LIGHT & WONDER, INC.
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.
On September 27, 2021 , we entered into a definitive agreement to sell our Sports
Betting business to Endeavor in a cash and stock transaction. On October 27,
2021 , we entered into a definitive agreement to sell our Lottery business to
Brookfield.
We have reflected the financial results of our Lottery and Sports Betting
businesses as discontinued operations in our consolidated statements of
operations and reflected the assets and liabilities of these businesses as held
for sale in our consolidated balance sheets, for all periods presented.
Accordingly, retrospective reclassifications have been made to prior period
financial statements and disclosures to present the Lottery and Sports Betting
businesses as discontinued operations. See Note 1 and Note 2 for additional
information.
We report our results of continuing operations in three business
segments-Gaming, SciPlay and iGaming (former Digital business segment excluding
Sports Betting)-representing the different products and services we expect to
continue to provide post-divestitures. As a result of our strategic changes and
Pending Divestitures, our Chief Operating Decision Maker re-assessed how he
evaluates the operating results and performance of our Gaming business segment
that resulted in an immaterial change to the Gaming business Segment AEBITDA
calculation, which is our primary measure of the Gaming business segment
performance measure of profit or loss. The Gaming business segment AEBITDA, has
been recast for all periods presented herein to exclude EBITDA from equity
investments to align with this new view. See Note 3 for additional information.
Unless otherwise noted, amounts, percentages and discussion for all periods included below reflect the results of operations and financial condition from our continuing operations.
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 in our continuing operations primarily includes supplying game content and gaming machines, CMSs and table game products and services to licensed gaming entities; providing social casino and other mobile games to retail customers; and providing a comprehensive suite of digital RMG, distribution platforms, content, products and services to various gaming entities. Our portfolio of revenue-generating activities in the discontinued operations primarily includes providing instant and drawbased lottery products, lottery systems and lottery content and services to lottery operators along with providing sports wagering solutions 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
Strategic Review Update
OnJune 29, 2021 , we announced that the Company (1) with the support of its Board of Directors, completed its strategic review, which reaffirmed our strategy to become a content-led growth company with a focus on content and digital markets; and (2) intended to divest the Lottery and Sports Betting businesses creating the path to significantly de-lever and position the Company for enhanced growth. In September and October of 2021, we signed definitive agreements to divest these businesses. The divestiture of the Lottery business is now expected to close by the end ofMarch 2022 while the sale of the Sports Betting business is on track to be completed in the second quarter of 2022, both subject to applicable regulatory approvals and customary conditions. These businesses held for sale are included in our covenant compliance requirements until disposed of and all of their related cash flows are available to the Company without restriction. 54 -------------------------------------------------------------------------------- OnJuly 15, 2021 , we submitted a proposal to SciPlay's board of directors to acquire all the outstanding equity interests in SciPlay not already owned by us (approximately 19%). Under our proposal, all SciPlay shareholders (other than SGC and our subsidiaries) would have received 0.250 shares of our common stock for each share of SciPlay Class A common stock they own. OnDecember 22, 2021 , we withdrew ourJuly 15, 2021 offer. As ofDecember 31, 2021 , we continue to own 81% economic interest and 98% voting interest in SciPlay. OnMarch 1, 2022 , we announced our intention to formally change our name toLight & Wonder, Inc. and that we would immediately begin doing business asLight & Wonder, Inc. The legal nameScientific Games Corporation is expected to be legally changed toLight & Wonder, Inc. during the second quarter of 2022, upon satisfying all applicable legal requirements in the state ofNevada , where the Company is incorporated. In connection therewith, the ticker symbol for the Company's common stock will be changed from SGMS to LNW, at the time of the legal name change. The Company's common stock will continue to be listed onThe NASDAQ Stock Market .
Impacts of COVID-19 on Business Operations, Financial Results and Liquidity
As also described in the "Description of the Business and Summary of Significant Accounting Policies - Impact of COVID-19" in Note 1, COVID-19 disruptions continue to impact our results of operations and particularly certain aspects of our Gaming business segment operations due to the widespread closures of gaming operation establishments and restricted reopening of a substantial number of gaming operation establishments coupled with global economic uncertainty. While most gaming establishments have reopened globally and have begun to operate at full capacity, there is a continued risk of future COVID-related developments including new virus variants, such as the Delta or Omicron variants, that might impact Gaming business segment results. During the second half of 2021, we noted that theU.S. andU.K. markets have rebounded which has had a notable impact on our Gaming operations primarily due to the lifting of restrictions and further elevated by consumer pent up demand from prior periods resulting in higher gross gaming revenues. Our 2021 Gaming operations revenue also benefited from the FOBT recovery as described in the Consolidated Results section below. We continue to see fluctuations in infection rates and regulations for various regions along with ongoing domestic and international travel restrictions or warnings, social distancing measures, reduced operating capacity and an overall economic and general uncertainty regarding the magnitude and length of time that these disruptions will continue. These circumstances may change in the future and such changes could be material. We continue to assess the situation jurisdiction by jurisdiction, actively managing our cash flows and continuing to evaluate additional measures that may reduce operating costs and conserve cash to preserve liquidity as we execute on our strategic initiatives. For more information on the effects that COVID-19 has had on each of our business segments, refer to the individual business segment sections below. Our only financial maintenance covenant (excluding SciPlay's Revolver) is contained in SGI's credit agreement. As ofDecember 31, 2021 , our total available liquidity (excluding our SciPlay business segment, but including cash and cash equivalents totaling$44 million of the businesses held for sale as those are still available for our general use until a divestiture occurs) was$903 million , which included$638 million of undrawn availability under SGI's revolving credit facility. During 2021, we made voluntary payments on SGI's revolving credit facility totaling$595 million , leaving the entire revolving credit facility undrawn and available as ofDecember 31, 2021 . See Note 15 for additional details regarding SGI's credit agreement.
