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ACQUISITION OF BUSINESS

6 Months Ended

Dec. 31, 2019

NOTE 2 –ACQUISITION OF BUSINESS

On December 18, 2019, the Company acquired the remaining 66.66% equity interest in Have&Be Co. Ltd. (“Have & Be”), the global skin care company behind Dr. Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash. This acquisition is expected to further strengthen the Company’s leadership position in skin care and expand its consumer reach in Asia/Pacific, North America, the United Kingdom and travel retail. We originally acquired a minority interest in Have & Be in December 2015, and that investment structure included a formula-based call option for the remaining equity interest. The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date. The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby the Company remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million. The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated OCI. The total gain on the Company’s previously held equity method investment of $553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies. The accounting for the Have & Be business combination is provisional pending finalization of the Have & Be calendar 2019 audited financial statements, working capital adjustments, and allocation of the total consideration transferred.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt. In anticipation of the closing, the Company transferred cash to a foreign subsidiary for purposes of making the closing payment. As a result, the Company recognized a foreign currency gain of $23 million, which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019.

The Company recorded a preliminary allocation of the total consideration transferred, which includes the cash paid at closing and the fair value of its previously held equity method investment, to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill. The preliminary allocation of the total consideration transferred has been recorded as follows:


(In millions, unaudited)
Cash	$	228
Accounts receivable		48
Inventory		83
Other current assets		5
Property, plant and equipment		3
Right-of-use assets		3
Intangible assets		1,427
Goodwill		556
Other long-term assets		3
Total assets acquired		2,356

Accounts payable		27
Other accrued liabilities		22
Deferred income taxes		352
Lease liability		1
Total liabilities assumed		402
Total consideration transferred	$	1,954

The results of operations of Have & Be will be reported in future periods on a one-month lag to facilitate consolidated reporting. Accordingly, operating income for the three and six months ended December 31, 2019 does not include the results of operations of Have & Be since the date of acquisition, which were not material. Acquisition-related costs, which primarily include financial advisory, accounting and legal fees, in the amount of $6 million are included in Selling, general and administrative expenses in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019. Pro forma results of operations reflecting the acquisition of Have & Be are not presented, as the impact on the Company’s consolidated financial results would not have been material.