The following discussion is intended to enhance the reader's understanding of our operations and current business environment and should be read in conjunction with the description of our business included under Part I, Item 1 "Condensed Consolidated Financial Statements" and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and under Part I, Item 1 "Business," Item 1A "Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 10-K. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under "Forward-Looking Statements" and "Risk Factors" included in this Quarterly Report on Form 10-Q and "Risk Factors" included in our 2019 10-K. As used in this MD&A, the terms "we," "us," "our" and the "Company" mean SGC together with its consolidated subsidiaries.
BUSINESS OVERVIEW We are a leading developer of technology-based products and services and associated content for the worldwide gaming, lottery, social and digital gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems and table game products and services to licensed gaming entities; providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; providing social casino solutions to retail consumers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services. Recent Events - Impact of COVID-19 InMarch 2020 , theWorld Health Organization declared the rapidly spreading COVID-19 outbreak a pandemic. In response to the COVID-19 pandemic, governments across the world implemented measures to prevent its spread including the temporary closure of all non-essential businesses and travel restrictions, which have affected and continue to affect our business segments in a number of ways. The closure and phased in reopening of gaming establishments during the latter part of the second quarter of 2020 have impacted a substantial amount of our gaming and, to a lesser extent, lottery operations. The reopening of gaming establishments began during the latter part of the second quarter of 2020, however, significant health and safety measures continue to be taken to ensure the safety of players which continues to negatively affect our gaming business segment as these measures are implemented and observed. These safety and social distancing measures include the reduction of floor occupancy, limitation of the number of players allowed at table games and a reduction of slot machines available for play, among others. Impact on Business Operations and Financial Results Our Gaming business segment is especially impacted due to the widespread temporary closures and restricted re-opening of a substantial number of gaming operations establishments coupled with global economic uncertainty. The COVID-19 pandemic remains a rapidly evolving situation. Although businesses began reopening during the latter part of the second quarter of 2020, our Participation gaming business revenue and cash flows continue to be significantly negatively affected, as they are largely driven by players' disposable incomes and level of gaming activity. New social distancing requirements that were implemented in many jurisdictions have and are expected to continue to have a negative impact on the amount of customer traffic within gaming establishments. The COVID-19 disruptions continue to cause prolonged periods of closures and modified operating schedules and may result in changes in customer behaviors, including a reduction in consumer discretionary spending as a result of the uncertainty caused by the pandemic and unemployment levels. Additionally, our gaming machine and table product sales largely depend on our customers' liquidity and operating results, which has negatively impacted the replacement cycle and demand for gaming machines, table products and opportunities from new or expanded markets. Further, we have granted customer concessions for a portion of the time for which such customers' operations were impacted by closures or quarantines. Also, based on historical gaming customers' orders and our manufacturing capacity, a substantial portion of gaming machine sales are fulfilled in the third month of each quarter. Since March when the COVID-19 disruptions became widespread, gaming machine sales revenues have been and continue to be particularly negatively impacted. We believe this negative trend could reduce the capital expenditures of casino operators and continue to lengthen the replacement cycles of their existing gaming machines. Unfavorable economic conditions caused by COVID-19 could continue to impact the timing of cash receipts from our Gaming customers. In addition, unfavorable economic conditions have caused, and could continue to cause, some of our Gaming customers to temporarily close gaming venues or ultimately declare bankruptcy, which would adversely affect our business. In recent years, our Gaming business has expanded the use of extended payment term financing for gaming machine 32 -------------------------------------------------------------------------------- purchases primarily in the LATAM region, and we expect to continue to provide a higher level of extended payment term financing in this business until demand from our customers for such financings abates or our business model changes. These financing arrangements may increase our collection risk, and if customers are not able to pay us, whether as a result of financial difficulties, bankruptcy or otherwise, we may incur provisions for bad debt related to our inability to collect certain receivables. In addition, both extended payment term financing and operating leases result in a delay in our receipt of cash, which reduces our cash balance, liquidity and financial flexibility to respond to changing economic events. Unfavorable economic conditions may also result in volatility in the credit and equity markets. The difficulty or inability of our customers to generate or obtain adequate levels of capital to finance their ongoing operations may reduce their ability to purchase our products and services. Refer to Note 5 for international locations with significant concentrations of our receivables with terms longer than one year. We increased our allowance for credit losses by$12 million and$40 million for the three and six month periods endedJune 30, 2020 , respectively. These increases were primarily related to Gaming customers in LATAM as those customers were particularly affected by COVID-19 closures of gaming operations establishments. In addition, customers in this region expect and have often been granted extended payment terms. As described above, our customers in LATAM have been and are expected to continue to be affected by the COVID-19-related closures of gaming operations establishments and the resulting impact on both their specific financial situations and the general macroeconomic environments in which they operate. During the three and six months endedJune 30, 2020 , we recorded$21 million and$30 million , respectively, in inventory valuation charges (recorded