FinanceLooker

Excrept from filing document 2025-09-30

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
The 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 2023 refer to the fiscal year ending June 30 2023 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
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 2022 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 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30 2023 All dollar amounts other than per share amounts in the following discussion are in millions of United States U S dollars unless otherwise indicated
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 2022 and June 30 2022 the Company had restricted cash of 35 4 and 30 5 respectively included in Restricted cash in the Condensed Consolidated Balance Sheets The Restricted cash balance as of September 30 2022 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 2022 Restricted cash is included as a component of Cash cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows
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 income net within the Condensed Consolidated Statements of Operations see Note 7 Equity Investments
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 acquired assets and liabilities associated with acquisitions 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
The effective income tax rate for the three months ended September 30 2022 and 2021 was 34 1 and 33 4 respectively The change in the effective tax rate for the three months ended September 30 2022 as compared with the three months ended September 30 2021 is primarily due to larger fair value gains related to the investment in Wella recorded in the prior period
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 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 2022 and June 30 2022 the gross amount of UTBs was 250 9 and 251 6 respectively As of September 30 2022 the total amount of UTBs that if recognized would impact the effective income tax rate is 169 8 As of September 30 2022 and June 30 2022 the liability associated with UTBs including accrued interest and penalties was 197 4 and 191 8 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 1 3 and 0 7 for the three months ended September 30 2022 and 2021 respectively The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30 2022 and June 30 2022 was 27 7 and 26 4 respectively On the basis of the information available as of September 30 2022 it is reasonably possible that a decrease of up to 13 5 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
which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if converted method The Company adopted this guidance using the modified retrospective method in the first quarter of fiscal year 2023 The adoption of this standard did not have a material impact on the Company s consolidated financial statements
which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease on the commencement date of the lease if specified criteria are met The Company adopted this guidance in the first quarter of fiscal year 2023 The adoption of this standard did not have a material impact on the Company s consolidated financial statements
in January 2021 The new guidance under these ASUs provides optional expedients and exceptions for applying U S GAAP to contracts hedging relationships and other transactions affected by reference rate reform if certain criteria are met The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31 2022 As of September 30 2022 the Company has not applied any of the optional expedients or exceptions allowed under these ASUs The Company does not believe that these ASUs will have a material impact on its consolidated financial position results of operations or cash flows
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
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 and divestiture 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 8 Goodwill and Other Intangible Assets net
Acquisition related costs which are expensed as incurred represent non restructuring costs directly related to acquiring and integrating an entity for both completed and contemplated acquisitions and can include finder s fees legal accounting valuation other professional or consulting fees and other internal costs which can include compensation related expenses for dedicated internal resources The Company recognized no acquisition related costs for the three months ended September 30 2022 and 2021
Divestiture related costs which are expensed as incurred represent non restructuring costs directly related to divesting and selling an entity including partial sales for both completed and contemplated divestitures These costs can include legal accounting information technology other professional or consulting fees and other internal costs Internal costs can include compensation related expenses for dedicated internal resources Additionally for divestitures the Company includes write offs of assets that are no longer recoverable and contract related costs due to the divestiture The Company recognized divestiture related costs of 0 0 and 4 0 for the three months ended September 30 2022 and 2021 respectively Divestiture related costs incurred during the three months ended September 30 2021 were primarily related to the strategic transaction with Rainbow UK Bidco Limited KKR Bidco an affiliate of funds and or separately managed accounts KKR Funds advised and or
managed by Kohlberg Kravis Roberts Co L P and its affiliates KKR for the sale of a majority stake in Coty s Professional and Retail Hair businesses including the Wella Clairol OPI and ghd brands together the Wella Business
In connection with the four year plan announced on July 1 2019 to drive substantial improvement and optimization in the Company s businesses the Turnaround Plan the Company has and expects to continue to incur restructuring and related costs On May 11 2020 the Company announced an expansion of the Turnaround Plan to further reduce fixed costs the Transformation Plan Of the expected costs the Company has incurred cumulative restructuring charges of 222 1 related to approved initiatives through September 30 2022 which have been recorded in Corporate
On January 4 2021 the Company completed its purchase of 20 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 During the three months ended September 30 2022 and 2021 the Company recognized 0 9 and 0 6 respectively representing its share of the investee s net loss in Other income net within the Condensed Consolidated Statements of Operations
On November 30 2020 the Company completed the previously announced strategic transaction with KKR for the sale of a 60 stake in Coty s Wella Business As of September 30 2022 and June 30 2022 the Company s stake in Wella was 25 9
On October 20 2021 the Company completed the sale of a 9 4 stake in Wella to an affiliate of KKR KKR Rainbow Aggregator L P KKR Aggregator in exchange for the redemption of 290 465 shares of KKR Aggregator s Series B Convertible Preferred Stock shares in Coty and a portion of unpaid dividends the First Exchange On November 30 2021 Coty completed the sale of an additional 4 7 stake in Wella to KKR Aggregator in exchange for the redemption of KKR Aggregator s remaining convertible preferred shares in Coty the Second Exchange reducing the Company s total shareholding in Wella to 25 9 Refer to Note 14 Equity and Convertible Preferred Stock
On March 3 2022 Wella approved an interim distribution to its shareholders As part of the transaction Wella refinanced its third party debt and used 210 7 of such funds to make a distribution to the Company which the Company has accounted for as a return of capital In addition on June 16 2022 Wella approved an additional distribution to its shareholders As part of the transaction Wella made a distribution of 19 9 to the Company which the Company has accounted for as a return of capital
In May 2022 the Wella Company divested its Russian operations The impact of the divestiture was included for valuation purposes For the three months ended September 30 2022 the impact of the Briogeo acquisition was included for valuation purposes
The following table presents summarized financial information of the Company s equity method investees for the period ending September 30 2022 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 2022 There were no internal movements to or from Level 3 and Level 1 or Level 2 for the period ended September 30 2022
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 2022 Included in the table are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments
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
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
The Company leases office facilities under non cancelable operating leases with terms generally ranging between 5 and 25 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
The Company maintains short term lines of credit and other short term debt with financial institutions around the world As of September 30 2022 total short term debt remained constant at nil from June 30 2022 In addition the Company had undrawn letters of credit of 13 6 and 14 3 and bank guarantees of 16 1 and 17 2 as of September 30 2022 and June 30 2022 respectively
On November 30 2021 the Company issued an aggregate principal amount of 500 0 of 4 75 senior secured notes due 2029 2029 Dollar Senior Secured Notes Coty received gross proceeds of 500 0 in connection with the offering of the 2029 Dollar Senior Secured Notes
On June 16 2021 the Company issued an aggregate principal amount of 700 0 million of 3 875 senior secured notes due 2026 the 2026 Euro Senior Secured Notes in a private offering Coty received gross proceeds of 700 0 million in connection with the offering of the 2026 Euro Senior Secured Notes
On April 21 2021 the Company issued an aggregate principal amount of 900 0 of 5 00 senior secured notes due 2026 the 2026 Dollar Senior Secured Notes and together with the 2026 Euro Senior Secured Notes and 2029 Dollar Senior Secured Notes the Senior Secured Notes Coty received gross proceeds of 900 0 in connection with the offering of the 2026 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 below 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
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
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 and January 15 2025 for the 2029 Dollar Senior Secured Notes the Early Redemption Dates
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 and 2029 Dollar Senior Secured Notes or Bund Rate in the case of the 2026 Euro Senior Secured Notes both Treasury Rate and Bund Rate as defined in the respective indentures as of such redemption date plus 50 basis points over b the principal amount of the respective Senior Secured Notes
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 100 of the respective principal amounts being redeemed plus the Applicable Premium plus accrued and unpaid interest if any to but excluding the redemption dates
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 a new credit agreement the 2018 Coty Credit Agreement which amended and restated the prior Coty credit agreement The 2018 Coty Credit Agreement provided for a the incurrence by the Company of 1 a senior secured term A facility in an aggregate principal amount of i 1 000 0 denominated in U S dollars and ii 2 035 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 1 400 0 denominated in U S dollars and ii 850 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 a senior secured revolving facility in an aggregate principal amount of 3 250 0 denominated in U S dollars specified alternative currencies or other currencies freely convertible into U S dollars and readily available in the London interbank market the 2018 Coty Revolving Credit Facility the 2018 Coty Term A Facility together with the 2018 Coty Term B Facility and the 2018 Coty Revolving Credit Facility the 2018 Coty Credit Facilities
The 2018 Coty Credit Agreement provides that with respect to the 2018 Coty Revolving Credit Facility up to 150 0 is available for letters of credit and up to 150 0 is available for swing line loans The 2018 Coty Credit Agreement also permits subject to certain terms and conditions the incurrence of incremental facilities thereunder in an aggregate amount of i 1 700 0 plus ii an unlimited amount if the First Lien Net Leverage Ratio as defined in the 2018 Coty Credit Agreement 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 3 00 to 1 00
The obligations of the Company under the 2018 Coty Credit Agreement 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 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
On June 27 2019 the Company entered into an amendment 2019 Amendment to the 2018 Coty Credit Agreement The 2019 Amendment modified the 2018 Coty Credit Agreement by amending the financial covenants to i delay until March 31 2022 the total net leverage ratio step down from 5 25 to 5 0 as further described in the
section below ii extend the applicable window for certain cost savings add backs in the calculation of Adjusted earnings before interest taxes depreciation and amortization Adjusted EBITDA for purpose of determining the total net leverage ratio and iii amend the determination of the exchange rate to be used for purposes of calculating Total Indebtedness as defined in the 2018 Coty Credit Agreement for purposes of the total net leverage ratio and decreasing the total commitments under the revolving credit facility by 500 0 to 2 750 0
On November 30 2020 the Company completed the strategic transaction with KKR for the sale of a majority stake in the Wella Business As part of the transaction Coty received initial cash proceeds of 2 451 7 for the sale of its 60 stake in the Wella Business and its pro rata share of Wella s return of capital distribution of 448 0 and retained a 40 stake in Wella In accordance with the 2018 Coty Credit Agreement as amended the Company utilized 2 015 5 of the net proceeds to pay down its 2018 Coty Term A and B Facilities on a pro rata basis and reserved a maximum of 500 0 for reinvestment in the business as defined in the 2018 Coty Credit Agreement as amended the Reinvestment Balance As a result of the prepayments the outstanding balances of the 2018 Coty Term A and B Facilities were reduced by 1 135 7 and 879 8 respectively
On September 30 2021 the Company entered into an amendment to the 2018 Coty Credit Agreement to permanently reduce the existing 2018 Coty Revolving Credit Facility by 700 0 and add a new class of incremental revolving facilities in an aggregate principal amount of 700 0 that matures on April 5 2025 the September 2021 Coty Revolving Credit Facility
On November 30 2021 the Company entered into an amendment to the 2018 Coty Credit Agreement that established a new class of senior secured revolving credit facility of 2 000 0 maturing on April 5 2025 the 2021 Coty Revolving Credit Facility which refinanced and replaced the 2018 Coty Revolving Credit Facility due April 5 2023 and the September 2021 Coty Revolving Credit Facility due April 5 2025 the 2021 Revolver Refinancing In connection with the November 30 2021 amendment to the 2018 Coty Credit Agreement the Company received consent from the participating banks to eliminate the requirements to utilize or repay the Reinvestment Balance
In October 2021 and January 2022 the Company completed the sale of certain real estate holdings and in accordance with the 2018 Coty Credit Agreement as amended the Company utilized the proceeds from the sale to pay down a portion of the outstanding balances of the 2018 Coty Term A Facility and 2018 Coty Term B Facility As a result of the October 2021 prepayments the outstanding principal balances of the 2018 Coty Term A Facility and the U S dollar portion of the 2018 Coty Term B Facility were reduced by 6 2 million approximately 7 2 and 91 9 respectively As a result of the January 2022 prepayments the outstanding principal balances of the euro and U S dollar portions of the 2018 Coty Term B Facility were reduced by 13 9 million approximately 15 7 and 22 3 respectively
On April 5 2018 the Company issued at par 550 0 of 6 50 senior unsecured notes due 2026 the 2026 Dollar Notes 550 0 million of 4 00 senior unsecured notes due 2023 the 2023 Euro Notes and 250 0 million of 4 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
in right of payment with all of the Company s existing and future senior indebtedness including the 2018 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 6 50 per annum The 2026 Euro Notes will bear interest at a rate of 4 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 101 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
During the three months ended September 30 2021 the Company capitalized original issue debt discounts of 7 0 and deferred issuance fees of 0 1 and wrote off unamortized deferred issuance fees of 0 6 which were recorded in Other income net in the Condensed Consolidated Statement of Operations
The Company makes quarterly payments of 0 25 of the initial aggregate principal amounts of the 2018 Coty Term B Facility The remaining balance of the initial aggregate principal amount of the 2018 Coty Term B Facility will be payable on the maturity date of the facility
