Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.73M
2: EX-10.11 Material Contract HTML 31K
3: EX-10.12 Material Contract HTML 31K
4: EX-13.13 Annual or Quarterly Report to Security Holders HTML 30K
5: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 31K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 28K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 28K
14: R1 Cover HTML 79K
15: R2 Condensed Consolidated Statements of Operations HTML 132K
16: R3 Condensed Consolidated Statements of Comprehensive HTML 74K
Income (Loss)
17: R4 Condensed Consolidated Statements of Comprehensive HTML 32K
Income (Loss) (Parentheticals)
18: R5 Condensed Consolidated Balance Sheets HTML 177K
19: R6 Condensed Consolidated Balance Sheets HTML 64K
(Parentheticals)
20: R7 Condensed Consolidated Statements of Equity HTML 132K
21: R8 Condensed Consolidated Statements of Cash Flows HTML 141K
22: R9 Description of Business HTML 31K
23: R10 Summary of Significant Accounting Policies HTML 38K
24: R11 Segment Reporting HTML 60K
25: R12 Restructuring Costs HTML 39K
26: R13 Inventories HTML 34K
27: R14 Equity Investments HTML 64K
28: R15 Goodwill and Other Intangible Assets, Net HTML 89K
29: R16 Leases HTML 54K
30: R17 Debt HTML 132K
31: R18 Interest Expense, Net HTML 36K
32: R19 Employee Benefit Plans HTML 67K
33: R20 Derivative Instruments HTML 65K
34: R21 Equity and Convertible Preferred Stock HTML 82K
35: R22 Share-Based Compensation Plans HTML 47K
36: R23 Net Income Attributable to Coty Inc. Per Common HTML 56K
Share
37: R24 Redeemable Noncontrolling Interests HTML 30K
38: R25 Commitments and Contingencies HTML 44K
39: R26 Related Party Transactions HTML 37K
40: R27 Subsequent Events HTML 30K
41: R28 Pay vs Performance Disclosure HTML 39K
42: R29 Insider Trading Arrangements HTML 33K
43: R30 Summary of Significant Accounting Policies HTML 59K
(Policies)
44: R31 Segment Reporting (Tables) HTML 58K
45: R32 Restructuring Costs (Tables) HTML 36K
46: R33 Inventories (Tables) HTML 35K
47: R34 Equity Investments (Tables) HTML 67K
48: R35 Goodwill and Other Intangible Assets, Net (Tables) HTML 101K
49: R36 Leases (Tables) HTML 55K
50: R37 Debt (Tables) HTML 112K
51: R38 Interest Expense, Net (Tables) HTML 36K
52: R39 Employee Benefit Plans (Tables) HTML 64K
53: R40 Derivative Instruments (Tables) HTML 70K
54: R41 Equity and Convertible Preferred Stock (Tables) HTML 65K
55: R42 Share-Based Compensation Plans (Tables) HTML 37K
56: R43 Net Income Attributable to Coty Inc. Per Common HTML 56K
Share (Tables)
57: R44 Commitment and Contingencies (Tables) HTML 40K
58: R45 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 51K
Narrative (Details)
59: R46 SEGMENT REPORTING - Reporting Segments (Details) HTML 51K
60: R47 SEGMENT REPORTING - Reportable Segments, Revenue HTML 38K
by Product Category (Details)
61: R48 RESTRUCTURING COSTS - Restructuring Costs by HTML 36K
Program (Details)
62: R49 RESTRUCTURING COSTS - Narrative (Details) HTML 55K
63: R50 Inventories (Details) HTML 36K
64: R51 EQUITY INVESTMENTS - Schedule of Equity HTML 48K
Investments (Details)
65: R52 EQUITY INVESTMENTS - Narrative (Details) HTML 38K
66: R53 EQUITY INVESTMENTS - Summarized Statements of HTML 65K
Operations Information (Details)
67: R54 EQUITY INVESTMENTS - Schedule of Movement in HTML 33K
Equity Investments (Details)
68: R55 EQUITY INVESTMENTS - Schedule of Significant HTML 51K
Unobservable Inputs used in Level 3 Valuation
(Details)
69: R56 GOODWILL AND OTHER INTANGIBLE ASSETS, NET - HTML 46K
Changes in Goodwill (Details)
70: R57 GOODWILL AND OTHER INTANGIBLE ASSETS, NET - Other HTML 33K
Intangible Assets, Net (Details)
71: R58 GOODWILL AND OTHER INTANGIBLE ASSETS, NET - HTML 39K
Schedule of Indefinite Lived Intangible Assets
(Details)
72: R59 GOODWILL AND OTHER INTANGIBLE ASSETS, NET - HTML 49K
Schedule of Intangible Assets Subject to
Amortization (Details)
73: R60 GOODWILL AND OTHER INTANGIBLE ASSETS, NET - HTML 29K
Narrative (Details)
74: R61 LEASES - Narrative (Details) HTML 32K
75: R62 LEASES - Lease cost (Details) HTML 49K
76: R63 LEASES - Minimum lease payments (Details) HTML 50K
77: R64 DEBT - Schedule of Debt (Details) HTML 79K
78: R65 DEBT - Narrative (Details) HTML 240K
79: R66 DEBT - Debt Instrument Redemption (Details) HTML 64K
80: R67 DEBT - Pricing Tiers (Details) HTML 81K
81: R68 DEBT - Schedule of Fair Value of Debt (Details) HTML 50K
82: R69 DEBT - Schedule of Maturities of Long-Term Debt HTML 44K
(Details)
83: R70 DEBT - Total Net Leverage Ratio (Details) HTML 36K
84: R71 Interest Expense, Net (Details) HTML 36K
85: R72 EMPLOYEE BENEFIT PLANS - Schedule of Components of HTML 58K
Net Periodic Benefit Cost (Details)
86: R73 DERIVATIVE INSTRUMENTS - Narrative (Details) HTML 64K
87: R74 DERIVATIVE INSTRUMENTS - Gains and Losses HTML 36K
Recognized in OCI (Details)
88: R75 DERIVATIVE INSTRUMENTS - Amount of Gains and HTML 38K
Losses Reclassified from AOCI (Details)
89: R76 DERIVATIVE INSTRUMENTS - Derivatives Not HTML 36K
Designated as Hedging (Details)
90: R77 EQUITY AND CONVERTIBLE PREFERRED STOCK - Narrative HTML 199K
(Details)
91: R78 EQUITY AND CONVERTIBLE PREFERRED STOCK - HTML 75K
Accumulated Other Comprehensive Income (Loss)
(Details)
92: R79 SHARE-BASED COMPENSATION PLANS - Schedule of HTML 47K
Share-based Compensation (Details)
93: R80 SHARE-BASED COMPENSATION PLANS - Narrative HTML 145K
(Details)
94: R81 Net Income Attributable to Coty Inc. Per Common HTML 78K
Share (Details)
95: R82 Redeemable Noncontrolling Interests (Details) HTML 34K
96: R83 Commitment and Contingencies (Details) HTML 52K
97: R84 Related Party Transactions (Details) HTML 63K
98: R85 Subsequent Events (Details) HTML 44K
101: XML IDEA XML File -- Filing Summary XML 181K
99: XML XBRL Instance -- coty-20230930_htm XML 2.28M
100: EXCEL IDEA Workbook of Financial Report Info XLSX 201K
10: EX-101.CAL XBRL Calculations -- coty-20230930_cal XML 252K
11: EX-101.DEF XBRL Definitions -- coty-20230930_def XML 968K
12: EX-101.LAB XBRL Labels -- coty-20230930_lab XML 2.50M
13: EX-101.PRE XBRL Presentations -- coty-20230930_pre XML 1.50M
9: EX-101.SCH XBRL Schema -- coty-20230930 XSD 236K
102: JSON XBRL Instance as JSON Data -- MetaLinks 701± 1.01M
103: ZIP XBRL Zipped Folder -- 0001024305-23-000102-xbrl Zip 472K
Registrant’s telephone number, including area code
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No ¨
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No iý
Securities Registered Pursuant to Section 12(b) of the Act:
Trade
receivables—less allowances of $i23.5 and $i23.2, respectively
i534.9
i360.9
Inventories
i845.4
i853.4
Prepaid
expenses and other current assets
i545.5
i553.6
Total
current assets
i2,243.5
i2,051.7
Property
and equipment, net
i689.5
i712.9
Goodwill
i3,927.5
i3,987.9
Other
intangible assets, net
i3,688.4
i3,798.0
Equity
investments
i1,072.1
i1,068.9
Operating
lease right-of-use assets
i281.1
i286.7
Deferred income taxes
i571.2
i589.9
Other
noncurrent assets
i143.6
i165.6
TOTAL ASSETS
$
i12,616.9
$
i12,661.6
LIABILITIES,
MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
i1,375.4
$
i1,444.7
Accrued
expenses and other current liabilities
i1,227.0
i1,042.0
Short-term
debt and current portion of long-term debt
i40.8
i57.9
Current
operating lease liabilities
i59.9
i65.6
Income and other taxes payable
i125.0
i126.6
Total
current liabilities
i2,828.1
i2,736.8
Long-term
debt, net
i4,095.4
i4,178.2
Long-term
operating lease liabilities
i244.3
i247.5
Pension and other post-employment
benefits
i273.0
i280.7
Deferred
income taxes
i682.9
i659.7
Other noncurrent liabilities
i343.5
i325.4
Total
liabilities
i8,467.2
i8,428.3
COMMITMENTS AND CONTINGENCIES
(See Note 17)
i
i
CONVERTIBLE SERIES B PREFERRED STOCK,$ii0.01/
par value; ii1.0/ shares authorized; ii0.1/
and ii0.1/ issued and outstanding at September 30, 2023 and June 30, 2023, respectively
i142.4
i142.4
REDEEMABLE
NONCONTROLLING INTERESTS
i98.6
i93.5
EQUITY:
Preferred
Stock, $ii0.01/ par value; ii20.0/
shares authorized, iiii1.0///
issued and outstanding at September 30, 2023 and June 30, 2023
i—
i—
Class
A Common Stock, $ii0.01/ par value; ii1,250.0/
shares authorized, i954.5 and i919.3 issued and i888.0
and i852.8 outstanding at September 30, 2023 and June 30, 2023, respectively
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(Unaudited)
1.
iDESCRIPTION OF BUSINESS
Coty Inc. and its subsidiaries (collectively, the “Company” or “Coty”) manufacture, market, sell and distribute branded beauty products, including fragrances, color cosmetics and skin & body related products throughout the world. Coty is a global beauty company with a rich entrepreneurial history and an iconic portfolio of brands.
iThe
Company operates on a fiscal year basis with a year-end of June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2024” refer to the fiscal year ending June 30, 2024. When used in this Quarterly Report on Form 10-Q, the term “includes” and “including” means, unless the context otherwise indicates, including without limitation.
The Company’s sales generally increase during the second fiscal quarter as a result of increased demand associated with the winter holiday season. Financial performance, working capital requirements, sales, cash flows and borrowings generally experience variability during the three to six months preceding the
holiday season. Product innovations, new product launches and the size and timing of orders from the Company’s customers may also result in variability.
2. iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis
of Presentation
The unaudited interim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include the Company’s consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited interim Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Consolidated Financial Statements as of
and for the year ended June 30, 2023. In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2024. All dollar amounts (other than per share amounts) in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
iRestricted
Cash
Restricted cash represents funds that are not readily available for general purpose cash needs due to contractual limitations. Restricted cash is classified as a current or long-term asset based on the timing and nature of when or how the cash is expected to be used or when the restrictions are expected to lapse. As of September 30, 2023 and June 30, 2023, the Company had restricted cash of $i37.7 and $i36.9,
respectively, included in Restricted cash in the Condensed Consolidated Balance Sheets. The Restricted cash balance as of September 30, 2023 primarily provides collateral for certain bank guarantees on rent, customs and duty accounts and also consists of collections on factored receivables that remain unremitted to the factor as of September 30, 2023. Restricted cash is included as a component of Cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows.
i
Equity Investments
The
Company elected the fair value option to account for its investment in Rainbow JVCO LTD and subsidiaries (together, "Wella" or the “Wella Company”) to align with the Company’s strategy for this investment. The fair value is updated on a quarterly basis. The investment is classified within Level 3 in the fair value hierarchy because the Company estimates the fair value of the investment using a combination of the income approach, the market approach and private transactions, when applicable. Changes in the fair value of equity investment under the fair value option are recorded in Other expense (income), net within the Condensed Consolidated Statements of Operations (see Note 6—Equity Investments).
i
Use
of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, the net realizable value of inventory, the fair value of equity investments, the assessment of goodwill, other intangible assets and long-lived assets for
impairment
and income taxes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the Condensed Consolidated Financial Statements in future periods.
i
Tax Information
The
effective income tax rate for the three months ended September 30, 2023 and 2022 was i80.0% and i34.1%, respectively. The change in the effective tax rate for
the three months ended September 30, 2023, as compared with the three months ended September 30, 2022, was primarily due to an expense of $i24.3 in the current period recognized on the revaluation of the Company's deferred tax liabilities due to a tax rate increase enacted in Switzerland.
The effective income tax rates vary from the U.S. federal statutory rate of 21% due to the
effect of (i) jurisdictions with different statutory rates, including impacts of rate changes, (ii) adjustments to the Company’s unrealized tax benefits (“UTBs”) and accrued interest, (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes.
/
As of September 30, 2023 and June 30, 2023, the gross amount of UTBs was $i233.1 and $i235.5,
respectively. As of September 30, 2023, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $i183.8. As of September 30, 2023 and June 30, 2023, the liability associated with UTBs, including accrued interest and penalties, was $i218.8 and $i218.6,
respectively, which was recorded in Income and other taxes payable and Other noncurrent liabilities in the Condensed Consolidated Balance Sheets. The total interest and penalties recorded in the Condensed Consolidated Statements of Operations related to UTBs was $ii1.3/
for the three months ended September 30, 2023 and 2022. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023 was $i34.4 and $i33.1,
respectively. On the basis of the information available as of September 30, 2023, it is reasonably possible that a decrease of up to $i11.3 in UTBs may occur within twelve months as a result of projected resolutions of global tax examinations and a potential lapse of the applicable statutes of limitations.
Russia Market Exit
In connection with the Company’s Board of Director’s
decision to wind down operations in Russia, the Company recognized total pre-tax losses in the Condensed Consolidated Statements of Operations of $i0.1 and $i1.1,
respectively, in the three months ended September 30, 2023 and 2022.