in cost of product sales) related to inventory in our Gaming business segment primarily due to the COVID-19 disruption impacting future demand combined with a reassessment of our Gaming product strategy. Our new Gaming leadership team brought in late in the first quarter of 2020 began to set a new strategic plan for the Gaming business late in the second quarter of 2020. This new strategic plan includes revising product roadmaps and an assessment of how many and which platforms we will support, when we end service on legacy platforms and when we stop selling on such platforms in conjunction with new product launches. This new approach, combined with the rapid demand reduction that took place in the second quarter largely as a result of the COVID-19 disruptions, required us to reassess our inventory valuation, including whether we had excess or obsolete inventory based on the new strategic plan and related demand. In addition, the continued closures in the LATAM region make it difficult to execute our previous strategy of shipping legacy platforms into that market. The combination of these factors led to the$21 million inventory valuation charge recognized in the three months endedJune 30, 2020 . Our policy is to continue to review and assess these and other factors, especially during the COVID-19 disruptions, and if such factors or our outlook changes, we record adjustments to the valuation of inventory. Our Lottery business segment continues to be negatively impacted primarily as a result of lower foot traffic and reduced discretionary spending by end players, coupled with international retail establishments that were temporarily closed and began to re-open during the second quarter of 2020. Lottery sales were down meaningfully early in the second quarter as a result of the pandemic, but have since largely recovered in theU.S. and we have also seen a strong recovery in international markets. The temporary closure of gaming operations, disruptions to lottery operations, travel restrictions, cancellation of sporting events, lower disposable incomes of consumers and the adverse impact on our casino and gaming customers' liquidity and financial results caused by the COVID-19 pandemic, had and continues to have an adverse effect on our results of operations, cash flows and financial condition for the first half of 2020 and into the second half of 2020 and potentially beyond. Although gaming and lottery operations have begun to re-open, with encouraging early performance results, we are unable to determine the ultimate magnitude and the length of time that the pandemic disruptions will continue to impact our results of operations, cash flows and financial condition, which will depend, among other factors, on the currently unknowable duration of the COVID-19 pandemic, the impact of governmental regulations and actions that might continue to be imposed in response to the pandemic, change in customer behaviors, social distancing measures, decreased gaming establishments operating capacity, high unemployment rates, and the pace of overall recovery of gaming and lottery operations globally. We implemented a number of measures to reduce operating costs and conserve liquidity. These include measures such as: reductions in both salaries and workforce, including temporary voluntary 50% or greater reductions in salaries by our executive leadership team (100% as to our President and Chief Executive Officer untilJune 30, 2020 and 50% fromJuly 1, 2020 toJuly 31, 2020 ), unpaid employee furloughs, temporary elimination of 401(k) matching among other compensation and benefits reductions and deferral of all non-essential operating and capital expenditures. We have also engaged with our vendors to negotiate concessions on the timing and amount of payments to preserve liquidity through the COVID-19 disruption period. We estimate that these measures resulted in excess of$150 million in cost savings in the second quarter of 2020. Additionally, reduced capital expenditures and the above measures are expected to result in an overall lower future cost structure. Impact on Liquidity OnMay 8, 2020 , SGC and the requisite lenders under SGI's revolving credit facility entered into the Credit Agreement Amendment that, among other things, implements a financial covenant relief period through the end of the first quarter endingMarch 31, 2021 (the "Covenant Relief Period"), as a result of which SGI is not required to maintain compliance with the 33 -------------------------------------------------------------------------------- consolidated net first lien leverage ratio covenant during the Covenant Relief Period, imposes a minimum liquidity requirement (excluding SciPlay) of at least$275 million during the Covenant Relief Period, and further restricts our ability to incur indebtedness and liens, make restricted payments and investments and prepay junior indebtedness during the Covenant Relief Period, subject to certain exceptions and further subject, in some instances, to maintaining minimum liquidity (excluding SciPlay) of at least$400 million . See Note 1 for additional details regarding the Credit Agreement Amendment. OnApril 9, 2020 , we borrowed$480 million under SGI's revolving credit facility. As ofJune 30, 2020 , our total available liquidity (excluding our SciPlay business segment) was$637 million . We continue to actively manage our daily cash flows and continue to evaluate additional measures that will reduce operating costs and conserve cash. We believe that, based on our current projections, we will have sufficient liquidity for a period of at least one year. OnJuly 1, 2020 , we completed the issuance of$550 million in aggregate principal amount of 8.625% senior unsecured notes due 2025 in a private offering, for which we received the total net proceeds of$543 million . We used a portion of the net proceeds to redeem all$341 million of our outstanding 2021 Notes and paid accrued and unpaid interest thereon plus related premiums, fees and costs, which redemption was completed onJuly 17, 2020 , and will use the remaining net proceeds to fund working capital and general corporate purposes. This refinancing transaction extends our significant debt maturities until 2024. Segments We report our operations in four business segments - Gaming, Lottery, SciPlay and Digital - representing our different products and services. See "- Business Segments Results" below and Note 3 for additional business segment information. Foreign Exchange Our results are impacted by changes in foreign currency exchange rates used in the translation of foreign functional currencies into USD and the remeasurement of foreign currency transactions or balances. The impact of foreign currency exchange rate fluctuations represents the difference between current rates and prior-period rates applied to current activity. Our exposure to foreign currency volatility on revenue is as follows:
© Edgar Online, source