GOODWILL AND OTHER INTANGIBLE ASSETS

3 Months Ended

Mar. 31, 2020

GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The Company’s reporting units are its operating segments. The Company assesses goodwill for impairment on an annual basis during the second quarter. If circumstances change significantly, the Company would complete an interim goodwill assessment of a reporting unit’s goodwill prior to its next annual assessment.

During the first quarter of 2020, oil prices decreased significantly due to decreased demand following the coronavirus outbreak and falling prices stemming from a lack of consensus among OPEC member nations on production reductions and oil producing nations’ response to reduced prices. The culmination of these events has created instability in the oil and gas industry and resulted in sharp declines in the stock prices of most industry participants. In addition, the uncertainty related to oil demand continues to have a significant impact on the investment and operating plans of Upstream Energy customers. As a result, the Company performed an interim goodwill impairment assessment for the Upstream Energy reporting unit as of March 31, 2020.

The Company used the discounted cash flow method to determine the fair value of the Upstream Energy reporting unit. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Included in the estimated fair value of the Upstream Energy reporting unit are assumptions and estimates regarding Upstream Energy’s future projections, as well as industry projections. These assumptions and estimates include estimated future growth rates, the discount rate, the terminal growth rate, and other market factors. Development of these assumption included significant observable market information and considered current market conditions as of March 31, 2020.

Based on the analysis performed, the Company concluded that the fair value of the Upstream Energy reporting unit exceeded the carrying value by more than 30%. If current expectations of future sales growth and margins are not met, if market factors outside the Company’s control result in changes to valuation assumption, most notably the discount rate, or if management’s expectations or plans otherwise change, then the Upstream Energy reporting unit may become impaired in the future. Recognizing the volatility of current markets, the Company completed various sensitivities. An increase in the discount rate of 1.0 percentage point, holding all other assumptions constant, would continue to result in a fair value that exceeds the carrying value. Similarly, a decrease in Upstream Energy’s projected terminal growth rate by 1.0 percentage point would also result in a fair value that exceeds the carrying value, when holding all other assumption constant. The Company also considered the implied value of the Upstream Energy reporting unit based on the ChampionX separation transaction (refer to Note 1 for more information). In each of these scenarios, the fair value of the Upstream Energy reporting unit would be above its carrying amount as of March 31, 2020 and the Upstream Energy reporting unit’s goodwill would not be impaired.

The changes in the carrying amount of goodwill for each of the Company's reportable segments during the first quarter ended March 31, 2020 were as follows:

					Global
	Global		Global		Healthcare and		Upstream		Global
(millions)	Industrial		Institutional		Life Sciences		Energy		Energy		Other		Total
December 31, 2019		$2,799.2		$1,147.7		$-		$-		$3,100.5		$204.3		$7,251.7
Segment changes (a)		1,124.6		(599.4)		859.3		1,682.6		(3,100.5)		33.4		-
December 31, 2019 revised		3,923.8		548.3		859.3		1,682.6		-		237.7		7,251.7
Prior year business combinations (b)		-		-		(0.1)		-		-		-		(0.1)
Dispositions		-		-		-		(3.2)		-		-		(3.2)
Effect of foreign currency translation		(10.2)		(0.6)		(1.8)		(3.9)		-		(0.4)		(16.9)
March 31, 2020		$3,913.6		$547.7		$857.4		$1,675.5		$-		$237.3		$7,231.5

(a) Relates to reclassifications made to reportable segments in the current year. In anticipation of the Upstream separation, the Company created the Upstream Energy and Downstream operating segment, which are also reporting units, from the Global Energy operating segment, which was also a reporting unit. Goodwill was allocated to each reporting unit based on a relative fair value allocation. The Downstream operating segment has been aggregated into the Global Industrial reportable segment, while the Upstream Energy operating segment is a separate reportable segment. In addition, the Company established the Global Healthcare and Life Sciences reportable segment. The Global Healthcare and Life Sciences reportable segment is comprised of the Healthcare and Life Sciences operating segments, which were previously included in the Global Institutional and Global Industrial reportable segment, respectively. These were and continue to be reporting units therefore no goodwill allocation was performed. Refer to Note 15 for further information.

(b) Represents the purchase price allocation adjustments for acquisitions deemed preliminary as of the end of the prior year.

Other Intangible Assets

The Nalco trade name is the Company’s principal indefinite life intangible asset, which is tested for impairment on an annual basis during the second quarter. Based on the ongoing performance of the Company’s reporting units associated with the trade name, an interim impairment assessment during the first quarter of 2020 was not deemed necessary. There has been no impairment of the Nalco trade name intangible since it was acquired.

The Company’s intangible assets subject to amortization primarily include customer relationships, trademarks, patents and other technology. The fair value of identifiable intangible assets is estimated based upon discounted future cash flow projections and other acceptable valuation methods. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. Total amortization expense related to other intangible assets during the first quarter of 2020 and 2019 was $80.3 million and $79.8 million, respectively. Estimated amortization for the remaining nine-month period of 2020 related to other amortizable intangible assets is expected to be approximately $240 million.