The Company anticipates that it will incur an immaterial amount of additional costs through completion of the wind down. Additionally, management anticipates derecognizing the cumulative translation adjustment balance pertaining to the Russian subsidiary. The Company has substantially completed its commercial activities in Russia. However, the Company anticipates that the process related to the liquidation of the Russian legal entity will take an extended period of time.
i
Recent
Accounting Pronouncements
No new accounting pronouncements issued but not yet adopted are expected to have a material impact on the Company's unaudited Condensed Consolidated Financial Statements.
3. iSEGMENT REPORTING
Operating and reportable segments (referred to as “segments”) reflect the way the
Company is managed and for which separate financial information is available and evaluated regularly by the Company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. The Company has designated its Chief Executive Officer ("CEO") as the CODM.
Certain income and shared costs and the results of corporate initiatives are managed by Corporate. Corporate primarily includes stock compensation expense, restructuring and realignment costs, costs related to acquisition, divestiture and early license termination activities, and impairments of long-lived assets, goodwill and intangibles that are not attributable to ongoing operating activities of the segments. Corporate costs are not used by the
CODM to measure the underlying performance of the segments.
With the exception of goodwill, the Company does not identify or monitor assets by segment. The Company does not present assets by reportable segment since various assets are shared between reportable segments. The allocation of goodwill by segment is presented in Note 7—Goodwill and Other Intangible Assets, net.
During fiscal 2024, the Company began the implementation of continued process optimization and improved technology support for certain areas (the "2024 Restructuring Actions"). The Company expects to incur approximately $i30.0 related to employee termination benefits under this plan. Of the expected costs, the
Company has incurred cumulative restructuring charges of $i29.9 related to approved initiatives through September 30, 2023, which have been recorded in Corporate.
The Company recognized expenses of $i28.6
and $i0.0 for the three months ended September 30, 2023 and 2022, respectively, which have been recorded in Corporate. The related liability balances were $i29.9 (including certain actions that were accrued during fiscal 2023) and $i0.0
at September 30, 2023 and June 30, 2023 respectively. The Company currently estimates that the total remaining accrual of $i29.9 will result in cash expenditures of approximately $i6.8,
$i9.3 and $i13.8 in fiscal 2024, 2025 and thereafter, respectively.
The Company previously announced a ifour-year plan to drive substantial improvement and optimization in the Company's businesses, under which the Company expected to incur restructuring and related costs (the “Transformation Plan”), which is now substantially complete. Of the expected costs, the
Company has incurred cumulative restructuring charges of $i215.3 related to approved initiatives through September 30, 2023, which have been recorded in Corporate.
The Company recognized income of $i0.2
and $i1.2 for the period ended September 30, 2023 and 2022, respectively. The related liability balances were $i7.5 and $i10.0
at September 30, 2023 and June 30, 2023 respectively. The Company currently estimates that the total remaining accrual of $i7.5 will result in cash expenditures of approximately $i6.1,
$i1.3 and $i0.1 in fiscal 2024, 2025 and thereafter, respectively.
(a)On
January 4, 2021, the Company completed its purchase of i20% of the outstanding equity of KKW Holdings. The Company accounts for this minority investment under the equity method, given it has the ability to exercise significant influence over, but not control, the investee. The carrying value of the
Company’s investment includes basis differences allocated to amortizable intangible assets.
The Company recognized $i0.8 and $i0.9, respectively,
during the three months ended September 30, 2023 and 2022 representing its share of the investee’s net loss in Other expense (income), net within the Condensed Consolidated Statements of Operations.
On
July 18, 2023, the Company announced that it had entered into a binding letter of intent to sell a i3.6% stake in Wella to an investment firm for $i150.0.
Subsequently, the Company and investment firm mutually agreed not to pursue the proposed transaction and entered into a termination letter in October 2023.
The following table presents summarized financial information of the Company’s equity method investees for the period ending September 30, 2023. Amounts presented represent combined totals at the investee level and not the
Company’s proportionate share:
The
following table summarizes movements in equity investments with fair value option that are classified within Level 3 for the period ended September 30, 2023. There were no internal movements to or from Level 3 and Level 1 or Level 2 for the period ended September 30, 2023.
The following table summarizes the significant unobservable inputs used in Level 3 valuation of the Company's investments carried at fair value as of September 30, 2023. Included in the table are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.
Fair
value
Valuation technique
Unobservable input
Range
Equity investments at fair value
$
i1,064.0
Discounted
cash flows
Discount rate
i10.50% (a)
Growth rate
i1.8%
- i9.2% (a)
Market multiple
Revenue multiple
i2.1x
– i2.3x (b)
EBITDA multiple
i10.4x
– i13.9x (b)
(a)The primary unobservable inputs used in the fair value measurement of the Company's equity investments with fair value option, when using a discounted cash flow method, are
the discount rate and revenue growth rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. The Company estimates the discount rate based on the investees' projected cost of equity and debt. The revenue growth rate is forecasted for future years by the investee based on their best estimates. Significant increases (decreases) in the revenue growth rate in isolation would result in a significantly higher (lower) fair value measurement.
(b)The primary unobservable inputs used in the fair value measurement of the Company's equity investments with fair value option, when using a market multiple method, are the revenue multiple and EBITDA multiple.
Significant increases (decreases) in the revenue multiple or EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. The market multiples are derived from a group of guideline public companies.
Amortization
expense was $i48.6 and $i47.3 for the three months ended September 30, 2023 and 2022, respectively.
8.
iLEASES
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between i4 and i25
years. The Company utilizes these leased office facilities for use by its employees in countries in which the Company conducts its business. Leases are negotiated with third parties and, in some instances contain renewal, expansion and termination options. The Company also subleases certain office facilities to third parties when the Company no longer intends to utilize the space. None of the Company’s leases restricts the payment of dividends or the incurrence of debt or additional lease obligations, or contain significant purchase options.
iThe
following chart provides additional information about the Company’s operating leases:
Three Months Ended September 30,
Lease Cost:
2023
2022
Operating
lease cost
$
i19.1
$
i19.2
Short-term
lease cost
i0.3
i0.2
Variable
lease cost
i10.8
i8.6
Sublease
income
(i3.9)
(i3.8)
Net lease cost
$
i26.3
$
i24.2
Other
information:
Operating cash outflows from operating leases
$
(i19.2)
$
(i21.7)
Right-of-use
assets obtained in exchange for lease obligations
$
i15.0
$
i7.6
Weighted-average
remaining lease term - real estate
i7.0 years
i7.6
years
Weighted-average discount rate - real estate leases
Table
excludes obligations for leases with original terms of twelve months or less, which have not been recognized as right-of-use assets or liabilities in the Condensed Consolidated Balance Sheets.
2021
Coty Revolving Credit Facility due April 2025
i—
i228.9
2018
Coty Term B Facility due April 2025
i—
i1,183.7
Senior
Unsecured Notes
2026 Dollar Notes due April 2026
i473.0
i473.0
2026
Euro Notes due April 2026
i190.7
i196.0
Brazilian Credit Facilities
i31.9
i31.9
Other
long-term debt and finance lease obligations
i6.4
i7.1
Total
debt
i4,212.1
i4,281.6
Less:
Short-term debt and current portion of long-term debt
(i40.8)
(i57.9)
Total Long-term debt
i4,171.3
i4,223.7
Less:
Unamortized financing fees and discounts on long-term debt
(i75.9)
(i45.5)
Total
Long-term debt, net
$
i4,095.4
$
i4,178.2
/
Short-Term
Debt
The Company maintains short-term lines of credit and other short-term debt with financial institutions around the world. As of September 30, 2023, total short-term debt increased by $i6.0 from inil
as of June 30, 2023. In addition, the Company had undrawn letters of credit of $i6.8 and $i7.2, and bank guarantees
of $i18.5 and $i16.3 as of September 30, 2023 and June 30, 2023, respectively.
On July 11, 2023, the Company entered into an amendment to the 2018 Coty Credit Agreement that (i) refinanced all of the existing $i2,000.0 of revolving credit commitments and the outstanding loans made pursuant thereto (the "2021 Coty Revolving Credit
Facility") with itwo new tranches of senior secured revolving credit commitments, one in an aggregate principal amount of $i1,670.0 available in U.S. dollars and certain other currencies
and the other in an aggregate principal amount of €i300.0 million available in euros, maturing in July 2028 (together, the "2023 Coty Revolving Credit Facility"), (ii) provided for a credit spread adjustment of i0.10%
for all interest periods, with respect to Secured Overnight Financing Rate ("SOFR") loans, (iii) added Fitch as a relevant rating agency for purposes of the collateral release provisions and determining applicable interest rates and fees and (iv) provided that certain covenants will cease to apply during a collateral release period.
Offering of Senior Secured Notes
On July 26, 2023, the Company issued an aggregate principal amount of $i750.0
of i6.625% senior secured notes due 2030 (“2030 Dollar Senior Secured Notes”). Coty received net proceeds of $i740.6 in connection with the offering of the 2030 Dollar Senior Secured Notes. In accordance with the 2018 Coty Credit Agreement (as defined
below), as amended, the net proceeds received from this offering were utilized to pay down the outstanding balance of the U.S. dollar and euro portions of the 2018 Coty Term B Facility, as defined below, by $i715.5 and €i22.6 million (approximately $i25.1),
respectively, in addition to related fees and expenses thereto.
On September 19, 2023, the Company issued an aggregate principal amount of €i500.0 million of i5.750%
senior secured notes due 2028 ("2028 Euro Senior Secured Notes") in a private offering. Coty received net proceeds of €i493.8 million in connection with the offering of the 2028 Euro Senior Secured Notes. In accordance with the 2018 Coty Credit Agreement (as defined below), as amended, the net proceeds received from this offering were utilized to pay down a portion of the borrowings outstanding under the 2023 Coty Revolving Credit Facility, without a reduction in commitment. Coty used cash on hand to pay the related fees and expenses to this offering.
2018 Term B
Facility Repayment
On August 3, 2023, the Company repaid €i408.0 million (approximately $i446.1) of the debt outstanding under the 2018 Term B Facility.
Senior
Secured Notes
On April 21, 2021, the Company issued an aggregate principal amount of $i900.0 of i5.00% senior secured
notes due 2026 (the “2026 Dollar Senior Secured Notes”). Coty received gross proceeds of $i900.0 in connection with the offering of the 2026 Dollar Senior Secured Notes.
On June 16, 2021, the Company issued an aggregate principal amount of €i700.0
million of i3.875% senior secured notes due 2026 (the “2026 Euro Senior Secured Notes”) in a private offering. Coty received gross proceeds of €i700.0 million in connection with the offering of the 2026 Euro Senior
Secured Notes.
On November 30, 2021, the Company issued an aggregate principal amount of $i500.0 of i4.75% senior secured
notes due 2029 ("2029 Dollar Senior Secured Notes" and, together with the 2026 Euro Senior Secured Notes, 2028 Euro Senior Secured Notes, 2029 Dollar Senior Secured Notes and 2030 Dollar Senior Secured Notes, the “Senior Secured Notes”). Coty received gross proceeds of $i500.0 in connection with the offering of the 2029 Dollar Senior Secured Notes.
See the above Recent Developments section for the issuances of the 2028 Euro Senior Secured Notes and 2030 Dollar Senior Secured Notes.
Coty
used the gross proceeds of the offerings of the Senior Secured Notes to repay a portion of the term loans outstanding under the existing credit facilities and to pay related fees and expenses thereto.
The Senior Secured Notes are senior secured obligations of Coty and are guaranteed on a senior secured basis by each of Coty’s wholly-owned domestic subsidiaries that guarantees Coty’s obligations under its existing senior secured credit facilities and are secured by first priority liens on the same collateral that secures Coty’s obligations under its existing senior secured credit facilities, as described above. The Senior Secured Notes and the guarantees are equal in right of payment with all of Coty’s and the guarantors’ respective existing and future senior indebtedness and are pari passu
with all of Coty’s and the guarantors’ respective existing and future indebtedness that is secured by a first priority lien on the collateral, including the existing senior secured credit facilities, to the extent of the value of such collateral. For the 2028 Euro Senior Secured Notes and the 2030 Dollar Senior Secured Notes, the collateral security and certain covenants will be released upon the respective Senior Secured Notes achieving investment grade ratings from two out of the three ratings agencies.
The indentures
governing the Senior Secured Notes specify the Applicable Premium (as defined in the respective indentures) to be paid upon early redemption of some or all of the Senior Secured Notes prior to, and on or after, April 15, 2023 for the 2026 Euro Senior Secured Notes and 2026 Dollar Senior Secured Notes, September 15, 2025 for the 2028 Euro Senior Secured Notes, January 15, 2025 for the 2029 Dollar Senior Secured Notes and July 15, 2026 for the 2030 Dollar Senior Secured Notes (the "Early Redemption Dates").
The Applicable Premium related to the respective Senior Secured Notes on any redemption date and as calculated by the
Company is the greater of:
(1)iiiii1.0////%
of the then outstanding principal amount of the respective Senior Secured Notes; and
(2)the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such respective Senior Secured Notes that would apply if such respective notes were redeemed on the respective Early Redemption Dates, (such redemption price is expressed as a percentage of the principal amount being set forth in the table appearing in the Redemption Pricing section below), plus (ii) all remaining scheduled payments of interest due on the respective Senior Secured Notes to and including the respective Early Redemption Dates, (excluding accrued but unpaid interest, if any, to, but excluding, the redemption date), with respect to each of subclause (i) and (ii), computed using a discount rate equal to the Treasury Rate in the case of the 2026 Dollar Senior Secured Notes, 2029 Dollar Senior Secured Notes
and 2030 Dollar Senior Secured Notes, or Bund Rate in the case of the 2026 Euro Senior Secured Notes and the 2028 Euro Senior Secured Notes (both Treasury Rate and Bund Rate as defined in the respective indentures) as of such redemption date plus iiiii50////
basis points; over (b) the principal amount of the respective Senior Secured Notes.
Redemption Pricing
At any time and from time to time prior to the Early Redemption Dates, the Company may redeem some or all of the respective notes at redemption prices equal to iiiii100////%
of the respective principal amounts being redeemed plus the Applicable Premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates.
i
At any time on or after the Early Redemption Dates, the Company may redeem some or all of the respective notes at the redemption prices (expressed in percentage of principal amount) set forth below, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates, if redeemed during the twelve-month period beginning on respective dates of each of the years indicated below:
On April 5, 2018, the Company entered into an amended and restated credit agreement (the "2018 Coty Credit Agreement"), which, as previously disclosed, was amended most recently in July 2023.
