COTY INC. The following discussion and analysis of the financial condition and results of operations ofCoty 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 theSecurities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 ("Fiscal 2021 Form 10-K"). When used in this discussion, the terms "Coty," the "Company," "we," "our," or "us" mean, unless the context otherwise indicates,Coty Inc. and its majority and wholly-owned subsidiaries. Also, when used in this Quarterly Report on Form 10-Q, the term "includes" and "including" means, unless the context otherwise indicates, including without limitation. The following report includes certain non-GAAP financial measures. See "Overview-Non-GAAP Financial Measures" for a discussion of non-GAAP financial measures and how they are calculated. All dollar amounts in the following discussion are in millions ofUnited States ("U.S.") dollars, unless otherwise indicated. More information about potential risks and uncertainties that could affect our business and financial results is included under the heading "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and other periodic reports we have filed and may file with theSEC from time to time. Forward-looking Statements Certain statements in this Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, the impact of COVID-19 and potential recovery scenarios, strategic planning, targets, segment reporting 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 impact of the sale of a majority stake in Coty's Professional and Retail Hair business, including the Wella,Clairol , OPI and ghd brands, (together, the "Wella Business") and the related transition services (the "TSA"), 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), 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 withKylie Jenner andKim Kardashian West , future cash flows, liquidity and borrowing capacity (including any refinancing 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 Transformation Plan (as defined below), including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, supply chain changes, e-commerce and digital initiatives, the expected impact of global supply chain challenges or inflationary pressures, 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: •the impact of COVID-19 (or future similar events), including demand for the Company's products, illness, quarantines, government actions, facility closures, store closures or other restrictions in connection with the COVID-19 pandemic, and the extent and duration thereof, the availability and widespread distribution of a safe and effective vaccine, 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, joint-venture partners, to meet their obligations to us, in particular collections from customers, the extent that government funding and reimbursement programs in connection with COVID-19 are available to us, and the ability to successfully implement measures to respond to such impacts; •our ability to successfully implement our multi-year Transformation Plan, including our management realignment, reporting structure changes, operational and organizational changes, and the initiatives to further reduce our cost base, and to develop and achieve our global business strategies (including mix management, select price increases, more disciplined promotions, and foregoing low value sales), compete effectively in the beauty industry and 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 innovation performance in Prestige and mass channels, strengthening our positions in core markets, accelerating our digital and e-commerce capabilities, building on our skincare portfolio, and expanding our presence inChina ) in each case within the expected time frame or at all; 35 -------------------------------------------------------------------------------- Table of Contents •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 toKylie Jenner's orKim Kardashian West's existing beauty businesses, any relaunched or rebranded products and the anticipated costs and discounting associated with such relaunches and rebrands, and consumer receptiveness to our current and future marketing philosophy and consumer engagement activities (including digital marketing and media); •use of estimates and assumptions in preparing our financial statements, including with regard to revenue recognition, income taxes (including the expected timing and amount of the release of any tax valuation allowance), the assessment of goodwill, other intangible and long-lived assets for impairments, the market value of inventory, the fair value of the equity investment, and the fair value of acquired assets and liabilities associated with acquisitions; •the impact of any future impairments; •managerial, transformational, operational, regulatory, legal and financial risks, including diversion of management attention to and management of cash flows, expenses and costs associated with the Company's response to COVID-19, the Transformation Plan, theTSA , the integration of the strategic partnerships withKylie Jenner andKim Kardashian , and future strategic initiatives, and, in particular, our ability to manage and execute many initiatives simultaneously including any resulting complexity, employee attrition or diversion of resources; •the timing, costs and impacts of divestitures and the amount and use of proceeds from any such transactions; •future divestitures and the impact thereof on, and future acquisitions, new licenses and joint ventures and the integration thereof with, our business, operations, systems, financial data and culture and the ability to realize synergies, manage supply chain challenges and 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 (including our ability to expand our digital, direct-to-consumer and e-commerce capabilities within contemplated timeframes or at all); •our and our joint ventures', business partners' and licensors' abilities to obtain, maintain and protect the intellectual property used in our and their respective businesses, protect our and their respective reputations (including those of our and their executives or influencers) and public goodwill, and defend claims by third parties for infringement of intellectual property rights; •any change to our capital allocation and/or cash management priorities, including any change in our dividend policy 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 withKylie Jenner andKim Kardashian , risks related to the entry into a new distribution channel, the potential for channel conflict, risks of retaining customers and key employees, difficulties of integration (or the risks associated with limiting integration), ability to protect trademarks and brand names, litigation or investigations by governmental authorities, and changes in law, regulations and policies that affectKKW 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 toKKW Holdings' business model, revenue, sales force or business; •our international operations and joint ventures, including enforceability and effectiveness of our joint venture agreements and reputational, compliance, regulatory, economic and foreign political risks, including difficulties and costs associated with maintaining compliance with a broad variety of complex local and international regulations; •our dependence on certain licenses (especially in the fragrance category) and our ability to renew expiring licenses on favorable terms or at all; 36 -------------------------------------------------------------------------------- Table of Contents •our dependence on entities performing outsourced functions, including outsourcing of distribution functions, and third-party manufacturers, logistics and supply chain suppliers, and other suppliers, including third-party software providers, web-hosting and e-commerce providers; •administrative, product development and other difficulties in meeting the expected timing of market expansions, product launches and re-launches and marketing efforts, including in connection with new products related toKylie Jenner's orKim Kardashian West's existing beauty businesses; •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 Brexit (and related business or market disruption), the currentU.S. administration and recent election, changes in theU.S. tax code, and recent changes and future changes in tariffs, retaliatory or trade protection measures, trade policies and other international trade regulations in theU.S. , theEuropean Union andAsia and in other regions where we operate; •currency exchange rate volatility and currency devaluation and/or inflation; •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 litigation relating to the tender offer byCottage Holdco B.V. (the "Cottage Tender Offer"), product liability cases (including asbestos and talc-related litigation for which indemnities and/or insurance may not be available), distributor or licensor litigation, and litigation or investigations relating to the strategic partnerships withKylie Jenner andKim Kardashian West ; •our ability to manage seasonal factors and other variability and to anticipate future business trends and needs; •disruptions in operations, sales and in other areas, including due to disruptions in our supply chain, restructurings and other business alignment activities, the Wella Transaction and related carve-out and transition activities, manufacturing or information technology systems, labor disputes, extreme weather and natural disasters, impact from COVID-19 or similar global public health events, 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; •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 theEuropean Union General Data Protection Regulation (the "GDPR"), the California Consumer Privacy Act and theBrazil General Data Protection Law) or to protect against theft of customer, employee and corporate sensitive information; •our ability to attract and retain key personnel and the impact of senior management transitions and organizational structure changes; •the distribution and sale by third parties of counterfeit and/or gray market versions of our products; •the impact of our Transformation Plan as well as the Wella Transaction on our relationships with key customers and suppliers and certain material contracts; •our relationship withCottage Holdco B.V. , as our majority stockholder, and its affiliates, and any related conflicts of interest or litigation; •our relationship with KKR, whose affiliatesKKR Rainbow Aggregator L.P. ("KKR Aggregator") and KKR Bidco are respectively a significant stockholder in Coty and an investor in the Wella Business, and any related conflicts of interest or litigation; •future sales of a significant number of shares by our majority stockholder or the perception that such sales could occur; and •other factors described elsewhere in this document and in documents that we file with theSEC from time to time. All forward-looking statements made in this document are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be 37 -------------------------------------------------------------------------------- Table of Contents required by applicable law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data. Industry, Ranking and Market Data Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations about our industry, market position, market opportunity and market sizes, is based on data from various sources including internal data and estimates as well as third-party sources widely available to the public, such as independent industry publications, government publications, reports by market research firms or other published independent sources and on our assumptions based on that data and other similar sources. We did not fund and are not otherwise affiliated with the third-party sources that we cite. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management's understanding of industry conditions, and such information has not been verified by any independent sources. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we generally believe the market, industry and other information included in this Quarterly Report on Form 10-Q to be the most recently available and to be reliable, such information is inherently imprecise and we have not independently verified any third-party information or verified that more recent information is not available. Our fiscal year ends onJune 30 . Unless otherwise noted, any reference to a year preceded by the word "fiscal" refers to the fiscal year endedJune 30 of that year. For example, references to "fiscal 2022" refer to the fiscal year endingJune 30, 2022 . Any reference to a year not preceded by "fiscal" refers to a calendar year. OVERVIEW We are one of the world's largest beauty companies, with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. 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. The King Kylie andKim Kardashian West transactions complement our existing portfolio as personality-led Direct-to-Consumer ("DTC") business models with strong social media engines. As we transform the Company, we continue to make progress on our strategic priorities, including stabilizing 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 DTC capabilities, expanding our presence inChina through Prestige products and select Consumer Beauty brands, and establishing Coty as an industry leader in sustainability. The completion of the strategic Wella Transaction is a reflection of our intent to focus on our core go-to-market competencies and to simultaneously deleverage our balance sheet. Our recent issuances of the senior secured notes further demonstrate our commitment to improve the maturity profile of our debt. In addition, we note the completion onOctober 20, 2021 of the sale of a 9.4% stake in the Wella Business to KKR Aggregator in exchange for the redemption of Series B Preferred Stock. Additionally, onNovember 6, 2021 , Coty entered into a definitive agreement to sell an additional approximate 4.7% stake in Wella to KKR Aggregator in exchange for the redemption of approximately 56% of KKR Aggregator 's remaining convertible preferred shares in Coty, reducing the Company's total shareholding in Wella to 25.9%. The transaction is expected close onNovember 30, 2021 . These transactions reflected significant appreciation in Wella's value, illustrating the potential upside of the stand-alone business in the longer term.
COVID-19 Impacts Update
The COVID-19 pandemic has had material effects on all our product categories
across all segments and geographies. most markets have recently shown
encouraging signs of emergence from the pandemic; however, sporadic containment
measures and travel restrictions continue to impact volume trends in certain
markets. However, the recent loosening of social distancing protocols and the
gradual removal or reduction of travel restrictions in certain key markets have
contributed to increased demand and sales growth, with the Prestige segment and
the travel retail channel in particular experiencing positive volume trends over
the comparative period. We also continue to experience growth in e-commerce. Our
Consumer Beauty segment has also shown moderate signs of recovery. However, many
of our Consumer Beauty product categories continue to experience negative
effects on sales volume due to changes in consumer behavior as a result of the
pandemic and continued social distancing measures in certain regions.
As previously reported, we have implemented several key measures in response to
the COVID-19 pandemic which continue to be in place. We have also amplified our
Transformation Plan, discussed below, to address the potentially longer-lasting
impacts of the COVID-19, the intermittent lockdowns and possible economic
uncertainty resulting from COVID-19 that continue in many markets. We anticipate
the recovery to be non-linear until COVID-19 containment measures are
discontinued across all regions and normal consumer traffic resumes on a
consistent basis. We currently expect that any easing of containment measures
and recovery of the impacted sectors of the economy will be gradual and uneven,
as regions face
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resurgence of COVID-19 and related uncertainties, and the availability and
widespread distribution of a safe and effective vaccine varies across regions.
