Impairments and Assets Held for Sale

Impairments and accelerated D&A charges recognized within D&A are summarized below:



	Year Ended December 31,
Asset	2016		2015		2014
Trade names (1)(2)	$	—	$	128.6	$	6.0
Buildings (3)	4.8		11.5		9.4
Lottery other assets (4)	—		13.8		4.2
Gaming equipment (5)	—		15.8		21.4
Total	$	4.8	$	169.7	$	41.0

(1) During the second quarter of 2015, as a result of an interim review of indefinite-lived trade name assets, we recorded an impairment charge of $25.0 million, with a $9.5 million tax benefit, to reduce the carrying value of one of our trade name assets to fair value.

(2) During the third quarter of 2015, we determined that circumstances no longer continued to support an indefinite useful life for certain of our indefinite-lived trade name assets in our Gaming business segment. We estimated the fair value of the trade name assets using the relief-from-royalty method, which uses several significant assumptions, including an estimated royalty rate, revenue projections that consider historical and estimated future results and general economic and market conditions, as well as the impact of planned business and operational strategies. The following estimates and assumptions were used in applying 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 name assets, we recorded an impairment charge of $103.6 million with a tax benefit of $38.8 million during the third quarter of 2015. The change in useful life determination was treated as a change in estimate with the new $97.5 million carrying value of the trade name assets being amortized on a straight-line basis over a fifteen-year period beginning in the fourth quarter of 2015, which materially approximates the expected pattern of use over the remaining useful life. The fifteen-year estimated useful life is a matter of management judgment, which we believe materially represents the period over which the trade name assets will contribute to the future cash flows of the respective asset group and is consistent with our policies for assigning useful lives.

(3) We recorded a non-cash charge of $4.8 million, $6.6 million and $9.4 million during 2016, 2015 and 2014, respectively, to adjust the carrying value of the Waukegan facility to fair value less expected selling costs.

(4) During the fourth quarter of 2015, we recorded $11.9 million in accelerated D&A of property and equipment related to our instant games operations.

(5) During 2015 and 2014, we recorded $15.8 million and $14.5 million, respectively, of accelerated depreciation on certain equipment assets included in our Gaming business segment.

Goodwill and intangible assets with indefinite useful lives

Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed of acquired companies. We test goodwill for impairment annually as of October 1 of each fiscal year or more frequently if 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 value. 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. We also have the option to first assess qualitative factors to determine whether the fair value of a reporting unit is not "more than likely" less than its carrying value, which is commonly referred to as "Step 0". If the fair value of the reporting unit is greater than its carrying value, goodwill is not considered impaired. If the 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 fair value of goodwill to its carrying value.

We reviewed our operating segments in accordance with ASC 350 to determine if additional reporting units exist within our operating segments based on the availability of discrete financial information that is regularly reviewed by segment management. For additional business segment information, see Note 2. We determined that we have eight reporting units as of our October 1, 2016 goodwill impairment testing date: Instant Products, U.S. Lottery Systems, International Lottery Systems, SG Gaming, legacy U.K. Gaming, Casino Management Systems, Table Products, and Interactive. There were no subsequent changes to this determination through December 31, 2016. These are the same reporting units that we determined at December 31, 2015.

Our annual goodwill impairment tests as of October 1, 2016 indicated estimated fair values in excess of their carrying values for each of our instant products, SG Gaming, legacy U.K. Gaming, Casino Management Systems, Table Products and Interactive reporting units. See below for discussion related to the impairment testing results of International Lottery Systems reporting unit.

We conduct impairment tests of our indefinite-lived assets annually in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of an indefinite-lived asset is less than its carrying value or when circumstances no longer continue to support an indefinite useful life.

Our annual impairment tests as of October 1, 2016 produced estimated fair values in excess of the carrying values for all of our remaining indefinite-lived intangible assets.

2016 International Lottery Systems Impairment Charge

Based on the results of our annual goodwill impairment test for our International Lottery Systems reporting unit, we recorded a goodwill impairment charge of $69.0 million, which resulted in a tax benefit of $14.5 million, during the fourth quarter of 2016. The impairment charge resulted from an accumulation of various internal and external factors, including the loss of our China Sports Lottery validation contract, the inability to receive regulatory approval in 2016 on certain games resulting in lower than anticipated replacement revenues, and the underlying factors driving the assumptions used in our model for goodwill valuation purposes, which were based on normalized historical results as described below.

For purposes of the step one test under ASC 350-20, we estimated the fair value of the International Lottery Systems reporting unit using both an income approach that analyzed projected discounted cash flows and a market approach that considered comparable public companies. In determining the fair value of our International Lottery Systems reporting unit, we have given equal weight to the income and the market approach.