As amended and restated through July 2023, the 2018 Coty Credit Agreement provides for (a) the incurrence by the Company of (1) a senior secured term A facility in an aggregate principal amount of (i) $i1,000.0
denominated in U.S. dollars and (ii) €i2,035.0 million denominated in euros (the “2018 Coty Term A Facility”) and (2) a senior secured term B facility in an aggregate principal amount of (i) $i1,400.0
denominated in U.S. dollars and (ii) €i850.0 million denominated in euros (the “2018 Coty Term B Facility”) and (b) the incurrence by the Company and Coty B.V., a Dutch subsidiary of the Company (the “Dutch Borrower” and, together with the Company, the “Borrowers”), of the 2023 Coty Revolving
Credit Facility (together with the 2018 Coty Term A Facility and the 2018 Coty Term B Facility, the "Coty Credit Facilities"). See the above Recent Developments section for information on the revolver refinancing made in July 2023.
The 2018 Coty Credit Agreement, as amended, provides that with respect to the 2023 Coty Revolving Credit Facility, up to $i150.0 is available for letters of credit and up to $i150.0
is available for swing line loans. The 2018 Coty Credit Agreement, as
amended, also permits, subject to certain terms and conditions, the incurrence of incremental facilities thereunder in an aggregate amount of (i) $i1,700.0 plus (ii) an unlimited
amount if the First Lien Net Leverage Ratio (as defined in the 2018 Coty Credit Agreement, as amended), at the time of incurrence of such incremental facilities and after giving effect thereto on a pro forma basis, is less than or equal to i3.00 to 1.00.
The obligations of the Company under the 2018 Coty Credit Agreement, as amended, are guaranteed by the material wholly-owned subsidiaries of
the Company organized in the U.S., subject to certain exceptions (the “Guarantors”) and the obligations of the Company and the Guarantors under the 2018 Coty Credit Agreement, as amended, are secured by a perfected first priority lien (subject to permitted liens) on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions. The Dutch Borrower does not guarantee the obligations of the Company under the 2018 Coty Credit Agreement or grant any liens on its assets to secure any obligations under the 2018 Coty Credit Agreement.
As previously
disclosed, the Company utilized proceeds from certain transactions to pay down portions of the outstanding balances of the 2018 Coty Term A Facility and 2018 Coty Term B Facility, in accordance to the 2018 Coty Credit Agreement, as amended. No balances remain outstanding under the 2018 Coty Term A Facility or 2018 Coty Term B Facility as of September 30, 2023. See the above Recent Developments section for information on the prepayments made on the 2018 Coty Term B Facility during the three months ended September 30, 2023.
Senior Unsecured Notes
On April 5, 2018the
Company issued, at par, $i550.0 of i6.50% senior unsecured notes due 2026 (the “2026 Dollar Notes”), €i550.0
million of i4.00% senior unsecured notes due 2023 (the “2023 Euro Notes”) and €i250.0 million of i4.75%
senior unsecured notes due 2026 (the “2026 Euro Notes” and, together with the 2023 Euro Notes, the “Euro Notes,” and the Euro Notes together with the 2026 Dollar Notes, the “Senior Unsecured Notes”) in a private offering.
The Senior Unsecured Notes are senior unsecured debt obligations of the Company and will be pari passu in right of payment with all of the Company’s existing and future senior indebtedness (including the Coty Credit Facilities). The Senior Unsecured Notes are guaranteed, jointly and severally, on a senior basis by the Guarantors. The Senior Unsecured Notes are senior unsecured obligations of the
Company and are effectively junior to all existing and future secured indebtedness of the Company to the extent of the value of the collateral securing such secured indebtedness. The related guarantees are senior unsecured obligations of each Guarantor and are effectively junior to all existing and future secured indebtedness of such Guarantor to the extent of the value of the collateral securing such indebtedness.
The 2026 Dollar and Euro Notes will mature on April 15, 2026. The 2026 Dollar Notes will bear interest at a rate of i6.50%
per annum. The 2026 Euro Notes will bear interest at a rate of i4.75% per annum. Interest on the 2026 Dollar and Euro Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
Upon the occurrence of certain change of control triggering events with respect to a series of Senior Unsecured Notes, the Company will be required to offer to repurchase all or part of the Senior Unsecured Notes of such series at i101% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the purchase date applicable to such Senior Unsecured Notes.
The Senior Unsecured Notes contain customary
covenants that place restrictions in certain circumstances on, among other things, incurrence of liens, entry into sale or leaseback transactions, sales of all or substantially all of the Company’s assets and certain merger or consolidation transactions. The Senior Unsecured Notes also provide for customary events of default.
Deferred Financing Costs
The Company wrote off unamortized deferred issuance fees and discounts of $i5.2
and $i0.0 during the three months ended September 30, 2023 and 2022, respectively, which were recorded in Other expense (income), net in the Condensed Consolidated Statement of Operations. Additionally, during the three months ended September 30, 2023 and 2022, the Company capitalized deferred issuance fees of $i40.4
and $i0.0, respectively.
Interest
The 2018 Coty Credit Agreement facilities will bear interest at rates equal to, at the Company’s option, either:
(1)SOFR of the applicable qualified currency, of which the Company can elect the applicable one, two, three, six or twelve month rate, plus the applicable
margin; or
(2)Alternate base rate (“ABR”) plus the applicable margin.
In the case of the 2023 Coty Revolving Credit Facility, the applicable margin means the lesser of a percentage per annum to be determined in accordance with the leverage-based pricing
grid and the debt rating-based grid below:
Pricing Tier
Total Net Leverage Ratio:
SOFR plus:
Alternative Base Rate Margin:
1.0
Greater
than or equal to i4.75:1
i2.000%
i1.000%
2.0
Less
than i4.75:1 but greater than or equal to i4.00:1
i1.750%
i0.750%
3.0
Less
than i4.00:1 but greater than or equal to i2.75:1
i1.500%
i0.500%
4.0
Less
than i2.75:1 but greater than or equal to i2.00:1
i1.250%
i0.250%
5.0
Less
than i2.00:1 but greater than or equal to i1.50:1
The
fair value of the 2023 Coty Revolving Credit Facility is equal to its carrying value, as the Company has the ability to repay the outstanding principal at par value at any time. The Company uses the market approach to value its other debt instruments. The Company obtains fair values from independent pricing services or utilizes the U.S. dollar SOFR curve to determine the fair value of these debt instruments. Based on the assumptions used to value these liabilities at fair value, these debt instruments are categorized as Level 2 in the fair value hierarchy.
Debt Maturities Schedule
i
Aggregate
maturities of the Company’s long-term debt, including the current portion of long-term debt and excluding short-term debt and finance lease obligations as of September 30, 2023, are presented below:
The
2018 Coty Credit Agreement contains affirmative and negative covenants. The negative covenants include, among other things, limitations on debt, liens, dispositions, investments, fundamental changes, restricted payments and affiliate
transactions. With certain exceptions as described below, the 2018 Coty Credit Agreement, as amended, includes a financial covenant that requires us to maintain a Total Net Leverage Ratio (as defined below), equal to or less than the ratios shown below for each respective test period.
(a)
Total Net Leverage Ratio means, as of any date of determination, the ratio of: (a) (i) Total Indebtedness minus (ii) unrestricted and Cash Equivalents of the Parent Borrower and its Restricted Subsidiaries as determined in accordance with GAAP to (b) Adjusted EBITDA for the most recently ended Test Period (each of the defined terms, including Adjusted EBITDA, used within the definition of Total Net Leverage Ratio have the meanings ascribed to them within the 2018 Coty Credit Agreement, as amended). Adjusted EBITDA, as defined in the 2018 Coty Credit Agreement, as amended, includes certain add backs related to cost savings, unusual events such as COVID-19, operating expense reductions and future unrealized synergies subject to certain limits and conditions as specified in the 2018 Coty Credit Agreement, as amended.
In the ifour
fiscal quarters following the closing of any Material Acquisition (as defined in the 2018 Coty Credit Agreement, as amended), including the fiscal quarter in which such Material Acquisition occurs, the maximum Total Net Leverage Ratio shall be the lesser of (i) i5.95 to 1.00 and (ii) i1.00
higher than the otherwise applicable maximum Total Net Leverage Ratio for such quarter (as set forth in the table above). Immediately after any such ifour fiscal quarter period, there shall be at least itwo
consecutive fiscal quarters during which the Company's Total Net Leverage Ratio is no greater than the maximum Total Net Leverage Ratio that would otherwise have been required in the absence of such Material Acquisition, regardless of whether any additional Material Acquisitions are consummated during such period.
As of September 30, 2023, the Company was in compliance with all covenants contained within the 2018 Coty Credit Agreement, as amended.
10. iINTEREST
EXPENSE, NET
iInterest expense, net for the three months ended September 30, 2023 and 2022, respectively, is presented below:
Foreign
exchange losses, net of derivative contracts
i8.2
i11.9
Interest
income
(i5.2)
(i3.6)
Total
interest expense, net
$
i69.8
$
i65.9
/
11.
iEMPLOYEE BENEFIT PLANS
i
The components of net periodic benefit cost for pension plans and other post-employment benefit plans recognized in the Condensed Consolidated Statements of Operations are presented below:
The Company
is exposed to foreign currency exchange fluctuations through its global operations. The Company may reduce its exposure to fluctuations in the cash flows associated with changes in foreign exchange rates by creating offsetting positions through the use of derivative instruments and also by designating foreign currency denominated borrowings and cross-currency swaps as hedges of net investments in foreign subsidiaries. The Company expects that through hedging, any gain or loss on the derivative instruments would generally offset the expected increase or decrease in the value of the underlying forecasted transactions.
As of September 30,
2023 and June 30, 2023, the notional amount of the outstanding forward foreign exchange contracts designated as cash flow hedges were $i29.1 and $i28.0, respectively.
The
Company also uses certain derivatives not designated as hedging instruments consisting primarily of foreign currency forward contracts and cross-currency swaps to hedge intercompany transactions and foreign currency denominated external debt. Although these derivatives were not designated for hedge accounting, the overall objective of mitigating foreign currency exposure is the same for all derivative instruments. For derivatives not designated as hedging instruments, changes in fair value are recorded in the line item in the Condensed Consolidated Statements of Operations to which the derivative relates. As of September 30, 2023 and June 30, 2023, the notional amounts of these outstanding non-designated foreign currency forward and cross-currency swap contracts
were $i1,465.1 and $i1,653.5, respectively.
Interest Rate Risk
The Company is exposed to interest
rate fluctuations related to its variable rate debt instruments. The Company may reduce its exposure to fluctuations in the cash flows associated with changes in the variable interest rates by entering into offsetting positions through the use of derivative instruments, such as interest rate swap contracts. The interest rate swap contracts result in recognizing a fixed interest rate for the portion of the Company’s variable rate debt that was hedged. This will reduce the negative and positive impact of increases in the variable rates over the term of the contracts.
Hedge effectiveness of interest rate swap contracts is based on a long-haul hypothetical derivative methodology and includes all changes in value.
As of September 30, 2023 and June 30, 2023, the Company had interest rate swap contracts designated as effective hedges in the notional amount of $ii200.0/.
These interest rate swaps are designated and qualify as cash flow hedges and were highly effective.
Net Investment Hedge
Foreign currency gains and losses on borrowings designated as a net investment hedge, except ineffective portions, are reported in the cumulative translation adjustment (“CTA”) component of accumulated other comprehensive income (loss) ("AOCI/(L)"), along with the foreign currency translation adjustments on those investments. As of September 30, 2023 and June 30, 2023, the nominal exposures of foreign currency denominated borrowings designated as net investment hedges were €i835.9 million
and €i701.3 million, respectively. The designated hedge amounts were considered highly effective.
In June and December 2022, the Company entered into certain forward repurchase contracts to start
hedging for potential $i200.0 and $i196.0 share buyback programs, in 2024 and 2025, respectively. These forward repurchase contracts are accounted for at fair value, with changes in the
fair value recorded in Other expense (income), net in the Condensed Consolidated Statements of Operations. Refer to Note 13—Equity and Convertible Preferred Stock.
Derivative and non-derivative financial instruments which are designated as hedging instruments:
The accumulated gain (loss) on foreign currency borrowings classified as net investment hedges in the foreign currency translation adjustment component of AOCI/(L) was $i5.5 and $(i12.2)
as of September 30, 2023 and June 30, 2023, respectively.
In September 2020, the Company terminated its net investment cross-currency swap derivative with a notional amount of $i550.0 in exchange for cash payment of $i37.6.
The loss related to this termination of $(ii37.6/)
is included in AOCI/(L) as of September 30, 2023 and June 30, 2023, and will remain until the sale or substantial liquidation of the underlying net investments.
iiThe
amount of gains and losses recognized in Other comprehensive income (loss) (“OCI”) in the Condensed Consolidated Balance Sheets related to the Company’s derivative and non-derivative financial instruments which are designated as hedging instruments is presented below:/
The
accumulated (loss) gain on derivative instruments classified as cash flow hedges in AOCI/(L), net of tax, was $i2.2 and $i0.7 as of September 30, 2023 and June 30,
2023, respectively. The estimated net gain related to these effective hedges that is expected to be reclassified from AOCI/(L) into earnings, net of tax, within the next twelve months is $i1.5. As of September 30, 2023, all of the Company's remaining foreign currency forward contracts designated as hedges were highly
effective.
iThe amount of gains and losses reclassified from AOCI/(L) to the Condensed Consolidated Statements of Operations related to the Company’s derivative financial instruments which are designated as hedging instruments is presented below:
Location
and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships
As of September 30, 2023, the Company’s common stock consisted of Class A Common Stock with a par value of $i0.01
per share. The holders of Class A Common Stock are entitled to ione vote per share. As of September 30, 2023, total authorized shares of Class A Common Stock was i1,250.0
million and total outstanding shares of Class A Common Stock was i888.0 million.
On September 28, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with a group of underwriters to issue and sell i33.0 million
shares of the Company’s Class A common stock, par value $i0.01 per share, at a public offering price of $i10.80 (or €i10.28)
per share in a global offering (the “Offering”). The Company also announced the admission to listing and trading of its Common Stock on the professional segment of the Euronext Paris.
i30.0 million shares were issued in euros and delivered on September 29, 2023 ("EUR shares"), and the remaining i3.0 million
shares were issued in U.S. dollars and delivered on October 2, 2023 ("USD shares").
Settlement of the Offering occurred on October 2, 2023 when €i299.8 million was received for the EUR shares and $i31.5
was received for the USD shares, net of $i10.0 of underwriting fees. Additionally, the Company incurred $i5.5 in estimated other professional fees. The underwriting fees and other professional fees incurred in connection with the Offering were incremental costs directly
attributable to the issuance and thus were presented as a reduction of Equity in the Condensed Consolidated Balance Sheets.
