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GOODWILL AND OTHER INTANGIBLE ASSETS

6 Months Ended

Dec. 31, 2019

GOODWILL AND OTHER INTANGIBLE ASSETS

NOTE 3 – GOODWILL AND OTHER INTANGIBLE ASSETS

As previously discussed in Note 2 – Acquisition of Business, in December 2019, the Company acquired Have & Be, which included the addition of goodwill of $556 million, amortizable intangible assets (customer lists) of $842 million with amortization periods of 7.5 years to 17.5 years, and non-amortizable intangible assets (trademarks) of $585 million. Goodwill associated with the acquisition is primarily attributable to the future revenue growth opportunities associated with additional share in the skin care category, as well as the value associated with assembled workforce. As such, the goodwill has been allocated to the Company’s skin care product category. The goodwill recorded in connection with this acquisition is not expected to be deductible for tax purposes. These amounts are provisional pending finalization of the Have & Be calendar 2019 audited financial statements, working capital adjustments, and allocation of the total consideration transferred.

During the six months ended December 31, 2019, the Company recognized $7 million of goodwill associated with the continuing earn-out obligations related to the acquisition of the Bobbi Brown brand.

The intangible assets acquired in connection with the acquisition of Have & Be are classified as level 3 in the fair value hierarchy. The estimate of the fair values of the acquired amortizable intangible assets were determined using a multi-period excess earnings income approach by discounting the incremental after-tax cash flows over multiple periods. Fair value was determined under this approach by estimating future cash flows over multiple periods, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash flows. The estimate of the fair values of the acquired intangible assets not subject to amortization were determined using an income approach, specifically the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset.

The following table presents goodwill by product category and the related change in the carrying amount:


(In millions)	Skin Care		Makeup		Fragrance		Hair Care		Total
Balance as of June 30, 2019
Goodwill	$	185	$	1,199	$	254	$	390	$	2,028
Accumulated impairments		(36)		(68)		(22)		(34)		(160)
		149		1,131		232		356		1,868

Goodwill acquired during the period		556		7		—		—		563
Impairment charges		—		(511)		—		—		(511)
Translation adjustments, goodwill		(1)		—		—		—		(1)
Translation adjustments, accumulated impairments		1		—		—		—		1
		556		(504)		—		—		52

Balance as of December 31, 2019
Goodwill		740		1,206		254		390		2,590
Accumulated impairments		(35)		(579)		(22)		(34)		(670)
	$	705	$	627	$	232	$	356	$	1,920

Other intangible assets consist of the following:


	December 31, 2019						June 30, 2019
	Gross				Total Net		Gross				Total Net
	Carrying		Accumulated		Book		Carrying		Accumulated		Book
(In millions)	Value		Amortization		Value		Value		Amortization		Value
Amortizable intangible assets:
Customer lists and other	$	1,524	$	389	$	1,135	$	684	$	369	$	315
License agreements		43		43		—		43		43		—
	$	1,567	$	432		1,135	$	727	$	412		315
Non-amortizable intangible assets:
Trademarks						1,207						888
Total intangible assets					$	2,342					$	1,203

The aggregate amortization expense related to amortizable intangible assets was $11 million and $12 million for the three months ended December 31, 2019 and 2018, respectively, and was $22 million and $25 million for the six months ended December 31, 2019 and 2018, respectively. The estimated aggregate amortization expense for the remainder of fiscal 2020 and for each of the next four fiscal years is as follows:


	Fiscal
(In millions)	2020		2021		2022		2023		2024
Estimated aggregate amortization expense	$	53	$	104	$	103	$	103	$	101

Impairment Testing During the Six Months Ended December 31, 2019

During December 2019, given the continuing declines in prestige makeup, generally in North America, and the ongoing competitive activity, the Company’s Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with the Company's brand strategy review process. The Company concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill. These changes in circumstances were also an indicator that the carrying amounts of their respective long-lived assets, including customer lists, may not be recoverable. Accordingly, the Company performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of December 31, 2019. The Company concluded that the carrying amounts of the long-lived assets were recoverable. The Company also concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges. After adjusting the carrying value of the trademarks, the Company completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units. The fair value of each reporting unit was based upon 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 that are applied to operating performance of the reporting unit. A summary of the impairment charges for the three and six months ended December 31, 2019 and the remaining trademark and goodwill carrying values as of December 31, 2019, for each reporting unit, are as follows:


(In millions)	Impairment Charge				Carrying Value
Reporting Unit:	Trademark		Goodwill		Trademark		Goodwill
Too Faced	$	211	$	430	$	314	$	175
BECCA		33		35		65		63
Smashbox		22		46		33		26
Total	$	266	$	511	$	412	$	264

The impairment charges were reflected in the makeup product category and in The Americas region.

Impairment Testing During the Six Months Ended December 31, 2018

During December 2018, the Company’s Smashbox reporting unit made revisions to its internal forecasts reflecting a slowdown of its makeup business driven by increased competitive activity and lower than expected growth in key retail channels for the brand. The Company concluded that these changes in circumstances in the Smashbox reporting unit triggered the need for an interim impairment review of its trademark and goodwill. Accordingly, the Company performed an interim impairment test as of December 31, 2018. The Company concluded that the carrying value of the Smashbox trademark exceeded its estimated fair value, which was determined utilizing a royalty rate to determine discounted projected future cash flows. As a result, the Company recognized an impairment charge of $18 million for the trademark. After adjusting the carrying value of the trademark, the Company completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge related to the Smashbox reporting unit of $20 million. The Company compared the fair value of the Smashbox reporting unit with its carrying amount to calculate the impairment charge. The fair value of the reporting unit was based upon 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 that are applied to operating performance of the reporting unit. These impairment charges were reflected in the makeup product category and in The Americas region.