AN N UAL R EPO RT
2 0 1 8
WE CELEB R ATE AN D LI B ER ATE
TH E D IVERS IT Y O F YO U R B E AUT Y
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2018
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
(State or other jurisdiction of incorporation or organization)
13-3823358
(I.R.S. Employer Identification Number)
350 Fifth Avenue, New York, NY
(Address of principal executive offices)
10118
(Zip Code)
(212) 389-7300
Registrant’s telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Class A Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
No
No
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. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
(Do not check if a smaller reporting company)
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
As of December 31, 2017, the aggregate market value of the registrant’s Class A Common Stock held by non-affiliates was
$8,993,216,977 based on the number of shares held by non-affiliates as of December 31, 2017 and the last reported sale price of the
registrant’s Class A Common Stock on December 31, 2017.
No
At August 14, 2018, 750,792,022 shares of the registrant’s Class A Common Stock, $0.01 par value were outstanding.
Table of Contents
COTY INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Part I:
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Part II:
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9A.
Part III:
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV:
Item 15.
Signatures
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Page
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5
23
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24
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27
28
62
62
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63
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63
63
63
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68
Forward-looking Statements
Certain statements in this Form 10-K 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 Company’s targets and outlook for future reporting periods (including the extent and timing of revenue and profit trends
and the Consumer Beauty division’s stabilization), establishing the Company as a global leader and challenger in beauty, its
future operations and strategy (including brand relaunches and performance in emerging markets and channels), synergies,
savings, performance, cost, timing and integration relating to our recent acquisitions (including The Proctor & Gamble
Company’s beauty business (the “P&G Beauty Business”)), ongoing and future cost efficiency and restructuring initiatives and
programs, strategic transactions (including mergers and acquisitions, joint ventures, investments, divestitures, licenses and
portfolio rationalizations), future cash flows and liquidity, future performance in digital and e-commerce and the expected
impact of our digital transformation agenda, future effective tax rates, timing and size of cash outflows and debt deleveraging,
and impact and timing of supply chain disruptions. 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”, “target”, “aim”, “potential” and similar words or phrases. These statements are
based on certain assumptions and estimates that we consider reasonable, but are subject to a number of risks and uncertainties,
many of which are beyond our control, which could cause actual events or results (including our financial condition, results of
operations, cash flows and prospects) to differ materially from such statements, including risks and uncertainties relating to:
•
•
•
our ability to achieve our global business strategies, compete effectively in the beauty industry and achieve the
benefits contemplated by our strategic initiatives (including sell-through of our relaunched brands, enhancement of our
innovation pipeline, focus on emerging markets and channels, improvement of in-store execution and reduction in
discounts in certain markets) within the expected time frame or at all;
our ability to anticipate, gauge and respond to market trends and consumer preferences, which may change rapidly,
and the market acceptance of new products, including any launches or relaunches and their associated costs and
discounting, and consumer receptiveness to our marketing 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,
stock compensation expense, income taxes, the assessment of goodwill, other intangible assets and long-lived assets
for impairment, the market value of inventory, pension expense and the fair value of acquired assets and liabilities
associated with acquisitions;
• managerial, integration, operational, regulatory, legal and financial risks, including diversion of management attention
to and management of cash flows, expenses and costs associated with multiple ongoing and future strategic initiatives,
internal reorganizations and restructuring activities;
•
•
•
•
•
•
the continued integration of the P&G Beauty Business and other recent acquisitions 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 and realize other 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 luxury channels), shelf-space resets or reductions, compression of go-to-market
cycles, changes in product and marketing requirements by retailers, 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 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), public goodwill, and defend claims by third parties for infringement of intellectual property
rights;
the effect of the divestiture and discontinuation of our non-core brands (including associated subsequent cost reduction
programs) and rationalizing wholesale distribution by reducing the amount of product diversion to the value and mass
channels;
any change to our capital allocation and/or cash management priorities;
any unanticipated problems, liabilities or other challenges associated with an acquired business 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 our Luxury division) and our ability to renew expiring licenses on
favorable terms or at all;
our dependence on entities performing outsourced functions and third-party suppliers, including third party software
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 legal, regulatory or policy changes, and/or the
enforcement thereof that affect our business, financial performance, operations or products, including the impact of
Brexit, the current U.S. administration, the results of elections in European countries and future elections in Brazil,
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. and in other regions where we operate including the
European Union and China;
the number, type, outcomes (by judgment, order or settlement) and costs of legal, compliance, tax, regulatory or
administrative proceedings, investigations and/or litigation;
our ability to manage seasonal and other variability and to anticipate future business trends and business needs;
disruptions in operations and sales, including due to disruptions in supply chain, logistics, restructurings and other
business alignment activities, manufacturing or information technology systems, labor disputes and natural disasters;
restrictions imposed on us through our license agreements, credit facilities and senior unsecured bonds or other
material contracts, our ability to repay, refinance or recapitalize debt, and changes in the manner in which we finance
our debt and future capital needs;
increasing dependency on information technology and our ability to protect against service interruptions, data
corruption, cyber-based attacks or network security breaches, costs and timing of implementation and effectiveness of
any upgrades or other changes to information technology systems, including our digital transformation initiatives, 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”)) or to protect against theft of customer, employee and corporate
sensitive information;
our ability to attract and retain key personnel;
the distribution and sale by third parties of counterfeit and/or gray market versions of our products; and
other factors described elsewhere in this document and from time to time in documents that we file with the Securities
and Exchange Commission (the “SEC”).
When used in this Annual Report on Form 10-K, the term “includes” and “including” means, unless the context
otherwise indicates, including without limitation. 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 Annual Report on Form 10-K and other periodic reports we have filed
and may file with the SEC from time to time.
All forward-looking statements made in this document are qualified by these cautionary statements. These forward-
looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be
required by 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 Annual Report on Form 10-K concerning our industry and the
market in which we operate, including our general expectations about our industry, market position and ranking, market
opportunity and market size, 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. This data involves a number of assumptions and limitations, and you are cautioned not to
give undue weight to such estimates. While we believe the market, industry and other information included in this Annual
Report on Form 10-K to be the most recently available and to be generally 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 2018” refer to the fiscal year ended June 30, 2018.
Any reference to a year not preceded by “fiscal” refers to a calendar year.
Item 1. Business.
Overview
PART I
Coty Inc. is one of the world’s largest beauty companies with a rich entrepreneurial heritage and an iconic portfolio of
brands. Founded in 1904, Coty has grown into a multi-segment beauty company with market leading positions in both North
America and Europe through new product offerings, diversified sales channels, acquisitions and a global growth strategy.
Today, we are the global leader in fragrance, a strong number two in professional salon hair color & styling, and number three
in color cosmetics.
Over the past three years, transformational acquisitions and strategic transactions have strengthened and diversified our
presence across the countries, product categories and channels in which we compete, including our acquisition of The Proctor
& Gamble Company’s beauty business (the “P&G Beauty Business”), the acquisition of ghd, a premium brand in high-end hair
styling appliances, the acquisition of the Brazilian personal care and beauty business of Hypermarcas S.A. (the “Hypermarcas
Brands”), and our joint venture with Younique LLC (“Younique”), a leading online peer-to-peer social selling platform in
beauty. In addition, we acquired the exclusive long-term global license rights for Burberry Beauty luxury fragrances, cosmetics
and skincare.
We are focused on rejuvenating our core business and amplifying our growth potential, by supporting and strengthening
our brands and developing a stronger innovation pipeline, including by accelerating our time to market with on-trend
collections and products, and advancing our end-to-end digital transformation and e-commerce efforts. We are also prioritizing
our growth opportunities to expand in the faster-growing emerging markets, as we continue our restructuring efforts to optimize
our business and reset fixed costs.
Segments
We are organized into three divisions, which are also our operating and reportable segments: Consumer Beauty, Luxury
and Professional Beauty. Our organizational structure is product category focused, putting the consumer first, by specifically
targeting how and where they shop and what and why they purchase. Each division has end-to-end responsibility to optimize
the consumers’ beauty experiences in their relevant categories and channels and to translate this into profitable growth.
Consumer Beauty is primarily focused on color cosmetics, retail hair coloring and styling products, body care and mass
fragrances.
Luxury is primarily focused on prestige fragrances, premium skincare and premium cosmetics.
Professional Beauty is primarily focused on hair and nail care products for salon professionals.
For segment and geographic area financial information and information about our long-lived assets, see Note 4, “Segment
Reporting” in the notes to our Consolidated Financial Statements, and for information about recent acquisitions or dispositions
of any material amount of assets, see Note 3, “Business Combinations” in the notes to our Consolidated Financial Statements.
1
Coty Professional Beauty
Clairol Professional*
ghd (good hair day)*
Kadus Professional*
Londa Professional*
Nioxin*
O P I*
Sassoon Professional
Sebastian*
System Professional*
Wella Professionals*
Brands
The following chart reflects our iconic brand portfolio by segment:
Coty Luxury
Alexander McQueen
Balenciaga
Burberry
Bottega Veneta
Calvin Klein
Cavalli
Chloe
Davidoff
Escada*
Gucci
Hugo Boss
Jil Sander
Joop!*
Lacoste
Lancaster*
Marc Jacobs
Miu Miu
philosophy*
Stella McCartney
Tiffany & Co.
Coty Consumer Beauty
Adidas
Beckham
Beyonce
Biocolor*
Bozzano*
Bourjois*
Bruno Banani
Clairol*
CoverGirl*
Enrique
Jovan*
Nautica
Max Factor*
Mexx
Monange*
Paixao*
Rimmel*
Risque*
Sally Hansen*
Stetson
Wella*
Younique*
007 James Bond
* Indicates an owned brand.
Marketing
We have a diverse portfolio of over 75 brands, some owned and some licensed, and we employ different models to create a
distinct image and personality suited to each brand’s equity, distribution, product focus and consumer. For our licensed brands,
we work with licensors to promote brand image. Each of our brands is promoted with logos, packaging and advertising
designed to enhance its image and the uniqueness of each brand. We manage our creative marketing work through a
combination of our in-house teams and external agencies that design and produce the sales materials, social media strategies,
advertisements and packaging for products in each brand. Our marketing teams work closely with our digital marketing agency,
increasingly using digital social listening and trend spotting capabilities to expand digital marketing of our brands to different
channels as the behaviors of beauty consumers continue to transform.
We promote our brands through various channels to reach and engage beauty consumers, through traditional media,
through in-store and in-salon displays, increasingly on digital and social media, and through collaborations, product placements
and events. In addition, we seek editorial coverage for products and brands in both traditional media and digital and social
media to drive influencer amplification and to build brand equity. We also leverage our relationships with celebrities and on-
line influencers to endorse certain of our products.
We have dedicated marketing and sales forces in most of our significant markets. These teams leverage local insights to
strategically promote our brands and product offerings and tailor our creative marketing to fit local tastes and resonate with
consumers most effectively.
We are focused on revamping our in-store execution and deploying new brand visuals for certain of our brands. Our
marketing efforts benefit from cooperative advertising programs with retailers, often in connection with in-store marketing
activities designed to engage consumers so that they try, or purchase, our products, including sampling and “gift-with-
purchase” programs designed to stimulate product trials. We have been working with retailers to develop branding and
2
marketing execution strategies and to enhance our in-store execution by implementing “perfect store” methodologies to
maximize the consumer experience.
Distribution Channels and Retail Sales
We market, sell and distribute our products in over 150 countries and territories, with dedicated local sales forces in most
of our significant markets. We have a balanced multi-channel distribution strategy which complements our product category
focused divisions. The Consumer Beauty division primarily sells products through hypermarkets, supermarkets, drug stores
and pharmacies, mid-tier department stores, and traditional food and drug retailers. The Luxury division primarily sells
products through prestige retailers, including perfumeries, department stores and duty-free shops, with travel retail sales
channels accounting for 15% of the division’s net revenues. The Professional Beauty division primarily sells products to nail
and hair salons, nail and hair professionals and professionals stores. We also sell our products through third-party distributors.
In fiscal 2018, no retailer accounted for more than 10% of our global net revenues; however, certain retailers accounted for
more than 10% of net revenues within certain geographic markets and segments. In fiscal 2018, Wal-Mart, our top retailer,
accounted for 6% of our net revenues. We are focused on expanding our e-commerce presence. All of our divisions sell
products through direct-to-consumer websites, third party-operated websites and through our own branded websites. In
addition, we selectively evaluate opportunities to expand into other channels, such as freestanding retail stores for certain
brands and social selling.
Innovation
Innovation is a pillar of our business. We innovate through brand-building and new product lines, as well as through new
technology. Our research and development teams work with our marketing and operations teams, as well as our internal digital
agency to identify recent trends and consumer needs and to bring products quickly to market.
We are continuously innovating to increase our sales by elevating our digital presence, including e-commerce and digital,
social media and influencer marketing designed to build brand equity and consumer engagement. We have also focused our
efforts on meeting evolving consumer shopping preferences and behaviors, both on-line and in-store. We have introduced new
ways to customize the consumer experience, including using artificial intelligence-powered tools to provide personalized
advice on selecting and using products, and augmented reality tools that invite customers to virtually try products with curated
looks, tutorials and product recommendations.
In addition, we continuously seek to improve our products through research and development. Our basic and applied
research groups, which conduct longer-term and “blue sky” research, seek to develop proprietary new technologies for first-to-
market products and for improving existing products. This research and development is done both internally and through
affiliations with various universities, technical centers, supply partners, industry associations and technical associations. As of
June 30, 2018, we owned approximately 2,000 utility patents and patent applications globally and approximately 1,800 design
patents.
Our principal research and development centers are located in the U.S. and Europe. See “Item 2. Properties.”
We do not perform, nor do we commission any third parties on our behalf to perform, testing of our products or ingredients
on animals except where required by law.
Supply Chain
We manufacture and package a majority of our products, primarily in the United States, Europe and Brazil. Our
manufacturing facilities provide multi-segment manufacturing. We recognize the importance of our employees at our
manufacturing facilities and have in place programs designed to ensure operating safety. In addition, we implement programs
designed to ensure that our manufacturing and distribution facilities comply with applicable environmental rules and
regulations. To capitalize on innovation and other supply chain benefits, we continue to utilize a network of third-party
manufacturers on a global basis.
The principal raw materials used in the manufacture of our products are primarily essential oils, alcohols and specialty
chemicals. The essential oils in our fragrance products are generally sourced from fragrance houses. As a result, we realize
material cost savings and benefits from the technology, innovation and resources provided by these fragrance houses.
We purchase the raw materials for all our products from various third parties. We also purchase packaging components that
are manufactured to our design specifications. We collaborate with our suppliers to meet our stringent design and creative
criteria. We believe that we currently have adequate sources of supply for all our products.
Following the acquisition of the P&G Beauty Business, we have been engaged in a transformation of our supply chain
aimed at integrating and optimizing the combined organization, and we continue to focus on restructuring our supply chain
footprint and processes in order to increase efficiency, improve utilization and reduce our order lead times. We have
3
experienced disruptions in our supply chain from time to time, including in connection with these restructuring efforts, and we
work to anticipate and respond to actual and potential disruptions.
Competition
There is significant competition within each market where our products are sold. We compete against manufacturers and
marketers of beauty products, hair care, salon professional and personal care products. In addition to the established
multinational brands against which we compete, small targeted niche brands continue to enter the beauty market. Competition
is also increasing from private label products sold by retailers.
We believe that we compete primarily on the basis of perceived value, including pricing and innovation, product efficacy,
service to the consumer, promotional activities, advertising, special events, new product introductions, e-commerce initiatives,
direct sales and other activities (including influencers). It is difficult for us to predict the timing, scale and effectiveness of our
competitors’ actions in these areas or the timing and impact of new entrants into the marketplace. For additional risks associated
with our competitive position, see “Risk Factors—The beauty industry is highly competitive, and if we are unable to compete
effectively, our business, prospects, financial condition and results of operation could suffer”.
Intellectual Property
We generally own or license the trademark rights in key sales countries in Trademark International Class 3 (covering
cosmetics and perfumery) for use in connection with our brands. When we license trademark rights we generally enter into
long-term licenses, and we are generally the exclusive trademark licensee for all Class 3 trademarks as used in connection with
our products. We or our licensors, as the case may be, actively protect the trademarks used in our principal products in the U.S.
and significant markets worldwide. We consider the protection of our trademarks to be essential to our business.
A number of our products also incorporate patented, patent-pending or proprietary technology in their respective
formulations and/or packaging, and in some cases our product packaging is subject to copyright, trade dress or design
protection. While we consider our patents and copyrights, and the protection thereof, to be important, no single patent or
copyright, or group of patents or copyrights, is material to the conduct of our business.
Products representing 39% of our fiscal 2018 net revenues are manufactured and marketed under exclusive license
agreements granted to us for use on a worldwide and/or regional basis. As of June 30, 2018, we maintained 31 brand licenses.
Our licenses impose obligations and restrictions on us that we believe are common to many licensing relationships in the
beauty industry, such as paying annual royalties on net sales of the licensed products and maintaining the quality of the licensed
products and the image of the applicable trademarks. We are currently in material compliance with the terms of our brand
license agreements.
Most brand licenses have renewal options for one or more terms, which can range from three to ten years. Certain brand
licenses provide for automatic extensions, so long as minimum annual royalty payments are made, while renewal of others is
contingent upon attaining of specified sales levels or upon agreement of the licensor. One of our brand licenses is up for
renewal during fiscal 2019, and, while many of our licenses are long term, licenses relating to certain of our global brands are
up for renewal in the next few years. For additional risks associated with our licensing arrangements, see “Risk Factors—Our
brand licenses may be terminated if specified conditions are not met, and we may not be able to renew expiring licenses on
favorable terms or at all” and “Risk Factors—Our failure to protect our reputation, or the failure of our partners or brand
licensors to protect their reputations, could have a material adverse effect on our brand images”.
Employees
As of June 30, 2018, we had approximately 20,000 full-time employees in over 46 countries. In addition, we employ a
large number of seasonal contractors during our peak manufacturing and promotional season. We expect our overall headcount
to decrease as we continue our efforts to restructure and rationalize our business.
Our employees in the U.S. are not covered by collective bargaining agreements. Our employees in certain countries in
Europe are subject to works council arrangements. We have not experienced a material strike or work stoppage in the U.S. or
any other country where we have a significant number of employees.
We recognize the importance of our employees to our business and believe our relationship with our employees is
satisfactory.
4
Government Regulation
We and our products are subject to regulation by various U.S. federal regulatory agencies as well as by various state and
local regulatory authorities and by the applicable regulatory authorities in the countries in which our products are produced or
sold. Such regulations principally relate to the ingredients, labeling, manufacturing, packaging, advertising and marketing and
sales and distribution of our products. Because we have commercial operations overseas, we are also subject to the U.S.
Foreign Corrupt Practices Act (the “FCPA”) as well as other countries’ anti-corruption and anti-bribery regimes, such as the
U.K. Bribery Act.
We are subject to numerous foreign, federal, provincial, state, municipal and local environmental, health and safety laws
and regulations relating to, among other matters, safe working conditions, product stewardship and environmental protection,
including those relating to emissions to the air, discharges to land and surface waters, generation, handling, storage,
transportation, treatment and disposal of hazardous substances and waste materials, and the registration and evaluation of
chemicals. We maintain policies and procedures to monitor and control environmental, health and safety risks, and to monitor
compliance with applicable environmental, health and safety requirements. Compliance with such laws and regulations
pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not
had a material effect upon our capital expenditures, earnings or competitive position. However, environmental and social
responsibility laws and regulations have tended to become increasingly stringent and, to the extent regulatory changes occur in
the future, they could result in, among other things, increased costs and risks of non-compliance for us. For example, certain
states in the U.S., such as California, and the U.S. Congress have proposed legislation relating to chemical disclosure and other
requirements related to the content of our products. For more information, see “Risk Factors—Changes in laws, regulations and
policies that affect our business or products could adversely affect our business, financial condition and results of operations.”
Seasonality
Our sales generally increase during our second fiscal quarter as a result of increased demand by retailers associated with
the holiday season. We also experience an increase in sales during our fourth fiscal quarter in our Professional Beauty segment
as a result of stronger activity prior to the summer holiday season. Working capital requirements, sales, and cash flows
generally experience variability during the three to six months preceding the holiday period due in part to product innovations
and new product launches and the size and timing of certain orders from our customers. We generally experience peak
inventory levels from July to October and peak receivable balances from September to December. During the months of
November, December and January of each year, cash is normally generated as customer payments for holiday season orders are
received. For more information, see “Risk Factors—Our business is subject to seasonal variability.”
Availability of Reports
We make available financial information, news releases and other information on our website at www.coty.com. There is a
direct link from our website to our SEC filings via the EDGAR database at www.sec.gov, where our annual reports on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge as soon as
reasonably practicable after we file such reports and amendments with, or furnish them to, the SEC. Stockholders may also
contact Investor Relations at 350 Fifth Avenue, New York, New York 10118 or call 212-389-7300 to obtain hard copies of these
filings without charge.
Item 1A. Risk Factors.
You should consider the following risks and uncertainties and all of the other information in this Annual Report on Form
10-K and our other filings in connection with evaluating our business and the forward-looking information contained in this
Annual Report on Form 10-K. Our business and financial results may also be adversely affected by risks and uncertainties not
presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following
discussion of risks should occur or other risks arise or develop, our business, prospects, financial condition, results of
operations, cash flows, as well as the trading price of our securities, may be materially and adversely affected. When used in
this discussion, the term “includes” and “including” means, unless the context otherwise indicates, including without
limitation and the terms “Coty,” the “Company,” “we,” “our,” or “us” mean, unless the context otherwise indicates, Coty Inc.
and its majority and wholly-owned subsidiaries.
The beauty industry is highly competitive, and if we are unable to compete effectively, our business, prospects, financial
condition and results of operations could suffer.
The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends, such as
the expansion of digital channels and advances in technology. Competition in the beauty industry is based on several factors,
including pricing, value and quality, product efficacy, packaging and brands, speed or quality of innovation and new product
introductions, in-store presence and visibility, promotional activities (including influencers) and brand recognition , distribution
channels, advertising, editorials and adaption to evolving technology and device trends, including via e-commerce initiatives.
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Our competitors include large multinational consumer products companies, private label brands and emerging companies,
among others, and some have greater resources than we do or may be able to respond more quickly or effectively to changing
business and economic conditions than we can. It is difficult for us to predict the timing and scale of our competitors’ actions
and their impact on the industry or on our business. For example, the fragrance category is being influenced by new product
introductions, niche brands and growing e-commerce distribution, and the nail category in the U.S. by lower cost brands, which
have increased pricing pressure and shifts in consumer preference away from certain traditional formulations. The color
cosmetics category has been influenced by entry by new competitors and smaller competitors that are fast to respond to trends
and engage with their customers through digital platforms and innovative in-store activations. In addition, the hair color
category is being influenced by new product introductions in the premium category and innovations by competitors to meet
growing category needs. Furthermore, the Internet and the online retail industry are characterized by rapid technological
evolution, changes in consumer requirements and preferences, frequent introductions of new products and services embodying
new technologies and the emergence of new industry standards and practices, any of which could render our existing
technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license
leading technologies useful in our business, and respond to technological advances and emerging industry standards and
practices in a cost-effective and timely way. If we are unable to compete effectively on a global basis or in our key product
categories or geographies, it could have an adverse impact on our business, prospects, financial condition, results of operations,
cash flows, as well as the trading price of our securities.
Further consolidation in the retail industry and shifting preferences in how and where consumers shop, including to e-
commerce, may adversely affect our business, prospects, financial condition and results of operations.
Significant consolidation in the retail industry has occurred during the last several years. The trend toward consolidation,
particularly in developed markets such as the U.S. and Western Europe, has resulted in our becoming increasingly dependent on
our relationships with, and the overall business health of, fewer key retailers that control an increasing percentage of retail
locations, which trend may continue. For example, certain retailers account for over 10% of our net revenues in certain
geographies, including the U.S. Our success is dependent on our ability to manage our retailer relationships, including offering
trade terms on mutually acceptable terms. Furthermore, increased online competition and declining in-store traffic has resulted,
and may continue to result, in brick-and-mortar retailers closing physical stores, which could negatively impact our distribution
strategies and/or sales if such retailers decide to significantly reduce their inventory levels for our products or to designate more
shelf space to our competitors. Additionally, these retailers periodically assess the allocation of shelf space and could elect to
reduce the shelf space allocated to our products. Some of our Consumer Beauty brands, including CoverGirl, have experienced
a loss of shelf space, and such declines may continue. Further consolidation and store closures, or reduction in inventory levels
of our products or shelf space devoted to our products, could have a material adverse effect on our business, prospects, financial
condition, results of operations, cash flows, as well as the trading price of our securities. We generally do not have long-term
sales contracts or other sales assurances with our retail customers.
Consumer shopping preferences have also shifted, and may continue to shift in the future, to distribution channels other
than traditional retail in which we have more limited experience, presence and development, such as direct sales and e-
commerce. If we are not successful in our digital transformation efforts or otherwise increase digital presence and grow our e-
commerce activities, we will not be able to compete effectively. In addition, our entry into new categories and geographies has
exposed, and may continue to expose, us to new distribution channels or risks about which we have less experience. If we are
not successful in developing and utilizing these channels or other channels that future consumers may prefer, we may
experience lower than expected revenues.
Changes in industry trends and consumer preferences could adversely affect our business, prospects, financial condition
and results of operations.
Our success depends on our products’ appeal to a broad range of consumers whose preferences cannot be predicted with
certainty and may change rapidly, and on our ability to anticipate and respond in a timely and cost-effective manner to industry
trends through product innovations, product line extensions and marketing and promotional activities, among other things.
Product life cycles and consumer preferences continue to be affected by the rapidly increasing use and proliferation of social
and digital media by consumers, and the speed with which information and opinions are shared. As product life cycles shorten,
we must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands
and shorten our product development and supply chain cycles.
In addition, net revenues and margins on beauty products tend to decline as they advance in their life cycles, so our net
revenues and margins could suffer if we do not successfully and continuously develop new products. This product innovation
also can place a strain on our employees and our financial resources, including incurring expenses in connection with product
innovation and development, marketing and advertising that are not subsequently supported by a sufficient level of sales.
Furthermore, we cannot predict how consumers will react to any new products that we launch or to repositioning of our brands.
Our successful Luxury division product launches may not continue. The amount of positive or negative sales contribution of
any of our products may change significantly within a period or from period to period. The above-referenced factors, as well as
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new product risks, could have an adverse effect on our business, prospects, financial condition, results of operations, cash
flows, as well as the trading price of our securities.
Our success depends on our ability to achieve our global business strategies.
Our future growth depends on our ability to successfully implement our global business strategies, which include
rejuvenating our core business and amplifying our growth potential, which we believe should ultimately translate into revenue
growth, strong cash flow and the creation of long-term shareholder value. Achieving our global business strategies will require
investment in new capabilities, products and brands, categories, distribution channels, technologies and emerging and more
mature geographies and beauty markets. These investments may result in short-term costs without any current revenues and,
therefore, may be dilutive to our earnings and negatively impact our cash flows. As part of this strategy, we are also working to
simplify and rationalize our cost structure, including reducing fixed costs, though a number of restructuring and cost-savings
initiatives. These cost efficiency measures may require us to change the way that we conduct and structure our operations, may
increase demands on our management and operations or disrupt business activities (including supply chain or logistics aspects),
and may not achieve the anticipated savings or benefits.
In addition, we have completed our announced portfolio rationalization program, which resulted in the termination or
divestiture of 14 brands. We may continue to dispose of or discontinue select brands and/or streamline operations in the future,
and incur costs or restructuring and/or other charges in doing so. We may face risks of declines in brand performance and
license terminations, due to expirations and/or allegations of breach or for other reasons, including with regard to our
potentially divested or discontinued brands. If and when we decide to divest or discontinue any brands or lines of business, we
cannot be sure that we will be able to locate suitable buyers or that we will be able to complete such divestitures or
discontinuances successfully, timely, on commercially advantageous terms or without significant costs, including relating to
any post-closing purchase price adjustments or claims for indemnification. Our recent divestitures and discontinuances, and any
future divestitures and discontinuances, could have a dilutive impact on our earnings, create dissynergies, and associated
activities have diverted and may continue to divert in the future significant financial, operational and managerial resources from
our existing operations, and make it more difficult to achieve our operating and strategic objectives. We also cannot be sure of
the effect such divestitures or discontinuances would have on the performance of our remaining business or ability to execute
our global strategies.
Although we believe that our strategy will lead to long-term growth in revenue and profitability, we may not realize, in full
or in part, the anticipated benefits. The failure to realize benefits, which may be due to our inability to execute plans, global or
local economic conditions, competition, changes in the beauty industry and the other risks described herein, could have a
material adverse effect on our business, prospects, financial condition, results of operations, cash flows, as well as the trading
price of our securities.
We have incurred significant costs associated with the acquisition and integration of the P&G Beauty Business and
simplifying our business that could affect our period-to-period operating results.
We anticipate that we will incur a total of approximately $1.3 billion of operating expenses and capital expenditures of
approximately $500 million in connection with the acquisition of the P&G Beauty Business. Through June 30, 2018, we
incurred life-to-date operating expenses and capital expenditures against these estimates of approximately $1,150 million and
$370 million, respectively, and we expect the remaining operating expenses, including any anticipated restructuring activities,
and capital expenditures to be incurred in future periods through fiscal 2021. The cash usage associated with such, and similar,
expenses usually occurs in subsequent periods and could impact our ability to execute our business strategies or deleverage. In
addition, independent of the final stages of our integration of the P&G Beauty Business, we are implementing a cost
restructuring program, which will combine and expand existing initiatives, in order to reduce fixed costs and enable further
investment in the business. We expect that this cost restructuring program will result in total pre-tax restructuring costs of
approximately $250.0 million. If our management is required to devote a substantial amount of time and attention to this cost
restructuring program, its implementation could divert attention from ongoing operations and affect our period-to-period
operating results. If our management is not able to effectively manage these initiatives, address fixed and other costs, we incur
additional operating expenses or capital expenditures to realize these synergies, simplifications and cost savings, or if any
significant business activities are interrupted as a result of these initiatives, our business, prospects, financial condition, results
of operations, cash flows, as well as the trading price of our securities may be materially adversely affected. The amount and
timing of the above-referenced charges and management distraction could further adversely affect our business, prospects,
financial condition, results of operations, cash flows, as well as the trading price of our securities. In addition, the ongoing
integration of acquisitions and continuing restructuring initiatives may impact our ability to anticipate future business trends
and accurately forecast future results.
Moreover, the diversion of resources to the integration of the P&G Beauty Business and the exit of all three stages of our
transition services agreement with The Proctor and Gamble Company (“P&G”) (the “TSA exit”) in fiscals 2017 and 2018
together with changes in our management teams as we reorganized our business, negatively impacted our fiscal year 2017 and
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2018 results. In particular, we incurred significantly higher costs in the fourth fiscal quarter of 2017 due, in part, to the lack of
visibility into the operating cash needs of the P&G Beauty Business while the transition services agreement was in place.
Although we have instituted initiatives to deliver meaningful, sustainable expense and cost management results, events and
circumstances such as financial or strategic difficulties, unexpected employee turnover, business disruption and delays may
occur or continue, resulting in new, unexpected or increased costs that could result in us not realizing all of the anticipated
benefits of the integration on our expected timetable or at all. In addition, we are executing many initiatives simultaneously,
which may result in further diversion of our resources and business disruption (including further supply chain disruptions), and
may adversely impact the execution of such initiatives. Any failure to implement the integration, our cost restructuring program
and other initiatives in accordance with our expectations could adversely affect our business, prospects, financial condition,
results of operations, cash flows, as well as the trading price of our securities.
Our new product introductions may not be as successful as we anticipate, which could have a material adverse effect on our
business, prospects, financial condition and results of operations.
We must continually work to develop, produce and market new products and maintain a favorable mix of products in order
to respond in an effective manner to changing consumer preferences. We continually develop our approach as to how and
where we market and sell our products. In addition, we believe that we must maintain and enhance the recognition of our
brands, which may require us to quickly and continuously adapt in a highly competitive industry to deliver desirable products
and branding to our consumers. For example, we are in the process of rebranding certain brands, particularly in Consumer
Beauty, to increase the competitiveness of those brands. There is no assurance that these or other initiatives will be successful
and, if they are not, our business, prospects, financial condition, results of operations, cash flows, as well as the trading price of
our securities could be adversely impacted.
We have made changes and may continue to change our process for the continuous development and evaluation of new
product concepts. In addition, each new product launch carries risks. For example, we may incur costs exceeding our
expectations, our advertising, promotional and marketing strategies may be less effective than planned or customer purchases
may not be as high as anticipated. In addition, we may experience a decrease in sales of certain of our existing products as a
result of consumer preferences shifting to our newly-launched products or to the products of our competitors as a result of
unsuccessful or unpopular product launches harming our brands. Any of these could have a material adverse effect on our
business, prospects, financial condition, results of operations, cash flows, as well as the trading price of our securities.
As part of our ongoing business strategy we expect that we will need to continue to introduce new products in our
traditional product categories and channels, while also expanding our product launches into adjacent categories and channels in
which we may have little operating experience. For example, we acquired professional and retail hair brands in connection with
the acquisition of the P&G Beauty Business, purchased a premium brand in high-end hair styling and appliances and entered
into a joint venture with an online peer-to-peer social selling platform in beauty, all of which were new product categories and
channels for us. The success of product launches in adjacent product categories could be hampered by our relative inexperience
operating in such categories and channels, the strength of our competitors or any of the other risks referred to herein. Our
inability to introduce successful products in our traditional categories and channels or in these or other adjacent categories and
channels could limit our future growth and have a material adverse effect on our business, prospects, financial condition, results
of operations, cash flows, as well as the trading price of our securities.
We may not be able to identify suitable acquisition targets and our acquisition activities and other strategic transactions may
present managerial, integration, operational and financial risks, which may prevent us from realizing the full intended
benefit of the acquisitions we undertake.
Our acquisition activities and other strategic transactions expose us to certain risks related to integration, including
diversion of management attention from existing core businesses and substantial investment of resources to support integration.
During the past several years, we have explored and undertaken opportunities to acquire other companies and assets as part of
our growth strategy. For example, we completed five significant acquisitions in fiscal 2016 through fiscal 2018 (including the
acquisition of P&G Beauty Business in October 2016) and entered into a joint venture with Younique in February 2017. These
assets represent a significant portion of our net assets, particularly the P&G Beauty Business. As we focus on re-prioritizing our
growth opportunities, we may continue to seek acquisitions that we believe strengthen our competitive position in our key
segments and geographies or accelerate our ability to grow into adjacent product categories and channels and emerging markets
or which otherwise fit our strategy. There can be no assurance that we will be able to identify suitable acquisition candidates, be
the successful bidder or consummate acquisitions on favorable terms or otherwise realize the full intended benefit of such
transactions. In addition, acquisitions could adversely impact our deleveraging strategy.
The assumptions we use to evaluate acquisition opportunities may not prove to be accurate, and intended benefits may not
be realized. Our due diligence investigations may fail to identify all of the problems, liabilities or other challenges associated
with an acquired business which could result in increased risk of unanticipated or unknown issues or liabilities, including with
respect to environmental, competition and other regulatory matters, and our mitigation strategies for such risks that are
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identified may not be effective. As a result, we may not achieve some or any of the benefits, including anticipated synergies or
accretion to earnings, that we expect to achieve in connection with our acquisitions, including the P&G Beauty Business
Acquisition, or we may not accurately anticipate the fixed and other costs associated with such acquisitions, or the business
may not achieve the performance we anticipated, which may materially adversely affect our business, prospects, financial
condition, results of operations, cash flows, as well as the trading price of our securities. Any financing for an acquisition could
increase our indebtedness or result in a potential violation of the debt covenants under our existing facilities requiring consent
or waiver from our lenders, which could delay or prevent the acquisition, or dilute the interests of our stockholders. For
example, in connection with the P&G Beauty Business Acquisition, Green Acquisition Sub Inc., a wholly-owned subsidiary of
the Company, was merged with and into Galleria, with Galleria continuing as the surviving corporation and a direct wholly-
owned subsidiary of the Company (the “Green Merger”) and pre-Green Merger holders of our stock were diluted to 46% of the
fully diluted shares of common stock immediately following the Green Merger. In addition, acquisitions of foreign businesses,
new entrepreneurial businesses and businesses in new distribution channels, such as our acquisition of the Hypermarcas
Brands, Younique, Burberry and ghd, entail certain particular risks, including potential difficulties in geographies and channels
in which we lack a significant presence, difficulty in seizing business opportunities compared to local or other global
competitors, difficulty in complying with new regulatory frameworks, the adverse impact of fluctuating exchange rates and
entering lines of business where we have limited or no direct experience. See “—Fluctuations in currency exchange rates may
negatively impact our financial condition and results of operations” and “—We are subject to risks related to our international
operations.”
