Intangible Assets, net and Goodwill

3 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets, net and Goodwill Intangible Assets, net

The following tables present certain information regarding our intangible assets as of March 31, 2020 and December 31, 2019.


	As of
	March 31, 2020										December 31, 2019
	Gross Carrying Value		Accumulated Amortization		Net Balance		Gross Carrying Value		Accumulated Amortization		Net Balance
Amortizable intangible assets:
Customer relationships	$	1,064	$	(398)	$	666	$	1,086	$	(383)	$	703
Intellectual property	915		(573)		342		931		(563)		368
Licenses	563		(361)		202		548		(329)		219
Brand names	120		(73)		47		123		(72)		51
Trade names	116		(34)		82		116		(31)		85
Patents and other	24		(15)		9		24		(15)		9

	2,802		(1,454)		1,348		2,828		(1,393)		1,435
Non-amortizable intangible assets:
Trade names	83		(2)		81		83		(2)		81
Total intangible assets	$	2,885	$	(1,456)	$	1,429	$	2,911	$	(1,395)	$	1,516

The following reflects intangible amortization expense included within D&A:


	Three Months Ended
	March 31,
	2020		2019
Amortization expense	$	65	$	77

Goodwill

Legacy U.K. Gaming Impairment Charge

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.

A substantial portion of our legacy U.K. Gaming reporting unit revenue comes from Ladbrokes Coral Group (acquired by GVC Holdings PLC in March 2018), which operates LBOs in the U.K. In May 2018, the U.K. government published its decision mandating that the maximum stakes limit on fixed-odds betting terminals be reduced from £100 to £2, which was effective as of April 1, 2019. As a result of this change, LBO operators began to rationalize their retail operations, which among other measures has included closure of certain LBO shops. Consequently, as of October 1, 2019, we concluded that an elevated risk of goodwill impairment existed for our legacy U.K. Gaming reporting unit as adverse changes in projections for future operating results or other key assumptions, such as projected revenue, profit margin, capital expenditures or cash flows associated with investments included in that reporting unit could lead to future goodwill impairments.

During the first quarter of 2020, the COVID-19 disruptions resulted in the widespread closures of LBO shops across the U.K., which, along with global economic uncertainty, contributed to further deterioration in business conditions from our 2019 annual goodwill test date. This had an adverse effect on our legacy U.K. Gaming reporting unit, which necessitated performing a quantitative goodwill impairment test during the first quarter of 2020.

We performed this quantitative impairment test by comparing the fair value of our legacy U.K. Gaming reporting unit to its carrying value, including goodwill. As described in further detail below, the fair value of our legacy U.K. Gaming reporting unit was determined using a combination of both an income approach, based on the present value of discounted cash flows, and a market approach. Due to current market volatility and limited market data points specific to the nature of our legacy U.K. Gaming reporting unit operations, we placed greater weight on the income approach than on the market approach. As a result of this analysis, during the first quarter of 2020 we recognized a partial impairment charge totaling $54 million,

which is the amount by which the carrying value exceeded the estimated fair value. This impairment charge resulted in no tax benefit.

We used projections of revenues, profit margin, operating costs, capital expenditures and cash flows that primarily considered general economic and market conditions and estimated future results including the estimated impact of the COVID-19 disruptions. We used a range of different scenarios and derived estimated fair value based on an equal weighting of these scenarios to reflect the economic uncertainty resulting from the COVID-19 disruptions and the timing and magnitude of the economic recovery following the COVID-19 disruptions coupled with the impact of the regulatory change. The following ranges of the key estimates and assumptions were used in the discounted cash flow analysis:

•Revenue growth for FY 2021 between negative 9% and negative 20%, an average revenue growth for FY 2022 to FY 2027 between positive 3% and positive 5%, and terminal revenue growth rate of positive 2.0%;

•An average profit margin ranging from 13% to 23%;

•Assumptions regarding future capital expenditures reflective of maintaining our current customer contracts; and

•An overall discount rate ranging from 8.5% to 10.0%.

In our market comparable analysis, we considered revenue and EBITDA multiples ranging from 2.1x to 2.7x and 5.7x to 7.5x, respectively, and ultimately selected multiples at the low end of the range.

The legacy U.K. Gaming reporting unit is included in our Gaming business segment.

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

December 31, 2019 to March 31, 2020.


	Gaming⁽¹⁾		Lottery		SciPlay		Digital		Totals
Balance as of December 31, 2019	$	2,449	$	349	$	115	$	367	$	3,280
Impairment	(54)		—		—		—		(54)
Foreign currency adjustments	(33)		(5)		—		(26)		(64)
Balance as of March 31, 2020	$	2,362	$	344	$	115	$	341	$	3,162

(1) Accumulated goodwill impairment charges for the Gaming segment as of March 31, 2020 were $989 million.