Light & Wonder, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion is intended to enhance the reader’s understanding of our operations and current business environment from management’s perspective 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 2022 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 2022 10-K. As used in this MD&A, the terms “we,” “us,” “our” and the “Company” mean L&W together with its consolidated subsidiaries.

BUSINESS OVERVIEW

We are a leading cross-platform global games company with a focus on content and digital markets. Our portfolio of revenue-generating activities 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, including casual gaming, to retail customers; and providing a comprehensive suite of digital gaming content, distribution platforms, player account management systems, as well as various other iGaming content and services.

As more fully described in *Part I, Item 1 “*Business” in our 2022 10-K, we are executing on our strategy to become a leading cross-platform global games company with a focus on content and digital markets. We report our results of operations in three business segments—Gaming, SciPlay and iGaming—representing our different products and services. See “Business Segments Results” below and Note 4 for additional business segment information.

Our operating results have substantially recovered from the impacts of the COVID-19 pandemic in 2020 and 2021; however, lingering impacts on supply chains in numerous industries have caused shortages of inputs/outputs, which in turn put inflationary pressures on the economy as a whole. Inflationary pressures may have an impact on discretionary income as people allocate more of their disposable income toward higher priced necessity goods and services, which could impact our customers. These circumstances may change in the future and such changes could be material.

In addition to our existing primary Nasdaq listing, our common stock is listed as CDIs on the ASX and commenced active trading on May 22, 2023 (AEST) under the ticker symbol “LNW.” We believe this secondary listing is creating substantial benefits for L&W and its shareholders, including enhancing the Company’s profile in Australia, one of the leading markets for the L&W’s Gaming business, and providing the Company access to new long-term Australian institutional investors that complement our strong existing base of shareholders.

We completed the third quarter of 2023 maintaining strong momentum and delivered a 10th consecutive quarter of consolidated revenue growth and fifth consecutive quarter of double-digit growth year-over-year, continuing advancement on our strategic plan and toward our long-term financial targets. Consolidated revenue growth was driven by double-digit growth across all of our businesses, including a fifth consecutive quarter of record revenues for SciPlay, and iGaming revenue held at a quarterly record level. We have returned $112 million of capital to shareholders through the repurchase of 1.5 million shares of common stock during the three months ended September 30, 2023, and since the initiation of the share repurchase program, we have returned a total of $550 million of capital to shareholders by repurchasing 9.1 million shares of common stock, or 73% of total program authorization.

As described in Note 1, on October 23, 2023, we acquired the remaining approximately 17% equity interest in SciPlay not already owned by us pursuant to the SciPlay Merger in an all-cash transaction for $496 million, excluding transaction fees and expenses. As a result of the SciPlay Merger, SciPlay ceased to be publicly traded and became a wholly owned subsidiary of L&W. We believe that this transaction will enable seamless collaboration with SciPlay that will add further momentum to our already robust cross-platform strategy, provide flexibility for use of SciPlay cash flows for investments across the enterprise, and facilitate long-term margin enhancement opportunities via synergies, all of which are expected to increase long-term shareholder value.

We have a significant portion of SciPlay personnel located in Tel Aviv, Israel. In light of current circumstances in Israel, we are actively monitoring developments and are ready to redirect resources as needed to minimize impact on SciPlay operations. We do not have servers or infrastructure that are located in Israel that host our games. While we have not yet seen an impact on our business from current events, they could negatively affect the performance of the personnel in that area and have an adverse impact on our business if these events continue and/or escalate. Refer to “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q for more information.

CONSOLIDATED RESULTS

($ in millions)

Revenue

Gaming revenue growth of 11% and 16% for the three and nine months ended September 30, 2023, respectively, was primarily driven by continued momentum in global Gaming machine sales, coupled with stronger performance in our U.S. and Canada premium install base, and increased demand for Table products and Systems.

SciPlay revenue increased 15% and 17% for the three and nine months ended September 30, 2023, respectively. Average revenue per daily active user grew 20% and 22% for the three and nine months ended September 30, 2023, respectively, reaching a new record high of $0.96 for the three months ended September 30, 2023. Social casino payer engagement and average monthly paying users also increased for both periods.

