QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER
001-35964
COTY INC.
(Exact name of registrant as specified in its charter)
Delaware
13-3823358
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
350 Fifth Avenue,
New York,
NY
10118
(Address of principal executive offices)
(Zip Code)
(212) 389-7300
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.01 par value
COTY
New York Stock Exchange
At October 30, 2020, 765,902,896 shares of the registrant’s Class A Common Stock, $0.01 par value, were outstanding.
Trade receivables—less allowances of $56.5 and $57.3, respectively
521.7
440.1
Inventories
727.7
678.2
Prepaid expenses and other current assets
388.1
411.6
Current assets held for sale
4,763.4
4,613.1
Total current assets
6,976.2
6,495.0
Property and equipment, net
1,051.2
1,081.6
Goodwill
4,023.7
3,973.9
Other intangible assets, net
4,423.5
4,372.1
Operating lease right-of-use assets
335.4
371.4
Deferred income taxes
900.1
362.4
Other noncurrent assets
70.0
72.4
TOTAL ASSETS
$
17,780.1
$
16,728.8
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
1,086.3
$
1,190.3
Accrued expenses and other current liabilities
1,289.4
1,111.6
Short-term debt and current portion of long-term debt
195.4
188.3
Current operating lease liabilities
92.6
105.0
Income and other taxes payable
29.2
33.8
Current liabilities held for sale
985.1
956.7
Total current liabilities
3,678.0
3,585.7
Long-term debt, net
8,134.8
7,892.1
Long-term operating lease liabilities
289.2
317.4
Pension and other post-employment benefits
405.5
400.3
Deferred income taxes
479.9
175.1
Other noncurrent liabilities
305.0
334.5
Total liabilities
13,292.4
12,705.1
COMMITMENTS AND CONTINGENCIES (See Note 19)
CONVERTIBLE SERIES B PREFERRED STOCK,$0.01 par value; 1.0 shares authorized; 1.0 and 0.8 issued and 1.0 and 0.8 and outstanding, respectively, at September 30, 2020 and June 30, 2020
979.0
715.8
REDEEMABLE NONCONTROLLING INTERESTS
83.1
79.1
EQUITY:
Preferred Stock, $0.01 par value; 20.0 shares authorized, 1.5 issued and outstanding at September 30, 2020 and June 30, 2020
—
—
Class A Common Stock, $0.01 par value; 1,250.0 shares authorized, 831.2 and 830.6 issued and 765.7 and 765.1 outstanding, respectively, at September 30, 2020 and June 30, 2020
8.3
8.3
Additional paid-in capital
10,434.1
10,447.4
Accumulated deficit
(5,332.9)
(5,548.6)
Accumulated other comprehensive income
(462.1)
(456.2)
Treasury stock—at cost, shares: 65.5 at September 30, 2020 and June 30, 2020
(1,446.3)
(1,446.3)
Total Coty Inc. stockholders’ equity
3,201.1
3,004.6
Noncontrolling interests
224.5
224.2
Total equity
3,425.6
3,228.8
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
$
17,780.1
$
16,728.8
See notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(Unaudited)
1. DESCRIPTION OF BUSINESS
Coty Inc. and its subsidiaries (collectively, the “Company” or “Coty”) manufacture, market, sell and distribute branded beauty products, including fragrances, color cosmetics, hair care products 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 2021” refer to the fiscal year ending June 30, 2021. 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.
On June 1, 2020, the Company entered into a definitive agreement with KKR Rainbow Aggregator (Asset) GP LLC (along with KKR Rainbow Aggregator L.P., "KKR"), regarding a strategic transaction (“Wella Transaction”) for the sale of Coty’s Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands, (together, the “Wella Business”), valuing the businesses at $4,300.0 on a cash- and debt-free basis. KKR will own 60% of this separately managed entity and Coty will own the remaining 40%. As a result of the above mentioned agreement, the Company’s financial statements present the Wella Business to be sold as discontinued operations and the related assets and liabilities as held for sale. Additionally, the Company recast its segment results due to the discontinued operations presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include the Company’s consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited interim Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended June 30, 2020. 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, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2021. 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
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, 2020 and June 30, 2020, the Company had restricted cash of $39.6 and $43.7, respectively, included in Restricted cash in the Condensed Consolidated Balance Sheets. The Restricted cash balance as of September 30, 2020 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, 2020. Restricted cash is included as a component of Cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows.
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 market value of inventory, the fair value of acquired assets and liabilities associated with acquisitions, 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.
Tax Information
The effective income tax rate for the three months ended September 30, 2020 and 2019 was 200.2% and 1,300.0%. The positive effective tax rate for both periods 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, 2020, as compared with the three months ended September 30, 2019, is primarily due to a preliminary benefit of $220.5 recorded in the current period and the US GAAP treatment of the Younique disposition in the prior period. The benefit recorded in the current period is the result of a tax rate differential on the deferred taxes recognized on the transfer of assets and liabilities, following the relocation of the Company's main principal location from Geneva to Amsterdam. This amount will be finalized when negotiations with the tax authorities are completed.
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, 2020 and June 30, 2020, the gross amount of UTBs was $281.2 and $277.9, respectively. As of September 30, 2020, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $154.5. As of September 30, 2020 and June 30, 2020, the liability associated with UTBs, including accrued interest and penalties, was $175.3 and $170.7, respectively, which was recorded in Income and other taxes payable and Other non-current 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 $1.4 for the three months ended September 30, 2020 and 2019, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020 was $20.8 and $19.3, respectively. On the basis of the information available as of September 30, 2020, it is reasonably possible that a decrease of up to $36.0 in UTBs may occur within 12 months as a result of projected resolutions of global tax examinations and a potential lapse of the applicable statutes of limitations.
Factoring of Receivables
The Company factors a portion of its trade receivables with unrelated third-party factoring companies on both a recourse and non-recourse basis. The Company has entered into factoring agreements with financial institutions and eligible trade receivables are purchased by the relevant financial institution for cash at net invoice value less a factoring fee. Pursuant to the factoring agreements, the Company acts as collections agent for the financial institution and is responsible for the collection and remittance to the financial institution of all customer payments related to trade receivables factored under these arrangements. For certain customer receivables factored, the Company will retain a recourse obligation of up to 10 percent of the respective invoice’s net invoice value, payable to the financial institution if the customer’s payment is not received by the contractual due date. The Company accounts for trade receivable transfers under the factoring agreements as sales and derecognizes the sold receivables from the Condensed Consolidated Balance Sheets. The fair value of sold receivables approximated their book value due to their short-term nature. The Company estimated that the fair value of its servicing responsibilities was not material. Cash received from the selling of receivables under the factoring arrangements is presented as a change in trade receivables within the operating activities section of the Condensed Consolidated Statements of Cash Flows.
In June 2016, the FASB issued ASU No. 2016-13 and ASU 2018-19, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires that a financial asset (or a group of financial assets) measured at an amortized cost basis be presented at the net amount expected to be collected. This approach to estimating credit losses applies to most financial assets measured at amortized cost and certain other instruments, including but not limited to, trade and other receivables. The Company adopted this guidance in the first quarter of fiscal 2021 and the cumulative effect adjustment from adoption was immaterial to the Company's Condensed Consolidated Financial Statements. On initial recognition, the Company recorded an after-tax cumulative effect decrease to retained earnings of $5.7 ($6.6 pre-tax) as of the beginning of fiscal 2021.
On July 1, 2020, the Company adopted Accounting Standards Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements. The adoption of this new standard had no impact on the Company's Condensed Consolidated Financial Statements.
3.DISCONTINUED OPERATIONS
On June 1, 2020, the Company entered into a definitive agreement with Rainbow UK Bidco Limited (“KKR Bidco”) , regarding a strategic transaction for the sale of Coty’s Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands (together, the “Wella Business”), valuing the businesses at $4,300.0 on a cash- and debt-free basis. KKR will own 60% of this separately managed business and Coty will own the remaining 40%. The transaction is expected to close during the second quarter of fiscal 2021.
On June 1, 2020, the Company and KKR Bidco also entered into a Separation Agreement, which sets forth the terms and conditions on which the Wella Business will be separated from the Company.
In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Wella Business are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Additionally, the Wella Business assets and liabilities which will be included in the sale are presented as assets and liabilities held for sale in the Condensed Consolidated Balance Sheets. The Wella Business historically comprised the Professional Beauty reportable segment and the Retail Hair business was historically included in the Americas, EMEA and Asia Pacific reportable segments.
The following table has selected financial information included in Net income from discontinued operations for the Wella Business.
Three Months Ended September 30,
2020
2019
Net revenues
$
566.4
$
531.6
Cost of sales
181.0
176.5
Gross profit
385.4
$
355.1
Selling, general and administrative expenses
240.0
265.9
Amortization expense
—
26.0
Restructuring costs
—
1.2
Operating income
145.4
62.0
Interest expense, net (a)
11.8
14.3
Other (income) expense, net
0.1
(0.1)
Income from discontinued operations before income taxes
133.5
47.8
Income tax on discontinued operations
28.8
8.3
Net income from discontinued operations
$
104.7
$
39.5
(a) Interest expense was allocated to the discontinued operations due to a requirement in our Credit Agreement that cash generated from the divestiture of any businesses through March 31, 2021 will be utilized to reduce our debt, other than a maximum of $500.0 that will be used to fund operations.
The following is selected financial information included in cash flows from discontinued operations for the Wella Business held for sale:
Three Months Ended September 30,
2020
2019
NON-CASH OPERATING ITEMS
Depreciation and amortization
$
—
$
36.3
CASH FLOW FROM INVESTING ACTIVITIES
Capital Expenditures
$
4.7
$
7.9
The major components of assets and liabilities of the Wella Business held for sale are provided below. The assets and liabilities held for sale will evolve up to the closing date for normal operational changes as well as contractual adjustments
including the finalization of local implementation agreements impacting the separation of the Wella Business in various countries.
September 30, 2020(a)
June 30,
2020(a)
ASSETS
Trade receivables
$
239.3
$
168.0
Inventories
252.8
269.2
Prepaid expenses and other current assets
138.1
134.9
Property and equipment, net
246.1
241.3
Goodwill
900.4
874.8
Other intangible assets, net
2,801.1
2,770.4
Operating lease right of use asset
115.4
73.4
Deferred income taxes
21.8
25.5
Other noncurrent assets
48.4
55.6
TOTAL ASSETS HELD FOR SALE
$
4,763.4
$
4,613.1
LIABILITIES
Accounts payable
$
111.9
$
128.3
Accrued expenses and other current liabilities
233.4
236.4
Current operating lease liabilities
24.0
17.2
Income and other taxes payable
17.5
15.8
Long-term operating lease liabilities
92.9
65.9
Noncurrent deferred tax liabilities
322.3
324.8
Pension and other post-employment benefits
154.0
140.8
Other noncurrent liabilities
29.1
27.5
TOTAL LIABILITIES HELD FOR SALE
$
985.1
$
956.7
(a) The Company expects that the transaction will close in the second quarter of fiscal 2021. As such, for the periods ending September 30, 2020 and June 30, 2020, all assets and liabilities held for sale are reported as current assets and liabilities held for sale on the Consolidated Balance Sheets.
4. SEGMENT REPORTING
Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company has designated its Chief Executive Officer as the CODM.
Due to discontinued operations presentation, the Company’s three remaining segments for its continuing operations are: Americas, EMEA, and Asia Pacific, excluding the discontinued retail hair operations in each segment. Americas, EMEA, and Asia Pacific include the businesses focused on prestige fragrances, prestige skin care, prestige cosmetics, mass color cosmetics, mass fragrance, mass skin care and body care, and are supported by central marketing teams.