We face risks associated with our joint ventures.
We are party to several joint ventures in both the U.S. and abroad. Going forward, we may acquire interests in more joint
venture enterprises to execute our business strategy by utilizing our partners’ skills, experiences and resources. These joint
ventures involve risks that our joint venture partners may:
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have economic or business interests or goals that are inconsistent with or adverse to ours;
take actions contrary to our requests or contrary to our policies or objectives, including actions that may violate
applicable law;
be unable or unwilling to fulfill their obligations under the relevant joint venture agreements;
take actions that may harm our reputation;
have financial difficulties; or
have disputes with us as to the scope of their rights, responsibilities and obligations.
In certain cases, joint ventures may present us with a lack of ability to fully control all aspects of their operations, including
due to veto rights, and we may not have full visibility with respect to all operations, customer relations and compliance
practices, among others.
Our present or future joint venture projects may not be successful. We have had, and cannot assure you that we will not in
the future have, disputes or encounter other problems with respect to our present or future joint venture partners or that our joint
venture agreements will be effective or enforceable in resolving these disputes or that we will be able to resolve such disputes
and solve such problems in a timely manner or on favorable economic terms, or at all. Any failure by us to address these
potential disputes or conflicts of interest effectively could have a material adverse effect on our business, prospects, financial
condition, results of operations, cash flows, as well as the trading price of our securities.
If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks, patents and
copyrights, or if our brand partners and licensors are unable to maintain and protect their intellectual property rights that
we use in connection with our products, our ability to compete could be negatively impacted.
Our intellectual property is a valuable asset of our business. Although certain of the intellectual property we use is
registered in the U.S. and in many of the foreign countries in which we operate, there can be no assurances with respect to the
continuation of such intellectual property rights, including our ability to further register, use or defend key current or future
trademarks. Further, applicable law may provide only limited and uncertain protection, particularly in emerging markets, such
as China.
Furthermore, we may not apply for, or be unable to obtain, intellectual property protection for certain aspects of our
business. Third parties have in the past, and could in the future, bring infringement, invalidity, co-inventorship, re-examination,
opposition or similar claims with respect to our current or future intellectual property. Any such claims, whether or not
successful, could be costly to defend, may not be sufficiently covered by any indemnification provisions to which we are party,
divert management’s attention and resources, damage our reputation and brands, and substantially harm our business, prospects,
financial condition, results of operations, cash flows, as well as the trading price of our securities. Patent expirations may also
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affect our business. As patents expire, competitors may be able to legally produce and market products similar to the ones that
were patented, which could have a material adverse effect on our business, prospects, financial condition, results of operations,
cash flows, as well as the trading price of our securities.
In addition, third parties may illegally distribute and sell counterfeit versions of our products, which may be inferior or
pose safety risks and could confuse consumers, which could cause them to refrain from purchasing our brands in the future or
otherwise damage our reputation. In recent years, there has been an increase in the availability of counterfeit goods, including
fragrances, in various markets by street vendors and small retailers, as well as on the Internet. The presence of counterfeit
versions of our products in the market and of prestige products in mass distribution channels could also dilute the value of our
brands, force us and our distributors to compete with heavily discounted products, cause us to be in breach of contract
(including license agreements) or otherwise have a negative impact on our reputation and business, prospects, financial
condition or results of operations. We are rationalizing our wholesale distribution and continue efforts to reduce the amount of
Luxury product diversion to the value and mass channels, however, stopping such commerce could result in a potential adverse
impact to our sales and net revenues, including to those customers who are selling our products to unauthorized retailers, or an
increase in returns over historical levels.
In order to protect or enforce our intellectual property and other proprietary rights, we may initiate litigation or other
proceedings against third parties, such as infringement suits, opposition proceedings or interference proceedings. Any lawsuits
or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business
concerns, adversely impact customer relations and we may not be successful. Litigation and other proceedings may also put our
intellectual property at risk of being invalidated or interpreted narrowly. The occurrence of any of these events may have a
material adverse effect on our business, prospects, financial condition, results of operations, cash flows, as well as the trading
price of our securities.
In addition, many of our products bear, and the value of our brands is affected by, the trademarks and other intellectual
property rights of our brand and joint venture partners and licensors. Our brand and joint venture partners’ and licensors’ ability
to maintain and protect their trademark and other intellectual property rights is subject to risks similar to those described above
with respect to our intellectual property. We do not control the protection of the trademarks and other intellectual property
rights of our brand and joint venture partners and licensors and cannot ensure that our brand and joint venture partners and
licensors will be able to secure or protect their trademarks and other intellectual property rights, which could have a material
adverse effect on our business, prospects, financial condition, results of operations and cash flows, as well as the trading price
of our securities.
Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the
intellectual property of third parties.
Our commercial success depends in part on our ability to operate without infringing, misappropriating or otherwise
violating the trademarks, patents, copyrights and other proprietary rights of third parties. However, we cannot be certain that the
conduct of our business does not and will not infringe, misappropriate or otherwise violate such rights. Moreover, our
acquisition targets and other businesses in which we make strategic investments are often smaller or younger companies with
less robust intellectual property clearance practices, and we may face challenges on the use of their trademarks and other
proprietary rights. For example, we are facing oppositions to our use of the “Younique” mark in certain jurisdictions, including
the European Economic Area and China. If we are found to be infringing, misappropriating or otherwise violating a third party
trademark, patent, copyright or other proprietary rights, we may need to obtain a license, which may not be available in a timely
manner on commercially reasonable terms or at all, or redesign or rebrand our products, which may not be possible or result in
a significant delay to market or otherwise have an adverse commercial impact. We may also be required to pay substantial
damages or be subject to a court order prohibiting us and our customers from selling certain products or engaging in certain
activities, which could therefore have a material adverse effect on our business, prospects, financial condition, results of
operations and cash flows, as well as the trading price of our securities.
Our goodwill and other assets have been subject to impairment and may continue to be subject to impairment in the future.
We are required, at least annually, to test goodwill and indefinite intangible assets to determine if any impairment has
occurred. Impairment may result from various factors, including adverse changes in assumptions used for valuation purposes,
such as actual or projected revenue growth rates, profitability or discount rates. If the testing indicates that an impairment has
occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill
or indefinite intangible assets and the implied fair value of the goodwill or the fair value of indefinite intangible assets.
We cannot predict the amount and timing of any future impairments, if any. We have experienced impairment charges with
respect to goodwill, intangible assets or other items in connection with past acquisitions, and we may experience such charges
in connection with recent and future acquisitions, particularly if business performance declines or expected growth is not
realized. Any future impairment of our goodwill or other intangible assets could have an adverse effect on our financial
condition and results of operations, as well as the trading price of our securities. For a further discussion of our impairment
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testing, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial
Condition—Liquidity and Capital Resources—Goodwill, Other Intangible Assets and Long-Lived Assets”.
We have taken on significant debt, and the agreements that govern such debt contain various covenants that impose
restrictions on us, which may adversely affect our business.
We have a substantial amount of indebtedness. There can be no assurances we will be able to refinance our indebtedness in
the future (1) on commercially reasonable terms, (2) on terms, including with respect to interest rates, as favorable as our
current debt or (3) at all.
Agreements that govern our indebtedness, including the indenture governing our senior unsecured notes (the “Indenture”)
and our credit agreement (the “2018 Coty Credit Agreement”), impose operating and financial restrictions on our activities.
These restrictions may limit or prohibit our ability and the ability of our restricted subsidiaries to, among other things:
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incur indebtedness or grant liens on our property;
dispose of assets or equity;
• make acquisitions or investments;
• make dividends, distributions or other restricted payments;
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effect affiliate transactions;
enter into sale and leaseback transactions; and
enter into mergers, consolidations or sales of substantially all of our assets and the assets of our subsidiaries.
In addition, we are required to maintain certain financial ratios calculated pursuant to a financial maintenance covenant
under the 2018 Coty Credit Agreement.
Our debt burden and the restrictions in the agreements that govern our debt could have important consequences, including
increasing our vulnerability to general adverse economic and industry conditions; limiting our flexibility in planning for, or
reacting to, changes in our business and our industry; requiring the dedication of a substantial portion of any cash flow from
operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow
to fund our operations, growth strategy, working capital, capital expenditures, future business opportunities and other general
corporate purposes; exposing us to the risk of increased interest rates with respect to any borrowings that are at variable rates of
interest; restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; limiting our ability to
obtain additional financing for working capital, capital expenditures, research and development, debt service requirements,
acquisitions and general corporate or other purposes; limiting our ability to adjust to changing market conditions; limiting our
ability to take advantage of financing and other corporate opportunities; and placing us at a competitive disadvantage relative to
our competitors who are less highly leveraged. In addition, a significant portion of our cash and investments are held outside
the U.S., and we may not be able to service our debt without undergoing the costs of repatriating those funds.
Our ability to service and repay our indebtedness will be dependent on the cash flow generated by our subsidiaries and
events beyond our control.
Prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect
our ability to make payments on our debt and to meet our deleveraging objectives. In particular, due to the seasonal nature of
the beauty industry, with the highest levels of consumer demand generally occurring during the holiday buying season in our
second fiscal quarter, our subsidiaries’ cash flow in the second half of the fiscal year may be less than in the first half of the
fiscal year, which may affect our ability to satisfy our debt service obligations, including to service our senior unsecured notes
and the 2018 Coty Credit Agreement, and to meet our deleveraging objectives. In addition, we earn a significant amount of our
operating income, and hold a significant portion of our cash and investments, in our foreign subsidiaries outside the U.S. As of
June 30, 2018, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was approximately
$301.4 million. If our domestic subsidiaries are not able to generate sufficient cash flow to satisfy our debt service obligations,
including to service our senior unsecured notes and the 2018 Coty Credit Agreement, we may need to repatriate additional
earnings. If we do not generate sufficient cash flow to satisfy our debt service obligations, including payments on our senior
unsecured notes and under the 2018 Coty Credit Agreement, we may have to undertake alternative financing plans, such as
refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional
capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such
time. Any refinancing of our debt could result in higher interest rates and may require us to comply with more onerous
covenants, which could further restrict our business operations. The terms of the Indenture governing our senior unsecured
notes, the 2018 Coty Credit Agreement or any existing debt instruments or future debt instruments that we may enter into may
restrict us from adopting some of these alternatives. The inability of our subsidiaries to generate sufficient cash flow to satisfy
our debt service obligations, including the inability to service our senior unsecured notes and the 2018 Coty Credit Agreement,
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or to refinance our obligations on commercially reasonable terms, could have a material adverse effect on our business,
financial condition, results of operations, profitability, cash flows or liquidity and may impact our ability to satisfy our
obligations in respect of our senior unsecured notes and the 2018 Coty Credit Agreement.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.
Borrowings under the 2018 Coty Credit Agreement are at variable rates of interest and expose us to interest rate risk. If
interest rates were to increase, our debt service obligations on the variable rate indebtedness referred to above would increase
even if the principal amount borrowed remained the same, and our net income and cash flows will correspondingly decrease.
We are currently party to, and in the future, we may enter into additional, interest rate swaps that involve the exchange of
floating for fixed rate interest payments, in order to reduce interest rate volatility. However, we may not maintain interest rate
swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate
risk.
A general economic downturn, credit constriction, uncertainty in global economic or political conditions or other global
events or a sudden disruption in business conditions may affect consumer spending, which could adversely affect our
financial results.
Global events may impact our business, prospects, financial condition, results of operations, cash flows, as well as the
trading price of our securities. We operate in an environment of slow overall growth in the segments and geographies in which
we compete with increasing competitive pressure and changing consumer preferences. While luxury fragrances and skin care
categories are experiencing strong growth, declines in the retail nail, mass color cosmetics and mass fragrance categories in the
U.S. and certain key markets in Western Europe continue to impact our business and financial results. Deterioration of social or
economic conditions in Europe or elsewhere could reduce sales and could also impair collections on accounts receivable. For
example, the June 23, 2016 referendum in the U.K. in which voters approved an exit from the E.U., commonly referred to as
“Brexit,” and subsequent initiation of formal withdrawal procedures by the U.K. government has caused significant volatility in
the financial and credit markets and may impact consumer spending and economic conditions generally in Europe. The global
markets and currencies have been adversely impacted, including volatility in the value of the British pound as compared to the
U.S. dollar. Volatilities in exchange rates resulting from Brexit are expected to continue at least in the short term as the U.K.
continues to negotiate its exit from the E.U. Although it is unknown what those terms will be, it is possible that there will be
greater restrictions on imports and exports between the U.K. and E.U. countries and increased regulatory complexities. These
changes may adversely affect our operations and financial results. See “—We are subject to risks related to our international
operations.” Further, recent political and economic developments in the U.S., the U.K., Europe and Brazil, including those
relating to the current administration in the U.S., and the results of several elections in European nations and future elections in
Brazil, have introduced uncertainty in the regulatory and business environment in which we operate (including potential
increases in tariffs). These political and economic developments have resulted and could continue to result in changes to
legislation or reformation of government policies, rules and regulations pertaining to trade. Such changes could have a
significant impact on our business by increasing the cost of doing business, affecting our ability to sell our products and
negatively impacting our profitability.
In addition, our sales are affected by the overall level of consumer spending. The general level of consumer spending is
affected by a number of factors, including general economic conditions, inflation, interest rates, government policies that affect
consumers (such as those relating to medical insurance or income tax), energy costs and consumer confidence, each of which is
beyond our control. Consumer purchases of discretionary and other items and services, including beauty products, tend to
decline during recessionary periods and otherwise weak economic environments, when disposable income is lower. A decline in
consumer spending may have a negative impact on our direct sales and could cause financial difficulties at our retailer and
other customers. If consumer purchases decrease, we may not be able to generate enough cash flow to meet our debt
obligations and other commitments and may need to refinance our debt, dispose of assets or issue equity to raise necessary
funds. We cannot predict whether we would be able to undertake any of these actions to raise funds on a timely basis or on
satisfactory terms or at all. The financial difficulties of a customer or retailer could also cause us to curtail or eliminate business
with that customer or retailer. We may also decide to assume more credit risk relating to the receivables from our customers or
retailers, which increases the possibility of late or non-payment of receivables. Our inability to collect receivables from a
significant retailer or customer, or from a group of these customers, could have a material adverse effect on our business,
prospects, results of operations, financial condition, results of operations, cash flows, as well as the trading price of our
securities. If a retailer or customer were to go into liquidation, we could incur additional costs if we choose to purchase the
retailer’s or customer’s inventory of our products to protect brand equity.
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Volatility in the financial markets could have a material adverse effect on our business, prospects, financial condition,
results of operations, cash flows, as well as the trading price of our securities.
While we currently generate significant cash flows from our ongoing operations and have access to global credit markets
through our various financing activities, credit markets may experience significant disruptions. Deterioration in global financial
markets could make future financing difficult or more expensive. If any financial institutions that are parties to our credit
facilities or other financing arrangements, such as interest rate or foreign currency exchange hedging instruments, were to
declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us. This could leave us
with reduced borrowing capacity or could leave us unhedged against certain interest rate or foreign currency exposures, which
could have an adverse impact on our business, prospects, financial condition, results of operations, cash flows, as well as the
trading price of our securities.
Fluctuations in currency exchange rates may negatively impact our financial condition and results of operations.
Exchange rate fluctuations have affected and may in the future affect our results of operations, financial condition, reported
earnings, the value of our foreign assets, the relative prices at which we and foreign competitors sell products in the same
markets and the cost of certain inventory and non-inventory items required by our operations. The currencies to which we are
exposed include the euro, the British pound, the Chinese yuan, the Polish zloty, the Russian ruble, the Brazilian real, the
Argentine peso, the Australian dollar and the Canadian dollar. The exchange rates between these currencies and the U.S. dollar
in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against
the U.S. dollar would decrease the U.S. dollar equivalent of the amounts derived from foreign operations reported in our
consolidated financial statements and an appreciation of these currencies would result in a corresponding increase in such
amounts. The cost of certain items, such as raw materials, transportation and freight, required by our operations may be affected
by changes in the value of the various relevant currencies. To the extent that we are required to pay for goods or services in
foreign currencies, the appreciation of such currencies against the U.S. dollar would tend to negatively impact our financial
condition and results of operations. Our efforts to hedge certain exposures to foreign currency exchange rates arising in the
ordinary course of business may not successfully hedge the effect of such fluctuations.
We are subject to risks related to our international operations.
We operate on a global basis, and approximately 68% of our net revenues in fiscal 2018 were generated outside North
America. We maintain offices in over 35 countries, and we market, sell and distribute our products in over 150 countries and
territories. Our presence in such geographies has expanded as a result of our acquisitions, including the ghd acquisition, the
acquisition of the Hypermarcas Brands and the P&G Beauty Business Acquisition, as well as organic growth, and we are
exposed to risks inherent in operating in geographies in which we have not operated in or have been less present in the past.
Non-U.S. operations are subject to many risks and uncertainties, including ongoing instability or changes in a country’s or
region’s economic, regulatory or political conditions, including inflation, recession, interest rate fluctuations, sovereign default
risk and actual or anticipated military or political conflicts (including any other change resulting from Brexit), labor market
disruptions, sanctions, boycotts, new or increased tariffs, quotas, exchange or price controls, trade barriers or other restrictions
on foreign businesses, our failure to effectively and timely implement processes and policies across our diverse operations and
employee base and difficulties and costs associated with complying with a wide variety of complex and potentially conflicting
regulations across multiple jurisdictions. Non-U.S. operations also increase the risk of non-compliance with U.S. laws and
regulations applicable to such non-U.S. operations, such as those relating to sanctions, boycotts, improper payments.
In addition, sudden disruptions in business conditions as a consequence of events such as terrorist attacks, war or other
military action or the threat of further attacks, pandemics or other crises or vulnerabilities or as a result of adverse weather
conditions or climate changes, may have an impact on consumer spending, which could have a material adverse effect on our
business, prospects, financial condition, results of operations, cash flows, as well as the trading price of our securities.
The U.S. and the other countries in which our products are manufactured or sold have imposed and may impose additional
quotas, duties, tariffs, retaliatory or trade protection measures, or other restrictions or regulations, or may adversely adjust
prevailing quota, duty or tariff levels, which can affect both the materials that we use to manufacture or package our products
and the sale of finished products. For example, the E.U. recently imposed tariffs on certain luxury products imported from the
U.S., which would impact the sale in the E.U. of certain of our Professional Beauty and Consumer Beauty products that are
manufactured in the U.S. Similarly, the tariffs imposed by the U.S. on goods and materials from China would impact any
materials we import for use in manufacturing or packaging in the U.S. Measures to reduce the impact of tariff increases or
trade restrictions, including shifts of production among countries and manufacturers, geographical diversification of our sources
of supply, adjustments in product or packaging design and fabrication, or increased prices, could increase our costs and delay
our time to market or decrease sales. Other governmental action related to tariffs or international trade agreements has the
potential to adversely impact demand for our products, our costs, customers, suppliers and global economic conditions and
cause higher volatility in financial markets.
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In addition, on December 22, 2017, the President of the U.S. signed the Tax Act, which includes a broad range of tax
changes significantly revising the U.S. corporate income tax system by, amongst other things, reducing the U.S. federal
corporate tax rate from 35% to 21%, implementing a modified territorial tax system (including a new minimum tax on certain
foreign earnings) and imposing one-time deemed repatriation tax on historical earnings generated by certain foreign
subsidiaries that had not previously been repatriated to the U.S. The new law makes broad and complex changes to the U.S. tax
laws that affect businesses operating internationally, and we expect to see future regulatory, administrative or legislative
guidance that could adversely affect our financial results. We have recorded provisional amounts in our financial statements
based on information available at this time and our current analysis of the Tax Act. We continue to analyze the Tax Act to
determine the full impact of the new law and related guidance, and to the extent any future guidance or analysis differs from
our preliminary interpretation of the law, it could have a material adverse effect on our financial position and results of
operations. In addition, some foreign governments may enact tax laws in response to the Tax Act that could result in further
changes to global taxation and that could materially adversely affect our financial results, which could have a material adverse
effect on our results of operations, financial condition and cash flows.
We are subject to legal proceedings and legal compliance risks.
We are subject to a variety of legal proceedings and legal compliance risks in the countries in which we do business,
including the matters described under the heading “Legal Proceedings” in Part I, Item 3 of this report. We are under the
jurisdiction of regulators and other governmental authorities which may, in certain circumstances, lead to enforcement actions,
changes in business practices, fines and penalties, the assertion of private litigation claims and damages and adversely impact
our customer relationships, particularly to the extent customers were implicated by such proceedings. We are also subject to
legal proceedings and legal compliance risks in connection with legacy matters involving the P&G Beauty Business, the
Burberry fragrance business, Hypermarcas Brands, ghd and Younique, that were previously outside our control and that we are
now independently addressing, which may result in unanticipated or new liabilities. While we believe that we have adopted,
and /or will adopt, appropriate risk management and compliance programs, the global nature of our operations and many laws
and regulations to which we are subject mean that legal and compliance risks will continue to exist with respect to our business,
and additional legal proceedings and other contingencies, the outcome and impact of which cannot be predicted with certainty,
will arise from time to time.
In addition, we are subject to pending tax assessment matters in Brazil relating to local sales tax credits for the 2016-2017
tax periods. Although we are seeking a favorable administrative decision on the related tax enforcement action, we may not be
successful. See Note 24, “Commitments and Contingencies” for more information regarding our potential tax obligations in
Brazil.
Our operations and acquisitions in certain foreign areas expose us to political, regulatory, economic and reputational risks.
We operate on a global basis. Our employees, contractors and agents, business partners, joint venture and joint venture
partners and companies to which we outsource certain of our business operations, may take actions in violation of our
compliance policies or applicable law. In addition, some of our recent acquisitions have required us to integrate non-U.S.
companies that had not, until our acquisition, been subject to U.S. law or other laws to which we are subject.
In many countries, particularly in those with developing economies, it may be common for persons to engage in business
practices prohibited by the laws and regulations applicable to us. We are in the process of enhancing our compliance program as
a result of the P&G Beauty Business Acquisition and our other recent acquisitions, but we cannot assure you that we will not
encounter problems with respect to such programs or that such programs will be effective in ensuring compliance.
Failure by us or our subsidiaries to comply with these laws or policies could subject us to civil and criminal penalties,
cause us to be in breach of contract or damage to our or our licensors’ reputation, each of which could materially and adversely
affect our business, prospects, financial condition, cash flows, results of operations, cash flows, as well as the trading price of
our securities.
In addition, the U.S. may impose additional sanctions at any time on countries where we sell our products. If so, our
existing activities may be adversely affected, we may incur costs in order to come into compliance with future sanctions,
depending on the nature of any further sanctions that may be imposed, or we may experience reputational harm and increased
regulatory scrutiny.
We are subject to the interpretation and enforcement by governmental agencies of other foreign laws, rules, regulations or
policies, including any changes thereto, such as restrictions on trade, import and export license requirements, and tariffs and
taxes (including assessments and disputes related thereto), which may require us to adjust our operations in certain areas where
we do business. We face legal and regulatory risks in the U.S. and abroad and, in particular, cannot predict with certainty the
outcome of various contingencies or the impact that pending or future legislative and regulatory changes may have on our
business. It is not possible to gauge what any final regulation may provide, its effective date or its impact at this time. These
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risks could have a material adverse effect on our business, prospects, financial condition, results of operations, cash flows, as
well as the trading price of our securities.
Our failure to protect our reputation, or the failure of our brand partners or licensors to protect their reputations, could
have a material adverse effect on our brand images.
Our ability to maintain our reputation is critical to our business and our various brand images. Our reputation could be
jeopardized if we fail to maintain high standards for product quality and integrity (including should we be perceived as
violating the law) or if we, or the third parties with whom we do business, do not comply with regulations or accepted practices
and are subject to a significant product recall, litigation, or allegations of tampering, animal testing, use of certain ingredients
(such as certain palm oil) or misconduct by executives. Any negative publicity about these types of concerns or other concerns,
whether actual or perceived or directed towards us or our competitors, may reduce demand for our products. Failure to comply
with ethical, social, product, labor and environmental standards, or related political considerations, could also jeopardize our
reputation and potentially lead to various adverse consumer actions, including boycotts. In addition, the behavior of our
employees, including with respect to our employees’ use of social media subjects us to potential negative publicity if such use
does not align with our high standards and integrity or fails to comply with regulations or accepted practices. Furthermore,
widespread use of digital and social media by consumers has greatly increased the accessibility of information and the speed of
its dissemination. Negative or inaccurate publicity, posts or comments on social media, whether accurate or inaccurate, about
us, our employees or our brand partners (including influencers) and licensors, our respective brands or our respective products,
whether true or untrue, could damage our respective brands and our reputation.
Additionally, our success is also partially dependent on the reputations of our brand partners and licensors and the goodwill
associated with their intellectual property. We often rely on our brand partners or licensors to manage and maintain their brands,
but these licensors’ reputation or goodwill may be harmed due to factors outside our control, which could be attributed to our
other brands and have a material adverse effect on our business, prospects, financial condition, results of operations, cash flows,
as well as the trading price of our securities. Many of these brand licenses are with fashion houses, whose popularity may
decline due to mismanagement, changes in fashion or consumer preferences, allegations against their management or designers
or other factors beyond our control. Similarly, certain of our products bear the names and likeness of celebrities, whose brand or
image may change without notice and who may not maintain the appropriate celebrity status or positive association among the
consumer public to support projected sales levels. In addition, in the event that any of these licensors were to enter bankruptcy
proceedings, we could lose our rights to use the intellectual property that the applicable licensors license to us.
Damage to our reputation or the reputations of our brand partners or licensors or loss of consumer confidence for any of
these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as
well as require additional resources to rebuild our reputation.
Our brand licenses may be terminated if specified conditions are not met, and we may not be able to renew expiring licenses
on favorable terms or at all.
We license trademarks for many of our product lines. Our brand licenses typically impose various obligations on us,
including the payment of annual royalties, maintenance of the quality of the licensed products, achievement of minimum sales
levels, promotion of sales and qualifications and behavior of our suppliers, distributors and retailers. We have breached, and
may in the future breach, certain terms of our brand licenses. If we breach our obligations, our rights under the applicable brand
license agreements could be terminated by the licensor and we could, among other things, lose our ability to sell products
related to that brand, lose any upfront investments made in connection with such license and sustain reputational damage. In
addition, most brand licenses have renewal options for one or more terms, which can range from three to ten years. Certain
brand licenses provide for automatic extensions, so long as minimum annual royalty payments are made, while renewal of
others is contingent upon attaining of specified sales levels or upon agreement of the licensor. For example, one of our brand
licenses is up for renewal in fiscal 2019, and, while many of our licenses are long term, licenses relating to certain of our global
brands are up for renewal in the next few years. We may not be able to renew expiring licenses on terms that are favorable to us
or at all. We may also face difficulties in finding replacements for terminated or expired licenses. Each of the aforementioned
risks could have a material adverse effect on our business, prospects, financial condition, results of operations, cash flows, as
well as the trading price of our securities.
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Our business is subject to seasonal variability.
Our sales generally increase during our second fiscal quarter as a result of increased demand by retailers associated with
the winter holiday season. We also experience an increase in sales during our fourth quarter in our Professional Beauty segment
as a result of stronger activity prior to the summer holiday season. Accordingly, our financial performance, sales, working
capital requirements, cash flow and borrowings generally experience variability during the three to six months preceding and
during the holiday period. As a result of this seasonality, our expenses, including working capital expenditures and advertising
spend, are typically higher during the period before a high-demand season. Consequently, any substantial decrease in, or
inaccurate forecasting with respect to, net revenues during such periods of high demand including as a result of decreased
customer purchases, increased product returns, production or distribution disruptions or other events (many of which are
outside of our control), would prevent us from being able to recoup our earlier expenses and could have a material adverse
effect on our financial condition, results of operations and cash flows.
A disruption in operations could adversely affect our business.
As a company engaged in manufacturing and distribution on a global scale, we are subject to the risks inherent in such
activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or
information systems, loss or impairment of key manufacturing sites or distribution centers, product quality control, safety,
licensing requirements and other regulatory issues, as well as natural disasters, pandemics, border disputes, acts of terrorism,
possible dawn raids, and other external factors over which we have no control. For example, disruptions in our U.K. planning
hub and one of our U.S. distribution centers in the fourth quarter of fiscal 2018 resulted in loss of revenue and increased costs,
including penalty payments to retailers for unshipped products, as we were unable to meet consumer demand for certain
Consumer Beauty products, which has impacted and is expected to continue to impact our results of operations. As we continue
our integration and restructuring activities, any additional or ongoing supply chain disruptions may impact our quarterly results.
The loss of, or damage or disruption to, any of our manufacturing facilities or distribution centers could have a material adverse
effect on our business, prospects, results of operations, financial condition, results of operations, cash flows, as well as the
trading price of our securities.
We manufacture and package a majority of our products. Raw materials, consisting chiefly of essential oils, alcohols,
chemicals, containers and packaging components, are purchased from various third-party suppliers. The loss of multiple
suppliers or a significant disruption or interruption in the supply chain could have a material adverse effect on the
manufacturing and packaging of our products. Increases in the costs of raw materials or other commodities may adversely
affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost
efficiencies in manufacturing and distribution. In addition, failure by our third-party suppliers to comply with ethical, social,
product, labor and environmental laws, regulations or standards, or their engagement in politically or socially controversial
conduct, such as animal testing, could negatively impact our reputations and lead to various adverse consequences, including
decreased sales and consumer boycotts. The Dodd-Frank Wall Street Reform and Consumer Protection Act includes disclosure
requirements regarding the use of certain minerals mined from the Democratic Republic of Congo and adjoining countries
(each, a “covered country”) and procedures pertaining to a manufacturer’s efforts regarding the source of such minerals. SEC
rules implementing these requirements may have the effect of reducing the pool of suppliers who can supply covered country
“conflict free” products, and we may not be able to obtain covered country conflict free products or supplies in sufficient
quantities for our operations. For calendar year 2017, we determined that we have no reason to believe that any products we
manufactured or contracted to manufacture contained conflict minerals that may have originated in the covered countries.
However, since our supply chain is complex, we may face operational obstacles and reputational challenges with our customers
and stockholders if we are unable to continue to sufficiently verify the origins for the minerals used in our products.
We have also outsourced and may continue to outsource certain functions, and we are dependent on the entities performing
those functions. For example, a short-term transportation workers strike in Brazil impacted the distribution of our products and
raw materials in the fourth quarter of fiscal 2018, resulting in increased logistical costs and lost revenues for products that could
not be shipped. The failure of one or more such providers to provide the expected services, provide them on a timely basis or
provide them at the prices we expect, or the costs incurred in returning these outsourced functions to being performed under our
management and direct control, may have a material adverse effect on our results of operations or financial condition.
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We are increasingly dependent on information technology, and if we are unable to protect against service interruptions,
corruption of our data and privacy protections, cyber-based attacks or network security breaches, our operations could be
disrupted.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic
and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal and tax
requirements. We also increasingly depend on our information technology infrastructure for digital marketing activities, e-
commerce and for electronic communications among our locations, personnel, customers and suppliers around the world. These
information technology systems, some of which are managed by third parties that we do not control, may be susceptible to
damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or
components thereof, cutover activities in our integration and simplification initiatives, power outages, hardware failures,
computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophic events or other problems.
If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not
effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be
materially and adversely affected, and we could experience delays in reporting our financial results. If not managed and
mitigated effectively, these risks could increase in the future as we expand our digital capabilities and e-commerce activities,
including through the use of new digital applications and technologies. There are further risks associated with the information
systems of our joint ventures and of the companies we acquire, both in terms of systems compatibility, process controls, level of
security and functionality. It may cost us significant money and resources to address these risks and if our systems were to fail
or we are unable to successfully expand the capacity of these systems, or we are unable to integrate new technologies into our
existing systems, our financial condition, results of operations and cash flows may be adversely affected.
We are subject to an evolving body of federal, state and non-U.S. laws, regulations, guidelines, and principles regarding
data privacy and security. A data breach or inability on our part to comply with such laws, regulations, guidelines, and
principles or to quickly adapt our practices to reflect them as they develop, could potentially subject us to significant liabilities
and reputational harm. Several governments, including the E.U., have regulations dealing with the collection and use of
personal information obtained from their citizens, and regulators globally are also imposing greater monetary fines for privacy
violations. For example, in the E.U. a new law governing data practices and privacy called the GDPR became effective in May
2018. The law establishes new requirements regarding the handling of personal data, and non-compliance with the GDPR may
result in monetary penalties of up to 4% of worldwide revenue. In addition, the state of California recently enacted a data
privacy law applicable to entities serving or employing California residents (the “California Consumer Privacy Act”) that will
require compliance by January 2020. The GDPR, the California Consumer Privacy Act and other changes in laws or regulations
associated with the enhanced protection of certain types of sensitive data and other personal information, require us to evaluate
our current operations, information technology systems and data handling practices and implement enhancements and
adaptations where necessary to comply. Compliance with these laws, could greatly increase our operational costs or require us
to adapt certain products, operations or activities, to comply with the stricter regulatory requirements, such as efforts to meet
consumer demand for personalized products and services, in jurisdictions where we operate. The regulations are complex and
likely require adjustments to our operations. Any failure to comply with all such laws by us, our business partners or third-
parties engaged by us could result in significant liabilities and reputational harm.
In addition, if we are unable to prevent or detect security breaches, or properly remedy them, we may suffer financial and
reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our
partners, customers or suppliers, including personal employee, consumer or presenter information stored in our or third-party
systems or as a result of the dissemination of inaccurate information. In addition, the unauthorized disclosure of nonpublic
sensitive information could lead to the loss of intellectual property or damage our reputation and brand image or otherwise
adversely affect our ability to compete.
Our information technology systems, operations and security control frameworks require an ongoing commitment of
significant resources to maintain, protect, and enhance existing systems to keep pace with continuing changes in technology,
legal and regulatory standards, cyber threats and the commercial opportunities that accompany the changing digital and data
driven economy. From time to time, we undertake significant information technology systems projects, including enterprise
resource planning updates, modifications, integrations and roll-outs. These projects may be subject to cost overruns and delays
and may cause disruptions in our daily business operations. These cost overruns and delays and distractions as well as our
reliance on certain third parties for certain business and financial information could impact our financial statements and could
adversely impact our ability to run our business, correctly forecast future performance and make fully informed decisions.
Our success depends, in part, on our employees, including our key personnel.
Our success depends, in part, on our ability to identify, hire, train and retain our employees, including our key personnel,
such as our executive officers and senior management team and our research and development and marketing personnel. The
unexpected loss of one or more of our key employees could adversely affect our business. Competition for highly qualified
individuals can be intense, and although many of our key personnel have signed non-compete agreements, it is possible that
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these agreements would be unenforceable, in whole or in part, in some jurisdictions, permitting employees in those jurisdictions
to transfer their skills and knowledge to the benefit of our competitors with little or no restriction. We may not be able to attract,
assimilate or retain qualified personnel in the future, and our failure to do so could adversely affect our business. Further, other
companies may attempt to recruit our key personnel, even if bound by non-competes, which could result in diversion of
management attention and our resources to litigation related to such recruitment. These risks may be exacerbated by the stresses
associated with the integration of the P&G Beauty Business and our other acquisitions, our restructurings and simplification
program, continued changes in our senior management team and other key personnel and other initiatives.