Acquisitions
During 2021, we acquired several businesses to expand the portfolio and content for each of our three continuing business segments and businesses held for sale, as noted below (see Note 10 for additional information).
Acquisitions Related to Continuing Operations
•In July of 2021, SciPlay acquired privately-held Koukoi.
•In August of 2021, we acquired privately-held Lightning Box, which has been included in our iGaming business segment.
•In October of 2021, we acquired ACS's table game solution PlayOn™, subsequently renamed to AToM™, which has been included in our Gaming business segment.
•In November of 2021, we acquired Authentic Gaming, a premium provider of live casino solutions, which has been included in our iGaming business segment.
•In December of 2021, we acquired
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•In March of 2022, SciPlay acquired privately held Alictus Yazilim Anonim
?irketi ("Alictus"), a
Acquisitions Related to Discontinued Operations
•In May of 2021, we acquired SportCast, which has been included in the Sports Betting business.
•In September of 2021, we acquired Sideplay, which has been included in the Lottery business.
OnFebruary 25, 2022 , our Board of Directors approved a share repurchase program under which the Company is authorized to repurchase, from time to time throughFebruary 25, 2025 , up to an aggregate amount of$750 million of our outstanding common stock over a three-year period. Repurchases may be made at the discretion of the Transaction Committee of the Board of Directors through one or more open market transactions, privately negotiated transactions, accelerated share repurchases, issuer tender offers or other derivative contracts or instruments, or a combination of the foregoing.
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.
Our ability to execute on our new strategic initiatives. The Company recently completed a comprehensive strategic review and is in the process of executing on the new strategy in becoming the leading, cross-platform global game company (more fully described in in Part I, Item 1 above). Successful execution on our strategy might present unexpected challenges and uncertainties, including actions that will result in increased restructuring charges as we incur integration and optimization expenses to execute and facilitate our strategies including costs necessary to complete the Pending Divestitures. COVID-19. See above "Business Overview - Highlights, including recent developments - Impacts of COVID-19 on Business Operations, Financial Results and Liquidity" for uncertainties regarding the pandemic that significantly impacted our business and result of operations during 2020 and, to a lesser extent, continue to impact our business and results of operations during 2021. Our high amount of leverage. We are currently 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 historically 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 during 2020. 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. Our iGaming business segment is facing challenges related to expanding our market share within new and emerging markets, 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. 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. 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 56
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We report our operations in three business segments - Gaming, SciPlay and iGaming - representing our different products and services. See Notes 3 and 4 for additional business segments information.
CONSOLIDATED RESULTS
(in millions) Year Ended December 31, Variance
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total revenue $ 2,153 $ 1,699 $ 2,388 $ 454 27 % $ (689) (29) %
Total operating expenses 2,043 1,944 2,098 99 5 % (154) (7) %
Operating income (loss) 110 (245) 290 355 (145) % (535) (184) %
Net loss from continuing (294) (804) (377) 510 63 % (427) (113) %
operations before income taxes
Net income (loss) from 24 (801) (330) 825 103 % (471) (143) %
continuing operations
Net income from discontinued 366 253 212 113 45 % 41 19 %
operations, net of tax
Net income (loss) attributable 371 (569) (130) 940 165 % (439) (338) %
to SGC
Revenue
[[Image Removed: sgms-20211231_g3.jpg]]
Year Ended
As described in the "Business Overview - Highlights, including recent developments - Impacts of COVID-19 on Business Operations, Financial Results and Liquidity" section above, our total revenue, and primarily revenues for the Gaming business segment, was significantly impacted in the prior period. Although these business disruptions continued to adversely impact certain aspects of our Gaming revenue in the first half of 2021, the re-opening of venues, lifting of restrictions, increased travel, and distribution of vaccines along with pent up consumer demand have caused the Gaming business segment to see more activity and thereby have helped drive 2021 revenue. Particularly, our Gaming operations revenue demonstrated strong growth driven by strong performance and increased market share. Machine and table product revenue continue to be impacted by reduced capital expenditures of casino operators coupled with ongoing COVID-19 restrictions impacting casino operating capacity. Additionally, Gaming operations revenue benefited from$44 million U.K. FOBT recovery received from certainU.K. customers related to a 2020 U.K. court ruling associated with overcharging of value-added tax for gaming operators that consequently reduced our net gaming revenues in those affected prior periods related to these customers and arrangements. SciPlay revenue increased by$24 million or 4% primarily due to elevated player engagement from continued COVID-19 prevention measures during the first half of 2021 in addition to the introduction of new content and features resulting in increased paying player interaction. 57 --------------------------------------------------------------------------------
iGaming revenue increased by
Our 2021 consolidated revenues were impacted by
Operating expenses
Year Ended December 31, Variance
(in millions) 2021 2020 2021 vs. 2020
Operating expenses:
Cost of services(1) $ 365 $ 338 $ 27 8 %
Cost of product sales(1) 244 272 (28) (10) %
SG&A 679 627 52 8 %
R&D 190 148 42 28 %
D&A 398 449 (51) (11) %
Goodwill impairment - 54 (54) nm
Restructuring and other 167 56 111 198 %
Total operating expenses $ 2,043 $ 1,944 $ 99 5 %
nm = not meaningful.
(1) Excludes D&A.
Cost of revenue
Cost of revenue for the year ended December 31, 2021 remained relatively flat as
a result of higher revenue due to the global economy beginning to recover as the
easing of COVID-19 restrictions continues, which was offset by the prior year
period including approximately $48 million in Gaming cost of product inventory
valuation charges for excess and obsolete inventory.
SG&A
SG&A increased primarily due to higher salaries, wages and other compensation of$39 million as a result of the prior year experiencing temporary austerity measures implemented to reduce costs during the COVID-19 disruptions, along with higher stock-based compensation expenses of$57 million driven by the acceleration of the expense as a result of attainment of certain targets for some of our directors coupled with the new equity awards issued at a higher fair value given the increase in our stock price compared to the prior period, and overall higher bonus incentive reflective of meeting and exceeding current year targets, of which portion will be paid in equity. This increase was partially offset by the prior period inclusion of$54 million allowance for credit loss charges reflecting the credit deterioration and credit weakness in our Gaming segment'sLatin America receivables primarily due to the COVID-19 disruptions.