Immediately after the Offering and taking into account the proxy agreement entered into on September 29, 2023 by and among JAB Beauty B.V. ("JAB"), Mr. Peter Harf, the Company's Chairman, and HFS Holdings S.à r.l, (“HFS”), which is beneficially owned by Mr. Harf, JAB, the Company’s largest stockholder, may be deemed to beneficially own approximately i53%
of Coty’s Class A Common Stock. This is inclusive of the i3.0 million shares JAB purchased in the Offering and all voting interests of HFS, including its shares of Series B Preferred Stock on an if converted basis.
The Company’s CEO, Sue Nabi, was granted a one-time sign-on award of restricted stock units on June 30, 2021. On October
29, 2021 and September 18, 2023, JAB completed the transfer of i10.0 million and i5.0 million
shares of Common Stock, respectively, to Ms. Nabi pursuant to an equity transfer agreement. See Note 14—Share-Based Compensation Plans for additional information.
Series A and A-1 Preferred Stock
As of September 30, 2023, total authorized shares of preferred stock are i20.0 million. There are itwo
classes of Preferred Stock, Series A Preferred Stock and Series A-1 Preferred Stock, both with a par value of $ii0.01/
per share.
As of September 30, 2023, there were iii1.0//
million shares of Series A and iiino//
shares of Series A-1 Preferred Stock authorized, issued and outstanding. Series A Preferred Stock and Series A-1 Preferred Stock are not entitled to receive any dividends and have iino/
voting rights except as required by law.
As of September 30, 2023, the Company has $i0.2 Series A Preferred Stock classified as a liability recorded in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet.
Convertible Series B Preferred Stock
On May 11, 2020, the
Company entered into an Investment Agreement with KKR Rainbow Aggregator L.P. ("KKR Aggregator"), relating to the issuance and sale by the Company to KKR Aggregator of up to i1,000,000 shares of the Company’s new Convertible Series B Preferred Stock, par value $i0.01
per share (the “Series B Preferred Stock”), for an aggregate purchase price of up to $i1,000.0, or $i1,000 per share (the “Issuance”). The
Company completed the issuances and sales of the Series B Preferred Stock on May 26, 2020 and July 31, 2020. On November 16, 2020, KKR Aggregator and affiliated investment funds agreed to sell i146,057 shares of Series B Preferred Stock, to HFS. The transaction closed on August 27, 2021.
As a result of various conversions and exchanges of KKR Aggregator's shares of
the Series B Preferred Stock, as of December 31, 2021, Kohlberg Kravis Roberts & Co. L.P. and its affiliates ("KKR") has fully redeemed/exchanged all of their Series B Preferred Stock.
Cumulative preferred dividends accrue daily on the Series B Preferred Stock at a rate of i9.0% per year. During the three months ended September 30, 2023 and 2022, the Board of Directors declared dividends on the Series B Preferred Stock of
$ii3.3/ and paid accrued dividends of $ii3.3/.
As of September 30, 2023 and June 30, 2023, the Series B Preferred Stock had outstanding accrued dividends of $ii3.3/.
Treasury
Stock
Share Repurchase Program
Since February 2014, the Board has authorized the Company to repurchase its Class A Common Stock under approved repurchase programs. On February 3, 2016, the Board authorized the Company to repurchase up to $i500.0 of its Class A Common Stock (the “Incremental Repurchase Program”).
Repurchases may be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, the market price of its Class A Common Stock, and general market conditions. For the three months ended September 30, 2023, the Company did inot repurchase any shares of its Class A Common Stock under the Incremental Repurchase Program. As of September 30,
2023, the Company had authority for $i396.8 remaining under the Incremental Repurchase Program.
In June and December 2022, the Company entered into forward repurchase contracts (the “Forward” and together the “Forwards”) with three large financial institutions
(“Counterparties”) to start hedging for potential $i200.0 and $i196.0 share buyback programs in 2024 and 2025, respectively.
As part of the Forward agreements, the
Company will pay interest on the outstanding underlying notional amount of the Forwards held by the Counterparties during the contract periods. The interest rates are variable, based on the United States secured overnight funding rate (“SOFR”) plus a spread. The weighted average interest rate plus applicable spread for the June and December 2022 Forward transactions were i9.7% and i9.7%,
respectively, as of September 30, 2023.
Since the Forwards permit a net cash settlement alternative in addition to the physical settlement, the Company accounted for the Forwards initially and subsequently at their fair value, with changes in the fair value recorded in Other expense (income), net in the Condensed Consolidated Statement of Operations.
Dividends
On April 29, 2020,
the Board of Directors suspended the payment of dividends on Common Stock. No dividends on Common Stock were declared for the period ended September 30, 2023.
During the period ended September 30, 2023 no dividends on Common Stock were recorded to additional paid-in capital ("APIC").
The change in dividends accrued recorded to APIC in the Condensed Consolidated Balance Sheet as of September 30, 2023 and 2022 was inil,
which represent dividends no longer expected to vest as a result of forfeitures of outstanding restricted stock units (“RSUs”). In addition, the Company made payments of nil and $i0.4, of which $i0.1
related to employee taxes, for the previously accrued dividends on RSUs that vested during the three months ended September 30, 2023 and 2022, respectively.
Total accrued dividends on unvested RSUs and phantom units included in Accrued expenses and other current liabilities are $ii1.0/
as of September 30, 2023 and June 30, 2023. In addition, accrued dividends of $ii0.1/
are included in Other noncurrent liabilities as of September 30, 2023 and June 30, 2023.
i
Accumulated Other Comprehensive Income (Loss)
Foreign
Currency Translation Adjustments
Gain on Cash Flow Hedges
(Loss) gain on Net Investment Hedge
Other Foreign Currency Translation Adjustments
Pension and Other Post-Employment Benefit Plans (a)
(a)
For the three months ended September 30, 2023, other comprehensive loss before reclassifications of $i1.5 and net amounts reclassified from AOCI/(L) related to pensions and other post-employment benefit plans included amortization of prior service credits and actuarial losses of $i1.5,
net of tax of $i0.9.
Share-based compensation
expense is recognized on a straight-line basis over the requisite service period. Total share-based compensation is shown in the table below:
(a)
Equity plan share-based compensation expense of $i30.2 and $i31.4
were recorded to additional paid in capital and presented in the Condensed Consolidated Statements of Equity for the three months ended September 30, 2023 and 2022, respectively.
/
As of September 30, 2023, the total unrecognized share-based compensation expense related to stock options, restricted stock, restricted stock units and other share awards, and performance restricted stock units ("PRSUs") is $i0.5,
$i2.8, $i142.7, and $i25.3,
respectively. The unrecognized share-based compensation expense related to stock options, restricted stock, restricted stock units and other share awards, and PRSUs, is expected to be recognized over a weighted-average period of i0.66, i1.72,
i3.98 and i2.77
years, respectively.
Restricted Stock Units and Other Share Awards
The Company granted no shares of RSUs and other share awards during the three months ended September 30, 2023. The Company recognized share-based compensation expense of $i29.4 and $i30.7
for the three months ended September 30, 2023 and 2022, respectively, of which $i21.0 and $i23.5 related to Ms. Nabi's award, as described below.
Performance
Restricted Stock Units
The Company granted i2.1 million shares of PRSUs, during the three months ended September 30, 2023. The Company recognized share-based compensation expense of $i0.6
and $i0.0 for the three months ended September 30, 2023 and 2022, respectively, of which $i0.1 and $i0.0,
respectively, related to Ms. Nabi's award, as described below.
Long-term Equity Program for CEO
The Company’s CEO, Sue Nabi, was granted a one-time sign-on award of restricted stock units (the “Award”) on June 30, 2021. The Award vested and settled in iii10.0//
million shares of the Company’s Class A Common Stock, par value $iii0.01//
per share, on each of August 31, 2021, August 31, 2022 and August 31, 2023. The Company recognized the share-based compensation expense, on a straight-line basis over the vesting period, based on the fair value on the grant date. The amount of compensation cost recognized at each vesting date must at least equal the portion of the award legally vested.
In connection with this Award, on October 29, 2021 and September 18, 2023, JAB, the Company’s largest stockholder and a wholly-owned subsidiary of JAB Holding
Company S.à r.l., completed the transfer of i10.0 million and i5.0 million
shares of Class A Common Stock, respectively, to Ms. Nabi.
On August 31, 2023 and 2022, the Company issued i5.0 million and i10.0
million shares of Class A Common Stock, respectively, to Ms. Nabi in connection with the third and second vesting of the Award.
Pursuant to the term of the amended employment agreement on May 4, 2023, the Company granted Ms. Nabi a one-time award of i10,416,667 RSUs and will grant a total of i10,416,665
PRSUs in five equal tranches over the next five years. These two awards will vest periodically over the next seven years in accordance with the terms discussed below.
Ms. Nabi's i10,416,667 RSUs will vest and settle in shares of the Company’s Class A Common Stock, par value $i0.01
per share over ifive years on the following vesting schedule: (i) i15% on September
1, 2024, (ii) i15% on September 1, 2025, (iii) i20%
on September 1, 2026, (iv) i20% on September 1, 2027; and (v) i30%
on September 1, 2028, in each case subject to Ms. Nabi’s continued employment through the applicable vesting date. The Company will recognize approximately $i109.6 of share-based compensation expense, on a straight-line basis over the vesting period, based on the fair value on the grant date, net of forfeitures. The amount of compensation cost recognized at each vesting date
must at least equal the portion of the award legally vested.
The first tranche of Ms. Nabi's PRSU award of i2,083,333 shares shall fully vest on September 1, 2026, subject to the achievement of ithree-year
performance objectives determined by the Board on September 28, 2023 (the grant date) and subject to Ms. Nabi’s continued employment. The next four tranches of i2,083,333 PRSUs will be granted on or around each September 1 of 2024 through 2027, which shall vest on the third-year anniversary of the respective grant date, subject in each case to the
achievement of ithree-year performance objectives to be determined by the Board. The Company will recognize share-based compensation expense associated with these PRSUs, on a straight-line basis over the vesting period, based on the fair value on the grant date when it is probable that the performance condition will be achieved.
In the event that JAB and Ms. Nabi sell
shares of Common Stock for cash in a privately negotiated transaction, subject to Board approval, the Company will grant Ms. Nabi new options to acquire shares of Common Stock (the “Reload Options”) in an amount equal to the number of shares sold by Ms. Nabi in such transaction. The Reload Options will have a strike price equal to the greater of the volume weighted average price for shares at the time of the relevant transaction and the fair market value on the date of grant. The potential expense attributed to the reload options will be recognized when the reload options are granted.
Series A Preferred Stock and Series A-1 Preferred Stock
The Company granted iiino//
shares of Series A Preferred Stock or Series A-1 Preferred Stock during the three months ended September 30, 2023. The Company recognized share-based compensation income of $i0.6 and $i0.4
for the three months ended September 30, 2023 and 2022, respectively.
Non-Qualified Stock Options
The Company granted ino non-qualified stock options during the three months ended September
30, 2023. The Company recognized share-based compensation (income) expense of $(i0.2) and $i0.3 for the three months ended September
30, 2023 and 2022, respectively.
15. iNET INCOME ATTRIBUTABLE TO COTY INC. PER COMMON SHARE
i
Reconciliation
between the numerators and denominators of the basic and diluted income per share (“EPS”) computations is presented below:
Weighted-average
common shares outstanding—Diluted
i854.3
i882.2
Earnings
per common share:
Earnings
per common share - basic
$
i—
$
i0.15
Earnings
per common share - diluted (e)
i—
i0.15
(a) For
the three months ended September 30, 2023, outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase shares of Common Stock were excluded in the computation of diluted loss per share due to the net loss incurred during the period. For the three months ended September 30, 2022, outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase i6.2 million
shares of Common Stock were anti-dilutive and excluded from the computation of diluted EPS.
(b) For the three months ended September 30, 2023, RSUs were excluded from the computation of diluted loss per share due to the net loss incurred during the period.
(c) For the three months ended September
30, 2023, Convertible Series B Preferred Stock was excluded from the computation of diluted loss per share due to the net loss incurred during the period.
(d) For the three months ended September 30, 2023, potential shares for the Forward Repurchase Contracts were excluded from the computation of diluted loss per share due to the net loss incurred during the period. For the three months ended September 30, 2022, i3.1 million
weighted average dilutive shares for the Forward Repurchase Contracts were excluded from the computation of diluted EPS as their inclusion would have been anti-dilutive.
(e) Diluted EPS is adjusted by the effect of dilutive securities, including awards under the Company's equity compensation plans, the convertible Series B Preferred Stock, and the Forward Repurchase Contracts. When calculating any potential dilutive effect of stock options, Series A Preferred Stock, restricted stock, RSUs and PRSUs, the Company uses the treasury method and the if-converted
method for the Convertible Series B Preferred Stock and the Forward Repurchase Contracts.The treasury method typically does not adjust the net income attributable to Coty Inc., while the if-converted method requires an adjustment to reverse the impact of the preferred stock dividends of $i3.3 and $i3.3,
respectively, and to reverse the impact of fair market value (gains)/losses for contracts with the option to settle in shares or cash of $i44.3 and $i27.7,
respectively, if dilutive, for the three months ended September 30, 2023 and 2022 on net income applicable to common stockholders during the period.
16. iREDEEMABLE NONCONTROLLING INTERESTS
Subsidiary in the Middle East
As of September 30, 2023, the
noncontrolling interest holder in the Company’s subsidiary in the Middle East had a i25% ownership share. The Company adjusts the redeemable noncontrolling interests (“RNCI”) to redemption value at the end of each reporting period with changes recognized as adjustments to APIC. The Company recognized $i98.6
and $i93.5 as the RNCI balances as of September 30, 2023 and June 30, 2023, respectively.
17. iCOMMITMENTS
AND CONTINGENCIES
Legal Matters
The Company is involved, from time to time, in various litigation, administrative and other legal proceedings, including regulatory actions, incidental or related to its business, including consumer class or collective actions, personal injury (mostly involving allegations related to alleged asbestos in the Company’s talc-based cosmetic products), intellectual property, competition, compliance and advertising claims litigation and disputes, among others (collectively, “Legal Proceedings”). While the Company cannot predict any final outcomes relating thereto, management believes
that the outcome of current Legal Proceedings will not have a material effect upon its business, prospects, financial condition, results of operations, cash flows or the trading price of the Company’s securities. However, management’s assessment of the Company’s current Legal Proceedings is ongoing, and could change in light of the discovery of additional facts with respect to Legal Proceedings not presently known to the Company, further legal analysis, or determinations by judges, arbitrators, juries or other finders of fact or deciders of law which are not in accord with management’s evaluation of the probable liability or outcome of such Legal Proceedings. From time to time, the
Company is in discussions with regulators, including discussions initiated by the Company, about actual or potential violations of law in order to remediate or mitigate associated legal or compliance risks and liabilities or penalties. As the outcomes of such proceedings are unpredictable, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, prospects, financial condition, results of operations, cash flows or the trading price of its securities.
