Acquisitions and Dispositions

Acquisitions

2013

On October 18, 2013 the Company acquired WMS for $1,485.9 million. The WMS acquisition creates one of the largest global gaming suppliers with a diversified suite of products and strong content creation capabilities. Additionally, the acquisition is expected to generate opportunities for cost and revenue synergies as we seek to increase the efficiency of our organization and build upon our capabilities.

We have recorded the assets and liabilities of WMS based on our preliminary estimates of their fair values at the acquisition date. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets and liabilities of WMS and resulting goodwill are subject to adjustment as the Company finalizes its fair value analysis. The significant items for which a final fair value has not been determined as of the filing of this Annual Report on Form 10-K include accrued liabilities, deferred income taxes and other long-term liabilities. We expect to complete our fair value determinations no later than the third quarter of 2014. We do not expect our fair value determinations to change; however, there may be differences compared to those amounts reflected in our consolidated financial statements at December 31, 2013 as we finalize our fair value analysis.

Based on our preliminary estimates, the equity purchase price exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities at the acquisition date by $385.6 million, which amount has been recognized as goodwill within our Gaming segment. We attribute this goodwill to enhanced financial and operational scale, market diversification, opportunities for synergies and other strategic benefits. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.

The preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed is presented below:



At October 18, 2013
Current assets	$	508.0
Long-term notes receivable	76.2
Property, plant and equipment, net	465.3
Goodwill	385.6
Intangible assets	325.0
Intellectual property	201.2
Other long-term assets	5.9
Total assets	1,967.2
Current liabilities	(164.4		)
Deferred income taxes	(166.6		)
Long-term liabilities	(150.3		)
Total liabilities	(481.3		)
Total equity purchase price	$	1,485.9

Our estimates of the fair values of depreciable tangible assets and identifiable intangible assets are presented below:



	Fair values at October 18, 2013		Average remaining useful life (in years)
Land	$	14.9	Indefinite
Real property	110.5		40
Gaming machines	230.8		1-6
Personal property	109.1		4-6
	$	465.3

Trade names	$	66.0	Indefinite
Product names	39.3		10
Customer relationships	131.5		2-15
Long-term licenses	88.2		2-5
	$	325.0

The estimated fair value of acquired real property was determined primarily using a cost approach, in which we determined an estimated replacement cost for the assets. To estimate the fair value of land, we utilized the sales comparison approach, which compares the land to properties that have recently been sold in similar transactions. For gaming machines and other personal property assets, we determined the fair value using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable.

The estimated fair values of acquired finite- and indefinite-lived trade names and finite-lived internally-developed intellectual property ("IP") was determined using the royalty savings method, which is a risk-adjusted discounted cash flow approach. Finite-lived intangible assets include certain product trade names, game content and design IP, and operating system and game server software. Intellectual property is classified as capitalized software, net, on the Consolidated Balance Sheet as of December 31, 2013 and has an average remaining useful life of four to ten years. The royalty savings method values an intangible asset by estimating the royalties saved through ownership of the asset. The royalty savings method requires identifying the future revenue that would be impacted by the trade name or IP asset (or royalty-free rights to the assets), multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets. The indefinite-lived trade names include "WMS" and "Williams Interactive".

The estimated fair value of the acquired customer relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as fixed assets, working capital, workforce and other intangible assets, including trade names and game content and design IP - was estimated through contributory asset capital charges. The value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets. The estimated fair value of the long-term licenses was determined based on a comparison of rates and terms of the acquired licenses to a portfolio of market comparables to determine if the acquired long term liabilities were at rates above or below market. In addition, we recorded a long-term asset and liability related to the minimum guarantee for long-term licenses in accordance with the Company's policy as described in Note 1 (Description of the Business and Summary of Significant Accounting Policies).

The estimated fair value of deferred income taxes was determined by applying the appropriate enacted statutory tax rate to the temporary differences that arose on the differences between the financial reporting value and tax basis of the assets and liabilities acquired.

The revenue and loss from continuing operations of WMS since the acquisition date that are included in our consolidated statements of operations are presented below. These amounts are not necessarily indicative of the results of operations that WMS would have realized if it had continued to operate as a stand-alone company during the period presented, primarily due to the elimination of certain headcount and administrative costs since the acquisition date that are the result of integration activities or due to costs that are now reflected in our unallocated corporate costs and not allocated to WMS.