R&D
R&D increased primarily due to higher salaries and benefits reflective of our increased investment in development and growth coupled with the prior period reflecting lower operating costs as a result of the company-wide austerity measures implemented to reduce costs during the COVID-19 disruptions.
D&A
D&A decreased primarily due to certain gaming equipment, intangible assets and software primarily associated with historical acquisitions becoming fully depreciated and amortized in the prior year period, which was partially offset by approximately$10 million related to accelerated amortization related to certain of our legacy trade names triggered by ongoing corporate wide re-branding (see Note 11 for additional details). The impact of accelerated amortization expense related to these legacy trade names is expected to continue over the next six quarters in the quarterly amount of approximately$16 million , however this estimate is subject to change and could accelerate or decelerate depending on the facts and circumstances related to our re-branding initiatives.
Goodwill impairment recorded in the prior year was related to our U.K. Gaming reporting unit, which was recorded during the first quarter of 2020. See Note 11 for additional details onGoodwill impairment charge.
Restructuring and other
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The increase in R&O is primarily due to charges related to the announced sales
of the Lottery and Sports Betting businesses, and to a lesser extent business
integration and optimization initiatives implementation costs primarily
associated with efficiency programs coupled with the legal settlement charge of
$25 million associated with the Washington State Matter (see Note 20), which
were partially offset by higher COVID-19 business disruption charges in the
prior year. See Note 5 for additional details.
Other Factors Affecting Net Income (Loss) Attributable to SGC Comparability
(in millions) Year EndedDecember 31 ,
Factors Affecting Net Income (Loss)
2021 2020 2021 vs. 2020
Gain (loss) on $ 41 $ (51) Gains and (losses) are attributable to remeasurement
remeasurement of debt of the 2026 Secured Euro Notes and 2026 Unsecured
Euro Notes and reflect changes in the Euro vs. the
U.S. Dollar
foreign exchange rates between the
periods. Approximately 69% of our Euro Notes were
not treated as a net investment hedge in 2021
compared to 81% in 2020.
Other income 33 (4) The increase is primarily due to higher impact of
(expense), net foreign
currency exchange rates coupled with a
million gain on sale of certain assets and as a
result of acquisitions included in the current year.
Income tax benefit 318 3 The increase is primarily due to the release of the
valuation allowance in 2021 primarily related to the
Pending Divestitures (see Note 19).
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,
2021 2020
% Consolidated F/X Impact on % Consolidated F/X Impact on
Revenue Revenue Revenue Revenue Revenue Revenue
Foreign Currency:
British Pound Sterling $ 175 8 % $ 14 $ 143 8 % $ 2
Euro 129 6 % 7 133 8 % -
Discontinued operations
The $132 million or 13% increase in 2021 revenue is primarily due to higher
Lottery instant products and systems revenue due to the impact of COVID-19 on
the prior year results coupled with the large lottery jackpots in the first half
of 2021 driving both instant products sales and system increases, coupled with
higher revenue from the Sports Betting business due to continued growth and
expansion in the U.S. sports-betting market. These increases in revenue
primarily drove the increase in net income from discontinued operations, net of
tax by $113 million or 45%.
Year Ended
As described in the "Business Overview - Highlights, including recent developments - Impacts of COVID-19 on Business Operations, Financial Results and Liquidity" section above, our 2020 total revenue, specifically revenues for the Gaming business segment, was adversely impacted by COVID-19 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. SciPlay revenue increased by$116 million or 25% 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 of Jackpot Party® Casino, Gold Fish® Casino, Quick Hit® Slots, and MONOPOLY® Slots.
iGaming revenue increased by
Our 2020 consolidated revenues were impacted by
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Operating expenses
Year Ended December 31, Variance
(in millions) 2020 2019 2020 vs. 2019
Operating expenses:
Cost of services(1) $ 338 $ 356 $ (18) (5) %
Cost of product sales(1) 272 390 (118) (30) %
SG&A 627 619 8 1 %
R&D 148 166 (18) (11) %
D&A 449 542 (93) (17) %
Goodwill impairment 54 - 54 nm
Restructuring and other 56 25 31 124 %
Total operating expenses $ 1,944 $ 2,098 $ (154) (7) %
nm = not meaningful.
(1) Excludes D&A.
Cost of revenue
Cost of revenue for the year ended December 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 ended
December 31, 2020 Cost of product sales included 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 8).
SG&A
SG&A increased primarily due to 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 7). The SG&A increase was partially offset by 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$45 million for 2020.
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$18 million for 2020.
D&A
D&A decreased primarily due to certain Gaming intangible assets and software becoming fully amortized in the prior year.
Restructuring and other
The increase is primarily due to severance and related charges associated with
COVID-19 disruptions. See Note 5 for additional details on Restructuring and
other charges.
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--------------------------------------------------------------------------------Other Factors Affecting Net Loss Attributable to SGC Comparability
Factors
Affecting
(in millions) Year Ended December 31, 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
transactions consummated 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 (51) 9 (Losses) and gains are attributable to
remeasurement 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 benefit 3 47 The decrease is primarily due to 2019
reflecting a $50 million income tax benefit as
a result of the exception provision within ASC
740-20-45-7 (see Note 19 for additional
information).
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
F/X Impact on F/X Impact on
Revenue % Consolidated Revenue Revenue Revenue % Consolidated Revenue Revenue
Foreign Currency:
British Pound Sterling $ 143 8 % $ 2 $ 154 6 % $ (8)
Euro 133 8 % - 189 8 % (9)
Discontinued operations
The $13 million or 1% increase in revenue for the period is primarily due to
higher Lottery systems revenue, coupled with growth in the Sports Betting
business due to higher license revenue from key customer renewals and growth in
the U.S. market. Net income from discontinued operations, net of tax increased
by $41 million or 19% due to 2019 reflecting $50 million in higher tax expense
as a result of the exception provision within ASC 740-20-45-7 (see Note 19)
coupled with the higher revenues as described above.
