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Light & Wonder(LNW) - 2022 Q4 - Annual Report

Part I Business Light & Wonder, Inc. transformed into a cross-platform global games company by divesting its Lottery and Sports Betting businesses, now focusing on core gaming segments under extensive global regulation - In 2022, the company completed the divestitures of its Lottery and Sports Betting businesses, marking a strategic shift to become a leading cross-platform global games company27 - On April 18, 2022, the company changed its name from Scientific Games Corporation to Light & Wonder, Inc. and its stock ticker from SGMS to LNW28 - The company's strategic roadmap focuses on growing market share, streamlining the organization, driving sustainable growth, and disciplined capital allocation31 - The business is structured into three reporting segments: Gaming, SciPlay, and iGaming29 Segments Overview The company operates through three core segments: Gaming, SciPlay, and iGaming, each providing distinct products and services within the global gaming industry and facing specific competitors - The Gaming segment provides machines, CMS, and table products to regulated U.S. and approximately 185 international jurisdictions, competing with Aristocrat, IGT, and Konami343637 - The SciPlay segment develops and publishes digital social casino and casual games on mobile and web platforms, competing with companies like Playtika and Take-Two Interactive414344 - The iGaming segment provides digital gaming content, distribution platforms, and player account management systems for real-money online casinos, competing with Evolution Gaming, IGT, and Playtech4546 Operations and Human Capital The company emphasizes R&D and intellectual property protection, utilizing a mix of in-house and third-party manufacturing, and employed approximately 6,100 people globally as of December 31, 2022 - The company relies on a mix of owned and licensed intellectual property, including popular brands like MONOPOLY and JAMES BOND™, to enhance product appeal4952 - Manufacturing and assembly of gaming machines and shufflers are conducted at facilities in Las Vegas, Sydney, and Europe, utilizing a just-in-time delivery model545556 - As of December 31, 2022, Light & Wonder employed approximately 6,100 people, with about 2,700 in the U.S. and 3,400 internationally61 - The company's Corporate Social Responsibility (CSR) initiatives are built on five pillars: Community, People, Planet, Players (Responsible Gaming), and Corporate Governance6869 Government Regulation All business segments operate under extensive and evolving government regulations, including stringent licensing for Gaming, data privacy compliance for SciPlay, and complex internet gaming laws for iGaming across global jurisdictions - The company holds licenses and permits to operate in approximately 468 jurisdictions worldwide, including 185 international gaming jurisdictions77 - The SciPlay business is subject to evolving laws around social gaming and data privacy, such as the EU's GDPR and California's CCPA/CPRA8081 - The iGaming business in the U.S. is shaped by the Unlawful Internet Gambling Enforcement Act (UIGEA) and the 2018 Supreme Court decision overturning PASPA, which opened the path for state-level sports wagering legalization8283 - Internationally, the iGaming market is evolving, with the U.K. government reviewing its Gambling Act 2005 and Ontario, Canada, opening its regulated iGaming market in 202286 Risk Factors The company faces diverse risks including adverse economic conditions, intense competition, significant debt, technological vulnerabilities, evolving regulatory landscapes, and potential litigation, all of which could materially affect its business Economic and Business Conditions The company's performance is sensitive to economic conditions, public health crises, and geopolitical uncertainty, with risks from strategic execution, foreign currency fluctuations, and the gaming machine replacement cycle - The COVID-19 pandemic and similar health crises can negatively impact operations by reducing consumer discretionary spending, causing casino closures, and disrupting supply chains108109 - Failure to successfully execute the new strategy to become a leading cross-platform global games company and establish the 'Light & Wonder' brand could negatively impact financial results113114115 - Approximately 31% of revenue for the year ended December 31, 2022, was derived from outside the U.S., exposing the company to foreign currency exchange rate fluctuations and other international risks119120 - Unfavorable economic conditions, such as inflation and rising interest rates, may reduce players' disposable income and casino operators' capital expenditures, adversely affecting all business segments125126 Industry and Operations The company faces intense competition and technology risks, with R&D investments not guaranteed to succeed, and is vulnerable to third-party platform policy changes and supply chain disruptions - The company faces intense competition in Gaming, SciPlay, and iGaming from both established players and new entrants, competing on content, technology, price, and distribution132133138 - Success is dependent on adapting to changing technology and investing in R&D, but there is no guarantee these investments will result in commercially viable products147149 - The SciPlay business is heavily reliant on third-party platforms (Apple, Google, Facebook, Amazon) for distribution and