The increases in iGaming revenue of 21% and 15% for the three and nine months ended September 30, 2023, respectively, were driven by growth both in the U.S. and international markets from the strength of our original content and benefited from $3 million and $5 million, respectively, in certain termination fees. In October 2023, we launched our live casino operations in Michigan, reaching a strategic market expansion milestone for our iGaming business.

Operating Expenses

($ in millions)

Cost of Revenue

Total cost of revenue for the three and nine months ended September 30, 2023 increased as a direct result of higher revenue as described above, driven by $13 million and $56 million, respectively, in higher cost of product revenue primarily associated with higher gaming machine sales. In addition, we recognized $8 million and $27 million for the three and nine months ended September 30, 2023, respectively, in higher cost of services for our SciPlay business segment correlated with revenue growth.

SG&A

SG&A increased for the three and nine months ended September 30, 2023 as compared to the prior year periods, primarily due to higher stock-based compensation expense of $17 million and $38 million, respectively, higher legal expenses of $3 million and $12 million, respectively, and higher salaries and benefits of $2 million and $5 million, respectively.

R&D

R&D remained relatively flat for the three months ended September 30, 2023, and the slight increase for the nine months ended September 30, 2023 was due to higher salaries and benefits in our SciPlay segment.

D&A

D&A decreased for the three and nine months ended September 30, 2023, primarily due to fully depreciated assets and amortization of intangible assets related to past acquisitions associated with our Gaming and iGaming segments. The decrease in the nine months ended September 30, 2023 was partially offset by an impairment charge of $5 million related to SciPlay restructuring of a certain foreign studio.

Restructuring and Other

The decrease in restructuring and other for the three and nine months ended September 30, 2023, as compared to the prior year periods, was primarily due to lower professional services, legal and other costs related to the strategic review and related transactions (see Note 5). The three and nine months ended September 30, 2023 included $3 million in costs associated with the SciPlay Merger, the nine months ended September 30, 2023 included $7 million in professional services associated with the ASX listing, and the nine months ended September 30, 2023 and 2022 included contingent consideration remeasurement charges of $10 million and $12 million, respectively.

Other Factors Affecting Net Income Attributable to L&W

(in millions)

Foreign Currency 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 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:

($ in millions)

BUSINESS SEGMENTS RESULTS (for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022)

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 the U.K. and continental Europe, and government agencies and their affiliated operators.

We generate Gaming revenue from both services and products. Our services revenue includes revenue earned from Participation gaming machines, other leased gaming machines (including VLTs and electronic table games), supplied table products and services (including Shufflers), casino management technology solutions and systems, and other services revenues. Our products revenue includes the sale of new and used gaming machines, electronic table games, VLTs and VGTs, casino-management technology solutions and systems, table products, proprietary table game licensing, conversion kits (including game, hardware or operating system conversions) and spare parts.

For additional information, refer to the Gaming primary business activities summary included within “Business Segment Results” under Item 7 of our 2022 10-K.

Current Year Update

We continue to see elevated demand for our Gaming products and services, while Gaming operations and Gaming machine sales have performed above pre-COVID levels. The increase in Gaming revenue for the three and nine months ended September 30, 2023, as compared to the prior year periods, was primarily driven by continued momentum in Gaming machine sales growing 23% and 37%, respectively, coupled with growth in Table products and Systems. Gaming operations also benefited from higher average daily revenue per unit, the continued success of our cabinets and strong game content performance. While demand remains strong, we are actively monitoring any impact of inflationary pressures and macroeconomic uncertainty that may impact our operations. We have experienced and continue to expect some level of supply chain volatility that could impact our ability to meet demand for our products and delay the timing of fulfillment and revenue recognition of orders.

Results of Operations and KPIs

Three and Nine Months Ended September 30, 2023 and 2022

($ in millions)

Gaming Operations

Gaming operations revenue for both current year periods demonstrated continued momentum driven by strong game performance of hit franchises and premium games. Average daily revenue per unit for U.S. and Canada increased by $1.89 and $1.81 for the three and nine months ended September 30, 2023, respectively, and for International units it increased by $1.62 and $1.62, respectively. Gaming operations for U.S. and Canada had a 499-unit increase in installed base, mainly due to growth in our premium games, partially offset by reductions in our public gaming and leased core products. International ending installed base decreased by 5,658 units primarily due to the expected closure of certain LBOs in the U.K. along with the reduction of certain low-yielding units in Greece and Latin America.