Certain income and shared costs and the results of corporate initiatives are managed by Corporate. Corporate primarily includes 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. The results of Younique, LLC ("Younique") are included in "Other." See Note 5—Business Combinations, Asset Acquisitions and Divestitures for information on Younique and the divestiture, which was completed on September 16, 2019. 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 9—Goodwill and Other Intangible Assets, net.
Loss from continuing operations before income taxes
$
(122.3)
$
(1.4)
Presented below are the percentage of revenues associated with the Company’s product categories:
Three Months Ended September 30,
PRODUCT CATEGORY
2020
2019
Fragrance
55.8
%
58.0
%
Color Cosmetics
30.2
29.4
Hair Care
0.3
0.3
Skin & Body Care
13.7
12.3
Total Coty Inc.
100.0
%
100.0
%
5. BUSINESS COMBINATIONS, ASSET ACQUISITIONS AND DIVESTITURES
Business Combinations and Asset Acquisitions
King Kylie Transaction
On November 18, 2019, the Company entered into a purchase agreement (the “Purchase Agreement”) with King Kylie, LLC ("King Kylie"), a Delaware limited liability company, and the other parties listed as signatories to the Purchase Agreement (the “Seller Group Parties”), to build and further expand King Kylie’s brands globally. Pursuant to the Purchase Agreement, on January 6, 2020, the Company acquired 51% of the equity interests in King Kylie from the applicable Seller Group Parties for a base purchase price of $600.0 in cash. In addition, as contemplated by the Purchase Agreement, the Company entered into a Collaboration Agreement, pursuant to which, in exchange for a marketing fee and a license fee, it received the right and license to manufacture, advertise, promote, distribute and sell certain products of King Kylie and use certain intellectual property owned by or licensed to King Kylie in connection with the development, manufacture, labelling, packaging, advertising, display, distribution and sale of such products.
The Company estimated the preliminary fair value of acquired assets, liabilities and noncontrolling interest as of the date of acquisition based on information currently available. The preliminary fair values are substantially complete, with the exception of primarily accrued expenses and goodwill. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The following table summarizes the estimated allocation of the purchase price to the net assets as of the January 6, 2020 acquisition date:
Estimated fair value (a)
Measurement
period
adjustments (b)
Estimated fair value as adjusted
Estimated useful life (in years)
Cash and cash equivalents
$
7.8
—
7.8
Receivables
1.0
—
1.0
Inventories
2.5
—
2.5
Property, plant and equipment
3.6
—
3.6
Collaboration agreement
369.0
—
369.0
20
License agreement
280.0
—
280.0
20
Customer relationships
27.0
—
27.0
1.5
Goodwill
128.6
—
128.6
Indefinite
Net other liabilities
(6.6)
—
(6.6)
Total value
$
812.9
—
812.9
Noncontrolling interest
212.9
212.9
Total purchase price
$
600.0
$
600.0
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020.
(b) The Company recorded no measurement period adjustments in the first quarter of fiscal 2021.
Goodwill is not expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from integrating King Kylie’s products into the Company’s existing manufacturing and sales channels.
The fair value of the noncontrolling interest was estimated using the income approach applied to the projected cash flows of King Kylie. As King Kylie is a private company, the fair value measurement was based on significant inputs that are not observable in the market and thus, represent a Level 3 measurement.
Business Divestitures
Younique
On August 27, 2019, the Company entered into a Contribution and Redemption Agreement to transfer all of its membership interest in Foundation, which held the net assets of Younique, to an existing noncontrolling interest holder. On September 16, 2019 (the “Closing Date”), the Company completed the sale of all of its membership interest in Foundation. Consideration received at the Closing Date consisted of $50.0 cash and a secured promissory note with a face value of $27.9. The initial estimate of the pre-tax gain of $84.5 was included in Gain on divestitures and sale of brand assets in the Condensed Consolidated statements of Operations for the three months ended September 30, 2019. During the fiscal year June 30, 2020, the Company recorded a final pre-tax gain of $111.5 resulting from the sale. The final pre-tax gain is included in (Gain) loss on divestitures and sale of brand assets in the Consolidated Statements of Operations for the fiscal year ended June 30, 2020.
Younique’s operations are included within Other and its results of operations through the Closing Date are included in the Consolidated Statements of Operations for the three months ended September 30, 2019.
6. ACQUISITION AND DIVESTITURE-RELATED COSTS
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 acquisition-related costs of $0.0 and $0.0 for the three months ended September 30, 2020 and 2019, respectively.
Divestiture-related costs, which are expensed as incurred, represent non-restructuring costs directly related to divesting and selling an entity, 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, we include write-offs of assets that are no longer recoverable and contract related costs due to the divestiture. The Company recognized divestiture-related costs of $46.3 and $0.0 for the three months ended September 30, 2020 and 2019, respectively. Divestiture-related costs incurred during the three months ended September 30, 2020 were primarily related to the definitive agreement with KKR regarding the strategic transaction for the sale of the Wella Business. See Note 1—Description of Business for information on the strategic transaction.
These costs have been recorded in Acquisition and divestiture-related costs in the Condensed Consolidated Statements of Operations.
7. RESTRUCTURING COSTS
Restructuring costs for the three months ended September 30, 2020 and 2019 are presented below:
Three Months Ended September 30,
2020
2019
Transformation Plan
$
31.2
$
7.6
Other Restructuring
(1.1)
(2.8)
Total
$
30.1
$
4.8
Transformation Plan
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 $187.8 related to approved initiatives through September 30, 2020, which have been recorded in Corporate.
Over the next three fiscal years, the Company expects to incur approximately $140.0 of additional restructuring charges pertaining to the approved actions, primarily related to employee termination benefits, contract terminations and other exit-related costs.
The following table presents aggregate restructuring charges for the program:
Severance and Employee Benefits
Fixed Asset Write-offs
Other Exit Costs
Total
Fiscal 2020
$
151.2
$
(1.1)
$
6.5
$
156.6
Fiscal 2021
31.3
(0.4)
0.3
31.2
Cumulative through September 30, 2020
$
182.5
$
(1.5)
$
6.8
$
187.8
The related liability balance and activity for the Transformation Plan restructuring costs are presented below:
Severance and Employee Benefits
Fixed Asset Write-offs
Other Exit Costs
Total
Balance—July 1, 2020
$
131.9
$
—
$
0.7
$
132.6
Restructuring charges
33.5
(0.4)
0.3
33.4
Payments
(19.6)
—
—
(19.6)
Changes in estimates
(2.2)
—
—
(2.2)
Non-cash utilization
—
0.4
—
0.4
Adjustment for liabilities reclassified to held for sale
(2.2)
—
—
(2.2)
Effect of exchange rates
4.0
—
—
4.0
Balance—September 30, 2020
$
145.4
$
—
$
1.0
$
146.4
The Company currently estimates that the total remaining accrual of $146.4 will result in cash expenditures of approximately $119.3, $26.3 and $0.8 in fiscal 2021, 2022 and thereafter, respectively.
In connection with the acquisition and integration of the P&G Beauty Business (the “Global Integration Activities”), which are substantially completed, the Company recorded (income) expenses of $(0.6) and $(2.2) during the three months ended September 30, 2020 and 2019, respectively. The related liability balances were $9.1 and $10.4 at September 30, 2020 and June 30, 2020, respectively. The Company currently estimates that the total remaining accrual of $9.1 will result in cash expenditures of $5.6, $1.2 and $2.3 in fiscal 2021, 2022 and thereafter, respectively.
The Company executed a number of other legacy restructuring activities in prior years, which are substantially completed. The Company recognized (income) expenses, net, of $(0.5) and $(0.6) during the three months ended September 30, 2020 and 2019, respectively. The related liability balances were $4.4 and $4.1 at September 30, 2020 and June 30, 2020, respectively. The Company currently estimates that the total remaining accrual of $4.4 will result in cash expenditures of $4.2 and $0.2 in fiscal 2021 and 2022, respectively.
8. INVENTORIES
Inventories as of September 30, 2020 and June 30, 2020 are presented below:
September 30, 2020
June 30, 2020
Raw materials
$
145.7
$
148.6
Work-in-process
8.4
11.1
Finished goods
573.6
518.5
Total inventories
$
727.7
$
678.2
9. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Goodwill as of September 30, 2020 and June 30, 2020 is presented below:
Americas
EMEA
APAC
Total
Gross balance at June 30, 2020
$
3,112.2
$
3,638.9
$
1,262.9
$
8,014.0
Accumulated impairments
(1,768.7)
(1,857.3)
(414.1)
(4,040.1)
Net balance at June 30, 2020
$
1,343.5
$
1,781.6
$
848.8
$
3,973.9
Changes during the period ended September 30, 2020
Foreign currency translation
11.9
24.4
13.5
49.8
Gross balance at September 30, 2020
$
3,124.1
$
3,663.3
$
1,276.4
$
8,063.8
Accumulated impairments
(1,768.7)
(1,857.3)
(414.1)
(4,040.1)
Net balance at September 30, 2020
$
1,355.4
$
1,806.0
$
862.3
$
4,023.7
Other Intangible Assets, net
Other intangible assets, net as of September 30, 2020 and June 30, 2020 are presented below:
The changes in the carrying amount of indefinite-lived other intangible assets are presented below:
Trademarks
Total
Gross balance at June 30, 2020
$
1,909.0
1,909.0
Accumulated impairments
(913.5)
(913.5)
Net balance at June 30, 2020
$
995.5
995.5
Changes during the period ended September 30, 2020
Foreign currency translation
$
17.1
17.1
Gross balance at September 30, 2020
$
1,926.1
1,926.1
Accumulated impairments
(913.5)
(913.5)
Net balance at September 30, 2020
$
1,012.6
1,012.6
Intangible assets subject to amortization are presented below:
Cost
Accumulated Amortization
Accumulated Impairment
Net
June 30, 2020
License agreements and collaboration agreements(a)
$
3,861.2
$
(1,021.1)
$
(19.6)
$
2,820.5
Customer relationships(a)
786.1
(427.3)
(5.5)
353.3
Trademarks
325.7
(154.0)
(0.5)
171.2
Product formulations and technology
86.2
(54.6)
—
31.6
Total
$
5,059.2
$
(1,657.0)
$
(25.6)
$
3,376.6
September 30, 2020
License agreements and collaboration agreements
$
3,972.8
$
(1,080.4)
$
(19.6)
$
2,872.8
Customer relationships
795.9
(453.4)
(5.5)
337.0
Trademarks
329.4
(159.8)
(0.5)
169.1
Product formulations and technology
88.2
(56.2)
—
32.0
Total
$
5,186.3
$
(1,749.8)
$
(25.6)
$
3,410.9
(a) Includes License agreements and Customer relationships of $649.0 and $27.0, respectively resulting from the King Kylie acquisition on January 6, 2020 (Refer to Note 5—Business Combinations, Asset Acquisitions and Divestitures).
Amortization expense was $65.4 and $58.3 for the three months ended September 30, 2020 and 2019, respectively.
10. LEASES
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between 10 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 following chart provides additional information about the Company’s operating leases for the three months ended September 30, 2020:
Three Months Ended September 30,
Lease Cost:
2020
2019
Operating lease cost
$
19.2
$
26.4
Short-term lease cost
0.2
0.6
Variable lease cost
13.9
10.3
Sublease income
(1.5)
(2.2)
Net lease cost
$
31.8
$
35.1
Other information:
Operating cash outflows from operating leases
$
(31.4)
$
(26.6)
Right-of-use assets obtained in exchange for lease obligations
$
8.0
$
(26.1)
Weighted-average remaining lease term - real estate
6.8 years
7.6 years
Weighted-average discount rate - real estate leases
3.20
%
3.92
%
Future minimum lease payments for the Company’s operating leases as of September 30, 2020 are as follows:
Fiscal Year Ending June 30,
2021, remaining
$
82.5
2022
83.6
2023
57.8
2024
46.0
2025
35.5
Thereafter
116.5
Total future lease payments
421.9
Less: imputed interest
(40.1)
Total present value of lease liabilities
381.8
Current operating lease liabilities
92.6
Long-term operating lease liabilities
289.2
Total operating lease liabilities
$
381.8
Table excludes obligations for leases with original terms of 12 months or less which have not been recognized as ROU assets or liabilities in the Condensed Consolidated Balance Sheets.