See "Business Segments Results" below for a more detailed explanation of the
significant changes in our components of revenue within the individual segment
results of operations.
BUSINESS SEGMENT RESULTS
The types of products and services from which our segments derive their revenues
are further discussed in Notes 3 and 4. Certain financial information relating
to our segments, including segment revenue, AEBITDA and total assets and certain
financial information relating to our revenue derived from and assets located in
the U.S. and other geographic areas is included in Note 3.
GAMING
Our Gaming business segment designs, develops, manufactures, markets and distributes a comprehensive portfolio of gaming content, 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. 61 --------------------------------------------------------------------------------
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. and Canada 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 the U.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 Spin® 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
the U.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.
•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 in Washington , Florida , Alabama and Oklahoma . We receive either a fixed
daily fee or a percentage of the Net win generated by the gaming
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--------------------------------------------------------------------------------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 or subscription arrangements to our PTG content library. 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 "Business Overview - Highlights, including recent developments - Impacts of COVID-19 on Business Operations, Financial Results and Liquidity" section above for a description of the COVID-19 impact on our Gaming business segment, which had an adverse effect on our results of operations and cash flows in 2020 and, to a lesser extent, continuing into 2021. Our results of operations and cash flows are recovering as social distancing measures (including reduced floor capacities, table play customer limitations and reduction of slot machines available for play) have generally been rolled back, however some measures have been extended or reimposed as infections increase due to the new virus variants. We are starting to see an increase in the demand for our Gaming products as the easing of restrictions continues and gaming operators are beginning to return to pre-COVID levels. Particularly, we are seeing strong demand and orders, however we are experiencing some supply chain challenges that could impact our ability to meet demand for our products and delay the timing of fulfillment of these orders and consequently the timing of revenue recognition. Additionally, we noted that theU.S. andU.K. markets have rebounded which has had a notable impact on our Gaming operations primarily due to the lifting of restrictions and further elevated by consumer pent up demand from prior periods resulting in higher gross gaming revenues. Our Gaming operations installed base at period end increased forU.S. andCanada from 30,105 in 2020 to 30,514 in 2021 as a result of COVID-19 disruptions in the prior year and current year recovery. Alternatively, International ending installed base units decreased from 32,061 in 2020 to 29,375 in 2021 due to the closure of certain LBOs in theU.K. that haven't yet recovered from the pandemic along with the reduction of some underperforming units inGreece andLatin America . Our Gaming business segment leadership team has developed and implemented a strategy to reverse the declining install base trend in prior periods, which is starting to show positive results, but a meaningful reversal of this trend is expected to take longer than a year. Gaming operations generated 45%, 36% and 34% of total Gaming segment revenues for 2021, 2020 and 2019, respectively. Additionally, our 2021 Gaming revenues benefited$44 million from a court ruling associated with overcharging of value-added tax for gaming operators in prior periods that consequently reduced our net gaming revenues related to these customers and arrangements. 63 -------------------------------------------------------------------------------- In October of 2021, we acquired ACS's table game solution PlayOnTM, a cashless product line that provides players with a debit solution at live table games. PlayOnTM was subsequently renamed AToMTM (see Note 10).
Results of Operations and Key Performance Indicators
[[Image Removed: sgms-20211231_g4.jpg]][[Image Removed: sgms-20211231_g5.jpg]][[Image Removed: sgms-20211231_g6.jpg]]
1 - The year ended
business segment, which are no longer being paid as of
IP License Agreement.
2 - We made an immaterial change to the prior period Gaming business segment AEBITDA
calculation, which is our primary measure of the Gaming business segment performance
measure of profit or loss. Prior period Gaming business segment AEBITDA has been recast to
exclude EBITDA from equity investments to align with this new view. This change decreased
Gaming business segment AEBITDA by
31, 2020 and 2019, respectively. See Note 3 for additional information.
(in millions) Year Ended December 31, Variance
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenue:
Gaming operations $ 601 $ 332 $ 597 $ 269 81 % $ (265) (44) %
Gaming machine sales 360 312 609 48 15 % (297) (49) %
Gaming systems 204 171 295 33 19 % (124) (42) %
Table products 156 111 247 45 41 % (136) (55) %
Total revenue $ 1,321 $ 926 $ 1,748 $ 395 43 % $ (822) (47) %
F/X impact on revenue $ 15 $ 3 $ (14) $ 12 (400) % $ 17 (121) %
KPIs:
U.S. and Canada units:
Installed base at period end 30,514 30,105 31,486 409 1 % (1,381)
(4) %
Average daily revenue per unit
77 % $ (15.10) (39) %
International units(1): Installed base at period end 29,375 32,061 34,370 (2,686) (8) % (2,309) (7) % Average daily revenue per unit$ 9.34 $ 5.07 $ 10.57 $ 4.27 84 %$ (5.50) (52) % Gaming machine sales:U.S. andCanada new unit shipments 11,876 9,987 19,512 1,889 19 % (9,525) (49) % International new unit shipments 6,327 12,591 10,810 (6,264) (50) % 1,781 16 % Total new unit shipments 18,203 22,578 30,322 (4,375) (19) % (7,744)
(26) %
Average sales price per new unit
38 % $ (5,165) (30) %
(1) Excludes the impact of game content licensing revenue.
Year Ended
64
--------------------------------------------------------------------------------Revenue
As noted above, Gaming revenue was adversely affected in 2020 which continued to a lesser extent into 2021, but is recovering as social distancing measures are being rolled back, although some measures continue to be enforced in certain jurisdictions, as noted above. While the restrictions continue to be eased and removed in some geographies, certain mitigation measures have been reintroduced as a result of new virus variants and are expected to continue for an indeterminate amount of time, which will continue to affect consumer behavior, and thus, we continue to see some impact on our Gaming segment.