As we continue to restructure our workforce from time to time (including with respect to business restructuring initiatives,
as well as acquisitions and our overall growth strategy) and work with more brand partners and licensors, the risk of potential
employment-related claims will also increase. As such, we or our partners may be subject to claims, allegations or legal
proceedings related to employment matters including discrimination, harassment (sexual or otherwise), wrongful termination or
retaliation, local, state, federal and non-U.S. labor law violations, injury, and wage violations. In addition, our employees in
certain countries in Europe are subject to works council arrangements, exposing us to associated delays, works council claims
and associated litigation. In the event we or our partners are subject to one or more employment-related claims, allegations or
legal proceedings, we or our partners may incur substantial costs, losses or other liabilities in the defense, investigation,
settlement, delays associated with, or other disposition of such claims. In addition to the economic impact, we or our partners
may also suffer reputational harm as a result of such claims, allegations and legal proceedings and the investigation, defense
and prosecution of such claims, allegations and legal proceedings could cause substantial disruption in our or our partners’
business and operations. While we do have policies and procedures in place to reduce our exposure to these risks, there can be
no assurance that such policies and procedures will be effective or that we will not be exposed to such claims, allegations or
legal proceedings.
Our success depends, in part, on the quality, efficacy and safety of our products.
Product safety or quality failures, actual or perceived, or allegations of product contamination, even when false or
unfounded, or inclusion of regulated ingredients could tarnish the image of our brands and could cause consumers to choose
other products. Allegations of contamination, allergens or other adverse effects on product safety or suitability for use by a
particular consumer, even if untrue, may require us from time to time to recall a product from all of the markets in which the
affected production was distributed. Such issues or recalls and any related litigation could negatively affect our profitability and
brand image.
In addition, government authorities and self-regulatory bodies regulate advertising and product claims regarding the
performance and benefits of our products. These regulatory authorities typically require a reasonable basis to support any
marketing claims. What constitutes a reasonable basis for substantiation can vary widely based on geography, and there is no
assurance that the efforts that we undertake to support our claims will be deemed adequate for any particular product or claim.
If we are unable to show adequate substantiation for our product claims, or our promotional materials make claims that exceed
the scope of allowed claims for the classification of the specific product, regulatory authorities could take enforcement action or
impose penalties, such as monetary consumer redress, requiring us to revise our marketing materials, amend our claims or stop
selling or recalling certain products, all of which could harm our business, prospects, financial condition, results of operations,
cash flows, as well as the trading price of our securities. Any regulatory action or penalty could lead to private party actions,
which could further harm our business, prospects, financial condition, results of operations, cash flows, as well as the trading
price of our securities.
If our products are perceived to be defective or unsafe, or if they otherwise fail to meet our consumers’ expectations, our
relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we
could lose sales or become subject to liability claims. In addition, safety or other defects in our competitors’ products could
reduce consumer demand for our own products if consumers view them to be similar or view the defects as symptomatic of the
product category. Any of these outcomes could result in a material adverse effect on our business, prospects, financial
condition, results of operations, cash flows, as well as the trading price of our securities.
If we underestimate or overestimate demand for our products and do not maintain appropriate inventory levels, our net
revenues or working capital could be negatively impacted.
We currently engage in a program seeking to improve control over our product demand and inventories. We have
identified, and may continue to identify, inventories that are not saleable in the ordinary course, but there is no assurance that
our existing program or any future inventory management program will be successful in improving our inventory control. Our
ability to manage our inventory levels to meet demand for our products is important for our business. If we overestimate or
underestimate demand for any of our products, we may not maintain appropriate inventory levels, we could have excess
inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard, which
could negatively impact our net sales or working capital, or cause us to incur excess and obsolete inventory charges. We also
18
could have inadequate inventories which could hinder our ability to meet demand. We have sought and continue to seek to
improve our payable terms, which could adversely affect our relations with our suppliers.
In addition, we have significant working capital needs, as the nature of our business requires us to maintain inventories that
enable us to fulfill customer demand. We generally finance our working capital needs through cash flows from operations and
borrowings under our credit facilities. If we are unable to finance our working capital needs on the same or more favorable
terms going forward, or if our working capital requirements increase and we are unable to finance the increase, we may not be
able to produce the inventories required by demand, which could result in a loss of sales. In addition, we are reliant on our cash
flows from operations to repay our indebtedness, which may impact the cash flows that are available for working capital needs.
Our ability to generate and maintain sufficient cash levels also could impact our ability to reduce our indebtedness.
Changes in laws, regulations and policies that affect our business or products could adversely affect our business, financial
condition, results of operations, cash flows, as well as the trading price of our securities.
Our business is subject to numerous laws, regulations and policies. Changes in the laws (both foreign and domestic),
regulations and policies, including the interpretation or enforcement thereof, that affect, or will affect, our business or products,
including those related to taxes, tariffs, corruption, the environment or climate change, immigration, restrictions or
requirements related to product content, labeling and packaging, trade and customs (including, among others, import and export
license requirements, sanctions, boycotts, quotas, trade barriers, and other measures imposed by U.S. and foreign countries),
restrictions on foreign investment, the outcome and expense of legal or regulatory proceedings, and any action we may take as
a result, and changes in accounting standards, could adversely affect our financial results. For example, the recent changes in
sanctions against Iran have adversely impacted our net revenues and prohibits us from conducting business in Iran. Also, the
Tax Act, enacted on December 22, 2017, introduced a broad range of tax changes significantly revising the U.S. corporate
income tax system by, amongst other things, reducing the U.S. federal corporate tax rate from 35% to 21%, implementing a
modified territorial tax system (including a new minimum tax on certain foreign earnings) and imposing one-time deemed
repatriation tax on historical earnings generated by certain foreign subsidiaries that had not previously been repatriated to the
United States. The new law makes broad and complex changes to the U.S. tax laws that affect businesses operating
internationally, and future regulatory, administrative or legislative guidance could adversely affect our financial results. See “—
We are subject to risks related to our international operations”, “—Network marketing is subject to intense government
scrutiny, and regulation and changes in the law, or the interpretation and enforcement of the law, might adversely affect our
business” and “—We face risks associated with our independent contractors.”
We are also subject to legal proceedings and legal compliance risks in connection with legacy matters related to recently
acquired companies that were previously outside our control. Such matters may result in our incurring unanticipated costs that
may negatively impact the positive financial contributions of such acquisitions at least in the periods in which such liability is
incurred or require operational adjustments that affect our results of operations with respect to such investments. We may not
have adequate or any insurance coverage for some of these legacy matters, including matters assumed in the acquisition of the
P&G Beauty Business, Younique, ghd, the Hypermarcas Brands and the Burberry fragrance business. While we believe that we
have adopted, and will adopt, appropriate risk management and compliance programs, the global nature of our operations and
many laws and regulations to which we are subject mean that legal and compliance risks will continue to exist with respect to
our business, and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with
certainty, will arise from time to time, which could adversely affect our business, prospects, financial condition, results of
operations and cash flows, as well as the trading price of our securities.
Network marketing is subject to intense government scrutiny, and regulation and changes in the law, or the interpretation
and enforcement of the law, might adversely affect our business.
On February 1, 2017, we entered into a joint venture with the founders of Younique, a leading online peer-to-peer social
selling platform in beauty. We are now subject to a number of federal and state regulations administered by the Federal Trade
Commission (the “FTC”) and various federal and state agencies in the United States related to Younique’s network marketing
program, as well as regulations on direct selling in foreign countries administered by foreign agencies. We are subject to the
risk that, in one or more countries, Younique’s network marketing program could be found by federal, state or foreign
regulators not to be in compliance with applicable law or regulations which could result in significant fines, changes in business
practices or a permanent injunction.
Regulations applicable to network marketing organizations generally are directed at preventing fraudulent or deceptive
schemes, often referred to as “pyramid” or “chain sales” schemes, by ensuring that product sales ultimately are made to
consumers and that advancement within an organization is based on sales of the organization’s products rather than investments
in the organization or other non-retail sales-related criteria. The regulatory requirements concerning network marketing
programs do not include “bright line” rules and are inherently fact-based and, thus, we are subject to the risk that these laws or
regulations or the enforcement or interpretation of these laws and regulations by governmental agencies or courts can change
19
and business practices can evolve. There is no assurance that the FTC or other federal, state or foreign courts or agencies will
consider us to be in compliance.
The ambiguity surrounding these laws can also affect the public perception of us. The failure of the network marketing
program to comply with current or newly adopted regulations or any allegations or charges to that effect brought by federal,
state, or foreign regulators could negatively impact our brands and business in a particular market or in general and may
adversely affect our share price.
We are also subject to the risk of private party challenges to the legality of the network marketing program. Some network
marketing programs of other companies have been successfully challenged in the past. Adverse judicial determinations with
respect to the network marketing program, or in proceedings not involving us directly but that challenge the legality of network
marketing systems, in any other market in which we operate, could increase costs to the extent we are obligated to contribute to
the cost of defense and could negatively impact our business, prospects, financial condition, results of operations and cash
flows, as well as the trading price of our securities.
Our employees or others may engage in misconduct or other improper activities including noncompliance with regulatory
standards and regulatory requirements.
We are exposed to the risk of fraud or other misconduct by our personnel or third parties such as independent contractors or
agents. Misconduct by employees, independent contractors, or agents could include intentional failures to comply with the laws
and regulations to which we are subject or with our policies, provide accurate information to regulatory authorities, comply
with ethical, social, product, labor and environmental standards, comply with fraud and abuse laws and regulations, report
financial information or data accurately, or disclose unauthorized activities to us. In particular, our business is subject to laws,
regulations and policies intended to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws and
regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer
incentive programs, and other business arrangements. Our current and former employees, influencers or independent
contractors may also become subject to allegations of sexual harassment, racial and gender discrimination or other similar
misconduct, which, regardless of the ultimate outcome, may result in adverse publicity that could significantly harm our
company’s brand, reputation and operations. Employee misconduct could also involve improper use of information obtained in
the course of employment, which could result in legal or regulatory action and serious harm to our reputation.
Violations of our prohibition on harassment, sexual or otherwise, could result in liabilities and/or litigation.
We prohibit harassment or discrimination in the workplace, in sexual or in any other form. This policy applies to all aspects
of employment. Notwithstanding our conducting training and taking disciplinary action against alleged violations, we may
encounter additional costs from claims made and/or legal proceedings brought against us, and we could suffer reputational
harm.
We face risks associated with our independent contractors.
We have personnel that we classify as independent contractors for U.S. federal and state and international employment law
purposes in certain positions in our business. For example, Younique relies on independent presenters that it classifies as
independent contractors to sell its products through its peer-to-peer social selling platform and we are subject to risks related to
Younique presenters’ status as independent contractors.
We are not in a position to directly provide the same direction, motivation and oversight to our independent contractors as
we would if such personnel were our own employees. As a result, there can be no assurance that our independent contractors
will comply with applicable law or our policies and procedures or reflect our culture or values. Violations by our independent
contractors of applicable law or of our policies and procedures in dealing with customers and other third parties or failure to
meet our standards or reflect our culture could reflect negatively on our products and operations and harm our business
reputation and also negatively impact our business, prospects, financial condition, results of operations and cash flows, as well
as the trading price of our securities. In addition, it is possible that a court could hold us civilly or criminally accountable based
on vicarious liability because of the actions of our independent contractors. In addition, our independent contractors are not
subject to employment agreements with us and our ability to retain such personnel or enforce non-competes or other restrictions
against them may be limited.
In addition, we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding
independent contractor classification. These regulations and guidelines are subject to changes in judicial and agency
interpretation, and it could be determined that the independent contractor classification is inapplicable. If legal standards for
classification of independent contractors change, it may be necessary to modify our compensation structure for these personnel,
including by paying additional compensation and taxes and/or reimbursing expenses. In addition, if we are determined to have
misclassified such personnel as independent contractors, we would incur additional exposure under federal and state law,
including workers' compensation, unemployment benefits, labor, employment and tort laws, including for prior periods, as well
as potential liability for employee benefits and tax withholdings. Any of these outcomes could result in costs to us, could impair
20
our financial condition and our ability to conduct our business and could damage our reputation and our ability to attract and
retain other personnel.
We are subject to risks related to our common stock and our stock repurchase program.
Any repurchases pursuant to our stock repurchase program, or a decision to discontinue our stock repurchase program,
which may be discontinued at any time, could affect our stock price and increase volatility. For a two-year period following the
closing of the P&G Beauty Business Acquisition, we are subject to certain restrictions in repurchasing our stock. For more
information on our stock repurchase restrictions, see “—We could be adversely affected by significant restrictions following the
P&G Beauty Business Acquisition in order to avoid tax-related liabilities.” In addition, the timing and actual number of any
shares repurchased will depend on a variety of factors including the timing of open trading windows, price, corporate and
regulatory requirements, an assessment by management and our board of directors of cash availability, capital allocation
priorities, including deleveraging, and other market conditions. Further, we allow pledging by our employees in connection
with certain executive ownership programs. A drop in the share price could result in pledged shares being sold pursuant to the
terms of the pledge, which could result in a decrease in the trading price of our stock and subject us to civil and criminal
investigations, including with respect to insider trading.
If the Distribution (as defined below) does not qualify as a tax-free transaction under sections 355 or 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended (the “Code”) or the Green Merger does not qualify as a tax-free
“reorganization” under section 368(a) of the Code, including as a result of actions taken in connection with the Distribution
or the Green Merger or as a result of subsequent acquisitions of Company, P&G or Galleria common stock, then P&G and
its shareholders may incur substantial U.S. federal income tax liability, and we may have substantial indemnification
obligations to P&G under the tax matters agreement entered into in connection with the P&G Beauty Business Acquisition
dated October 1, 2016 (the “Tax Matters Agreement”).
In connection with the closing of the P&G Beauty Business Acquisition on October 1, 2016, we and P&G received written
opinions from special tax counsel regarding the intended tax treatment of the Green Merger, and P&G received an additional
written opinion from special tax counsel regarding the intended tax treatment of the Distribution. The opinions were based on,
among other things, certain assumptions and representations as to factual matters and certain covenants made by us, P&G,
Galleria and Green Acquisition Sub Inc. (“Green Merger Sub”) which, if incorrect or inaccurate in any material respect, could
jeopardize the conclusions reached by special tax counsel in their opinions. We are not aware of any facts or circumstances that
would cause the assumptions or representations to be relied upon in the above-described tax opinions to be untrue or
incomplete in any material respect or that would preclude any of us, P&G, Galleria or Green Merger Sub from complying with
all applicable covenants. Any change in currently applicable law, which may be retroactive, or the failure of any representation
or assumption to be true, correct and complete or any applicable covenant to be satisfied in all material respects, could
adversely affect the conclusions reached by counsel. Furthermore, it should be noted that there is a lack of binding
administrative and judicial authority addressing the tax-free treatment of transactions substantially similar to the distribution by
P&G of its shares of Galleria common stock to P&G shareholders by way of an exchange offer (the “Distribution”) and the
Green Merger, the opinions will not be binding on the Internal Revenue Service (“IRS”) or a court, and the IRS or a court may
not agree with the opinions. As a result, while it is impossible to determine the likelihood that the IRS or a court could disagree
with the conclusions of the above-described opinions, the IRS could assert, and a court could determine, that the Distribution
and Green Merger should be treated as taxable transactions.
If, notwithstanding the receipt of the above-described opinion received by P&G, the Distribution is determined to be a
taxable transaction, each P&G shareholder who receives shares of Galleria common stock in the Distribution would generally
be treated as recognizing taxable gain equal to the difference between the fair market value of the shares of Galleria common
stock received by the shareholder and its tax basis in the shares of P&G common stock exchanged therefor. Additionally, in
such case, P&G would generally recognize taxable gain equal to the excess of the fair market value of the assets transferred to
Galleria plus liabilities assumed by Galleria over P&G’s tax basis in those assets, and this would likely produce substantial
income tax adjustments to P&G.
Even if the Galleria Transfer (as used herein, “Galleria Transfer” means the contribution of certain specified assets related
to P&G Beauty Business by P&G to Galleria in exchange for Galleria common stock, any distribution to P&G of a portion of
the amount calculated pursuant to the transaction agreement entered into in connection with the P&G Beauty Business
Acquisition dated July 8, 2015 (the “Transaction Agreement”) for the recapitalization of Galleria and the assumption of certain
liabilities related to P&G Beauty Business, in each case in accordance with the Transaction Agreement) and the Distribution,
taken together, were otherwise to qualify as a tax-free transaction under section 368(a)(1)(D) of the Code, and the Distribution
were otherwise to qualify as a distribution to P&G shareholders pursuant to section 355 of the Code, the Distribution would
become taxable to P&G (but not P&G shareholders) pursuant to section 355(e) of the Code if a 50% or greater interest (by vote
or value) of either P&G or Galleria was acquired (including, in the latter case, through the acquisition of our stock in or after
the Green Merger), directly or indirectly, by certain persons as part of a plan or series of related transactions that included the
Distribution. For this purpose, any acquisitions of shares of our common stock, P&G common stock or Galleria common stock
21
within the period beginning two years before the Distribution and ending two years after the Distribution are presumed to be
part of such a plan, although we, P&G or Galleria may be able to rebut that presumption. While the Green Merger will be
treated as part of such a plan for purposes of the test, standing alone, it should not cause the Distribution to be taxable to P&G
under section 355(e) of the Code because P&G shareholders held over 54% of our outstanding common stock immediately
following the Green Merger. However, if the IRS were to determine that other acquisitions of our shares of stock, P&G
common stock or Galleria common stock, either before or after the Distribution, were part of a plan or series of related
transactions that included the Distribution, that determination could result in the recognition of a taxable gain by P&G. While
P&G generally would recognize gain as if it had sold the shares of Galleria common stock distributed to P&G shareholders in
the Distribution for an amount equal to the fair market value of such stock, P&G has agreed under the Tax Matters Agreement
among us, P&G, Galleria and Green Merger Sub to make a protective election under section 336(e) of the Code with respect to
the Distribution, which generally causes a deemed sale of Galleria’s assets upon a taxable Distribution. In such case, to the
extent that P&G is responsible for the resulting transaction taxes, we generally would be required to make periodic payments to
P&G equal to the tax savings arising from a “step up” in the tax basis of Galleria’s assets as a result of the protective election
under section 336(e) of the Code taking effect.
Under the Tax Matters Agreement, we are required to indemnify P&G against tax-related losses (e.g., increased taxes,
penalties and interest required to be paid by P&G) if the Distribution were taxable to P&G as a result of the acquisition of a
50% or greater interest (by vote or value) in us as part of a plan or series of related transactions that included the Distribution,
except where such acquisition would not have been taxable but for P&G’s breach of certain provisions described in the Tax
Matters Agreement. In addition, we are required to indemnify P&G for any tax liabilities resulting from the failure of the Green
Merger to qualify as a reorganization under section 368(a) of the Code or the failure of the Distribution to qualify as a tax-free
reorganization under sections 355 and 368(a) of the Code (including, in each case, failure to so qualify under a similar
provision of state or local law) to the extent that such failure is attributable to a breach of certain representations and warranties
by us or certain actions or omissions by us. Tax-related losses attributable both to actions or omissions by us, on the one hand,
and certain actions or omissions by P&G, on the other hand, would be shared according to the relative fault of us and P&G. If
we are required to indemnify P&G in the event of a taxable Distribution, this indemnification obligation would be substantial
and could have a material adverse effect on us, including with respect to our financial condition and results of operations.
Except as described above, P&G would not be entitled to indemnification under the Tax Matters Agreement with respect to any
taxable gain recognized in the Distribution. To the extent that we have any liability for any taxes of P&G, Galleria or any of
their affiliates with respect to the P&G Beauty Business Acquisition that do not result from actions or omissions for which we
are liable as described above, P&G must indemnify us for such tax-related losses.
We could be adversely affected by significant restrictions following the P&G Beauty Business Acquisition in order to avoid
tax-related liabilities.
The Tax Matters Agreement among us, P&G, Galleria and Green Merger Sub requires that we and Galleria, for a two-year
period following the closing of the Merger, generally avoid taking certain actions. This period ends on October 1, 2018. These
limitations are designed to restrict actions that might cause the Distribution to be treated under section 355(e) of the Code as
part of a plan under which a 50% or greater interest (by vote or value) in us is acquired or that could otherwise cause the
Distribution, Green Merger and/or certain related transactions to become taxable to P&G. Unless we deliver an unqualified
opinion of tax counsel reasonably acceptable to P&G, confirming that a proposed action would not cause the Distribution,
Green Merger and/or certain related transactions to become taxable, or P&G otherwise consents to the action, we and Galleria
are each generally prohibited or restricted during the two-year period following the closing of the Green Merger from:
•
•
subject to specified exceptions, issuing stock (or stock equivalents) or recapitalizing, repurchasing, redeeming or
otherwise participating in acquisitions of its stock;
amending our or Galleria’s certificate of incorporation or other organizational documents to affect the voting rights of
our or Galleria’s stock;
• merging or consolidating with another entity, or liquidating or partially liquidating, except for any merger,
consolidation, liquidation or partial liquidation that is disregarded for U.S. federal income tax purposes;
•
•
•
discontinuing, selling, transferring or ceasing to maintain the Galleria active business under section 355(b) of the
Code;
taking any action that permits a proposed acquisition of our stock or Galleria stock to occur by means of an agreement
to which none of us, Galleria or their affiliates is a party (including by soliciting a tender offer for Galleria stock or our
stock, participating in or otherwise supporting any unsolicited tender offer for such stock or redeeming rights under a
shareholder rights plan with respect to such stock); and
engaging in other actions or transactions that could jeopardize the tax-free status of the Distribution, Merger and/or
certain related transactions.
22
In addition, even if we deliver such an unqualified opinion, or P&G otherwise consents, we generally would be required to
indemnify P&G if an action that would be otherwise restricted results in tax-related losses to P&G.
Due to these restrictions and indemnification obligations under the Tax Matters Agreement, including the indemnification
obligations described in the preceding risk factor, many strategic alternatives may be unavailable to us during the two-year
period following the consummation of the Green Merger, which could have a material adverse effect on our liquidity and
financial condition. We may be limited during this period in our ability to pursue strategic transactions, equity or convertible
debt financings, internal restructurings or other transactions that may maximize the value of our business and that may
otherwise be in our best interests. Also, the restrictions and our potential indemnity obligation to P&G might discourage, delay
or prevent a change of control transaction during this two-year period that our stockholders may consider favorable to our
ability to pursue strategic alternatives.
JABC is a significant shareholder of the Company, owning approximately 39% of the fully diluted shares of Class A
Common Stock, and has the ability to exercise significant influence over decisions requiring stockholder approval, which
may be inconsistent with the interests of our other stockholders.
Prior to the close of the P&G Beauty Business Acquisition, we were controlled by JABC, Lucresca and Agnaten. Lucresca
and Agnaten indirectly share voting and investment control over the shares of the Class A Common Stock held by JABC.
Following the completion of the P&G Beauty Business Acquisition, JABC remains our largest stockholder, owning
approximately 39% of the fully diluted shares of Class A Common Stock following the close of the P&G Beauty Business
Acquisition. As a result, JABC, Lucresca and Agnaten continue to have the ability to exercise significant influence over
decisions requiring stockholder approval, including the election of directors, amendments to our certificate of incorporation and
approval of significant corporate transactions, such as a merger or other sale of the Company or our assets. In addition, several
of the directors on our Board of Directors are affiliated with JABC.
JABC’s interests may be different from or conflict with the interests of our other shareholders and, as a result, this
concentration of ownership may have the effect of delaying, preventing or deterring a change in control of us and may
negatively affect the market price of our stock. Also, JABC and its affiliates are in the business of making investments in
companies and may from time to time acquire and hold interests in businesses that compete indirectly with us. JABC or its
affiliates may also pursue acquisition opportunities that are complementary to our business, and, as a result, those acquisition
opportunities may not be available to us.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We occupy numerous offices, manufacturing, distribution and research and development facilities in the U.S. and abroad.
Our principal executive offices are located in New York, U.S. and our division corporate headquarters are located in New York
for Consumer Beauty, Paris, France for Luxury and Geneva, Switzerland for Professional Beauty.
We consider our properties to be generally in good condition and believe that our facilities are adequate for our operations
and provide sufficient capacity to meet anticipated requirements. The following table sets forth our principal owned and leased
corporate, manufacturing and research and development facilities as of June 30, 2018. The leases expire at various times
subject to certain renewal options at our option.
23
Table of Contents
Location/Facility
London, England (leased)
New York, New York, U.S. (leased)
Paris, France (3 locations) (leased)
Geneva, Switzerland (2 locations) (leased)
Ashford, England (land leased, building owned)
Bangkok, Thailand (owned)
Capella, Russia (owned)
Chartres, France (owned)
Cologne, Germany (owned)
Granollers, Spain (owned)
Hünfeld, Germany (owned)
Hunt Valley, U.S. (owned)
Mariscala, Mexico (owned)
Monaco, Monaco (leased)
Rothenkirchen, Germany (owned)
Sanford, North Carolina, U.S. (owned)
Senador Canedo, Brazil (owned)
Wujiang, China (owned)
Use
Segment
Corporate/Commercial
Corporate/Commercial
Corporate/Commercial
Corporate/Commercial/R&D
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Corporate
Corporate / Consumer Beauty
Corporate / Luxury
Corporate / Professional Beauty
Consumer Beauty
Professional Beauty
Consumer Beauty
Luxury
Luxury
Luxury
Professional Beauty
Consumer Beauty
Professional Beauty
Luxury
Professional Beauty
Luxury
Consumer Beauty
Consumer Beauty
All segments
Morris Plains, New Jersey, U.S. (leased)
R&D
Item 3. Legal Proceedings.
We are involved, from time to time, in various litigation and administrative and other legal proceedings including
regulatory actions, incidental or related to our business, including consumer class or collective actions, personal injury
(including asbestos-related claims), intellectual property, competition, and advertising claims litigation, among others
(collectively, “Legal Proceedings”). While we cannot predict any final outcomes relating thereto, management believes that the
outcome of current Legal Proceedings will not have a material effect upon our business, prospects, financial condition, results
of operations, cash flows, as well as the trading price of our securities. However, management’s assessment of our Legal
Proceedings is ongoing, and could change in light of the discovery of additional facts with respect to Legal Proceedings
pending against us not presently known to us 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, we are in discussions with regulators, including discussions initiated by us, about actual or potential
violations of law in order to remediate or mitigate associated legal or compliance risks. As the outcomes of such proceedings
are unpredictable, we can give no assurance that the results of any such proceedings will not materially affect our reputation,
our business, prospects, financial condition, results of operations, cash flows, as well as the trading price of our securities.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Class A Common Stock is listed and publicly traded on the New York Stock Exchange (“NYSE”) under the symbol
“COTY”.
Fiscal 2018
Fiscal 2017
High
Low
Cash
Dividends
High
Low
Cash
Dividends
July 1 - September 30
$
20.88
$
15.83
$
0.125
$
30.13
$
23.06
$
October 1 - December 31
January 1 - March 31
April 1 - June 30
20.31
21.68
18.75
14.24
16.50
12.92
0.125
0.125
0.125
25.34
20.09
20.51
17.94
18.12
16.95
0.275
0.125
0.125
0.125
24
Stockholders of Record
As of June 30, 2018 there were 991 stockholders of record of our Class A Common Stock. The actual number of
stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose
shares are held in street name by brokers and other nominees. This number of holders of record also does not include
stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have paid an annual dividend since fiscal 2011, and we began paying a quarterly dividend in fiscal 2017. Subject to
legally available funds, we expect to continue to pay a quarterly cash dividend on our Class A Common Stock, but there can be
no assurance that our Board of Directors (“Board”) will continue to declare dividends or that any dividends will be paid in the
anticipated amounts and frequency, or at all.
Furthermore, we are required to comply with certain covenants contained within the agreements that govern our
indebtedness, including our credit agreements and the indenture relating to our senior unsecured notes. These agreements
contain customary representations and warranties as well as customary affirmative and negative covenants, including but not
limited to, restrictions on incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments,
mergers, acquisitions and affiliate transactions. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Financial Condition—Liquidity and Capital Resources—Debt” and Note 13 “Debt” in the notes to our
Consolidated Financial Statements.
Market Performance Graph
Comparison of 5 Year Cumulative Total Return (a)
Coty Inc., The S&P 500 Index, and Fiscal 2018 Peer Group (b)
(a) Total return assumes reinvestment of dividends at the closing price at the end of each quarter, since June 30, 2013.
(b) The Peer Group includes L'Oréal S.A., Avon Products, Inc., Estee Lauder Companies, Inc. and Revlon, Inc.
25
The Market Performance Graph above assumes a $100.00 investment on June 30, 2013, in Coty Inc.’s common stock, the
S&P 500 Index and the Peer Group. The dollar amounts indicated in the graph above are as of the last trading day in the
quarter. The returns of each company in the Peer Group have been weighted according to their respective stock market
capitalization at the beginning of each measurement period for purposes of arriving at a Peer Group average.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security
holders
Options(a)
Series A Preferred Stock (b)
Restricted Stock Units
Subtotal
Equity compensation plans not approved by
security holders
Options (c)
Series A Preferred Stock (b)(d)
Phantom Units (e)
Subtotal
Total
(1)
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
Weighted-average
exercise price
of outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans(f)
(excluding securities
reflected in column(1))
13,375,385
$
3,324,707
7,538,244
24,238,336
16,975
1,645,921
$
349,432
2,012,328
26,250,664
16.75
23.36
N/A
—
10.50
24.15
N/A
—
46,825,145
—
—
46,825,145
N/A is not applicable
(a) For information about options, see Note 22, “Share-Based Compensation Plans” in the notes to our Consolidated Financial Statements.
(b) Upon vesting of the Series A Preferred Stock, the recipient receives, in cash or shares, at our sole election, the fair market value of our
Class A Common Stock on the vest date of the Series A Preferred Stock less the sum of the fair market value of our Class A Common Stock
on the original issue date of the Series A Preferred Stock and a hurdle price specified in the recipient’s subscription agreement. As such, the
benefit provided under the Series A Preferred Stock will always be based solely on the increase in value of our Class A Common Stock
after the date of grant and the Series A Preferred Stock will not have any value to the participant until the value of our Class A Common
Stock exceeds the value of such shares on the date of grant plus the specified hurdle.
(c) Executive Ownership Plan. From fiscal 2008 until December 2012, we invited certain key executives to participate in our Executive
Ownership Plan by purchasing shares of our common stock and receiving stock options to match such purchases. The Executive
Ownership Plan was replaced by the Platinum Program in December 2012. All matching stock options have five-year cliff vesting tied to
continued employment with us and continued ownership of the restricted shares that the matching stock options match.
(d) On April 14, 2015, a duly constituted committee of the Board approved employment inducement awards outside of the Company’s Equity
and Long-Term Incentive Plan of Series A Preferred Stock in the amount of 645,921 shares to Camillo Pane who had, at that time, been
announced as the Company’s new Executive Vice President of Category Development. On March 27, 2017, the Board approved an award
of 1,000,000 shares of Series A Preferred Stock, par value $0.01 per share, to Lambertus J.H. Becht in his capacity as a non-employee
director to compensate him for services performed in connection with closing the P&G Beauty Business transaction, aiding with the
transition of the new chief executive officer into his role and integrating the P&G Beauty Business.
(e) On December 1, 2014, the Board granted Lambertus J.H. Becht an award of 49,432 phantom units (the “December Grant”). On July 21,
2015, the Board granted to Mr. Becht an award of 300,000 phantom units (the “July Grant”). Both the December Grant and July Grant to
Mr. Becht were outside of the Company’s Equity and Long-Term Incentive Plan. At the time of December Grant, the phantom units had a
value of $1,000,009 based on the closing price of the Company’s Class A Common Stock on December 1, 2014, and at the time of the July
Grant, the phantom units had a value of approximately $8,106,000 based on the closing price of the Class A Common Stock on July 21,
2015. Each phantom unit has an economic value equivalent to one share of the Company’s Class A Common Stock. The phantom units vest
on the fifth anniversary of the grant date and, in the event of a change in control or Mr. Becht’s death or disability, the phantom units shall
vest immediately. Within 30 days of the grant date, Mr. Becht had the ability to elect whether to receive payment in respect of the phantom
units in cash or shares of Class A Common Stock. Mr. Becht elected to receive payment in respect of the December Grant and the July
Grant in shares of Class A Common Stock.
26
(f) Reflects number of securities remaining available for future issuance under equity compensation plans, excluding share reserves related to
terminated equity plans.
Issuer Purchases of Equity Securities
No shares of Class A Common Stock were repurchased during the fiscal quarter ended June 30, 2018.
Item 6. Selected Financial Data.
(in millions, except per share data)
Consolidated Statements of Operations Data:
Net revenues
Gross profit
Restructuring costs
Acquisition-related costs
Asset impairment charges
Operating income (loss)
Interest expense, net
Loss on early extinguishment of debt
Other expense, net
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
Net income attributable to noncontrolling interests
Net income attributable to redeemable noncontrolling
interests
Net (loss) income attributable to Coty Inc.
Per Share Data:
Weighted-average common shares
Basic
Diluted
Cash dividends declared per common share
Net (loss) income attributable to Coty Inc. per common
share:
Basic
Diluted
(in millions)
Consolidated Cash Flows Data:
Net cash provided by operating activities
Net cash (used in) investing activities
Net cash provided by (used in) financing activities
2018 (a)
2017 (b)
Year Ended June 30,
2016 (c)
2015 (c)
2014
$
9,398.0
$
7,650.3
$
4,349.1
$
4,395.2
$
4,551.6
5,789.6
173.2
64.2
—
161.2
265.0
10.7
38.0
(152.5)
(24.7)
(127.8)
2.0
4,621.8
2,603.1
2,638.2
2,685.9
372.2
355.4
—
(437.8)
218.6
—
1.6
(658.0)
(259.5)
(398.5)
15.4
86.9
174.0
5.5
254.2
81.9
3.1
30.4
138.8
(40.4)
179.2
7.6
75.4
34.1
—
395.1
73.0
88.8
—
233.3
(26.1)
259.4
15.1
37.3
0.7
316.9
25.7
68.5
—
1.3
(44.1)
20.1
(64.2)
17.8
39.0
8.3
14.7
11.8
15.4
$
(168.8) $
(422.2) $
156.9
$
232.5
$
(97.4)
$
$
$
749.7
749.7
642.8
642.8
345.5
354.2
353.3
362.9
0.50
$
0.65
$
0.25
$
0.20
$
(0.23) $
(0.66) $
0.45
$
0.66
$
(0.23)
(0.66)
0.44
0.64
381.7
381.7
0.20
(0.26)
(0.26)
2018 (a)
2017 (b)
Year Ended June 30,
2016 (c)
2015 (c)
2014
$
413.7
(687.6)
69.3
757.5
(1,163.6)
595.2
$
501.4
(1,059.2)
592.6
$
526.3
(171.2)
(1,138.2)
$
536.5
(257.6)
(5.7)
27
(in millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents
Total assets (d)
Total debt, net of discount
Total Coty Inc. stockholders’ equity
2018 (a)
2017 (b)
As of June 30,
2016 (c)
2015 (c)
2014
$
331.6
$
535.4
$
372.4
$
341.3
$
1,238.0
22,630.2
22,548.2
7,610.5
8,849.7
7,205.0
9,314.7
7,035.6
4,162.8
360.2
5,998.0
2,634.7
969.8
6,570.8
3,293.5
843.8
(a) Included in fiscal 2018 are the financial impacts of the acquisition of the Burberry Beauty Business as of October 2, 2017.
(b) Included in fiscal 2017 are the financial impacts of the acquisitions of the P&G Beauty Business as of October 1, 2016, ghd as of
November 21, 2016 and Younique as of February 1, 2017.
(c) Included in fiscal 2016 and 2015 are the financial impacts of the Hypermarcas Brands as of February 1, 2016 and the Bourjois acquisition
as of April 1, 2015.
