Light & Wonder(LNW) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited) The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2021, show a significant turnaround from the prior year, with revenue increasing to $880 million for the quarter, driving a net income of $113 million, compared to a net loss of $198 million in Q2 2020, while the balance sheet reflects total assets of $7.76 billion and total liabilities of $10.13 billion, and cash flow from operations was positive at $272 million for the six-month period Consolidated Statements of Operations For the three months ended June 30, 2021, the company reported total revenue of $880 million, a significant increase from $539 million in the same period of 2020, resulting in operating income of $163 million, a sharp reversal from an operating loss of $56 million in the prior-year quarter, and net income attributable to SGC was $109 million, or $1.10 per diluted share, compared to a net loss of $203 million, or ($2.15) per share, in Q2 2020 Consolidated Statements of Operations (Three Months Ended June 30) | Financial Metric | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Total Revenue | $880 | $539 | | Operating Income (Loss) | $163 | $(56) | | Net Income (Loss) Attributable to SGC | $109 | $(203) | | Diluted Net Income (Loss) per Share | $1.10 | $(2.15) | Consolidated Statements of Operations (Six Months Ended June 30) | Financial Metric | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Total Revenue | $1,609 | $1,264 | | Operating Income (Loss) | $244 | $(88) | | Net Income (Loss) Attributable to SGC | $94 | $(362) | | Diluted Net Income (Loss) per Share | $0.97 | $(3.85) | - A notable item in Q2 2021 was a $63 million gain related to the SportCast acquisition, recorded under 'Other income (expense), net'[19] Consolidated Balance Sheets As of June 30, 2021, the company's balance sheet showed total assets of $7.76 billion, a slight decrease from $7.98 billion at year-end 2020, while total liabilities decreased to $10.13 billion from $10.51 billion, primarily due to a reduction in long-term debt, and the total stockholders' deficit improved to $(2.37) billion from $(2.52) billion at the end of 2020 Consolidated Balance Sheet Highlights (as of June 30, 2021) | Account | June 30, 2021 (in millions) | Dec 31, 2020 (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $932 | $1,016 | | Total Assets | $7,762 | $7,984 | | Long-term debt, excluding current portion | $8,975 | $9,259 | | Total Liabilities | $10,132 | $10,508 | | Total Stockholders' Deficit | $(2,370) | $(2,524) | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash provided by operating activities was $272 million, an improvement from $172 million in the prior-year period, net cash used in investing activities was $98 million, mainly for capital expenditures, and net cash used in financing activities was $324 million, driven by a $250 million repayment of the SGI revolving credit facility, contrasting with a net borrowing of $440 million in the first half of 2020 Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $272 | $172 | | Net cash used in investing activities | $(98) | $(84) | | Net cash (used in) provided by financing activities | $(324) | $402 | | (Decrease) increase in cash | $(150) | $489 | Notes to Condensed Consolidated Financial Statements The notes detail significant corporate actions and accounting policies, including a strategic review resulting in plans to divest the Lottery and Sports Betting businesses, a proposal to acquire the remaining public equity in SciPlay, the ongoing impact of COVID-19 on the Gaming segment despite most establishments reopening, and the completion of the SportCast acquisition in May 2021 - On June 29, 2021, the company announced its intention to divest its Lottery and Sports Betting operations to significantly de-lever and focus on growth, with strategic alternatives being considered including an IPO, SPAC combination, or a sale[30] - On July 15, 2021, the company proposed to acquire the remaining ~19% of SciPlay it does not already own in an all-stock transaction[31] - In May 2021, the company acquired SportCast for a total consideration of $81 million, which included a $63 million gain on the remeasurement of a previously held option[38][40] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant recovery in financial results, driven by the reopening of gaming venues and strong performance in the Lottery and Digital segments, alongside a key strategic development to divest the Lottery and Sports Betting businesses to reduce debt and focus on becoming a content-led growth company, while the Gaming segment saw a dramatic rebound, aided by a $38 million UK FOBT recovery, and SciPlay's revenue declined slightly as player engagement normalized Business Overview and Recent Events The company reaffirmed its strategy to become a content-led growth company with a focus on digital markets, leading to the decision to divest the Lottery and Sports Betting businesses to significantly de-lever, and concurrently proposed acquiring the remaining 19% of SciPlay, while the business, particularly the Gaming segment, continues to be impacted by the lingering effects of the COVID-19 pandemic despite most gaming establishments reopening - The company completed a strategic review and intends to divest its Lottery and Sports Betting operations to de-lever and focus on digital markets[133] - The Gaming business segment was especially impacted by COVID-19 but has seen a notable rebound in the U.S. and U.K. markets due to the lifting of restrictions and pent-up consumer demand[138] Consolidated Results Consolidated revenue for Q2 2021 increased 63% year-over-year to $880 million, leading to operating income of $163 million compared to a loss of $56 million in Q2 2020, with the improvement driven by the recovery in the Gaming segment, including a $38 