Gaming Operations
Gaming operations revenue increased primarily due to the significant impact of COVID-19 disruptions on the prior year period, as described in the Consolidated Results - Revenue section above, coupled with strong growth, which approached 2019 levels as a result of strong product performance and increased market share. Gaming operations had a 409-unit increase in theU.S. andCanada installed base along with increases in average daily revenue per unit of$18.15 for theU.S. andCanada units and$4.27 for the International units, respectively, which were all primarily caused by the COVID-19 disruptions in the prior year and current year recovery. Additionally, International ending installed base units decreased by 2,686-units primarily due to the closure of certain LBOs in theU.K. that haven't yet recovered from the pandemic along with the reduction of some underperforming units inLatin America and reducing our footprint for certain low yield operations inGreece . Additionally, Gaming operations revenue for the year endedDecember 31, 2021 benefited from FOBT recovery in theU.K. as described in the Consolidated Results - Revenue section above. Gaming Machine Sales Gaming machine sales revenue increased primarily due to higher sales of replacement units in theU.S andCanada along with a higher average sales price per new unit. Additionally, the impact of COVID-19 on the prior year period as described above, resulted in lower unit shipments in the prior year period.
The following table summarizes Gaming machine sales changes:
Year Ended December 31 , Variance
2021 2020 2021 vs. 2020
Replacement units 10,385 5,957
4,428 74 %
Casino opening and expansion units 1,491 4,030
(2,539) (63) %
Total unit shipments 11,876 9,987
1,889 19 %
International unit shipments:
Replacement units 3,930 12,010
(8,080) (67) %
Casino opening and expansion units 2,397 581 1,816 313 % Total unit shipments 6,327 12,591 (6,264) (50) % Gaming Systems Gaming systems revenue increased primarily due to the COVID-19 disruptions in the prior year which resulted in fewer installations of new CMSs on fewer casino openings and expansions and lower hardware sales, systems maintenance revenue, and iVIEW® installations. Operating Expenses The decrease in operating expenses is primarily due to a number of charges in the prior year period, which did not recur in 2021. The prior period included (1) a$54 million in goodwill impairment charge related to our U.K. Gaming reporting unit, which was recorded during the first quarter of 2020; (2)$54 million in higher allowance for credit loss charges; and (3)$48 million in inventory valuation charges to cost of products.
AEBITDA
AEBITDA increased by$419 million or 175% primarily due to increased revenues coupled with$102 million in lower charges to allowance for credit losses and inventory during the year ended 2021 described above. AEBITDA margin for the year ended 2021 increased by 24 percentage points to 50%. 65 --------------------------------------------------------------------------------
Year Ended
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 "Business Overview - Highlights, including recent developments - Impacts of COVID-19 on Business Operations, Financial Results and Liquidity" section above. As gaming establishments began to reopen in June and openings have continued through the year, demand has steadily increased. 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 play) have had a negative impact on our Gaming revenue.
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 Ended December 31, Variance
2020 2019 2020 vs. 2019
U.S. and Canada unit shipments:
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 8), and (2)
$20 million increase in Restructuring and other charges. Additionally, the year
ended December 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 our Latin America receivables portfolio
specifically (see Note 7).
66
--------------------------------------------------------------------------------AEBITDA
AEBITDA decreased by$616 million or 72% 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 23 percentage points to 26%. SCIPLAY Our SciPlay business segment is a leading developer and publisher of digital games on mobile and web platforms. SciPlay operates in the social gaming market, which is characterized by gameplay online, on mobile phones or on tablets that are social and competitive, and self-directed in pace and session length. SciPlay generates substantially all of their revenue from in-app purchases in the form of coins, chips and cards, which players can use to play slot games, table games or bingo games. Players who install SciPlay's games receive free coins, chips or cards upon the initial launch of the game and additional free coins, chips or cards at specific time intervals. Players may exhaust the coins, chips or cards that they receive for free and may choose to purchase additional coins, chips or cards in order to extend their time of game play. Once obtained, coins, chips and cards (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play within SciPlay's apps. SciPlay distributes their games through various global social web and mobile platforms such as Facebook, Apple, Google, Amazon, and Microsoft. SciPlay currently offers a variety of social casino games, including Jackpot Party® Casino, Gold Fish® Casino, Quick Hit® Slots, 88 Fortunes® Slots, MONOPOLY® Slots and Hot Shot Casino®. Our SciPlay business segment continues to pursue its strategy of expanding into the casual games market. Current casual game titles include Bingo Showdown® and Solitaire PetsTM Adventure. SciPlay currently plans to launch an additional casual game in 2022. SciPlay's social casino games typically include slots-style game play and occasionally include table games-style game play, while our casual games blend solitaire-style or bingo game play with adventure game features. All of SciPlay's games are offered and played across multiple platforms, including Apple, Google, Facebook, Amazon, and Microsoft. In addition to SciPlay's internally created game content, SciPlay's content library includes recognizable, game content fromScientific Games . This content allows players who like playing land-based slot machines to enjoy some of those same titles in our free-to-play games. SciPlay has access toScientific Games' library of more than 1,500 iconic casino titles, including titles and content from third-party licensed brands such as MONOPOLY™, THE FLINTSTONES™, JAMES BOND™, and PLAYBOY™. SciPlay's access to this content, coupled with our years of experience developing in-house content, uniquely positions SciPlay to create compelling social games.
