GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Mar. 31, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

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 $573 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. As of March 31, 2020, the accounting for the Have & Be business combination is provisional pending the calculation of the final purchase price, finalization of the opening balance sheet (working capital adjustments), the final valuation report, and allocation of the total consideration transferred.

During the nine months ended March 31, 2020, the Company recognized $10 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	573		10		—		—		583
Impairment charges	(52)		(734)		—		—		(786)
Translation adjustments, goodwill	(30)		—		(2)		(2)		(34)
Translation adjustments, accumulated impairments	1		—		—		1		2
	492		(724)		(2)		(1)		(235)

Balance as of March 31, 2020
Goodwill	728		1,209		252		388		2,577
Accumulated impairments	(87)		(802)		(22)		(33)		(944)
	$	641	$	407	$	230	$	355	$	1,633

Other intangible assets consist of the following:


	March 31, 2020										June 30, 2019
(In millions)	Gross Carrying Value		Accumulated Amortization		Total Net Book Value		Gross Carrying Value		Accumulated Amortization		Total Net Book Value
Amortizable intangible assets:
Customer lists and other	$	1,482	$	411	$	1,071	$	684	$	369	$	315
License agreements	43		43		—		43		43		—
	$	1,525	$	454	$	1,071	$	727	$	412	$	315
Non-amortizable intangible assets:
Trademarks					1,119						888
Total intangible assets					$	2,190					$	1,203

The aggregate amortization expense related to amortizable intangible assets was $23 million and $13 million for the three months ended March 31, 2020 and 2019, respectively, and was $45 million and $38 million for the nine months ended March 31, 2020 and 2019, 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	$	30	$	104	$	103	$	103	$	101

Impairment Testing During the Nine Months Ended March 31, 2020

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 totaling $266 million for trademarks during the three months ended December 31, 2019. 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, totaling $511 million during the three months ended December 31, 2019. 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.

During March 2020, given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the Company, the Company made revisions to the internal forecasts relating to its Too Faced, BECCA, Smashbox and GLAMGLOW reporting units. 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 March 31, 2020. 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 based on probability weighted 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, based on probability weighted undiscounted 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 nine months ended March 31, 2020 and the remaining trademark and goodwill carrying values as of March 31, 2020, for each reporting unit, are as follows:


			Impairment Charge
(In millions)			Three Months Ended March 31, 2020						Nine Months Ended March 31, 2020						Carrying Value
Reporting Unit:	Product Category	Region	Trademark		Goodwill		Trademark		Goodwill		Trademark		Goodwill
Too Faced	Makeup	The Americas	$	42	$	162	$	253	$	592	$	272	$	13
BECCA	Makeup	The Americas	14		35		47		70		51		28
Smashbox	Makeup	The Americas	1		26		23		72		32		—
GLAMGLOW	Skin care	The Americas	1		52		1		52		62		62
Total			$	58	$	275	$	324	$	786	$	417	$	103

Impairment Testing During the Nine Months Ended March 31, 2019

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 during the three months ended December 31, 2018. 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 during the three months ended December 31, 2018.

During March 2019, the Company’s Smashbox reporting unit made additional revisions to its internal forecasts reflecting the continued slowdown of its makeup business driven by ongoing 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 March 31, 2019. 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 $4 million for the trademark during the three months ended March 31, 2019. 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 $48 million during the three months ended March 31, 2019.

The Company compared the fair value of the Smashbox reporting unit with its carrying amount to calculate the impairment charge. The fair values of the reporting unit as of December 31, 2018 and March 31, 2019 were 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.