The Company’s debt balances consisted of the following as of September 30, 2020 and June 30, 2020, respectively:
September 30, 2020
June 30, 2020
Short-term debt
$
1.7
$
—
2018 Coty Credit Agreement
2018 Coty Revolving Credit Facility due April 2023
1,560.2
1,438.8
2018 Coty Term A Facility due April 2023
3,006.1
2,959.0
2018 Coty Term B Facility due April 2025
2,343.2
2,308.5
Senior Unsecured Notes
2026 Dollar Notes due April 2026
550.0
550.0
2023 Euro Notes due April 2023
645.2
618.3
2026 Euro Notes due April 2026
293.3
281.1
Other long-term debt and capital lease obligations
0.5
0.6
Total debt
8,400.2
8,156.3
Less: Short-term debt and current portion of long-term debt
(195.4)
(188.3)
Total Long-term debt
8,204.8
7,968.0
Less: Unamortized debt issuance costs
(61.4)
(66.9)
Less: Discount on Long-term debt
(8.6)
(9.0)
Total Long-term debt, net
$
8,134.8
$
7,892.1
Short-Term Debt
The Company maintains short-term lines of credit and other short-term debt with financial institutions around the world. As of September 30, 2020, total short-term debt increased to $1.7 from $0.0 as of June 30, 2020. In addition, the Company had undrawn letters of credit of $8.5 and $6.0 and bank guarantees of $45.2 and $45.7 as of September 30, 2020 and June 30, 2020, respectively.
Long-Term Debt
On April 5, 2018, the Company issued senior unsecured notes in a private offering and entered into a new credit agreement (the “2018 Coty Credit Agreement”). The net proceeds of the offering of the notes, together with borrowings under the 2018 Coty Credit Agreement, were used to repay in full and refinance the indebtedness outstanding under the Company’s previously existing long-term debt agreements and to pay accrued interest, related premiums, fees and expenses in connection therewith.
Offering of Senior Unsecured Notes
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 of 4.00% senior unsecured notes due 2023 (the “2023 Euro Notes”) and €250.0 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.
The Senior Unsecured Notes are senior unsecured debt obligations of the Company and will be pari passu in right of payment with all of the Company’s existing and future senior indebtedness (including the 2018 Coty Credit Facilities described below). The Senior Unsecured Notes are guaranteed, jointly and severally, on a senior basis by the Guarantors (as later defined under “2018 Coty Credit Agreement”). 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 Notes will mature on April 15, 2026. The 2026 Dollar Notes will bear interest at a rate of 6.50% per annum. Interest on the 2026 Dollar Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
The 2023 Euro Notes will mature on April 15, 2023 and the 2026 Euro Notes will mature on April 15, 2026. The 2023 Euro Notes will bear interest at a rate of 4.00% per annum, and the 2026 Euro Notes will bear interest at a rate of 4.75% per annum. Interest on the 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.
2018 Coty Credit Agreement
On April 5, 2018, the Company entered into the 2018 Coty Credit Agreement, which amended and restated the prior Coty Credit Agreement. The 2018 Coty Credit Agreement provides for (a) the incurrence by the Company of (1) a senior secured term A facility in an aggregate principal amount of (i) $1,000.0 denominated in U.S. dollars and (ii) €2,035.0 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”). Initial borrowings under the 2018 Coty Term Loan B Facility were issued at a 0.250% discount.
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 Covenants 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 April 29, 2020, the Company amended its existing credit agreement. The amendment (i) provides a net debt to EBITDA financial covenant "holiday" through March 31, 2021; (ii) establishes a minimum liquidity covenant through March 31, 2021 of $350.0; and (iii) effectively places certain limitations on the ability to make certain investments and restricted payments (including limiting our ability to pay dividends in cash through March 31, 2021) and on incurring additional secured indebtedness. The amendment does not modify the applicable funding costs during the period through March 31, 2021.
Scheduled Amortization
The Company makes quarterly payments of 1.25% and 0.25%, of the initial aggregate principal amounts of the 2018 Coty Term A Facility and the 2018 Coty Term B Facility, respectively. The remaining balance of the initial aggregate principal amounts of the 2018 Coty Term A Facility and the 2018 Coty Term B Facility will be payable on the maturity date for each facility, respectively.
Interest
The 2018 Coty Credit Agreement facilities will bear interest at rates equal to, at the Company’s option, either:
•LIBOR of the applicable qualified currency, of which the Company can elect the applicable one, two, three, six or twelve month rate, plus the applicable margin; or
•Alternate base rate (“ABR”) plus the applicable margin.
In the case of the 2018 Coty Revolving Credit Facility and the 2018 Coty Term A Facility, the applicable margin means the lesser of a percentage per annum to be determined in accordance with the leverage-based pricing grid and the debt rating-based grid below:
Pricing Tier
Total Net Leverage Ratio:
LIBOR plus:
Alternative Base Rate Margin:
1.0
Greater than or equal to 4.75:1
2.000%
1.000%
2.0
Less than 4.75:1 but greater than or equal to 4.00:1
1.750%
0.750%
3.0
Less than 4.00:1 but greater than or equal to 2.75:1
1.500%
0.500%
4.0
Less than 2.75:1 but greater than or equal to 2.00:1
1.250%
0.250%
5.0
Less than 2.00:1 but greater than or equal to 1.50:1
1.125%
0.125%
6.0
Less than 1.50:1
1.000%
—%
Pricing Tier
Debt Ratings S&P/Moody’s:
LIBOR plus:
Alternative Base Rate Margin:
5.0
Less than BB+/Ba1
2.000%
1.000%
4.0
BB+/Ba1
1.750%
0.750%
3.0
BBB-/Baa3
1.500%
0.500%
2.0
BBB/Baa2
1.250%
0.250%
1.0
BBB+/Baa1 or higher
1.125%
0.125%
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.
Fair Value of Debt
September 30, 2020
June 30, 2020
Carrying Amount
Fair Value
Carrying Amount
Fair Value
2018 Coty Credit Agreement
$
6,909.5
$
6,334.3
$
6,706.3
$
5,962.3
Senior Unsecured Notes
1,488.5
1,206.6
1,449.4
1,270.3
The Company uses the market approach to value the 2018 Coty Credit Agreement and the Senior Unsecured Notes. The Company obtains fair values from independent pricing services 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 a Level 2 in the fair value hierarchy.
Debt Maturities Schedule
Aggregate maturities of the Company’s long-term debt, including the current portion of long-term debt and excluding capital lease obligations as of September 30, 2020, are presented below:
The 2018 Coty Credit Agreement contains affirmative and negative covenants. The negative covenants include, among other things, limitations on debt, liens, dispositions, investments, fundamental changes, restricted payments and affiliate transactions. With certain exceptions as described below, the 2018 Coty Credit Agreement, as amended, includes a financial covenant that requires us to maintain a Total Net Leverage Ratio (as defined below), equal to or less than the ratios shown below for each respective test period.
Quarterly Test Period Ending
Total Net Leverage Ratio (as amended April 29, 2020) (a)
September 30, 2020 through March 31, 2021
N/A (not tested)(b)
June 30, 2021 through December 31, 2021
5.25 to 1.00
March 31, 2022
5.00 to 1.00
June 30, 2022
4.75 to 1.00
September 30, 2022
4.50 to 1.00
December 31, 2022
4.25 to 1.00
March 31, 2023 through June 30, 2023
4.00 to 1.00
(a) Total Net Leverage Ratio means, as of any date of determination, the ratio of: (a) (i) Total Indebtedness minus (ii) unrestricted and Cash Equivalents of the Parent Borrower and its Restricted Subsidiaries as determined in accordance with GAAP to (b) Adjusted EBITDA for the most recently ended Test Period (each of the defined terms, including Adjusted EBITDA, used within the definition of Total Net Leverage Ratio have the meanings ascribed to them within the 2018 Coty Credit Agreement, as amended). Adjusted EBITDA, as defined in the 2018 Coty Credit Agreement, as amended, includes certain add backs related to cost savings, unusual events such as COVID-19, operating expense reductions and future unrealized synergies subject to certain limits and conditions as specified in the 2018 Coty Credit Agreement, as amended.
(b) The 2018 Coty Credit Agreement, as amended, establishes a quarterly minimum liquidity covenant for this period of $350.0. As of September 30, 2020, the current immediate liquidity was $1,721.7.
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 our 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. On January 6, 2020, the Company entered into a purchase agreement for the King Kylie Transaction, which constituted a Material Acquisition. As such, per the 2018 Coty Credit Agreement, as amended, the maximum Total Net Leverage Ratio for the quarter ended September 30, 2020 is 5.95.
As of September 30, 2020, the Company was in compliance with all covenants contained within the 2018 Coty Credit Agreement, as amended.
12. INTEREST EXPENSE, NET
Interest expense, net for the three months ended September 30, 2020 and 2019 is presented below:
Three Months Ended September 30,
2020
2019
Interest expense
$
59.0
$
61.2
Foreign exchange losses, net of derivative contracts
As part of the Turnaround Plan, the Company concluded that restructuring actions resulted in a significant reduction of future services of active employees in certain of our non-U.S. pension plans. As a result, the Company recognized curtailment gains of $5.3 during the period ended September 30, 2020. The impact of the curtailment activity on the current and prior comparative periods is included in Other expense, net in the Consolidated Statements of Operations.
The components of net periodic benefit cost for pension plans and other post-employment benefit plans recognized in the Condensed Consolidated Statements of Operations are presented below:
Three Months Ended September 30,
Pension Plans
Other Post-
Employment Benefits
U.S.
International
Total
2020
2019
2020
2019
2020
2019
2020
2019
Service cost
$
—
$
—
$
6.7
$
9.5
$
0.3
$
0.5
$
7.0
$
10.0
Interest cost
0.1
0.1
2.5
2.3
0.3
0.4
2.9
2.8
Expected return on plan assets
—
—
(1.9)
(2.1)
—
—
(1.9)
(2.1)
Amortization of prior service credit
—
—
(0.1)
(0.2)
(0.9)
(1.6)
(1.0)
(1.8)
Amortization of net loss
0.4
0.1
—
—
—
—
0.4
0.1
Curtailment gain recognized
—
—
(5.3)
—
—
—
(5.3)
—
Net periodic benefit cost (credit)
$
0.5
$
0.2
$
1.9
$
9.5
$
(0.3)
$
(0.7)
$
2.1
$
9.0
Net periodic benefit costs include amounts related to discontinued operations of $3.7 and $3.6 for the three months ended September 30, 2020 and 2019, respectively.
14. DERIVATIVE INSTRUMENTS
Foreign Exchange Risk Management
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. The Company entered into foreign exchange forward contracts for which hedge accounting treatment has been applied, which the Company anticipates realizing in the Condensed Consolidated Statements of Operations through fiscal 2021. In September 2020, the Company terminated its existing net investment cross currency swap derivatives with notional amount of $550.0 in exchange for cash payment of $37.6. Cash paid due to the termination of the cross currency swap derivatives is included in investing activities in the Condensed Consolidated Statements of Cash Flows. The related loss from this termination is included in AOCI/(L) until the sale or substantial liquidation of the underlying net investments.
Interest Rate Risk Management
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 impacts of changes 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.
During September 2019, the Company entered into incremental interest rate swap contracts in the notional amount of $1,000.0, which extended the maturity of the interest rate swap portfolio from 2021 through 2023. These interest rate swaps are designated and qualify as cash flow hedges. As of September 30, 2020 and June 30, 2020, the Company had interest rate swap contracts designated as effective hedges in the notional amount of $3,000.0 and $3,000.0, respectively.