Current year update
As described in the "Business Overview - Highlights, including recent developments - Impacts of COVID-19 on Business Operations, Financial Results and Liquidity" section above, COVID-19 impacted our business in various ways. While many of SciPlay's current and potential players may have had significantly more free time to play SciPlay's games during the earlier stages of the pandemic, they may have also experienced sustained consumer unease and lower discretionary income. While the increased player engagement SciPlay experienced during the first half of 2020 as a result of the stay-at-home measures across theU.S. receded, SciPlay is still seeing higher player engagement as compared to the pre-COVID-19 time period. SciPlay is not able to predict and quantify the ultimate impact of further COVID-19 developments on their results of operations in future periods. Throughout 2021, SciPlay deployed significant updates across a number of their portfolio games, and it expects to deploy further updates to games in future years. While SciPlay has continued testing in certain international markets, it has not yet achieved the anticipated international market share growth. SciPlay plans to continue to explore opportunities and increase their investments in the expansion of international markets throughout 2022 and in future years. Despite a challenging 2020 comparable that heavily benefited from global stay-at-home measures, 2021 was another record year for total revenue. SciPlay's year over year total revenue growth of 4% was below the overall industry growth. This result is primarily attributable to the previously disclosed event isolated in Jackpot Party® Casino during the third quarter and a delayed release of the third version of Quick Hit® Slots. SciPlay's fourth quarter of 2021 compared to the third quarter of 2021 total revenue growth of 5% is above overall industry growth, showing a strong rebound from the above noted factors impacting Jackpot Party® Casino and Quick Hit® Slots. We believe that there is an opportunity for continued improvement of operating results in 2022 and beyond, as SciPlay continues to execute on their strategic game updates, enhanced analytics, international expansion, and an upcoming new game release. InJuly 2021 , SciPlay acquired privately held Koukoi, aFinland -based developer and operator of casual mobile games which allows us to expand our casual games portfolio (see Note 10).
In
67
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Challenge 3D,
Results of Operations and Key Performance Indicators
[[Image Removed: sgms-20211231_g7.jpg]][[Image Removed: sgms-20211231_g8.jpg]][[Image Removed: sgms-20211231_g9.jpg]].
1 - The year ended
Gaming business segment, which are no longer being paid as of
Agreement.
(in millions, except
ARPDAU) Year Ended December 31, Variance
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenue:
Mobile $ 537 $ 506 $ 391 $ 31 6 % $ 115 29 %
Web and other 69 76 75 (7) (9) % 1 1 %
Total $ 606 $ 582 $ 466 $ 24 4 % $ 116 25 %
KPIs:
Mobile Penetration(1) 89 % 87 % 83 % 2 pp nm 4 pp nm
Average MAU(2) 6.2 7.4 8.0 (1.2) (16) % (0.6) (8) %
Average DAU(3) 2.3 2.7 2.7 (0.4) (15) % - - %
ARPDAU(4) $ 0.71 $ 0.60 $ 0.48 $ 0.11 18 % $ 0.12 25 %
Average MPUs(5) 0.5 0.5 0.5 - - % - - %
AMRPPU(6) $ 95.26 $ 92.75 $ 82.19 $ 2.51 3 % $ 10.56 13 %
Payer Conversion Rate(7) 8.5 % 7.1 % 6.0 % 1.4 pp nm 1.1 pp nm
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.
(5) MPU = Monthly Paying Users is the number of individual users who made an in-game purchase during a particular month.
(6) AMRPPU = Average Monthly Revenue Per Paying User is calculated by dividing average monthly revenue by average MPUs for the applicable time period.
(7) Payer conversion rate is calculated by dividing average MPU for the period by the average MAU for the same period.
Year Ended
Revenue
Mobile platform revenue increased$31 million or 6 percent primarily due to elevated player engagement from continued COVID-19 prevention measures during the first quarter of 2021 compared to limited COVID-19-prevention measures for most of the first quarter of 2020 in addition to the introduction of new content and features resulting in increased paying player interaction. 68 --------------------------------------------------------------------------------
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 and average DAU decreased due to the turnover in users. Consequently, ARPDAU increased as a function of lower average DAU. AMRPPU increased while Average MPU was consistent with prior year due to introduction of new content and features resulting in increased paying player interaction.
All-time high payer conversion rate was due to the growing popularity of SciPlay's games while focusing on live operations to enhance game play and engagement
Operating Expenses
Operating expenses increased by$48 million primarily due to a$25 million legal settlement charge associated with theWashington State Matter (see Note 20), higher compensation and benefit costs related to increases in headcount, and an increase in D&A. AEBITDA
AEBITDA decreased by
Year Ended
Revenue
Mobile platform revenue increased$115 million or 29% primarily due to increased player engagement as a result of the stay at home measures acrossNorth America and other regions and ongoing popularity of Jackpot Party® Casino, Gold Fish® Casino, Quick Hit® 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 SciPlay's 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. The increase in payer conversion rates was due to the growing popularity of our games and increased interaction with the games by our players as a result of the introduction of new content and features into SciPlay's games.
Operating Expenses
Operating expenses increased by
AEBITDA
AEBITDA increased by
iGaming
We renamed our Digital business segment to iGaming business segment and the
presentation was recast for all periods to exclude the Sports Betting business
due to the pending sale, as described in Note 1. Our iGaming business segment
provides a comprehensive suite of digital gaming content, including digital RMG,
distribution platforms, content, products and services. We derive revenue from
our content aggregation platforms, including Open Gaming System, 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. 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. 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
69--------------------------------------------------------------------------------
We continue to expand our customer base and capitalize on growth in the
In August of 2021, we acquired Lightning Box, which expanded our iGaming content portfolio.
InNovember 2021 , we acquired Authentic Gaming, a premium provider of live casino solutions, providing a foothold in a key vertical and the fast growing part of the iGaming market. The acquisition enhances our premium product offering and is highly synergistic with our leading iGaming platform and our land-based and proprietary table game content
In
Results of Operations
[[Image Removed: sgms-20211231_g10.jpg]][[Image Removed: sgms-20211231_g11.jpg]][[Image Removed: sgms-20211231_g12.jpg]]
Year Ended
Revenue
Overall, iGaming revenue increased by$35 million or 18% due to iGaming market expansion in theU.S. and higher player activity including original content launches during 2021. The revenue increase was partially offset by the winding down of our SG Universe® services, which had a$10 million impact on our 2021 revenue or 7%.