As a result, we anticipate that consumer spending habits and consumer confidence
will continue to shift, causing future sales and volume trends to be non-linear.
Further, risks of inflationary trends in certain markets and global supply chain
challenges may negatively affect our sales and operating performance. Currently,
we are mitigating these risks through effective financial management and
measures such as the use of alternative methods of transportation; 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. In
addition, as product life cycles shorten, results are driven primarily by
successfully developing, introducing and marketing new, innovative products.
Transformation Plan Update
As previously reported, we are implementing a comprehensive transformation agenda (the "Transformation Plan"), which aims to stabilize and accelerate revenue growth, improve our profitability through gross margin growth and cost control, optimize our operating model for speed and agility, accelerate e-commerce and digital growth, and deleverage our balance sheet. This Transformation Plan is designed to adjust our cost base to allow us to exit the post-COVID recovery phase as a financially and operationally stronger, more nimble company, which is well positioned to capture growth opportunities. We are continually reviewing ways to accelerate and amplify the transformation of the Company, including through the implementation of additional initiatives in connection with our Transformation Plan. These organizational, business and structural changes are still being operationalized, which introduces additional risk and complexity as we roll out several initiatives simultaneously, including the ongoing obligations under theTSA .
Other Matters
As previously disclosed, our CODM has been in the process of finalizing her organization structure and how she will assess performance, and we have concurrently evaluated the potential impact to our segment reporting. Based on this evaluation, we have determined that it is appropriate to realign our reportable segments to a principally product category-based structure, comprised of a Prestige business segment and a Consumer Beauty business segment beginning in the first quarter of fiscal 2022.
Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures for continuing operations andCoty Inc. including Adjusted operating income (loss), Adjusted EBITDA, Adjusted net income (loss), and Adjusted net income (loss) attributable toCoty Inc. to common stockholders (collectively, the "Adjusted Performance Measures"). The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. Despite the limitations of these non-GAAP financial measures, our management uses the Adjusted Performance Measures as key metrics in the evaluation of our performance and annual budgets and to benchmark performance of our business against our competitors. The following are examples of how these Adjusted Performance Measures are utilized by our management: •strategic plans and annual budgets are prepared using the Adjusted Performance Measures; •senior management receives a monthly analysis comparing budget to actual operating results that is prepared using the Adjusted Performance Measures; and •senior management's annual compensation is calculated, in part, by using some of the Adjusted Performance Measures. In addition, our financial covenant compliance calculations under our debt agreements are substantially derived from these Adjusted Performance Measures. Our management believes that Adjusted Performance Measures are useful to investors in their assessment of our operating performance and the valuation of the Company. In addition, these non-GAAP financial measures address questions we routinely receive from analysts and investors and, in order to ensure that all investors have access to the same data, our management has determined that it is appropriate to make this data available to all investors. The Adjusted Performance Measures exclude the impact of certain items (as further described below) and provide supplemental information regarding our operating performance. By disclosing these non-GAAP financial measures, our management intends to provide investors with a 39 -------------------------------------------------------------------------------- Table of Contents 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 toCoty Inc. and Adjusted net income attributable toCoty Inc. per common share are adjusted for certain interest and other (income) expense items and preferred stock deemed dividends, as described below, and the related tax effects of each of the items used to derive Adjusted net income as such charges are not used by our management in assessing our operating performance period-to-period. Adjusted Performance Measures reflect adjustments based on the following items: •Costs related to acquisition and divestiture activities: We have excluded acquisition- and divestiture-related costs and the accounting impacts such as those related to transaction costs and costs associated with the revaluation of acquired inventory in connection with business combinations because these costs are unique to each transaction. Additionally, for divestitures, we exclude write-offs of assets that are no longer recoverable and contract related costs due to the divestiture. The nature and amount of such costs vary significantly based on the size and timing of the acquisitions and divestitures, and the maturities of the businesses being acquired or divested. Also, the size, complexity and/or volume of past transactions, which often drives the magnitude of such expenses, may not be indicative of the size, complexity and/or volume of any future acquisitions or divestitures. •Restructuring and other business realignment costs: We have excluded costs associated with restructuring and business structure realignment programs to allow for comparable financial results to historical operations and forward-looking guidance. In addition, the nature and amount of such charges vary significantly based on the size and timing of the programs. By excluding the referenced expenses from our non-GAAP financial measures, our management is able to further evaluate our ability to utilize existing assets and estimate their long-term value. Furthermore, our management believes that the adjustment of these items supplement 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 supplement 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 supplement 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. •Loss/(Gain) on divestitures: We have excluded the impact of Loss/(gain) on divestitures as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of divestitures. Our management believes that the adjustment of these items supplement 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 40 -------------------------------------------------------------------------------- Table of Contents 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 supplement 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 write-off of deferred financing fees and discounts that resulted from the pay down of our term debt from the proceeds of the Wella sale, due to the requirements of the 2018 Coty Credit Agreement, as amended. Our management believes these costs do not reflect our underlying ongoing business, and the adjustment of such costs helps investors and others compare and analyze performance from period to period. We have also 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. •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 non-controlling 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 Exchange Agreement from our calculation of adjusted net income attributable toCoty Inc. These deemed dividends are nonmonetary in nature 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 scale of the combined company by evaluating consolidated and segment financial metrics; •the expansion of product offerings by evaluating segment, brand, and geographic performance and the respective strength of the brands; •the evaluation of share expansion in categories and geographies; •the earnings per share accretion and substantial incremental free cash flow generation providing financial flexibility for us; and •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. Constant Currency We operate on a global basis, with the majority of our net revenues generated outside of theU.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 thanU.S. dollars intoU.S. dollars using prior year foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information we present may not be comparable to similarly titled measures reported by other companies. Basis of Presentation of Acquisitions, Divestitures and Terminations 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 41 -------------------------------------------------------------------------------- Table of Contents 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. As the sale of the Wella Business was completed onNovember 30, 2020 , no net revenues, operating expenses, or net income from discontinued operations were recorded in the three months endedSeptember 30, 2021 . Financial results for the Wella Business for fiscal year 2021 are presented as discontinued operations. Unless otherwise noted, the following section pertains to the results of continuing operations. THREE MONTHS ENDEDSEPTEMBER 30, 2021 AS COMPARED TO THREE MONTHS ENDEDSEPTEMBER 30, 2020 NET REVENUES In the three months endedSeptember 30, 2021 , net revenues increased 22%, or$247.6 , to$1,371.7 from$1,124.1 in the three months endedSeptember 30, 2020 , reflecting an increase in unit volume of 2%, a positive price and mix impact of 19%, and a positive foreign currency exchange translation impact of 1%. The overall increase in net revenues primarily reflects the reopening of stores across regions and increased leisure travel due to reduced COVID restrictions. A number of countries in theAsia Pacific region continued to experience rolling lockdowns; however, inChina these lockdowns were generally of a shorter duration and confined to certain localities. The market reopening had a favorable impact on both the Prestige and Consumer Beauty segments, with the highest impact on the Prestige segment. The Prestige segment also benefited from various strong and successful launches such as Gucci Flora,Burberry Hero , CK Defy,Tiffany Rose Gold , and the relaunch of Kylie cosmetics. In addition, the growth of e-commerce and continued expansion in theU.S. andChina contributed to the net revenue increase. Net Revenues by Segment Three Months Ended September 30, (in millions) 2021 2020 Change % NET REVENUES Prestige$ 870.7 $ 644.4 35 % Consumer Beauty 501.0 479.7 4 % Total$ 1,371.7 $ 1,124.1 22 % Prestige In the three months endedSeptember 30, 2021 , net revenues from the Prestige segment increased 35%, or$226.3 to$870.7 compared to$644.4 in the three months endedSeptember 30, 2020 , reflecting an increase in unit volume of 28%, a positive foreign currency exchange translation impact of 1%, and a positive price and mix impact of 6%. This increase in net revenues primarily reflects: (i)an increase in net revenues from the travel retail business as many localities, particularly inNorth America ,Europe , andChina , have reduced travel restrictions and reopened for leisure travel as they emerge from the COVID-19 pandemic; (ii)an increase in net revenues from the new launches of Gucci Flora,Burberry Hero , CK Defy,Tiffany Rose Gold , and the global relaunch of Kylie cosmetics, as well as the continued success ofMarc Jacobs Perfect , Gucci Guilty, and Gucci Makeup; (iii)an increase in net revenues due to growth of e-commerce across the regions, distribution expansion inChina , and additional shelf space in theU.S. retail stores; and (iv)an increase in net revenues in the Russian market due to the resolution of a dispute with a primary distributor, which negatively impacted net revenues in the prior year. These increases in net revenue were partially offset by: (i)lower net revenues due to strategic initiatives to reduce sales through lower priced channels; and (ii)lower net revenues related to Kylie skin products due to less innovation in the current fiscal year. 42 -------------------------------------------------------------------------------- Table of Contents Consumer Beauty In the three months endedSeptember 30, 2021 , net revenues from the Consumer Beauty segment increased 4%, or$21.3 , to$501.0 from$479.7 in the three months endedSeptember 30, 2020 , reflecting a positive price and mix impact of 3%, and a positive foreign currency exchange translation impact of 1%. The increase in net revenues primarily reflects: (i)an increase in net revenues due to market recovery from COVID-19, increasing customer demand and store traffic, which positively impacted all brands within the segment. The highest impacts were seen in CoverGirl andMax Factor . Additionally, new brand positioning and enhanced support for these brands contributed to the net revenue increase. The sales volume increase as a result of COVID-19 recovery was partially offset by a decrease in sales volume inBrazil , due to a recent price increase resulting in lower orders; (ii)an increase in net revenues from adidas due to a strategic focus to expand the brand inChina ; and (iii)an incremental increase in net revenues fromMax Factor inChina as a result of additional sell through trend compared to the prior comparative period. These increases in net revenue were partially offset by lower net revenues due to strategic initiatives to reduce sales through lower priced channels. COST OF SALES In the three months