Gaming Machine Sales

Gaming machine sales revenue increased as operator capital spending returned to more normalized levels. The increases for the three and nine months ended September 30, 2023, as compared to prior periods, were due to higher sales of replacement units globally of 1,391 and 4,980, respectively, shipments of additional units into international new opening and expansion markets of 649 and 2,255, respectively, and higher average sales price per new unit mainly due to favorable shifts in product mix. The following table summarizes Gaming machine sales changes:

Operating Expenses and AEBITDA

Operating expenses for the three months ended September 30, 2023 decreased by $1 million, as compared to the corresponding prior year period, primarily due to lower D&A of $19 million as a result of fully depreciated and amortized assets, partially offset by $14 million in higher cost of revenue associated with the increase in revenue and $5 million in higher SG&A costs. Operating expenses for the nine months ended September 30, 2023 increased by $64 million, as compared to the corresponding prior year period, as a result of $68 million in higher cost of revenue associated with the increase in revenue as described above and $23 million in higher SG&A and restructuring and other costs, partially offset by lower D&A of $27 million.

For the three and nine months ended September 30, 2023 as compared to the prior year periods, AEBITDA increased by $33 million and $121 million, respectively, which is primarily related to increased revenue, and AEBITDA as a percentage of revenue (“AEBITDA margin”) increased by 3 percentage points to 51% and 50%, respectively, primarily driven by favorable revenue mix as well as margin enhancement initiatives. AEBITDA also benefited from a change in the incentive compensation mix from cash to equity awards, resulting in a $4 million and $8 million benefit, respectively, as well as lower legal expenses.

SCIPLAY

Our SciPlay business segment is a leading developer and publisher of digital games on mobile and web platforms. SciPlay operates primarily in the social gaming market, which is characterized by gameplay online or on mobile devices that is social, competitive and self-directed in pace and session length. SciPlay also operates in the hyper-casual space, which is characterized by simpler core loops and more repetitive gameplay than casual games. SciPlay generates a substantial portion of its revenue from in-app purchases in the form of virtual coins, chips and cards, which players can use to play slot games, table games or bingo games. Players who install SciPlay’s social games typically 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 generates additional revenue through advertising arrangements in SciPlay’s hyper-casual games. Players who install SciPlay’s hyper-casual games receive free, unlimited gameplay that requires viewing of periodic in-game advertisements.

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 Backgammon Live as well as other titles in the hyper-casual space, including games such as CANDY CHALLENGE 3D™, BOSS LIFE™ and DEEP CLEAN INC. 3D™. During 2023, SciPlay continued development and testing of various new games. SciPlay’s social casino games typically include slots-style game play and occasionally include table games-style game play, while its casual games blend solitaire-style or bingo game play with adventure game features and its hyper-casual games include many simple core loop mechanics. 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 from Light & Wonder. This content allows players who like playing land-based game content to enjoy some of those same titles in SciPlay’s free-to-play games. SciPlay has access to Light & Wonder’s library of more than 1,500 iconic casino titles, including titles and content from third-party licensed brands such as MONOPOLY and JAMES BOND™. We believe that SciPlay’s access to this content, coupled with its years of experience developing in-house content, uniquely positions SciPlay to create compelling digital games.

Current Year Update

SciPlay continues to see strong momentum and higher payer engagement in 2023. Revenue growth was primarily attributable to the social casino business, including games such as Jackpot Party Casino, Quick Hit Slots and Gold Fish Casino. SciPlay continues to deploy significant updates across a number of their portfolio games, execute on its strategic game updates and enhanced analytics, and pursue international expansion.

Results of Operations and KPIs

Three and Nine Months Ended September 30, 2023 and 2022

(in millions unless otherwise noted)

39

For the three months ended September 30, 2023, revenues increased as social casino payer engagement increased and average monthly revenue per paying user reached a new record high.

For the nine months ended September 30, 2023, revenues increased as social casino payer engagement increased with an increase in average monthly paying users.

The mobile penetration percentage for the three months ended September 30, 2023 was flat, and for the nine months ended September 30, 2023, it increased, primarily reflecting a continued trend of players migrating from web to mobile platforms to play SciPlay’s games.

Average MAU for the three and nine months ended September 30, 2023 decreased due to the turnover in users.

ARPDAU increased with an increase in payers and higher daily average revenue per player while DAU was flat for the three months ended September 30, 2023.