	From October 18, 2013 through December 31, 2013
Revenue	$	144.7
Loss from continuing operations	$	(31.4	)

As required by ASC 805, Business Combinations, the following unaudited pro forma statements of operations for the years ended December 31, 2013 and 2012 give effect to the WMS acquisition as if it had been completed on January 1, 2012. The unaudited pro forma financial statements are presented for illustrative purposes only and are not necessarily indicative of what the operating results actually would have been had the WMS acquisition been completed during the periods presented. In addition, the unaudited pro forma financial statements do not purport to project the future operating results of the Company. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma statements of operations does not reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the WMS acquisition.



	Year Ended December 31,
	2013		2012
Revenue from Consolidated Statements of Operations and Comprehensive Loss	$	1,090.9	$	928.6
Add: WMS revenue not reflected in Consolidated Statements of Operations and Comprehensive Loss	567.4		688.5
Unaudited pro forma revenue	$	1,658.3	$	1,617.1



	Year Ended December 31,
	2013			2012
Net loss from continuing operations from Consolidated Statements of Operations and Comprehensive Loss	$	(25.6	)	$	(43.9	)
Add: WMS net loss from continuing operations not reflected in Consolidated Statements of Operations and Comprehensive Loss plus pro forma adjustments described below	(34.7		)	(50.4		)
Unaudited pro forma net loss from continuing operations	$	(60.3	)	$	(94.3	)

Unaudited pro forma amounts include adjustments to reflect the following:


(1)	An adjustment to reflect additional depreciation and amortization of $22.2 million and $60.9 million for the years ended December 31, 2013 and 2012, respectively, that would have been charged assuming the fair value adjustments to intangible assets and property and equipment had been applied on January 1, 2012.


(2)	An adjustment to increase cost of sales by $13.0 million to reflect the impact of purchase accounting adjustments on the carrying value of inventory for the year ended December 31, 2013.


(3)	An adjustment to reverse acquisition-related fees and expenses of $74.0 million and $2.5 million for the years ended December 31, 2013 and 2012, respectively.


(4)	An adjustment to reflect the additional interest expense of $61.0 million and $83.0 million for the years ended December 31, 2013 and 2012, respectively, that would have been charged assuming our new credit facilities were in place as of January 1, 2012.


(5)	An adjustment of $12.5 million and $33.3 million for the years ended December 31, 2013 and 2012, respectively, to reverse the U.S. tax expense of WMS under the assumption that the U.S. taxable income of WMS for each period presented would have been offset by U.S. tax attributes of the Company.

2012

In July 2012, we acquired substantially all of the assets of Parspro for $11.8 million. Parspro is a provider of sports betting systems and related products via point of sale terminals, the internet and mobile devices. We allocated $9.9 million of the $11.8 million purchase price in excess of the fair value of the acquired net assets to goodwill. The acquired assets include technology that we have integrated into our Lottery Systems business segment and our interactive games platform as part of an expanded service offering to lottery customers. Had the operating results of Parspro been included as if the transaction was consummated on January 1, 2011, our pro forma results of operations for the years ended December 31, 2012 and 2011 would not have been materially different.

In June 2012, we acquired 100% of the equity interests of Provoloto for $9.7 million (including an estimated earn-out payable to the sellers of approximately $2.0 million contingent on the future performance of the acquired business). We allocated $5.1 million of the purchase price in excess of the fair value of the acquired net assets to goodwill. The operating results of Provoloto have been included in our Instant Products segment and were consolidated in our results of operations since the date of acquisition. Had the operating results of Provoloto been included as if the transaction was consummated on January 1, 2011, our pro forma results of operations for the years ended December 31, 2012 and 2011 would not have been materially different. In December 2013, we initiated a reorganization plan to exit our Provoloto instant lottery game operations in Mexico.

In June 2012, we acquired ADS for £3.5 million, subject to certain adjustments. ADS provides maintenance and other services for LBOs in the U.K. The acquisition has allowed us to expand our service offering to the LBOs. We allocated £2.2 million of the £3.5 million purchase price in excess of the fair value of the acquired net assets to goodwill. The operating results of ADS have been included in our Gaming segment and have been consolidated in our results of operations since the date of acquisition. Had the operating results of ADS been included as if the transaction was consummated on January 1, 2011, our pro forma results of operations for the years ended December 31, 2012 and 2011 would not have been materially different.

2011

In September 2011 we acquired Barcrest, a leading supplier of gaming content and machines in Europe, from subsidiaries of IGT for £33.0 million in cash (subject to certain adjustments). Barcrest has been integrated with our Gaming segment.