revenue collection, with policy changes potentially impacting the business167168 - The company relies on third-party suppliers and manufacturers for components and services; any interruption or quality lapse could disrupt operations and fulfillment of customer orders162163164 Capital Structure The company's significant indebtedness of $3.9 billion as of December 31, 2022, poses a major risk, impacting financial flexibility, requiring substantial cash flow for debt service, and imposing restrictive covenants - As of December 31, 2022, the company had total indebtedness of $3.9 billion, which could affect its ability to obtain financing and requires a significant portion of cash flow for debt service176 - A significant portion of borrowings are at variable interest rates, exposing the company to risk from rising rates177 - Debt agreements, including the LNWI Credit Agreement and SciPlay Revolver, impose operating and financial restrictions, such as limitations on dividends, liens, and additional debt182183 - The Board of Directors has authorized a $750 million share repurchase program, but changes to or elimination of this program could adversely affect the stock price175 Technology and Legal The company faces significant technological and legal risks, including cybersecurity threats, intellectual property protection, complex and evolving government regulations, data privacy laws, and potential impacts from tax law changes or litigation - The business is vulnerable to security breaches, including cyber-attacks, which could compromise sensitive data, disrupt operations, and expose the company to liability and reputational harm191192206 - The company's success depends on protecting its own intellectual property and its ability to license IP from third parties, with infringement claims potentially being costly195198210 - The company and its industries are subject to strict and evolving government regulations regarding licensing, product approvals, and suitability of key personnel, which can limit operations and growth216222 - Evolving data privacy laws, such as the EU's GDPR and California's CCPA/CPRA, increase operational costs and expose the company to significant penalties for non-compliance252253 - Changes in tax laws, such as the requirement to capitalize and amortize R&D expenses for U.S. tax purposes and the OECD's global minimum tax proposals, could materially affect financial results243245247 Properties The company occupies approximately 561,000 sq. ft. in the U.S. and 763,000 sq. ft. internationally, with principal facilities in Las Vegas (corporate headquarters) and India, some encumbered by debt Principal Properties | Location | Sq. Ft. | Supports | Tenancy | | :--- | :--- | :--- | :--- | | Las Vegas, Nevada | 426,986 | Corporate Headquarters, Gaming and iGaming | Lease/Own | | India (Bangalore and Chennai) | 143,604 | Corporate, Gaming, SciPlay and iGaming | Lease | Legal Proceedings The company is involved in various legal proceedings, including ongoing litigation in Colombia, settled matters in Italy, multiple U.S. antitrust lawsuits, and a $25 million social casino class action settlement, with $11 million accrued for contingencies as of December 31, 2022 - As of December 31, 2022, the company had accrued liabilities of $11 million for legal matters, down from $27 million in 2021643 - A putative class action in Washington State regarding social casino games was settled for $25 million, fully paid by the SciPlay segment in the third quarter of 2022655 - The company faces several antitrust lawsuits alleging illegal monopolization of the automatic card shuffler market656657658 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'LNW', has never paid cash dividends, and repurchased 3.4 million shares for $202 million in Q4 2022 under its share repurchase program - The company's common stock is listed on the Nasdaq Global Select Market under the symbol 'LNW', with 583 holders of record as of February 24, 2023280 - The company has never paid cash dividends on its common stock and does not intend to in the foreseeable future281 Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Number of Shares Purchased (millions) | Average Price Paid per Share | Total Cost of Repurchase (millions) | | :--- | :--- | :--- | :--- | | 10/1/2022 - 10/31/2022 | 0.7 | $48.15 | $31 | | 11/1/2022 - 11/30/2022 | 1.1 | $62.76 | $69 | | 12/1/2022 - 12/31/2022 | 1.6 | $62.67 | $102 | | Total | 3.4 | $59.88 | $202 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Light & Wonder completed its strategic transformation by divesting Lottery and Sports Betting businesses for approximately $6.5 billion, leading to 17% revenue growth from continuing operations, a 148% increase in operating income, and a net income of $3.7 billion attributable to L&W after divestiture gains - Completed divestitures of the Lottery and Sports Betting businesses in 2022, receiving approximately $5.7 billion and $0.8 billion in gross proceeds, respectively293 - Reduced the outstanding face value of debt by approximately $4.9 billion following a series of refinancing transactions in April 2022297 - Initiated a $750 million share repurchase program in March 2022, returning $413 million to shareholders through February 24, 2023298 Consolidated Results Summary (2022 vs 2021) | (in millions) | 2022 | 2021 | Variance | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $2,512 | $2,153 | $359 | 17% | | Operating income | $273 | $110 | $163 | 148% | | Net (loss) income from continuing