized and therefore the prices we charge are variable, the determination of a stand-alone selling price or the relative range may require significant judgment. Our total gaming systems, lottery systems and Digital revenue that could be subject to this judgment and thus allocated 68 -------------------------------------------------------------------------------- to distinct performance obligations differently was a portion of$433 million for the year endedDecember 31, 2020 , or approximately 16 percent of consolidated revenue. •Transfer of control in Lottery POS contracts - the guidance requires that we recognize revenue when or as control over a performance obligation transfers to a customer. In instant products contracts under POS terms, instant products are delivered to lottery customers, but we retain the risk of such inventory until retail sales of such tickets takes place. Because those shipments are to a lottery-controlled warehouse and we do not have the ability to direct the use of such instant products subsequent to this delivery, we have determined that control transfers upon delivery. This conclusion requires the use of judgment. If we concluded that control transferred upon retail sales when the end customer obtained control over the instant tickets, the revenue that could be subject to decrease would be a portion of$93 million for the year endedDecember 31, 2020 , or approximately 3 percent of consolidated revenue. Inventory Valuation We review our inventory levels each reporting period and adjust the value of our inventory to the extent we determine that inventory cost is in excess of its net realizable value. To estimate obsolete and excess inventory, we consider a number of qualitative and quantitative factors, including product strategy and product lifecycles, estimates of future demand, current pricing, historical sales trends, market trends, and economic conditions. Any changes in these factors could result in material inventory charges which would increase our cost of products and decrease our gross margin, and such charges could be material. During the years endedDecember 31, 2020 , 2019, and 2018, we recorded$48 million ,$9 million , and$20 million , respectively, in charges related to inventory in our Gaming business segment. The 2020 charges are primarily due to the COVID-19 disruption impacting future demand combined with a continuing reassessment of our Gaming products strategy by the new Gaming business segment leadership. The total Gaming business segment net inventory as ofDecember 31, 2020 was$124 million . See Note 7 for additional information. Allowance for Credit Losses Following the adoption of ASC 326 onJanuary 1, 2020 , the receivables allowance for credit losses are recognized based on our best estimate of the amount of expected credit losses in our existing receivables over the contractual term. Such an estimate requires consideration of any relevant available information, which begins with historical credit loss experience, consideration of current and expected conditions and market trends (such as general economic conditions, other microeconomic and macroeconomic considerations (including foreign currency impacts), geography, etc.) and reasonable and supportable forecasts that could impact the collectability of such receivables over the contractual term individually or in the aggregate. Based on these risk factors, we place our customers in different tranches to determine which customers should be assessed on an individual basis and which customers should be assessed on a more general basis. Any changes in circumstances relating to these factors could result in material increase or decrease to our receivables allowance for credit losses and such changes could be material, particularly impacting our Gaming segment receivables. Unfavorable economic conditions exacerbated by COVID-19 impacted and could continue to impact the timing and amount of cash receipts from our Gaming customers. Additionally and as described in Note 6, we have certain concentrations of outstanding Gaming segment receivables, primarily in the LATAM region where we historically provided extended payment term financing for product purchases, as is a common industry practice. These factors (including any future changes) collectively may increase our collection risks and materially impact our estimate of receivables allowance for credit losses. We increased our allowance for credit losses by$56 million for the year endedDecember 31, 2020 . This increase was primarily related to specific Gaming customers in LATAM as certain of those customers had extended payment term financing, and/or were particularly affected by COVID-19 prolonged closures of gaming operations establishments generally and credit deterioration from macroeconomic conditions of the region, including foreign currency impacts. We had a total of$380 million in Gaming segment receivables, net as ofDecember 31, 2020 of which$54 million relates to the LATAM region. See Note 6 for additional information.Goodwill and other indefinite-lived intangibles - impairment assessment We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on at least an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. We have ten reporting units: Instant Products,U.S. Lottery Systems, International Lottery Systems, SG Gaming, legacy U.K. Gaming ,Casino Management Systems , Table Products, SciPlay, Digital sports and platform and Digital gaming and other.Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an 69 -------------------------------------------------------------------------------- operating segment) annually onOctober 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, or sale or disposition of a significant portion of a reporting unit.Goodwill is reviewed for impairment using either a qualitative assessment or a quantitative one-step process. If we perform a qualitative assessment and determine that the fair value of a reporting unit more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the quantitative process, we are required to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows and a market approach, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, we recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit's estimated fair value. 