The following table summarizes the adjusted fair values of the assets acquired and liabilities assumed at the acquisition date based on a final purchase price allocation:



At September 23, 2011
Cash and cash equivalents	$	1.9
Accounts receivable, net of allowance of doubtful accounts of $2.0 as of September 23, 2011	22.6
Inventories	7.5
Prepaid expenses, deposits and other current assets	1.8
Property and equipment	14.5
Deferred income taxes	0.1
Other long-term assets	2.5
Intangible assets	12.0

Total identifiable assets acquired	62.9
Accounts payable	7.7
Accrued liabilities	11.1
Long-term deferred income tax liabilities	2.1

Net identifiable assets acquired	42.0
Goodwill	6.4

Net assets acquired	$	48.4

Subsequent to the filing of our 2011 Annual Report on Form 10-K, we adjusted the estimated fair values of certain of the assets acquired as part of our acquisition of Barcrest on September 23, 2011 to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date. The adjustments resulted in an increase in goodwill of $2.0 million, an increase in other assets of $1.5 million, a decrease in inventory of $2.0 million, a decrease in the current portion of deferred income taxes of $1.1 million and a decrease in prepaid expenses, deposits and other current assets of $0.5 million. We have applied the adjustment retrospectively to the Consolidated Balance Sheet as of December 31, 2011.

Of the $12.0 million of acquired intangible assets, $0.9 million was allocated to trade names and is not subject to amortization. The remaining $11.1 million of intangible assets includes customer lists of $5.7 million (with a four-year weighted average useful life) and intellectual property of $5.4 million (with a 4.5-year weighted average useful life).

The $6.4 million of goodwill was assigned to our Gaming segment. None of the goodwill is expected to be deductible for income tax purposes.

We recognized $4.7 million of acquisition-related costs that were expensed in 2011. These costs are included in SG&A in our Consolidated Statements of Operations and Comprehensive Income.

Barcrest service and product sales revenue for the period September 23, 2011 (date of acquisition) through December 31, 2011 was $6.9 million and $7.4 million, respectively. Barcrest net loss was $0.5 million for the same period.

As required by ASC 805, Business Combinations, set forth below is our unaudited pro forma revenue and net loss for the years ended December 31, 2010 and 2011, as if the acquisition of Barcrest had occurred on January 1, 2010.



	Years Ended December 31,
	2011		2010
Revenue from Consolidated Statements of Operations and Comprehensive Income	865.9		$	870.5
Add: Barcrest revenue not reflected in Consolidated Statements of Operations and Comprehensive Income plus pro forma adjustment (1) below	43.2		53.4
Unaudited pro forma revenue	$	909.1	$	923.9

_______________________________________________________________________________


(1)	Pro forma adjustment made to eliminate intercompany revenue and costs of $3.2 million and $0.5 million for the years ended December 31, 2011 and 2010, respectively.



	Years Ended December 31,
	2011			2010
Net loss from continuing operations from Consolidated Statements of Operations and Comprehensive Loss	$	(5.8	)	$	(144.4	)
Add: Barcrest net income not reflected in Consolidated Statements of Operations and Comprehensive Income plus pro forma adjustments (1) and (2) below	2.5			6.6
Unaudited pro forma net loss from continuing operations	$	(3.3	)	$	(137.8	)

_______________________________________________________________________________


(1)	Pro forma adjustment made to capitalize development costs of $1.7 million for each of the years ended December 31, 2011 and 2010, in accordance with the Company's accounting policies.


(2)	Pro forma adjustment made to reflect the additional depreciation and amortization of $2.3 million and $2.2 million for the years ended December 31, 2011 and 2010, respectively, that would have been charged assuming the fair value adjustments to intangible assets had been applied on January 1, 2010.

Dispositions

On March 25, 2013, we completed the sale of our installed base of gaming machines in our pub business for a purchase price of £0.5 million. The revenue and expenses of the discontinued pub operations for the years ended December 31, 2013, 2012, and 2011 were as follows:



	Year Ended
	December 31,
	2013			2012			2011
Revenue:
Services	$	1.8		$	12.0		$	12.8

Operating expenses:
Cost of services (1)	3.0			10.4			9.7
Selling, general and administrative	1.2			2.8			3.9
Employee termination and restructuring	—			0.9			—
Depreciation and amortization	0.6			22.5			7.6

Loss from discontinued operations	(3.0		)	(24.6		)	(8.4		)

Other (expense) income, net	0.8			(0.1		)	(0.9		)
Income tax (expense) benefit	(2.4		)	6.0			2.5

Net loss from discontinued operations	$	(4.6	)	$	(18.7	)	$	(6.8	)

(1) Exclusive of depreciation and amortization.