In the case of the 2021 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
In the case of the U S dollar portion of the 2018 Coty Term B Facility the applicable margin means 2 25 per annum in the case of LIBOR loans and 1 25 per annum in the case of ABR loans In the case of the Euro portion of the 2018 Coty Term B Facility the applicable margin means 2 50 per annum in the case of EURIBOR loans In no event will LIBOR be deemed to be less than 0 00 per annum
The Company uses the market approach to value its debt instruments The Company obtains fair values from independent pricing services or utilizes the USD LIBOR 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
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
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 four 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 5 95 to 1 00 and ii 1 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 four fiscal quarter period there shall be at least two 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
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
In September 2019 the Company entered into cross currency swap contracts in the notional amount of 550 0 and designated these cross currency swaps as hedges of its net investment in certain foreign subsidiaries In September 2020 the Company terminated its existing net investment cross currency swap derivatives in exchange for cash payment of 37 6 The related loss from this termination is included in accumulated other comprehensive income loss AOCI L until the sale or substantial liquidation of the underlying net investments
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 Consolidated Statements of Operations to which the derivative relates As of September 30 2022 and June 30 2022 the notional amounts of these outstanding non designated foreign currency forward and cross currency forward contracts were 2 645 5 and 2 403 8 respectively
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 2022 and June 30 2022 the Company had interest rate swap contracts designated as effective hedges in the notional amount of 800 0 These interest rate swaps are designated and qualify as cash flow hedges and were highly effective
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 AOCI L along with the foreign currency translation
adjustments on those investments As of September 30 2022 and June 30 2022 the nominal exposures of foreign currency denominated borrowings designated as net investment hedges were 484 4 million and 289 0 million respectively The designated hedge amounts were considered highly effective
In June 2022 the Company entered into certain forward repurchase contracts to start hedging for a potential 200 0 share buyback program in 2024 These forward repurchase contracts are accounted for at fair value with changes in the fair value recorded in Other expense income net in the Consolidated Statements of Operations Refer to Note 14 Equity and Convertible Preferred Stock
The accumulated gain on foreign currency borrowings classified as net investment hedges in the foreign currency translation adjustment component of AOCI L was 36 4 and 41 7 as of September 30 2022 and June 30 2022 respectively
The 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 gain on derivative instruments classified as cash flow hedges in AOCI L net of tax was 5 2 and 4 3 as of September 30 2022 and June 30 2022 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 6 8 As of September 30 2022 all of the Company s remaining foreign currency forward contracts designated as hedges were highly effective
The 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
As of September 30 2022 the Company s common stock consisted of Class A Common Stock with a par value of 0 01 per share The holders of Class A Common Stock are entitled to one vote per share As of September 30 2022 total authorized shares of Class A Common Stock was 1 250 0 million and total outstanding shares of Class A Common Stock was 849 3 million
As of September 30 2022 the Company s largest stockholder was Cottage Holdco B V which owned approximately 53 of Coty s outstanding Class A Common Stock Cottage Holdco B V a wholly owned subsidiary of JAB Cosmetics B V JABC is indirectly controlled by Lucresca SE Agnaten SE and JAB Holdings B V JAB The Company s CEO Sue Nabi was granted a one time sign on award of restricted stock units the Award on June 30 2021 On October 29 2021 Cottage Holdco B V completed the transfer of 10 0 million shares of Common Stock to Ms Nabi in connection with her sign on award of restricted stock units See Note 15 Share Based Compensation Plans for additional information
As of September 30 2022 total authorized shares of preferred stock are 20 0 million There are two classes of Preferred Stock Series A Preferred Stock and Series A 1 Preferred Stock both with a par value of 0 01 per share
As of September 30 2022 there were 1 5 million shares of Series A and no 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 no voting rights except as required by law
On May 11 2020 the Company entered into an Investment Agreement with KKR Aggregator relating to the issuance and sale by the Company to KKR Aggregator of up to 1 000 000 shares of the Company s new Convertible Series B Preferred Stock par value 0 01 per share the Series B Preferred Stock for an aggregate purchase price of up to 1 000 0 or 1 000 per share the Issuance The Issuance was proposed to be issued in two tranches i an initial issuance of 750 000 shares of Series B Preferred Stock the Initial Issuance and ii a subsequent issuance of 250 000 shares of Series B Preferred Stock the Second Issuance which was subject to the execution and delivery of a definitive purchase agreement between the Company and KKR Aggregator or certain of its affiliates in respect of the Wella Business
On May 26 2020 the Closing Date the Company and KKR Aggregator completed the issuance and sale of 750 000 shares of Series B Preferred Stock for an aggregate purchase price of 750 0 On July 31 2020 the Company completed the sale of 250 000 shares of the Company s Series B Preferred Stock to KKR Aggregator for an aggregate purchase price of 250 0
On November 16 2020 KKR Aggregator and affiliated investment funds agreed to sell 146 057 shares of Series B Preferred Stock to HFS Holdings S à r l that is beneficially owned by Peter Harf a director of the Company The transaction which was subject to customary closing conditions closed on August 27 2021
On September 10 2021 KKR Aggregator converted 285 576 shares of Series B Preferred Stock and 26 4 of unpaid dividends into 50 000 088 shares of Class A common stock Immediately after the conversion KKR Aggregator completed the public secondary offering of 50 000 088 shares of Class A common stock The Company did not receive any proceeds from the sale of the shares of Class A Common Stock by KKR Aggregator As a result of the conversion the Company measured the accrued dividends at fair value which resulted in an increase of 6 7 Such adjustment is considered a deemed dividend for purposes of calculating basic and diluted EPS
On September 30 2021 the Company entered into a definitive agreement to sell a 9 4 stake in Wella to KKR Aggregator in exchange for the redemption of 290 465 shares of Series B Preferred Stock and 22 5 of unpaid dividends as previously defined as the First Exchange As a result the Series B Preferred Stock net of issuance costs and related accrued dividends were reclassified from temporary equity to a liability as Mandatorily redeemable Convertible Series B Preferred Stock as of September 30 2021 Upon reclassification the Company measured the Series B Preferred Stock and accrued dividends at fair value which resulted in an increase of 93 6 The excess in fair value is considered a deemed dividend for purposes of calculating basic and diluted EPS The First Exchange was completed on October 20 2021 Upon closing the Company re measured the Series B Preferred Stock and accrued dividends at fair value which resulted in a decrease of 6 5 Such adjustment is considered a gain on extinguishment and is included in Other income expense net in the Consolidated Statements of Operations A key input in determining the fair value of the liability was based on the Company s share price as of the measurement date As this liability is not actively traded it is classified as a Level 2 fair value measurements Upon closing of the First Exchange the Company recognized a non monetary loss of 2 9 and is included in Other income net in the Consolidated Statements of Operations See Note 7 Equity Investments for additional information