ARPDAU increased as a function of slightly lower average DAU coupled with an increase in payers for the nine months ended September 30, 2023.

For the three and nine months ended September 30, 2023, AMRPPU and average MPU increased as payer conversion improved compared to the prior year period.

Payer conversion rates continue to be at high levels due to consistent payer interaction with the games as a result of SciPlay’s focus on introducing new content, features and live events in their games.

Operating Expenses and AEBITDA

The increase in operating expenses for the three and nine months ended September 30, 2023 as compared to the prior year periods primarily correlated with the increase in revenue (as described above) as a result of higher platform fees, higher stock-based compensation of $10 million and $19 million, respectively, and higher salaries and benefits related to an increase in headcount of $3 million and $11 million, respectively, partially offset by lower marketing spend of $4 million and $5 million, respectively. The nine months ended September 30, 2023 also included an impairment charge of $5 million related to the restructuring of a certain foreign studio.

AEBITDA for the three and nine months ended September 30, 2023 increased as compared to the prior year periods, and AEBITDA margin increased by 6 and 4 percentage points, respectively, primarily due to the increase in revenue (as described above) and reduced marketing spend, partially offset by higher operating costs resulting from increases in salaries and benefits.

iGAMING

Our iGaming business segment provides a comprehensive suite of digital gaming content, distribution platforms, player account management systems, as well as various other iGaming content and services. The majority of our revenue is derived from casino-style game content, including a wide variety of internally developed and branded games as well as popular third-party provider games. These games are made available to iGaming operators via content aggregation platforms, including Open Gaming System, remote gaming servers and various other platforms. We also provide our Open Platform System, a player account management 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 which is integrated with the online casino operators’ websites.

Current Year Update

We continue to expand our customer base and capitalize on growth in the European and North American markets by leveraging our industry leading platforms, content and solutions, as well as invest in our ability to scale our own original U.S. land-based content offering. Currently we have launched in six U.S. states, and we are positioned to enter others as additional state legislatures authorize online gaming. In October 2023, we launched our live casino operations in Michigan, reaching a strategic market expansion milestone for our iGaming business.

Results of Operations

Three and Nine Months Ended September 30, 2023 and 2022

The increases in iGaming revenue of 21% and 15% for the three and nine months ended September 30, 2023, respectively, as compared to the prior year periods, were primarily due to continuing momentum in the U.S. market, which delivered 25% and 30% year-over-year revenue growth, respectively, driven by the strength of our original content and growth in our partner network, as well as growth in international markets. The current year periods also benefited from $3 million and $5 million, respectively, in certain license termination fees. Wagers processed through our Open Gaming System for both current year periods increased to $20 billion and $61 billion, respectively. Revenue for the three months ended September 30, 2023 was impacted by favorable impact of foreign currency translation of $2 million, and the nine months ended September 30, 2023 were impacted by unfavorable impact of $2 million.

AEBITDA for the three and nine months ended September 30, 2023 increased as compared to the prior year periods primarily due to the increase in revenue as described above. AEBITDA margin increased by 2 and 1 percentage points for the three and nine months ended September 30, 2023, respectively.

RECENTLY ISSUED ACCOUNTING GUIDANCE

We do not expect that any recently issued accounting guidance will have a significant effect on our consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

For a description of our policies regarding our critical accounting estimates, see “Critical Accounting Estimates” in *Item 7 “*Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 10-K.

There have been no significant changes in our critical accounting estimate policies or the application of those policies to our condensed consolidated financial statements from those presented in *Item 7 “*Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 10-K.

LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL

Cash and Available Liquidity

As of September 30, 2023, our principal sources of liquidity, other than cash flows provided by operating activities, were cash and cash equivalents, including SciPlay cash and cash equivalents (for our SciPlay business segment), and amounts available under the LNWI Revolver and SciPlay Revolver (for our SciPlay business segment).

Cash and Available Revolver Capacity

(in millions)

Total cash held by our foreign subsidiaries was $183 million and $142 million as of September 30, 2023 and December 31, 2022, respectively. We believe that substantially all cash held outside the U.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 generally require significant upfront capital expenditures, and we may need to incur additional capital expenditures in order to retain or increase market share and continue our product investments. Other capital requirements for the near term primarily include debt principal and interest payments, purchase obligations, supply contracts, license agreement minimum guaranteed payments and lease obligations. There have been no material changes to our capital requirements disclosed in our 2022 10-K, other than those associated with the issuance of the 2031 Unsecured Notes and redemption of the 2025 Unsecured Notes.