operations | $(176) | $24 | $(200) | nm | | Net income from discontinued operations, net of tax | $3,873 | $366 | $3,507 | nm | | Net income attributable to L&W | $3,675 | $371 | $3,304 | nm | Business Segment Results In 2022, Gaming revenue grew 21% to $1.6 billion, SciPlay revenue increased 11% to $671 million, and iGaming revenue rose 6% to $240 million, with U.S. iGaming growth partially offset by foreign currency impacts Gaming Segment Revenue and KPIs (2022 vs 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue (in millions) | $1,601 | $1,321 | 21% | | AEBITDA (in millions) | $767 | $659 | 16% | | Total New Unit Shipments | 26,803 | 18,203 | 47% | | Avg. Sales Price per New Unit | $17,462 | $16,833 | 4% | SciPlay Segment Revenue and KPIs (2022 vs 2021) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenue (in millions) | $671 | $606 | 11% | | AEBITDA (in millions) | $187 | $186 | 1% | | ARPDAU | $0.78 | $0.71 | +$0.07 | | Payer Conversion Rate | 9.6% | 8.5% | +1.1 pp | iGaming Segment Revenue (2022 vs 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue (in millions) | $240 | $226 | 6% | | AEBITDA (in millions) | $80 | $75 | 7% | - iGaming revenue growth was driven by a 47% year-over-year increase in the U.S. market, but was partially offset by a $15 million unfavorable impact from foreign currency translation365 Critical Accounting Estimates Management identifies critical accounting estimates including business combinations, revenue recognition, goodwill impairment testing, gain on sale of discontinued operations, income taxes, and legal contingencies, with the October 1, 2022 goodwill test showing fair value substantially exceeded carrying value - Key estimates include business combinations, revenue recognition, goodwill and asset impairment, gain on sale of discontinued operations, income taxes, and legal contingencies369373 - The annual goodwill impairment test as of October 1, 2022, concluded that the fair value of each reporting unit substantially exceeded its carrying value, requiring no further quantitative assessment378 - Due to a corporate rebranding in late 2021, the company changed the useful life estimate for certain legacy trade names, resulting in accelerated amortization with incremental expenses of $59 million in 2022 and $10 million in 2021553 Liquidity, Capital Resources and Working Capital As of December 31, 2022, the company had $1.8 billion in total liquidity, with net cash used in operating activities of $425 million due to divestiture-related tax payments, while investing activities provided $6.1 billion and financing activities used $5.5 billion for debt repayment and share repurchases Cash and Available Liquidity (as of Dec 31, 2022) | (in millions) | Cash and cash equivalents | Revolver capacity | Total | | :--- | :--- | :--- | :--- | | L&W (excluding SciPlay) | $584 | $738 | $1,322 | | SciPlay | $330 | $150 | $480 | | Total | $914 | $888 | $1,802 | - Net cash used in operating activities from continuing operations was $425 million, largely due to $641 million in cash tax payments related to the divestitures399 - Net cash used in financing activities was $5.5 billion, reflecting debt repayments of approximately $7.0 billion and share repurchases, partially offset by $2.2 billion in new term loan proceeds403 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $2.2 billion variable-rate debt, with a 1% rate change impacting annual interest expense by $22 million, mitigated by $700 million in interest rate swap contracts - The company is exposed to interest rate risk with $2.2 billion of variable rate debt outstanding as of December 31, 2022, where a hypothetical 1% change in rates would impact interest expense by approximately $22 million406 - To manage interest rate risk, the company entered into interest rate swap contracts with a total notional amount of $700 million, effectively fixing the interest rate on a portion of its variable rate debt, with hedges maturing in April 2027407409 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by an unqualified audit opinion from Deloitte & Touche LLP - Based on an evaluation as of December 31, 2022, the CEO and CFO concluded that the company's disclosure controls and procedures were effective413 - Management concluded that as of December 31, 2022, the company's internal control over financial reporting was effective based on the criteria set forth by COSO415 - No changes in internal control over financial reporting occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, internal controls417 Part IV Exhibits, Financial Statement Schedules This section presents the company's consolidated financial statements for 2020-2022, the independent auditor's report from Deloitte & Touche LLP, and a comprehensive index of all exhibits filed with the 10-K report - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting438444 - The auditor identified the 'Gain on sale of discontinued operations' as a critical audit matter due to the complexity of calculating the gains and the resulting income tax expense across multiple jurisdictions442443 Consolidated Financial Statements Summary (FY 2022) | (in millions) | Amount | | :--- | :--- | | Total Revenue | $2,512 | | Net (Loss) from Continuing Operations | $(176) | | Net Income from Discontinued Operations | $3,873 | | Net Income Attributable to L&W | $3,675 | | Total Assets (at Dec 31, 2022) | $6,009 | | Total Liabilities (at Dec 31, 2022) | $4,848 | | Total Stockholders' Equity (at Dec 31, 2022) | $1,161 |