Derivative and non-derivative financial instruments which are designated as hedging instruments:
The accumulated gain on foreign currency borrowings classified as net investment hedges in the foreign currency translation adjustment component of AOCI/(L) was $88.8 and $261.9 as of September 30, 2020 and June 30, 2020, respectively.
The accumulated loss on derivative instruments classified as net investment hedges in the foreign currency translation adjustment component of AOCI/(L) was $(37.6) and $(12.5) as of September 30, 2020 and June 30, 2020, 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:
Gain (Loss) Recognized in OCI
Three Months Ended September 30,
2020
2019
Foreign exchange forward contracts
$
(1.2)
$
0.4
Interest rate swap contracts
0.2
(0.5)
Cross-currency swap contracts
(25.1)
3.9
Net investment hedge
(173.1)
157.3
The accumulated loss on derivative instruments classified as cash flow hedges in AOCI/(L), net of tax, was $(37.3) and $(43.0) as of September 30, 2020 and June 30, 2020, respectively. The estimated net loss 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 $(23.4). As of September 30, 2020, 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:
Location and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships
Three Months Ended September 30,
2020
2019
Net revenues
Interest expense, net
Net revenues
Interest expense, net
Foreign exchange forward contracts:
Amount of gain (loss) reclassified from AOCI into income
$
1.0
$
—
$
—
$
—
Interest rate swap contracts:
Amount of gain (loss) reclassified from AOCI into income
—
(9.8)
—
0.9
Derivatives not designated as hedging:
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments is presented below:
Condensed Consolidated Statements of Operations Classification of Gain (Loss) Recognized in Operations
Three Months Ended September 30,
2020
2019
Foreign exchange contracts
Selling, general and administrative expenses
$
0.1
$
(0.5)
Foreign exchange contracts
Interest expense, net
5.3
4.7
Foreign exchange contracts
Other expense, net
(0.3)
(0.1)
15. EQUITY AND CONVERTIBLE PREFERRED STOCK
Common Stock
As of September 30, 2020, 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, 2020, total authorized shares of Class A Common Stock was 1,250.0 million and total outstanding shares of Class A Common Stock was 765.7 million.
As of September 30, 2020, the Company’s largest stockholder was Cottage Holdco B.V., which owned approximately 61% 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”). During the three months ended September 30, 2020, JABC did not acquire any shares of Class A Common Stock.
As of September 30, 2020, 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, 2020, total authorized, issued and outstanding shares of Series A Preferred Stock were 1.5 million, and Series A-1 Preferred Stock were nil. 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.
As of September 30, 2020, the Company has nil Series A and Series A-1 Preferred Stock classified as equity or as a liability recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
Convertible Series B Preferred Stock
On May 11, 2020, the Company entered into an Investment Agreement with KKR Aggregator (the “Investor”), relating to the issuance and sale by the Company to the Investor 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 the Investor or certain of its affiliates in respect of the Wella Business.
On May 26, 2020 (the “Closing Date”), the Company and the Investor completed the issuance and sale of 750,000 shares of the Company’s Series B Preferred Stock for an aggregate purchase price of $750.0. On July 31, 2020, the Company completed the previously announced issuance and sale of 250,000 shares of the Company’s Series B Preferred Stock to the Investor for an aggregate purchase price of $250.0.
Cumulative preferred dividends accrue daily on the Series B Preferred Stock at a rate of 9.0% per year. The Series B Preferred Stock had accrued unpaid dividends of $27.3 and $6.5 as of September 30, 2020 and June 30, 2020, respectively. There were no dividends paid in relation to the Series B Preferred Stock in the three months ended September 30, 2020.
Treasury Stock
Share Repurchase Program
Since February 2014, the Board has authorized the Company to repurchase its Class A Common Stock under approved repurchase programs. On February 3, 2016, the Board authorized the Company to repurchase up to $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, 2020, the Company did not repurchase any shares of its Class A Common Stock. As of September 30, 2020, the Company had authority for $396.8 remaining under the Incremental Repurchase Program.
Other Repurchases
There were no other stock repurchases during the three months ended September 30, 2020. The Company repurchased 0.5 million shares of its Class A Common Stock for $4.5 during the three months ended September 30, 2019 in connection with the exit of an executive in September 2019.
Dividends
On April 29, 2020, the Board of Directors suspended the payment of dividends, in keeping with the 2018 Coty Credit Agreement, as amended, which is expected to last through April 21, 2021 or until such later date that a Net debt to Adjusted EBITDA of 4x is reached.
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 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;if a holder elected to participate in the program fifty percent (50%) of their cash dividends were reinvested in additional shares of Class A Common Stock.
The change in dividends accrued recorded to additional paid-in capital (“APIC”) in the Condensed Consolidated Balance Sheet as of September 30, 2020 were $0.8, consisting of $0.8 of dividends no longer expected to vest as a result of forfeitures of outstanding RSUs. In addition to the activity noted above, the Company made a payment of $0.8 for the previously accrued dividends on RSUs that vested during the three months ended September 30, 2020. Thus, total dividends settled in cash during the three months ended September 30, 2020 were $0.8.
Total accrued dividends on unvested RSUs and phantom units of $2.0 and $3.0 are included in Accrued expenses and other current liabilities and Other noncurrent liabilities, respectively, in the Condensed Consolidated Balance Sheet as of September 30, 2020.
Accumulated Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustments
Loss on Cash Flow Hedges
Gain (loss) on Net Investment Hedge
Other Foreign Currency Translation Adjustments
Pension and Other Post-Employment Benefit Plans (a)
Total
Balance—July 1, 2020
$
(43.0)
$
261.9
$
(683.8)
$
8.7
$
(456.2)
Other comprehensive (loss) income before reclassifications
(1.0)
(210.7)
200.3
—
(11.4)
Net amounts reclassified from AOCI/(L)
6.7
—
—
(1.2)
5.5
Net current-period other comprehensive income (loss)
5.7
(210.7)
200.3
(1.2)
(5.9)
Balance—September 30, 2020
$
(37.3)
$
51.2
$
(483.5)
$
7.5
$
(462.1)
(a) For the three months ended September 30, 2020, net amounts reclassified from AOCI/(L) related to pensions and other post-employment benefit plans included amortization of prior service credits and actuarial loss of $1.2, net of tax of $0.0.
Foreign Currency Translation Adjustments
Loss on Cash Flow Hedges
Gain on Net Investment Hedge
Other Foreign Currency Translation Adjustments
Pension and Other Post-Employment Benefit Plans
Total
Balance—July 1, 2019
$
(13.3)
$
214.8
$
(257.4)
$
(2.9)
$
(58.8)
Other comprehensive (loss) income before reclassifications
(0.5)
161.2
(283.8)
—
(123.1)
Net amounts reclassified from AOCI/(L)
(0.7)
—
—
(0.8)
(1.5)
Net current-period other comprehensive (loss) income
(1.2)
161.2
(283.8)
(0.8)
(124.6)
Balance—September 30, 2019
$
(14.5)
$
376.0
$
(541.2)
$
(3.7)
$
(183.4)
16. SHARE-BASED COMPENSATION PLANS
Share-based compensation expense is recognized on a straight-line basis over the requisite service period. Total share-based compensation is shown in the table below:
Three Months Ended September 30,
2020
2019
Equity plan expense(a)
$
4.9
$
4.4
Equity plan modified and cash settled
0.9
—
Liability plan (income) expense
(0.1)
—
Total share-based compensation expense
$
5.7
$
4.4
(a) Equity Plan shared-based compensation expense of $6.2 and $6.3 were recorded to additional paid in capital and presented in the Condensed Consolidated Statement of Equity for the three months ended September 30, 2020 and 2019, respectively. Of the $6.2 and $6.3, $1.3 and $1.9 were reclassified to discontinued operations.
The share-based compensation expense for the three months ended September 30, 2020 and 2019, respectively, of $5.7 and $4.4 includes $6.4 and $6.9 expense offset by $(0.7) and $(2.5), respectively, primarily due to significant executive forfeitures of share-based compensation instruments.
As of September 30, 2020, the total unrecognized share-based compensation expense related to stock options, Series A Preferred Stock, restricted stock, restricted stock units and other share awards is $20.4, $0.0, $0.0 and $60.0, respectively. The unrecognized share-based compensation expense related to stock options, Series A Preferred stock, restricted stock, restricted stock units and other share awards is expected to be recognized over a weighted-average period of 3.19, 0.00, 0.00 and 3.24 years, respectively.
Restricted Share Units and Other Share Awards
The Company granted nil shares of RSUs and other share awards during the three months ended September 30, 2020. The Company recognized share-based compensation expense of $5.3 and $3.6 for the three months ended September 30, 2020 and 2019, respectively.
Restricted Stock
The Company granted no shares of restricted stock and other share awards during the three months ended September 30, 2020. The Company recognized share-based compensation expense of $(0.1) and nil for the three months ended September 30, 2020 and 2019, respectively.
Series A Preferred Stock and Series A-1 Preferred Stock
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, 2020. The Company recognized share-based compensation expense (income) of $(0.1) and $0.5 for the three months ended September 30, 2020 and 2019, respectively.
Non-Qualified Stock Options
The Company granted no non-qualified stock options during the three months ended September 30, 2020. The Company recognized share-based compensation expense of $0.6 and $0.3 for the three months ended September 30, 2020 and 2019, respectively.
17. NET INCOME ATTRIBUTABLE TO COTY INC. PER COMMON SHARE
Reconciliation between the numerators and denominators of the basic and diluted income per share (“EPS”) computations is presented below:
Three Months Ended September 30,
2020
2019
(in millions, except per share data)
Amounts attributable to Coty Inc.:
Net income from continuing operations
116.7
12.8
Convertible Series B Preferred Stock dividends
(20.8)
—
Net income from continuing operations attributable to common stockholders
95.9
12.8
Net income from discontinued operations, net of tax
104.7
39.5
Net income attributable to common stockholders
$
200.6
$
52.3
Weighted-average common shares outstanding:
Weighted-average common shares outstanding—Basic
763.9
754.2
Effect of dilutive stock options and Series A/A-1 Preferred Stock(a)
—
1.1
Effect of restricted stock and RSUs(b)
1.4
3.6
Effect of Convertible Series B Preferred Stock
151.4
—
Weighted-average common shares outstanding—Diluted
916.7
758.9
Earnings per common share
Earnings from continued operations per common share - basic
$
0.13
$
0.02
Earnings from continued operations per common share - diluted
$
0.13
$
0.02
Earnings from discontinued operations - basic
$
0.13
$
0.05
Earnings from discontinued operations - diluted
$
0.11
$
0.05
Earnings per common share - basic
$
0.26
$
0.07
Earnings per common share - diluted
$
0.24
$
0.07
(a) For the three months ended September 30, 2020 and 2019, outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase 16.8 and 24.3 million shares of Common Stock, respectively, were excluded from the computation of diluted EPS as their inclusion would be anti-dilutive.
(b) For the three months ended September 30, 2020 and 2019, there were 10.9 and 0.6 million anti-dilutive RSUs, respectively, excluded from the computation of diluted EPS as their inclusion would be anti-dilutive.
18. MANDATORILY REDEEMABLE FINANCIAL INTERESTS AND REDEEMABLE NONCONTROLLING INTERESTS
Mandatorily Redeemable Financial Interest
United Arab Emirates subsidiary
The Company is required under a shareholders agreement (the "U.A.E. Shareholders Agreement) to purchase all of the shares held by the noncontrolling interest holder equal to 25% of the outstanding shares of a certain subsidiary in the United Arab Emirates (the “U.A.E. subsidiary”) at the termination of the agreement on December 31, 2020. The Company has determined such shares to be a mandatorily redeemable financial interest (“MRFI”) that is recorded as a liability. The liability is calculated based upon a pre-determined formula in accordance with the related U.A.E. Shareholders Agreement. As of September 30, 2020 and June 30, 2020, the liability amounted to $7.5 and $8.8, respectively.