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. Performance of the qualitative goodwill assessment requires judgment in identifying and considering the significance of relevant key factors, events and circumstances that affect the fair value or carrying amount of the reporting units. The estimates used to calculate the fair value of a reporting unit as a part of the quantitative goodwill assessment change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment, if any, for each reporting unit. We performed our annual goodwill impairment test as ofOctober 1, 2020 using both a quantitative assessment (for our Gaming and Digital segments reporting units and International lottery systems reporting unit) and a qualitative assessment (for our Instant product and SciPlay reporting units). The test results for all reporting units for which we performed a quantitative assessment indicated the fair values significantly exceeded (greater than 20%) the carrying value. As described in the "Business Overview - Highlights including recent developments - Impacts of COVID-19" section above, the COVID-19 pandemic has 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. While our 2020 annual goodwill impairment test did not indicate impairment, continued uncertainty as to the ultimate impact of the COVID-19 disruptions and pace of recovery described above, we believe there to be an elevated risk of goodwill impairment for the Gaming segment reporting units if the adverse impact of the disruptions or overall recovery for our Gaming reporting units sustains over an extended period of time. The following table summarizes goodwill balances and cushions (excess of fair value over carrying value) based on the latest annual goodwill test for all of our Gaming segment reporting units: December 31, 2020 Goodwill FY 2020 Goodwill Testing Reporting Unit Balance (in millions) Percentage Cushion SG Gaming$1,097 32% U.K. Gaming 129 24% Casino Management Systems 560 42% Table Products 639 45% Discounted cash flow analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the relative risk of achieving those cash flows, and 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. Specifically, our annual goodwill impairment test as ofOctober 1, 2020 , included our estimated impacts of COVID-19 disruptions, which for our Gaming segment reporting units assumed returning cash flows to a normal level in 2023, using market multiples for 2023 and assigning more weight to the income approach. Our analysis also includes comparison of our reporting units' total estimated fair values to the total enterprise value and assessing the implied control premium, supporting the reasonableness of our concluded estimated fair values determined under the combination of income and market approaches as of our testing date. Q1 2020 Legacy U.K. Gaming Impairment Charge 70 -------------------------------------------------------------------------------- A substantial portion of our legacy U.K. Gaming reporting unit revenue comes fromLadbrokes Coral Group (acquired byEntain (formerly GVC Holdings PLC) inMarch 2018 ), which operates LBOs in theU.K. OnApril 1, 2019 , the maximum stakes limit on fixed-odds betting terminals was reduced from £100 to £2. 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 ofOctober 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, we determined that the COVID-19 disruptions reached a level that triggered a quantitative test for our legacy U.K. Gaming reporting unit. Accordingly, we performed a quantitative impairment test by comparing the fair value of our legacy U.K. Gaming reporting unit to its carrying value, including goodwill. 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 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, we recognized a partial impairment charge totaling$54 million during the first quarter of 2020, which is the amount by which the carrying value exceeded the estimated fair value. We test our other indefinite-lived assets annually for impairment in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying value or when circumstances no longer continue to support an indefinite useful life. An impairment test may be qualitative or quantitative, depending on the circumstances. When a quantitative test is performed, fair value is determined using a discounted cash flow approach where projections of future cash flows generated by those assets are discounted using an estimated discount rate. We estimate the fair value of our indefinite-lived assets using the relief-from-royalty method, which uses several significant assumptions, including an assumed royalty rate, revenue projections that consider both historical and estimated future results, general economic and market conditions, and the impact of planned business and operational strategies. If the indicated fair value of the indefinite-lived asset exceeds its carrying value, the asset is not considered impaired. In the event that the fair value of the indefinite-lived asset is less than its carrying value, the difference is recorded as an impairment charge. Long-lived assets and finite-lived intangible assets - impairment assessment We evaluate the recoverability of intangible assets and other long-lived assets with finite useful lives by comparing the carrying value of the asset group to the estimated undiscounted future cash flows that we expect the asset to generate if events or changes in circumstances indicate that these assets are not recoverable. Any impairment is measured as the amount by which the carrying value of the asset exceeds the estimated fair value. The fair value is determined using a discounted cash flow approach where projections of future cash flows generated by those assets are discounted using an estimated discount rate. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows. We also make judgments about the remaining useful lives of intangible assets and other long-lived assets that have finite lives. While we believe our estimates of future operating results and projected cash flows are reasonable, any significant adverse changes in key assumptions (i.e., adverse change in the extent or manner which an asset (asset group) is being used or expectation that, more likely than not, an asset (asset group) will be sold or otherwise disposed of before the end of its useful life) or adverse changes in economic and market conditions may cause a change in our evaluation of recoverability or our estimation of fair value and could result in an impairment charge that could be material to our financial statements. Income taxes We are subject to the income tax laws of the many jurisdictions in which we operate. These tax laws are complex, and the manner in which they apply to our facts is sometimes open to interpretation. In establishing the provision for income taxes, we must make judgments about the application of these inherently complex tax laws. Despite our belief that our tax return positions are consistent with applicable tax laws, we believe that taxing authorities could challenge certain positions. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. We record tax benefits for uncertain tax positions based upon management's evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more likely than not of being sustained based on technical merits. The tax benefit for positions meeting the recognition threshold is measured as the largest benefit more likely than not of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Significant judgment is required in making these determinations, and adjustments to uncertain tax positions may be necessary to reflect actual taxes payable upon settlement. Adjustments related to positions impacting the effective tax rate affect the provision for income taxes. Adjustments related to positions impacting the timing of deductions impact deferred tax assets and liabilities. 71 -------------------------------------------------------------------------------- Our income tax positions and analysis are based on currently enacted tax law. Future changes in tax law could significantly impact the provision for income taxes, the amount of taxes payable, and the deferred tax asset and liability balances in future periods. Deferred tax assets generally represent tax benefits for tax deductions or credits available in future tax returns. Certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, available carry-backs and carry-forwards, reversing temporary differences and available prudent and feasible tax planning strategies. We have recorded valuation allowances in certain jurisdictions to reduce our deferred tax assets to the amounts that are more likely than not to be realized. Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, we record or adjust the related valuation allowance in the annual period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in the provision for income taxes. Legal contingencies We are subject to certain legal proceedings, demands, claims and threatened litigation that arise in the normal course of our business. We review the status of each significant matter quarterly and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we record a liability and an expense for the estimated loss. If we determine that a loss is reasonably possible and the range of the loss can be reasonably estimated, then we disclose the range of the possible loss. Significant judgment is required in the determination of whether a potential loss is probable, reasonably possible, or remote and in the determination of whether a potential exposure is reasonably estimable. Our accruals are based on the best information available at the time. As additional information becomes available, we reassess the liabilities and disclosures related to our pending claims and litigation and may revise our estimates. Potential legal liabilities and the revision of estimates of legal liabilities could have a material impact on our results of operations, cash flows and financial position. For discussion of our legal proceedings, see Note 21, which is incorporated by reference into Item 3 of this Annual Report on Form 10-K. LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL Cash and available liquidity As ofDecember 31, 2020 , 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 SciPlay Revolver (for our SciPlay business segment) discussed below under "Credit Agreement and Other Debt". The following table summarizes our cash and available revolver capacity as ofDecember 31, 2020 : SGC (in millions) (excluding SciPlay) SciPlay Total Cash and cash equivalents $ 747 $ 269$ 1,016 Revolver capacity 650 150 800 Revolver capacity drawn or committed to letters of credit (547) - (547) Total $ 850 $ 419$ 1,269 OnMay 7, 2019 , SciPlay completed an IPO for an 18.0% minority interest in our Social gaming business, after giving effect to the underwriters' partial exercise of their over-allotment option onJune 4, 2019 . We received$312 million in net proceeds from the offering (net of$30 million used by SciPlay to pay the offering fees and the balance retained by SciPlay for general corporate purposes). Subsequent to the IPO,SciPlay Holding Company, LLC ("SciPlay Holding "), a subsidiary of SciPlay, entered into a$150 million revolving credit agreement that matures inMay 2024 . These proceeds enabled us to reduce our revolving credit facility and other debt in 2019. In 2018, the amount of dividends declared and paid by SciPlay to SG Gaming was$77 million . At this time, we do not expect SciPlay to declare or pay any cash dividends, other than tax distributions and certain cash distributions related to the impact of taxes pursuant to the TRA, of which payments totaling$15 million were made for the year endedDecember 31, 2020 . Sources of liquidity As ofDecember 31, 2020 , we had a total revolver net undrawn revolver balance of$253 million that remains available for future needs if necessary. During 2020 we drew$530 million under SGI's revolving credit facility and repaid$190 million . In February of 2021, we made voluntary payment of$100 million on SGI's revolving credit facility. 