Operating Expenses and AEBITDA
Operating expenses increased primarily due to higher costs of revenue correlated with the increase in revenue. AEBITDA increased by$17 million or 29% primarily due to the increase in revenue described above. AEBITDA margin for the year endedDecember 31, 2021 increased by 2.8 percentage points to 33%.
Year Ended
Overall iGaming revenue increased by
Operating Expenses and AEBITDA
Operating expenses increased primarily due to higher costs of revenue correlated with the increase in revenue. AEBITDA increased by$18 million or 45% primarily due to the increase in revenue (described above). AEBITDA margin for the year endedDecember 31, 2020 increased by 7 percentage points to 30%.
RECENTLY ISSUED ACCOUNTING GUIDANCE
For a description of recently issued accounting pronouncements, see Note 1.
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 with
70
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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;
•Goodwill, long-lived and other intangible assets - impairment assessment;
•Income taxes; and
•Legal contingencies.
Business Combinations
As described in Note 10, 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. For example, for the acquisitions completed during 2021,
if the intangible assets useful life was extended by two years the total annual
depreciation and amortization would decrease by approximately $3 million and if
the useful life was shortened by two years the total annual depreciation and
amortization would increase by approximately $7 million .
Revenue Recognition
Our revenue recognition policies described in Note 4 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 revenue that often contains multiple promised goods and services was$204 million for the year endedDecember 31, 2021 , or approximately 9 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 revenue that could be subject to this judgment and thus allocated to distinct performance obligations differently was a portion of$204 million for the year endedDecember 31, 2021 , or approximately 9 percent of consolidated revenue.
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
71
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allocation approach. As a result of the financial results of our Lottery and
Sports Betting businesses being reflected as discontinued operations (see Note
2), we reassessed our continuing operations reporting units and determined that
we have six reporting units: SG Gaming, U.K. Gaming , Casino Management Systems ,
Table Products, SciPlay, and iGaming. Goodwill is tested for impairment at the
reporting unit level (operating segment or one level below an operating segment)
annually on October 1 and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. These events or circumstances could
include a significant change in the business climate, legal factors, operating
performance indicators, competition, 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. Such events and circumstances that we
have considered include macroeconomic conditions, industry specific and market
considerations, and reporting units specific factors such as overall actual and
projected financial performance, among other factors. We also considered the
results of the most recent date that a fair value measurement was performed as a
part of the quantitative goodwill assessment and specifically the cushion
between each reporting unit's fair value and carrying value. 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 of October 1, 2021 using a
qualitative assessment for all of our reporting units other than for the U.K
Gaming reporting unit for which we performed a quantitative assessment given its
impairment in 2020. Based on the results of our qualitative impairment
assessment, we concluded that it is more likely than not that the fair values of
each of our reporting units exceeded their respective carrying values and there
were no reporting units requiring further assessment. The test results for U.K.
Gaming reporting unit for which we performed a quantitative assessment indicated
the fair value was substantially in excess (greater than 20%) of the carrying
value. As of December 31, 2021 , the carrying amount of goodwill related to our
U.K. Gaming reporting unit was $127 million .
Refer to Note 11 for key estimates and assumptions used in the 2020 discounted
cash flow analysis for U.K. Gaming reporting unit during which our impairment
testing for these reporting units resulted in an impairment charge.
Long-lived and other 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 in 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. Refer to Note 11 for our fourth quarter
2021 change in estimate related to the useful lives for certain of our legacy
trade names triggered by corporate-wide re-branding as described above in the
"Business Overview - Highlights, including recent developments" section.
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--------------------------------------------------------------------------------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 to be 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. 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. In assessing the timing of valuation allowance release, we specifically assessed the certainty and expected gains related to pending sales of our businesses held for sale, which required significant judgment and evaluation of various factors. See Note 19 for a more detailed discussion related to valuation allowance release during 2021.
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 20, 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, 2021 , our principal sources of liquidity, other than cash flows provided by operating activities, were cash and cash equivalents, including SciPlay cash and cash equivalents (for our SciPlay business segment), cash and cash equivalents of businesses held for sale 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 of
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Revolver
capacity drawn
or committed
Cash and cash to letters of
(in millions) equivalents Revolver capacity credit Total
SGC (excluding SciPlay and businesses
held for sale) $ 221 $ 650 $ (12) $ 859
Businesses held for sale 44 - - 44
SciPlay 364 150 - 514
Total as of December 31, 2021 $ 629 $ 800 $ (12) $ 1,417
SGC (excluding SciPlay and businesses
held for sale) $ 659 $ 650 $ (547) $ 762
Businesses held for sale 88 - - 88
SciPlay 269 150 - 419
Total as of December 31, 2020 $ 1,016 $ 800 $ (547) $ 1,269
On May 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 on June 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 in May 2024 . These proceeds enabled us
to reduce our revolving credit facility and other debt in 2019. 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 $4 million were made for the
year ended December 31, 2021 .
Sources of liquidity
During 2021, we drew
Total cash held by our foreign subsidiaries (including discontinued operations) was$180 million and$173 million as ofDecember 31, 2021 andDecember 31, 2020 , 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 (included in our discontinued operations) businesses generally require significant upfront capital expenditures, and we may need to incur additional capital expenditures in order to retain or win new contracts. Our ability to make payments on and to refinance our indebtedness and other obligations depends on our ability to generate cash in the future. We may also, from time to time, repurchase or otherwise retire or refinance our debt, through our subsidiaries or otherwise. In the event we pursue significant acquisitions or other expansion opportunities, we may need to raise additional capital. If we do not have adequate liquidity to support these activities, we may be unable to obtain financing for these cash needs on favorable terms or at all. For additional information regarding our cash needs and related risks, see "Risk Factors" under Part I, Item 1A. 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 (included in our discontinued operations) generally require service providers to provide performance bonds in connection with the relevant contract. As ofDecember 31, 2021 , our outstanding performance bonds (including those related to discontinued operations) totaled$272 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 74 --------------------------------------------------------------------------------
information regarding our surety or performance bonds in connection with our contracts, see "Risk Factors" under Part I, Item 1A.