On November 10 2021 KKR Aggregator converted 123 219 shares of Series B Preferred Stock and 1 2 of unpaid dividends into 19 944 701 shares of Class A common stock Immediately after the conversion KKR Aggregator completed a sale of 19 944 701 shares of Class A common stock The Company did not receive any proceeds from the sale of the shares of Class A Common Stock by KKR Aggregator As a result of the conversion the Company measured the accrued dividends at fair value which resulted in an increase of 0 8 Such adjustment is considered a deemed dividend for purposes of calculating basic and diluted EPS
On November 6 2021 the Company entered into a definitive agreement to sell an additional 4 7 stake in Wella to KKR Aggregator in exchange for the redemption or conversion of 154 683 shares of Series B Preferred Stock as previously defined as the Second Exchange The Second Exchange closed on November 30 2021 Upon closing the Company recognized 66 4 in excess of the fair value of the consideration transferred in exchange for the redemption of the Series B Preferred Stock The excess in fair value is considered a deemed dividend for purposes of calculating basic and diluted EPS As of December 31 2021 KKR has fully redeemed exchanged all of their Series B Preferred Stock See Note 7 Equity Investments for additional information
In October 2021 the Company paid the remaining accrued dividends on the Series B Preferred Stock that were outstanding as of June 30 2021 totaling 25 1 As a result 4 4 of previously recorded fair value adjustments for unpaid dividends were reversed through additional paid in capital APIC and is considered a deemed contribution
Cumulative preferred dividends accrue daily on the Series B Preferred Stock at a rate of 9 0 per year During the three months ended September 30 2022 and 2021 the Board of Directors declared dividends on the Series B Preferred Stock of 3 3 and 22 7 respectively of which 0 0 and 3 5 respectively were paid Additionally the Company paid previously accrued dividends that were outstanding as of June 30 2022 totaling 3 3 As of September 30 2022 and June 30 2022 the Series B Preferred Stock had outstanding accrued dividends of 3 3 and 3 3 respectively
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 500 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 2022 the Company did not repurchase any shares of its Class A Common Stock under the Incremental Repurchase Program As of September 30 2022 the Company had authority for 396 8 remaining under the Incremental Repurchase Program
In June 2022 the Company entered into forward repurchase contracts the Forward and together the Forwards with three large financial institutions Counterparties to start hedging for a potential 200 0 share buyback program in 2024 In connection with the Forward transactions the Company incurred certain execution fees of 2 0 which was recognized as a premium to the forward price recorded at inception and amortized ratably over the contract period
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 period 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 was 6 8 as of September 30 2022
The Forward agreements with two of the Counterparties which purchased approximately 13 7 million and 6 2 million shares of the Company s Class A Common Stock during June and July 2022 require the Company to i repurchase the shares on or before June 6 2024 at a price based on the weighted average of the daily volume weighted average price VWAP
during the initial acquisition period Initial Price or ii at the Company s option pay or receive the difference between the Final Price defined as the weighted average of the daily VWAP during the unwind period as defined in the agreement and Initial Price of the Forwards
Simultaneously the remaining Counterparty purchased approximately 7 1 million shares of the Company s Class A Common Stock during June 2022 This Forward requires the Company to pay or receive the difference between the Final Price and Initial Price established at inception of the Forward on or before June 6 2024
In addition the Forwards include a provision for a potential true up in cash upon specified changes in the price of the Company s Class A Common Stock relative to the Initial Price Hedge Valuation Adjustment Such Hedge Valuation Adjustment shall not result in a termination date or any adjustment of the number of Coty s Class A Common Stock shares purchased by the Counterparties at inception
In the event the Company declares and pays any cash dividends on its Class A Common Stock the Forward Counterparties will be entitled to such dividend payments and payable at termination of the Forwards
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 income net in the Consolidated Statement of Operations
During fiscal 2020 prior to the Board s decision to suspend the payment of dividends the Company maintained a Stock Dividend Reinvestment Program and had registered a total of 19 3 million shares of Class A Common Stock for purchase under the program All holders of records of Class A Common Stock had the opportunity to participate in the program
For the three months ended September 30 2022 the Company made a payment of 0 4 of which 0 1 related to employee taxes for the previously accrued dividends on RSUs that vested during the three months ended September 30 2022
Total accrued dividends on unvested RSUs and phantom units of 1 3 and 0 2 are included in Accrued expenses and other current liabilities and Other noncurrent liabilities respectively in the Condensed Consolidated Balance Sheet as of September 30 2022
For the three months ended September 30 2022 other comprehensive loss before reclassifications of 2 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 1 5 net of tax of 0 8
Equity plan share based compensation expense of 31 4 and 107 8 were recorded to additional paid in capital and presented in the Condensed Consolidated Statements of Equity for the three months ended September 30 2022 and 2021 respectively
As of September 30 2022 the total unrecognized share based compensation expense related to stock options Series A Preferred Stock restricted stock and restricted stock units and other share awards is 1 9 0 0 2 6 and 124 5 respectively The unrecognized share based compensation expense related to stock options Series A Preferred stock restricted stock and restricted stock units and other share awards is expected to be recognized over a weighted average period of 0 92 0 00 1 17 and 1 09 years respectively
The Company granted no shares of RSUs and other share awards during the three months ended September 30 2022 The Company recognized share based compensation expense of 30 7 and 106 9 for the three months ended September 30 2022 and 2021 respectively of which 23 5 and 100 8 respectively related to Ms Nabi s award as described below
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 will vest and settle in 10 000 000 shares of the Company s Class A Common Stock par value 0 01 per share on each of August 31 2021 August 31 2022 and August 31 2023 subject to her continued employment through each such date The Company will recognize 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 Cottage Holdco B V the Company s largest stockholder and a wholly owned subsidiary of JAB Holding Company S à r l agreed pursuant to an equity transfer agreement to transfer to Ms Nabi either directly or through contributing to the Company 10 000 000 shares of Class A Common Stock no later than sixty days following the first vesting date On October 29 2021 Cottage Holdco B V completed the transfer of 10 000 000 shares of Class A Common Stock to Ms Nabi If however Ms Nabi is terminated without cause or due to death or disability on or following the first vesting date but prior to the second vesting date the Company has agreed to issue to Cottage Holdco B V the number of shares of Class A Common Stock determined on pro rata basis in accordance with the equity transfer agreement In the event Ms Nabi remains employed through the third vesting date Cottage Holdco B V has agreed to transfer an additional 5 000 000 shares of Class A Common Stock to Ms Nabi
The Company granted no shares of restricted stock during the three months ended September 30 2022 The Company recognized share based compensation expense of 0 5 and 0 2 for the three months ended September 30 2022 and 2021 respectively
The Company granted no shares of Series A Preferred Stock and no shares of Series A 1 Preferred Stock during the three months ended September 30 2022 The Company recognized share based compensation income expense of 0 4 and 0 4 for the three months ended September 30 2022 and 2021 respectively