72 -------------------------------------------------------------------------------- OnMay 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 quarter endingMarch 31, 2021 . The Covenant Relief Period was subsequently extended toMarch 31, 2022 onOctober 8, 2020 . See Note 1 for additional details regarding the Credit Agreement Amendment and Credit Agreement Extension Amendment. 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 and onJuly 17, 2020 we redeemed all$341 million of our outstanding 2021 Notes (see above and Note 15). Total cash held by our foreign subsidiaries was$173 million and$112 million as ofDecember 31, 2020 andDecember 31, 2019 , respectively. We believe that substantially all cash held outside theU.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. For Gaming operations, to attract and retain gaming operations customers, we seek to develop and incorporate the newest technology within our equipment and products, which may require additional capital expenditures. Similarly, in connection with a renewal or bid of a Lottery systems contract, a customer may seek to obtain new equipment or impose new service requirements, which may require upfront capital expenditures in order to retain or win the contract. For additional information regarding our cash needs and related risks, see "Risk Factors" under Part I, Item 1A. Our Lottery segment's ability to generate revenue and 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 were negatively affected by the COVID-19 pandemic. If we do not have adequate liquidity or are unable to obtain financing for these upfront cash payments on favorable terms or at all, we may not be able to bid on certain contracts, which could restrict our ability to grow and have a material adverse effect on our results of operations, cash flows and financial condition. Our ability to make payments on and to refinance our indebtedness and other obligations depends on our ability to generate cash in the future. From time to time we have also 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. 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 or additional financing arrangements, which sources of funds may not necessarily be available on terms acceptable to us, or at all. For additional information regarding our cash needs and related risks, see "Risk Factors" under Part I, Item 1A. In addition,U.S. lottery customers generally require service providers to provide performance bonds in connection with the relevant contract. As ofDecember 31, 2020 , our outstanding performance bonds totaled$253 million . Our ability to obtain performance bonds on commercially reasonable terms is subject to our financial condition and 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 I, Item 1A. Cash Flow Summary (in millions) Year Ended December 31, Variance 2020 2019 2020 vs. 2019 Net cash provided by operating activities $ 471$ 546 $ (75) Net cash used in investing activities (173) (263) 90 Net cash provided by (used in) financing activities 463 (129) 592
Effect of exchange rates on cash, cash equivalents and restricted cash
7 1 6
Increase in cash, cash equivalents and restricted cash $ 768
$ 155 $ 613 Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Cash flows from operating activities Net cash provided by operating activities decreased in 2020 primarily due to lower cash earnings impacted by the 73 -------------------------------------------------------------------------------- COVID-19 business disruptions. The changes in our working capital accounts for the year endedDecember 31, 2020 were primarily driven by the following: •$121 million favorable change in receivables due to timing of collections and lower billing primarily associated with Gaming segment receivables; •$14 million favorable change in inventory due to timing of orders and shipments; •$35 million unfavorable change in other current assets and liabilities primarily related to increases in various prepaid expenses and timing of contract assets and liabilities; •$60 million favorable change in accounts payable and accrued liabilities primarily as a result of the timing of expenditures. Cash flows from investing activities Net cash used in investing activities decreased primarily due to lower capital expenditures and proceeds received from the sale of certain properties inChicago , which was partially offset by SciPlay's acquisition of Come2Play. 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 by financing activities increased primarily due to the$340 million net draw on SGI's revolving credit facility, while the prior year included$342 million in proceeds from the sale of SciPlay common stock, which were partially offset by$253 million in net payments on long-term debt and$23 million in debt issuance, deferred financing and offering costs. Additionally, during 2020, we received net proceeds of$543 million from the issuance of 2025 Senior Unsecured Notes partially offset by$1 million in debt issuance and offering costs and$341 million in net payments for the redemption of the 2021 Notes. Credit Agreement and Other Debt For additional information regarding our credit agreement and other debt, interest rate risk and interest rate hedging instruments, see "Contractual Obligations" in this Item 7 below, in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" and in Note 15 and Note 16. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K. Contractual Obligations Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness, contractual purchase obligations and future minimum operating lease obligations and other long-term liabilities as set forth in the table below as ofDecember 31, 2020 : 74 --------------------------------------------------------------------------------
(in millions) Cash Payments Due In Less than 1 More than 5 Total year 1 - 3 years 4 - 5 years years Debt, face value (1)$ 9,407 $ 44 $ 89$ 6,269 $ 3,005 Interest payments (2) 2,318 458 883 683 294 License royalty minimum guaranteed payments 178 45 74 59 - Purchase obligations (3) 183 183 - - - Operating leases (4) 116 30 44 27 15 Other obligations (5) 48 17 6 8 17 Total contractual obligations$ 12,250 $ 777
(1) See Note 15 for information regarding long-term and other debt, including
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