The Company’s Brazilian subsidiaries receive tax assessments from local, state and federal tax authorities in Brazil from time to time. Current open tax assessments as of September 30, 2023 are:
Assessment
received
Type of assessment
Type of Tax
Tax period impacted
Estimated amount, including interest and penalties as of
State sales tax credits, which the Treasury Office of the State of Goiás considers as improperly registered
ICMS
2016-2017
R$i0.0
million (approximately $i0.0) (a)
Aug-20
ICMS
2017-2019
R$i674.1
million (approximately $i133.9)
Oct-20
Federal excise taxes, which the Treasury Office of the Brazil’s Internal Revenue Service considers as improperly calculated
IPI
2016-2017
R$i414.6
million (approximately $i82.4)
Nov-22
IPI
2018-2019
R$i556.5
million (approximately $i110.5)
Nov-20
State sales taxes, which the Treasury Office of the State of Minas Gerais considers as improperly calculated
ICMS
2016-2019
R$i223.0
million (approximately $i44.3)
Jun-21
State sales tax, which the Treasury Office of the State of Goiás considers as improperly calculated
ICMS
2016-2020
R$i65.2
million (approximately $i13.0)
(a) During the fourth quarter of fiscal 2023, the ICMS assessment received in March 2018 had an unfavorable decision at administrative instance. The
Company paid the R$i1.1 million (approximately $i0.2) penalty in August 2023 and the case closed. The
Company does not believe the outcome of this decision will weigh on other pending cases as the case factors for other open ICMS assessments are different.
/
The Minas Gerais State tax ICMS assessment received in November 2020 is currently at the judicial process. For the Goiás State tax ICMS assessment received in August 2020, the Company has in parallel a judicial case about an additional claim for fees over the tax incentive, for which the Company received an unfavorable ruling and has filed an appeal. In the first quarter of fiscal 2024, the
Company filed a motion for clarification as a step before potentially appealing to a Brazilian higher court. All other cases are currently in the administrative process. The Company expects that cases may move from the administrative to the judicial process, although the exact timing is uncertain. For cases in the judicial process, the Company will be required to make a judicial deposit or enter into a surety bond for the disputed tax assessment, interest and penalties. The judicial process in Brazil is likely to take a number of years to conclude. The Company is seeking favorable judicial and administrative decisions on the tax enforcement actions filed by the tax authorities for these assessments. The
Company believes it has meritorious defenses and it has not recognized a loss for these assessments as the Company does not believe a loss is probable.
Due to the fiscal environment in Brazil, the possibility of further tax assessments related to the same or similar matters cannot be ruled out.
18. iRELATED PARTY TRANSACTIONS
Relationship
with KKR
On December 22, 2021, the Company entered into an agreement with Rainbow UK Bidco Limited (“KKR Bidco”) (an affiliate of funds and/or separately managed accounts advised and/or managed by KKR), related to post-closing adjustments to the purchase consideration for the Coty’s Professional and Retail Hair businesses, including the Wella, Clairol, OPI and ghd brands, (together, the “Wella Business”). In relation to this agreement, the Company recognized a gain of $i6.6,
in the three months ended September 30, 2023, which is reported in Other expense (income), net in the Condensed Consolidated Statements of Operations. As of September 30, 2023, the Company earned the full amount advanced from the Wella Business as part of this agreement and has recognized a receivable from Wella of $i4.1 for amounts earned that have not been paid.
Wella
As of
September 30, 2023, Coty owned i25.9% of the Wella Company as an equity investment and performs certain services to Wella. Refer to Note 6— Equity Investments.
In connection with the sale of the Wella Business, the Company and Wella entered into a Transitional Services Agreement (“TSA”). Subject to the terms of this TSA, the Company will perform
services for Wella in exchange for related service fees. Such services include billing and collecting from Wella customers, certain logistics and warehouse services, as well as other administrative and systems support. The Company and Wella have mutually agreed to end the contracted TSA services on January 31, 2022. The Company and Wella have also entered into other manufacturing and distribution arrangements to
facilitate
the Wella Business transition in the U.S. and Brazil. TSA fees and other fees earned were $i1.0 and $i2.3, respectively, for the three months ended September 30, 2023 and $i0.8
and $i2.1, respectively, for the three months ended September 30, 2022. The TSA fees are principally invoiced on a cost plus basis. The TSA fees and other fees were included in Selling, general and administrative expenses and Cost of sales, respectively, in the Company's Condensed Consolidated Statement of Operations.
The Company also entered into an agreement with Wella to provide management, consulting
and financial services to Wella and its direct and indirect divisions, subsidiaries, parent entities and controlled affiliates (in assisting it in the management of its business). Amounts due to the Company pursuant to this arrangement as of September 30, 2023 is $i0.3.
As of September 30, 2023, accounts receivable from and accounts payable to Wella of $i78.4
and $i7.6, respectively, were included in Prepaid expenses and other current assets and Accrued expenses and other current liabilities, respectively, in the Company's Condensed Consolidated Balance Sheets. Additionally, as of September 30, 2023, the Company has accrued $i34.5
related to long-term payables due to Wella included in Other noncurrent liabilities in the Company's Condensed Consolidated Balance Sheet.
In accordance with the separation agreement with Wella, Coty shall retain and be solely responsible for any amounts payable to former Coty employees transferred to Wella (“Wella employees”), who participated in the Coty Long-Term Incentive Plan. The Wella employees will continue to participate and vest on the current terms for the remaining vesting period after the separation. As such, Coty will continue to recognize the share-based compensation expense for Wella employees until the existing equity awards reach their vesting date. For the three months ended September 30, 2023 and 2022, Coty recorded
$i0.7 and $i1.7, respectively of share-based compensation expense related to Wella employees, which was presented as part of Other expense (income), net in the Condensed Consolidated Statements of Operations.
The
Company has certain sublease arrangements with Wella after the sale. The Company reported sublease income from Wella of $i2.1 and $i2.4, respectively for the three months ended September 30, 2023 and 2022.
19.
iSUBSEQUENT EVENTS
Euronext Paris Public Offering
On September 28, 2023, the Company entered into the Underwriting Agreement with a group of underwriters to issue and sell i33.0 million
shares of the Company’s Class A common stock, par value $i0.01 per share (see Note 13—Equity and Convertible Preferred Stock for additional information). The Company intends to use the proceeds of approximately $i348.5,
net of underwriting fees, from this offering primarily to retire the principal amount of outstanding debt. Other uses include general corporate purposes, such as strategic investments in the business, working capital and capital expenditures. Settlement of the Offering occurred on October 2, 2023.
Paydown of Brazilian Credit Facility
On October 5, 2023, a wholly-owned subsidiary of the Company utilized cash on hand to fully paid down the U.S. Dollar-denominated credit facility in Brazil in the amount of $i31.9.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the financial condition and results of operations of Coty Inc. and its consolidated subsidiaries, should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and related notes included elsewhere in this document, and in our other public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (“Fiscal 2023 Form 10-K”). When used in this discussion, the terms “Coty,” the “Company,”“we,”“our,”
or “us” mean, unless the context otherwise indicates, Coty Inc. and its majority and wholly-owned subsidiaries. Also, when used in this Quarterly Report on Form 10-Q, the term “includes” and “including” means, unless the context otherwise indicates, including without limitation. The following report includes certain non-GAAP financial measures. See “Overview—Non-GAAP Financial Measures” for a discussion of non-GAAP financial measures and how they are calculated.
All dollar amounts in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
More information about potential risks and uncertainties that could affect our business and financial results is included under the heading “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and other periodic reports we have filed and may file with the SEC from time to time.
Forward-looking Statements
Certain statements in this Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, strategic planning, targets and outlook for future reporting periods (including the extent and timing of revenue, expense and profit trends and changes in operating cash flows and cash flows from operating activities and investing activities), the wind down of the Company’s operations in Russia (including timing and expected
impact), the Company’s future operations and strategy (including the expected implementation and related impact of its strategic priorities), ongoing and future cost efficiency, optimization and restructuring initiatives and programs, expectations of the impact of inflationary pressures and the timing, magnitude and impact of pricing actions to offset inflationary costs, strategic transactions (including their expected timing and impact), expectations and/or plans with respect to joint ventures (including Wella and the timing and size of any related divestiture, distribution or return of capital), the Company’s capital allocation strategy and payment of dividends (including suspension of dividend payments and the duration thereof and any plans to resume cash dividends on common stock or to continue
to pay dividends in cash on preferred stock and expectations for stock repurchases), investments, licenses and portfolio changes, product launches, relaunches or rebranding (including the expected timing or impact thereof), synergies, savings, performance, cost, timing and integration of acquisitions, future cash flows, liquidity and borrowing capacity (including any refinancing or deleveraging activities), timing and size of cash outflows and debt deleveraging, the timing and extent of any future impairments, and synergies, savings, impact, cost, timing and implementation of the Company’s ongoing transformation agenda (including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, continued process improvements and supply chain changes), the impact, cost, timing and implementation of e-commerce and digital initiatives,
the expected impact, cost, timing and implementation of sustainability initiatives (including progress, plans and goals), the impact of COVID-19, the expected impact of geopolitical risks including the ongoing war in Ukraine and/or the armed conflict in the Middle East on our business operations, sales outlook and strategy, the expected impact of global supply chain challenges and/or inflationary pressures (including as a result of the war in Ukraine and/or armed conflict in the Middle East) and expectations regarding future service levels and inventory levels, the impact of the dual-listing of our Class A Common Stock on Euronext Paris, and the priorities of senior management. These forward-looking statements are generally identified by words or phrases, such as “anticipate”, “are going to”, “estimate”, “plan”, “project”, “expect”, “believe”, “intend”, “foresee”, “forecast”, “will”, “may”,
“should”, “outlook”, “continue”, “temporary”, “target”, “aim”, “potential”, “goal” and similar words or phrases. These statements are based on certain assumptions and estimates that we consider reasonable, but are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual events or results (including our financial condition, results of operations, cash flows and prospects) to differ materially from such statements, including risks and uncertainties relating to:
•our ability to successfully implement our multi-year transformation agenda and compete effectively in the beauty industry, achieve the benefits contemplated by our strategic initiatives (including revenue growth, cost control, gross margin growth and debt deleveraging) and successfully implement our strategic priorities (including stabilizing
our consumer beauty brands through leading innovation and improved execution, accelerating our prestige fragrance brands and ongoing expansion into prestige cosmetics, building a comprehensive skincare portfolio, enhancing our e-commerce and direct-to-consumer (“DTC”) capabilities, expanding our presence in China through prestige products and select consumer beauty brands, and establishing Coty as an industry leader in sustainability) in each case within the expected time frame or at all;
•our ability to anticipate, gauge and respond to market trends and consumer preferences,
which may change rapidly, and the market acceptance of new products, including new products in our skincare and prestige cosmetics portfolios, any relaunched or rebranded products and the anticipated costs and discounting associated with such relaunches and rebrands, and consumer receptiveness to our current and future marketing philosophy and consumer engagement activities (including digital marketing and media);
•use of estimates and assumptions in preparing our financial statements, including with regard to revenue recognition, income taxes (including the expected timing and amount of the release of any tax valuation allowance), the assessment of goodwill, other intangible and long-lived assets for impairments, the market value of inventory, and the fair value of the equity investment;
•the impact of any
future impairments;
•managerial, transformational, operational, regulatory, legal and financial risks, including diversion of management attention to and management of cash flows, expenses and costs associated with our transformation agenda, our global business strategies, the integration and management of the strategic partnerships with Kylie Jenner and Kim Kardashian, and future strategic initiatives, and, in particular, our ability to manage and execute many initiatives simultaneously including any resulting complexity, employee attrition or diversion of resources;
•the timing, costs and impacts of divestitures and the amount and use of proceeds from any such transactions;
•future divestitures and the impact thereof
on, and future acquisitions, new licenses and joint ventures and the integration thereof with, our business, operations, systems, financial data and culture and the ability to realize synergies, manage supply chain challenges and other business disruptions, reduce costs (including through our cash efficiency initiatives), avoid liabilities and realize potential efficiencies and benefits (including through our restructuring initiatives) at the levels and at the costs and within the time frames contemplated or at all;
•increased competition, consolidation among retailers, shifts in consumers’ preferred distribution and marketing channels (including to digital and prestige channels), distribution and shelf-space resets or reductions, compression of go-to-market cycles, changes in product and marketing requirements by retailers, reductions in retailer inventory levels and order lead-times or changes in
purchasing patterns, impact from COVID-19 on retail revenues, and other changes in the retail, e-commerce and wholesale environment in which we do business and sell our products and our ability to respond to such changes (including our ability to expand our digital, direct-to-consumer and e-commerce capabilities within contemplated timeframes or at all);
•our and our joint ventures’, business partners’ and licensors’ abilities to obtain, maintain and protect the intellectual property used in our and their respective businesses, protect our and their respective reputations (including those of our and their executives or influencers) and public goodwill, and defend claims by third parties for infringement of intellectual property rights;
•any change to our capital allocation and/or cash
management priorities, including any change in our dividend policy and any change in our stock repurchase plans;
•any unanticipated problems, liabilities or integration or other challenges associated with a past or future acquired business, joint ventures or strategic partnerships, which could result in increased risk or new, unanticipated or unknown liabilities, including with respect to environmental, competition and other regulatory, compliance or legal matters, and specifically in connection with the strategic partnerships with Kylie Jenner and Kim Kardashian, risks related to the entry into a new distribution channel, the potential for channel conflict, risks of retaining customers and key employees, difficulties of integration (or the risks associated with limiting integration) and management of the partnerships, our relationships with Kylie Jenner and Kim Kardashian, our ability to protect trademarks
and brand names, litigation, investigations by governmental authorities, and changes in law, regulations and policies that affect King Kylie LLC (“King Kylie”) and/or KKW Holdings, LLC’s (“KKW Holdings”) business or products, including risk that direct selling laws and regulations may be modified, interpreted or enforced in a manner that results in a negative impact to King Kylie and/or KKW Holdings’ business model, revenue, sales force or business;
•our international operations and joint ventures, including enforceability and effectiveness of our joint venture agreements and reputational, compliance, regulatory, economic and foreign political risks, including difficulties and costs associated with maintaining compliance with a broad variety of complex local and international regulations;
•our dependence on certain licenses
(especially in the fragrance category) and our ability to renew expiring licenses on favorable terms or at all;
•our dependence on entities performing outsourced functions, including outsourcing of distribution functions, and third-party manufacturers, logistics and supply chain suppliers, and other suppliers, including third-party software providers, web-hosting and e-commerce providers;
•administrative, product development and other difficulties in meeting the expected timing of market expansions, product launches, re-launches and marketing efforts,
including in connection with new products in our skincare and prestige cosmetics portfolios;
•changes in the demand for our products due to declining or depressed global or regional economic conditions, and declines in consumer confidence or spending, whether related to the economy (such as austerity measures, tax increases, high fuel costs, or higher unemployment), wars and other hostilities and armed conflicts, natural or other disasters, weather, pandemics, security concerns, terrorist attacks or other factors;
•global political and/or economic uncertainties, disruptions or major regulatory or policy changes, and/or the enforcement thereof that affect our business, financial performance, operations or products, including the impact of the war in Ukraine and any escalation or expansion