The Company granted no non qualified stock options during the three months ended September 30 2022 The Company recognized share based compensation expense of 0 3 and 0 8 for the three months ended September 30 2022 and 2021 respectively
For the three months ended September 30 2022 and 2021 outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase 6 2 million and 11 4 million shares of Common Stock respectively were anti dilutive and excluded from the computation of diluted EPS
For the three months ended September 30 2021 163 1 million weighted average dilutive shares of Convertible Series B Preferred Stock were excluded from the computation of diluted EPS as their inclusion would be anti dilutive
For the three months ended September 30 2022 3 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
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 and RSUs 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 3 3 and 123 0 and fair market value adjustments of 27 7 and 0 0 respectively if dilutive for the three months ended September 30 2022 and 2021 on net income applicable to common stockholders during the period
In July 2021 the Company purchased the remaining 25 noncontrolling interest of a certain subsidiary in the United Arab Emirates from the noncontrolling interest holder for 7 1 pursuant to the related U A E Shareholders Agreement The termination was effective on December 31 2020 and immediately prior to the cash payment the noncontrolling interest balance was recorded as a mandatorily redeemable financial instrument liability
As of September 30 2022 the noncontrolling interest holder in the Company s subsidiary in the Middle East had a 25 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 69 3 and 69 8 as the RNCI balances as of September 30 2022 and June 30 2022 respectively
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 including asbestos claims related to 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
A consolidated stockholder class and derivative action the Tender Offer Litigation concerning the tender offer by Cottage Holdco B V the Cottage Tender Offer and the Schedule 14D 9 is pending against certain current and former directors of the Company JAB Holding Company S à r l JAB Holdings B V JAB Cosmetics B V and Cottage Holdco B V in the Court of Chancery of the State of Delaware The Company was named as a nominal defendant The case which was filed on May 6 2019 was captioned Massachusetts Laborers Pension Fund v Harf et al Case No 2019 0336 AGB On June 14 2019 plaintiffs in the consolidated action filed a Verified Amended Class Action and Derivative Complaint Amended Complaint After defendants responded to the Amended Complaint on October 21 2019 plaintiffs filed a Verified Second Amended Class Action and Derivative Complaint the Second Amended Complaint alleging that the directors and JAB Holding Company S à r l JAB Holdings B V JAB Cosmetics B V and Cottage Holdco B V breached their fiduciary duties to the Company s stockholders and breached the Stockholders Agreement The Second Amended Complaint seeks among other things monetary relief On November 21 2019 the defendants moved to dismiss certain claims asserted in the Second Amended Complaint and certain of the director defendants also answered the complaint On May 7 2020 plaintiffs stipulated to the dismissal without prejudice of JAB Holding Company S à r l from the action On August 17
2020 the court denied the remaining motions to dismiss As of October 17 2022 the parties to the Tender Offer Litigation have reached an agreement in principle to resolve the matter which is not expected to have a material impact on the Company s financial results
A purported stockholder class action complaint alleging violations of the U S securities laws in connection with the P G beauty brands acquisition is pending against the Company as well as certain current and former officers of the Company in the U S District Court for the Southern District of New York The case which was filed on September 4 2020 is captioned Crystal Garrett Evans v Coty Inc et al Case No 1 20 cv 07277 the Evans Action On November 23 2020 the court appointed the individual Susan Nock as lead plaintiff and the Rosen Firm as lead counsel The plaintiff filed an amended complaint on January 22 2021 The Amended Complaint asserts claims under the federal securities laws and seeks among other things monetary relief On March 8 2021 the Company filed a motion to dismiss the amended complaint and on August 4 2021 the court dismissed the amended complaint holding that it failed to set forth a valid claim There has been no appeal of the dismissal and the Evans Action has been concluded
A second purported stockholder class action and derivative complaint alleging violations of the U S securities laws in connection with the P G beauty brands acquisition and the Kylie Brands transaction as well as claims for breach of fiduciary duties unjust enrichment abuse of control gross mismanagement and waste of corporate assets by certain current and former officers and directors of the Company is pending in the U S District Court for the Southern District of New York The case which was filed on November 17 2020 is captioned Chris Lewis v Becht et al Case No 1 20 cv 09685 the Lewis Action The Company was named as a nominal defendant The plaintiff seeks among other things injunctive and or monetary relief This action was voluntarily stayed during the pendency of the motion to dismiss the Evans Action Following the dismissal of the Evans Action counsel for the plaintiff in the Lewis Action agreed to dismiss the case and the court has approved the dismissal of the action as of October 2021
All cases are currently in the administrative process The Company is seeking favorable 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
On September 10 2021 KKR Aggregator converted a portion of its Series B Preferred Stock into Class A common stock of the Company and completed a secondary public offering of the converted shares of Class A common stock Refer to Note 14 Equity and Convertible Preferred Stock
On October 20 2021 the Company completed the sale of a 9 4 stake in Wella to KKR Aggregator in the First Exchange On November 10 2021 KKR Aggregator converted 123 219 shares of Series B Preferred Stock and 1 2 of unpaid dividends into 19 944 701 shares of Class A common stock Immediately after the conversion KKR Aggregator completed a sale of 19 944 701 shares of Class A common stock On November 30 2021 Coty completed the sale of an additional 4 7 stake in Wella to KKR Aggregator in the Second Exchange reducing the Company s total shareholding in Wella to 25 9 Refer to Note 14 Equity and Convertible Preferred Stock Following the Second Exchange KKR no longer holds any preferred stock of the Company and no longer has the right to designate any directors to the Company s Board of Directors
On December 22 2021 the Company entered into an agreement with KKR Bidco related to post closing adjustments to the purchase consideration for the Wella Business As part of this agreement the Company received future contingent proceeds of 34 0 Earning the contingent proceeds is based on the future recovery of certain tax credits of the Wella Company During fiscal 2023 and 2022 certain recovery targets were achieved and the Company recognized gains of 13 9 and 0 7 respectively which are reported in Other income net The unearned portion of amounts advanced to the Company as of September 30 2022 is 19 4 and is reflected in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet
The Company also entered into agreements with KKR Bidco to provide management consulting and financial services to KKR Bidco 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 2022 is 1 9
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 0 8 and 2 1 respectively for the three months ended September 30 2022 and 33 2 and 1 5 respectively for the three months ended September 30 2021 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 As of September 30 2022 accounts receivable from and accounts payable to Wella of 71 5 and 3 0 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 2022 the Company has accrued 58 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 2022 and 2021 Coty recorded 1 7 and 1 6 respectively of share based compensation expense related to Wella employees which was presented as part of Other income net in the Condensed Consolidated Statements of Operations
