Intangible Assets and Goodwill

Intangible Assets

The following tables present certain information regarding our intangible assets as of September 30, 2015 and December 31, 2014. Amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives with no estimated residual value.



Intangible Assets	Gross Carrying Amount		Accumulated Amortization		Net Balance
Balance as of September 30, 2015
Amortizable intangible assets:
Patents	$	20.4	$	9.5	$	10.9
Customer relationships	876.5		95.1		781.4
Licenses	366.4		128.6		237.8
Intellectual property	727.1		117.3		609.8
Trade names	97.5		—		97.5
Brand names	123.3		15.2		108.1
Non-compete agreements	0.3		0.3		—
	2,211.5		366.0		1,845.5
Non-amortizable intangible assets:
Trade names	97.4		2.1		95.3
Total intangible assets	$	2,308.9	$	368.1	$	1,940.8

Balance as of December 31, 2014
Amortizable intangible assets:
Patents	$	17.9	$	8.4	$	9.5
Customer relationships	883.2		46.7		836.5
Licenses	332.8		88.5		244.3
Intellectual property	736.3		19.5		716.8
Brand names	128.2		5.3		122.9
Non-compete agreements	0.3		0.2		0.1
Lottery contracts	1.5		1.5		—
	2,100.2		170.1		1,930.1
Non-amortizable intangible assets:
Trade names	323.6		2.1		321.5
Total intangible assets	$	2,423.8	$	172.2	$	2,251.6

The aggregate intangible amortization expense for the three and nine months ended September 30, 2015 was $181.5 million and $331.8 million, respectively. The aggregate intangible amortization expense for the three and nine months ended September 30, 2014 was $18.1 million and $49.0 million, respectively. Amortization expense is excluded from cost of services, cost of product sales, cost of instant games and other operating expenses and is separately stated within D&A in the Consolidated Statements of Operations and Comprehensive Loss.

We conduct impairment tests of our indefinite-lived trade name assets annually in the fourth quarter and on an interim quarterly basis when events arise or circumstances change that indicate that it is more likely than not that the fair value is less than carrying value or when circumstances no longer continue to support an indefinite useful life. During the second quarter of 2015, as a result of an interim review of assets with indefinite useful lives, we recorded an impairment charge of $25.0 million to reduce the carrying value of one indefinite-lived trade name asset to its fair value.

During the third quarter of 2015 and in conjunction with both our introduction of a new SG-branded gaming cabinet and our step two impairment analysis for our SG gaming reporting unit goodwill as further described below, we determined that certain of our indefinite-lived trade name assets in our gaming business segment should be classified as finite-lived instead of indefinite-lived. In connection with this change, we performed a quantitative impairment test for our SG gaming related trade name assets which consisted of a comparison of the fair value of the assets to their carrying amount. If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess. We estimated the fair value of the trade names using the relief-from-royalty method, which uses several significant assumptions, including an estimate of useful life and revenue projections that consider historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. The following estimates and assumptions were also used in the relief-from-royalty method:


•	Royalty rates between 0.5% and 1.0% based on market observed royalty rates; and


•	A discount rate of 9.0% based on the required rate of return for the trade name assets.

Based on the estimated fair value of the trade names, we recorded a non-cash impairment charge of $103.6 million for the three ended September 30, 2015, which impairment is reflected in D&A in our Consolidated Statements of Operations and Comprehensive Loss. The change in useful life determination was treated as a change in estimate with the new $97.5 million carrying value of the trade names to be amortized on a straight-line basis over a fifteen-year period beginning in the fourth quarter of 2015. The fifteen-year estimated useful life is a matter of management judgment which we believe most accurately represents the period over which the trade names will contribute to the future cash flows of the gaming business segment and is consistent with our policies for assigning useful lives as disclosed in Note 1 (Description of the Business and Summary of Significant Accounting Policies) in our 2014 Annual Report on Form 10-K.

The aggregate amount of impairment charges for our trade name assets reflected in D&A in our Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015 are $103.6 million and $128.6 million, respectively. No intangible asset impairments were recorded for the three and nine months ended September 30, 2014.

Goodwill

We evaluate goodwill at the reporting unit level by comparing the carrying value of each reporting unit to its fair value using a quantitative two-step impairment test in accordance with ASC 350-20. We conduct impairment tests of goodwill annually in the fourth quarter and on an interim quarterly basis when events arise or circumstances change that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the indicated fair value of the reporting unit is greater than its carrying value, goodwill is not considered impaired. If the indicated fair value of the reporting unit is less than its carrying value, the amount of the impairment loss, if any, will be measured by comparing the indicated fair value of goodwill to its carrying value. Our reporting units as of September 30, 2015 include: instant products, U.S. lottery systems, international lottery systems, SG gaming, legacy U.K. gaming, casino management systems, table products, and interactive.