(d) In fiscal 2017, we adopted authoritative guidance issued by the Financial Accounting Standards Board requiring that debt issuance costs be
presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.
Prior to the adoption of this guidance, debt issuance costs were presented within total assets in the Consolidated Balance Sheets. Total
assets for all periods presented in the table above have been conformed to the current balance sheet presentation.
Item 7. 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 Consolidated Financial Statements and related
notes included elsewhere in this document. 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. The following
discussion contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” for a discussion on the
uncertainties, risks and assumptions associated with these statements as well as any updates to such discussion as may be
included in subsequent reports we file with the SEC. Actual results may differ materially and adversely from those contained in
any forward-looking statements. The following discussion 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.
OVERVIEW
We are a global beauty company and our vision is to be a new global leader and challenger in the beauty industry. We
manufacture, market, sell and distribute branded beauty products, including fragrances, color cosmetics, hair care products and
skin & body related products throughout the world.
Operating and Reportable Segments
Our business is organized into three divisions: Luxury, Consumer Beauty and Professional Beauty, and our operating and
reportable segments reflect this divisional structure. Certain shared costs and the results of corporate initiatives are managed
outside of our three segments by Corporate.
Our organizational structure is product category focused, putting the consumer first, by specifically targeting how and
where they shop and what and why they purchase. Each division has full end-to-end responsibility to optimize the consumers’
beauty experiences in their relevant categories and channels in this new organizational design and translate this into profitable
growth.
The operating and reportable segments are:
Luxury — primarily focused on prestige fragrances, premium skin care and premium cosmetics;
Consumer Beauty — primarily focused on color cosmetics, retail hair coloring and styling products, mass fragrance, mass
skin care and body care;
Professional Beauty — primarily focused on hair and nail care products for professionals.
Geographic Structure
We have determined our geographic regions to be North America (Canada and the U.S.), Europe and ALMEA (Asia, Latin
America, the Middle East, Africa and Australia).
28
Overview
We are one of the world’s largest beauty companies, with a purpose to celebrate and liberate the diversity of consumers’
beauty. Over the past three years, the transformational acquisition of the P&G Beauty Business and our other strategic
transactions have strengthened and diversified our presence across the countries, categories and channels in which we compete.
As we complete the final stages of the P&G Beauty Business integration, we are focused on rejuvenating our core business and
amplifying our growth potential, by supporting and strengthening our brands, developing a stronger innovation pipeline,
advancing our end-to-end digital transformation, and expanding our presence in the faster-growing emerging markets.
The beauty industry has continued to evolve, driven by increasing consumer desire for immersive shopping experiences,
the importance of digital communication for brand building, the expanding role of e-commerce and specialty retail formats, and
new brand introductions. This evolution has put pressure on traditional retail formats and traditional models of brand building
and reaching consumers.
We are tailoring our approach to address this evolution of the beauty industry. Revenues from e-commerce channels
comprise a small but fast-growing portion of our consolidated net revenues. Transforming our digital and e-commerce
capabilities is a central part of our overall strategy. While we are still in the early days of our digital transformation, we are
making significant multi-year investments in talent acquisition, in-house content creation capabilities and product management
systems that will fuel our e-commerce efforts. This, together with the dedication across each of our divisions to drive
momentum in this rapidly expanding channel, will allow for expansion of our e-commerce footprint.
The economics of developing, producing, launching, supporting and discontinuing products 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. We are continuing to improve our innovation process, aiming
to introduce bigger, more impactful innovations while reducing time-to-market. We also support new and established products
through our focus on strategic advertising and merchandising, brand repositioning, innovation and in-store execution.
Certain market segments and geographies in which we compete generally continue to grow moderately. While luxury
fragrances and skin care categories are experiencing strong growth, low single digit declines in the retail nail, retail hair, mass
body care, mass color cosmetics and mass fragrances categories in the U.S. and certain key countries in Western Europe
continue to impact our business and financial results. We experienced strong growth in our Luxury segment supported by
strong category trends and our successful brand innovation, steady growth in our Professional Beauty segment and uneven
performance in our Consumer Beauty segment. Emerging markets have been a source of growth in many of our categories in
fiscal 2018. We are also continuing to expand our presence in faster-growth emerging markets, by building strong relationships
with key retailers in those markets and leveraging our broad portfolio of brands.
Transformation of our business
Following our acquisition of the P&G Beauty Business, we have been focused on integrating, restructuring and optimizing
the combined organization. In fiscal 2018, we successfully exited the third and final stage of our transition services agreement
with P&G, following the successful exit of the first two stages in fiscal 2017. We also instituted new initiatives to deliver
meaningful, sustainable expense and cost management to address increases in our fixed cost base as a combined company. The
last step of the integration includes the completion of the one order, one invoice, one shipment program which will make Coty a
fully integrated company, able to sell, ship and invoice all of our brands in a seamless way for our customers, allowing
significant simplification for our employees and increasing our scalability potential.
Further, in connection with the acquisition of the P&G Beauty Business, we are implementing our plan through which we
continue to target realizing approximately $750 million of synergies driven by cost, procurement, supply chain and selling,
general, and administrative savings through fiscal 2020. We realized cumulative synergies of approximately 20% in fiscal 2017,
50% though fiscal 2018, and we expect to cumulatively generate approximately 80% of the net synergies throughout fiscal
2019 and the full $750 million through fiscal 2020.
A milestone in our transformation was the completion in fiscal 2018 of our announced portfolio rationalization program
and, as a result, we divested or terminated 14 brands including: CLC, Celine Dion, Cutex, Esprit, Guess, Halle Berry, JLo, Lady
Gaga, Love2Love, Playboy, Summer and Tim McGraw, which were reported in our Consumer Beauty segment and Cerruti and
Chopard, which were reported in our Luxury segment. In addition, we continuously evaluate strategic transactions including
acquisitions, divestitures and new brand licenses to optimize our portfolio. During fiscal 2018, we acquired the exclusive long-
term global license rights and other related assets for the Burberry Beauty luxury fragrances, cosmetics and skincare business
(the “Burberry Beauty Business”), which is managed within the Luxury division. We will continue to opportunistically look at
strategic opportunities as and when they arise, subject to our strict financial discipline and deleveraging objectives.
Performance
29
In fiscal 2018, solid operating performance was driven by steady progress on business integration. Modest revenue growth
was driven by strong performance in Luxury, due to impactful innovations across the major brands, and solid growth in
Professional Beauty supported by growth in both hair and nail categories, offset by declines in Consumer Beauty revenues as
we made gradual progress towards stabilizing performance. In the fourth fiscal quarter, strong performance from Luxury and
solid growth in Professional Beauty were offset by declines in Consumer Beauty, where a number of temporary supply chain
disruptions impacted revenues. Specifically, disruptions in two major distribution centers in the U.S. and U.K., due in part to
challenges arising in connection with our restructuring efforts, impacted our ability to meet consumer demand for products in
the Consumer Beauty segment and resulted in a loss of revenue and increased costs that we expect to continue into the first half
of fiscal 2019. In addition, during the same period, a transportation workers strike in Brazil impacted the delivery of raw
materials as well as our ability to ship our products to customers in that country.
Outlook
While we work on the full turnaround of the new Coty, we expect the integration to be largely completed by the end of fiscal
2019. We are focused on returning the business to flat to modest net revenue growth. This level of net revenue growth,
combined with our ongoing focus on reducing costs even after the synergies are fully delivered, underpins our medium term
target of achieving operating margin growth.
Against this backdrop, we view fiscal 2019 as an important step in the right direction to achieve our medium term
ambitions. For fiscal 2019, we are targeting operating margin expansion, which, combined with our target of flat to modest net
revenue growth would deliver operating income growth. We believe financial performance across quarters in fiscal 2019 will
not be linear and the peak of the impact of the supply chain disruptions, due to logistics and manufacturing consolidation, will
come in first half of fiscal 2019. We anticipate that this will have a considerable impact on both net revenue and net income. We
do expect that the business disruption related impacts will be substantially complete by the end of first half fiscal 2019 and our
fiscal 2019 targets take these disruptions into consideration. We are also focused on increasing our cash flow and reducing our
indebtedness.
Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures including
Adjusted operating income, Adjusted net income attributable to Coty Inc. and Adjusted net income attributable to Coty Inc. per
common share (collectively, the “Adjusted Performance Measures”). The reconciliations of these non-GAAP financial
measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in
tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior
to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in
that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP.
Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures
differently than we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, our management uses the Adjusted Performance Measures
as key metrics in the evaluation of our performance and annual budgets and to benchmark performance of our business against
our competitors. The following are examples of how these Adjusted Performance Measures are utilized by our management:
•
•
strategic plans and annual budgets are prepared using the Adjusted Performance Measures;
senior management receives a monthly analysis comparing budget to actual operating results that is prepared using the
Adjusted Performance Measures; and
•
senior management’s annual compensation is calculated, in part, by using 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
30
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 excludes restructuring costs and business structure realignment programs, amortization,
acquisition-related costs and acquisition accounting impacts, the impact of accounting modifications from liability plan
accounting to equity plan accounting as a result of amended share-based compensation plans, 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 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.
The Adjusted Performance Measures were changed in the fourth quarter of fiscal 2016 to incorporate the exclusion of
expense and tax effects associated with the amortization of acquisition-related intangible assets. Our management believes that
such amortization is not reflective of the results of operations in a particular year because the intangible assets result from the
allocation of the acquisition purchase price to the fair value of identifiable intangible assets acquired. The effect of this
exclusion on our non-GAAP presentation was to amend Adjusted operating income in a manner that provides investors with a
measure of our operating performance that facilitates period to period comparisons, as well as comparability to our peers.
Exclusion of the amortization expense allows investors to compare operating results that are consistent over time for the
consolidated company, including newly acquired and long-held businesses, to both acquisitive and nonacquisitive peer
companies.
Adjusted Performance Measures reflect adjustments based on the following items:
• Costs related to acquisition activities: We have excluded acquisition-related costs and acquisition 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. The nature and amount of such costs
vary significantly based on the size and timing of the acquisitions and the maturities of the businesses being acquired.
Also, the size, complexity and/or volume of past acquisitions, which often drives the magnitude of such expenses, may
not be indicative of the size, complexity and/or volume of any future acquisitions.
• 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.
• 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.
• 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.
•
Share-based compensation adjustment: During fiscal 2016, we excluded the impact of the fiscal 2013 accounting
modification from liability plan to equity plan accounting for the share-based compensation plans as well as other
share-based compensation transactions that are not reflective of the ongoing and planned pattern of recognition for
such expense. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K filed with the SEC for the
fiscal year ended June 30, 2016 for a full discussion of the share-based compensation adjustment.
31
•
Interest and other (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.
• 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 are based on the tax rates related to the jurisdiction in which the
adjusted items are received or incurred.
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 market 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.
32
Basis of Presentation of Acquisitions and Divestitures
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 in the prior year period, 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.
First fiscal quarter
2018
n/a
2017
n/a
Second fiscal quarter
Acquisition: Burberry Beauty Business (Luxury
segment)
Acquisitions: P&G Beauty Business (all segments)
and ghd (Professional Beauty segment)
Third fiscal quarter
Termination: Guess (Consumer Beauty segment)
Acquisition: Younique (Consumer Beauty segment)
Divestiture: J.Lo (Consumer Beauty segment)
Fourth fiscal quarter
Divestitures: Playboy (Consumer Beauty segment)
and Cerruti (Luxury segment)
n/a
When used herein, the term “Acquisitions” and “Divestitures” refer to the financial contributions 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.
NET REVENUES
In fiscal 2018, net revenues increased 23%, or $1,747.7, to $9,398.0 from $7,650.3 in fiscal 2017. Incremental net
revenues from the acquisition of the P&G Beauty Business comprised 13% of the total percentage increase in net revenues for
the fiscal year and the incremental net revenues from the acquisitions of Younique, ghd, and the Burberry Beauty Business
combined comprised 6% of the total percentage increase in net revenues for the fiscal year. The incremental net revenues in the
first quarter of fiscal 2018 from the acquisition of the P&G Beauty Business in the prior year was the primary driver of the
significant increase in total net revenues in all of our segments and geographic regions. Excluding the impacts of the
Acquisitions and Divestitures, total net revenues in fiscal 2018 increased 4%, or $340.6, to $7,924.6 from $7,584.0 in fiscal
2017, reflecting a positive price and mix impact of 6%, a positive foreign currency exchange translations impact of 4%, and a
decrease in unit volume of 6%. See below for further details of net revenues by segment.
In fiscal 2017, net revenues increased 76%, or $3,301.2, to $7,650.3 from $4,349.1 in fiscal 2016. The acquisition of the
P&G Beauty Business comprised 41% of total net revenues for the fiscal year and the Hypermarcas Brands, ghd and Younique
combined comprised 7% of the total net revenues for the fiscal year. The acquisition of the P&G Beauty Business was the
primary driver of the significant increase in total net revenues in all of our segments and geographic regions. The increase in
net revenues in fiscal 2017 reflects an increase in unit volume of 75% and a positive price and mix impact of 4%, partially
offset by a negative foreign currency exchange translations impact of 3%. Excluding the impacts of the Acquisitions and
Divestitures, total net revenues in fiscal 2017 decreased 8% reflecting a negative price and mix impact of 4%, a decrease in unit
volume of 3% and a negative foreign currency exchange translations impact of 1%.
33
Net Revenues by Segment
(in millions)
NET REVENUES
Luxury
Consumer Beauty
Professional Beauty
Total
Luxury
Year Ended June 30,
Change %
2018
2017
2016
2018/2017
2017/2016
$
$
3,210.5
$
2,566.6
$
4,268.1
1,919.4
9,398.0
$
3,688.2
1,395.5
7,650.3
$
1,836.6
2,262.5
250.0
4,349.1
25%
16%
38%
23%
40%
63%
>100%
76%
In fiscal 2018, net revenues from the Luxury segment increased 25%, or $643.9 to $3,210.5 from $2,566.6 in fiscal 2017,
primarily due to the impact of the Acquisitions. The incremental net revenues in the first quarter of fiscal 2018 from the
acquisition of the P&G Beauty Business in the prior year comprised 12% of the total percentage change in net revenues for the
segment, and the acquisition of the Burberry Beauty Business comprised 3% of the total percentage change in net revenues for
the segment in fiscal 2018 as compared to fiscal 2017. Excluding the impacts of the Acquisitions and Divestitures, net
revenues from the Luxury segment increased 10%, or $267.6, to $2,828.6 in fiscal 2018 from $2,561.0 in fiscal 2017, reflecting
a positive price and mix impact of 5%, a positive foreign currency exchange translations impact of 4%, and an increase in unit
volume of 1%. This increase in net revenues primarily reflects: (i) the successful launches of Tiffany & Co. and Gucci Bloom
and (ii) higher net revenues from Calvin Klein due to the launch of Obsessed by Calvin Klein and from CK One due to the
launch of a successful campaign in the third quarter of fiscal 2018. Fiscal 2018 revenues were positively impacted by
innovative products across our philosophy, Marc Jacobs and Chloe brands. There was also solid growth in fiscal 2018,
compared to fiscal 2017, of Luxury brands sold in China and the Middle East as well as an increased contribution of Luxury
brands sold through e-commerce channels.
In fiscal 2017, net revenues from the Luxury segment increased 40% or $730.0 to $2,566.6 from $1,836.6 in fiscal 2016,
primarily due to the impact of the Acquisitions. The acquisition of the P&G Beauty Business comprised 33% of the total net
revenues for the segment. Hugo Boss and Gucci fragrances were the largest contributors to net revenues as a result of the
acquisition of the P&G Beauty Business. Excluding the impacts of the Acquisitions and Divestitures, net revenues from the
Luxury segment decreased 6%, or $110.0, to $1,726.6 in fiscal 2017 from $1,836.6 in fiscal 2016, reflecting a negative price
and mix impact of 3%, a decrease in unit volume of 2%, and a negative foreign currency exchange translations impact of 1%.
This decrease primarily reflects lower net revenues from Calvin Klein and Marc Jacobs fragrances. Net revenues from Calvin
Klein declined due to: (i) our strategic efforts to rationalize wholesale distribution by reducing the amount of product diversion
to the value and mass channels resulting in a lower volume and (ii) a higher level of discounting and promotional activities
resulting in a negative price and mix. The decline in Marc Jacobs primarily reflects declines in volumes from existing product
lines and a lower level of launch activity in fiscal 2017 as compared to fiscal 2016.
Consumer Beauty
In fiscal 2018, net revenues from the Consumer Beauty segment increased 16%, or $579.9, to $4,268.1 from $3,688.2 in fiscal
2017, due to the impact of the Acquisitions. The incremental net revenues in the first quarter of fiscal 2018 from the acquisition
of the P&G Beauty Business in the prior year comprised 11% of the total percentage change in net revenues for the segment, and
the acquisition of Younique comprised 6% of the total percentage change in net revenues for the segment in fiscal 2018 compared
to fiscal 2017. Excluding the impacts of the Acquisitions and the Divestitures, net revenues from the Consumer Beauty segment
decreased 1%, or $21.2, to $3,622.3 in fiscal 2018 from $3,643.5 in fiscal 2017, primarily reflecting a decrease in unit volume of
7%, a positive foreign currency exchange translations impact of 3%, and a positive price and mix impact of 3%. The change in
net revenues primarily reflects:
(i)
(ii)
(iii)
A decline in net revenues from CoverGirl due to declines in existing product lines along with increased
markdowns and trade spending. Despite declines in the brand in fiscal 2018, we have launched a multi-year
brand turnaround strategy for CoverGirl in North America in the second quarter of fiscal 2018.
Lower net revenues from Sally Hansen and Playboy due to less innovation in the first half of fiscal 2018 and
declines in existing product lines.
Lower net revenues from Risque due to a reduction in volume in Brazil in response to decreased sales discounts
in the second half of fiscal 2018 and trade inventory correction. However, we continue to experience market
share growth.
(iv)
Lower net revenues from Astor due to shelf-space losses in Germany.
34
These decreases were partially offset by:
(i)
(ii)
Higher net revenues from Nautica primarily driven by increased volume through value distribution channels.
Higher net revenues from Max Factor primarily reflecting increased distribution in China.
(iii)
Higher net revenues from Guess due to the timing of shipments.
In addition, net revenues from Clairol comprised over 5% of the Consumer Beauty net revenues for fiscal 2018. Clairol,
whose core markets are the U.S. and the U.K., was pressured in fiscal 2018 but benefited from the relaunch of the Nice'N'Easy
franchise, on the back of a breakthrough new formula, with the relaunch now largely implemented on the shelf.
In fiscal 2017, net revenues from the Consumer Beauty segment increased 63%, or $1,425.7, to $3,688.2 from $2,262.5 in
fiscal 2016, primarily due to the impact of the Acquisitions. The acquisition of the P&G Beauty Business, Younique and the
incremental net revenues from the seven months of the Hypermarcas Brands in fiscal 2017, comprised 35%, 5% and 5%,
respectively, of the total net revenues for the segment. CoverGirl and Max Factor cosmetics and the retail product line of Wella
and Clairol hair products were the largest contributors to net revenues as a result of the acquisition of the P&G Beauty
Business, although these and other brands were negatively impacted as we reorganized our business and by transitional factors,
including significantly higher than expected trade inventory prior to the closing of the P&G Beauty Business acquisition.
Additionally, a reduction in shelf space and declines in certain of these brands negatively impacted our results. Excluding the
impacts of the Acquisitions and the Divestitures, net revenues from the Consumer Beauty segment decreased 10%, or $217.7,
to $2,038.5 in fiscal 2017 from $2,256.2 in fiscal 2016, primarily reflecting a negative price and mix impact of 5%, a decrease
in unit volume of 3%, and a negative foreign currency exchange translations impact of 2%. The decrease in net revenues
primarily reflects lower net revenues from mass fragrances, as well as Sally Hansen and Rimmel. Mass fragrances declined in
part due to a decrease in volume from brands that are later in their lifecycles and our continued efforts to execute portfolio
rationalization in non-strategic distribution channels, and have also been adversely impacted by a negative market trend in the
U.S. Lower net revenues from Sally Hansen and Rimmel reflect a decrease in volume as the result of the implementation of a
new inventory management system by a key U.S. customer and a negative foreign currency translations impact. Lower net
revenues from Sally Hansen also reflect the negative retail nail market trend in the U.S. and a lower volume of relative higher
priced products. The declines in the segment were partially offset by higher net revenues from an increase in volume from the
Hypermarcas Brands during the five months of the comparable periods and an increase in volume from Bourjois due to
continued expansion in Eastern Europe.
Professional Beauty
In fiscal 2018, net revenues from the Professional Beauty segment increased 38%, or $523.9, to $1,919.4 from $1,395.5 in
fiscal 2017, primarily due to the impact of the Acquisitions. The incremental net revenues in the first quarter of fiscal 2018
from the acquisition of the P&G Beauty Business in the prior year comprised 23% of the total percentage change in net
revenues for the segment, and incremental net revenues from the acquisition of ghd comprised 8% of the total percentage
change in net revenues for the segment in fiscal 2018 as compared to fiscal 2017. Excluding the impacts of the Acquisitions,
net revenues from the Professional Beauty segment increased 7%, or $94.2 to $1,473.7 in fiscal 2018, from $1,379.5 in fiscal
2017, primarily reflecting a positive foreign currency exchange translation impact of 5%, a positive price and mix impact of
2%, and no impact from unit volume. The increase in this segment primarily reflects higher net revenues from OPI driven by
the launch of the OPI ProHealth GelColor System, an increase in the professional product line of Wella hair products due to the
launch of WellaPlex and higher ghd net revenues primarily due to strong performance in Europe. In fiscal 2018, there was solid
performance in Wella and other hair brands, as well as OPI and other nail products in both developed and emerging markets.
In fiscal 2017, net revenues from the Professional Beauty segment increased greater than 100%, or $1,145.5, to $1,395.5
from $250.0 in fiscal 2016, primarily due to the impact of the Acquisitions. The acquisitions of the P&G Beauty Business and
ghd comprised 74% and 10%, respectively, of the total net revenues for the segment. The professional product line of Wella
hair products was the largest contributor to net revenues as a result of the P&G Beauty Business acquisition. Excluding the
impacts of the Acquisitions and Divestitures, net revenues from the Professional Beauty segment decreased 12%, or $30.5 to
$219.5 in fiscal 2017, from $250.0 in fiscal 2016, primarily reflecting the following activity related to OPI: (i) a decrease in
unit volume of 8% as a result of declines from existing lacquer product lines, partially offset by an increase in volume of gel
and long wear product lines, (ii) a negative price and mix impact of 3% as a result of unfavorable regional, channel and
promotional mix and (iii) a negative foreign currency exchange translations impact of 1%.
Net Revenues by Geographic Regions
In addition to our reporting segments, net revenues by geographic regions are as follows.
35
(in millions)
NET REVENUES
North America
Europe
ALMEA
Total
North America
Year Ended June 30,
Change %
2018
2017
2016
2018/2017
2017/2016
$
2,966.0
$
2,506.9
$
4,201.6
2,230.4
9,398.0
$
3,325.7
1,817.7
7,650.3
$
$
1,413.0
1,924.6
1,011.5
4,349.1
18%
26%
23%
23%
77%
73%
80%
76%
In fiscal 2018, net revenues in North America increased 18% or $459.1, to $2,966.0 from $2,506.9 in fiscal 2017, primarily
due to the impact of the Acquisitions. Excluding the impacts of the Acquisitions and Divestitures, net revenues in North
America decreased 3% or $72.4, to $2,420.9 in fiscal 2018 from $2,493.3 in fiscal 2017, primarily due to declines in color
cosmetics in the U.S. The decline in color cosmetics primarily reflects: (i) a decline in net revenues from CoverGirl due to
declines in existing product lines, declines in the mass color cosmetics category and increased markdowns and trade spending
associated with the CoverGirl brand relaunch which began in the second quarter of fiscal 2018, (ii) lower net revenues from
Rimmel as declines in revenues from existing product lines offset current year launch activity. The decline in revenues in the
region was partially offset by (i) higher revenues driven by the launches of the Tiffany & Co. and Gucci Bloom fragrances, and
(ii) higher revenues in mass fragrances, primarily from Nautica due to an increased volume through value distribution channels.
There was no impact from foreign currency exchange translations in fiscal 2018.
In fiscal 2017, net revenues in North America increased 77% or $1,093.9, to $2,506.9 from $1,413.0 in fiscal 2016,
primarily due to the impact of the Acquisitions. Excluding the impacts of the Acquisitions and Divestitures, net revenues in
North America decreased 10% or $141.8, to $1,271.2 in fiscal 2017 from $1,413.0 in fiscal 2016, primarily due to lower net
revenues in the U.S. from Sally Hansen, in part reflecting negative market trends in the retail nail market in the U.S., N.Y.C.
New York Color and Rimmel in the Consumer Beauty division, as well as, OPI in the Professional Beauty division. There was
no impact from foreign currency exchange translations in North America.
Europe
In fiscal 2018, net revenues in Europe increased 26%, or 875.9, to $4,201.6 from $3,325.7 in fiscal 2017, primarily due to
the impact of the Acquisitions. Excluding the impacts of the Acquisitions and Divestitures, net revenues in Europe increased
8%, or $251.4, to $3,542.8 in fiscal 2018 from $3,291.4 in fiscal 2017, primarily due to: (i) strong growth from prestige
fragrances in Western Europe, (ii) incremental revenues from fragrances driven by the launches of the Tiffany & Co. and Gucci
Bloom fragrances resulting in higher revenues in Western and Southern Europe, including the U.K., Spain, Italy, and Germany,
and (iii) higher revenues from mass fragrances across the region. These increases were partially offset by declines in Playboy
and Astor in Western Europe, including France and Germany. Excluding the impact of the Acquisitions, Divestitures and the
positive foreign currency exchange translations impact of 8%, net revenues in Europe remained constant.
In fiscal 2017, net revenues in Europe increased 73%, or $1,401.1, to $3,325.7 from $1,924.6 in fiscal 2016, primarily due
to the impact of the Acquisitions. Excluding the impacts of the Acquisitions and Divestitures, net revenues in Europe decreased
13%, or $242.2, to $1,682.4 in fiscal 2017 from $1,924.6 in fiscal 2016, primarily due to lower net revenues from mass
fragrances across the region as a result of a negative market trend in Europe, Rimmel in the U.K., Astor in Germany and
Eastern Europe, Playboy in Germany, France, and Eastern Europe and adidas in the U.K. and Germany, partially offset by
growth in Bourjois in Eastern Europe. Excluding the impact of the Acquisitions, Divestitures and the negative foreign currency
exchange translations impact of 4%, net revenues in Europe decreased 9%.
ALMEA
In fiscal 2018, net revenues in ALMEA increased 23%, or $412.7, to $2,230.4 from $1,817.7 in fiscal 2017, primarily due
to the impact of the Acquisitions. Excluding the impacts of the Acquisitions and Divestitures, net revenues in ALMEA
increased 9%, or $161.7, to $1,961.0 in fiscal 2018 from $1,799.3 in fiscal 2017, primarily due to: (i) incremental revenues
from fragrances, driven by the launches of the Tiffany & Co. and Gucci Bloom fragrances, (ii) higher revenues from mass
fragrances in Southeast Asia, driven by Nautica, and (iii) higher revenues from color cosmetics, driven by Max Factor in
China. These increases were partially offset by declines in Brazil in response to decreased sales discounts in the third and fourth
quarters of fiscal 2018. Excluding the impact of the Acquisitions, Divestitures and the positive foreign currency exchange
translations impact of 1%, net revenues in ALMEA increased 8%.
In fiscal 2017, net revenues in ALMEA increased 80% or $806.2, to $1,817.7 from $1,011.5 in fiscal 2016, primarily due
to the impact of the Acquisitions. Excluding the impacts of the Acquisitions and Divestitures, net revenues in ALMEA
increased 2%, or $19.4, to $1,030.9 in fiscal 2017 from $1,011.5 in fiscal 2016, primarily due to the Hypermarcas Brands in
36
Brazil during the five months of the comparable periods, partially offset by declines in Calvin Klein in China and Marc Jacobs
in our travel retail business in Latin America. Excluding the impact of the Acquisitions, Divestitures and the positive foreign
currency exchange translations impact of 1%, net revenues in ALMEA increased 1%.
COST OF SALES
In fiscal 2018, cost of sales increased 19%, or $579.9, to $3,608.4 from $3,028.5 in fiscal 2017, primarily due to the impact
of the Acquisitions. Cost of sales as a percentage of net revenues decreased to 38.4% in fiscal 2018 from 39.6% in fiscal 2017,
resulting in a gross margin improvement of approximately 120 basis points, primarily reflecting: (i) lower cost related to acquired
inventory step-up amortization in fiscal 2018 as compared to fiscal 2017, (ii) mix impact associated with the increased net revenue
contribution from higher-margin Luxury and Professional Beauty products in fiscal 2018 as compared to fiscal 2017, in addition
to (iii) the continued contribution from our supply chain savings program. These improvements were partially offset by the negative
impact of accelerated depreciation of buildings and equipment associated with plant closures, distributor terminations and inventory
artwork transition costs related to the Global Integration Activities (as later defined).
In fiscal 2017, cost of sales increased 73%, or $1,282.5, to $3,028.5 from $1,746.0 in fiscal 2016, primarily due to the impact
of the Acquisitions. Cost of sales as a percentage of net revenues decreased to 39.6% in fiscal 2017 from 40.1% in fiscal 2016,
resulting in a gross margin improvement of approximately 50 basis points primarily reflecting the acquisitions of higher margin
businesses in fiscal 2017 including the P&G Beauty Business and Younique and continued contribution from our supply chain
savings program partially offset by: (i) the negative impact of the revaluation of acquired inventory from the Acquisitions, (ii) the
negative impact of inventory buyback associated with distributor terminations relating to the acquisition of the P&G Beauty
Business and (iii) higher promotional and discounted pricing activity reported in net revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In fiscal 2018, selling, general and administrative expenses increased 23%, or $949.6, to $5,009.6 from $4,060.0 in fiscal
2017, primarily due to the impact of the Acquisitions. Selling, general and administrative expenses as a percentage of net
revenues increased to 53.3% in fiscal 2018 from 53.1% in fiscal 2017.
In fiscal 2017, selling, general and administrative expenses increased greater than 100%, or $2,032.2, to $4,060.0 from
$2,027.8 in fiscal 2016, primarily due to the impact of the Acquisitions. Selling, general and administrative expenses as a
percentage of net revenues increased to 53.1% in fiscal 2017 from 46.6% in fiscal 2016.
Unfavorable and (favorable) basis point changes in selling, general and administrative expenses as a percentage of net
revenues for the fiscal years ended June 30, 2018 and 2017 as compared to the respective prior year periods, are comprised of
the following:
(bps rounded to the nearest tenth)
Administrative costs
Advertising and consumer promotion costs
Foreign currency exchange impact
Share-based compensation
Other selling, general, and administrative expenses
Total basis point unfavorable (favorable) change
Year Ended June 30,
2018/2017
180
(110)
—
—
(50)
20
2017/2016
500
240
(50)
(40)
—
650
In fiscal 2018, the selling, general and administrative expenses as a percentage of net revenues increased primarily due to
higher administrative costs from: (i) incremental consulting and third-party outsourcing expenses and (ii) increased
depreciation expense for technological infrastructure which was placed into service with the successful completion of the P&G
Beauty Business transition services agreement in the first quarter of fiscal 2018. The lower advertising and consumer promotion
spending as a percentage of net revenues is primarily due to a shift in spending programs within our color cosmetics brands as
the decrease in marketing spend, recorded in advertising and consumer promotion costs, was offset by an increase in in-store
support, which is recorded as a reduction to net revenues.
In fiscal 2017, the selling, general, and administrative expenses as a percentage of net revenues increased primarily due to
higher administrative costs as a result of consulting expenses and compensations costs incurred in the connection with the
integration of the P&G Beauty Business and the new organizational structure in the Professional Beauty division where we
acquired a large sales organization to service the salon business. The higher advertising and consumer promotion spending is
37
primarily due to the impact of the higher spending ratio for the P&G Beauty Business as compared with the Legacy-Coty
business in fiscal 2016 and increased spending primarily supporting Rimmel, Sally Hansen, and Bourjois.
OPERATING (LOSS) INCOME
In fiscal 2018, operating income of $161.2 increased greater than 100%, or $599.0, from a loss of $437.8 in fiscal 2017.
Operating margin, or operating income (loss) as a percentage of net revenues, increased to 1.7% of net revenues in fiscal 2018
as compared to (5.7)% in fiscal 2017.
In fiscal 2017, operating loss of $437.8 declined greater than 100%, or $692.0, from income of $254.2 in fiscal 2016.
Operating margin, or operating (loss) income as a percentage of net revenues, declined to (5.7)% of net revenues in fiscal 2017
as compared to 5.8% in fiscal 2016
Favorable and (unfavorable) basis point changes in operating income (loss) as a percentage of net revenues for the fiscal
years ended June 30, 2018 and 2017 as compared to the respective prior year periods, are comprised of the following:
(bps rounded to nearest tenth)
Acquisition-related costs
Restructuring
Cost of sales
Loss (gain) on sale of assets
Selling, general and administrative expenses
Amortization
Other operating expenses
Asset impairment charges
Total basis point favorable (unfavorable) change
Operating (Loss) Income by Segment
(in millions)
OPERATING INCOME (LOSS)
Luxury
Consumer Beauty
Professional Beauty
Corporate
Total
Luxury
Year Ended June 30,
2018/2017
400
300
120
(30)
(20)
(20)
(10)
—
740
2017/2016
(60)
(290)
50
(50)
(650)
(180)
20
10
(1,150)
Year Ended June 30,
Change %
2018
2017
2016
2018/2017
2017/2016
$
248.7
$
158.0
$
278.9
119.4
(485.8)
161.2
261.2
78.5
(935.5)
$ (437.8) $
$
228.9
246.5
68.0
(289.2)
254.2
57%
7%
52%
(31%)
6%
15%
48% <(100%)
>100% <(100%)
In fiscal 2018, operating income for Luxury increased 57%, or $90.7, to $248.7 from $158.0 in fiscal 2017. Operating
margin increased to 7.7% of net revenues in fiscal 2018 as compared to 6.2% in fiscal 2017, primarily driven by lower selling,
general and administrative expenses as a percentage of net revenues and lower amortization expense as a percentage of net
revenues.
In fiscal 2017, operating income for Luxury decreased 31%, or $70.9, to $158.0 from $228.9 in fiscal 2016. Operating
margin decreased to 6.2% of net revenues in fiscal 2017 as compared to 12.5% in fiscal 2016, primarily driven by higher
selling, general and administrative expenses as a percentage of net revenues and higher amortization as a percentage of net
revenues, partially offset by lower cost of goods sold as a percentage of net revenues.
Consumer Beauty
In fiscal 2018, operating income for Consumer Beauty increased 7%, or $17.7, to $278.9 from $261.2 in fiscal 2017.
Operating margin decreased to 6.5% of net revenues in fiscal 2018 as compared to 7.1% in fiscal 2017, primarily driven by
38
higher selling, general and administrative expenses as a percentage of net revenues and higher amortization expense as a
percentage of net revenues.
In fiscal 2017, operating income for Consumer Beauty increased 6%, or $14.7, to $261.2 from $246.5 in fiscal 2016.
Operating margin decreased to 7.1% of net revenues in fiscal 2017 as compared to 10.9% in fiscal 2016, primarily driven by
higher selling, general and administrative expenses as a percentage of net revenues and higher amortization expense as a
percentage of net revenues, partially offset by lower cost of goods sold as a percentage of net revenues.
Professional Beauty
In fiscal 2018, operating income for Professional Beauty increased 52%, or $40.9 to $119.4 from $78.5 in fiscal 2017.
Operating margin increased to 6.2% of net revenues in fiscal 2018 as compared to 5.6% in fiscal 2017, primarily driven by
lower amortization as a percentage of net revenues and lower selling, general, and administrative expenses as a percentage of
net revenues.