The Company evaluated the effect of events and transactions subsequent to the condensed consolidated balance sheet date of September 30 2022 through the date of issuance of the Condensed Consolidated Financial Statements and determined that no subsequent events have occurred that require recognition in the Condensed Consolidated Financial Statements or disclosure in the notes to the Condensed Consolidated Financial Statements
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 2022 Fiscal 2022 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
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
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 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 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 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 including the strategic partnerships with Kylie Jenner and Kim Kardashian West 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 and supply chain changes the impact cost timing and implementation of e commerce and digital initiatives 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 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 COVID 19 and or the war in Ukraine and expectations regarding future service levels 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
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 related to Kylie Jenner s or Kim Kardashian West s existing beauty businesses any relaunched or rebranded products and the anticipated costs and discounting
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 the fair value of the equity investment and the fair value of acquired assets and liabilities associated with acquisitions
managerial transformational operational regulatory legal and financial risks including diversion of management attention to and management of cash flows expenses and costs associated with the Company s response to COVID 19 our transformation agenda our global business strategies the integration of the
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 avoid future supply chain 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
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 or if our Board declares dividends on common stock our stock dividend reinvestment program the Stock Dividend Reinvestment Program
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 West 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 ability to protect trademarks and brand names litigation or investigations by governmental authorities and changes in law regulations and policies that affect 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 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 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
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 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 Brexit and related business or market disruption recent
the current U S administration and mid term 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 and
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
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 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 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 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 in response to COVID 19 and our ability 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
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
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 2023 refer to the fiscal year ending June 30 2023 Any reference to a year not preceded by fiscal refers to a calendar year
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 Through targeted strategic transactions we have strengthened and diversified our presence across the countries categories and channels in which we compete building a strong beauty platform As we transform the Company we continue to make progress on our strategic priorities including 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 through Prestige products and select Consumer Beauty brands and establishing Coty as an industry leader in sustainability
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 adopting to changing circumstances Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways
Our operations outside of the United States account for a significant portion of our revenues and expenses As a result a substantial portion of our total revenue and expenses are denominated in currencies other than the U S dollar Recently exchange rates between these currencies and the U S dollar have fluctuated significantly and may continue to do so in the future Fluctuations in foreign exchange rates may have a significant impact our operating results During the first quarter fluctuations in the U S dollar relative to certain other foreign currencies such as the euro and British pound reduced our reported revenue and expenses principally related to cost of sales controllable fixed costs and advertising and consumer
We expect that our net revenue for fiscal year 2023 will grow in the mid to high single digits versus the prior year excluding the impact of foreign exchange after adjusting for the impact of the Russia exit
While our revenues and overall product sales volume increased in the first quarter of fiscal 2023 compared to the prior year period we continue to experience global supply chain challenges resulting from industry wide component shortages and transportation delays These challenges have negatively impacted order fill rates across our product categories including categories where there has been demand growth particularly in the North America and certain European countries
We continue to take steps to improve order fill rates and mitigate the impact of these constraints by working closely with our suppliers to ensure the availability of components such as glass and metal However we expect these challenges to continue into the remainder of the fiscal year 2023
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 first quarter The combination of our strategy to premiumize the portfolio cost savings programs and recent pricing actions are enabling us to offset inflationary pressure on costs We currently anticipate the impact of inflation to continue into the second quarter and second half fiscal 2023 We will continue to implement mitigation strategies and price increases to offset these trends however such measures may not fully offset the impact to our operating performance After the resumption of more typical business conditions the economics of developing producing launching supporting and discontinuing products will continue to impact the timing of our sales and operating performance each period
We continue to wind down the operations of our Russian subsidiary In connection with our wind down we liquidated a portion of our remaining inventory in Russia in accordance with applicable sanctions during the first quarter We anticipate incurring up to 9 0 of additional costs through completion of the wind down and future net cash costs of 30 0 to 35 0 which will be funded by our Russian subsidiary Additionally management anticipates derecognizing the cumulative translation adjustment balance pertaining to the 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
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
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
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
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 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 defined in Note 14 Equity and Convertible Preferred Stock 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
While acquiring brands and licenses comprises a part of our overall growth strategy along with targeting organic growth opportunities we have excluded acquisition related costs and acquisition accounting impacts in connection with business combinations because these costs are unique to each transaction and the amount and frequency are not consistent and are significantly impacted by the timing and size of our acquisitions Our management assesses the success of an acquisition as a component of performance using a variety of indicators depending on the size and nature of the acquisition including
the comparison of actual and projected results including achievement of projected synergies post integration provided that timing for any such comparison will depend on the size and complexity of the acquisition
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
During the period when we complete an acquisition divestiture or early license termination 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 to maintain comparable financial results with the current fiscal year period There are no acquisitions divestitures or early license terminations in the comparable periods 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