endedSeptember 30, 2021 , cost of sales increased 9%, or$39.9 , to$504.8 from$464.9 in the three months endedSeptember 30, 2020 . Cost of sales as a percentage of net revenues decreased to 36.8% in the three months endedSeptember 30, 2021 from 41.4% in the three months endedSeptember 30, 2020 , resulting in a gross margin increase of approximately 460 basis points, primarily reflecting: (i)approximately 230 basis points related to positive product and category mix associated with increased contribution from higher margin Prestige products, as well as reduced sales of products through lower priced channels; (ii)approximately 120 basis points related to decreased manufacturing overhead costs and variable costs due to increased manufacturing efficiencies and improvements in productivity; (iii)approximately 100 basis points related to decreased excess and obsolescence expense on inventory due to higher than normal costs in the prior year as a result of the COVID-19 pandemic, as well as improvements in the current fiscal year in forecasting sales and improved focus on planning for new products; and (iv)approximately 50 basis points related to price increases within our product portfolio. These increases were partially offset by: (i)approximately 40 basis points related to inflation in material costs; (ii)approximately 20 basis points related to an unfavorable mix of Prestige brands with higher royalty rates; and (iii)approximately 10 basis points related to higher freight expenses due to rising global logistics costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In the three months endedSeptember 30, 2021 , selling, general and administrative expenses increased 33%, or$192.9 , to$776.3 from$583.4 in the three months endedSeptember 30, 2020 . Selling, general and administrative expenses as a percentage of net revenues increased to 56.6% in the three months endedSeptember 30, 2021 from 51.9% in the three months endedSeptember 30, 2020 , or approximately 470 basis points. This increase primarily reflects: (i)740 basis points in stock-based compensation primarily related to the CEO grant made onJune 30, 2021 ; (ii)520 basis points due to increase in advertising and consumer promotional costs related to support for certain key brands and product launches; and (iii)60 basis points related to higher bad debt expense. These increases were partially offset by the following decreases: (i)660 basis points in administrative costs primarily due to a decrease in compensation related to a reduction in employee headcount; (ii)120 basis points related to favorable transactional impacts from our exposure to foreign currency exchange fluctuations; and (iii)70 basis points related to lower logistics costs as a percentage of net revenue. 43 -------------------------------------------------------------------------------- Table of Contents OPERATING INCOME (LOSS) In the three months endedSeptember 30, 2021 , operating income was$17.2 compared to a loss of$66.0 in the three months endedSeptember 30, 2020 . Operating income as a percentage of net revenues, increased to 1.3% in the three months endedSeptember 30, 2021 as compared to an operating loss as a percentage of net revenues of 5.9% in the three months endedSeptember 30, 2020 . The improved operating margin is largely driven by a reduction in fixed costs, higher sales volume within the Prestige segment, lower cost of goods sold as a percentage of net revenues, a decrease in acquisition and divestiture related expenses, reduced restructuring expense, and lower amortization expense, partially offset by higher stock-based compensation and an increase in advertising and consumer promotional costs. Operating Income by Segment Three Months Ended September 30, (in millions) 2021 2020 Change % Operating income (loss) Prestige$ 132.1 $ 34.0 >100% Consumer Beauty 11.4 (13.7) >100% Corporate (126.3) (86.3) (46) % Total$ 17.2 $ (66.0) >100% Prestige In the three months endedSeptember 30, 2021 , operating income for Prestige was$132.1 compared to income of$34.0 in the three months endedSeptember 30, 2020 . Operating margin increased to 15.2% of net revenues in the three months endedSeptember 30, 2021 as compared to 5.3% in the three months endedSeptember 30, 2020 , driven by higher sales volume, a reduction in fixed costs, and a decrease in amortization expense, partially offset by an increase in advertising and consumer promotional costs. Consumer Beauty In the three months endedSeptember 30, 2021 , operating income for Consumer Beauty was$11.4 compared to loss of$13.7 in the three months endedSeptember 30, 2020 . Operating margin increased to 2.3% of net revenues in the three months endedSeptember 30, 2021 as compared to (2.9)% in the three months endedSeptember 30, 2020 , driven by lower cost of goods sold as a percentage of net revenues and a reduction in fixed costs, partially offset by an increase in advertising and consumer promotional costs. Corporate Corporate primarily includes income and expenses not directly relating to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance of the segments. In the three months endedSeptember 30, 2021 , the operating loss for Corporate was$126.3 compared to a loss of$86.3 in the three months endedSeptember 30, 2020 , as described under "Adjusted Operating Income (Loss) for Continuing Operations" below. The increase in the operating loss for Corporate was primarily driven by an increase in share-based compensation expense, partially offset by a decrease in acquisition and divestiture related expenses and lower restructuring expense. Adjusted Operating Income (Loss) by Segment 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: 44
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Three Months Ended
Reported Adjusted
(in millions) (GAAP) Adjustments (a) (Non-GAAP)
Operating income (loss)
Prestige $ 132.1 $ 44.9 $ 177.0
Consumer Beauty 11.4 12.1 23.5
Corporate (126.3) 126.3 - Total$ 17.2 $ 183.3$ 200.5
Three Months Ended
Reported Adjusted
(in millions) (GAAP) Adjustments (a) (Non-GAAP)
Operating income (loss)
Prestige $ 34.0 $ 51.7 $ 85.7
Consumer Beauty (13.7) 13.7 -
Corporate (86.3) 86.3 -
Total $ (66.0) $ 151.7 $ 85.7
(a)See a reconciliation of reported operating income to adjusted operating
income and a description of the adjustments under "Adjusted Operating Income
(Loss) for Continuing Operations" below. All adjustments are reflected in
Corporate, except for amortization and asset impairment charges on goodwill,
indefinite-lived intangible assets, and finite-lived intangible assets, which
are reflected in the Prestige and Consumer Beauty segments.
Adjusted Operating Income (Loss) and Adjusted EBITDA for Continuing Operations
We believe that adjusted operating income (loss) further enhances an investor's
understanding of our performance. See "Overview-Non-GAAP Financial Measures."