In April 2023, we paid $32 million in cash taxes associated with the Divestitures. As required under our certain debt agreements, we used a portion of the proceeds received from the Divestitures to reinvest in our business through the SciPlay Merger (see Note 1 for additional details). On October 23, 2023, we paid $496 million to the holders of SciPlay Class A common stock in connection with the SciPlay Merger. Upon completion of the SciPlay Merger, the SciPlay Revolver was terminated, and any SciPlay cash and cash equivalents became available for use by L&W.

In connection with the termination of the SciPlay Revolver, during the fourth quarter of 2023, L&W intends to designate SciPlay and its wholly owned domestic subsidiaries and certain parent holding companies, which hold substantially all the assets of and operate SciPlay’s social gaming business, as “Restricted Subsidiaries” and join certain of these entities as guarantors under the LNWI Credit Agreement and the Unsecured Notes. As a result of such designations, these subsidiaries will be obligated to comply with many of the covenants set forth in those agreements and the assets, liabilities and financial results of those subsidiaries will be included in the calculation of the applicable financial metrics required by those agreements.

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, from time to time, repurchase or otherwise repay, retire or refinance our debt, through our subsidiaries or otherwise. In the event we pursue significant acquisitions or other expansion opportunities, or conduct significant repurchases of our outstanding securities, 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 in our 2022 10-K.

On March 1, 2022, our Board of Directors approved a share repurchase program under which we are authorized to repurchase, from time to time through February 25, 2025, up to an aggregate amount of $750 million of our outstanding common stock. During the nine months ended September 30, 2023, we repurchased 2.1 million shares of common stock under the program at an aggregate cost of $146 million (including excise tax).

On May 9, 2022, SciPlay’s Board of Directors approved a share repurchase program under which it is authorized to repurchase, from time to time through May 9, 2024, up to an aggregate amount of $60 million of its outstanding Class A common stock. SciPlay has since completed the initial share repurchase program authorization. On May 3, 2023, SciPlay’s Board of Directors approved another share repurchase program under which it is authorized to repurchase, from time to time through May 3, 2024, up to an aggregate amount of $60 million of its outstanding Class A common stock. No share repurchases have been made under the new program as of September 30, 2023. Upon completion of the SciPlay Merger, the SciPlay share repurchase program was terminated.

Cash Flow Summary

($ in millions)

Cash Flows from Operating Activities

($ in millions)

Net cash provided by operating activities from continuing operations increased primarily due to favorable changes in working capital accounts and a $209 million increase in earnings (drivers described above).

Changes in working capital accounts for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 primarily benefited from a decrease of $433 million in cash taxes paid associated with the Divestitures and lower interest payments, partially offset by $9 million in cash paid for contingent consideration and $7 million in professional services associated with the ASX listing. The prior year period was also negatively impacted by the timing of disbursements including costs associated with the strategic review, accelerated cash interest payments associated with refinancing debt transactions in April 2022 and $25 million paid by SciPlay for the Washington State matter settlement as described in Note 20 in our 2022 10-K.

Cash Flows from Investing Activities

Net cash used in investing activities from continuing operations decreased primarily due to SciPlay’s acquisition of Alictus Yazilim Anonim Şirketi in the prior year period, partially offset by the settlement of cross-currency interest rate swaps in the prior year period, in which we received $50 million in cash proceeds, and higher capital expenditures in the current year period. Capital expenditures are composed of investments in systems, equipment and other assets related to contracts, property and equipment, intangible assets and software.

Net cash provided by investing activities from discontinued operations decreased primarily as a result of the receipt of $6.4 billion in gross cash proceeds from the Divestitures, net of cash, cash equivalents and restricted cash transferred, during the nine months ended September 30, 2022.

Cash Flows from Financing Activities

Net cash used in financing activities decreased primarily due to the refinancing debt transactions in April 2022, in which we repaid $7.0 billion in senior notes (including redemption premium) and outstanding term loan borrowings and received $2.2 billion in proceeds from the issuance of the LNWI Term Loan B. This decrease was partially offset by costs related to the debt transactions in August 2023, in which we paid $20 million in premiums, fees and expenses for the issuance of the 2031 Unsecured Notes and redemption of the 2025 Unsecured Notes. We also purchased less of our outstanding common stock under our share repurchase program during the current year period. During the nine months ended September 30, 2023 and 2022, we purchased $145 million and $203 million, respectively, of our common stock.