thereof, armed conflict in the Middle East, elections in Brazil, the current U.S. administration and future elections, changes in the U.S. tax code, and recent changes and future changes in tariffs, retaliatory or trade protection measures, trade policies and other international trade regulations in the U.S., the European Union, and Asia and in other regions where we operate, potential regulatory limits on payment terms in the European Union, recent and future changes in sanctions regulations including in connection with the war in Ukraine and any escalation or expansion thereof, regulatory uncertainty impacting the wind-down of our business in Russia, and recent and future changes in regulations impacting the beauty industry, including regulatory measures addressing products, formulations, raw materials and packaging;
•currency
exchange rate volatility and currency devaluation and/or inflation;
•our ability to implement and maintain pricing actions to effectively mitigate increased costs and inflationary pressures, and the reaction of customers or consumers to such pricing actions;
•the number, type, outcomes (by judgment, order or settlement) and costs of current or future legal, compliance, tax, regulatory or administrative proceedings, investigations and/or litigation, including product liability cases (including asbestos and talc-related litigation for which indemnities and/or insurance may not be available), distributor or licensor litigation, and compliance, litigation or investigations relating to our joint ventures and strategic partnerships;
•our ability to manage seasonal factors
and other variability and to anticipate future business trends and needs;
•the impact of COVID-19 (or future similar events), including demand for the Company’s products, illness, quarantines, government actions, facility closures, store closures or other restrictions in connection with the COVID-19 pandemic, and the extent and duration thereof, related impact on our ability to meet customer needs and on the ability of third parties on which we rely, including our suppliers, customers, contract manufacturers, distributors, contractors, commercial banks and joint-venture partners, to meet their obligations to us, in particular collections from customers, and the ability to successfully
implement measures to respond to such impacts;
•disruptions in the availability and distribution of raw materials and components needed to manufacture our products, and our ability to effectively manage our production and inventory levels in response to supply challenges;
•disruptions in operations, sales and in other areas, including due to disruptions in our supply chain, restructurings and other business alignment activities, manufacturing or information technology systems, labor disputes, extreme weather and natural disasters, impact from COVID-19 or similar global public health events, the outbreak of war or hostilities (including the war in Ukraine and armed conflict in the Middle East and any escalation or expansion thereof), the impact of global supply chain challenges, and the impact of such disruptions on our ability to
generate profits, stabilize or grow revenues or cash flows, comply with our contractual obligations and accurately forecast demand and supply needs and/or future results;
•our ability to adapt our business to address climate change concerns, including through the implementation of new or unproven technologies or processes, and to respond to increasing governmental and regulatory measures relating to environmental, social and governance matters, including expanding mandatory and voluntary reporting, diligence and disclosure, as well as new taxes (including on energy and plastic), and the impact of such measures on our costs, business operations and strategy;
•restrictions imposed on us through our license agreements, credit facilities and senior unsecured bonds or other material
contracts, our ability to generate cash flow to repay, refinance or recapitalize debt and otherwise comply with our debt instruments, and changes in the manner in which we finance our debt and future capital needs;
•increasing dependency on information technology, including as a result of remote working practices, and our abilityor the ability of any of the third-party service providers we use to support our business, to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, including ransomware attacks, costs and timing of implementation and effectiveness of any upgrades or other changes to information technology systems, and the cost of compliance or our failure to comply with any privacy or data security laws (including the
European Union General Data Protection Regulation (the “GDPR”), the California Consumer Privacy Act and similar state laws,
the Brazil General Data Protection Law, and the China Data Security Law and Personal Information Protection Law) or to protect against theft of customer, employee and corporate sensitive information;
•our ability to attract and retain key personnel and the impact of senior management transitions;
•the distribution and sale by third
parties of counterfeit and/or gray market versions of our products;
•the impact of our ongoing transformation agenda and continued process improvements on our relationships with key customers and suppliers and certain material contracts;
•our relationship with JAB Beauty B.V., as our majority stockholder, and its affiliates, and any related conflicts of interest or litigation;
•our relationship with KKR, whose affiliate KKR Bidco, is an investor in the Wella Business, and any related conflicts of interest or litigation;
•future sales of a significant number
of shares by our majority stockholder or the perception that such sales could occur; and
•other factors described elsewhere in this document and in documents that we file with the SEC from time to time.
More information about potential risks and uncertainties that could affect our business and financial results is included under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and other periodic reports we have filed and may file with the SEC from time to time.
All forward-looking statements made in this document are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as
may be required by applicable law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.
Industry, Ranking and Market Data
Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations about our industry, market position, market opportunity and market sizes, is based on data from various sources including internal data and estimates as well as third-party
sources widely available to the public, such as independent industry publications, government publications, reports by market research firms or other published independent sources and on our assumptions based on that data and other similar sources. We did not fund and are not otherwise affiliated with the third-party sources that we cite. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management’s understanding of industry conditions, and such information has not been verified by any independent sources. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we generally believe the market, industry and other information
included in this Quarterly Report on Form 10-Q to be the most recently available and to be reliable, such information is inherently imprecise and we have not independently verified any third-party information or verified that more recent information is not available.
Our fiscal year ends on June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2024” refer to the fiscal year ending June 30, 2024. Any reference to a year not preceded by “fiscal” refers to a calendar year.
OVERVIEW
We are one of the world’s largest beauty companies, with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. Our strategic priorities
include stabilizing and growing our Consumer Beauty brands through leading innovation and improved execution, accelerating our Prestige fragrance business and ongoing expansion into Prestige cosmetics, building a comprehensive skincare portfolio leveraging existing brands, enhancing our e-commerce and Direct-to-Consumer (“DTC”) capabilities, expanding our presence in China and travel retail through Prestige products and select Consumer Beauty brands, and establishing Coty as an industry leader in sustainability. Our brands empower people to express themselves freely, creating their own visions of beauty; and we are committed to making a positive impact on the planet.
Our products are sold in over 120 countries and territories. As a geographically diverse company we are susceptible to global economic trends, geopolitical conflicts, domestic and foreign governmental policies, and changes in foreign exchange rates. We remain attentive to economic and geopolitical conditions that may materially impact our business. We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adapting to changing circumstances. Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways.
We expect that our net revenue for fiscal year 2024 will grow in the high single digits to low double digits versus the prior year, excluding the impact of foreign exchange, the Russia
Market Exit and the early termination of the Lacoste fragrance license.
Order Fill Rates
Our ability to fulfill demand for our products is critical to our success. Through steps taken to improve order fill rates and mitigate the impact of supply chain constraints, we have seen sequential quarterly improvements in our order fill rates on a company-wide basis. As a result, we achieved near pre-COVID-19 service levels across our divisions during the first quarter.
Inflation
Inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. We continued to experience the impact of inflation on material, logistical and other costs during the three months ended September
30, 2023. We expect that the combination of our strategy to premiumize the portfolio, cost savings programs, and recent pricing actions will enable us to offset inflationary pressure on costs. Inflation may continue to impact certain costs, such as labor, however, we currently anticipate the overall impact of inflation to ease in the upcoming quarters.
Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures for continuing operations and Coty Inc. including Adjusted operating income (loss), Adjusted EBITDA, Adjusted net income (loss), and Adjusted net income (loss) attributable to Coty Inc. to common stockholders (collectively, the “Adjusted Performance Measures”). The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented
in accordance with GAAP are shown in tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, our management uses the Adjusted Performance Measures as key metrics in the evaluation of our performance and annual budgets and to benchmark performance of our business against our competitors. The following are examples of how these Adjusted Performance
Measures are utilized by our management:
•strategic plans and annual budgets are prepared using the Adjusted Performance Measures;
•senior management receives a monthly analysis comparing budget to actual operating results that is prepared using the Adjusted Performance Measures; and
•senior management’s annual compensation is calculated, in part, by using some of the Adjusted Performance Measures.
In addition, our financial covenant compliance calculations under our debt agreements are substantially derived from these Adjusted Performance Measures.
Our management believes that Adjusted Performance Measures are useful to investors in their assessment of our operating performance
and the valuation of the Company. In addition, these non-GAAP financial measures address questions we routinely receive from analysts and investors and, in order to ensure that all investors have access to the same data, our management has determined that it is appropriate to make this data available to all investors. The Adjusted Performance Measures exclude the impact of certain items (as further described below) and provide supplemental information regarding our operating performance. By disclosing these non-GAAP financial measures, our management intends to provide investors with a supplemental comparison of our operating results and trends for the periods presented. Our management believes these measures are also useful to investors as such measures allow investors to evaluate our performance using the same metrics that our management uses to evaluate past performance and prospects
for future performance. We provide disclosure of the effects of these non-GAAP financial measures by presenting the corresponding measure prepared in conformity with GAAP in our financial statements, and by providing a reconciliation to the corresponding GAAP measure so that investors may understand the adjustments made in arriving at the non-GAAP financial measures and use the information to perform their own analyses.
Adjusted operating income/Adjusted EBITDA from continuing operations excludes restructuring costs and business structure realignment programs, amortization, acquisition- and divestiture-related costs and acquisition accounting
impacts, stock-based compensation, and asset impairment charges and other adjustments as described below. For adjusted EBITDA, in addition to the preceding, we exclude adjusted depreciation as defined below. We do not consider these items to be reflective of our core operating performance due to the variability of such items from period-to-period in terms of size, nature and significance. They are primarily incurred to realign our operating structure and integrate new acquisitions, and implement divestitures of components of our business, and fluctuate based on specific facts and circumstances. Additionally, Adjusted net income attributable to Coty Inc. and Adjusted net income attributable to Coty Inc. per common share are adjusted for certain interest and other (income) expense items and preferred stock deemed dividends, as described below, and the related tax effects of each of the items used to derive Adjusted net income as such charges are not used by our management
in assessing our operating performance period-to-period.
Adjusted Performance Measures reflect adjustments based on the following items:
•Costs related to acquisition and divestiture activities: We have excluded acquisition- and divestiture-related costs and the accounting impacts such as those related to transaction costs and costs associated with the revaluation of acquired inventory in connection with business combinations because these costs are unique to each transaction. Additionally, for divestitures, we exclude write-offs of assets that are no longer recoverable and contract related costs due to the divestiture. The nature and amount of such costs vary significantly based on the size and timing of the acquisitions and divestitures, and the maturities of the
businesses being acquired or divested. Also, the size, complexity and/or volume of past transactions, which often drives the magnitude of such expenses, may not be indicative of the size, complexity and/or volume of any future acquisitions or divestitures.
•Restructuring and other business realignment costs: We have excluded costs associated with restructuring and business structure realignment programs to allow for comparable financial results to historical operations and forward-looking guidance. In addition, the nature and amount of such charges vary significantly based on the size and timing of the programs. By excluding the referenced expenses from our non-GAAP financial measures, our management is able to further evaluate our ability to utilize existing assets and estimate their long-term value. Furthermore, our management believes that the adjustment of these items supplements the GAAP information
with a measure that can be used to assess the sustainability of our operating performance.
•Asset impairment charges: We have excluded the impact of asset impairments as such non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
•Amortization expense: We have excluded the impact of amortization of finite-lived intangible assets, as such non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Our management believes that the adjustment of these items supplements the GAAP information with a measure
that can be used to assess the sustainability of our operating performance. Although we exclude amortization of intangible assets from our non-GAAP expenses, our management believes that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets.
•Gain on sale and early license termination: We have excluded the impact of gain on sale and early license termination as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of the sale and early license termination.
•Costs related to market exit: We have excluded
the impact of direct incremental costs related to our decision to wind down our business operations in Russia. We believe that these direct and incremental costs are inconsistent and infrequent in nature. Consequently, our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
•Gains on sale of real estate: We have excluded the impact of gains on sale of real estate as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of the sale. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
•Stock-based compensation: Although stock-based compensation
is a key incentive offered to our employees, we have excluded the effect of these expenses from the calculation of adjusted operating income and adjusted EBITDA. This is due to their primarily non-cash nature; in addition, the amount and timing of these expenses may be highly variable and unpredictable, which may negatively affect comparability between periods.
•Depreciation and Adjusted depreciation: Our adjusted operating income excludes the impact of accelerated depreciation for certain restructuring projects that affect the expected useful lives of Property, Plant and Equipment, as such charges vary significantly based
on the size and timing of the programs. Further, we have excluded adjusted depreciation, which represents depreciation expense net of accelerated depreciation charges, from our adjusted EBITDA. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
•Other (income) expense: We have excluded the impact of pension curtailment (gains) and losses and pension settlements as such events are triggered by our restructuring and other business realignment activities and the amount of such charges vary significantly based on the size and timing of the programs. Further, we have excluded the change in fair value of the investment in Wella, as well as expenses related to potential or actual sales transactions reducing equity investments, as our management believes these unrealized (gains)
and losses do not reflect our underlying ongoing business, and the adjustment of such impact helps investors and others compare and analyze performance from period to period. We have excluded the gain on the exchange of Series B Preferred Stock. Such transactions do not reflect our operating results and we have excluded the impact as our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
•Noncontrolling interest: This adjustment represents the after-tax impact of the non-GAAP adjustments included in Net income attributable to noncontrolling interests based on the relevant noncontrolling interest percentage.
•Tax: This adjustment represents the impact of the tax effect of the pretax items excluded from Adjusted
net income. The tax impact of the non-GAAP adjustments is based on the tax rates related to the jurisdiction in which the adjusted items are received or incurred. Additionally, adjustments are made for the tax impact of any intra-entity transfer of assets and liabilities.
•Deemed Preferred Stock Dividends: We have excluded preferred stock deemed dividends related to the First Exchange and the Second Exchange (as disclosed and defined in Note 27—Related Party Transactions in our Annual Report on Form 10-K for fiscal 2023) from our calculation of adjusted net income attributable to Coty Inc. These deemed dividends are nonmonetary in nature, the transactions were entered into to simplify our capital structure and do not reflect our underlying ongoing business. Management believes that this adjustment helps investors and others compare and analyze our performance from period to period.