Reconciliation of reported operating income to adjusted operating income is
presented below:
Three Months Ended
September 30,
(in millions) 2021 2020 Change %
Reported operating income (loss) $ 17.2 $ (66.0) >100%
% of net revenues 1.3 % (5.9) %
Amortization expense 57.0 65.4 (13) %
Restructuring and other business realignment costs 14.1 34.4 (59) %
Stock-based compensation 108.2 5.6 >100%
Costs related to acquisition and divestiture
activities 4.0 46.3 (91) %
Total adjustments to reported operating income 183.3 151.7 21 %
Adjusted operating income $ 200.5 $ 85.7 >100%
% of net revenues 14.6 % 7.6 %
Adjusted depreciation 78.0 80.9 (4) %
Adjusted EBITDA $ 278.5 $ 166.6 67 %
% of net revenues 20.3 % 14.8 %
In the three months ended September 30, 2021 , adjusted operating income
increased $114.8 to $200.5 from $85.7 in the three months ended September 30,
2020 . Adjusted operating margin increased to 14.6% of net revenues in the three
months ended September 30, 2021 from 7.6% in the three months ended September
30, 2020 . In the three months ended September 30, 2021 , adjusted EBITDA
increased $111.9 to $278.5 from $166.6 in the three months ended September 30,
2020 . Adjusted EBITDA margin increased to 20.3% of net revenues in the three
months ended September 30, 2021 from 14.8% in the three months ended September
30, 2020 , primarily driven by a reduction in fixed costs and lower cost of goods
sold as a percentage of net revenues, partially offset by an increase in
advertising and consumer promotional costs.
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Amortization Expense
In the three months ended September 30, 2021 , amortization expense decreased to
$57.0 from $65.4 in the three months ended September 30, 2020 . 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. In the
three months ended September 30, 2020 , amortization expense of $51.7 and $13.7
was reported in the Prestige and Consumer Beauty segments, respectively. The
decrease was primarily driven by finite intangible assets that are fully
amortized as of fiscal 2021, partially offset by amortization for the KKW
acquisition completed in the third quarter of fiscal 2021.
Acquisition and Divestiture Activities
In the three months ended September 30, 2021 we incurred $4.0 of costs related
to acquisition and divestiture activities. These costs were primarily associated
with the Wella Transaction.
In the three months ended September 30, 2020 , we incurred $46.3 of costs related
to acquisition and divestiture activities. These costs were primarily associated
with the Wella Transaction.
In all reported periods, all costs related to acquisition and divestiture
activities were reported in Corporate.
Restructuring and Other Business Realignment Costs
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 $381.1 of cash costs life-to-date as of September 30, 2021 , which have
been recorded in Corporate.
In the three months ended September 30, 2021 , we incurred restructuring and
other business structure realignment costs of $14.1 , as follows:
•We incurred restructuring costs of $12.4 primarily related to the
Transformation Plan, included in the Condensed Consolidated Statements of
Operations; and
•We incurred business structure realignment costs of $1.7 primarily related to
the Transformation Plan and certain other programs. This amount includes $(1.0)
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, 2020 , we incurred restructuring and
other business structure realignment costs of $34.4 as follows:
•We incurred restructuring costs of $30.1 primarily related to the
Transformation Plan, included in the Condensed Consolidated Statements of
Operations; and
•We incurred business structure realignment costs of $4.3 primarily related to
the Transformation Plan and certain other programs. This amount includes $4.3
reported in selling, general and administrative expenses, and nil reported in
Cost of sales in the Condensed Consolidated Statement of Operations.
In all reported periods, all restructuring and other business realignment costs
were reported in Corporate.
Stock-Based Compensation
In the three months ended September 30, 2021 , stock-based compensation was
$108.2 as compared with $5.6 in the three months ended September 30, 2020 . The
increase in stock-based compensation is primarily related to the CEO grant made
on June 30, 2021 .
In all reported periods, all costs related to stock-based compensation were
reported in Corporate.
Adjusted Depreciation Expense
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, 2020 , adjusted
depreciation expense of $34.1 and $46.8 was reported in the Prestige and
Consumer Beauty segments, respectively.
INTEREST EXPENSE, NET
In the three months ended September 30, 2021 , net interest expense was $59.8 as
compared with $62.1 in the three months ended September 30, 2020 . This decrease
is primarily due to the lower debt balance, partially offset by a higher average
interest rate in the current period.
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OTHER INCOME, NET
In the three months ended September 30, 2021 , other income, net was $386.1 as
compared with $5.8 in the three months ended September 30, 2020 . This increase
is primarily due to a favorable adjustment of $390.0 related to an unrealized
gain in the Wella investment.
INCOME TAXES
The effective income tax rate for the three months ended September 30, 2021 and
2020 was 33.4% and 200.2%, respectively. The positive effective tax rate for the
three months ended September 30, 2021 results from reporting income before taxes
and a provision for income taxes. The positive effective tax rate for the three
months ended September 30, 2020 results from reporting losses before income
taxes and a benefit for income taxes. The change in the effective tax rate for
the three months ended September 30, 2021 , as compared with the three months
ended September 30, 2020 , is primarily due to the limitation on the
deductibility of executive stock compensation in the current period as well as a
benefit related to a change in our main principal location of $220.5 recorded in
the prior period.
The effective income tax rates vary from the U.S. federal statutory rate of 21%
due to the effect of (i) jurisdictions with different statutory rates, (ii)
adjustments to our unrecognized tax benefits and accrued interest, (iii)
non-deductible expenses, (iv) audit settlements and (v) valuation allowance
changes. Our effective tax rate could fluctuate significantly and could be
adversely affected to the extent earnings are lower than anticipated in
countries that have lower statutory rates and higher than anticipated in
countries that have higher statutory rates.