In fiscal 2017, operating income for Professional Beauty increased 15%, or $10.5, to $78.5 from $68.0 in fiscal 2016.
Operating margin decreased to 5.6% of net revenues in fiscal 2017 as compared to 27.2% in fiscal 2016 primarily driven by
higher selling, general and administrative expenses as a percentage of net revenues and higher amortization expense as a
percentage of net revenues, partially offset by lower cost of goods sold as a percentage of net revenues.
Corporate
Corporate primarily includes corporate 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.
Operating loss for Corporate was $485.8, $935.5 and $289.2 in fiscal 2018, 2017 and 2016, respectively, as described
under “Adjusted Operating Income” below.
Adjusted Operating Income by Segment
We believe that adjusted operating income by segment further enhances an investor’s understanding of our performance. See
“Overview—Non-GAAP Financial Measures.” A reconciliation of reported operating income (loss) to adjusted operating
income is presented below, by segment:
(in millions)
Operating income (loss)
Luxury
Consumer Beauty
Professional Beauty
Corporate
Total
(in millions)
Operating income (loss)
Luxury
Consumer Beauty
Professional Beauty
Corporate
Total
Year Ended June 30, 2018
Reported
(GAAP)
Adjustments (a)
Adjusted
(Non-GAAP)
$
248.7
$
278.9
119.4
(485.8)
161.2
(145.1) $
(132.2)
(75.5)
(485.8)
(838.6)
393.8
411.1
194.9
—
999.8
Year Ended June 30, 2017
Reported
(GAAP)
Adjustments (a)
Adjusted
(Non-GAAP)
$
158.0
$
261.2
78.5
(935.5)
(437.8)
(125.0) $
(94.5)
(55.6)
(935.5)
(1,210.6)
283.0
355.7
134.1
—
772.8
39
(in millions)
Operating income (loss)
Luxury
Consumer Beauty
Professional Beauty
Corporate
Total
Year Ended June 30, 2016
Reported
(GAAP)
Adjustments (a)
Adjusted
(Non-GAAP)
$
228.9
$
246.5
68.0
(289.2)
254.2
(50.5) $
(20.5)
(8.5)
(289.2)
(368.7)
279.4
267.0
76.5
—
622.9
(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 expense which is reflected in
the Luxury, Consumer Beauty and Professional Beauty divisions.
Adjusted Operating Income for Coty Inc.
Adjusted operating income provides investors with supplementary information relating to our performance. See “Overview
—Non-GAAP Financial Measures.” Reconciliation of reported operating (loss) income to adjusted operating income is
presented below:
(in millions)
Reported operating income (loss)
% of Net revenues
Restructuring and other business realignment costs
Amortization expense
Costs related to acquisition activities
Pension settlement
Asset impairment charges
Share-based compensation expense adjustment
Loss/(gain) on sale of assets
Total adjustments to reported operating (loss) income
Adjusted operating income
Year Ended June 30,
Change %
2018
$ 161.2
2017
$ (437.8)
2016
$ 254.2
2018/2017
2017/2016
>100% <(100%)
1.7%
(5.7)%
5.8%
381.1
352.8
76.1
—
—
—
426.2
275.1
494.9
17.5
—
—
28.6
(3.1)
838.6
$ 999.8
1,210.6
$ 772.8
109.7
79.5
197.5
—
5.5
1.3
(24.8)
368.7
$ 622.9
(11%)
28%
(85%)
(100%)
N/A
N/A
>100%
(31%)
29%
>100%
>100%
>100%
100%
(100%)
(100%)
88%
>100%
24%
% of Net revenues
10.6%
10.1 %
14.3%
In fiscal 2018, adjusted operating income increased 29%, or $227.0, to $999.8 from $772.8 in fiscal 2017. Adjusted
operating margin increased to 10.6% of net revenues in fiscal 2018 as compared to 10.1% in fiscal 2017, driven by
approximately 60 basis points related to lower selling, general, and administrative expenses partially offset by approximately 10
basis points related to higher adjusted costs of sales as a percentage of net revenues. Excluding the impact of foreign currency
exchange translations, adjusted operating income increased 28%.
In fiscal 2017, adjusted operating income increased 24%, or $149.9, to $772.8 from $622.9 in fiscal 2016. Adjusted
operating margin decreased to 10.1% of net revenues in fiscal 2017 as compared to 14.3% in fiscal 2016, driven by
approximately 630 basis points related to higher adjusted selling, general and administrative expenses partially offset by
approximately 200 basis points related to lower adjusted cost of sales as a percentage of net revenues. Excluding the impact of
foreign currency exchange translations, adjusted operating income increased 23%.
Restructuring and Other Business Realignment Costs
We periodically undertake activities to integrate, realign and restructure our business to streamline operations and optimize
our cost structure.
In connection with the acquisition of the Burberry Beauty Business, we recorded $3.9 of restructuring costs related to
distributor terminations which have been recorded in Corporate.
40
We continue to analyze our cost structure, including opportunities to simplify and streamline operations. Independent of
the Global Integration Activities (as defined below), we are considering a range of smaller initiatives and other cost reduction
activities, which will combine and expand existing initiatives, in order to reduce fixed costs and enable further investment in
the business (the “2018 Restructuring Actions”). We expect that the 2018 Restructuring Actions will result in pre-tax
restructuring and related costs of approximately $250.0, out of which approximately $78.0 has been approved through fiscal
2018.
In connection with the acquisition of the P&G Beauty Business, we anticipate that we will incur a total of approximately
$1.3 billion of operating expenses, including restructuring and related costs aimed at integrating and optimizing the combined
organization (“Global Integration Activities”). We expect that the Global Integration Activities will result in pre-tax
restructuring and related costs of approximately $700.0 to $800.0, out of which approximately $700.0 has been approved
through fiscal 2018.
In the first quarter of fiscal 2016, our Board approved an expansion to the acquisition integration program in connection
with the acquisition of the Bourjois (the “Acquisition Integration Program”). Actions associated with the program were initiated
after the Bourjois acquisition and substantially completed during fiscal 2017. We incurred $55.4 of restructuring costs life-to-
date as of June 30, 2018, which have been recorded in Corporate.
In fiscal 2018, we incurred restructuring and other business realignment costs of $381.1, as follows:
• We incurred restructuring costs of $173.2 primarily related to the Global Integration Activities and 2018 Restructuring
Actions, included in the Consolidated Statements of Operations.
• We incurred business structure realignment costs of $207.9 primarily related to our Global Integration Activities, and
certain other programs. This amount includes $156.8 in Selling, general and administrative expenses and $51.1 in Cost
of sales.
In fiscal 2017, we incurred restructuring and other business realignment costs of $426.2, as follows:
• We incurred restructuring costs of $372.2 primarily related to the Global Integration Activities, included in the
Consolidated Statements of Operations.
• We incurred business structure realignment costs of $54.0 primarily related to our Global Integration Activities,
Organizational Redesign and certain other programs. This amount includes $37.4 in Selling, general and
administrative expenses and $16.6 in Cost of sales.
In fiscal 2016, we incurred restructuring and other business realignment costs of $109.7, as follows:
• We incurred Restructuring costs of $86.9 primarily related to the Acquisition Integration Program and Organizational
Redesign, included in the Consolidated Statements of Operations
• We incurred other business realignment costs of $21.6 primarily related to our Organizational Redesign and the 2013
Productivity Program, included in Selling, general and administrative expenses in the Consolidated Statements of
Operations. We incurred $1.2 of accelerated depreciation for fiscal 2016 resulting from a change in the estimated
useful life of manufacturing equipment reported in Cost of sales.
In all reported periods, all restructuring and other business realignment costs were reported in Corporate.
Costs related to acquisition activities
Costs related to acquisition activities comprise primarily of: (i) costs included in Acquisition-related costs in the
Consolidated Statements of Operations, which may include finder’s fees, legal, accounting, valuation, and other professional or
consulting fees, and other internal costs which may include compensation related expenses for dedicated internal resources. and
(ii) other costs related to the amortization of acquired inventory step-up, included in Cost of sales in the Consolidated
Statements of Operations.
In fiscal 2018, we incurred $76.1 of costs related to acquisition activities. We recognized Acquisition-related costs of
$64.2, primarily in connection with the acquisitions of the P&G Beauty Business, the Burberry Beauty Business, ghd and
Younique. We also incurred $7.1 of cost related to acquired inventory step-up amortization in connection with the acquisitions
of Younique and the Burberry Beauty Business, as well as $4.8 in excess costs associated with the Burberry Beauty Business
acquisition, included in Cost of sales in the Consolidated Statements of Operations.
In fiscal 2017, we incurred $494.9 of costs related to acquisition activities. We recognized Acquisition-related costs of
$355.4, primarily in connection with the acquisition of P&G Beauty Business, ghd and Younique, included in the Consolidated
Statements of Operations. We also incurred $48.8, $44.4, and $40.8 in Cost of sales in the Consolidated Statements of
41
Operations, primarily related to the amortization of acquired inventory step-up in connection with the acquisition of the P&G
Beauty Business, ghd, and Younique, respectively.
In fiscal 2016, we incurred $197.5 of costs related to acquisition activities. This includes Acquisition-related costs of
$174.0, primarily in connection with the acquisition of P&G Beauty Business, included in the Consolidated Statements of
Operations. We also incurred $20.3 of costs, primarily related to the amortization of acquired inventory step-up in connection
with the acquisition of the Hypermarcas Brands and Bourjois, included in Cost of sales in the Consolidated Statements of
Operations. We also incurred $3.2 of costs related to acquisition activities, included in Selling, general and administrative
expense in the Consolidated Statements of Operations.
In all reported periods, all acquisition-related costs were reported in Corporate, except where otherwise noted.
Amortization Expense
In fiscal 2018, amortization expense increased to $352.8 from $275.1 in fiscal 2017 primarily as a result of the
Acquisitions. In fiscal 2018, amortization expense of $145.1, $132.2, and $75.5 were reported in the Luxury, Consumer
Beauty, and Professional Beauty segments, respectively.
In fiscal 2017, amortization expense increased to $275.1 from $79.5 in fiscal 2016, primarily as a result of the P&G Beauty
Business acquisition. In fiscal 2017, amortization expense of $124.4, $94.9 and $55.8 were reported in the Luxury, Consumer
Beauty, and Professional Beauty segments, respectively.
In fiscal 2016, amortization expense increased to $79.5 from $74.7 in fiscal 2015, primarily as a result of the Hypermarcas
Brands and Bourjois Acquisition. In fiscal 2016, amortization expense of $50.4, $20.6 and $8.5 were reported in the Luxury,
Consumer Beauty, and Professional Beauty segments, respectively.
Pension Settlement Charges
In fiscal 2018 and fiscal 2016, we did not incur any pension settlement charges.
In fiscal 2017, we incurred charges of $17.5 primarily in connection with the settlement of obligations related to the U.S.
Del Laboratories, Inc. pension plan. The settlement of the plan was effectuated through lump sum payments to eligible
participants during the three months ended September 30, 2016, in addition to, the purchase of annuity contracts from a third
party insurance provider, effectively transferring the U.S. Del Laboratories, Inc. pension plan obligation to the insurance
provider, during fiscal 2017. The settlement charge for fiscal 2017 is as a result of accelerating the recognition of losses
previously deferred in other comprehensive income (loss). Pension settlement charges were reported in Corporate.
Asset Impairment Charges
In fiscal 2018 and 2017, we did not incur any asset impairment charges.
In fiscal 2016, Asset impairment charges of $5.5 were reported in the Consolidated Statements of Operations. The
impairment represents the write-off of long-lived assets in Southeast Asia consisting of customer relationships reported in
Corporate.
Share-Based Compensation Adjustment
There was no share-based compensation expense adjustment included in the calculation of adjusted operating income in
fiscal 2018 and 2017. Share-based compensation adjustment for Pre-IPO grants in fiscal 2016 was $1.3.
Loss (Gain) on sale of assets
In fiscal 2018, we sold certain assets relating to our Playboy and Cerruti fragrance brands and recorded a loss of $28.6
which has been reflected in Loss (gain) on sale of assets in the Consolidated Statements of Operations.
In fiscal 2017, we sold certain assets relating to our J.Lo fragrance brand and recorded a gain of $3.1 which has been
reflected in Loss (gain) on sale of assets in the Consolidated Statements of Operations.
In fiscal 2016, we sold the Cutex brand and related assets and recorded a gain of $24.8 which has been reflected in Loss
(gain) on sale of assets in the Consolidated Statements of Operations.
INTEREST EXPENSE, NET
In fiscal 2018, net interest expense was $265.0 as compared with $218.6 in fiscal 2017. This increase is primarily a result
of higher average debt balances and increased average interest rates.
In fiscal 2017, net interest expense was $218.6 as compared with $81.9 in fiscal 2016.This increase is primarily a result of
higher average debt balances at increased interest rates due to the assumption of debt under the Galleria Credit Agreement and
42
the financings of the acquisitions of ghd and Younique. Additionally included in the prior period interest expense is a onetime
foreign currency exchange gain of $11.1 related to our debt refinancing in fiscal 2016.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
In fiscal 2018, we incurred $10.7 in losses related to the write-off of debt discount and deferred financing costs in
connection with the refinancing of our credit agreement entered into on October 27, 2017 (the “Coty Credit Agreement”) and
the debt facilities available under the Galleria Credit Agreement (the “Galleria Credit Agreement”).
In fiscal 2017, there were no losses related to the early extinguishment of debt.
In fiscal 2016, we incurred $3.1 in losses related to the write-off of deferred financing costs in connection with the
refinancing of our long-term credit facilities.
OTHER EXPENSE (INCOME), NET
In fiscal 2018, we incurred $38.0 of net other expense. The other expense in fiscal 2018 primarily includes $24.1 in
expense related to third-party debt issuance costs incurred in connection with the refinancing of the Coty Credit Agreement and
Galleria Credit Agreement and $12.5 related to the change in the Mandatorily Redeemable Financial Instrument (“MRFI”)
balance primarily associated with a certain Southeast Asian subsidiary.
In fiscal 2017, we incurred $1.6 million of net other expense.
In fiscal 2016, we incurred $30.4 million of net other expense related to losses incurred of $29.6 on foreign currency
contracts related to payments to Hypermarcas S.A. in connection with the acquisition of the Hypermarcas Brands and expenses
of $0.8 related to the purchase of the remaining mandatorily redeemable financial instrument in a subsidiary.
INCOME TAXES
The following table presents our (benefit) provision for income taxes, and effective tax rates for the periods presented
(Benefit) provision for income taxes
$
Effective income tax rate
2018
2017
2016
$
(24.7)
16.2%
(259.5)
$
39.4%
(40.4)
(29.1)%
The effective income tax rate for fiscal 2018 was 16.2% as compared with 39.4% in fiscal 2017 and (29.1)% in fiscal 2016.
The effective income tax rate in fiscal 2018 includes an expense of $41.0 as a result of the Tax Act. This expense is due to the
one-time deemed repatriation tax offset by a tax benefit on the revaluation of the Company’s deferred taxes. See Note 15—
Income Taxes in the notes to our Consolidated Financial Statements for additional information.
The effective income tax rate in fiscal 2017 includes the release of a valuation allowance in the U.S. as a result of the P&G
Beauty Business acquisition of $111.2.
The negative effective income tax rate in fiscal 2016 reflects a change in recognized tax benefit of $51.4 due to the
settlement of tax audits in multiple jurisdictions and the expiration of foreign and state statutes of limitation.
The effective rates vary from the U.S. federal statutory rate of approximately 28% 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.
43
Reconciliation of Reported (Loss) Income Before Income Taxes to Adjusted Income Before Income Taxes and Effective
Tax Rates:
Year Ended June 30, 2018
Year Ended June 30, 2017
Year Ended June 30, 2016
(Loss)/
income
before
income
taxes
(Benefit)
provision
for
income
taxes
Effective
tax rate
(Loss)/
income
before
income
taxes
(Benefit)
provision
for
income
taxes
Effective
tax rate
Income
before
income
taxes
(Benefit)
provision
for
income
taxes
Effective
tax rate
$ (152.5)
(24.7)
16.2% $ (658.0)
(259.5)
39.4% $ 138.8
(40.4)
(29.1)%
838.6
152.5
1,210.6
355.0
33.4
10.4
1.4
0.4
368.7
9.6
50.7
(0.7)
$ 719.5
$ 138.2
19.2% $ 554.0
$
95.9
17.3% $ 517.1
$
9.6
1.9 %
(in millions)
Reported (loss) income
before income taxes
Adjustments to reported
operating income (loss) (a) (b)
Other adjustments (b) (c)
Adjusted income before
income taxes
(a) See a description of adjustments under “Adjusted Operating Income for Coty Inc.”
(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
benefit/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 benefit/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) See “Reconciliation of Reported Net (Loss) Income Attributable to Coty Inc. to Adjusted Net Income Attributable to Coty Inc.”
The adjusted effective tax rate was 19.2% compared to 17.3% in the prior-year period. The differences were primarily due
to the release of a valuation allowance in the US in the prior period as a result of the P&G Beauty Business acquisition. Cash paid
during the years ended June 30, 2018, 2017 and 2016, for income taxes of $124.6, $90.1 and $118.1 represents 17.3%, 16.3% and
22.8% of Adjusted income before income taxes for the fiscal year ended, respectively.
NET (LOSS) INCOME ATTRIBUTABLE TO COTY INC.
In fiscal 2018, net loss attributable to Coty Inc. decreased $253.4 to a loss of $168.8 from a loss of $422.2 in fiscal 2017.
This decrease primarily reflects higher operating income partially offset by higher interest expense in fiscal 2018 and
incremental costs related to the loss on early extinguishment of debt and other debt issuance costs.
In fiscal 2017, net loss attributable to Coty Inc. increased $579.1 to a loss of $422.2, from income of $156.9 in fiscal 2016.
This decrease primarily reflects lower operating income and higher interest expense in fiscal 2017, partially offset by a higher
tax benefit in the fiscal 2017 than in fiscal 2016 and losses related to hedges on the acquisition of the Hypermarcas Brands in
fiscal 2016.
We believe that adjusted net income attributable to Coty Inc. provides an enhanced understanding of our performance. See
“Overview—Non-GAAP Financial Measures.”
44
(in millions)
Reported net (loss) income attributable to Coty Inc.
% of Net revenues
Adjustments to reported operating income (a)
Adjustments to other expense (b)
Loss on early extinguishment of debt (c)
Adjustments to interest (income) expense (d)
Adjustments to noncontrolling interest expense (e)
Change in tax provision due to adjustments to reported net
(loss) income attributable to Coty Inc.
Adjusted net income attributable to Coty Inc.
% of Net revenues
Per Share Data
Adjusted weighted-average common shares
Basic
Diluted
Adjusted net income attributable to Coty Inc. per common
share
Basic
Diluted
Year Ended June 30,
Change %
2018
$ (168.8)
2017
$ (422.2)
2016
$ 156.9
2018/2017
2017/2016
60% <(100%)
(1.8%)
(5.5%)
3.6%
838.6
1,210.6
24.1
10.7
(1.4)
(24.0)
—
—
1.4
(25.9)
368.7
30.4
3.1
(23.9)
—
(31%)
>100%
>100%
<(100%)
7%
>100%
(100%)
(100%)
>100%
(100%)
(162.9)
$ 516.3
(355.4)
$ 408.5
(50.0)
$ 485.2
54% <(100%)
(16%)
26%
5.5%
5.3%
11.2%
749.7
753.1
642.8
647.8
345.5
354.2
$ 0.69
$ 0.69
$ 0.64
$ 0.63
$
$
1.40
1.37
(a) See a description of adjustments under “Adjusted Operating Income for Coty Inc.”
(b) In fiscal 2018, we incurred losses of $24.1 related to the expensing of third-party debt issuance costs incurred in connection with the
refinancing of the Coty Credit Agreement and Galleria Credit Agreement. In fiscal 2016, we incurred losses of $29.6 on foreign currency
contracts related to payments for the acquisition of the Hypermarcas Brands and expenses of $0.8 related to the purchase of the remaining
mandatorily redeemable financial interest in a subsidiary, included in Other expense, net in the Consolidated Statements of Operations.
(c) In fiscal 2018, the amount represents the write-off of debt discount and deferred financing costs in connection with the refinancing of the
Coty Credit Agreement and Galleria Credit Agreement, included in Loss on early extinguishment of debt in the Consolidated Statements of
Operations. In fiscal 2016, the amount represents the write-off of deferred financing costs in connection with the refinancing of debt,
included in Loss on early extinguishment of debt in the Consolidated Statements of Operations.
(d) The amount in fiscal 2018 represents one-time gains of $1.4 on short-term forward contracts to exchange euros for U.S. dollars to repay
U.S. dollar debt balances outstanding under the Coty Credit Agreement and Galleria Credit Agreement, in connection with the refinancing
of those respective agreements in April 2018, included in Interest expense, net in the Consolidated Statements of Operations. The amount
in fiscal 2017 represents a net loss of $1.4 incurred in connection with the acquisition of the Hypermarcas Brands and subsequent
intercompany loans, included in Interest expense, net in the Consolidated Statements of Operations. The amount in fiscal 2016 primarily
represents one-time gains of $11.1 on short-term forward contracts to exchange euros for U.S. dollars related to the euro-denominated debt
and a net gain of $12.8 in connection with the acquisition of the Hypermarcas Brands and subsequent intercompany loans, included in
Interest expense, net in the Consolidated Statements of Operations.
(e) 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 Consolidated Statements of Operations.
Quarterly Results of Operations Data
The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight
quarters in the periods ended June 30, 2018. We have prepared the quarterly consolidated statements of operations data on a
basis consistent with the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary
Data” in this Annual Report on Form 10-K. In the opinion of management, the financial information reflects all adjustments,
consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This
information should be read in conjunction with the consolidated financial statements and related notes included in Part II, Item
8, “Financial Statements and Supplementary Data” in this Annual Report. The results of historical periods are not necessarily
indicative of the results of operations for any future period.
45
Fiscal 2018 (a)
Three Months Ended
Fiscal 2017 (b)
Three Months Ended
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
2018
2018
2017
2017
2017
2017
2016
2016
$ 2,299.4
$ 2,222.7
$ 2,637.6
$ 2,238.3
$ 2,241.3
$ 2,032.1
$ 2,296.7
$ 1,080.2
1,402.7
1,410.3
1,612.6
1,364.0
1,366.0
1,216.0
1,404.4
635.4
97.6
0.5
(61.8)
65.7
10.7
27.9
42.7
2.6
19.9
72.6
—
3.0
21.7
7.0
174.4
60.3
—
3.4
11.2
54.1
28.7
66.4
—
3.7
(41.4)
(25.3)
193.2
80.3
155.8
57.7
(279.0)
(192.5)
59.5
—
1.4
60.8
—
(0.5)
(339.9)
(252.8)
15.8
135.9
(12.7)
57.9
—
(0.6)
(70.0)
(38.9)
(93.4)
(122.1)
(Loss) income before income taxes
(166.1)
(55.7)
110.7
Provision (benefit) for income taxes
4.1
4.4
(7.9)
Net (loss) income
$ (170.2) $
(60.1) $
118.6
$
(16.1) $
(301.0) $ (159.4) $
52.1
$
$
5.0
6.1
$
$
1.1
15.8
$
$
(1.9) $
(2.2) $
11.3
5.8
$
1.2
2.6
$
$
3.5
1.3
$
$
2.5
2.8
$ (181.3) $
(77.0) $
109.2
(19.7) $
(304.8) $ (164.2) $
46.8
$
$
7.4
81.5
46.4
40.4
—
1.3
4.7
(5.1)
9.8
8.2
1.6
—
$
$
$
$
(in millions, except per share data)
Consolidated Statements of
Operations Data:
Net revenues
Gross profit
Restructuring costs
Acquisition-related costs
Operating (loss) income
Interest expense, net
Loss on early extinguishment of debt
Other expense (income), net
Net income (loss) attributable to
noncontrolling interests
Net income attributable to
redeemable noncontrolling interests
Net (loss) income attributable to
Coty Inc.
Per Share Data:
Weighted-average common shares:
Basic
Diluted
Cash dividends declared per
common share
Net (loss) income attributable to
Coty Inc. per common share:
750.6
750.6
750.1
750.1
749.6
752.7
748.6
748.6
747.7
747.7
747.3
747.3
746.6
752.4
336.3
336.6
$
0.125
$
0.125
$
0.125
$
0.125
$
0.125
$
0.125
$
0.125
$
0.275
Basic
Diluted
$
(0.24) $
(0.10) $
0.15
$
(0.03) $
(0.41) $
(0.22) $
0.06
$
(0.24)
(0.10)
0.15
(0.03)
(0.41)
(0.22)
0.06
—
—
(a) Beginning in the second quarter of fiscal 2018, the financial results presented above include the impacts of the Burberry Beauty Business
acquisition.
(b) Beginning in the second quarter of fiscal 2017, the financial results presented above include the impacts of the acquisitions of the P&G
Beauty Business and ghd. Beginning in the third quarter of fiscal 2017, the financial results presented above include the impacts of the
Younique acquisition.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of June 30, 2018, we had cash and cash equivalents of $331.6 compared with $535.4 at June 30, 2017. Our cash and
cash equivalents balances decreased by $203.8 during fiscal 2018 primarily as a result of cash used for capital expenditures,
dividend payments to shareholders and acquisitions, partially offset by cash generated from operations and net borrowings from
long-term debt. During fiscal 2018, we reduced our cash held outside of the U.S. by $168.8, which was utilized for corporate
purposes.
Our cash flows are subject to seasonal variation throughout the year, including demands on cash made during our first
fiscal quarter in anticipation of higher global sales during the second fiscal quarter and strong cash generation in the second
fiscal quarter as a result of increased demand by retailers associated with the holiday season. Our principal uses of cash are to
fund planned operating expenditures, capital expenditures, interest payments, acquisitions, dividends, share repurchases and
any principal payments on debt. The working capital movements are based on the sourcing of materials related to the
46
production of products within each of our segments. The phasing of payments to vendors also impacts our working capital from
time-to-time as we seek to efficiently manage our cash and working capital requirements.
As a result of the cash on hand, our ability to generate cash from operations and through access to our revolving credit
facility and other lending sources, we believe we have sufficient liquidity to meet our ongoing needs on both a near term and
long-term basis.
Debt
The balances consisted of the following as of June 30, 2018 and June 30, 2017, respectively:
Short-term debt
2018 Coty Credit Agreement
2018 Coty Revolving Credit Facility due April 2023
2018 Coty Term A Facility due April 2023
2018 Coty Term B Facility due April 2025
Senior Unsecured Notes
2026 Dollar Notes due April 2026
2023 Euro Notes due April 2023
2026 Euro Notes due April 2026
Galleria Credit Agreement
Galleria Revolving Credit Facility due September 2021
Galleria Term Loan A Facility due September 2021
Galleria Term Loan B Facility due September 2023
Coty Credit Agreement
Coty Revolving Credit Facility due October 2020
Coty Term Loan A Facility due October 2020
Coty Term Loan A Facility due October 2021
Coty Term Loan B Facility due October 2022
Other long-term debt and capital lease obligations
Total debt
Less: Short-term debt and current portion of long-term debt
Total Long-term debt
Less: Unamortized debt issuance costs (a) (b)
Less: Discount on Long-term debt
Total Long-term debt, net
June 30,
2018
June 30,
2017
$
9.2
$
3.7
368.1
3,371.5
2,390.5
550.0
640.9
291.4
—
—
—
—
—
—
—
1.6
7,623.2
(218.9)
7,404.3
(86.2)
(12.7)
7,305.4
$
$
—
—
—
—
—
—
—
944.3
1,000.0
810.0
1,792.8
950.6
1,712.5
1.7
7,215.6
(209.1)
7,006.5
(67.6)
(10.6)
6,928.3
(a) Balances as of June 30, 2018 consist of unamortized debt issuance costs of $31.4 for the 2018 Coty Revolving Credit Facility, $29.2 for
the 2018 Coty Term A Facility, $10.9 for the 2018 Coty Term B Facility, $8.3 for the 2026 Dollar and Euro Notes and $6.4 for the 2023
Euro Notes.
(b) Balances as of June 30, 2017 consist of unamortized debt issuance costs of $17.5 for the Coty Revolving Credit Facility, $33.2 for the
Coty Term Loan A Facility, $11.3 for the Coty Term Loan B Facility, $2.7 for the Galleria Term Loan A Facility and $3.0 for the Galleria
Term Loan B Facility. Unamortized debt issuance costs of $4.2 for the Galleria Revolving Credit Facility were classified as Other
noncurrent assets as of June 30, 2017.
Short-Term Debt
We maintain short-term lines of credit with financial institutions around the world. Total available lines of credit were
$129.2 and $132.4, of which $4.7 and $3.2 were outstanding at June 30, 2018 and 2017, respectively. Interest rates on these
short-term lines of credit vary depending on market rates for borrowings within the respective geographic locations plus
applicable spreads. Interest rates plus applicable spreads on these lines ranged from 0.2% to 10.7% and from 0.4% to 11.2% as
of June 30, 2018 and 2017, respectively. The weighted-average interest rate on short-term debt outstanding was 2.2% and 3.0%
47
as of June 30, 2018 and 2017, respectively. In addition, we had undrawn letters of credit of $5.4 and $5.5 as of June 30, 2018
and 2017, respectively.
Long-Term Debt
Our long-term debt facilities consisted of the following as of June 30, 2018:
Facility
Maturity
Date
Borrowing
Capacity
(in
millions)
2018 Coty
Revolving Credit
Facility
April 2023
$3,250.0
April 2023
$1,000.0
April 2023
€2,035.0
2018 Coty Term
A Facility - USD
Portion
2018 Coty Term
A Facility - EUR
Portion
2018 Coty Term
B Facility - USD
Portion
2018 Coty Term
B Facility - EUR
Portion
Interest Rate Terms
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d) (e)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d)
Applicable
Interest Rate
Spread as of
June 30, 2018
Debt
Discount
Repayment Schedule
1.75%
N/A(b)
Payable in full at
maturity date
1.75%
N/A(b)
1.75%
N/A(b)
Quarterly repayments
beginning September 30,
2018 at 1.25% of original
principal amount
Quarterly repayments
beginning September 30,
2018 at 1.25% of original
principal amount
Quarterly repayments
beginning September 30,
2018 at 0.25% of original
principal amount
Quarterly repayments
beginning September 30,
2018 at 0.25% of original
principal amount
April 2025
$1,400.0
LIBOR(a) plus a margin of 2.25% per
annum or a base rate plus a margin of
1.25% per annum (d)
2.25%
0.25%
April 2025
€850.0
LIBOR(a) plus a margin of 2.50% per
annum (d)
2.50%
0.25%
2026 Dollar
Notes
April 2026
$550.0
2023 Euro Notes
April 2023
€550.0
2026 Euro Notes
April 2026
€250.0
6.5% per annum, payable semi-annually
in arrears on April 15 and October 15 of
each year, beginning on October 15,
2018
4.0% per annum, payable semi-annually
in arrears on April 15 and October 15 of
each year, beginning on October 15,
2018
4.75% per annum, payable semi-
annually in arrears on April 15 and
October 15 of each year, beginning on
October 15, 2018
N/A(b)
N/A(b)
Payable in full at
maturity date
N/A(b)
N/A(b)
Payable in full at
maturity date
N/A(b)
N/A(b)
Payable in full at
maturity date
(a) As defined below.
(b) N/A - Not Applicable.
(c) As defined per the 2018 Coty Credit Agreement.
(d) The selection of the applicable one, two, three, six or twelve month interest rate for the period is at the discretion of the Company.
(e) The Company will pay to the Revolving Credit Facility lenders an unused commitment fee calculated at a rate ranging
from 0.10% to 0.35% per annum, based on the Company’s total net leverage ratio(c). As of June 30, 2018, the applicable rate on the unused
commitment fee was 0.30%.
See Note 13—Debt in the notes to our Consolidated Financial Statements for additional information on our debt
arrangements.
Offering of Senior Unsecured Notes
On April 5, 2018 we issued, at par, $550.0 of 6.50% senior unsecured notes due 2026 (the “2026 Dollar Notes”), €550.0
million of 4.00% senior unsecured notes due 2023 (the “2023 Euro Notes”) and €250.0 million of 4.75% senior unsecured
notes due 2026 (the “2026 Euro Notes” and, together with the 2023 Euro Notes, the “Euro Notes,” and the Euro Notes together
with the 2026 Dollar Notes, the “Senior Unsecured Notes”) in a private offering to qualified institutional buyers pursuant to
Rule 144A under the Securities Act and to non-U.S. persons outside the U.S. pursuant to Regulation S under the Securities
48
Act. The net proceeds of this offering, together with borrowings under our 2018 Credit Agreement were used to repay in full
and refinance the indebtedness outstanding under the 2015 Coty Credit Agreement and Galleria Credit Agreement and to pay
accrued interest, related premiums, fees and expenses in connection therewith.
The Senior Unsecured Notes are our senior unsecured debt obligations and will be pari passu in right of payment with all
of our 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 our senior unsecured obligations and are effectively junior to all our
existing and future secured indebtedness 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.
In addition to the optional redemption outlined below, we may, at our option, redeem either series of the Euro Notes, in
whole but not in part, at a redemption price equal to 100% of the principal amount of the Euro Notes to be redeemed, together
with any accrued and unpaid interest thereon to, but excluding, the redemption date, at any time, upon the occurrence of certain
tax events.
Upon the occurrence of certain change of control triggering events with respect to a series of Senior Unsecured Notes, we
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 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 our assets and certain merger or
consolidation transactions. The Notes also provide for customary events of default.
Optional Redemption
Applicable Premium
The indenture governing the Senior Unsecured Notes (the “Indenture”) specifies the Applicable Premium (as defined in the
Indenture) to be paid upon early redemption of some or all of the 2026 Dollar Notes, 2023 Euro Notes or 2026 Euro Notes.
The Applicable Premium related to the 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes on any redemption date
and as calculated by the Company is the greater of:
(1) 1.0% of the then outstanding principal amount of the respective 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro
Notes; and
(2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 2026 Dollar
Notes, 2023 Euro Notes or 2026 Euro Notes that would apply if such 2026 Dollar Notes, 2023 Euro Notes or 2026
Euro Notes were redeemed on April 15, 2021, April 15, 2020 or April 15, 2021, respectively (such redemption price is
expressed as a percentage of the principal amount being set forth in the table appearing in the Redemption Pricing
section below), plus (ii) all remaining scheduled payments of interest due on the 2026 Dollar Notes, 2023 Euro Notes
or 2026 Euro Notes to and including April 15, 2021, April 15, 2020 and April 15, 2021, respectively (excluding
accrued but unpaid interest, if any, to, but excluding, the redemption date), with respect to each of subclause (i) and
(ii), computed using a discount rate equal to the Treasury Rate in the case of the 2026 Dollar Notes or Bund Rate in
the case of both the 2020 Euro Notes or 2026 Euro Notes (both Treasury Rate and Bund Rate as defined in the
Indenture) as of such redemption date plus 50 basis points; over (b) the principal amount of the respective 2026 Dollar
Notes, 2023 Euro Notes or 2026 Euro Notes.
Redemption Pricing
At any time and from time to time prior to April 15, 2021, April 15, 2020 and April 15, 2021, we may redeem some or all
of the 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes, respectively, at redemption prices equal to 100% of the
respective principal amounts being redeemed plus the Applicable Premium, plus accrued and unpaid interest, if any, to, but
excluding, the redemption dates.