As of September 30, 2015, we have reviewed each of our reporting units for indicators of impairment, and, with the exception of the SG gaming reporting unit, we have not identified events or circumstances affecting our other seven reporting units which would indicate an impairment. Market-related factors negatively impacting gaming machine unit demand and the number of gaming machines leased by our customers coupled with fewer than anticipated new casino openings and expansions have resulted in continued declines in our gaming machine sales and participation game revenues. A prolonged reduction in customer spending on new gaming machine units, a lack of new casino openings, economic and political conditions impacting unit sales and participation game revenues in certain international jurisdictions, and cost reduction initiatives undertaken by certain of our customers during the quarter have all negatively impacted our SG gaming reporting unit. These conditions have culminated in a change in outlook for the SG gaming reporting unit during the third quarter of 2015 which we believe is an indicator of goodwill impairment. Our SG gaming reporting unit is included in our gaming operating segment, which is reflected in the segment table below.

We performed an interim step one goodwill analysis of our SG gaming reporting unit, and we determined that the indicated fair value of our SG gaming reporting unit was less than its carrying value. For purposes of the step one analysis under ASC 350-20, we estimated the fair value of the SG gaming reporting unit using both an income approach that analyzed projected discounted cash flows and a market approach that considered both comparable public companies as well as comparable industry transactions. In determining the fair value of our SG gaming reporting unit, we have given more weight to the income approach than to the market valuation approach due to a relatively small number of comparable companies within our industry and absence of a significant volume of recent comparable industry transactions.

In calculating the fair value of our SG gaming reporting unit using the income approach, we used projections of revenues, gross margin, operating costs and cash flows that considered historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. The following estimates and assumptions were also used in the discounted cash flow analysis:


•	A terminal profit margin percentage reflecting our historical and forecasted profit margins;


•	A terminal revenue growth rate of 2.0% based on long term nominal growth rate potential;


•	Assumptions regarding future capital expenditures reflective of maintaining our installed base of leased gaming machines and facilities under normalized operations; and


•	An overall discount rate of 9% based on our weighted average cost of capital for the SG gaming reporting unit.

Additionally, under the market approach, we used other significant observable inputs including various peer company comparisons and industry transaction data. Changes in these estimates or assumptions could materially affect the determination of fair value and the conclusions of the step one analysis for the reporting unit.

As the step one analysis indicated an impairment in the carrying value of the SG gaming unit, we then proceeded to perform a step two impairment analysis to determine the amount of goodwill impairment to be recorded. The amount of the impairment is calculated by comparing the implied fair value of the goodwill to its carrying amount, which requires us to allocate the fair value determined in the step one analysis to the individual assets and liabilities of the reporting unit. Any remaining fair value would represent the implied fair value of goodwill as of the testing date.

As of the filing date of this Quarterly Report on Form 10-Q, we have not completed our step two analysis due to its complexity. However, based on the work performed through the date of this filing, we recorded a $535.0 million non-cash impairment charge with no tax benefit to reduce the historical carrying value of our SG gaming goodwill to its implied fair value, which impairment is reflected in Goodwill impairment in our Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015. This impairment charge does not impact our operations, compliance with our debt covenants or our cash flows. The carrying value of our SG gaming goodwill as of September 30, 2015 following the impairment charge is $1,483.7 million.

The completion of our step two analysis is subject to the finalization of fair values which we expect to complete prior to filing our 2015 Annual Report on Form 10-K. We believe that the preliminary estimate of the impairment charge is reasonable and represents our current good faith estimate of the amount of the impairment charge based on our analysis to date. We based our fair value estimates on assumptions that are subject to inherent uncertainty and there can be no assurance that no material adjustments to the preliminary estimate will be required as the step two analysis is finalized. Following completion of the analysis, we will adjust our preliminary estimate if necessary, and record any required adjustment in our consolidated financial statements for the year ended December 31, 2015.

The table below reconciles the change in the carrying amount of goodwill by business segment for the period from

December 31, 2013 to September 30, 2015.



Goodwill	Gaming			Lottery			Interactive		Totals
Balance as of December 31, 2013	$	612.7		$	513.9		$	56.5	$	1,183.1
Acquisitions	2,902.8			—			53.3		2,956.1
Foreign currency adjustments	(15.8		)	(15.1		)	—		(30.9		)
Balance as of December 31, 2014	3,499.7			498.8			109.8		4,108.3
Foreign currency adjustments	(77.0		)	(11.1		)	—		(88.1		)
Impairment	(535.0		)	—			—		(535.0		)
Balance as of September 30, 2015	$	2,887.7		$	487.7		$	109.8	$	3,485.2