In the three months ended September 30 2022 net revenues increased 1 or 18 3 to 1 390 0 from 1 371 7 in the three months ended September 30 2021 reflecting a positive price and mix impact of 6 and an increase in unit volume of 2 partially offset by a negative foreign currency exchange translation impact of 7 The overall increase in net revenues reflects growth in our Consumer Beauty segment due to positive performance across the body care skincare and color cosmetics categories Net revenues in our Prestige segment remained relatively flat benefiting from the positive performance in the prestige fragrance category due to the continued success of fragrance brands such as
The prestige makeup category negatively impacted by lockdowns in China experienced a decline in net revenues The overall increase in net revenues reflects the successful implementation of global price increases across all product categories our product premiumization strategy and positive overall market trends Additionally there was growth in travel retail sales due to increased leisure travel in the period E commerce sales remained relatively flat led by growth in Europe partially offset by declines across the US and the Asia Pacific region partially due to lockdowns in China Despite overall growth foreign exchange headwinds negatively impacted net revenues primarily affecting the euro and British pound
The overall change in net revenues was impacted by our ongoing exit from Russia resulting in an approximate 2 negative net impact on our net revenues in the current quarter including an approximate 2 negative net impact on our Prestige business net revenues
In the three months ended September 30 2022 net revenues from the Prestige segment decreased 1 or 7 3 to 863 4 compared to 870 7 in the three months ended September 30 2021 reflecting a negative foreign currency exchange translation impact of 8 and a decrease in unit volume of 3 partially offset by a positive price and mix impact of 10 This decrease in net revenues primarily reflects
In the three months ended September 30 2022 net revenues from the Consumer Beauty segment increased 5 or 25 6 to 526 6 from 501 0 in the three months ended September 30 2021 reflecting a positive price and mix impact of 9 and an increase in unit volume of 3 partially offset by a negative foreign currency exchange translation impact of 7 The increase in net revenues primarily reflects
products resulting from the continued decline for demand for at home nail care compared to the prior year quarter where COVID 19 restrictions had resulted in fewer nail salon visits and positively impacted the nail category and the brand s net revenue in the prior year quarter
In the three months ended September 30 2022 cost of sales decreased 1 or 3 5 to 501 3 from 504 8 in the three months ended September 30 2021 Cost of sales as a percentage of net revenues decreased to 36 1 in the three months ended September 30 2022 from 36 8 in the three months ended September 30 2021 resulting in a gross margin increase of approximately 70 basis points primarily reflecting
approximately 60 basis points due to lower returns and markdown costs for the Consumer Beauty division as a result of higher sell through compared to the prior year period and lower returns volume for products in the Prestige division primarily in the US and Latin American markets
approximately 50 basis points related to a favorable impact on variable costs due to increased manufacturing efficiencies improvements in productivity as well as procurement and material cost optimization and
In the three months ended September 30 2022 selling general and administrative expenses decreased 14 or 105 6 to 670 7 from 776 3 in the three months ended September 30 2021 Selling general and administrative expenses as a percentage of net revenues decreased to 48 3 in the three months ended September 30 2022 from 56 6 in the three months ended September 30 2021 or approximately 830 basis points This decrease primarily reflects
140 basis points due to decrease in advertising and consumer promotional costs as a percentage of net revenue primarily related to a reduction of marketing costs principally for non working media in the first quarter due to the timing of certain campaigns for the Prestige division
In the three months ended September 30 2022 operating income was 171 9 compared to 17 2 in the three months ended September 30 2021 Operating income as a percentage of net revenues increased to 12 4 in the three months ended September 30 2022 as compared to an operating income as a percentage of net revenues of 1 3 in the three months ended September 30 2021 The improved operating margin is primarily driven by lower stock based compensation expense lower advertising and consumer promotional costs as a percentage of revenues lower restructuring costs lower amortization expense lower cost of sales as a percentage of net revenues and lower acquisition and divestiture related costs
In the three months ended September 30 2022 operating income for Prestige was 170 3 compared to income of 132 1 in the three months ended September 30 2021 Operating margin increased to 19 7 of net revenues in the three months ended September 30 2022 as compared to 15 2 in the three months ended September 30 2021 driven by lower cost of goods sold as a percentage of net revenues lower advertising and consumer promotional costs as a percentage of net revenues and lower amortization expense
In the three months ended September 30 2022 operating income for Consumer Beauty was 32 0 compared to income of 11 4 in the three months ended September 30 2021 Operating margin increased to 6 1 of net revenues in the three months ended September 30 2022 as compared to 2 3 in the three months ended September 30 2021 driven by lower advertising and consumer promotional costs as a percentage of net revenues and lower fixed costs partially offset by an increase in cost of goods sold as a percentage of net revenues
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 2022 the operating loss for Corporate was 30 4 compared to a loss of 126 3 in the three months ended September 30 2021 as described under Adjusted Operating Income Loss for Continuing Operations below The decrease in the operating loss for Corporate was primarily driven by a decrease in share based compensation expense restructuring costs and acquisition and divestiture related costs
We believe that adjusted operating income loss by segment further enhances an investor s understanding of our performance See Overview Non GAAP Financial Measures A reconciliation of reported operating income loss to adjusted operating income is presented below by segment
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
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
In the three months ended September 30 2022 adjusted operating income increased 49 1 to 249 6 from 200 5 in the three months ended September 30 2021 Adjusted operating margin increased to 18 0 of net revenues in the three months ended September 30 2022 from 14 6 in the three months ended September 30 2021 In the three months ended September 30 2022 adjusted EBITDA increased 29 4 to 307 9 from 278 5 in the three months ended September 30 2021 Adjusted EBITDA margin increased to 22 2 of net revenues in the three months ended September 30 2022 from 20 3 in the three months ended September 30 2021 primarily driven by lower advertising and consumer promotional costs as a percentage of revenues and lower cost of sales as a percentage of net revenues
In the three months ended September 30 2022 amortization expense decreased to 47 3 from 57 0 in the three months ended September 30 2021 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 In the three months ended September 30 2021 amortization expense of 44 9 and 12 1 was reported in the Prestige and Consumer Beauty segments respectively The decrease was primarily driven by certain license agreements and product formulations which were fully amortized in the prior year
We continue to analyze our cost structure including opportunities to simplify and optimize operations In connection with the four year Turnaround plan announced on July 1 2019 to drive substantial improvement and optimization in our business we have and expect to continue to incur restructuring and other business realignment costs On May 11 2020 we announced an expansion of the Turnaround Plan to further reduce fixed costs the Transformation Plan We incurred 483 0 of cash costs life to date as of September 30 2022 which have been recorded in Corporate