At any time on or after April 15, 2021, April 15, 2020 and April 15, 2021, we may redeem some or all of the 2026 Dollar
Notes, 2023 Euro Notes and 2026 Euro Notes, respectively, at the redemption prices (expressed in percentage of principal
amount) set forth below, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates, if redeemed during
the twelve-month period beginning on April 15 of each of the years indicated below:
49
Year
2020
2021
2022
2023
2024 and thereafter
2026 Dollar Notes
N/A
104.8750%
103.2500%
101.6250%
100.0000%
Price
2023 Euro Notes
102.0000%
101.0000%
100.0000%
100.0000%
N/A
2026 Euro Notes
N/A
103.5625%
102.3750%
101.1875%
100.0000%
In addition, at any time prior to April 15, 2021, April 15, 2020 and April 15, 2021, we may redeem up to 35% of the
aggregate principal amounts of the outstanding 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes, respectively, using
the net cash proceeds from certain equity offerings at redemption prices (expressed as a percentage of the principal amount) of
106.50%, 104.00% and 104.75%, respectively, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates;
provided that (i) at least 65% of the aggregate principal amount of 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes,
respectively, originally issued on the date of the Indenture remain outstanding after each such redemption, and (ii) notice of any
such redemption is delivered to the Trustee within 90 days of the closing of each such equity offering.
2018 Coty Credit Agreement
On April 5, 2018, we entered into a new credit agreement (the “2018 Coty Credit Agreement”), which amended and
restated the previously existing 2015 Coty Credit Agreement. The 2018 Coty Credit Agreement provides for (a) our incurrence
of (1) a senior secured term A facility in an aggregate principal amount of (i) $1,000.0 denominated in U.S. dollars and (ii)
€2,035.0 million denominated in euros (the “2018 Coty Term A Facility”) and (2) a senior secured term B facility in an
aggregate principal amount of (i) $1,400.0 denominated in U.S. dollars and (ii) €850.0 million denominated in euros (the “2018
Coty Term B Facility”) and (b) the incurrence by us and Coty B.V., a Dutch subsidiary of ours (the “Dutch Borrower” and,
together with us, 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 net proceeds of the Senior Unsecured Notes and the 2018 Coty Credit Facilities were used to repay in full and
refinance the indebtedness outstanding under the 2015 Coty Credit Agreement and Galleria Credit Agreement and to pay
accrued interest, related premiums, fees and expenses in connection therewith. Future borrowings under the 2018 Coty Credit
Agreement could be used for corporate purposes.
Our obligations under the 2018 Coty Credit Agreement are guaranteed by our material wholly-owned subsidiaries
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 ours and the Guarantors’ assets, subject to certain exceptions. The Dutch Borrower does not guarantee our obligations
under the 2018 Coty Credit Agreement or grant any liens on its assets to secure any obligations under the 2018 Coty Credit
Agreement.
See Note 13—Debt in the notes to our Consolidated Financial Statements for additional information on our prior period
credit agreements.
Interest
The 2018 Coty Credit Agreement facilities bears interest at rates equal to, at our option, either:
• LIBOR of the applicable qualified currency, of which the we can elect the applicable one, two, three, six or twelve
month rate, plus the applicable margin; or
50
• 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
2.0
3.0
4.0
5.0
6.0
Greater than or equal to
4.75:1
Less than 4.75:1 but greater
than or equal to 4.00:1
Less than 4.00:1 but greater
than or equal to 2.75:1
Less than 2.75:1 but greater
than or equal to 2.00:1
Less than 2.00:1 but greater
than or equal to 1.50:1
Less than 1.50:1
2.000%
1.750%
1.500%
1.250%
1.125%
1.000%
1.000%
0.750%
0.500%
0.250%
0.125%
—%
Pricing Tier
Debt Ratings S&P/Moody’s:
LIBOR plus:
Alternative Base Rate
Margin:
5.0
4.0
3.0
2.0
1.0
Less than BB+/Ba1
BB+/Ba1
BBB-/Baa3
BBB/Baa2
BBB+/Baa1 or higher
2.000%
1.750%
1.500%
1.250%
1.125%
1.000%
0.750%
0.500%
0.250%
0.125%
In the case of the USD 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.
Debt Maturities Schedule
Aggregate maturities of all long-term debt, including current portion of long-term debt and excluding capital lease
obligations as of June 30, 2018, are presented below:
Fiscal Year Ending June 30,
2019
2020
2021
2022
2023
Thereafter
Total
Covenants
$
$
192.5
192.5
192.5
192.5
3,730.1
3,112.3
7,612.4
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 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.
51
Quarterly Test Period Ending
June 30, 2018
September 30, 2018 through December 31, 2018
March 31, 2019 through June 30, 2019
September 30, 2019 through December 31, 2019
March 31, 2020 through June 30, 2020
September 30, 2020 through December 31, 2020
March 31, 2021 through June 30, 2021
September 30, 2021 through June 30, 2023
Total Net Leverage Ratio(a)
5.50 to 1.00
5.50 to 1.00
5.25 to 1.00
5.00 to 1.00
4.75 to 1.00
4.50 to 1.00
4.25 to 1.00
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 cash 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 used within the definition of Total Net Leverage Ratio have the
meanings ascribed to them within the 2018 Coty Credit Agreement).
In the four fiscal quarters following the closing of any Material Acquisition (as defined in the 2018 Coty Credit
Agreement), 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.
Business Combinations
Burberry Beauty Business Acquisition
On October 2, 2017, we acquired the exclusive global license rights and other related assets for the Burberry Limited
(“Burberry”) luxury fragrances, cosmetics and skincare business (the “Burberry Beauty Business”). The Burberry Beauty
Business acquisition is expected to further strengthen our position in the global luxury beauty industry. Total purchase
consideration, after post-closing adjustments, was £191.7 million, the equivalent of $256.3, at the time of closing. Included in
the purchase price was cash consideration of £183.3 million, the equivalent of $245.1, at the time of closing, in addition to £8.4
million, the equivalent of $11.2, of estimated contingent consideration, at the time of closing.
P&G Beauty Business Acquisition
On October 1, 2016, we acquired the P&G Beauty Business. The P&G Beauty Business further strengthens our position in
the global beauty industry. The purchase price was $11,570.4 and consisted of $9,628.6 of total equity consideration and
$1,941.8 of assumed debt.
We issued 409.7 million shares of common stock to the former holders of Galleria Co. (“Galleria”) (which held the assets
of the P&G Beauty Business) common stock, together with cash in lieu of fractional shares. Coty Inc. is considered to be the
acquiring company for accounting purposes.
Acquisition of ghd
On November 21, 2016, we completed the acquisition of 100% of the equity interest of Lion/Gloria Topco Limited, which
held the assets of ghd (“ghd”) which stands for “Good Hair Day”, a premium brand in high-end hair styling appliances,
pursuant to a sale and purchase agreement. The ghd acquisition further strengthens our professional hair category. The total
cash consideration paid net of acquired cash and cash equivalents was £430.2 million, the equivalent of $531.5, at the time of
closing.
Acquisition of Younique
On February 1, 2017, we completed our acquisition of 60% of the membership interest in Foundation, LLC
(“Foundation”), which held the net assets of Younique, LLC, a Utah limited liability company (“Younique”), for cash
consideration of $600.0, net of acquired cash and debt assumed, and an additional payment of $7.5 for working capital
adjustments paid in the first half of fiscal 2018. The existing Younique membership holders contributed their 100% membership
interest in Younique to Foundation in exchange for a 40% membership interest in Foundation and $607.5 of cash consideration.
Younique strengthens the Consumer Beauty division’s color cosmetics and skin and body care product offerings. We account
for the noncontrolling interest portion of the acquisition as a redeemable noncontrolling interest. Refer to Note 20—
52
Redeemable Noncontrolling Interests for information regarding valuation method and significant assumptions used to calculate
the fair value.
Hypermarcas Brands Acquisition
On February 1, 2016, we completed the acquisition of 100% of the net assets of the personal care and beauty business of
Hypermarcas S.A. (the “Hypermarcas Brands”) pursuant to a share purchase agreement in order to further strengthen our
position in the Brazilian beauty and personal care market. This acquisition was included in the Consumer Beauty segment. The
total consideration of R$3,599.5 million, the equivalent of $901.9, at the time of closing, was paid during fiscal 2016.
Dispositions
During fiscal 2018, we divested the Playboy and Cerruti brands and related assets for total proceeds of $33.0. We allocated
$12.3 of goodwill to these brands as part of the sale. We recorded a non-cash loss of $28.6 which has been reflected in Loss
(gain) on sale of assets in the Consolidated Statements of Operations for the fiscal year ended June 30, 2018.
During fiscal 2017, we sold assets of the J.Lo brand for a total purchase price of $10.5. We allocated $2.4 of goodwill to
the brand as part of the sale. We recorded a gain of $3.1 which has been reflected in Loss (gain) on sale of assets in the
Consolidated Statements of Operations for the fiscal year ended June 30, 2017.
During fiscal 2016, we sold the Cutex brand and related assets for a total disposal price of $29.2. We allocated $4.2 of
goodwill to the brand as part of the sale. We recorded a gain of $24.8 which has been reflected in Loss (gain) on sale of assets
in the Consolidated Statements of Operations for the fiscal year ended June 30, 2016.
Cash Flows
Consolidated Statements of Cash Flows Data:
(in millions)
Net cash provided by operating activities
Net cash (used in) investing activities
Net cash provided by (used in) financing activities
Net cash provided by operating activities
Year Ended June 30,
2017
2016
2018
$
$
413.7
(687.6)
69.3
$
757.5
(1,163.6)
595.2
501.4
(1,059.2)
592.6
Net cash provided by operating activities was $413.7, $757.5 and $501.4 for fiscal 2018, 2017 and 2016, respectively.
The decrease in operating cash inflows in fiscal 2018 compared with fiscal 2017 was $343.8. This decrease is primarily
due to an increase in cash outflows related to working capital of $907.1, partially offset by an increase in net income after
adjusting for non-cash items of $573.3. Working capital changes in fiscal 2018 generated cash outflows of $110.2, compared
with generating cash inflows of $796.9 in fiscal 2017. The working capital cash inflows in fiscal 2017 included the impact of (i)
an increase in accounts payable in fiscal 2017 due to implementing significantly longer Coty payment terms to the vendors
associated with the P&G Beauty Business, as compared to the prior P&G payment terms and (ii) an increase in accrued
expenses and other current liabilities in fiscal 2017 due to the establishment of accruals for the Global Integration Activities
along with incrementally larger accruals resulting from the larger combined business subsequent to the acquisition of the P&G
Beauty Business. The working capital cash outflows in fiscal 2018 included the positive impact of the phasing of payments to
vendors. The increase in net income after adjusting for non-cash items in fiscal 2018, compared to fiscal 2017, resulted
primarily from changes in the net loss, deferred income taxes and depreciation and amortization from recent acquisitions.
The increase in operating cash inflows in fiscal 2017 compared with fiscal 2016 was $256.1. This increase is primarily due
to an increase of $687.0 resulting from the change in operating assets and liabilities acquired in the P&G Beauty Business
acquisition, coupled with changes in working capital. The increase in accounts payable during fiscal 2017 was primarily due to
implementing significantly longer Coty payment terms to the vendors associated with the P&G Beauty Business, as compared
to the prior P&G payment terms. The increase in accrued expenses and other current liabilities during fiscal 2017 resulted
primarily from the establishment of the restructuring accrual for the Global Integration Activities along with incrementally
larger accruals (e.g., accruals for advertising and marketing expenditures, for customer rebates and for compensation and other
related employee benefits) resulting from the larger combined business subsequent to the acquisition of the P&G Beauty
Business. In addition, the increase also included a change of $323.1 for depreciation and amortization as a result of the new
acquisitions. This is offset by a decrease in deferred income tax of $250.8 primarily due to a release of valuation allowance as a
result of the P&G Beauty Business acquisition and a decrease of $577.7 in Net income (loss).
Net cash used in investing activities
53
Net cash used in investing activities was $(687.6), $(1,163.6) and $(1,059.2) for fiscal 2018, 2017 and 2016, respectively.
The decrease in cash outflows of $476.0 was primarily due to lower cash payments for business combinations of $464.6. The
business combinations in the current period included $245.1 for the Burberry Beauty Business, $25.4 for other acquisitions and
$7.5 of net working capital adjustments from the Younique acquisition previously accrued for and paid in the current period.
The increase in cash outflows in fiscal 2017 as compared to fiscal 2016 of $104.4 is primarily driven by higher cash
payments for capital projects of $282.2, partially offset by a decrease of $166.1 for net payments in connection with the P&G
Beauty Business, ghd and Younique acquisitions.
Net cash provided by financing activities
Net cash provided by financing activities was $69.3, $595.2 and $592.6 for fiscal 2018, 2017 and 2016, respectively. The
decrease in cash inflows of $525.9 was primarily due to lower net borrowings of debt of $521.1, higher debt issuance costs of
$30.7 and higher distributions to noncontrolling interests and redeemable noncontrolling interests of $24.1. These amounts
were partially offset by lower repurchases of Class A Common Stock held as Treasury Stock of $36.3.
The increase in cash inflows in fiscal 2017 as compared to fiscal 2016 of $2.6 is primarily driven by a decrease of $758.6
in payments for Class A Common Stock compared to the prior year, partially offset by an increase of $474.0 in net repayments
of short term debt, the revolving loan and term loan facilities and an increase of $283.6 in cash dividends paid.
Dividends
Prior to October 2016, we declared annual cash dividends in the first quarter of the fiscal year. Beginning after October
2016, we began declaring cash dividends on a quarterly basis.
The following dividends were declared during fiscal years 2018, 2017 and 2016:
Dividend
Type
Dividend
Per
Share
Holders of Record
Date
Dividend
Value
Dividend Payment
Date
Dividends
Paid
Dividends
Payable
Declaration Date
Fiscal 2018
August 22, 2017
Quarterly
November 9, 2017
Quarterly
Quarterly
Quarterly
February 8, 2018
May 9, 2018
Fiscal 2018
Fiscal 2017
August 1, 2016
Annual
December 9, 2016
Quarterly
February 9, 2017
May 10, 2017
Quarterly
Quarterly
Fiscal 2017
Fiscal 2016
$
$
$
$
$
$
$
$
$
$
0.125
September 1, 2017
0.125 November 30, 2017
February 28, 2018
May 31, 2018
0.125
0.125
0.500
0.275
August 11, 2016
0.125 December 19, 2016
February 28, 2017
May 31, 2017
0.125
0.125
0.650
$
$
$
$
$
$
$
$
$
$
94.4
September 14, 2017
94.6 December 14, 2017
March 15, 2018
June 14, 2018
94.6
94.6
378.2
93.4
August 19, 2016
94.0 December 28, 2016
March 10, 2017
June 13, 2017
94.0
94.0
375.4
$
$
$
$
$
$
$
$
$
$
93.6
93.7
93.8
93.8
374.9
92.4
93.4
93.4
93.4
372.6
$
$
$
$
$
$
$
$
$
$
0.8
0.9
0.8
0.8
3.3
1.0
0.6
0.6
0.6
2.8
September 11, 2015
Annual
$
0.250
October 1, 2015
$
90.1
October 15, 2015
$
89.0
$
1.1
Treasury Stock - Share Repurchase Program
Since February 2014, the Board has authorized us to repurchase our Class A Common Stock under approved repurchase
programs. Repurchases may be made from time to time at our discretion, based, among other things, on ongoing assessments of
the capital needs of the business, the market price of our Class A Common Stock, our deleveraging strategy, and general market
conditions. As of June 30, 2018, we had $396.8 remaining under the current repurchase program that was approved by our
Board on February 3, 2016. The following table summarizes the share repurchase activities during the fiscal years ended June
30, 2018, 2017, and 2016:
54
Period
Fiscal Year Ended June 30, 2018
Fiscal Year Ended June 30, 2017
Fiscal Year Ended June 30, 2016
Treasury Stock - Other Repurchases
Number of
shares
repurchased
(in millions)
Cost of shares
repurchased
(in millions)
Lowest fair
value of shares
repurchased
per share
Highest fair
value of shares
repurchased
per share
— $
1.4
27.4
$
$
— $
36.3
767.0
$
$
— $
25.35
25.10
$
$
—
27.40
30.35
In addition to the above mentioned repurchase activities, on December 3, 2015, we entered into a stock purchase
agreement with a shareholder holding more than 5% of our Class A Common Stock to repurchase 1.0 million shares of our
Class A Common Stock. On December 17, 2015, we remitted payment for the repurchased shares at a price of $27.91 per share.
The fair value of shares repurchased was approximately $27.9, which was recorded as an increase to Treasury stock in the
Consolidated Balance Sheets and Consolidated Statements of Equity and Redeemable Noncontrolling Interests.
Contractual Obligations and Commitments
Our principal contractual obligations and commitments as of June 30, 2018 are presented below:
(in millions)
Long-term debt obligations
Interest on long-term debt obligations (a)
Operating lease obligations
License agreements: (b)
Royalty payments
Advertising and promotional spend
obligations
Other contractual obligations (c)
Other long-term obligations:
Pension obligations (mandated) (d)
Total
Total
$ 7,612.4
2,577.0
829.5
$
2019
192.5
281.0
128.9
Payments Due in Fiscal
2021
2020
2022
$
192.5
304.4
112.1
$
192.5
333.9
97.0
$
192.5
365.8
80.4
2023
$ 3,730.1
367.1
71.8
Thereafter
$ 3,112.3
924.8
339.3
673.9
126.0
0.7
418.2
0.7
258.8
85.3
—
60.2
63.0
—
55.1
46.7
—
34.5
47.9
305.0
—
7.7
—
1.9
87.6
$ 12,199.3
19.0
$ 1,006.9
18.2
772.7
17.4
758.9
$
$
16.8
736.7
16.2
$ 4,240.8
—
$ 4,683.3
$
(a) Interest costs on our debt after consideration of our interest rate swap arrangements are determined based on interest rate forecast and
assumptions of the amount of debt outstanding. A 25 basis-point increase in our variable interest rate debt would have increased our interest
costs by $103.1 over the term of our long-term debt.
(b) Obligations under license agreements relate to royalty payments and required advertising and promotional spending levels for our products
bearing the licensed trademark. Royalty payments are typically made based on contractually defined net sales. However, certain licenses
require minimum guaranteed royalty payments regardless of sales levels. Minimum guaranteed royalty payments and required minimums
for advertising and promotional spending have been included in the table above. Actual royalty payments and advertising and promotional
spending are expected to be higher. Furthermore, early termination of any of these license agreements could result in potential cash
outflows that have not been reflected above.
(c) Other contractual obligations primarily represent advertising/marketing, manufacturing, logistics and capital improvements commitments.
Additionally, we have included the mandatorily redeemable financial instruments arising out of our subsidiaries as discussed in Note 19—
Mandatorily Redeemable Financial Interest. We also maintain several distribution agreements for which early termination could result in
potential future cash outflows that have not been reflected above.
(d) Represents future contributions to our pension and other postretirement benefit plans over the next five years mandated by local regulations
or statutes. Subsequent funding requirements cannot be reasonably estimated as the return on plan assets in future periods, as well as future
assumptions are not known.
The table above excludes obligations for uncertain tax benefits, including interest and penalties, of $135.4 as of June 30,
2018, as we are unable to predict when, or if, any payments would be made. See Note 15—Income Taxes in the notes to our
Consolidated Financial Statements for additional information on our uncertain tax benefits.
The table excludes $661.3 of RNCI which is reflected in Redeemable noncontrolling interests in the Consolidated Balance
Sheet as of June 30, 2018 related to our 25.0% RNCI in our subsidiary in the Middle East (“Middle East Subsidiary”) and our
40.6% interest in Foundation. Given the provisions of the associated Put and Call rights, both RNCI are redeemable outside of
our control and are recorded in temporary equity.
55
See Note 20—Redeemable Noncontrolling Interests in the notes to our Consolidated Financial Statements for further
discussion related to the calculation of the redemption value for each of these noncontrolling interests.
Derivative Financial Instruments and Hedging Activities
We are exposed to foreign currency exchange fluctuations and interest rate volatility through our global operations. We
utilize natural offsets to the fullest extent possible in order to identify net exposures. In the normal course of business,
established policies and procedures are employed to manage these net exposures using a variety of financial instruments. We do
not enter into derivative financial instruments for trading or speculative purposes.
Foreign Currency Exchange Risk Management
We operate in multiple functional currencies and are exposed to the impact of foreign currency fluctuations. For foreign
currency exposures, which primarily relate to receivables, inventory purchases and sales, payables and intercompany loans,
derivatives are used to better manage the earnings and cash flow volatility arising from foreign currency exchange rate
fluctuations. We recorded foreign currency losses of $3.9, $1.5 and $7.2 in fiscal 2018, 2017 and 2016, respectively, resulting
from non-financing foreign currency exchange transactions which are included in their associated expense type and are
included in the Consolidated Statements of Operations. Net gains (losses) of $8.5, $(12.8) and $19.2 in fiscal 2018, 2017 and
2016, respectively, resulting from financing foreign exchange currency transactions are included in Interest expense, net in the
Consolidated Statements of Operations. Net (losses) of nil, $(1.7) and $(29.4) in fiscal 2018, 2017 and 2016, respectively,
resulting from acquisition-related foreign exchange currency transactions are included in Other expense, net in the
Consolidated Statements of Operations.
Exchange gains or losses are also partially offset through the use of qualified derivatives under hedge accounting, for
which we record accumulated gains or losses in Accumulated other comprehensive income until the underlying transaction
occurs at which time the gain or loss is reclassified into the respective account in the Consolidated Statements of Operations.
We have experienced and will continue to experience fluctuations in our net income as a result of balance sheet
transactional exposures. As of June 30, 2018, in the event of a 10.0% unfavorable change in the prevailing market rates of
hedged foreign currencies versus the U.S. dollar, the change in fair value of all foreign exchange forward contracts would result
in a $26.3 increase in the fair value of the forward contracts. In the view of management, these hypothetical gains resulting
from an assumed change in foreign currency exchange rates are not material to our consolidated financial statement position or
results of operations. This gain does not include the impact on our underlying foreign currency exposures.
Interest Rate Risk Management
We are exposed to interest rate risk that relates primarily to our indebtedness, which is affected by changes in the general
level of the interest rates primarily in the U.S. and Europe. We periodically enter into interest rate swap agreements to facilitate
our interest rate management activities. We have designated these agreements as cash flow hedges and, accordingly, applied
hedge accounting. The effective changes in fair value of these agreements are recorded in AOCI/(L), net of tax, and ineffective
portions are recorded in current- period earnings. Amounts in AOCI/(L) are subsequently reclassified to earnings as interest
expense when the hedged transactions are settled.
We expect that both at the inception and on an ongoing basis, the hedging relationship between any designated interest rate
hedges and underlying variable rate debt will be highly effective in achieving offsetting cash flows attributable to the hedged
risk during the term of the hedge. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly
effective hedge, we will be required to discontinue hedge accounting with respect to that derivative prospectively. The
corresponding gain or loss position of the ineffective hedge recorded to AOCI/(L) will be reclassified to current-period
earnings.
If interest rates had been 10% higher/lower and all other variables were held constant, (Loss) income before income taxes
in fiscal 2018 would decrease/increase by $25.2.
During August 2018, we extended the maturity of our interest rate swap portfolio, in order to maintain a 50:50 ratio of
fixed to floating rate debt through 2021 to better manage our medium term exposure to interest rate increases. Looking forward,
we expect that the fixed to floating rate debt ratio will improve as we reduce the notional value of our floating rate debt. We
intend to continue to target a 50:50 euro to U.S. dollar liability split under our long term debt agreements which would match
our underlying cash inflows, to manage our exposure to foreign exchange risk in the financial markets.
56
Credit Risk Management
We attempt to minimize credit exposure to counterparties by generally entering into derivative contracts with
counterparties that have an “A” (or equivalent) credit rating. The counterparties to these contracts are major financial
institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the fair value of
contracts in net asset positions, which totaled $44.6 as of June 30, 2018. Accordingly, management believes risk of material
loss under these hedging contracts is remote.
Inflation Risk
To date, we do not believe inflation has had a material effect on our business, financial condition or results of operations.
However, if our costs were to become subject to significant inflationary pressures in the future, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do so could harm our business, prospects, financial
condition, results of operations, cash flows, as well as the trading price of our securities.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of June 30, 2018 and 2017.
Critical Accounting Policies
We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. The
preparation of these Consolidated Financial Statements requires us to make estimates, assumptions and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions can
be subjective and complex and, consequently, actual results may differ from those estimates that would result in material
changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other assumptions that we believe to be reasonable under the
circumstances. Our most critical accounting policies relate to revenue recognition, the assessment of goodwill, other intangible
and long-lived assets for impairment, business combinations, inventory, pension benefit costs, income taxes and redeemable
noncontrolling interests.
Our management has discussed the selection of significant accounting policies and the effect of estimates with the Audit
and Finance Committee of our Board of Directors.
Revenue Recognition
Revenue is recognized when realized or realizable and earned. Our policy is to recognize revenue when risk of loss and
title to the product transfers to the customer, which usually occurs upon delivery. Net revenues comprise gross revenues less
customer discounts and allowances, actual and expected returns (estimated based on returns history and position in product life
cycle) and various trade spending activities. Trade spending activities relate to advertising, product promotions and
demonstrations, some of which involve cooperative relationships with customers. Returns represent 2%, 2% and 3% of gross
revenue after customer discounts and allowances in fiscal 2018, 2017 and 2016, respectively. Trade spending activities recorded
as a reduction to gross revenue after customer discounts and allowances represent 8%, 7%, and 8% in fiscal 2018, 2017 and
2016, respectively.
Our sales return accrual reflects seasonal fluctuations, including those related to the holiday season in our second quarter.
This accrual is a subjective critical estimate that has a direct impact on reported net revenues, and is calculated based on history
of actual returns, estimated future returns and information provided by retailers regarding their inventory levels. In addition, as
necessary, specific accruals may be established for significant future known or anticipated events. The types of known or
anticipated events that we have considered, and will continue to consider, include the financial condition of our customers, store
closings by retailers, changes in the retail environment, and our decision to continue to support new and existing brands. If the
historical data we use to calculate these estimates does not approximate future returns, additional allowances may be required.
Goodwill, Other Intangible Assets and Long-Lived Assets
Goodwill
Goodwill is calculated as the excess of the cost of purchased businesses over the fair value of their underlying net assets.
Other intangible assets consist of indefinite-lived trademarks. Goodwill and other indefinite-lived intangible assets are not
amortized.
We assess goodwill at least annually as of May 1 for impairment, or more frequently, if certain events or circumstances
warrant. We test goodwill for impairment at the reporting unit level, which is the same level as our reportable segments. We
identify our reporting units by assessing whether the components of our reporting segments constitute businesses for which
discrete financial information is available and management of each reporting unit regularly reviews the operating results of
those components.
57
When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine
if it is necessary to perform a quantitative goodwill impairment test. In performing our qualitative assessment, we consider the
extent to which unfavorable events or circumstances identified, such as changes in economic conditions, industry and market
conditions or company specific events, could affect the comparison of the reporting unit’s fair value with its carrying amount. If
we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required
to perform a quantitative impairment test.
Quantitative impairment testing for goodwill is performed in two steps: (i) the determination of possible impairment, based
upon the fair value of a reporting unit as compared to its carrying value; and (ii) if there is a possible impairment indicated, this
step measures the amount of impairment loss, if any, by comparing the implied fair value of goodwill with the carrying amount
of that goodwill. We make certain judgments and assumptions in allocating assets and liabilities to determine carrying values
for our reporting units.
Testing goodwill for impairment requires us to estimate fair values of reporting units using significant estimates and
assumptions. The assumptions made will impact the outcome and ultimate results of the testing. We use industry accepted
valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we
engage independent third-party valuation specialists for advice. To determine fair value of the reporting unit, we used a
combination of the income and market approaches. We believe the blended use of both models compensates for the inherent
risk associated with either model if used on a stand-alone basis, and this combination is indicative of the factors a market
participant would consider when performing a similar valuation.
Under the income approach, we determine fair value using a discounted cash flow method, projecting future cash flows of
each reporting unit, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk
of the cash flows. Under the market approach, we utilize information from comparable publicly traded companies with similar
operating and investment characteristics as the reporting units, which creates valuation multiples that are applied to the
operating performance of the reporting units being tested, to value the reporting unit.
The key estimates and factors used in these approaches include revenue growth rates and profit margins based on our
internal forecasts, our specific weighted-average cost of capital used to discount future cash flows, and comparable market
multiples for the industry segment as well as our historical operating trends. Certain future events and circumstances, including
deterioration of market conditions, higher cost of capital, a decline in actual and expected consumer consumption and demands,
could result in changes to these assumptions and judgments. A revision of these assumptions could cause the fair values of the
reporting units to fall below their respective carrying values. We would then perform the second step of the goodwill
impairment test to determine the amount of any non-cash impairment charge. Such charge could have a material effect on the
Consolidated Statements of Operations and Balance Sheets.
There were no impairments of goodwill at our reporting units in fiscal 2018, 2017 and 2016.
Based on the annual impairment test performed at May 1, 2018, we determined that the fair values of our reporting units
exceeded their respective carrying values at that date by a range of approximately 20.1% to 97.6%. To determine the fair value
of our reporting units, we have used expected growth rates that are in line with expected market growth rates for the respective
product categories and include a discount rate of 7.25%.
We believe the assumptions used in calculating the estimated fair value of the reporting units are reasonable. However, we
can provide no assurances that we will achieve such projected results. Further, we can provide no assurances that we will not
have to recognize additional impairment of goodwill in the future due to other market conditions or changes in our discount
rates. Recognition of additional impairment of a significant portion of our goodwill would negatively affect our reported results
of our operations and total capitalization.
Other Intangible Assets
We assess indefinite-lived other intangible assets (trademarks) at least annually as of May 1 for impairment, or more
frequently if certain events occur or circumstances change that would more likely than not reduce the fair value of an
indefinite-lived intangible asset below its carrying value. Trademarks are tested for impairment on a brand level basis.
The trademarks’ fair values are based upon the income approach, primarily utilizing the relief from royalty methodology.
This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights
to use the comparable asset. An impairment loss is recognized when the estimated fair value of the intangible asset is less than
the carrying value. Fair value calculation requires significant judgments in determining both the assets’ estimated cash flows as
well as the appropriate discount and royalty rates applied to those cash flows to determine fair value. Variations in the economic
conditions or a change in general consumer demands, operating results estimates or the application of alternative assumptions
could produce significantly different results.
58
On May 1, 2018, 2017 and 2016, we performed our annual impairment testing of indefinite-lived other intangible assets
and determined that no adjustments to carrying values were required.
The carrying value of our indefinite-lived other intangible assets was $3,186.2 as of June 30, 2018, and is comprised of
trademarks for the following brands: OPI of $664.9, CoverGirl of $610.0, the professional product line of Wella of $440.0, Max
Factor of $340.0, philosophy of $274.2, Sally Hansen of $184.5, ghd of $158.2, and other trademarks totaling $514.4. As of
May 1, 2018, we determined that the fair value of our ghd trademark exceeded its carrying value by approximately 7% using
projections that assumed an average revenue growth rate of 4.7% and discount rate of 9.25%. The fair value of the ghd
trademark would fall below its carrying value if the average annual revenue growth rate decreased by approximately 106 basis
points or the discount rate increased by 75 basis points. The fair values of the remaining indefinite-lived trademarks exceeded
their carrying values by amounts ranging from 13.0% to 100%.
We believe the assumptions used in calculating the estimated fair value of the trademarks are reasonable and attainable.
However, we can provide no assurances that we will not have to recognize additional impairment of indefinite-lived intangible
assets in the future due to other market conditions or changes in our discount rates. Recognition of additional impairment of a
significant portion of our indefinite-lived intangible assets would negatively affect our reported results of operations and total
capitalization.
Long-Lived Assets
Long-lived assets, including tangible and intangible assets with finite lives, are amortized over their respective lives to
their estimated residual values and are also reviewed for impairment whenever certain triggering events may indicate
impairment. When such events or changes in circumstances occur, a recoverability test is performed comparing projected
undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying value. If the projected
undiscounted cash flows are less than the carrying value, an impairment would be recorded for the excess of the carrying value
over the fair value, which is determined by discounting future cash flows.
During fiscal 2018, we recorded asset impairment charges of $15.6, primarily relating to the planned disposal of certain
manufacturing facilities, and the write-off of machinery and equipment in excess of our needs due to our Global Integration
Activities. The impairment charges are included in Restructuring costs in the Consolidated Statements of Operations. There
were no impairments on long-lived assets in fiscal 2017.
In conjunction with our analysis of our go-to-market strategy in Southeast Asia during the first quarter of fiscal 2016, we
evaluated future cash flows for this asset group and determined that the carrying value exceeded the undiscounted cash flows.
As a result, we evaluated the fair value of the long-lived assets in the asset group, through an analysis of discounted future cash
flows, and determined that the customer relationships were fully impaired and thus recorded $5.5 of Asset impairment charges
in the Consolidated Statements of Operations for the fiscal year ended June 30, 2016.
Business Combinations
We allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair
values as of the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the
assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact
our future operating results, as we recognize depreciation and amortization expense on long lived assets. We use a variety of
information sources to determine the value of acquired assets and liabilities including: third-party appraisers for the values and
lives of property, identifiable intangibles and inventories; and legal counsel or other experts to assess the obligations and
liabilities associated with legal, environmental or other claims.
Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful
lives. The fair value estimates are based on historical information and on future expectations and assumptions deemed
reasonable by management, but are inherently uncertain. Determining the useful life of an intangible asset also requires
judgment. Certain brand intangibles are expected to have indefinite lives based on their history and our plans to manage the
acquired brands. Other intangible assets are expected to have determinable useful lives. Our assessment of intangible assets that
have an indefinite life and those that have a determinable life is based on a number of factors including the competitive
environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment.
The costs of determinable-lived intangible assets are amortized to expense over the estimated useful life.
We generally use the following methodologies for valuing our significant acquired intangibles assets:
• Trademarks (indefinite or finite) - We use a relief from royalty method to value trademarks. The key assumptions for
the model are forecasted net revenue, the royalty rate, the effective tax rate and the discount rate.
• Customer relationships and license agreements - We use an excess earnings method to value customer relationships.
The key assumptions for the model are forecasted net revenue and EBITDA, the estimated allocation of earnings
between different classes of assets, the attrition rate, the effective tax rate and the discount rate.
59
Inventory
Inventories include items which are considered salable or usable in future periods, and are stated at the lower of cost or net
realizable value, with cost being based on standard cost which approximates actual cost on a first-in, first-out basis. Costs
include direct materials, direct labor and overhead (e.g., indirect labor, rent and utilities, depreciation, purchasing, receiving,
inspection and quality control) and in-bound freight costs. We classify inventories into various categories based upon their stage
in the product life cycle, future marketing sales plans and the disposition process.
We also record an inventory obsolescence reserve, which represents the excess of the cost of the inventory over its
estimated net realizable value, based on various product sales projections. This reserve is calculated using an estimated
obsolescence percentage applied to the inventory based on age, historical trends, and requirements to support forecasted sales.
In addition, and as necessary, we may establish specific reserves for future known or anticipated events. These estimates could
vary significantly, either favorably or unfavorably, from the amounts that we may ultimately realize upon the disposition of
inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels, competitive
conditions or other factors differ from our estimates and expectations.
Pension Benefit Costs
We sponsor both funded and unfunded pension plans in various forms covering employees who meet the applicable
eligibility requirements. We use several statistical and other factors in an attempt to estimate future events in calculating the
liability and expense related to these plans. Certain significant variables require us to make assumptions such as anticipated
discount rate and expected rate of return on plan assets. We evaluate these assumptions with our actuarial advisors and select
assumptions that we believe reflect the economics underlying our pension obligations. While we believe these assumptions are
within accepted industry ranges, an increase or decrease in the assumptions or economic events outside our control could have
a material impact on reported net income.
The discount rates used to measure the benefit obligations at the measurement date and the net periodic benefit cost for the
subsequent fiscal year are reset annually using data available at the measurement date.
The long-term rates of return on our pension plan assets are based on management’s expectations of long-term average
rates of return to be achieved by the underlying investment portfolios. In establishing this assumption, management considers
historical and expected returns for the assets in which the plan is invested, as well as current economic and market conditions.