We intend to repay, refinance and/or restructure a significant portion of our
existing indebtedness to significantly de-lever our balance sheet and position
the Company for enhanced growth following the receipt of cash from the Pending
Divestitures (See Note 1), which we would also expect to significantly change
the terms and outstanding amounts of our debt.
Cash Flow Summary
(in millions) Year Ended December 31, Variance
2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net cash provided by operating activities
from:
Continuing operations $ 304 $ 33 $ 209 $ 271 $ (176)
Discontinued operations 381 438 $ 337 (57) 101
Net cash provided by operating activities 685 471 546 214 (75)
Net cash used in investing activities from:
Continuing operations (347) (126) (220) (221) 94
Discontinued operations (95) (47) (43) (48) (4)
Net cash used in investing activities (442) (173) (263) (269) 90
Net cash (used in) provided by financing
activities from:
Continuing operations (655) 469 (126) (1,124) 595
Discontinued operations (24) (6) (3) (18) (3)
Net cash (used in) provided by financing (679) 463 (129) (1,142) 592
activities
Effect of exchange rate changes on cash, (6) 7 1 (13) 6 cash equivalents and restricted cash (Decrease) increase in cash, cash$ (442) $ 768
Cash flows from operating activities - continuing operations
Year Ended December 31, Variance
($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net income (loss) $ 390 $ (548)
(253) (212) (113) (41)
net of tax
Adjustments to reconcile net income (loss) 479 740 712 (261) 28
from continuing operations to net cash
provided by operating activities from
continuing operations
Changes in working capital accounts, 143 121 (113) 22 234
excluding the effects of acquisitions
Changes in deferred income taxes and other (342) (27) (60) (315) 33
Net cash provided by operating activities $ 304 $ 33
Year Ended
Net cash provided by operating activities from continuing operations increased
in 2021 primarily due to higher cash earnings resulting from the lifting of
certain COVID-19 related disruptions. The changes in our working capital
accounts for the year ended
•$19 million favorable change in receivables primarily due to increased billing and collection as recovery from the COVID-19 pandemic continues to gain momentum with eased restrictions and continued progress towards the return to pre-COVID levels;
•$9 million favorable change in inventory due to timing of orders and shipments;
•$17 million favorable change in other current assets and liabilities primarily
related to increases in various prepaid expenses and timing of contract assets
and liabilities;
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--------------------------------------------------------------------------------•$98 million favorable change in accounts payable and accrued liabilities primarily as a result of the timing of expenditures.
Net cash provided by operating activities from discontinued operations increased due to higher cash flows from discontinued operations driven by higher Lottery instant products and systems revenue due to the impact of COVID-19 on the prior year results coupled with the large lottery jackpots in the first half of 2021 driving both instant products sales and system increases.
Cash flows from investing activities
Net cash used in investing activities from continuing operations increased primarily due to acquisitions of businesses completed during 2021, as described in Note 10, and higher capital expenditures. Capital expenditures are composed of investments in systems, equipment and other assets related to contracts, property and equipment, intangible assets and software. Net cash used in investing activities from discontinued operations increased primarily due to acquisitions completed during 2021, as described in Note 10, higher additions to equity method investments and capital expenditures.
Cash flows from financing activities
Net cash used in financing activities increased primarily due to net repayments of$535 million under SGI's revolving credit facility compared to the prior year period$340 million net draw on SGI's revolving credit facility and net issuance of senior term loans of$209 million , coupled with$16 million in higher licensing payments and$23 million for taxes paid related to net share settlement of equity awards during 2021.
Year Ended
Net cash provided by operating activities from continuing operations decreased in 2020 primarily due to lower cash earnings impacted by the COVID-19 business disruptions. The changes in our working capital accounts for the year endedDecember 31, 2020 were primarily driven by the following:
•$137 million favorable change in receivables due to timing of collections and lower billing primarily associated with Gaming segment receivables;
•$4 million favorable change in inventory due to timing of orders and shipments;
•$6 million favorable change in/ other current assets and liabilities primarily related to increases in various prepaid expenses and timing of contract assets and liabilities;
•$26 million unfavorable change in accounts payable and accrued liabilities primarily as a result of the timing of expenditures.
Net cash provided by operating activities from discontinued operations decreased primarily due to lower earnings impacted by COVID-19 on the 2020 results.
Cash flows from investing activities
Net cash used in investing activities from continuing operations 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 from continuing operations 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$341 million in net payments for the redemption of the 2021 Notes.
Credit Agreement and Other Debt
For additional information regarding our credit agreement and other debt, interest rate risk and interest rate hedging instruments, see "Contractual Obligations" in this Item 7 below, in Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" and in Notes 15 and 16.
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--------------------------------------------------------------------------------Contractual Obligations
Our contractual obligations and commercial commitments principally include obligations associated with our outstanding indebtedness, contractual purchase obligations and future minimum operating lease obligations and other long-term liabilities as set forth in the table below as ofDecember 31, 2021 : (in millions) Cash Payments Due In Less than 1 More than 5 Total year 1 - 3 years 4 - 5 years years Debt, face value (1)$ 8,772 $ 44 $ 3,978 $ 3,550 $ 1,200 Interest payments (2) 1,802 423 802 398 179 License royalty minimum guaranteed payments 105 35 46 24 - Purchase obligations (3) 368 368 - - - Operating leases (4) 56 17 24 13 2 Other obligations (5) 51 3 48 - - Contractual obligations related to continuing operations 11,154 890 4,898 3,985 1,381 Contractual obligations related to discontinued operations 256 181 49 18 8 Total contractual obligations$ 11,410 $ 1,071 $ 4,947 $ 4,003 $ 1,389
(1) See Note 15 for information regarding long-term and other debt, including
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