Credit Agreement and Other Debt

For additional information regarding the LNWI Credit Agreement and other debt, interest rate risk and interest rate hedging instruments, see Notes 15 and 16 and *Item 7A “*Quantitative and Qualitative Disclosures About Market Risk” in our 2022 10-K as well as Notes 11 and 12 and Item 3 below in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

As of September 30, 2023, we did not have any significant off-balance sheet arrangements.

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates and commodity prices. The following are our primary exposures to market risks:

Interest Rate Risk

As of September 30, 2023, the face value of long-term debt was $3.9 billion, including $2.2 billion of variable-rate obligations. Assuming a constant outstanding balance for our variable-rate long-term debt and excluding the impact of interest rate swap contracts, a hypothetical 1% change in interest rates would result in interest expense changing by approximately $22 million. All of our interest rate sensitive financial instruments are held for purposes other than trading.

In April 2022, we entered into interest rate swap contracts with $700 million notional amount to hedge a portion of our interest expense associated with our variable rate debt to effectively fix the interest rate that we will pay. The objective of our interest rate swap contracts, which are designated as cash flow hedges of the future interest payments, is to eliminate the variability of cash flows attributable to the SOFR component of interest expense to be paid on a portion of our variable rate debt. These hedges mature in April 2027.

For additional information regarding our long-term debt and interest rate swap contracts, see Notes 11 and 12, respectively.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 3a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Interim Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of September 30, 2023.

There were no changes in our internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our risk factors from those disclosed under *Item 1A “*Risk Factors” included in our 2022 10-K, except as noted below.

Our secondary listing of the Company’s common stock on the Australian Securities Exchange could lead to price variations and other impacts on holders our common stock.

On May 22, 2023 (AEST), our common stock was listed as CDIs on the ASX and commenced active trading under the ASX code “LNW,” in addition to our existing primary listing on The Nasdaq Stock Market (“Nasdaq”). Dual listing may result in price variations between our securities listed on the different exchanges due to a number of factors, including that our common stock listed on the Nasdaq is traded in U.S. dollars and any CDIs listed on the ASX are traded in Australian Dollars, volatility in the exchange rate of the two currencies and differences between the vacation schedules, trading schedules and time zones of the two exchanges, among other factors. A decrease in the price of our securities in one market may result in a decrease in the price of our securities in the other market. Dual listing also presents us with the opportunity to raise additional funds through the issuance of CDIs, which could cause dilution to existing stockholders.

The SciPlay Merger subjects us to a number of risks and uncertainties, including whether it will yield additional value for our stockholders and adversely impact our business, financial results, results of operations, cash flows or stock price.

On October 23, 2023, we acquired the remaining approximately 17% equity interest in SciPlay not already owned by us pursuant to the SciPlay Merger in an all-cash transaction for $496 million, excluding transaction fees and expenses. The SciPlay Merger exposes us to a number of risks and uncertainties, including that L&W may be unable to achieve the expected operational, strategic and financial benefits of the SciPlay Merger; difficulties in retaining or motivating key management personnel of SciPlay; and exposure to potential litigation. Any of these factors could disrupt our business and could have a material adverse effect on our business, financial condition, results of operations, cash flows or stock price.

Unfavorable U.S. and international economic conditions, decreased discretionary spending, travel or operational disruptions due to other factors such as inflation, rising benchmark interest rates, terrorist activity or threat thereof, armed conflicts or hostilities, civil unrest, health epidemics, contagious disease outbreaks, or public perception thereof, other economic or political uncertainties, or other events beyond our control have adversely affected and may in the future adversely affect our business, results of operations, cash flows and financial condition.