The difference between actual and expected return on plan assets is reported as a component of accumulated other
comprehensive income (loss). Those gains or losses that are subject to amortization over future periods will be recognized as a
component of the net periodic benefit cost in such future periods. In fiscal 2018, our pension plans had actual returns on assets
of $18.8 as compared with expected return on assets of $7.5, which resulted in a net deferred gain of $11.3, substantially all of
which is currently subject to be amortized over periods ranging from approximately 9 to 29 years. The actual return on assets
was primarily related to the performance of equity markets during the past fiscal year.
The weighted-average assumptions used to determine our projected benefit obligation were as follows:
Discount rates
Pension Plans
U.S.
International
2018
4.0%
2017
3.6%
2018
0.6%-8.0%
2017
0.4%-7.5%
The weighted-average assumptions used to determine our net periodic benefit cost during the fiscal year were as follows:
Discount rates
Expected long-term rates
of return on plan assets
2018
3.6%
N/A
Pension Plans
U.S.
2017
3.3%-3.8%
2016
4.1%-4.5%
2018
0.4%-7.5%
International
2017
0.2%-7.8%
2016
1.0%-2.7%
N/A
5.1%
1.8%-8.2%
1.6%-6.0%
2.3%-4.3%
The actuarial assumptions used by us may differ materially from actual results due to changing market and economic
conditions. Differences from these assumptions could significantly impact the actual amount of net periodic benefit cost and
liability recorded by us.
60
Income Taxes
We are subject to income taxes in the U.S. and various foreign jurisdictions. We account for income taxes under the asset
and liability method. Therefore, income tax expense is based on reported income before income taxes, and deferred income
taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial
reporting purposes and the amounts that are recognized for income tax purposes. Deferred taxes are recorded at currently
enacted statutory tax rates and are adjusted as enacted tax rates change.
In November 2015, the FASB issued authoritative guidance to eliminate the requirement to present deferred tax assets and
liabilities as current and noncurrent amounts in a classified balance sheet. The new standard requires deferred tax assets and
liabilities to be classified as noncurrent. We early adopted this guidance as of the fourth quarter of fiscal 2017 on a prospective
basis beginning with the fiscal 2017 period presented. Accordingly, deferred tax assets and liabilities as well as corresponding
valuation allowances have been classified as noncurrent in our Consolidated Balance Sheet. A valuation allowance is
established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on
currently available evidence. We consider how to recognize, measure, present and disclose in financial statements uncertain tax
positions taken or expected to be taken on a tax return.
We are subject to tax audits in various jurisdictions. We regularly assess the likely outcomes of such audits in order to
determine the appropriateness of liabilities for unrecognized tax benefits. We classify interest and penalties related to
unrecognized tax benefits as a component of the provision for income taxes.
For unrecognized tax benefits, we first determine whether it is more-likely-than-not (defined as a likelihood of more than
fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing
authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-
likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent
likely to be realized upon effective settlement with a taxing authority. As the determination of liabilities related to unrecognized
tax benefits, including associated interest and penalties, requires significant estimates to be made by us, there can be no
assurance that we will accurately predict the outcomes of these audits, and thus the eventual outcomes could have a material
impact on our operating results or financial condition and cash flows.
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances,
including progress of examinations by tax authorities, developments in case law and closing of statute of limitations. Such
adjustments are reflected in the provision for income taxes as appropriate. In addition, we are present in approximately 55 tax
jurisdictions and we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS)
and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes.
As a result of the 2017 Tax Act changing the U.S. to a modified territorial tax system, the Company no longer asserts that
any of its undistributed foreign earnings are permanently reinvested. We do not expect to incur significant withholding or state
taxes on future distributions. To the extent there remains a basis difference between the financial reporting and tax basis of an
investment in a foreign subsidiary after the repatriation of the previously taxed income of $4,500.0, the Company is
permanently reinvested.
Redeemable Noncontrolling Interests
Interests held by third parties in consolidated majority-owned subsidiaries are presented as noncontrolling interests, which
represents the noncontrolling stockholders’ interests in the underlying net assets of Coty consolidated majority-owned
subsidiaries.
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 Consolidated Balance Sheets between liabilities and equity, as
redeemable noncontrolling interests (“RNCI”). We adjust the redeemable noncontrolling interests to the redemption values on
each balance sheet date with changes recognized as an adjustment to retained earnings, or in the absence of retained earnings,
as an adjustment to additional paid-in capital.
Younique
We use an income approach, a market approach or a combination of these approaches to estimate the fair value of the
RNCI related to our subsidiary Foundation, LLC, which holds a 100% interest in Younique, LLC. The income approach is used
to determine the fair value of the Foundation RNCI using a discounted cash flow method, projecting future cash flows of the
business, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash
flows. For the market approach, we use a selected multiple based on comparable companies multiplied by the forecasted cash
flows. The key estimates and factors used in this approach include, but are not limited to, revenue growth rates and profit
61
margins based on our internal forecasts and the entity specific weighted-average cost of capital used to discount future cash
flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have operations both within the U.S. and internationally, and we are exposed to market risks in the ordinary course of
our business, including the effect of foreign currency fluctuations, interest rate changes and inflation. Information relating to
quantitative and qualitative disclosures about these market risks is set forth in under the captions “Foreign Currency Exchange
Risk Management,” “Interest Rate Risk Management,” and “Credit Risk Management” within Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and is
incorporated in this Item 7A by reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item appears beginning on page F-1 of this Annual Report on Form 10-K and is
incorporated in this Item 8 by reference.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-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 (“CEO”) and our Chief Financial Officer (“CFO”),
evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. Based on the evaluation of our
disclosure controls and procedures as of June 30, 2018, our CEO and CFO concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
We have included our Management Report over Internal Control over Financial Reporting in “Item 15. Exhibits, Financial
Statement Schedules” and is incorporated in this Item 9A by reference.
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) and 15d-15(f) of the Exchange Act during the year 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.
62
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
PART III
Information regarding directors is incorporated by reference to the “Directors” and “Corporate Governance” sections of
our proxy statement on Schedule 14A for the 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”).
Executive Officers
Information regarding executive officers is incorporated by reference to the “Executive Officers” section of our 2018
Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
This information is incorporated by reference to the “Section 16(a) Beneficial Ownership Reporting Compliance” section
of our 2018 Proxy Statement.
Code of Ethics
This information is incorporated by reference to the “Corporate Governance Guidelines and Code of Business Conduct”
section of our 2018 Proxy Statement.
Item 11. Executive Compensation.
This information is incorporated by reference to the “Executive Compensation” and “Director Compensation” sections of
our 2018 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This information is incorporated by reference to the “Security Ownership of Certain Beneficial Owners and Management”
section of our 2018 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This information is incorporated by reference to the “Certain Relationships and Transactions of Related Persons” and
“Corporate Governance” section of our 2018 Proxy Statement.
Item 14. Principal Accounting Fees and Services.
This information is incorporated by reference to the “Audit Fees and Other Fees” section of our 2018 Proxy Statement.
Item 15. Exhibits, Financial Statement Schedules.
List of documents filed as part of this Report:
PART IV
(1) Consolidated Financial Statements and Reports of Independent Registered Public Accounting Firm included herein:
See Index on page F-1.
(2) Financial Statement Schedule: See S-1.
(3) All other schedules are omitted as they are inapplicable or the required information is furnished in the Company’s
Consolidated Financial Statements or the Notes thereto.
(4) List of Exhibits:
Exhibit
Number
2.1
2.2
Document
Transaction Agreement dated as of July 8, 2015 among The Procter & Gamble Company, Coty Inc., Galleria
Co. and Green Acquisition Sub Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Annual
Report on Form 10-K filed on August 17, 2015).*
Repurchase Letter Agreement dated August 13, 2015 among The Procter & Gamble Company, Coty Inc.,
Galleria Co. and Green Acquisition Sub Inc. (incorporated by reference to Exhibit 2.3 to the Company’s
Annual Report on Form 10-K filed on August 17, 2015).
63
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
Letter Agreement, dated February 19, 2016, by and among The Procter & Gamble Company, the registrant,
Galleria Co. and Green Acquisition Sub Inc. (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on February 25, 2016).
Third Amendment to Transaction Agreement, dated May 25, 2016, by and among The Procter & Gamble
Company, Coty Inc., Galleria Co. and Green Acquisition Sub Inc. (incorporated by reference to Exhibit 10.1
to the registrant’s Current Report on Form 8-K filed on May 27, 2016).
Fourth Amendment to Transaction Agreement, dated August 25, 2016, by and among The Procter & Gamble
Company, Coty Inc., Galleria Co. and Green Acquisition Sub Inc. (incorporated by reference to Exhibit 2.5
to Amendment No. 4 to the Company’s Registration Statement on Form S-4, filed on August 25, 2016).*
Side Letter, dated September 13, 2016, between Coty Inc. and The Procter & Gamble Company
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on
November 9, 2016 ).
Assignment and Transfer Agreement, dated as of November 2, 2015, by and between JAB Cosmetics B.V.
and Coty Inc., including as an exhibit thereto that certain Shares and Trademarks Sale and Purchase
Agreement, dated as of November 2, 2015, by and among JAB Cosmetics B.V., Hypermarcas S.A., Cosmed
Indústria de Cosméticos e Medicamentos S.A., and as intervening and consenting parties, Novita
Distribuição, Armazenamento e Transportes S.A., and Savoy Indústria de Cosméticos S.A. (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 3, 2015).
Sale and Purchase Agreement, dated as of October 17, 2016, by and among Coty Inc., Gloria Coinvest 1
L.P., Lion Capital Fund III L.P., Lion Capital Fund III SBS L.P., Lion Capital Fund III (USD) L.P., Lion
Capital Fund III SBS (USD) L.P., Ghd Nominees Limited (“GHD”), the management sellers named therein,
and the other individual sellers named therein (incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed on October 17, 2016).*
Tax Matters Agreement, effective as of October 1, 2016, by and among Coty Inc., The Procter & Gamble
Company, Galleria Co. and Green Acquisition Sub Inc. (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on October 3, 2016).
Contribution Agreement, dated as of January 10, 2017, by and among Coty Inc., Coty US Holdings Inc.,
Foundation, LLC, Younique, LLC, UEV Holdings, LLC, Aspen Cove Holdings, Inc., each of the other unit
holders of Younique, LLC, and Derek Maxfield (incorporated by reference to Exhibit 2.1 to the Company’s
Current Report on Form 8-K filed on February 1, 2017).
Amended and Restated Certificate of Incorporation of Coty Inc. (incorporated by reference to Exhibit 3.1 to
Amendment No. 5 of the Company’s Registration Statement on Form S-1 (File No. 333-182420) filed on
May 14, 2013)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Coty Inc.
(incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 3,
2016).
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to Amendment No. 4 to the
Company’s Registration Statement on Form S-1 (File No. 333-182420) filed on April 24, 2013).
Specimen Class A Common Stock Certificate of the registrant (incorporated by reference to Exhibit 4.1 to
Amendment No. 6 to the Company’s Registration Statement on Form S-1 (File No. 333-182420) filed on
May 28, 2013)
Certificate of Designations of Preferred Stock, Series A, dated April 17, 2015 (incorporated by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 20, 2015).
Indenture, dated as of April 5, 2018, among Coty Inc., the guarantors named therein, Deutsche Bank Trust
Company Americas, as Trustee, Registrar and U.S. Paying Agent with respect to the 2026 Dollar Notes, and
Deutsche Bank AG. London Branch, as London Paying Agent with respect to the Euro Notes (incorporated
by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 10, 2018).
Form of 2026 Dollar notes (included in Exhibit 4.4) (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on April 10, 2018).
Form of 2023 Euro Notes (included in Exhibit 4.4) (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on April 10, 2018).
Form of 2036 Euro Notes (included in Exhibit 4.4) (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on April 10, 2018).
10.1
Credit Agreement, dated as of October 27, 2015, by and among Coty Inc., the other borrowers party thereto
from time to time, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the
other agents from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on October 30, 2015).
64
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Pledge and Security Agreement, dated as of October 27, 2015, by and among Coty Inc., its subsidiaries
signatory thereto and any other subsidiary who may become a party thereto and JPMorgan Chase Bank,
N.A, as collateral agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on October 30, 2015).
Credit Agreement, dated January 26, 2016, among Galleria Co., as initial borrower, the other borrowers
from time to time party thereto, J.P. Morgan Chase Bank, N.A., as administrative agent and collateral agent,
and the other agents and lenders party thereto (incorporated by reference to Exhibit 10.4 of Galleria Co.’s
Registration Statement on Form S-4 filed on April 22, 2016).
Guaranty Agreement, dated as of October 27, 2015, by and among Coty Inc., its subsidiaries signatory
thereto and any other subsidiary who may become a party thereto and JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent (incorporate by reference to Exhibit 10.3 to the Company’s Current
Report on Form 8-K filed on October 30, 2015).
Incremental Assumption Agreement and Amendment No. 1, dated April 8, 2016 to the Credit Agreement, by
and among Coty Inc., Coty B.V., certain subsidiaries of Coty Inc. party thereto, the incremental lenders
party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 14, 2016).
Incremental Assumption Agreement and Refinancing Amendment to Credit Agreement, dated as of October
28, 2016, among Coty Inc., Coty B.V., the other loan parties party thereto, the lenders party thereto and
JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on October 28, 2016).
Amended and Restated Credit Agreement, dated as of April 5,2018, by and among Coty Inc., Coty B.V., the
other borrowers party thereto from time to time, the lenders and other parties from time to time party thereto
and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 10, 2018).
Registration Rights Agreement, dated April 1, 2015, between Coty Inc. and Mousseluxe S.a.r.l.
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 1,
2015).
Transition Services Agreement, effective as of October 1, 2016, by and between The Procter & Gamble
Company and Galleria Co. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on October 3, 2016).
Incremental Facility Activation Notice, dated as of October 28, 2016, among Coty Inc., each incremental
term A lender and JPMorgan Chase Bank, N.A. as administrative agent (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 28, 2016).
Employment Agreement, dated June 20, 2016, between Coty Services UK Limited and Patrice de Talhouët
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on From 8-K filed on June 24,
2016).†
Employment Agreement, dated January 2014, between Coty Geneva S.A. Versoix and Mario Reis
(incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K filed on August
28, 2014).†
Employment Agreement, dated July 20, 2016, by and between Camillo Pane and Coty Services UK Limited,
as amended October 24, 2016 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed on October 28, 2016).†
Open-Ended Employment Agreement, dated August 24, 2015, between Coty S.A.S. and Sebastien
Froidefond (incorporated by reference to Exhibit 10.58 to the Company’s Current Report on Form 8-K filed
on November 5, 2015).†
Side Letter, dated as of March 31, 2017, between Coty Services UK Limited and Sébastien Froidefond
(incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on May
10, 2017).†
Offer Letter, dated as of April 1, 2016, between Ayesha Zafar and the Company (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 11, 2016).†
Employment Agreement, dated October 12, 2015, between Coty Geneva SA Versoix and Sylvie Moreau
(incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q filed on
February 4, 2016).†
Employment Agreement, dated November 2, 2015, between Coty S.A.S. and Edgar Huber (incorporated by
reference to Exhibit 10.31 to the Company’s Quarterly Report on Form 10-Q filed on February 4, 2016).†
Employment Agreement, dated as of October 11, 2016, between Coty Services UK Limited and Greerson
McMullen (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q
filed on February 9, 2017).†
65
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
21.1
23.1
24.1
31.1
31.2
Employment Agreement, dated as of January 16, 2017, between Coty Inc. and Laurent Kleitman
(incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed on August
23, 2017).†
Employment Agreement, dated as of February 12, 2018, between Coty Services U.K. Limited and Esra
Erkal-Paler. †
Offer Letter, dated as of September 4, 2017, between Daniel Ramos and the Company (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 9, 2017).†
Form of Indemnification Agreement between the registrant and its directors and officers (incorporated by
reference to Exhibit 10.24 to Amendment No. 4 to the Company’s Registration Statement on Form S-1(File
No. 333-182420) filed on April 24, 2013).
Amended and Restated Annual Performance Plan, as of February 1, 2017 (incorporated by reference to
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2017).†
Adoption of Amendments to Pre-2008 Stock Options Granted Under the Coty Inc. 2007 Stock Plan for
Directors Or the Coty Inc. Stock Plan for Non-Employee Directors (applicable to awards outstanding on
September 14, 2010) (incorporated by reference to Exhibit 10.40 to Amendment No. 4 to the Company’s
Registration Statement on Form S-1 (File No. 333-182420) filed on April 24, 2013).†
Form of Restricted Stock Unit Award under Coty Inc. 2007 Stock Plan for Directors, as amended on April 8,
2013 (incorporated by reference to Exhibit 10.41 to Amendment No. 4 to the Company’s Registration
Statement on Form S-1 (File No. 333-182420) filed on April 24, 2013).†
Amended and Restated Coty Inc. Equity and Long-Term Incentive Plan, as amended and restated on
February 1, 2017. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
10-Q filed on May 10, 2017).†
Restricted Stock Unit Award Terms and Conditions Under Coty Inc. Equity and Long-Term Incentive Plan,
as amended and restated on April 8, 2013 (incorporated by reference to Exhibit 10.44 to Amendment No. 4
to the Company’s Registration Statement on Form S-1 (File No. 333-182420) filed on April 24, 2013).†
Restricted Stock and Restricted Stock Unit Tandem Award Terms and Conditions under the Coty Inc. Equity
and Long-Term Incentive Plan, as amended and restated on April 8, 2013 (incorporated by reference to
Exhibit 10.45 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No.
333-182420) filed on April 14, 2013).†
Form of Subscription Agreement for Series A Preferred Stock (incorporated by reference to Exhibit 10.55 to
the Company’s Annual Report on Form 10-K filed on August 17, 2015).†
Subscription Agreement, dated as of November 23, 2016, between Coty Inc. and Camillo Pane
(incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed on
February 9, 2017).†
Subscription Agreement, dated as of February 16, 2017, between Coty Inc. and Sébastien Froidefond
(incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on May
10, 2017).†
Subscription Agreement, dated as of March 27, 2017, between Coty Inc. and Lambertus J.H. Becht.
(incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on May
10, 2017).†
Amended Form of Elite Subscription and Stock Option Agreement (incorporated by reference to Exhibit
10.5 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2017).†
Form of Phantom Unit Award Terms and Conditions (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on December 5, 2014).†
Terms and Conditions Performance Stock Options under Coty Inc. Equity and Long-Term Incentive Plan, as
amended and restated on October 28, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed on February 8, 2018).†
Side Letter, dated as of November 29, 2017, between Coty Services UK Limited and Camillo Pane
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on
February 8, 2018).†
Side Letter, dated November 29, 2017, between Coty Services UK Limited and Patrice de Talhouët
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on
February 8, 2018).†
List of significant subsidiaries.
Consent of Deloitte & Touche LLP.
Power of Attorney (included in signature page).
Certification of Chief Executive Officer, pursuant to Rules 13a-14a and 15d-14(a)
Certification of Chief Financial Officer, pursuant to Rules 13a-14(d) and 15d-14(d)
66
32.1
32.2
Certification of Chief Executive Officer, pursuant to 18 U.S. C. Section 1350
Certification of Chief Financial Officer, pursuant to 18 U.S. C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The
Company agrees to furnish supplementary to the Securities and Exchange Commission a copy of any omitted
schedule or similar attachment upon request.
† Exhibit is a management contract or compensatory plan or arrangement.
67
Pursuant to the requirements of Section 13 or 15(d) 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, in the city of New York, New York on
August 21, 2018.
SIGNATURES
COTY INC.
By: /s/Patrice de Talhouët
Name: Patrice de Talhouët
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Greerson G. McMullen, as his true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as
he or she might or could do in person, hereby ratifying and confirming that all said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/Camillo Pane
(Camillo Pane)
/s/Patrice de Talhouët
(Patrice de Talhouët)
/s/Ayesha Zafar
(Ayesha Zafar)
/s/ Lambertus J.H. Becht
(Lambertus J.H. Becht)
/s/Sabine Chalmers
(Sabine Chalmers)
/s/Joachim Faber
(Joachim Faber)
/s/Olivier Goudet
(Olivier Goudet)
/s/Peter Harf
(Peter Harf)
/s/Paul Michaels
(Paul Michaels)
/s/Erhard Schoewel
(Erhard Schoewel)
/s/Robert Singer
(Robert Singer)
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Senior Vice President, Group Controller
(Principal Accounting Officer)
August 21, 2018
August 21, 2018
August 21, 2018
Chairman of the Board of Directors
August 21, 2018
August 21, 2018
August 21, 2018
August 21, 2018
August 21, 2018
August 21, 2018
August 21, 2018
August 21, 2018
Director
Director
Director
Director
Director
Director
Director
68
Table of Contents
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Coty’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) of the Securities Exchange Act of 1934) to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America ("GAAP"). Coty’s internal control over financial reporting includes those
policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Coty’s management evaluated the effectiveness of internal control over financial reporting as of June 30, 2018 based on the
criteria established in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on the evaluation, management has concluded that Coty maintained effective
internal control over financial reporting as of June 30, 2018.
The Company's internal control over financial reporting as of June 30, 2018 has been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in their attestation report which appears herein.
/s/Camillo Pane
Camillo Pane
Chief Executive Officer and Director
/s/Patrice de Talhouët
Patrice de Talhouët
Chief Financial Officer
August 21, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Coty Inc.
We have audited the internal control over financial reporting of Coty Inc. and subsidiaries (the “Company”) as of June 30,
2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements, and financial statement schedule as of and for the year ended June 30, 2018 of
the Company and our report dated August 21, 2018 expressed an unqualified opinion on those financial statements and
financial statement schedule.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, New York
August 21, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Coty Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Coty Inc. and subsidiaries (the “Company”) as of June 30,
2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), equity and redeemable
noncontrolling interests, and cash flows, for each of the three years in the period ended June 30, 2018, and the related notes,
and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30,
2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018,
in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of June 30, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated August 21, 2018, expressed an unqualified opinion on the Company’s internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
August 21, 2018
We have served as the Company’s auditor since 1995.
COTY INC. & SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Equity and Redeemable Noncontrolling Interests
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts
F-1
F-2
F-3
F-4
F-7
F-9
S-1
COTY INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
Net revenues
Cost of sales
Gross profit
Selling, general and administrative expenses
Amortization expense
Restructuring costs
Acquisition-related costs
Asset impairment charges
Loss (gain) on sale of assets
Operating income (loss)
Interest expense, net
Loss on early extinguishment of debt
Other expense, net
(Loss) income before income taxes
Benefit for income taxes
Net (loss) income
Net income attributable to noncontrolling interests
Net income attributable to redeemable noncontrolling interests
Net (loss) income attributable to Coty Inc.
Net (loss) income attributable to Coty Inc. per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
Year Ended
June 30,
2018
2017
2016
$
9,398.0
$
7,650.3
$
3,608.4
5,789.6
5,009.6
352.8
173.2
64.2
—
28.6
161.2
265.0
10.7
38.0
(152.5)
(24.7)
(127.8)
2.0
3,028.5
4,621.8
4,060.0
275.1
372.2
355.4
—
(3.1)
(437.8)
218.6
—
1.6
(658.0)
(259.5)
(398.5)
15.4
$
$
39.0
(168.8) $
8.3
(422.2) $
(0.23) $
(0.23)
(0.66) $
(0.66)
749.7
749.7
642.8
642.8
4,349.1
1,746.0
2,603.1
2,027.8
79.5
86.9
174.0
5.5
(24.8)
254.2
81.9
3.1
30.4
138.8
(40.4)
179.2
7.6
14.7
156.9
0.45
0.44
345.5
354.2
See notes to Consolidated Financial Statements.
F-1
COTY INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Net (loss) income
Other comprehensive income (loss):
Foreign currency translation adjustment
Net unrealized derivative gain (loss) on cash flow hedges, net of taxes of
$(2.2), $(7.7) and $0.3, respectively
Pension and other post-employment benefits, net of tax of $1.5, $(25.1) and
$7.9, respectively
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Comprehensive income attributable to noncontrolling interests:
Net income
Foreign currency translation adjustment
Total comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to redeemable noncontrolling
interests:
Net income
Foreign currency translation adjustment
Total comprehensive income attributable to redeemable noncontrolling
interests
Comprehensive (loss) income attributable to Coty Inc.
Year Ended
June 30,
2018
2017
2016
$
(127.8) $
(398.5) $
179.2
115.7
15.2
17.5
148.4
20.6
2.0
0.5
2.5
39.0
—
121.9
41.5
80.6
244.0
(154.5)
15.4
(0.1)
15.3
8.3
—
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(20.9) $
8.3
(178.1) $
$
83.3
(28.8)
(19.7)
34.8
214.0
7.6
0.1
7.7
14.7
0.4
15.1
191.2
See notes to Consolidated Financial Statements.
F-2
COTY INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Trade receivables—less allowances of $81.8 and $58.5, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Other intangible assets, net
Deferred income taxes
Other noncurrent assets
TOTAL ASSETS
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Short-term debt and current portion of long-term debt
Income and other taxes payable
Total current liabilities
Long-term debt, net
Pension and other post-employment benefits
Deferred income taxes
Other noncurrent liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (See Note 24)
REDEEMABLE NONCONTROLLING INTERESTS
EQUITY:
Preferred stock, $0.01 par value; 20.0 shares authorized; 5.0 and 4.2 issued and outstanding,
at June 30, 2018 and 2017, respectively
Class A Common Stock, $0.01 par value; 1,000.0 shares authorized, 815.8 and 812.9 issued
and 750.7 and 747.9 outstanding at June 30, 2018 and 2017, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Treasury stock—at cost, shares: 65.0 at June 30, 2018 and 2017, respectively
Total Coty Inc. stockholders’ equity
Noncontrolling interests
Total equity
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND
EQUITY
See notes to Consolidated Financial Statements.
June 30,
2018
June 30,
2017
$
$
$
$
$
$
331.6
30.6
1,536.0
1,148.9
603.9
3,651.0
1,680.8
8,607.1
8,284.4
107.4
299.5
22,630.2
1,928.6
1,844.4
218.9
52.1
4,044.0
7,305.4
533.3
842.5
388.5
13,113.7
535.4
35.3
1,470.3
1,052.6
487.9
3,581.5
1,632.1
8,555.5
8,425.2
72.6
281.3
22,548.2
1,732.1
1,796.4
209.1
66.0
3,803.6
6,928.3
549.2
924.9
473.4
12,679.4
661.3
551.1
—
—
8.1
10,750.8
(626.2)
158.8
(1,441.8)
8,849.7
5.5
8,855.2
8.1
11,203.2
(459.2)
4.4
(1,441.8)
9,314.7
3.0
9,317.7
$
22,630.2
$
22,548.2
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F
COTY INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Asset impairment charges
Deferred income taxes
Provision for bad debts
Provision for pension and other post-employment benefits
Share-based compensation
Loss (gain) on sale of assets
Loss on early extinguishment of debt
Other
Change in operating assets and liabilities, net of effects from purchase of acquired companies:
Trade receivables
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Income and other taxes payable
Other noncurrent assets
Other noncurrent liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Payments for business combinations, net of cash acquired
Proceeds from sale of assets
Payments related to loss on foreign currency contracts
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt, original maturity more than three months
Repayments of short-term debt, original maturity more than three months
Net proceeds from (repayments of) short-term debt, original maturity less than three months
Proceeds from revolving loan facilities
Repayments of revolving loan facilities
Proceeds from term loans and other long term debt
Repayments of term loans and other long term debt
Dividend payment
Net proceeds from issuance of Class A Common Stock and Series A Preferred Stock and related
tax benefits
Payments for purchases of Class A Common Stock held as Treasury Stock
Net proceeds (payments) for foreign currency contracts
Year Ended
June 30,
2018
2017
2016
$
(127.8) $
(398.5) $
179.2
737.0
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555.1
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232.0
5.5
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413.7
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(278.0)
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162.3
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540.9
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757.5
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(742.6)
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3.1
12.8
(44.5)
27.2
6.7
148.2
23.3
15.7
9.0
(6.1)
501.4
(150.1)
(908.7)
29.2
(29.6)
(687.6)
(1,163.6)
(1,059.2)
—
—
21.0
9.5
(10.2)
(49.2)
19.1
(28.3)
25.4
3,185.5
2,244.4
1,940.0
(3,643.2)
(2,074.4)
(1,430.0)
7,467.2
(6,492.6)
(375.8)
22.6
—
12.4
1,075.0
(136.1)
(372.6)
22.8
(36.3)
(1.2)
3,506.2
(2,499.4)
(89.0)
44.7
(794.9)
(9.7)
Distributions to mandatorily redeemable financial interests, redeemable noncontrolling interests
and noncontrolling interests
(66.4)
(42.3)
(33.2)
Purchase of additional mandatorily redeemable financial interests, redeemable noncontrolling
interests and noncontrolling interests
Payment of debt issuance costs
—
(55.1)
(9.8)
(24.4)
(0.7)
(57.6)
F-7
All other
Net cash provided by financing activities
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND
RESTRICTED CASH
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for interest
Cash paid during the year for income taxes, net of refunds received
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Accrued capital expenditure additions
Non-cash stock issued for business combination
Non-cash debt assumed for business combination
Non-cash capital contribution associated with special share purchase transaction
Non-cash acquisition of additional redeemable noncontrolling interests
Non-cash reclassification from noncontrolling interest to mandatorily redeemable financial
interest
Non-cash contingent consideration for business combination (See Note 3)
See notes to Consolidated Financial Statements.
(6.3)
69.3
(3.9)
(208.5)
570.7
362.2
242.8
124.6
$
$
—
595.2
—
592.6
9.2
(3.7)
198.3
372.4
570.7
190.2
90.1
$
$
31.1
341.3
372.4
90.3
118.1
$
$
$
158.8
$
106.7
$
78.0
—
—
—
—
—
8.3
9,628.6
1,943.0
—
415.9
49.9
—
—
—
13.8
10.1
—
—
F-8
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
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 2018” refer
to the fiscal year ending June 30, 2018.
The Company’s sales generally increase during the second fiscal quarter as a result of increased demand associated with
the winter holiday season. Financial performance, working capital requirements, sales, cash flows and borrowings generally
experience variability during the three to six months preceding the holiday season. Product innovations, new product launches
and the size and timing of orders from the Company’s customers may also result in variability. The Company also generally
experiences an increase in sales during its fourth fiscal quarter in its Professional Beauty segment as a result of higher demand
prior to the summer holiday season.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements of the Company are presented on a consolidated basis in accordance with
accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and
transactions have been eliminated in consolidation.
The Company also consolidates majority-owned entities in the United States of America, United Arab Emirates, Kingdom
of Saudi Arabia, Malaysia, Indonesia, Philippines, Singapore, Hong Kong, China, South Korea, Thailand and Taiwan where the
Company has the ability to exercise controlling influence. Ownership interests of noncontrolling parties are presented as
mandatorily redeemable financial interests, noncontrolling interests or redeemable noncontrolling interests, as applicable.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the period reported. Significant accounting policies that contain
subjective management estimates and assumptions include those related to revenue recognition, the market value of inventory,
the fair value of acquired assets and liabilities associated with acquisitions, pension benefit costs, the assessment of goodwill,
other intangible assets and long-lived assets for impairment, income taxes, and redeemable noncontrolling interests.
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 Consolidated Financial Statements in future periods.
Cash Equivalents
Cash equivalents include all highly liquid investments with original maturities of three months or less at the time of
purchase.
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 June 30, 2018 and June 30, 2017, the Company had restricted
cash of $30.6 and $35.3, respectively, included in Restricted cash in the Consolidated Balance Sheets. The restricted cash
balance as of June 30, 2018 provides collateral for certain bank guarantees on rent, customs and duty accounts. Restricted cash
is included as a component of Cash, cash equivalents, and restricted cash in the Consolidated Statement of Cash Flows.
Trade Receivables
Trade receivables are stated net of the allowance for doubtful accounts and cash discounts, which is based on the
evaluation of the accounts receivable aging, specific exposures, and historical trends. The Company reviews its allowances by
F-9
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
assessing factors such as an individual trade receivable aging and liquidity. Trade receivables are written off on a case-by-case
basis, net of any amounts that may be collected.
Inventories
Inventories include items which are considered salable or usable in future periods, and are stated at the lower of cost or net
realizable value, with cost being based on standard cost which approximates actual cost on a first-in, first-out basis. Costs
include direct materials, direct labor and overhead (e.g., indirect labor, rent and utilities, depreciation, purchasing, receiving,
inspection and quality control) and in-bound freight costs. The Company classifies inventories into various categories based
upon their stage in the product life cycle, future marketing sales plans and the disposition process.
The Company also records an inventory obsolescence reserve, which represents the excess of the cost of the inventory over
its net realizable value, based on various product sales projections. This reserve is calculated using an estimated obsolescence
percentage applied to the inventory based on age, historical trends, and requirements to support forecasted sales. In addition,
and as necessary, the Company may establish specific reserves for future known or anticipated events.
Property and Equipment and Other Long-lived Assets
Property and equipment is stated at cost less accumulated depreciation or amortization. The cost of renewals and
betterments is capitalized and depreciated. Expenditures for maintenance and repairs are expensed as incurred. Property and
equipment that is disposed of through sale, trade-in, donation, or scrapping is written off, and any gain or loss on the
transaction, net of costs to dispose, is recorded in Gain (loss) on sale of assets. Depreciation and amortization are computed
principally using the straight-line method over the following estimated useful lives:
Description
Buildings
Marketing furniture and fixtures
Machinery and equipment
Estimated Useful Lives
20-40 years
3-5 years
2-15 years
Computer equipment and software
Property and equipment under capital leases and leasehold improvements
2-5 years
Lesser of lease term or economic life
Intangible assets with finite lives are amortized principally using the straight-line method over the following estimated
useful lives:
Description
License agreements
Customer relationships
Trademarks
Product formulations and technology
Estimated Useful Lives
5-34 years
2-28 years
2-30 years
3-29 years
Long-lived assets, including tangible and intangible assets with finite lives, are tested for recoverability whenever events or
changes in circumstances indicate that their carrying amount may not be recoverable. When such events or changes in
circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual
disposition of an asset or asset group to its carrying value. If the projected undiscounted cash flows are less than the carrying
value, an impairment charge would be recorded for the excess of the carrying value over the fair value. The Company estimates
fair value based on the best information available, including discounted cash flows and/or the use of third-party valuations.
Goodwill and Other Indefinite-lived Intangible Assets
Goodwill is calculated as the excess of the cost of purchased businesses over the fair value of their underlying net assets.
Goodwill is allocated and evaluated at the reporting unit level, which are the Company’s operating segments. The Company
identifies its operating segments by assessing whether the components of the Company’s reportable segments constitute
businesses for which discrete financial information is available and management of each operating segment regularly reviews
the operating results of those components. The Company has identified three reporting units. Luxury, Consumer Beauty and
Professional Beauty are considered operating segments and each a reporting unit. The Company allocates goodwill to one or
more reporting units that are expected to benefit from synergies of the business combination.
Goodwill and other intangible assets with indefinite lives are not amortized, but are evaluated for impairment annually as
of May 1 or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. When
F-10
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
testing goodwill for impairment, the Company has the option of first performing a qualitative assessment to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine if it is
necessary to perform a quantitative goodwill impairment test. In performing its qualitative assessment, the Company considers
the extent to which unfavorable events or circumstances identified, such as changes in economic conditions, industry and
market conditions or company specific events, could affect the comparison of the reporting unit’s fair value with its carrying
amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, the Company is required to perform a quantitative impairment test.
Quantitative impairment testing for goodwill is performed in two steps: (i) the determination of possible impairment, based
upon the fair value of a reporting unit as compared to its carrying value; and (ii) if there is a possible impairment indicated, this
step measures the amount of impairment loss, if any, by comparing the implied fair value of goodwill with the carrying amount
of that goodwill. The Company makes certain judgments and assumptions in allocating assets and liabilities to determine
carrying values for its reporting units.
Indefinite-lived other intangible assets principally consist of trademarks. The fair values of indefinite-lived other intangible
assets are estimated and compared to their respective carrying values. The trademarks’ fair values are based upon the income
approach, utilizing the relief from royalty or excess earnings methodology. An impairment loss is recognized when the
estimated fair value of the intangible asset is less than its carrying value.