million UK FOBT recovery, and continued strength in Lottery and Digital, while operating expenses increased 21%, reflecting higher activity levels and increased SG&A, partially offset by lower D&A Consolidated Results Summary (Three Months Ended June 30) | Metric (in millions) | 2021 | 2020 | Variance | Variance % | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $880 | $539 | $341 | 63% | | Operating Income (Loss) | $163 | $(56) | $219 | 391% | | Net Income (Loss) | $113 | $(198) | $311 | 157% | - Gaming operations revenue for Q2 2021 benefited from a $38 million U.K. FOBT recovery related to a 2020 court ruling on overcharged value-added tax[151] - SG&A expenses increased primarily due to higher stock-based compensation ($27M for Q2) and the reversal of temporary austerity measures from the prior year[155] Business Segments Results The Gaming segment revenue surged 303% to $367 million in Q2 2021, with AEBITDA turning positive at $196 million, while the Lottery segment grew 27% to $266 million, the SciPlay segment saw a 7% revenue decline to $154 million as player engagement normalized post-pandemic, and the Digital segment's revenue increased 27% to $93 million, driven by U.S. market expansion Gaming Segment Revenue (Three Months Ended June 30) | Metric (in millions) | 2021 | 2020 | Variance % | | :--- | :--- | :--- | :--- | | Gaming operations | $181 | $16 | 1,031% | | Machine sales | $100 | $53 | 89% | | Total Revenue | $367 | $91 | 303% | - Gaming segment's Average Daily Revenue Per Unit in the U.S. and Canada increased to $44.58 in Q2 2021 from $4.45 in Q2 2020[167] Revenue by Segment (Three Months Ended June 30, 2021) | Segment | Revenue (in millions) | YoY Change | | :--- | :--- | :--- | | Gaming | $367 | +303% | | Lottery | $266 | +27% | | SciPlay | $154 | -7% | | Digital | $93 | +27% | Liquidity, Capital Resources and Working Capital As of June 30, 2021, total liquidity was $1.435 billion, including $932 million in cash and $503 million in available revolver capacity, and the company made a voluntary payment of $150 million on its revolving credit facility in July 2021, while net cash from operations for the first six months was $272 million, a $100 million increase from the prior year, reflecting improved earnings Liquidity Position (as of June 30, 2021) | Component (in millions) | Amount | | :--- | :--- | | Cash and cash equivalents | $932 | | Available Revolver Capacity | $503 | | Total Liquidity | $1,435 | - In July 2021, the company made a voluntary repayment of $150 million on the SGI revolving credit facility, with a cumulative $500 million repaid as of August 9, 2021, since Q4 2020[206][209] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates and foreign currency exchange rates, with $4.32 billion of its $9.11 billion in long-term debt being variable-rate as of June 30, 2021, meaning a hypothetical 1% change in interest rates would impact annual interest expense by approximately $43 million, and the company uses interest rate swaps and cross-currency swaps to mitigate these risks - As of June 30, 2021, the company had $9.11 billion in long-term debt, with $4.32 billion being variable-rate obligations[213] - A hypothetical 1% change in interest rates would impact annual interest expense by approximately $43 million[213] - The company uses cross-currency interest rate swaps to effectively convert $460 million of USD-denominated notes to Euro-denominated debt and designates a portion of its Euro notes as a net investment hedge to reduce currency volatility[215][217] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[220] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 16 of the financial statements for a detailed description of the company's legal proceedings, including litigation related to social casino games in Washington State, an antitrust complaint regarding card shufflers, a long-standing dispute in Colombia, and shareholder lawsuits concerning the SciPlay IPO, which have reached an agreement in principle to settle - For a full description of legal proceedings, the report refers to Note 16 in the financial statements and Note 21 in the 2020 10-K[222] Item 1A. Risk Factors The company highlights new material risks associated with its strategic review, including the uncertainty that the planned divestitures of the Lottery and Sports Betting businesses and the proposed acquisition of SciPlay will be consummated or yield additional value, as the process could divert management attention, incur significant expenses, and disrupt business relationships, and the company also notes increased supply chain pressures, which contributed to a $5 million inventory obsolescence charge in the quarter - A new risk factor addresses the strategic review, stating there is no assurance that the divestiture of Lottery and Sports Betting businesses or the acquisition of public SciPlay shares will be completed or create value[224] - The evaluation of strategic alternatives exposes the company to risks such as management diversion, significant expenses, difficulty retaining key personnel, and potential loss of customers or partners[225] - The company experienced supply chain pressures related to parts sourcing, which led to an approximately $5 million inventory obsolescence charge during the three months ended June 30, 2021[229] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no stock repurchase activity during the three months ended June 30, 2021 - There was no stock repurchase activity during the three months ended June 30, 2021[238] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to employment agreements, the amended 2003 Incentive Compensation Plan, an amendment to the Credit Agreement, and CEO/CFO certifications - Key exhibits filed include Amendment No. 8 to the Credit Agreement, dated July 28, 2021, and various executive employment agreements and compensation plans[241]