Constant
Currency
We operate on a global basis, with the majority of our net revenues generated outside of the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented in “constant currency”, excluding the impact of foreign currency exchange translations to provide a framework for assessing how our underlying businesses performed excluding the impact of foreign currency exchange translations. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using prior year foreign currency exchange rates. The constant currency calculations
do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information we present may not be comparable to similarly titled measures reported by other companies.
Basis of Presentation of Acquisitions, Divestitures, Terminations and Market Exit from Russia
During the period when we complete an acquisition, divestiture, early license termination, or market exit, the financial results of the current year period are not comparable to the financial results presented in the prior year period. When explaining such changes from period to period and to maintain a consistent basis between periods, we exclude the financial contribution of: (i) the acquired brands or businesses in the current year period until we have twelve months of comparable financial
results, and (ii) the divested brands or businesses or early terminated brands or markets exited in the prior year period, to maintain comparable financial results with the current fiscal year period. Acquisitions, divestitures, early license terminations, and market exits that would impact the comparability of financial results between periods presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations are shown in the table below.
In the three months ended September 30, 2023, net revenues increased 18%, or $251.4, to $1,641.4 from $1,390.0 in the three months ended September 30, 2022. Excluding net revenue from the first quarter of the prior period from Russia, net revenues increased 21% or $280.9 to $1,641.4 from $1,360.5 in the three months ended September 30, 2022, reflecting a positive price and mix impact of 17% and a positive foreign currency exchange translation impact of 3%, and an increase in unit volume of 1%. The overall increase in net revenues reflects growth
of prestige fragrances, specifically Burberry, Hugo Boss, Calvin Klein, Gucci and Marc Jacobs. Net revenues increased in our Consumer Beauty segment due to positive performance across the color cosmetics category, mass fragrance category, and the skin and body care category in Brazil.
The overall increase in net revenues reflects the continued success of our pricing and revenue management strategies, including the implementation of targeted price increases across our product portfolio. Volume growth across our fragrance portfolio, as well as in skin and body care products in Brazil, helped partially offset volume declines from certain brands in China due to macroeconomic conditions.
Geographically, except for China, net revenues in all major markets grew, led by the United States. Additionally,
there was an increase in travel retail sales in the Europe, Americas and Asia Pacific regions.
Digital and e-commerce sales growth also contributed to the increase in net revenues.
Net Revenues by Segment
Three Months Ended September 30,
(in
millions)
2023
2022
Change %
NET REVENUES
Prestige
$
1,064.7
$
863.4
23
%
Consumer
Beauty
576.7
526.6
10
%
Total
$
1,641.4
$
1,390.0
18
%
Prestige
In
the three months ended September 30, 2023, net revenues from the Prestige segment increased 23%, or $201.3 to $1,064.7 compared to $863.4 in the three months ended September 30, 2022. Excluding net revenue from the first quarter of the prior period from Russia, net revenues from the Prestige segment increased 25% or $215.8 to $1,064.7 from $848.9 in the three months ended September 30, 2022, reflecting a positive price and mix impact of 11%, an increase in unit volume of 11%, and a positive foreign currency exchange translation impact of 3%. The increase in net revenues primarily reflects:
(i)the successful launch of Burberry Goddess;
(ii)continued
success and growth of prestige fragrances, specifically Burberry Her, Hugo Boss Boss Bottled, Calvin Klein, Gucci Flora, Gucci Guilty, and Marc Jacobs Perfect; and
(iii)an increase in net revenues due to positive pricing and mix impact as a result of global price increases and in line with the overall premiumization strategy.
Consumer Beauty
In the three months ended September 30, 2023, net revenues from the Consumer Beauty segment increased 10%, or $50.1, to $576.7 from $526.6 in the three months ended September 30, 2022. Excluding net revenue from the first quarter of the prior period from Russia, net revenues from the Consumer Beauty segment increased 13% or $65.1
to $576.7 from $511.6 in the three months ended September 30, 2022, reflecting a positive price and mix impact of 10% and a positive foreign currency exchange translation impact of 3%. The increase in net revenues primarily reflects:
(i)an increase in net revenues from color cosmetics brands, including Rimmel Manhattan, primarily attributable to color category growth in European markets and distribution gains in the United States;
(ii)an increase in net revenues from the mass fragrance category primarily due to the re-launch of David Beckham Instinct, distribution growth in the United States for the Nautica fragrance brand, and innovation in
Bruno Banani with the launch of Magnetic Man;
(iii)an increase in net revenues from the skin and body care brands in Brazil due to strong category momentum and positive impact of pricing; and
(iv)an increase in net revenues due to price increases across the Consumer Beauty product portfolio.
These increases in net revenues were partially offset by:
(i)a
decrease in net revenues due to lower sales volume for Adidas primarily as a result of category slowdown in China.
COST OF SALES
In the three months ended September 30, 2023, cost of sales increased 20%, or $98.2, to $599.5 from $501.3 in the three months ended September 30, 2022. Cost of sales as a percentage of net revenues increased to 36.5% in the three months ended September 30, 2023 from 36.1% in the three months ended September 30, 2022, resulting in a gross margin decrease of approximately 40 basis points, primarily
reflecting:
(i)approximately 60 basis points related to an increase in excess and obsolescence costs primarily associated with the Prestige product portfolio;
(ii)approximately 30 basis points related to an increase in designer license fees due licensed Prestige brands comprising a larger portion of overall net revenues in the current period; and
(ii) approximately 10 basis points primarily related to an increase in manufacturing and material costs.
These decreases were partially offset by:
(i)approximately 70 basis points related to decreased freight costs.
The above includes the negative impact of
inflation (principally for material costs) and the positive impact from pricing of approximately 190 basis points each.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In the three months ended September 30, 2023, selling, general and administrative expenses increased 14%, or $96.7, to $767.4 from $670.7 in the three months ended September 30, 2022. Selling, general and administrative expenses as a percentage of net revenues decreased to 46.8% in the three months ended September 30, 2023 from 48.3% in the three months ended September 30, 2022, or approximately 150 basis points. This decrease primarily reflects:
(i)150
basis points due to a decrease in administrative fees as a percentage of net revenues, which was primarily due to lower depreciation expense related to fully depreciated IT equipment, lower costs associated with leased IT equipment, and lower compensation and outsourcing related expenses;
(ii)50 basis points due to a decrease in logistics costs as a percentage of net revenues; and
(iii)40 basis points due to a decrease in stock-based compensation cost primarily related to a reduction in expense recognized in connection with awards granted to the CEO.
These decreases were partially offset by the following increases:
(i)30 basis points due to an increase in bad debt expense;
(ii)30
basis points due to unfavorable transactional impact from our exposure to foreign currency fluctuations; and
(iii)30 basis points due to an increase in advertising and consumer promotional costs primarily due to an increase in consumer promotions and sampling and non-working media spend.
OPERATING INCOME
In the three months ended September 30, 2023, operating income was $197.5 compared to income of $171.9 in the three months ended September 30, 2022. Operating income as a percentage of net revenues, decreased to 12.0% in the three months ended September
30, 2023 as compared to 12.4% in the three months ended September 30, 2022. The decrease in operating margin is primarily driven by an increase in restructuring costs, an increase in cost of goods sold as a percentage of net revenues, an increase in advertising and consumer promotional costs as a percentage of net revenues, partially offset by a decrease in fixed costs as a percentage of net revenues.
In the three months ended September 30, 2023, operating income for Prestige was $221.6 compared to income of $170.3 in the three months ended September 30, 2022. Operating margin increased to 20.8% of net revenues in the three months ended September 30, 2023 as compared to 19.7% in the three months ended September 30, 2022, driven by a decrease in fixed costs as a percentage of net revenues, partially offset by an increase in cost of goods sold as a percentage of net revenues.
Consumer Beauty
In the three months ended September 30, 2023, operating income for Consumer Beauty was $32.0 compared
to income of $32.0 in the three months ended September 30, 2022. Operating margin decreased to 5.5% of net revenues in the three months ended September 30, 2023 as compared to 6.1% in the three months ended September 30, 2022, driven by an increase in advertising and consumer promotional costs as a percentage of net revenues and cost of goods sold as a percentage of net revenues, partially offset by a decrease in fixed costs as a percentage of net revenues.
Corporate
Corporate primarily includes income and expenses not directly relating to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance
of the segments.
In the three months ended September 30, 2023, the operating loss for Corporate was $56.1 compared to a loss of $30.4 in the three months ended September 30, 2022, as described under “Adjusted Operating Income (Loss) for Continuing Operations” below. The increase in the operating loss for Corporate was primarily driven by an increase in restructuring costs in the current period.
We believe that adjusted operating income by segment further enhances an investor’s understanding of our performance. See “Overview—Non-GAAP Financial Measures.” A reconciliation of reported operating income to adjusted operating income is presented below, by segment:
(a)See
a reconciliation of reported operating income to adjusted operating income and a description of the adjustments under “Adjusted Operating Income for Continuing Operations” below. All adjustments are reflected in Corporate, except for amortization and asset impairment charges on goodwill, indefinite-lived intangible assets, and finite-lived intangible assets, which are reflected in the Prestige and Consumer Beauty segments.
Adjusted Operating Income and Adjusted EBITDA for Coty Inc.
We believe that adjusted operating income further enhances an investor’s understanding of our performance. See “Overview—Non-GAAP Financial Measures.” Reconciliation of reported operating income to adjusted operating income is presented below:
Three
Months Ended September 30,
(in millions)
2023
2022
Change %
Reported operating income
$
197.5
$
171.9
15
%
%
of net revenues
12.0
%
12.4
%
Amortization expense
48.6
47.3
3
%
Restructuring and other business realignment costs
27.3
(0.8)
>100%
Stock-based
compensation
29.7
31.1
(5)
%
Gain on sale of real estate
(1.7)
(1.0)
(70)
%
Early
license termination and market exit costs
0.8
1.1
(27)
%
Total adjustments to reported operating income
$
104.7
$
77.7
35
%
Adjusted
operating income
$
302.2
$
249.6
21
%
% of net revenues
18.4
%
18.0
%
Adjusted depreciation
58.1
58.3
—
%
Adjusted
EBITDA
$
360.3
$
307.9
17
%
% of net revenues
22.0
%
22.2
%
In the three months ended September 30, 2023, adjusted
operating income increased $52.6 to $302.2 from $249.6 in the three months ended September 30, 2022. Adjusted operating margin increased to 18.4% of net revenues in the three months ended September 30, 2023 from 18.0% in the three months ended September 30, 2022, primarily driven by a decrease in fixed
costs as a percentage of net revenues. In the three months ended September 30, 2023, adjusted EBITDA increased $52.4 to $360.3 from $307.9 in the
three months ended September 30, 2022. Adjusted EBITDA margin decreased to 22.0% of net revenues in the three months ended September 30, 2023 from 22.2% in the three months ended September 30, 2022.
Amortization Expense
In the three months ended September 30, 2023, amortization expense increased to $48.6 from $47.3 in the three months ended September 30, 2022. In the three months ended September 30, 2023, amortization expense of $38.7 and $9.9 was reported in the Prestige and Consumer Beauty segments, respectively. In the three months ended September
30, 2022, amortization expense of $37.0 and $10.3 was reported in the Prestige and Consumer Beauty segments, respectively. The increase was primarily driven by foreign currency translation, primarily affecting the euro. This was partially offset by certain license agreements and product formulations, which were fully amortized in the prior year.
Restructuring and Other Business Realignment Costs
We continue to analyze our cost structure, including opportunities to simplify and optimize operations. In connection with the previously announced four-year Transformation plan to drive substantial improvement and optimization in our business, we have substantially completed and incurred all expected restructuring and other business realignment costs. We incurred $518.9 of cash costs life-to-date related to the Transformation plan as of September 30,
2023, which have been recorded in Corporate. During fiscal 2024, the Company began the implementation of continued process optimization and improved technology support for certain areas ("2024 Restructuring Actions").
In the three months ended September 30, 2023, we incurred restructuring and other business structure realignment costs of $27.3, as follows:
•We incurred restructuring costs of $28.4 primarily related to the 2024 Restructuring Actions, included in the Condensed Consolidated Statements of Operations; and
•We incurred a credit in business structure realignment costs of $(1.1) primarily related to the Transformation Plan, which is
reported in selling, general and administrative expenses.
In the three months ended September 30, 2022, we incurred a credit in restructuring and other business structure realignment costs of $(0.8) as follows:
•We incurred a credit in restructuring costs of $(1.2) primarily related to the Transformation Plan due to the change in estimate, included in the Condensed Consolidated Statements of Operations; and
•We incurred business structure realignment costs of $0.4 primarily related to the Transformation Plan and certain other programs, of which $0.9 and a credit of $(0.5) were reported in Cost of sales and selling, general and administrative expenses, respectively in the Condensed Consolidated Statement of Operations.
In
all reported periods, all restructuring and other business realignment costs were reported in Corporate.
Stock-Based Compensation
In the three months ended September 30, 2023, stock-based compensation was $29.7 as compared with $31.1 in the three months ended September 30, 2022. The decrease in stock-based compensation is primarily related to a reduction in expense recognized in connection with awards granted to the CEO.
In the three months ended September 30, 2023 and 2022, all costs related to stock-based compensation were reported in Corporate.
Gain on Sale of Real Estate
In
thethree months ended September 30, 2023 and 2022, we recognized gain of $1.7 and $1.0, respectively, related to sale of real estate.
Early License Termination and Market Exit Costs
In the three months ended September 30, 2023, we incurred costs of $0.8 related to the early termination of a license and market exit activity which are included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
In the three months ended September 30, 2022, we incurred costs of $1.1 related to our decision to wind down our business in Russia which are included
in Selling, general and administrative expenses and Cost of sales in the Condensed Consolidated Statements of Operations.
In the three months ended September 30, 2023, adjusted depreciation expense of $27.3 and $30.8 was reported in the Prestige and Consumer Beauty segments, respectively. In the three months ended September 30, 2022, adjusted depreciation expense of $27.6 and $30.7 was reported in the Prestige and Consumer Beauty segments, respectively.
INTEREST
EXPENSE, NET
In the three months ended September 30, 2023, net interest expense was $69.8 as compared with $65.9 in the three months ended September 30, 2022. This increase is primarily due the impact of a higher average interest rate in the current period, partially offset by lower losses due to foreign currency exchange.
OTHER EXPENSE (INCOME)
In the three months ended September 30, 2023, other expense was $76.6 as compared with other income of $98.2 in the three months ended September 30, 2022. This decrease in income to an expense position is principally due to a lower favorable fair value adjustment for our investment
in the Wella Company recorded in the current period and an increase in loss due to a fair value adjustment for our forward repurchase contracts.