As of September 30, 2020, the noncontrolling interest holder in the Company’s subsidiary in the Middle East (“Middle East Subsidiary”) had a 25% ownership share. The Company adjusts the RNCI to redemption value at the end of each reporting period with changes recognized as adjustments to APIC. The Company recognized $83.1 and $79.1 as the RNCI balances as of September 30, 2020 and June 30, 2020, respectively.
19. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved, from time to time, in various litigation, administrative and other legal proceedings, including regulatory actions, incidental or related to its business, including consumer class or collective actions, personal injury (including asbestos related claims), 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.
Certain Litigation. A purported stockholder class action complaint concerning the tender offer by Cottage Holdco B.V. (the “Cottage Tender Offer”) and the Schedule 14D-9, captioned Rumsey v. Coty, Inc., et al., Case No. 1:19-cv-00650-LPS, was filed by a putative stockholder against the Company and certain current and former directors of the Company in the U.S. District Court for the District of Delaware, but has not yet been served. The plaintiff alleges that the Company’s Schedule 14D-9 omits certain information, including, among other things, certain financial data and certain analyses underlying the opinion of Centerview Partners LLC. The plaintiff asserts claims under the federal securities laws and seeks, among other things, injunctive and/or monetary relief.
A second consolidated purported stockholder class action and derivative complaint concerning 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. A further scheduling order has not yet been entered.
A purported stockholder class action complaint, alleging violations of the US securities laws in connection with the P&G beauty brands acquisition and the King Kylie transaction 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, was captioned Crystal Garrett-Evans v. Coty Inc. et.al., Case No. 1:20-cv-07277. The plaintiff asserts claims under the federal securities laws and seeks, among other things, injunctive and/or monetary relief. This case remains at an early stage.
At this time, we cannot reasonably estimate a range of loss, if any, not covered by available insurance, that may result given the current status of these lawsuits.
In connection with a local tax audit of one of the Company’s subsidiaries in Brazil, the Company was notified of tax assessments issued in March of 2018. The assessments relate to local sales tax credits, which the Treasury Office of the State of Goiás considers as improperly registered for 2016-2017 tax periods. These tax assessments, including estimated interest and penalties, through September 30, 2020 amount to a total of R$249.0 million (approximately $44.2 as of September 30, 2020). Additionally, the Company received tax assessments related to tax years 2017-2019 during August 2020. These additional tax assessments, including estimated interest and penalties, through September 30, 2020 amount to a total R$579.0 million (approximately $102.8 as of September 30, 2020). The Company is seeking a favorable administrative decision on the tax enforcement actions filed by the Treasury Office of the State of Goiás. 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.
In connection with a federal tax audit of one of the Company’s subsidiaries in Brazil, the Company was notified of tax assessments issued in October of 2020. The assessments relate to federal excise taxes, which the Treasury Office of the Brazil’s Internal Revenue Service considers as improperly calculated for the period from February 2016 to December 2017. These tax assessments, including estimated interest and penalties, through September 30, 2020 amount to a total of R$334.8 million (approximately $59.4 as of September 30, 2020). The Company is seeking a favorable administrative decision on the tax enforcement actions filed by the Treasury Office of the Brazil’s Internal Revenue Service. 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.
20. RELATED PARTY TRANSACTIONS
Contribution Agreement
In July 2020, in connection with a one-time sign-on award of restricted stock units to be granted to the Chief Executive Officer ("CEO") in January 2021, Cottage Holdco B.V., has agreed to transfer to the CEO (either directly or through contributing to the Company) one-half of the total number of shares of Common Stock owed to the CEO if and when the award vests.
Relationship with KKR
As noted in Note 15—Equity and Convertible Preferred Stock., in fiscal 2020 KKR Aggregator purchased Series B Preferred Stock. This preferred stock conveys to KKR Aggregator the right to designate two directors to the Company’s Board of Directors and voting rights on an as-converted basis. Assuming full conversion of the preferred stock and no other changes to the Company’s capitalization, KKR Aggregator would be the second largest shareholder, with a 17% stake.
In June of 2020, KKR Bidco and Coty entered into a separate definitive agreement regarding a strategic transaction (“Wella Transaction”) for the sale of the Company’s Professional and Retail Hair business. KKR will own 60% of this separately managed entity and Coty will own the remaining 40%.
During fiscal 2021, fees of $7.6 were incurred with KKR in connection with the second closing of the Series B Preferred Stock; these fees reduced the carrying value of the stock.
The Company also entered into agreements with KKR for potential consulting and advisory services. No fees were incurred under such agreements in fiscal 2021.
From time to time, certain funds held by KKR may hold the Company’s Notes. These funds may receive principal and interest payments on the same terms as other investors in the Company’s Notes.
21. SUBSEQUENT EVENTS
The Company was notified of tax assessments issued in October 2020 in connection with a federal tax audit of the Company's subsidiaries in Brazil. See Note 19—Commitments and Contingencies for more information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the financial condition and results of operations of Coty Inc. and its consolidated subsidiaries, should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and related notes included elsewhere in this document, and in our other public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“Fiscal 2020 Form 10-K”). When used in this discussion, the terms “Coty,” the “Company,” “we,” “our,” or “us” mean, unless the context otherwise indicates, Coty Inc. and its majority and wholly-owned subsidiaries. Also, when used in this Quarterly Report on Form 10-Q, the term “includes” and “including” means, unless the context otherwise indicates, including without limitation. The following report includes certain non-GAAP financial measures. See “Overview—Non-GAAP Financial Measures” for a discussion of non-GAAP financial measures and how they are calculated.
All dollar amounts in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
More information about potential risks and uncertainties that could affect our business and financial results is included under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and other periodic reports we have filed and may file with the SEC from time to time.
Forward-looking Statements
Certain statements in this Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, the impact of COVID-19 and potential recovery scenarios, the Company’s Transformation Plan (as defined below), 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 sale of the Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands (the “Wella Business”) and the investment by Rainbow UK Bidco Limited ((“KKR Bidco”) an affiliate of funds and/or separately managed accounts advised and/or managed by Kohlberg Kravis Roberts & Co. L.P. and its affiliates (collectively, “KKR”)) in connection with the standalone business (the “Wella Transaction”), including timing of the Wella Transaction and the use of proceeds from the Wella Transaction, the Company’s future operations and strategy (including the expected implementation and related impact of its strategic priorities), ongoing and future cost efficiency 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), investments, licenses and portfolio changes, synergies, savings, performance, cost, timing and integration of acquisitions, including the King Kylie Transaction, and the announced pending transaction with Kim Kardashian West, future cash flows, liquidity and borrowing capacity, timing and size of cash outflows and debt deleveraging, the availability of local government funding or reimbursement programs in connection with COVID-19 (including expected timing and amounts), the timing and extent of any future impairments, and synergies, savings, impact, cost, timing and implementation of the Company’s Transformation Plan, including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, supply chain changes, e-commerce and digital initiatives, 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, 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 in China) in each case within the expected time frame or at all;
•the timing, costs and impacts of the Wella Transaction or other divestitures, and the amount and use of proceeds from any such transactions;
•our ability to successfully implement the separation of the Wella Business;
•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 existing beauty business, any relaunched or rebranded products and the anticipated costs and discounting associated with such relaunches and rebrands, and consumer receptiveness to our current and future marketing philosophy and consumer engagement activities (including digital marketing and media);
•use of estimates and assumptions in preparing our financial statements, including with regard to revenue recognition, income taxes (including the expected timing and amount of the release of any tax valuation allowance), the assessment of goodwill, other intangible and long-lived assets for impairments, the market value of inventory, and the fair value of 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, the Wella Transaction and related transition services ("Wella TSA"), the integration of the King Kylie Transaction, 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;
•future divestitures and the impact thereof on, and future acquisitions (including the pending transaction with Kim Kardashian West), new licenses and joint ventures and the integration thereof with, our business, operations, systems, financial data and culture and the ability to realize synergies, 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, 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;
•our international operations and joint ventures, including enforceability and effectiveness of our joint venture agreements and reputational, compliance, regulatory, economic and foreign political risks, including difficulties and costs associated with maintaining compliance with a broad variety of complex local and international regulations;
•our dependence on certain licenses (especially in the fragrance category) and our ability to renew expiring licenses on favorable terms or at all;
•our dependence on entities performing outsourced functions, including outsourcing of distribution functions, and third-party manufacturers, logistics and supply chain suppliers, and other suppliers, including third-party software providers, web-hosting and e-commerce providers;
•administrative, product development and other difficulties in meeting the expected timing of market expansions, product launches and marketing efforts;
•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 business or market disruption arising from a “hard Brexit”), the current U.S. administration and upcoming election, 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;
•currency exchange rate volatility and currency devaluation;
•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 by Cottage Holdco B.V. (the “Cottage Tender Offer”) and product liability cases (including asbestos);
•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, 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 the European Union General Data Protection Regulation (the “GDPR”), the California Consumer Privacy Act and the Brazil 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 with Cottage Holdco B.V., as our majority stockholder, and its affiliates, and any related conflicts of interest or litigation;
•our relationship with KKR, whose affiliates KKR 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 the Securities and Exchange Commission (the “SEC”) from time to time.
All forward-looking statements made in this document are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.
Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.
Industry, Ranking and Market Data
Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations about our industry, market position, market opportunity and market sizes, is based on data from various sources including internal data and estimates as well as third-party sources widely available to the public, such as independent industry publications, government publications, reports by market research firms or other published independent sources and on our assumptions based on that data and other similar sources. We did not fund and are not otherwise affiliated with the third-party sources that we cite. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management’s understanding of industry conditions, and such information has not been verified by any independent sources. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we generally believe the market, industry and other information included in this Quarterly Report on Form 10-Q to be the most recently available and to be reliable, such information is inherently imprecise and we have not independently verified any third-party information or verified that more recent information is not available.
Our fiscal year ends on June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2021” refer to the fiscal year ending June 30, 2021. 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 transaction and the pending transaction with Kim Kardashian West complement our existing portfolio as personality-led DTC business models with strong social media engines. As we continue to transform our Company, we are focused on the fragrance, color cosmetics and skin care categories, in both our prestige and mass beauty businesses, and strengthening our e-commerce presence.
The divestiture of the Younique business in September 2019 and the strategic Wella Transaction are reflections of our intent to focus on our core go-to-market competencies and to simultaneously deleverage our balance sheet. By retaining a 40% interest in the Wella Business following the closing of the Wella Transaction, we are able to benefit from the potential upside of the stand-alone business in the longer term, both through our partial ownership of the ongoing profit and cash flows and through a potential divestiture at a later stage.
Our recent management changes demonstrate a commitment to our continued transformation, including strengthening our focus on luxury cosmetics and skincare, building out our presence in Asia, and accelerating our digital and e-commerce capabilities. We expect that our strategy will continue to develop under the direction of our new management team.
COVID-19 Impacts Update
The COVID-19 pandemic has, and is expected to continue to have, material effects on all our product categories across all segments and geographies. The continuing sporadic containment measures adopted worldwide to address the pandemic have contributed to a significant decline in volume trends, albeit with some emerging evidence of recovery during the first quarter of fiscal 2021. In particular, demand for prestige products sold in retail malls and the travel retail channel continues to be more significantly impacted by temporary closures of non-essential businesses and social distancing measures, although this is being partially offset by growth in beauty product sales online. Many of our mass products are offered in other channels, such as drug and grocery stores, that continue to operate as essential businesses. However, social distancing measures continue to negatively affect sales volumes for these product categories as well.
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 lockdown and a possible recession resulting from COVID-19 in many markets.