We incurred business structure realignment costs of 0 4 primarily related to the Transformation Plan and certain other programs This amount includes 0 5 reported in Selling general and administrative expenses and 0 9 reported in Cost of sales in the Condensed Consolidated Statement of Operations
We incurred a credit in business structure realignment costs of 2 7 primarily related to the Transformation Plan and certain other programs This amount includes nil reported in Selling general and administrative expenses and 2 7 reported in Cost of sales in the Condensed Consolidated Statement of Operations
In the three months ended September 30 2022 stock based compensation was 31 1 as compared with 108 2 in the three months ended September 30 2021 The decrease in stock based compensation is primarily related to a reduction in expense recognized in connection with a prior year s grant made to the CEO
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 In the three months ended September 30 2021 adjusted depreciation expense of 38 0 and 40 0 was reported in the Prestige and Consumer Beauty segments respectively
In the three months ended September 30 2022 net interest expense was 65 9 as compared with 59 8 in the three months ended September 30 2021 This increase is primarily due to a higher average interest rate despite lower debt balances in the current period
In the three months ended September 30 2022 other income was 98 2 as compared with 386 1 in the three months ended September 30 2021 This decrease in income is primarily due to a less favorable fair value adjustment related to our investment in the Wella Company compared to the prior period in addition to unfavorable changes in the fair value adjustments for our forward repurchase contracts
The effective income tax rate for the three months ended September 30 2022 and 2021 was 34 1 and 33 4 respectively The change in the effective tax rate for the three months ended September 30 2022 as compared with the three months ended September 30 2021 is primarily due to larger fair value gains related to the investment in the Wella business recorded in the prior period
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 ii adjustments to our unrecognized tax benefits 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
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
The adjusted effective tax rate was 29 6 for the three months ended September 30 2022 compared to 29 1 for the three months ended September 30 2021 The differences were primarily due to the resolution of foreign uncertain tax positions in the prior period
Net income attributable to Coty Inc was 128 6 in the three months ended September 30 2022 as compared to an income of 226 0 in the three months ended September 30 2021 The decrease in the income is primarily driven by the lower unrealized gain in the Wella investment partially offset by higher operating income and decrease in tax provision in the current period
Adjusted Diluted EPS is adjusted by the effect of dilutive securities For the three months ended September 30 2022 convertible Series B Preferred Stock 23 7 million weighted average dilutive shares were excluded and the Forward Repurchase Contracts 3 1 million weighted average dilutive shares were excluded were antidilutive Accordingly we excluded these shares from the diluted shares and did not adjust the earnings for the related dividend 3 3 and change in fair value 27 7 For the three months ended September 30 2021 the convertible Series B Preferred Stock was antidilutive Accordingly we excluded the convertible Series B Preferred Stock form the diluted shares and did not adjust the earnings for the related dividend
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 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 business structure realignment expenditures interest payments acquisitions dividends share repurchases and any principal payments on debt 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 continue to wind down the operations of our Russian subsidiary We anticipate incurring up to 9 0 of additional costs through completion of the wind down and future net cash costs of 30 0 to 35 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
The net amount utilized under the factoring facilities was 177 8 and 179 3 as of September 30 2022 and June 30 2022 respectively The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to 346 0 and 264 2 during the three months ended September 30 2022 and 2021 respectively
Net cash provided by operating activities was 163 2 and 285 7 for the three months ended September 30 2022 and 2021 respectively The decrease in cash provided by operating activities of 122 5 was primarily driven by higher net outflows from changes throughout working capital accounts which were partially offset by an increase in cash related net income during the first three months of the current fiscal year Changes in accrued expenses and other current liabilities were the main driver of the increase in outflows from working capital accounts which was primarily due to timing of payments and accruals for restructuring and sales related activities Changes in cash related net income reflects higher net revenues and lower costs as a percentage of net revenues year over
Net cash used in investing activities was 75 0 and 45 0 for the three months ended September 30 2022 and 2021 respectively The increase in cash used in investing activities of 30 0 was due to the timing of payments and level of capital expenditure projects
Net cash used in financing activities during the three months ended September 30 2022 and 2021 was 87 8 and 122 7 respectively The decrease in cash used in financing activities of 34 9 is primarily driven by is driven by net proceeds from borrowings on revolving credit facilities in the current year compared to net repayments in the prior year as well as higher payments in the prior year for accrued and incurred debt issuance costs and prior year purchase of the remaining mandatorily redeemable noncontrolling interest Higher cash outflows from realized losses on financing foreign currency contracts was the primary offset to the overall year over year decrease in cash used in financing activities
On April 29 2020 our Board of Directors suspended the payment of dividends in keeping with our 2018 Coty Credit Agreement as amended 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 After the expiration of applicable restrictions under the 2018 Coty Credit Agreement as amended we began to pay dividends on the Convertible Series B Preferred Stock in cash for the period ended June 30 2021 and we expect to continue to pay such dividends in cash on a quarterly basis subject to the declaration thereof by our Board of Directors Dividends accrued on the Convertible Series B Preferred Stock before April 1 2021 have been declared and paid in October 2021 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 During the three months ended September 30 2022 and 2021 the Board of Directors declared dividends on the Series B Preferred Stock of 3 3 and 22 7 respectively of which 0 0 and 3 5 respectively were paid Additionally we paid previously accrued dividends that were outstanding as of June 30 2022 totaling 3 3
See Note 17 Mandatorily Redeemable Financial Interests and 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
For information on our litigation matters and Brazilian tax assessments see Note 18 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 135 2 million approximately 25 0 as of September 30 2022
Our principal contractual obligations and commitments as of September 30 2022 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 2022 Form 10 K For the three months ended September 30 2022 there have been no material changes in our contractual obligations outside the ordinary course of business
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
As of September 30 2022 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 2022 Form 10 K
See Note 13 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 2022 Form 10 K
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 2022 Based on the evaluation of our disclosure controls and procedures as of September 30 2022 our CEO and CFO concluded that as of such date our disclosure controls and procedures were effective at the reasonable assurance level
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
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

Company Name	COTY INC. Vist SEC web-site
Category	PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS
Trading Symbol	COTY