Reconciliation of Reported (Loss) Income Before Income Taxes to Adjusted Income
Before Income Taxes and Effective Tax Rates:
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
(Loss) (Loss)
Income Income
Before (Benefit) Before
Income Provision for Effective Tax Income Provision for Effective Tax
(in millions) Taxes Income Taxes Rate Taxes Income Taxes Rate
Reported (loss) before income taxes
33.4 %$ (122.3) $ (244.9) 200.2 % Adjustments to reported operating income (a) 183.3 151.7 Change in fair value of investment in Wella Business (c) (390.0) - Other adjustments (d) 0.2 (5.3) Total Adjustments (b) (e) (206.5) (74.8) 146.4 250.9
Adjusted income before income taxes
29.1 % $ 24.1 $ 6.0 24.9 %
(a)See a description of adjustments under "Adjusted Operating Income (Loss) for
Continuing Operations."
(b)The tax effects of each of the items included in adjusted income are
calculated in a manner that results in a corresponding income tax
expense/provision for adjusted income. In preparing the calculation, each
adjustment to reported income is first analyzed to determine if the adjustment
has an income tax consequence. The provision for taxes is then calculated based
on the jurisdiction in which the adjusted items are incurred, multiplied by the
respective statutory rates and offset by the increase or reversal of any
valuation allowances commensurate with the non-GAAP measure of profitability.
(c)The amount represents the unrealized (gain) loss recognized for the change in
fair value of the investment in Wella.
(d)For the three months ended September 30, 2021 , this primarily represents the
loss from equity investment in KKW. For the three months ended September 30,
2020 , this primarily represents the pension curtailment gain.
(e)The total tax impact on adjustments in the prior period includes a $220.5
benefit recorded as the result of a tax rate differential on the deferred taxes
recognized on the transfer of assets and liabilities, following the relocation
of our main principal location from Geneva to Amsterdam on July 1, 2020 .
The adjusted effective tax rate was 29.1% for the three months ended September
30, 2021 compared to 24.9% for the three months ended September 30, 2020 . The
differences were primarily due to the jurisdictional mix of income.
DISCONTINUED OPERATIONS
As the sale of the Wella Business was completed on November 30, 2020 , no net
revenues, operating expenses, or net income from discontinued operations were
recorded in the three months ended September 30, 2021 . As we finalize
post-closing adjustments to the purchase consideration for working capital and
other contractually specified items over the coming months, there may be further
adjustments to the purchase price and loss on sale. The Company anticipates
resolution of any further purchase price adjustments in fiscal 2022.
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NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC.
Net income attributable to Coty Inc. was $226.0 in the three months ended
September 30, 2021 as compared to an income of $221.4 in the three months ended
September 30, 2020 . The increase in the income is primarily driven by higher
operating income in the current year, and a favorable adjustment of $390.0
related to an unrealized gain in the Wella investment, partially offset by a tax
benefit of $220.5 in the first quarter of fiscal 2021 which was the result of a
tax rate differential on the deferred taxes recognized on the transfer of assets
and liabilities, following the relocation of our main principal location from
Geneva to Amsterdam , and the net income recognized from discontinued operations
in the prior fiscal year.
We believe that adjusted net income (loss) attributable to Coty Inc. provides an
enhanced understanding of our performance. See "Overview-Non-GAAP Financial
Measures."
Three Months Ended
September 30,
(in millions) 2021 2020 Change %
Net income from Coty Inc. net of noncontrolling
interests $ 226.0 $ 221.4 2 %
Convertible Series B Preferred Stock dividends (a) (123.0) (20.8) <(100%)
Reported net income attributable to Coty Inc. $ 103.0 $ 200.6 (49) %
% of net revenues 7.5 % 11.9 %
Adjustments to reported operating income (b) 183.3 153.1 20 %
Change in fair value of investment in Wella Business (c) (390.0)
- N/A
Adjustment to other expense (d) 0.2 (5.3) >100%
Adjustments to noncontrolling interests (e) (1.8) (1.2) (50) %
Change in tax provision due to adjustments to reported
net income attributable to
74.8 (255.9) >100%
Adjustment for deemed Series B Preferred Stock dividends related to the Exchange Agreement (a) (f)
93.6 - N/A
Adjusted net income attributable to Coty Inc. $ 63.1 $ 91.3 (31) %
% of net revenues 4.6 % 5.4 %
Per Share Data
Adjusted weighted-average common shares
Basic 777.6 763.9
Diluted (a) 787.7
763.9
Adjusted net income attributable toCoty Inc. per common share Basic$ 0.08 $ 0.12 Diluted (a)$ 0.08 $ 0.12 (a)Adjusted Diluted EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plans and the convertible Series B Preferred Stock. For both periods presented, the convertible Series B Preferred Stock was antidilutive. Accordingly, we excluded the convertible Series B Preferred Stock from the diluted shares and did not adjust the earnings for the related dividend. (b)See a description of adjustments under "Adjusted Operating Income (Loss) for Continuing Operations" (c)The amount represents the unrealized (gain) loss recognized for the change in fair value of the investment in Wella. (d)For the three months endedSeptember 30, 2021 , this primarily represents the loss from equity investment in KKW. For the three months endedSeptember 30, 2020 , this primarily represents the pension curtailment gain. (e)The amounts represent the after-tax impact of the non-GAAP adjustments included in Net (loss) income attributable to noncontrolling interests based on the relevant noncontrolling interest percentage in the Condensed Consolidated Statements of Operations. (f)This adjustment represents the deemed dividend from the Exchange Agreement onSeptember 30, 2021 . The deemed dividend is the result of carrying the Convertible Series B Preferred Stock at fair value. 