We anticipate continued negative pressure on sales 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 resurgence of COVID-19 and related uncertainties. 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. 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.
Exclusive of the ongoing effects of the COVID-19 pandemic, and despite maintenance in the current quarter of market share in the Americas region, our global share trends in the mass color cosmetics categories in which we compete continue to
decline. However, CoverGirl experienced an incremental increase in shelf space due to the expansion to new retail customer’s stores. Sally Hansen continues to show positive trends over multiple financial periods. In addition, sales from the e-commerce channel, particularly in the Americas, continue to accelerate. Overall, as certain markets and geographies reopen sales channels, we have seen considerable volume improvements during the first quarter of fiscal 2021. However, our revenues continue to be below the comparable period in the prior year.
Transformation Plan Update
As previously reported, we are implementing a comprehensive transformation agenda (the “Transformation Plan”), which aims to stabilize and gradually accelerate revenue growth, improve our profitability through gross margin growth and cost control, optimizing 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 expect to incur cash costs consistent with the previously announced estimate. 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 complexity as we roll out several initiatives simultaneously, such as the separation of the Wella Business and the obligations under the related Wella TSA in connection with the Wella Transaction.
Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures for continuing operations and Coty Inc. including Adjusted operating income (loss), Adjusted 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Three Months Ended September 30, 2020 As Compared To Three Months Ended September 30, 2019.” These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, our management uses the Adjusted Performance Measures as key metrics in the evaluation of our performance and annual budgets and to benchmark performance of our business against our competitors. The following are examples of how these Adjusted Performance Measures are utilized by our management:
•strategic plans and annual budgets are prepared using the Adjusted Performance Measures;
•senior management receives a monthly analysis comparing budget to actual operating results that is prepared using the Adjusted Performance Measures; and
•senior management’s annual compensation is calculated, in part, by using some of the Adjusted Performance Measures.
In addition, our financial covenant compliance calculations under our debt agreements are substantially derived from these Adjusted Performance Measures.
Our management believes that Adjusted Performance Measures are useful to investors in their assessment of our operating performance and the valuation of the Company. In addition, these non-GAAP financial measures address questions we routinely receive from analysts and investors and, in order to ensure that all investors have access to the same data, our management has determined that it is appropriate to make this data available to all investors. The Adjusted Performance Measures exclude the impact of certain items (as further described below) and provide supplemental information regarding our operating performance. By disclosing these non-GAAP financial measures, our management intends to provide investors with a supplemental comparison of our operating results and trends for the periods presented. Our management believes these measures are also useful to investors as such measures allow investors to evaluate our performance using the same metrics that our management uses to evaluate past performance and prospects for future performance. We provide disclosure of the effects of these non-GAAP financial measures by presenting the corresponding measure prepared in conformity with GAAP in our financial statements, and by providing a reconciliation to the corresponding GAAP measure so that investors may understand the adjustments made in arriving at the non-GAAP financial measures and use the information to perform their own analyses.
Adjusted operating income from continuing operations excludes restructuring costs and business structure realignment programs, amortization, acquisition- and divestiture-related costs and acquisition accounting impacts, asset impairment charges and other adjustments as described 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 exclude divestitures, 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 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 and sale of brand assets: We have excluded the impact of Loss/(gain) on divestitures and sale of brand assets 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.
•Interest (income) expense: We have excluded foreign currency impacts associated with acquisition-related and debt financing-related forward contracts, as well as debt financing transaction costs as the nature and amount of such charges are not consistent and are significantly impacted by the timing and size of such transactions.
•Other expense (income): We have excluded the impact of costs incurred for legal and advisory services rendered in connection with the tender offer that was in fiscal 2019 initiated by certain of our shareholders. 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.
•Loss on early extinguishment of debt: We have excluded loss on extinguishment of debt as this represents a non-cash charge, and the amount and frequency of such charges is not consistent and is significantly impacted by the timing and size of debt financing transactions.
•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.
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 the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented in “constant currency”, excluding the impact of foreign currency exchange translations to provide a framework for assessing how our underlying businesses performed excluding the impact of foreign currency exchange translations. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using prior year foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information we present may not be comparable to similarly titled measures reported by other companies.
Basis of Presentation of Acquisitions, Divestitures 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 divested brands or businesses or early terminated brands, to maintain comparable financial results with the current fiscal year period. Acquisitions, divestitures and early license terminations that would impact the comparability of financial results between periods presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations are shown in the table below.
Period of acquisition, divestiture, or termination
Acquisition, divestiture, or termination
Impact on basis of presentation
First quarter fiscal 2020
Divestiture: Younique - the divestiture of the interest in Foundation, which holds the net assets for Younique
First quarter fiscal year 2020 net revenue excluded.
Third quarter fiscal 2020
Acquisition: King Kylie Transaction - the acquisition of 51% interest in King Kylie LLC
First quarter fiscal year 2021 net revenue excluded.
When used herein, the term “Acquisitions” and “Divestitures” or "Acquisition" and “Divestiture”, as applicable, refer to the net revenues of the related acquisitions or divestitures and early license terminations shown above, during the period that is not comparable as a result of such acquisitions or divestitures and early license terminations.
Financial results for the Wella Business for fiscal years 2020 and 2019 are presented as discontinued operations.
Unless otherwise noted, the following section pertains to the results of continuing operations.
THREE MONTHS ENDED SEPTEMBER 30, 2020 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2019
NET REVENUES
In the three months ended September 30, 2020, net revenues decreased 20.3%, or $287.1, to $1,124.1 from $1,411.2 in the three months ended September 30, 2019. Excluding the impact of the Acquisition and the Divestiture, total net revenues decreased 19%, or $256.8, to $1,098.9 in the three months ended September 30, 2020 from $1,355.7 in the three months ended September 30, 2019, reflecting a decrease in unit volume of 5%, and a negative price and mix impact of 14%. The overall decrease in net revenues primarily reflects the impact of the ongoing COVID-19 pandemic. The pandemic continued to have the highest impact on our prestige products, due to the closure of travel retail and reduced traffic in certain luxury retail channels, while the impact to the mass category brands sold in drug and grocery stores, although significant due to social distancing directives, was relatively mitigated due to these distribution channels mostly remaining open.
The gradual reopening of retail malls and travel retail channels across all regions, coupled with continued e-commerce growth, contributed to improvements in net revenues as compared to the fourth quarter of fiscal 2020, with the most notable improvements in the Americas. Travel retail channels remained challenged, especially in EMEA and Asia Pacific, due to travel restrictions and significantly decreased leisure travel, which had a negative impact on prestige product categories.
Net Revenues by Segment
Three Months Ended September 30,
(in millions)
2020
2019
Change %
NET REVENUES
Americas
$
470.6
$
488.8
(4)
%
EMEA
530.4
676.7
(22)
%
Asia Pacific
123.1
190.2
(35)
%
Other
—
55.5
(100)
%
Total
$
1,124.1
$
1,411.2
(20)
%
Americas
In the three months ended September 30, 2020, net revenues from the Americas segment decreased 4%, or $18.2 to $470.6 compared to $488.8 in the three months ended September 30, 2019. Excluding the impact of the Acquisition, net revenues from the Americas segment decreased 9%, or $43.4, to $445.4 in the three months ended September 30, 2020, from $488.8 in the three months ended September 30, 2019 reflecting an increase in unit volume of 9% and a negative foreign currency exchange translation impact of 4%, offset by a negative price and mix impact of 14%. The decrease in net revenues primarily reflects:
(i)lower net revenues due to the COVID-19 pandemic, impacting primarily Color Cosmetics product categories across the segment due to reduced customer traffic in retail malls, professional salons and travel retail channels primarily in Latin America (excluding Brazil), the United States, and Canada;
(ii)negative category trends in the United States and Latin America for mass color cosmetics and mass fragrances, primarily impacting the Covergirl and Rimmel brands; and
(iii)lower net revenues due to strategic focus on reducing value distribution in the United States and the impact of distributor changes in Latin America.
These decreases in net revenue were partially offset by the following:
(i)an increase in net revenues from Sally Hansen products, primarily in the United States, which continues to benefit as professional salons remain closed or operating under restrictions. Sally Hansen has had continued success across its core sub-brands as well as incremental net revenues from the launch of Sally Hansen Good.Kind.Pure and Sally Hansen Miracle Gel in prior periods;
(ii)an increase in net revenues related to e-commerce, primarily in the United States, Brazil, and Canada;
(iii)an increase in net revenues from the Monange brand which benefited from significant channel replenishment demand in the current quarter; and
(iv)an increase in net revenues from the successful launch of Marc Jacobs Perfect in the current quarter.
In the three months ended September 30, 2020, net revenues from the EMEA segment decreased 22%, or $146.3, to $530.4 from $676.7 in the three months ended September 30, 2019, reflecting a decrease in unit volume of 17%, a positive foreign currency exchange translation impact of 3%, and a negative price and mix impact of 8%. The decrease in net revenues primarily reflects:
i.lower net revenues due to the COVID-19 pandemic, impacting all product categories across the segment with the highest impact on prestige products due to reduced customer traffic in retail malls and travel retail channels. Travel retail channels in particular continue to be significantly impacted due to restrictions in airports and other travel hubs. The impact to the mass category brands sold in drug and grocery stores, although significant due to social distancing directives and reprioritization at the retailers, was relatively mitigated due to these distribution channels mostly remaining open;
ii.negative category and share trends across EMEA relating to color cosmetics and mass fragrance; and
iii.lower net revenues in the Russian market due to a dispute with a primary distributor which was resolved by the end of the quarter.
These decreases were partially offset by net revenue increases across EMEA resulting from the successful launch of new luxury fragrances, including Hugo Boss Alive and Boss Bottled, as well as continued growth of e-commerce sales.
Asia Pacific
In the three months ended September 30, 2020, net revenues from the Asia Pacific segment decreased 35%, or $67.1, to $123.1 from $190.2 in the three months ended September 30, 2019, reflecting a decrease in unit volume of 30%, a positive foreign currency exchange translation impact of 1%, and a negative price and mix impact of 6%. The decrease in net revenues primarily reflects:
i.lower net revenues due to the COVID-19 pandemic, impacting all product categories across the segment, with the highest impact on the prestige category due to the closure of retail malls and travel retail channels. The impact to the mass category, primarily in color cosmetic brands sold in drug and grocery stores, although significant due to social distancing directives, was relatively mitigated due to these distribution channels mostly remaining open;
ii.lower net revenues due to management decision at the start of the calendar year to reduce the reliance on the value distribution channel for prestige brands in order to maintain brand integrity across the Asia Pacific region;
iii.lower net revenues in the mass channel, including Max Factor and Rimmel brands, primarily related to customer optimization of inventory levels in China; and
iv.lower net revenues due to shift in product mix from prestige to mass categories across certain markets in the region, as luxury products were more negatively impacted by the pandemic.
These decreases were partially offset by net revenue increases across the region resulting from the continued growth of e-commerce sales as well as market share improvement in China, Thailand, Singapore, and Malaysia resulting from the addition of new distribution channels.
Other
Other consists of revenues from Younique, a business divested in Q1 of Fiscal 2020.
COST OF SALES
In the three months ended September 30, 2020, cost of sales decreased 17%, or $97.0, to $464.9 from $561.9 in the three months ended September 30, 2019. Cost of sales as a percentage of net revenues increased to 41.4% in the three months ended September 30, 2020 from 39.8% in the three months ended September 30, 2019, resulting in a gross margin decrease of approximately 160 basis points, primarily reflecting:
(i)negative gross margin impacts from changes in product and category mix, across all regions, as these markets experienced a relatively lower contribution of higher margin prestige products due to the pandemic and our Brazil market's proportionate share increased, negatively impacting gross margins due to its lower margin contribution;
(ii) negative gross margin impact related to an unfavorable mix of prestige brands with higher minimum royalty rates.