In calculating the fair value of our International Lottery Systems reporting unit using the income approach, we used projections of revenues, profit margin, operating costs, capital expenditures and cash flows that primarily considered historical results, but also considered estimated future results and general economic and market conditions. In developing these projections, as large system installations and related hardware and terminal sales are inherently unpredictable, we used normalized historical results, even though such installations have occurred in the past and may reoccur in the future. The following estimates and assumptions were used in the discounted cash flow analysis:


•	A terminal revenue growth rate of 2.0%;


•	A terminal profit margin percentage reflecting our historical normalized profit margins;


•	Assumptions regarding future capital expenditures reflective of maintaining and renewing our current customer contracts under normalized operations; and


•	An overall discount rate of 8% based on our weighted average cost of capital for the International Lottery Systems reporting unit.

As the step one test indicated a possible impairment in the carrying value of our International Lottery Systems reporting unit goodwill, we performed step two of the impairment test to determine the amount of goodwill impairment to be recorded. The amount of the impairment was calculated by using assumptions consistent with our step one assumptions described above and the resulting implied fair value of the goodwill after allocating the fair value determined in the step one test to the individual assets and liabilities of the reporting unit, including the fair value of identified intangible assets which are not included in the existing carrying value of the reporting unit. The International Lottery Systems reporting unit fair value from our step one test was primarily allocated to our existing recorded assets and liabilities and our unrecorded identified intangible assets, including our proprietary Lottery systems platform and our existing customer relationships, resulting in an unallocated excess amount of $22.9 million, which was the implied fair value of the goodwill and was used in determining the impairment charge. The International Lottery Systems reporting unit is included in our Lottery business segment.

2015 SG Gaming Impairment Charge

During the third quarter of 2015, we identified certain events and circumstances, which impacted our SG Gaming reporting unit and required the performance of an interim goodwill impairment test. Specifically, 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 had 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 third quarter of 2015 had all negatively impacted our SG Gaming reporting unit.

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 had given more weight to the income approach than to the market approach due to a relatively small number of comparable companies within our industry and absence of a significant volume of recent comparable industry transactions. Additionally, under the market approach, we used other significant observable inputs including various peer company comparisons.

The following key estimates and assumptions were used in the discounted cash flow analysis:


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


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


•	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.

Based on the results of our goodwill impairment analysis for our SG Gaming reporting unit, we recorded a $935.0 million non-cash impairment charge with no tax benefit for the year ended December 31, 2015.

2015 U.S. Lottery Systems Impairment Charge

Based on the results of our annual goodwill impairment test for our U.S. Lottery Systems reporting unit, we recorded a goodwill impairment charge of $67.6 million, which resulted in a tax benefit of $24.9 million during the fourth quarter of 2015. The impairment charge resulted from an accumulation of various internal and external factors, including our consideration of the U.S lottery industry outlook, our failure to win anticipated new U.S. lottery system contracts, intense price-based competition and requirements for up-front cash-based payments.

We estimated the fair value of the U.S. Lottery Systems reporting unit using both an income approach that analyzed projected discounted cash flows and a market approach that considered comparable public companies. In determining the fair value of our U.S. Lottery Systems reporting unit, we had given more weight to the income approach than to the market approach due to a relatively small number of comparable companies within our industry. The key estimates and assumptions used in the discounted cash flows analysis included a 2.0% terminal revenue growth rate and an overall discount rate of 8%.

Other long-lived assets and intangible assets with finite useful lives

Intangible assets with finite useful lives are amortized over two to sixteen years using the straight-line method, which materially approximates the pattern of the assets' use. Factors considered when assigning useful lives include legal, regulatory and contractual provisions, product obsolescence, demand, competition and other economic factors.

We assess the recoverability of long-lived assets and intangible assets with finite useful lives whenever events arise or circumstances change that indicate the carrying value of an asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured by a comparison of the carrying value of the asset (or asset group) to the expected net future undiscounted cash flows to be generated by that asset (or asset group). The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount by which the carrying value of the asset exceeds the fair market value of the asset.

Assets held for sale

As of December 31, 2016 and 2015, we had $6.5 million and $16.7 million of assets held for sale, respectively. These assets held for sale are included within Prepaid expenses, deposits and other current assets and are reported at the lower of the carrying value or fair market value, less expected costs to sell.

We measured the fair value of assets held for sale under a market approach and have categorized such measurements as Level 3 in the fair value hierarchy.