48 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sources of funds include cash expected to be generated from operations, borrowings from issuance of debt and lines of credit provided by banks and lenders in theU.S. and abroad. Our cash flows are subject to seasonal variation throughout the year, including demands on cash made during our first fiscal quarter in anticipation of higher global sales during the second fiscal quarter and strong cash generation in the second fiscal quarter as a result of increased demand by retailers associated with the holiday season. Our principal uses of cash are to fund planned operating expenditures, capital expenditures, 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. OnNovember 30, 2020 , the Company completed the sale of the Wella Business. As part of the transaction, we received cash proceeds of$2,451.7 and retained a 40% stake in the business. In accordance with the 2018 Coty Credit Agreement, we utilized$2,015.5 of the net proceeds of the sale of the Wella Business to pay down our 2018 Coty Term A and B Facilities on a pro rata basis and reserved a maximum of$500.0 for reinvestment in the business ("the Reinvestment Balance"). If the Reinvestment Balance is not reinvested within twelve months, we are required to use the remainder to pay down our 2018 Coty Term A and B Facilities on a pro rata basis byDecember 2021 . OnSeptember 10, 2021 , KKR 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, the Investor completed the public secondary offering of 50,000,088 shares of Class A common stock. We did not receive any proceeds from the sale of the shares of Class A Common Stock by KKR. OnOctober 20, 2021 , the Company completed the sale of a 9.4% stake in the Wella Business to KKR in exchange for the redemption of 290,465 shares of Series B Preferred Stock, and$22.5 of unpaid dividends, reducing the Company's total shareholding in the Wella Business to approximately 30.6%. Additionally, onNovember 6, 2021 , Coty entered into a definitive agreement to sell an additional approximate 4.7% stake in Wella to KKR Aggregator in exchange for the redemption of approximately 56% of KKR Aggregator 's remaining convertible preferred shares in Coty, reducing the Company's total shareholding in Wella to 25.9%. The transaction is expected close onNovember 30, 2021 . Refer to Note 15-Equity and Convertible Preferred Stock. As ofNovember 5, 2021 , the Company has obtained binding commitments from lenders under the 2018 Coty Credit Agreement, as amended, to replace its two existing classes of revolving commitments, having an aggregate principal amount of$2,750.0 , with a single class of revolving commitments, having an aggregate principal amount of$2,000.0 . The resulting class of revolving commitments will have substantially the same terms as the new class of revolving commitments established pursuant to the 2021 Coty Revolving Credit Facility, including a maturity inApril 2025 . The Company expects the transaction to close in the second quarter of 2022, subject to the refinancing conditions. Our response to the impact of COVID-19 In response to the ongoing risks presented by the COVID-19 pandemic, we continue to utilize a number of measures to bolster our liquidity position and provide additional financial flexibility. Such measures include actively aligning operating expenses to the current state of the business, initiatives to improve cash flow and hiring and travel restrictions. We have also reduced advertising and consumer promotion costs for sales channels heavily impacted by the pandemic. However, as certain markets have reopened, we have increased these expenditures to bolster key brands and product launches. We will continue to actively manage our working capital to support our liquidity needs. Despite encouraging signs of recovery in the latter half of fiscal 2021 and continuing into the first quarter of fiscal 2022, the impact and duration of COVID-19 on our business continues to be uncertain. In addition, risks of inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. Currently, we are mitigating these risks through effective financial management and measures such as the use of alternative methods of transportation; however, such measures may not fully offset the impact to our operating performance. However, as a result of cash on hand and our plans to manage expenses, we believe we have sufficient liquidity and covenant headroom to meet our foreseeable business operating and recurring cash needs (including for debt service and capital expenditures). To address the potentially longer-lasting impacts of COVID-19, we have implemented a plan to reduce our cost base by the end of fiscal 2023, with additional plans for savings in fiscal 2024. This plan includes an adaptation of our supply network, organizational changes, renegotiation of purchasing and licensing agreements, as well as a reduction of certain discretionary expenses. 49
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Table of Contents Debt Management is in the process of deleveraging our company and improving the maturity mix of our debt. In the fourth quarter of fiscal 2021, we refinanced$900.0 of our dollar-denominated term loan debt and €700.0 million (approximately$833.3 as ofJune 30, 2021 ) of our euro-denominated term loan debt that were scheduled to mature in 2023 with new senior secured notes that mature in 2026. This improved our medium term liquidity. We used the net proceeds of these offerings to repay portions of the term loans outstanding under the existing credit facilities and to pay related premiums, fees and expenses thereto. As noted above, our Convertible Series B Preferred stock was converted and exchanged during the quarter which reduces our future commitment to preferred shareholders improving our ability to reduce our external debt. As we refinance our debt in order to extend maturing obligations, the applicable interest rates have been, and are likely to continue to be, higher than previous applicable interest rates, due in large part to prevailing macroeconomic conditions and our credit ratings at the time. Despite these higher interest rates, we expect that our interest expense will be favorably impacted by lower overall debt balances as we continue to deleverage. See Note 11-Debt in the notes to our Condensed Consolidated Financial Statements for additional information on our debt arrangements and prior period credit agreements. Factoring of Receivables From time to time, we supplement the timing of our cash flows through the factoring of trade receivables. In this regard, we have entered into factoring arrangements with financial institutions. The net amount utilized under the factoring facilities was$175.5 and$133.6 as ofSeptember 30, 2021 andJune 30, 2021 , respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to$264.2 and$191.2 during the three months endedSeptember 30, 2021 and 2020, respectively.
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