INCOME TAXES
The effective income tax rate for the three months ended September 30, 2023 and 2022 was 80.0% and 34.1%, respectively. The change in the effective tax rate for the three months ended September 30, 2023, as compared with the three months ended September 30, 2022, is primarily due to an expense of $24.3 in the current period
recognized on the revaluation of the Company's deferred tax liabilities due to a tax rate increase enacted in Switzerland.
The effective income tax rates vary from the U.S. federal statutory rate of 21% due to the effect of (i) jurisdictions with different statutory rates, including impacts of rate changes, (ii) adjustments to the Company’s unrealized tax benefits (“UTBs”) and accrued interest, (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes. Our effective tax rate could fluctuate significantly and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.
Reconciliation
of Reported Income Before Income Taxes to Adjusted Income Before Income Taxes and Effective Tax Rates:
Change
in fair value of investment in Wella Business (c)
(4.0)
(135.0)
Other adjustments (d)
3.9
0.2
Total
Adjustments (b)
104.6
27.1
(57.1)
(26.2)
Adjusted income before income taxes
$
155.7
$
68.0
43.7
%
$
147.1
$
43.5
29.6
%
(a)See
a description of adjustments under “Adjusted Operating Income for Continuing Operations.”
(b)The tax effects of each of the items included in adjusted income are calculated in a manner that results in a corresponding income tax expense/provision for adjusted income. In preparing the calculation, each adjustment to reported income is first analyzed to determine if the adjustment has an income tax consequence. The provision for taxes is then calculated based on the jurisdiction in which the adjusted items are incurred, multiplied by the respective statutory rates and offset by the increase or reversal of any valuation allowances commensurate with the non-GAAP measure of profitability.
(c)The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella.
(d)For
the three months ended September 30, 2023, this primarily represents divestiture-related costs related to our equity investments and loss from our equity investment in KKW. For the three months ended September 30, 2022, this primarily represents loss from our equity investment in KKW.
The adjusted effective tax rate was 43.7% for the three months ended September 30, 2023 compared to 29.6% for the three months ended September 30, 2022. The differences were primarily due to an expense of $24.3 in the current period recognized on the revaluation of the Company's deferred tax liabilities due to a tax rate increase enacted in Switzerland.
Net income attributable to Coty Inc. was $1.6 in the three months ended September 30, 2023 as compared to net income of $128.6 in the three months ended September 30, 2022. The decrease in the income is primarily driven by a lower favorable fair value adjustment for our investment in the Wella Company recorded in the current period and an increase in loss due to a fair value adjustment for our forward repurchase contracts, partially offset by higher operating income.
We believe that adjusted net income attributable to Coty Inc. provides an enhanced understanding of our performance.
See “Overview—Non-GAAP Financial Measures.”
Three Months Ended September 30,
(in millions)
2023
2022
Change %
Net
income from Coty Inc. net of noncontrolling interests
$
1.6
$
128.6
(99)
%
Convertible Series B Preferred Stock dividends (a)
(3.3)
(3.3)
—
%
Reported
net (loss) income attributable to Coty Inc.
$
(1.7)
$
125.3
<(100%)
% of net revenues
(0.1)
%
9.0
%
Adjustments to reported operating income (b)
104.7
77.7
35
%
Change
in fair value of investment in Wella Company (c)
(4.0)
(135.0)
97
%
Adjustment to other expense (d)
3.9
0.2
>100%
Adjustments to noncontrolling interests (e)
(1.7)
(1.7)
—
%
Change
in tax provision due to adjustments to reported net income attributable to Coty Inc.
(27.1)
26.2
<(100%)
Adjusted net income attributable to Coty Inc.
$
74.1
$
92.7
(20)
%
%
of net revenues
4.5
%
6.7
%
Per Share Data
Adjusted weighted-average common shares
Basic
854.3
842.0
Diluted
(a)
867.3
858.5
Adjusted net income attributable to Coty Inc. per common share
Basic
$
0.09
$
0.11
Diluted
(a)
$
0.09
$
0.11
(a)Adjusted Diluted EPS is adjusted by the effect of dilutive securities. For the three months ended September 30, 2023, shares for the Forward Repurchase Contracts
were excluded from the computation of adjusted diluted EPS as Coty is in the position to receive shares from the counterparties and as such their inclusion would be anti-dilutive. Accordingly, we did not reverse the impact of the fair market value loss for contracts with the option to settle in shares or cash of $44.3. For the three months ended September 30, 2022, the Forward Repurchase Contracts (3.1 million weighted average dilutive shares) were anti-dilutive. Accordingly, we excluded these shares from the diluted shares and did not adjust the earnings for the fair market value loss of $27.7. For the three months ended September 30, 2023 and 2022,
convertible Series B Preferred Stock (23.7 million weighted average dilutive shares) were anti-dilutive. Accordingly, we excluded these shares from the diluted shares and did not adjust the earnings for the related dividend of $3.3.
(b)See a description of adjustments under “Adjusted Operating Income for Continuing Operations."
(c)For the three months ended September 30, 2023 and 2022, the amount represents the unrealized (gain) loss recognized for the change in fair value of the investment in Wella.
(d)For the three months ended September 30, 2023, this primarily represents divestiture-related costs related to
our equity investments and loss from equity investment in KKW. For the three months ended September 30, 2022, this primarily represents adjustments for equity loss from KKW.
(e)The amounts represent the after-tax impact of the non-GAAP adjustments included in net income attributable to noncontrolling interests based on the relevant noncontrolling interest percentage in the Condensed Consolidated Statements of Operations.
Our primary sources of funds include cash expected to be generated from operations, borrowings from issuance of debt and lines of credit provided by banks and lenders in the U.S. and abroad.
Our cash flows are subject to seasonal variation throughout the year, including demands on cash made during our first fiscal quarter in anticipation of higher global sales during the second fiscal quarter and strong cash generation in the second fiscal quarter as a result of increased demand by retailers associated with the holiday season.
Our principal uses of cash are to fund planned operating expenditures, capital expenditures, interest payments, dividends, share repurchases, any principal payments on debt,
and from time to time, acquisitions, and business structure realignment expenditures. Working capital movements are influenced by the sourcing of materials related to the production of products. Cash and working capital management initiatives, including the phasing of vendor payments and factoring of trade receivables from time-to-time, may also impact the timing and amount of our operating cash flows.
We remain focused on deleveraging our balance sheet using cash flows generated from our operations. We continue to take steps to permanently reduce our debt to reduce interest costs and improve our long-term profitability and cash flows. During the first quarter, we explored an opportunity to further deleverage by divesting a portion of our equity position in Wella to use the proceeds to repay our debt. On July 18, 2023, we announced that we had entered into a binding letter
of intent to sell a 3.6% stake in Wella to an investment firm for $150.0. Subsequently, we and the investment firm mutually agreed not to pursue the proposed transaction and entered into a termination letter in October 2023. Our remaining 25.9% investment in Wella continues to give us the opportunity for further permanent debt reductions when our equity position is divested.
We continue to wind down the operations of our Russian subsidiary. We anticipate that we will incur an immaterial amount of additional costs through completion of the wind down, and future net cash costs of $10.0 to $20.0, which will be funded by our Russian subsidiary. The amount of future costs, including cash costs, will be subject to various factors, such as additional government regulation and the resolution of legal contingencies. We have substantially completed our commercial activities in Russia. However, we anticipate that the process related
to the liquidation of the Russian legal entity will take an extended period of time.
Although inflationary trends persisted into the first quarter, impacting material, logistical, and other costs, we expect that the impact of inflation will subside in the coming quarters. Additionally, we have improved order fill rates and achieved near pre-COVID-19 service levels in the first quarter and anticipate being able to maintain this level of service into the foreseeable future.
Debt Financing
We are in the process of deleveraging our company and improving the maturity mix of our debt, including through refinancing or repayment of a portion of our debt.
We have taken action to reduce variability in our interest
payments including paying down variable interest rate debt outstanding under our 2018 Coty Term B Facility and issuing fixed rate bonds. Approximately 98% of our total debt was fixed rate as of September 30, 2023. The remaining 2% variable rate debt was effectively converted to fixed rate through interest rate swap contracts as of September 30, 2023.
In the first quarter of fiscal 2024, we amended the 2018 Coty Credit Agreement and replaced our existing revolving commitments with two tranches of revolving commitments, having an aggregate principal amount of $1,670.0 available in U.S. dollars and certain other currencies and the other in an aggregate principal amount of €300.0 million available in euros, and issued $750.0 and €500.0 million
of senior secured notes due July 2030 and September 2028, respectively. The net proceeds received from the offerings were used to primarily pay down the outstanding balance of the U.S. dollar and euro portions of the 2018 Coty Term B Facility by $715.5 and €22.6 million (approximately $25.1), respectively and a portion of the borrowings outstanding under our revolving credit facility. In August 2023, we repaid the €408.0 million (approximately $446.1) of the debt outstanding under the 2018 Term B Facility, thus repaying the facility in full. See Note 9—Debt in the notes to our Condensed Consolidated Financial Statements for additional information on our debt arrangements and prior period credit agreements, as well as definitions of capitalized terms.
In October 2023, one of our wholly-owned subsidiaries utilized cash on hand to fully
pay down the U.S. Dollar-denominated credit facility in Brazil in the amount of $31.9. See Note 19—Subsequent Events in the notes to our Condensed Consolidated Financial Statements for additional information on the repayment of our Brazilian debt.
On September 28, 2023, we entered into an agreement with a group of underwriters to issue and sell 33.0 million shares of our Class A common stock, par value $0.01 per share (see Note 13—Equity and Convertible Preferred Stock for additional information). We intend to use the proceeds of approximately
$348.5, net of underwriting fees, from this offering primarily to retire the principal amount of outstanding debt. Other uses include general corporate purposes, such as strategic investments in the business, working capital and capital expenditures. Settlement of the Offering occurred on October 2, 2023.
Factoring of Receivables
From time to time, we supplement the timing of our cash flows through the factoring of trade receivables. In this regard, we have entered into factoring arrangements with financial institutions.
The net amount utilized under the factoring facilities was $253.9 and $202.9 as of September 30, 2023 and June 30, 2023, respectively. The aggregate amount of trade receivable
invoices factored on a worldwide basis amounted to $430.0 and $346.0 during the three months ended September 30, 2023 and 2022, respectively.
Condensed Consolidated
Statements of Cash Flows Data: (in millions)
Net cash provided by operating activities
$
186.2
$
163.2
Net cash used in investing activities
(62.2)
(75.0)
Net cash used in financing activities
(78.6)
(87.8)
Net
cash provided by operating activities
Net cash provided by operating activities was $186.2 and $163.2 for the three months ended September 30, 2023 and 2022, respectively. The increase in cash provided by operating activities of $23.0 was primarily reflects a net increase from the impacts from lower restructuring related cash payments, partially offset by higher cash payments for incomes taxes and interest. The remaining increase is driven by net inflows from changes in working capital primarily due to accrued expenses and other current liabilities.
Net cash used in investing activities
Net cash used in investing activities was $62.2 and $75.0 for the three months ended September 30, 2023
and 2022, respectively. The decrease in investing cash flows of $12.8 was due to timing and level of capital expenditures.
Net cash used in financing activities
Net cash used in financing activities during the three months ended September 30, 2023 and 2022 was $78.6 and $87.8, respectively. The decrease in cash used in financing activities of $9.2 was primarily driven by lower cash payments in the current year compared to the prior year due to realized losses on the Company's financing related foreign current contracts. These lower outflows were offset by
the net impact of repayments of long-term debt associated with the 2018 Coty Credit Agreement during the first three months of the current fiscal year including payments for debt issuance costs compared to net proceeds from debt activity in the same period of the prior year.
Dividends
On April 29, 2020, the Board of Directors suspended the payment of dividends on Common Stock. As we focus on preserving cash, we expect to suspend the payment of dividends until we reach a Net debt to Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of 2x. Any determination to pay dividends in the future will be at the discretion of our Board of Directors.
Dividends on the Convertible Series B Preferred Stock are payable in cash, or by increasing the amount
of accrued dividends on Convertible Series B Preferred Stock, or any combination thereof, at the sole discretion of the Company. We expect to pay such dividends in cash on a quarterly basis, subject to the declaration thereof by our Board of Directors. The terms of the Convertible Series B Preferred Stock restrict our ability to declare cash dividends on our common stock until all accrued dividends on the Convertible Series B Preferred Stock have been declared and paid in cash.
For additional information on our dividends, see Note 13—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.
For information on our Share Repurchase Program, see Note 13—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.
Commitments and Contingencies
See Note 16—Redeemable Noncontrolling Interests in the notes to our Condensed Consolidated Financial Statements for information on our United Arab Emirates subsidiary and subsidiary in the Middle East.
Legal Contingencies
For information on our litigation matters and Brazilian tax assessments, see Note 17—Commitments and Contingencies in the notes to our Condensed Consolidated Financial Statements. In relation to the appeal of our Brazilian tax assessments,
we have entered into surety bonds of R$423.8 million (approximately $84.2) as of September 30, 2023.
Off-Balance Sheet Arrangements
We had undrawn letters of credit of $6.8 and $7.2 and bank guarantees of $18.5 and $16.3 as of September 30, 2023 and June 30, 2023, respectively.
Contractual Obligations
Our principal contractual obligations and commitments as of June 30, 2023 are summarized in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations and Commitments,” of our Fiscal 2023 Form 10-K.
For the three months ended September 30, 2023, there have been no material changes in our contractual obligations outside the ordinary course of business.
Critical Accounting Policies
We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our Condensed Consolidated Financial Statements:
•Revenue Recognition;
•Equity Investments;
•Goodwill, Other Intangible Assets and Long-Lived Assets;
•Inventory; and
•Income
Taxes.
As of September 30, 2023, there have been no material changes to the items disclosed as critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II—Item 7 of our Fiscal 2023 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Note 12—Derivative Instruments for updates to our foreign currency risk management and interest rate risk management. There have been no material changes in market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Fiscal 2023 Form 10-K.
Item
4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our
management, with the participation of our Chief Executive Officer (the “CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(f) of the Exchange Act during the first fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving our objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information on our legal matters, see Note 17—Commitments and Contingencies in the notes to our Condensed Consolidated Financial Statements.
Item
1A. Risk Factors.
We have disclosed information about the risk factors that could adversely affect our business in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
No shares of our Class A Common Stock were repurchased during the fiscal quarter ended September 30, 2023.
Item 5. Other Information
During
the three months ended September 30, 2023, none of the Company’s directors or Section 16 reporting officers iiadopted/ or iiterminated/
any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of the SEC’s Regulation S-K).
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.