These decreases were partially offset by improvements in freight and distribution costs driven by various productivity initiatives as compared to the comparative period, and positive currency impact.
In the three months ended September 30, 2020, selling, general and administrative expenses decreased 28%, or $223.3, to $583.4 from $806.7 in the three months ended September 30, 2019. Selling, general and administrative expenses as a percentage of net revenues decreased to 51.9% in the three months ended September 30, 2020 from 57.2% in the three months ended September 30, 2019, or approximately 530 basis points. This decrease primarily reflects:
(i)660 basis points related to lower advertising and consumer promotional costs as a percentage of net revenue as disciplined management of advertising and consumer promotion spending, entered to counter the COVID-19 pandemic, led to savings that outpaced the decline in net revenues;
(ii)110 basis points related to lower bad debt expense;
These decreases were partially offset by the following increases:
(i)130 basis points related to higher negative transactional impact from our exposure to foreign currency exchange fluctuations;
(ii)40 basis points related to other expenses, primarily due to costs associated with the disposal of fixed assets;
(iii)30 basis points related to higher logistics costs as a percentage of net revenue; and
(iv)20 basis points related to higher share-based compensation due to executive forfeitures of share-based compensation instruments in the prior year.
OPERATING INCOME (LOSS)
In the three months ended September 30, 2020, operating loss was $66.0 compared to income of $64.0 in the three months ended September 30, 2019. Operating margin, or operating loss as a percentage of net revenues, decreased to (5.9)% in the three months ended September 30, 2020 as compared to an operating income as a percentage of net revenues of 4.5% in the three months ended September 30, 2019. The operating margin declines are largely driven by the reduced sales volume due to the COVID-19 pandemic impacting demand, increased cost of sales as a percentage of net revenues in the current quarter, in addition to increased amortization expense, acquisition and divestiture related expenses, and restructuring and other business realignment costs as a percentage of net revenues.
Operating Income by Segment
Three Months Ended September 30,
(in millions)
2020
2019
Change %
Operating income (loss)
Americas
$
21.3
$
(17.5)
>100%
EMEA
13.0
28.2
(54)
%
Asia Pacific
(19.0)
8.5
<(100%)
Other
—
(10.9)
100
%
Corporate
(81.3)
55.7
<(100%)
Total
$
(66.0)
$
64.0
<(100%)
Americas
In the three months ended September 30, 2020, operating income for Americas was $21.3 compared to a loss of $17.5 in the three months ended September 30, 2019. Operating margin increased to 4.5% of net revenues in the three months ended September 30, 2020 as compared to (3.6)% in the three months ended September 30, 2019, driven primarily by reduced advertising and promotional spend in the current quarter. The variance is also impacted by the operating loss in the comparative quarter which was driven by significant media investments in the color cosmetics category.
In the three months ended September 30, 2020, operating income for EMEA was $13.0 compared to an income of $28.2 in the three months ended September 30, 2019. Operating margin decreased to 2.5% of net revenues in the three months ended September 30, 2020 as compared to 4.2% in the three months ended September 30, 2019, driven by reduced sales volume due to the COVID-19 pandemic impacting demand and higher cost of goods sold as a percentage of net revenues. These were partially offset by lower selling, general, and administrative costs as a percentage of net revenues, largely driven by a significant decrease in advertising and promotional spend and a reduction in fixed costs.
Asia Pacific
In the three months ended September 30, 2020, operating loss for Asia Pacific was $19.0 compared to an income of $8.5 in the three months ended September 30, 2019. Operating margin decreased to (15.4)% of net revenues in the three months ended September 30, 2020 as compared to 4.5% in the three months ended September 30, 2019, primarily driven by reduced sales volume due to the COVID-19 pandemic impacting demand, higher cost of goods sold, higher selling and general administrative costs, and higher amortization expense as a percentage of net revenues.
Other
Other represents operating income (loss) from Younique, a business divested in Q1 of Fiscal 2020.
Corporate
Corporate primarily includes income and expenses not directly relating to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance of the segments.
In the three months ended September 30, 2020, the operating loss for Corporate was $81.3 compared to income of $55.7 in the three months ended September 30, 2019, as described under “Adjusted Operating Income for Coty Inc.” below. The increase to operating loss for Corporate was primarily driven by an increase in acquisition and divestiture related costs and an increase in restructuring and other business realignment costs as a percentage of net revenues. Additionally, the variance was amplified by the gain on divestiture of Younique, which was recognized in the comparative period.
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:
(a)See a reconciliation of reported operating income to adjusted operating income and a description of the adjustments under “Adjusted Operating Income for Coty Inc.” below. All adjustments are reflected in Corporate, except for amortization and asset impairment charges on goodwill, regional indefinite-lived intangible assets, and finite-lived intangible assets, which are reflected in the Americas, EMEA, Asia Pacific, and Other segments.
Adjusted Operating Income 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)
2020
2019
Change %
Reported operating income (loss)
$
(66.0)
$
64.0
<(100%)
% of net revenues
(5.9)
%
4.5
%
Amortization expense
65.4
58.3
12
%
Acquisition and divestiture-related costs
46.3
—
N/A
Restructuring and other business realignment costs
35.4
27.6
28
%
Gain on divestitures and sale of brand assets
—
(84.5)
100
%
Total adjustments to reported operating income
147.1
1.4
>100%
Adjusted operating income
81.1
65.4
24
%
% of net revenues
7.2
%
4.6
%
In the three months ended September 30, 2020, adjusted operating income increased approximately 24%, or $15.7 to $81.1 from $65.4 in the three months ended September 30, 2019. Adjusted operating margin increased to 7.2% of net revenues in the three months ended September 30, 2020 from 4.6% in the three months ended September 30, 2019, primarily driven by an increase in adjustments related to costs incurred for acquisitions and divestitures, restructuring and other business realignment activities, and amortization, further discussed below, as well as reduced net revenues due to the COVID-19 pandemic.
Amortization Expense
In the three months ended September 30, 2020, amortization expense increased to $65.4 from $58.3 in the three months ended September 30, 2019. In the three months ended September 30, 2020, amortization expense of $26.1, $32.8, and $6.5 was reported in the Americas, EMEA, and Asia Pacific segments, respectively. In the three months ended September 30, 2019, amortization expense of $12.7, $31.9, $6.3, and $7.4 was reported in the Americas, EMEA, Asia Pacific, and Other segments, respectively.
Acquisition and Divestiture Activities
In the three months ended September 30, 2020 we incurred $46.3 of costs related to acquisition and divestiture activities. These costs were associated with the Wella Transaction.
In the three months ended September 30, 2019 there were no acquisition or divestiture-related charges incurred.
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 $276.4 of cash costs life-to-date as of September 30, 2020, which have been recorded in Corporate.
Prior to July 1, 2019, we incurred restructuring and related costs aimed at integrating and optimizing the combined organization following the acquisition of the P&G Beauty Business, which we refer to as the Global Integration Activities, and reducing fixed costs and enabling further investment in the business, which we refer to as the 2018 Restructuring Actions.
In the three months ended September 30, 2020, we incurred restructuring and other business structure realignment costs of $35.4, as follows:
•We incurred restructuring costs of $30.1 primarily for charges related to the Transformation Plan, included in the Condensed Consolidated Statements of Operations; and
•We incurred business structure realignment costs of $5.3 primarily related to the Transformation Plan and certain other programs. This amount includes $5.3 reported in selling, general and administrative expenses, primarily related to severance, consulting costs and accelerated depreciation costs and nil reported in cost of sales in the Condensed Consolidated Statement of Operations.
In the three months ended September 30, 2019, we incurred restructuring and other business structure realignment costs of $27.6 as follows:
•We incurred restructuring costs of $4.8 primarily related to charges related to the Transformation Plan, included in the Condensed Consolidated Statements of Operations; and
•We incurred business structure realignment costs of $22.8 primarily related to our Global Integration Activities and certain other programs. This amount includes $22.8 reported in selling, general and administrative expenses and nil reported in cost of sales in the Condensed Consolidated Statements of Operations, primarily due to costs incurred for the realignment of the business due to the P&G Beauty Business.
In all reported periods, all restructuring and other business realignment costs were reported in Corporate.
Gain on divestitures and sale of brand assets
In the three months ended September 30, 2020, there were no gains on divestitures or sales of brand assets.
In the three months ended September 30, 2019, the Company completed the divestiture of Younique resulting in a gain of $84.5 included in Gain on divestitures and sale of brand assets in the Condensed Consolidated Statements of Operations. During the fiscal year ended June 30, 2020, the Company recorded a final pre-tax gain of $111.5 resulting from the sale.
INTEREST EXPENSE, NET
In the three months ended September 30, 2020, net interest expense was $62.1 as compared with $63.1 in the three months ended September 30, 2019. This decrease is primarily due to the impact of transactional foreign exchange.
INCOME TAXES
The effective income tax rate for the three months ended September 30, 2020 and 2019 was 200.2% and 1,300.0%, respectively. The change in the effective tax rate for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, is primarily due to a preliminary benefit of $220.5 recorded in the current period and the US GAAP treatment of the Younique disposition in the prior period. The benefit recorded in the current period is 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. This amount will be finalized when negotiations with the tax authorities are completed.
The effective rates vary from the blended rate of approximately 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.
On March 27, 2020, the United States government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act). The Company has analyzed the provisions, which include modifications to net operating loss limitations, modifications to the deductibility of business interest expense, as well as Alternative Minimum Tax ("AMT") credit acceleration, and interim reporting considerations and there is no impact to the current quarter.
Reconciliation of Reported (Loss) Income Before Income Taxes to Adjusted Income Before Income Taxes and Effective Tax Rates:
Three Months Ended September 30, 2020
Three Months Ended September 30, 2019
(in millions)
(Loss) Income Before Income Taxes
(Benefit) Provision for Income Taxes
Effective Tax Rate
(Loss) Income Before Income Taxes
Provision for Income Taxes
Effective Tax Rate
Reported (loss) before income taxes
$
(122.3)
$
(244.9)
200.2
%
$
(1.4)
$
(18.2)
1,300.0
%
Adjustments to reported operating income (a) (b)
147.1
33.0
85.9
13.9
Gain on sale of business adjustment (a) (b)
—
—
(84.5)
4.8
Tax impact from intra-entity transfer of assets (c)
—
220.5
—
—
Other adjustments (b)
(5.3)
(1.1)
—
—
Adjusted income before income taxes
$
19.5
$
7.5
38.5
%
$
—
$
0.5
0.0
%
(a)See a description of adjustments under “Adjusted Operating (Loss) Income for Continuing Operations.”
(b)The tax effects of each of the items included in adjusted income are calculated in a manner that results in a corresponding income tax expense/provision for adjusted income. In preparing the calculation, each adjustment to reported income is first analyzed to determine if the adjustment has an income tax consequence. The provision for taxes is then calculated based on the jurisdiction in which the adjusted items are incurred, multiplied by the respective statutory rates and offset by the increase or reversal of any valuation allowances commensurate with the non-GAAP measure of profitability.
(c)Tax benefit of $220.5M is 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. This amount will be finalized when negotiations with the tax authorities are completed.
The adjusted effective tax rate was 38.5% for the three months ended September 30, 2020 compared to 0% for the three months ended September 30, 2019. The differences were primarily due to foreign uncertain tax positions recorded in the current year.
DISCONTINUED OPERATIONS
In the three months ended September 30, 2020, net revenues from discontinued operations increased by 6.5% or $34.8 to $566.4 from $531.6. The increase in net revenues is primarily driven by reorders from the reopening and restocking of professional salons in the US, increased sales in Wella and Clairol retail channels driven by an ongoing trend of at-home self-care, as well as the continued growth of ghd products through the e-commerce channel across all geographical regions. This increase was partially offset by restrictions on salon operations due to social distancing protocols. Operating income was $145.4 in the three months ended September 30, 2020 compared to $62.0 in the three months ended September 30, 2019. This was primarily due to no amortization and depreciation charges in the current quarter (due to the accounting treatment of assets held for sale), as well as lower selling, general, and administrative expenses, primarily driven by decreases in advertising spend and travel expenses, and lower cost of goods sold as a percentage of net revenues in the current year.
NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC.
Net income attributable to Coty Inc. was income of $221.4 in the three months ended September 30, 2020 as compared to income of $52.3 in the three months ended September 30, 2019. This increase primarily reflects a tax benefit of $220.5 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.
We believe that adjusted net income (loss) attributable to Coty Inc. provides an enhanced understanding of our performance. See “Overview—Non-GAAP Financial Measures.”
Net income from Coty Inc. net of noncontrolling interests
$
221.4
$
52.3
>100%
Convertible Series B Preferred Stock dividends
(20.8)
—
N/A
Reported net income attributable to Coty Inc.
$
200.6
$
52.3
>100%
% of net revenues
12.6
%
2.7
%
Adjustments to reported operating income (a)
147.1
28.7
>100%
Adjustment to other expense
(5.3)
—
N/A
Adjustments to noncontrolling interests (b)
(1.2)
(3.0)
60
%
Change in tax provision due to adjustments to reported net income attributable to Coty Inc.
(257.6)
(27.5)
<(100%)
Adjusted net income attributable to Coty Inc.
$
83.6
$
50.5
66
%
% of net revenues
4.9
%
2.6
%
Per Share Data
Adjusted weighted-average common shares
Basic
763.9
754.2
Diluted (c)
916.7
758.9
Adjusted net income attributable to Coty Inc. per common share
Basic
$
0.11
$
0.07
Diluted (c)
$
0.11
$
0.07
(a)See a description of adjustments under “Adjusted Operating Income for Coty Inc.”
(b)The amounts represent the after-tax impact of the non-GAAP adjustments included in Net income attributable to noncontrolling interest based on the relevant noncontrolling interest percentage in the Condensed Consolidated Statements of Operations.
(c)Diluted EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plans and the convertible Series B Preferred Stock. We use the if-converted method for calculating any potential dilutive effect of the convertible Series B Preferred Stock, which requires an adjustment to reverse the impact of the preferred stock dividends of $20.8 on income applicable to common stockholders during the period.
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 committed and uncommitted lines of credit provided by banks and lenders in the U.S. and abroad.
Our cash flows are subject to seasonal variation throughout the year, including demands on cash made during our first fiscal quarter in anticipation of higher global sales during the second fiscal quarter and strong cash generation in the second fiscal quarter as a result of increased demand by retailers associated with the holiday season.
Our principal uses of cash are to fund planned operating expenditures, capital expenditures, 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 have utilized the cash proceeds from the issuance of convertible preferred shares to KKR Aggregator in order to pay down our revolving credit facility. As specified in our Credit Agreement, cash generated from the divestiture of any businesses through March 31, 2021 will be utilized to reduce debt, other than a maximum of $500.0 that will be used to fund operations.
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, including slowing down our production to adjust our inventories, the temporary compensation reductions for certain executives and for our non-executive board members, hiring and travel restrictions, and the reduction of advertising and consumer promotion costs for sales channels that are closed or heavily impacted by social distancing. We intend to utilize any tax payment deferrals that apply to us in specific jurisdictions. We will continue to actively manage our working capital to support our liquidity needs. During the quarter, KKR Aggregator purchased an additional $250.0 of convertible preferred stock.
Due in part to these measures, our current cash position is favorable; as of September 30, 2020, we had $1,721.7 of immediate liquidity, which consisted of available cash and cash equivalents and available borrowings under our 2018 Coty Revolving Credit Facility.
While the impact and duration of COVID-19 on our business is currently uncertain, as a result of the cash on hand, our amended debt covenants, 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 the COVID-19, potential lockdowns and a possible recession resulting from COVID-19 in many markets, we have implemented a plan to reduce our cost base, which does not vary with revenues, by 25%, including an adaptation of our supply network and organization as well as a reduction of certain discretionary expenses.
Debt
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.
Based on our credit agreement (the “2018 Coty Credit Agreement”), as amended, the calculation of our financial covenant for net debt excludes the impact of operating leases. In order to be consistent with our financial covenant, we will continue to report our net debt calculation excluding operating leases.
On April 29, 2020, we amended our existing credit agreement. The amendment (i) provides a Total Net Leverage Ratio financial covenant “holiday” through March 31, 2021; (ii) establishes a minimum liquidity covenant through March 31, 2021 of $350 million; and (iii) effectively places certain limitations on the ability to make certain investments and restricted payments (including limiting our ability to pay dividends in cash through March 31, 2021) and on incurring additional indebtedness. The amendment does not modify the applicable funding costs during the period through March 31, 2021.
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 $164.5 and $123.1 as of September 30, 2020 and June 30, 2020, respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to $191.2 and $223.8 during the three months ended September 30, 2020 and 2019, respectively. Remaining balances due from factors amounted to $2.6 and $6.2 as of September 30, 2020 and June 30, 2020, respectively, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets.
Cash Flows
Three Months Ended September 30,
2020
2019
Condensed Consolidated Statements of Cash Flows Data:
(in millions)
Net cash provided by operating activities
$
42.6
$
39.9
Net cash used in investing activities
(81.5)
(60.8)
Net cash provided by financing activities
264.2
36.7
Net cash provided by operating activities
Net cash provided by operating activities was $42.6 and $39.9 for the three months ended September 30, 2020 and 2019, respectively. The increase in cash flows from operating activities of $2.7 year over year was primarily driven by higher cash related net income of $18.1 and higher inflows from changes in other noncurrent assets of $17.9, offset by higher outflows from changes in other noncurrent liabilities of $30.3 and slightly higher outflows from changes in net working capital of $3.0.
Higher cash related Net income of $18.1 is the result of the reduction in costs due to our cost reduction activities, partially offset by the negative impacts of COVID-19 on our profitability and increased acquisition and divestiture-related costs. Changes in Other noncurrent liabilities and net working capital partially offset the higher inflows from changes in cash related Net income and Other noncurrent assets. Changes in Other noncurrent liabilities during the first three months of fiscal 2021 compared to fiscal 2020 contributed to higher outflows of $30.3 primarily due to lower accruals for noncurrent bonuses compared to prior year. Changes in trade receivables contributed to lower inflows year over year of $221.4 as a result of lower sales due to COVID-19 and lower inflows from factoring. Changes in Prepaid expenses and other current assets year over year included the positive current year impact from the collection of refunds related to tax overpayments. Changes in Accrued expenses and other current liabilities contributed to higher inflows year over year of $148.6, which included the impacts of higher inflows from the positive impact of lower overall accruals and payments for certain customer sales related accruals, VAT liabilities and the timing of restructuring payments and accruals partially offset by outflows from changes in the accruals for consulting and legal fees. Fluctuations in other working capital accounts were in line with prior year.
Net cash used in investing activities
Net cash used in investing activities was $81.5 and $60.8 for the three months ended September 30, 2020 and 2019, respectively. The increase in net cash used in investing activities of $20.7 in the first quarter of fiscal 2021 as compared with fiscal 2020 is primarily caused by the cash payment of $37.6 that resulted from the termination of the net investment cross currency swap derivatives which did not occur in the prior year. Lower cash outflows for capital expenditures of $15.5 million helped to partially offset the outflow from the termination of the cross currency swaps. Also, during the first quarter of fiscal 2021, we collected $27.0 from the promissory note receivable associated with the prior year sale of the Younique business which was slightly higher than the net $25.6 of proceeds from the sale that were collected in cash during the first quarter of fiscal 2020.
Net cash provided by financing activities
Net cash provided by financing activities during the three months ended September 30, 2020 and 2019 was $264.2 and $36.7, respectively. The increase in cash from financing activities of $227.5 was primarily driven by the first quarter fiscal 2021 net proceeds of $227.2 from the issuance and sale of additional Convertible Series B Preferred Stock in connection with the Investment Agreement with KKR Aggregator. Additionally, we had $62.5 of lower cash outflows for dividend payments due to the suspension of dividend payments that began in the fourth quarter of fiscal 2020. Further, as a result of the prior year payment of $45.0 during the first quarter of fiscal 2020 to purchase the remaining mandatorily redeemable noncontrolling interest in our Southeast Asian subsidiary, which did not reoccur in the current quarter, we had higher overall cash from financing activities. The impact of these higher inflows was partially offset by lower cash as a result of less net borrowings of $112.9 on our revolving loan facilities.
Dividends
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 through April 1, 2021 or until such later date that we reach a Net debt to Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of 4x. 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, by increasing the amount of accrued dividends with respect to a share of Convertible Series B Preferred Stock, or any combination thereof, at the sole discretion of the Company.
For additional information on our dividends, see Note 15—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.
Treasury Stock - Share Repurchase Program
For information on our Share Repurchase Program, see Note 15—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.
We are required under a shareholders agreement (the “U.A.E. Shareholders Agreement”) to purchase all of the shares held by the noncontrolling interest holder equal to 25% of a certain subsidiary in the United Arab Emirates (the “U.A.E. subsidiary”) at the termination of the agreement. We have determined such shares to be an MRFI that is recorded as a liability. The liability is calculated based upon a pre-determined formula in accordance with the U.A.E Shareholders Agreement. As of September 30, 2020 and June 30, 2020, the liability amounted to $7.5 and $8.8, respectively.
Redeemable Noncontrolling Interests
Noncontrolling interests, where we may be required to repurchase the noncontrolling interest under a put option or other contractual redemption requirement, are reported in the Condensed Consolidated Balance Sheet between liabilities and equity, as redeemable noncontrolling interests (“RNCI”). We adjust the RNCI to the higher of the redemption value or the carrying value (the acquisition date fair value adjusted for the noncontrolling interest’s share of net income (loss) and dividends) on each balance sheet date with changes recognized as an adjustment to additional paid-in capital (“APIC”).
Subsidiary in the Middle East
As of September 30, 2020, the noncontrolling interest holder in our subsidiary in the Middle East (“Middle East Subsidiary”) had a 25% ownership share. We recognized $83.1 and $79.1 as the RNCI balances as of September 30, 2020 and June 30, 2020, respectively.
Legal Contingencies
For information on our Brazilian tax assessments, see Note 19—Commitments and Contingencies in the notes to our Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We had undrawn letters of credit of $8.5 and $6.0 and bank guarantees of $45.2 and $45.7 as of September 30, 2020 and June 30, 2020, respectively.
Contractual Obligations
Our principal contractual obligations and commitments as of September 30, 2020 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 2020 Form 10-K, except as noted above. For the three months ended September 30, 2020, there have been no material changes in our contractual obligations outside the ordinary course of business.
Critical Accounting Policies
We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our Condensed Consolidated Financial Statements:
•Revenue Recognition;
•Goodwill, Other Intangible Assets and Long-Lived Assets;
•Business Combinations;
•Inventory; and
•Income Taxes.
As of September 30, 2020, there have been no other 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 2020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 2020 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, 2020. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(f) of the Exchange Act during the first fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving our objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information on our legal matters, see Note 19—Commitments and Contingencies in the notes to our Condensed Consolidated Financial Statements.
Item 1A. Risk Factors.
We have disclosed information about the risk factors that could adversely affect our business in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal 2020 and subsequent Quarterly Reports on Form 10-Q. There have been no material changes to these risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
No shares of our Class A Common Stock were repurchased during the fiscal quarter ended September 30, 2020.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COTY INC.
Date: November 6, 2020
By:
/s/Sue Nabi
Name: Sue Nabi
Title: Chief Executive Officer
(Principal Executive Officer)
/s/Pierre-André Terisse
Name: Pierre-André Terisse
Title: Chief Operating Officer and Chief Financial Officer