Unfavorable economic conditions, including recession, inflation, economic slowdown, decreased liquidity in the financial markets, decreased availability of credit, relatively high rates of unemployment and inflation, have had, and may continue to have, a negative effect on our business. Socio-political factors such as terrorist activity or threat thereof, armed conflicts or hostilities, civil unrest or other economic or political uncertainties, or health epidemics, contagious disease outbreaks, or public perception thereof, or other events beyond our control that contribute to consumer unease may also result in decreased discretionary spending or travel by consumers and have a negative effect on our businesses. Such factors out of our control may also have effects beyond discretionary spending or travel, such as disruptions to our operations and productivity, which could also have a negative effect on our businesses. We cannot fully predict the effects that unfavorable social, political and economic conditions, economic uncertainties and public health crises and any resulting decrease in discretionary spending or travel would have on us, as they would be expected to impact our customers, suppliers, employees, consultants and business partners in varied ways. For a description of the impact of the COVID-19 pandemic and other public health crises, see the risk factor captioned “The effects of the COVID-19 pandemic or similar health epidemics, contagious disease outbreaks and public perception thereof, continue to and, in the future, could impact our operations and, should negative impacts such as significant negative player engagement develop, adversely affect and continue to adversely affect our operations, business, results of operations, cash flows and financial condition” disclosed under *Item 1A “*Risk Factors” included in our 2022 10-K. In our Gaming business, especially our Participation gaming business, our revenue is largely driven by players’ disposable incomes and level of gaming activity which may be reduced by unfavorable economic conditions. A further or extended decline in disposable income may result in reduced play levels on our Participation gaming machines, causing our results of operations and cash flows from these products to decline. Additionally, higher travel and other costs may adversely affect the number of players visiting our customers’ casinos. Adverse changes in discretionary consumer spending or consumer preferences, resulting in fewer patrons visiting casinos and reduced play levels, could also be driven by factors such as an unstable job market, outbreaks of contagious diseases or public perception thereof or fears of terrorism or other violence.

A decline in play levels has negatively impacted the results of operations, cash flows and financial condition of our casino customers and their ability to purchase or lease our products and services.

Unfavorable economic conditions have also impacted, and could continue to impact, the ability of our Gaming customers to make timely payments to us. These conditions, and the concentration of certain outstanding Gaming segment receivables, may increase our collection risks and materially impact our estimate of receivables allowance for credit losses. We increased our allowance for credit losses by $56 million for the year ended December 31, 2020. In addition, unfavorable economic conditions have caused, and may cause in the future, some of our Gaming customers to temporarily close gaming venues or ultimately declare bankruptcy, which adversely affects our business. Consistent with other suppliers in the gaming industry, our Gaming business has recently expanded the use of extended payment term financing for gaming machine purchases, 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 7 in our 2022 10-K for international locations with significant concentrations of our receivables with terms longer than one year.

In our iGaming business based on a Participation model, our revenue is largely driven by disposable incomes and level of player activity. Unfavorable economic conditions have previously reduced and may later reduce the disposable incomes of end users consuming the services, which could negatively impact revenues for the iGaming business. Suppliers to our iGaming business may suffer financial difficulties and may not be able to offer their services and products, which could restrict the provision of our services and negatively impact our revenues. Various gambling regulators have implemented additional responsible and safer gambling measures relating to online casinos, including the implementation of bet limits, spin speeds, deposit limits and bonusing, which could negatively impact our revenues, particularly if additional gambling regulators follow suit or additional measures are introduced.

In our SciPlay business, while we maintain offices in the U.S., we have employees and consultants operating in foreign jurisdictions, including Israel, Turkey and Ukraine. In the foreign jurisdictions in which SciPlay operates, conditions such as political instability, terrorist activity or threat thereof, armed conflicts or hostilities and civil unrest could adversely affect our business and results of operations. For example, political, economic and military conditions in Israel, including acts of terrorism, war or other armed conflicts, such as Hamas’ attack against Israel, which has impacted our employees and operations, in Israel, could in the future cause business interruptions or other spillover effects that could materially adversely affect SciPlay’s business and results of operations.

There are ongoing concerns regarding the debt burden of certain countries, particularly in Europe and South America, and their ability to meet their future financial obligations, which have resulted in downgrades of the debt ratings for these countries. We currently operate in, and our growth strategy may involve pursuing expansion or business opportunities in certain of these jurisdictions, such as Argentina, Brazil, Greece, Italy, Puerto Rico, Turkey and Ukraine among others. These sovereign debt concerns, whether real or perceived, could result in a recession, prolonged economic slowdown, or otherwise negatively impact the general health and stability of the economies in these countries or more broadly. In more severe cases, this could result in a limitation on the availability or flow of capital, thereby restricting our liquidity and negatively impacting our results of operations, cash flows and financial condition.