Deferred Financing Fees
The Company capitalizes costs related to the issuance of debt instruments, as applicable. Such costs are amortized over the
contractual term of the related debt instrument in Interest expense, net using the straight-line method, which approximates the
effective interest method, in the Consolidated Statements of Operations.
Noncontrolling Interests and Redeemable Noncontrolling Interests
Interests held by third parties in consolidated majority-owned subsidiaries are presented as noncontrolling interests, which
represents the noncontrolling stockholders’ interests in the underlying net assets of the Company’s consolidated majority-owned
subsidiaries. Noncontrolling interests that are not redeemable are reported in the equity section of the Consolidated Balance
Sheets.
Noncontrolling interests, where the Company may be required to repurchase the noncontrolling interest under a put option
or other contractual redemption requirement, are reported in the Consolidated Balance Sheets between liabilities and equity, as
redeemable noncontrolling interests. The Company adjusts the redeemable noncontrolling interests to the redemption values on
each balance sheet date with changes recognized as an adjustment to retained earnings, or in the absence of retained earnings,
as an adjustment to additional paid-in capital.
Revenue Recognition
Revenue is recognized when realized or realizable and earned. The Company’s policy is to recognize revenue when risk of
loss and title to the product transfers to the customer, which usually occurs upon delivery. Net revenues comprise gross
revenues less customer discounts and allowances, actual and expected returns (estimated based on returns history and position
in product life cycle) and various trade spending activities. Trade spending activities primarily relate to advertising, product
promotions and demonstrations, some of which involve cooperative relationships with customers. Returns represented 2%, 2%
and 3% of gross revenue after customer discounts and allowances in fiscal 2018, 2017 and 2016, respectively. Trade spending
activities recorded as a reduction to gross revenue after customer discounts and allowances represented 8%, 7%, and 8% in
fiscal 2018, 2017 and 2016, respectively.
Cost of Sales
Cost of sales includes all of the costs to manufacture the Company’s products. For products manufactured in the
Company’s own facilities, such costs include raw materials and supplies, direct labor and factory overhead. For products
manufactured for the Company by third-party contractors, such costs represent the amounts invoiced by the contractors. Cost of
sales also includes royalty expense associated with license agreements. Additionally, shipping costs, freight-in and depreciation
and amortization expenses related to manufacturing equipment and facilities are included in Cost of sales in the Consolidated
Statements of Operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include advertising and promotional costs and research and development
costs. Also included in Selling, general and administrative expenses are share-based compensation, certain warehousing fees,
non-manufacturing overhead, personnel and related expenses, rent on operating leases, and professional fees.
F-11
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Advertising and promotional costs are expensed as incurred and totaled $2,206.3, $1,883.3 and $967.6 in fiscal 2018, 2017
and 2016, respectively. Included in advertising and promotional costs are $120.9, $107.4, and $65.0 of depreciation of
marketing furniture and fixtures, such as product displays, in fiscal 2018, 2017 and 2016, respectively. Research and
development costs are expensed as incurred and totaled $174.6, $139.2 and $47.7 in fiscal 2018, 2017 and 2016, respectively.
Share-Based Compensation
Common Stock
Common shares are available to be awarded for the exercise of phantom units, vested stock options, the settlement of
restricted stock units (“RSUs”), and the conversion of Series A Preferred Stock.
Share-based compensation expense is measured and fixed at the grant date, based on the estimated fair value of the award
and is recognized on a straight-line basis, net of estimated forfeitures, over the employee’s requisite service period.
The fair value of stock options is determined using the Black-Scholes valuation model using the assumptions discussed in
Note 22—Share-Based Compensation Plans. The fair value of RSUs is determined on the date of grant based on the Company’s
stock price.
Preferred Stock
The Company has issued Series A Preferred Stock that can be converted into Class A Common Stock or settled in cash.
Series A Preferred Stock is accounted for using liability plan accounting to the extent the award is expected to be settled in cash.
Accordingly, share-based compensation expense for the portion that is liability accounted is measured based on the fair value of
the award on each reporting date and recognized as an expense to the extent earned. Share-based compensation expense for the
portion of the grants that the Company is not required to settle in cash is measured based on the estimated fair value of the
award at the time it is known that they are going to be settled in shares and is recognized on a straight-line basis, net of
estimated forfeitures, over the employee’s requisite service period.
The fair value of Series A Preferred Stock is determined using the binomial valuation model for fiscal 2018 and 2017 using
the weighted-average assumptions discussed in Note 22—Share-Based Compensation Plans. The fair value of Series A
Preferred Stock was determined using the Black-Scholes valuation model for fiscal 2016 using the weighted-average
assumptions discussed in Note 22—Share-Based Compensation Plans.
Treasury Stock
The Company accounts for treasury stock under the cost method. When shares are reissued or retired from treasury stock they
are accounted for at an average price. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as
a component of Additional paid-in-capital in the Company’s Consolidated Balance Sheets. When treasury stock is re-issued at a
price lower than its cost, the difference is recorded as a reduction of Additional paid-in-capital to the extent that there are treasury
stock gains to offset the losses. If there are no treasury stock gains in Additional paid-in-capital, the losses upon re-issuance of
treasury stock are recorded as a reduction of Retained earnings in the Company’s Consolidated Balance Sheets.
Income Taxes
The Company is subject to income taxes in the U.S. and various foreign jurisdictions. The Company accounts for income
taxes under the asset and liability method. Therefore, income tax expense is based on reported (Loss) income before income
taxes, and deferred income taxes reflect the effect of temporary differences between the carrying amounts of assets and
liabilities that are recognized for financial reporting purposes and the carrying amounts that are recognized for income tax
purposes. Prior to the fourth quarter of fiscal 2017, the classification of deferred tax assets and liabilities corresponds with the
classification of the underlying assets and liabilities, giving rise to the temporary differences or the period of expected reversal,
as applicable. In the fourth quarter of fiscal 2017 the Company adopted guidance issued by the Financial Accounting Standards
Board (“FASB”) (as later discussed) which allows for presentation of deferred tax assets and liabilities as noncurrent. This
guidance was adopted on a prospective basis and Deferred taxes in the Consolidated Balance Sheet for the year ended June 30,
2017 are presented as noncurrent. A valuation allowance is established, when necessary, to reduce deferred tax assets to the
amount that is more likely than not to be realized based on currently available evidence. The Company considers how to
recognize, measure, present and disclose in financial statements uncertain tax positions taken or expected to be taken on a tax
return.
The Company is subject to tax audits in various jurisdictions. The Company regularly assesses the likely outcomes of such
audits in order to determine the appropriateness of liabilities for unrecognized tax benefits (“UTBs”). The Company classifies
interest and penalties related to UTBs as a component of the provision for income taxes.
F-12
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
For UTBs, the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty
percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing
authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-
likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely
to be realized upon effective settlement with a taxing authority. As the determination of liabilities related to UTBs and
associated interest and penalties requires significant estimates to be made by the Company, there can be no assurance that the
Company will accurately predict the outcomes of these audits, and thus the eventual outcomes could have a material impact on
the Company’s operating results or financial condition and cash flows.
As a result of the 2017 Tax Act changing the U.S. to a modified territorial tax system, the Company no longer asserts that
any of its undistributed foreign earnings are permanently reinvested. We do not expect to incur significant withholding or state
taxes on future distributions. To the extent there remains a basis difference between the financial reporting and tax basis of an
investment in a foreign subsidiary after the repatriation of the previously taxed income of $4,500.0, the Company is
permanently reinvested.
Restructuring Costs
Charges incurred in connection with plans to restructure and integrate acquired businesses or in connection with cost-
reduction initiatives that are initiated from time to time are included in Restructuring costs in the Consolidated Statements of
Operations if such costs are directly associated with an exit or disposal activity, a reorganization, or with integrating an acquired
business. These costs can include employee separations, contract and lease terminations, and other direct exit costs. Employee
severance and other termination benefits are primarily determined based on established benefit arrangements, local statutory
requirements or historical practices. The Company recognizes these benefits when payment is probable and estimable.
Additional elements of severance and termination benefits associated with non-recurring benefits are recognized ratably over
each employee’s required future service period.
Costs to terminate a contract before the end of its term are recognized and measured at their fair value when the Company
gives written notice to the counterparty. For lease terminations, a liability based on the remaining lease rentals, reduced by
estimated sublease rentals is measured at the cease-use date. All other costs are recognized as incurred.
Other business realignment costs represent the incremental cost directly related to the restructuring activities which can
include accelerated depreciation, professional or consulting fees and other internal costs including compensation related costs
for dedicated internal resources. Other business realignment costs are generally recorded in Selling, general and administrative
expenses in the Consolidated Statements of Operations.
Charges for accelerated depreciation are recognized on long-lived assets that will be taken out of service before the end of
their normal service, in which case depreciation estimates are revised to reflect the use of the asset over its shortened useful life.
All other costs are recognized as incurred.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The acquisition method of
accounting requires that purchase price, including the fair value of contingent consideration, of the acquisition be allocated to
the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date.
The Company remeasures the fair value of contingent consideration at each reporting period using a probability-adjusted
discounted cash flow method based on significant inputs not observable in the market and any change in the fair value from
either the passage of time or events occurring after the acquisition date, is recorded in earnings. Contingent consideration
payments that exceed the acquisition date fair value of the contingent consideration are reflected as an operating activity in the
Consolidated Statements of Cash Flows. Payments made for contingent consideration recorded as part of an acquisition’s
purchase price are reflected as financing activities in the Company’s Consolidated Statements of Cash Flows, if paid more than
three months after the acquisition date. If paid within three months of the acquisition date, these payments are reflected as
investing activities in the Company’s Consolidated Statements of Cash Flows.
The Company generally uses the following methodologies for valuing our significant acquired intangibles assets:
• Trademarks (indefinite or finite) - The Company uses a relief from royalty method to value trademarks. The key
assumptions for the model are forecasted net revenue, the royalty rate, the effective tax rate and the discount rate.
• Customer relationships and license agreements - The Company uses an excess earnings method to value customer
relationships and license agreements. The key assumptions for the model are forecasted net revenue, EBITDA, the
estimated allocation of earnings between different classes of assets, the attrition rate, the effective tax rate and the
discount rate.
F-13
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Fair Value Measurements
The following fair value hierarchy is used in selecting inputs for those assets and liabilities measured at fair value that
distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable
inputs). The Company evaluates these inputs and recognizes transfers between levels, if any, at the end of each reporting period.
The hierarchy consists of three levels:
Level 1 - Valuation based on quoted market prices in active markets for identical assets or liabilities;
Level 2 - Valuation based on inputs other than Level 1 inputs that are observable for the assets or liabilities either directly
or indirectly;
Level 3 - Valuation based on prices or valuation techniques that require inputs that are both significant to the fair value
measurement and supported by little or no observable market activity.
The Company has not elected the fair value measurement option for any financial instruments or other assets not required
to be measured at fair value on a recurring basis.
Derivative Instruments and Hedging Activities
Refer to Note 18—Derivative Instruments for the Company’s policies for Derivative Instruments and Hedging Activities.
Foreign Currency
Exchange gains or losses incurred on non-financing foreign exchange currency transactions conducted by one of the
Company’s operations in a currency other than the operation’s functional currency are reflected in Cost of sales or operating
expenses. Net losses of $3.9, $1.5 and $7.2 in fiscal 2018, 2017 and 2016, respectively resulting from non-financing foreign
exchange currency transactions are included in the Consolidated Statements of Operations.
Assets and liabilities of foreign operations are translated into U.S. dollars at the rates of exchange in effect at the end of the
reporting period. Income and expense items are translated at the average exchange rates prevailing during each reporting period
presented. Translation gains or losses are reported as cumulative adjustments in Accumulated other comprehensive income
(loss) (“AOCI/(L)”).
Net gains (losses) of $8.5, $(12.8) and $19.2 in fiscal 2018, 2017 and 2016, respectively, resulting from financing foreign
exchange currency transactions are included in Interest expense, net in the Consolidated Statements of Operations. Net (losses)
of nil, $(1.7) and $(29.4) in fiscal 2018, 2017 and 2016, respectively, resulting from acquisition-related foreign exchange
currency transactions are included in Other expense, net in the Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which changes the
classification and presentation of certain items within the statement of cash flows including, but not limited to, debt prepayment
or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the
settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions
received from equity method investees. The Company early adopted the ASU during the fourth quarter of fiscal 2018 on a
retrospective basis. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial
Statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for a reclassification of
the stranded tax effects resulting from the enactment of “H.R.1”, formerly known as the “Tax Cuts and Jobs Act,” (“Tax Act”)
from AOCI/(L) to Retained earnings. The amendment will be effective for the annual periods beginning after December 15,
2018, and interim periods within those fiscal years, with early adoption permitted. The Company adopted the ASU during June
2018. The impact of this adoption on the Company’s Consolidated Financial Statements was an increase of $6.5 to
Accumulated deficit and an increase to AOCI/(L).
During the first quarter of fiscal 2018, the Company adopted the amended FASB ASU No. 2016-09, Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of
accounting for share-based payment transactions. The adoption of the ASU did not have a material impact on the Company’s
Consolidated Financial Statements. The primary impact of the new standard was the recognition of previously unrecognized
excess tax benefits as an $8.3 cumulative-effect adjustment to Accumulated deficit as of July 1, 2017 to reflect a modified
retrospective application. Prospectively, the excess tax benefits will be recorded as a component of Income tax expense as
required, whereas they were previously recorded in Additional paid-in capital (“APIC”). Additionally, the ASU required that
F-14
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
$3.6 related to shares withheld for employee taxes to be reported in Cash flows from financing activities for the year ended
June 30, 2018 with an insignificant impact to prior periods.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which
simplifies the measurement of inventories by requiring inventory to be measured at the lower of cost and net realizable value,
rather than at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU No.
2015-11 during the first quarter of fiscal 2018. The adoption of this guidance did not have a material impact on the Company’s
Consolidated Financial Statements.
Recently Issued and Not Yet Adopted Accounting Pronouncements
Topic
Effective Period
Summary
Accounting
Standard
Update(s)
2017-12
Derivatives and
Hedging (Topic
815): Targeted
Improvements to
Accounting for
Hedging
Activities
Fiscal 2020. Early
adoption is permitted
for the Company
beginning in fiscal
2019.
2017-09
Scope of
Modification
Accounting
Fiscal 2019. Early
adoption is permitted
for the Company
beginning in fiscal
2018.
2017-07
Improving the
Presentation of
Net Periodic
Pension Cost
and Net Periodic
Postretirement
Benefit Cost
Fiscal 2019. Early
adoption is permitted
for the Company
beginning in fiscal
2018.
2017-04
2016-16
Simplifying the
Test for
Goodwill
Impairment
Fiscal 2021. Early
adoption is permitted
for the Company
beginning in fiscal
2018.
Intra-Entity
Transfers of
Assets Other
Than Inventory
Fiscal 2019. Early
adoption is permitted
for the Company
beginning in fiscal
2018.
The FASB issued authoritative guidance for improvements to accounting for
hedging activities. The amendments better align an entity’s risk management
activities and financial reporting for hedging relationships through changes to
both the designation and measurement guidance for qualifying hedging
relationships and the presentation of hedge results. The Company is evaluating
the impact this guidance will have on the Company’s Consolidated Financial
Statements and related disclosures.
The FASB issued authoritative guidance regarding changes to terms or conditions
of share-based payment awards that require an entity to apply modification
accounting. Under this amendment, an entity should not account for the effects
of a modification if all of the following conditions are met: i) the fair value (or
calculated value or intrinsic value, if such an alternative measurement method is
used) of the modified and original award (immediately before modification) is
the same; ii) the vesting conditions of the modified and original award
(immediately before modification) are the same; iii) the classification of the
modified and original award (immediately before modification) as an equity or a
liability instrument is the same. The Company is currently evaluating the impact
this guidance will have on the Company’s Consolidated Financial Statements.
The FASB issued authoritative guidance that requires an employer to report the
service cost component of an employee benefits plan in the same line item or
items as other compensation costs arising from services rendered by the pertinent
employees during the period. The other components of net periodic benefit cost
as defined in the current guidance are required to be presented in the income
statement separately from the service cost component and outside the subtotal of
income from operations, if one is presented. If separate line item or items are not
used, the line item or items used in the income statement to present the other
components of net periodic benefit cost must be disclosed. The amendment allows
only the service cost component to be eligible for capitalization, when applicable.
The Company is currently evaluating the impact this guidance will have on the
Company’s Consolidated Financial Statements.
The FASB issued authoritative guidance that simplifies the subsequent
measurement of goodwill by eliminating step two from the goodwill impairment
test. Under this amendment, an entity should recognize a goodwill impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s
fair value; however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The amendment also eliminated the
requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative test, to perform
step two of the goodwill impairment test. The Company does not expect this
guidance to impact the Company’s Consolidated Financial Statements.
The FASB issued authoritative guidance that amends accounting guidance for
intra-entity transfer of assets other than inventory to require the recognition of
taxes when the transfer occurs. The Company is currently evaluating the impact
this guidance will have on the Company’s Consolidated Financial Statements.
F-15
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Accounting
Standard
Update(s)
Topic
Effective Period
Summary
2014-09
2015-14
2016-08
2016-10
2016-12
Revenue from
Contracts with
Customers
Fiscal 2019 with either
retrospective or
modified retrospective
treatment applied.
Early adoption is
permitted for the
Company beginning in
fiscal 2018.
2016-02
2018-10
2018-11
Leases
Fiscal 2020 with early
adoption permitted.
In May 2014, the FASB issued authoritative guidance that implements a common
revenue model that will enhance comparability across industries and require
enhanced disclosures. The new standard introduces a five step principles based
process to determine the timing and amount of revenue ultimately expected to be
received. In March 2016, the FASB issued authoritative guidance amending
certain portions of this standard to clarify the implementation guidance on
principal versus agent considerations. In April 2016, the FASB issued
authoritative guidance amending certain portions of this standard to clarify the
considerations for identifying performance obligations and to clarify the
implementation guidance for revenue recognized from licensing arrangements.
In May 2016, the FASB issued authoritative guidance amending certain portions
of the standard to narrow the scope over, or to provide practical expedients, for
assessing collectibility, presentation of sales taxes, noncash consideration, and
completed contracts and contract modifications at transition.
The Company adopted the standard on July 1, 2018 using the modified
retrospective transition method of adoption. The Company’s evaluation indicated
that the adoption impact is expected to be primarily related to the timing of certain
accruals associated with customer incentives and potential reclassifications of
certain costs between Selling, general and administrative expenses and trade
spending activities recorded as a reduction to gross revenue resulting from changes
in the accounting treatment of store fixtures under the new standard. If this ASU
had been adopted in fiscal 2018, the impact on the Company’s Consolidated
Financial Statements would have been a reduction in Net revenues of $25.2.
Additionally, the Company expects to provide expanded financial statements
disclosures as a result of the adoption of this ASU.
The FASB issued authoritative guidance requiring that a lessee recognize the
assets and liabilities that arise from operating leases. A lessee should recognize
in its balance sheet a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to use the underlying asset for the lease
term. For leases with a term of 12 months or less, a lessee is permitted to make
an accounting policy election by class of underlying asset not to recognize lease
assets and lease liabilities. The Company is currently evaluating the impact the
standard will have on the Company’s Consolidated Financial Statements and
related disclosures.
Lessees and lessors have the option to recognize and measure leases at the
beginning of the earliest period presented using a modified retrospective approach
or to initially apply the new leases standard at the adoption date and recognize a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The Company has selected the transition method provided by
the authoritative guidance in ASU 2018-11 and will recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption.
3. BUSINESS COMBINATIONS
P&G Beauty Business Acquisition
On October 1, 2016, the Company acquired the P&G Beauty Business in order to further strengthen the Company’s
position in the global beauty industry. The purchase price was $11,570.4 and consisted of $9,628.6 of total equity consideration
and $1,941.8 of assumed debt.
The Company issued 409.7 million shares of common stock to the former holders of Galleria Co. (“Galleria”) (which held
the assets of the P&G Beauty Business) common stock, together with cash in lieu of fractional shares. Coty Inc. is considered to
be the acquiring company for accounting purposes.
The Company has finalized the valuation of assets acquired and liabilities assumed for the P&G Beauty Business
acquisition. The Company recognized certain measurement period adjustments as disclosed below during the quarter ended
September 30, 2017. The measurement period for the P&G Beauty Business acquisition closed at the end of the first quarter of
fiscal 2018.
The following table summarizes the allocation of the purchase price to the net assets of the P&G Beauty Business as of the
October 1, 2016 acquisition date:
F-16
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Cash and cash equivalents
Inventories
Property, plant and equipment
Goodwill
Trademarks — indefinite
Trademarks — finite
Customer relationships
License agreements
Product formulations
Other net working capital
Net other assets
Unfavorable contract liabilities
Pension liabilities
Deferred tax liability, net
Total purchase price
Estimated
fair value as
previously
reported (a)
$
$
387.6
465.5
742.9
5,528.4
1,575.0
747.7
1,074.2
2,299.0
183.8
(23.2)
64.6
(130.0)
(404.1)
(941.0)
11,570.4
Measurement
period
adjustments (b)
$
— $
—
(16.9)
35.5
—
—
18.8
12.0
(10.0)
—
(33.7)
—
—
(5.7)
$
— $
Final fair value
as adjusted
Estimated
useful life
(in years)
3 - 40
Indefinite
Indefinite
10 - 30
2 - 26
4 - 30
5 - 28
387.6
465.5
726.0
5,563.9
1,575.0
747.7
1,093.0
2,311.0
173.8
(23.2)
30.9
(130.0)
(404.1)
(946.7)
11,570.4
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. The business combination
was completed in fiscal 2017.
(b) The Company recorded measurement period adjustments in the first quarter of fiscal 2018. The measurement period adjustments related to
Customer relationships, License agreements and Product formulations, collectively, of $20.8, were a result of changes in assumptions that
were used at the date of acquisition for valuation purposes including allocation of costs and synergies. The measurement period
adjustments related to Property, plant and equipment and Net other assets of ($16.9) and ($33.7), respectively, primarily related to obtaining
new facts and circumstances about acquired assets and liabilities that existed at the acquisition date. The increase to Deferred tax liability,
net was primarily a result of the change of the jurisdictional allocation of the tangible and intangible assets. All measurement period
adjustments were offset against Goodwill.
Goodwill is primarily attributable to the anticipated company-specific synergies and economies of scale expected from the
operations of the combined company. The synergies include certain cost savings, operating efficiencies, and leverage of the
acquired brand recognition to be achieved as a result of the P&G Beauty Business acquisition. Goodwill is not expected to be
deductible for tax purposes. Goodwill of $1,889.8, $3,188.1 and $486.0 is allocated to the Luxury, Consumer Beauty and
Professional Beauty segments, respectively. The allocation of goodwill to segments was based on the relative fair values of
expected future cash flows.
ghd Acquisition
On November 21, 2016, the Company completed the acquisition of 100% of the equity interest of Lion/Gloria Topco
Limited which held the net assets of ghd (“ghd”) which stands for “Good Hair Day,” a premium brand in high-end hair styling
appliances. The ghd acquisition further strengthens the Company’s professional hair category and is included in the
Professional Beauty segment’s results after the acquisition date. The total cash consideration paid net of acquired cash and cash
equivalents was £430.2 million, the equivalent of $531.5, at the time of closing.
The Company has finalized the valuation of assets acquired and liabilities assumed for the ghd acquisition. The Company
recognized certain measurement period adjustments as disclosed below during the six months ended December 31, 2017. The
measurement period for the ghd acquisition closed on November 21, 2017.
F-17
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The following table summarizes the allocation of the purchase price to the net assets of ghd as of the November 21, 2016
acquisition date:
Cash and cash equivalents
Inventories
Property, plant and equipment
Goodwill
Indefinite-lived other intangible assets
Customer relationships
Technology
Other net working capital
Net other assets
Deferred tax liability, net
Total purchase price
Estimated
fair value as
previously
reported (a)
$
$
7.1
79.6
10.0
174.4
163.8
36.6
146.6
(16.6)
0.9
(63.9)
538.5
Measurement
period
adjustments (b)
$
— $
—
—
24.6
(14.8)
(2.3)
(17.2)
4.7
(0.9)
5.9
$
— $
Final fair value
as adjusted
Estimated
useful life
(in years)
3 - 10
Indefinite
Indefinite
11 - 25
11 - 17
7.1
79.6
10.0
199.0
149.0
34.3
129.4
(11.9)
—
(58.0)
538.5
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. The business combination
was completed in fiscal 2017.
(b) The Company recorded measurement period adjustments in the first half of fiscal 2018. The measurement period adjustments related to
decreases to Technology, Indefinite-lived other intangible assets and Customer relationships of $17.2, $14.8 and $2.3, respectively, and a
decrease to the deferred tax liability of $5.9 were a result of changes in assumptions that were used at the date of acquisition for valuation
purposes. The measurement period adjustments related to Other net working capital of $4.7 were a result of obtaining new facts and
circumstances about acquired accrued expenses that existed as of the acquisition date. All measurement period adjustments were offset
against Goodwill.
Goodwill is not expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting
from integrating ghd’s products into the Company’s existing sales channels. Goodwill of $49.0, $42.0, and $108.0 is allocated
to the Luxury, Consumer Beauty and Professional Beauty segments, respectively. The allocation of goodwill to the segments
was due to the reduction in corporate and regional overhead allocated to these segments due to the addition of the ghd
acquisition.
Younique Acquisition
On February 1, 2017, the Company completed its acquisition of 60% of the membership interest in Foundation, LLC
(“Foundation”), which held the net assets of Younique, LLC, a Utah limited liability company (“Younique”), for cash
consideration of $600.0, net of acquired cash and assumed debt, and an additional payment of $7.5 for working capital
adjustments paid in fiscal 2018. The existing Younique membership holders contributed their 100% membership interest in
Younique to Foundation in exchange for a 40% membership interest in Foundation and $607.5 of cash consideration. Younique
strengthens the Consumer Beauty segment’s product offerings. The Company accounts for the noncontrolling interest portion of
the acquisition as a redeemable noncontrolling interest.
The Company has finalized the valuation of assets acquired and liabilities assumed for the Younique acquisition. The
Company recognized certain measurement period adjustments as disclosed below during the nine months ended March 31,
2018. The measurement period for the Younique acquisition closed on February 1, 2018.
F-18
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The following table summarizes the allocation of the purchase price to the net assets of Younique as of the February 1,
2017 acquisition date:
Cash and cash equivalents
Inventories
Property, plant and equipment
Goodwill
Trademark — finite
Product formulations
Customer relationships
Other net working capital
Short-term and long-term debt
Total equity value
Redeemable noncontrolling interest
Net cash and debt acquired
Total purchase price
$
Estimated
fair value as
previously
reported (a)
17.5
88.1
67.1
575.3
123.0
0.6
197.0
(27.7)
(1.2)
1,039.7
415.9
16.3
Measurement
period
adjustments (b)
$
— $
Final fair value
as adjusted
Estimated
useful life
(in years)
—
—
(0.3)
—
—
—
0.3
—
—
—
—
3 - 8
Indefinite
20
5
7 - 10
17.5
88.1
67.1
575.0
123.0
0.6
197.0
(27.4)
(1.2)
1,039.7
415.9
16.3
607.5
$
607.5
$
— $
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. The business combination
was completed in fiscal 2017.
(b) The Company recorded measurement period adjustments in the nine months ended March 31, 2018 to account for an increase in the
estimated other net working capital of $0.3 as of the February 1, 2017 acquisition date. This adjustment is offset against Goodwill.
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from
certain manufacturing and supply chain cost savings. Goodwill of $95.0, $420.0 and $60.0 is allocated to the Luxury, Consumer
Beauty and Professional Beauty segments, respectively. The allocation of goodwill to the segments was due to the reduction in
corporate and regional overhead allocated to these segments due to the addition of the Younique acquisition.
Burberry Beauty Business Acquisition
On October 2, 2017, the Company acquired the exclusive global license rights and other related assets for the Burberry
Limited (“Burberry”) luxury fragrances, cosmetics and skincare business (the “Burberry Beauty Business”). The Burberry
Beauty Business acquisition is expected to further strengthen the Company’s position in the global luxury beauty industry. Total
purchase consideration, after post-closing adjustments, was £191.7 million, the equivalent of $256.3, at the time of closing.
Included in the purchase price was cash consideration of £183.3 million, the equivalent of $245.1, at the time of closing, in
addition to £8.4 million, the equivalent of $11.2, of estimated contingent consideration, at the time of closing.
The future contingent consideration payments will range from zero to £16.7 million and will be payable on a quarterly
basis to Burberry as certain items of inventory transferred to the Company at the acquisition date are subsequently used or sold.
The amount of the contingent consideration recorded was estimated as of the acquisition date and is subject to change based on
the related inventory usage. The fair value of the contingent consideration was determined by estimating the future inventory
usage and corresponding payments over a four-year period, with the contingent payments being made in each of the respective
years. The estimate of the contingent consideration payable is recorded in Other noncurrent liabilities in the Consolidated
Balance Sheet. From the date of acquisition through the end of fiscal 2018, the Company made £2.1 million in contingent
payments.
The Company estimated the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on
information currently available. The Company is still evaluating the fair value of assets acquired and liabilities assumed,
therefore, the final allocation of the purchase price has not been completed. As the Company finalizes the fair value of assets
acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The
Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
F-19
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The following table summarizes the estimated allocation of the purchase price to the net assets of the Burberry Beauty
Business as of the October 2, 2017 acquisition date:
Inventories
Property, plant and equipment
License and distribution rights
Goodwill
Net other liabilities
Total purchase price
Estimated
fair value as
previously
reported (a)
$
$
55.1
5.8
129.7
68.2
(8.7)
250.1
Measurement
period
adjustments (b)
$
(7.2) $
— $
$
48.1
(33.3) $
(1.4) $
$
6.2
$
Estimated fair
value as
adjusted
Estimated
useful life
(in years)
1 - 3
3 - 15
Indefinite
47.9
5.8
177.8
34.9
(10.1)
256.3
(a) As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018.
(b) The Company recorded measurement period adjustments in the third and fourth quarters of fiscal 2018. The measurement period
adjustments related to an increase in the value of the License and distribution rights and a decrease in the Inventory value were due to
changes in assumptions that were used at the date of acquisition for valuation purposes. The measurement period adjustment related to an
increase in net other liabilities acquired was a result of obtaining new facts and circumstances about acquired accrued expenses that existed
as of the acquisition date. In addition, the Company adjusted the estimate of contingent consideration payments due to the seller based on
gathering additional information about facts and circumstances that existed at the acquisition date regarding the acquired inventory for
which the contingent payments are based. All measurement period adjustments were offset against Goodwill.
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from
integrating the Burberry Beauty Business products into the Company’s existing sales channels. Goodwill
of $23.4, $6.2 and $5.3 is allocated to the Luxury, Consumer Beauty and Professional Beauty segments, respectively. The
allocation of goodwill to the segments were due to the reduction in corporate and regional overhead allocated to these segments
due to the addition of the Burberry Beauty Business acquisition.
For the fiscal year ended June 30, 2018, net revenues and net loss of the Burberry Beauty Business included in the
Company’s Consolidated Statements of Operations were $87.0 and $31.3, respectively. Net loss for the fiscal year ended June
30, 2018 was impacted by the amortization of certain asset values based on the estimated fair values of the acquired assets as
determined during the initial purchase accounting, such as the amortization of inventory step-up and finite-lived intangibles.
This amortization impacted the net loss for the fiscal year ended June 30, 2018 by $10.3, net of tax.
Hypermarcas Brands Acquisition
On February 1, 2016, the Company completed the acquisition of 100% of the net assets of the personal care and beauty
business of Hypermarcas S.A. (the “Hypermarcas Brands”) pursuant to a share purchase agreement in order to further
strengthen its position in the Brazilian beauty and personal care market. This acquisition was included in the Consumer Beauty
segment. The total consideration of R$3,599.5 million, the equivalent of $901.9, at the time of closing, was paid during fiscal
2016.
The Company has finalized the valuation of assets acquired and liabilities assumed for the Hypermarcas Brands. The
measurement period for the Hypermarcas Brands was closed as of September 30, 2016.
F-20
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The following table summarizes the allocation of the purchase price to the net assets acquired as of the February 1, 2016
acquisition date:
Cash and cash equivalents
Inventories
Property, plant and equipment
Goodwill
Trademarks — indefinite
Trademarks — finite
Customer relationships
Product formulations
Other net working capital
Net other assets
Deferred tax liability, net
Total purchase price
Final
fair value
Estimated
useful life
(in years)
2 - 40
Indefinite
Indefinite
5 - 15
13 - 28
3
$
$
11.1
45.6
95.4
537.1
147.1
10.3
44.6
12.8
0.7
1.4
(4.2)
901.9
The Company has completed the local tax requirements allowing approximately $500.0 of goodwill and $44.6 of customer
relationships assets to be tax deductible.
Unaudited Pro Forma Information
The unaudited pro forma financial information in the table below summarizes the combined results of the Company and the
P&G Beauty Business, Younique and the Hypermarcas Brands (the “Pro Forma Acquisitions”). The information in the table
below is presented to reflect the pro forma results as if the combination of the P&G Beauty Business and Younique occurred on
July 1, 2015 and the Hypermarcas Brands occurred on July 1, 2014. The fiscal years ended June 30, 2017 and 2016 include pro
forma adjustments for all the Pro Forma Acquisitions.
The pro forma adjustments include incremental amortization of intangible assets and depreciation adjustment of property,
plant and equipment, based on the values of each asset as well as costs related to financing the Pro Forma Acquisitions. The
unaudited pro forma information also includes non-recurring acquisition-related costs as well as amortization of the inventory
step-up. Pro forma adjustments were tax-effected at the Company’s statutory rates. For the pro forma basic and diluted earnings
per share calculation, 409.7 million shares issued in connection with the P&G Beauty Business acquisition were considered as
if issued on July 1, 2015. The pro forma information is presented for informational purposes only and may not be indicative of
the results of operations that would have been achieved if the acquisitions of the P&G Beauty Business and Younique had taken
place on July 1, 2015 and the acquisition of the Hypermarcas Brands on July 1, 2014 or that may occur in the future, and does
not reflect future synergies, integration costs, or other such costs or savings. The pro forma information for the fiscal years
ended 2017 and 2016, respectively, are as follows:
Year Ended June 30,
2017(a)
2016(b)
Pro forma Net revenues
Pro forma Net (loss) income
Pro forma Net (loss) income attributable to Coty Inc.
Pro forma Net (loss) income attributable to Coty Inc. per common share
Basic
Diluted
$
$
$
8,889.2
(101.2)
(142.7)
(0.19) $
(0.19) $
$
8,219.6
171.2
135.5
0.18
0.18
(a) For the twelve months ended June 30, 2017, the pro forma information excluded $476.3 of non-recurring acquisition-related costs
and $89.6 of amortization of inventory step up, respectively.
F-21
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(b) For the twelve months ended June 30, 2016, the pro forma information included $45.8 of non-recurring acquisition-related costs
and $80.1 of amortization of inventory step up, respectively.
4. SEGMENT REPORTING
The Company’s organizational structure is category focused, putting the consumer first, by specifically targeting how and
where they shop and what and why they purchase. 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 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.
The Company has determined that its three divisions are its operating segments and reportable segments. Each division has
full end-to-end responsibility to optimize consumers’ beauty experience in the relevant categories and channels. The operating
and reportable segments are:
Luxury — primarily focused on prestige fragrances, premium skin care and premium cosmetics;
Consumer Beauty — primarily focused on color cosmetics, retail hair coloring and styling products, mass fragrance, mass
skin care and body care;
Professional Beauty — primarily focused on hair and nail care products for professionals.
Certain revenues and shared costs and the results of corporate initiatives are being managed outside of the three segments
by Corporate. The items within Corporate relate to corporate-based responsibilities and decisions and are not used by the
CODM to measure the underlying performance of the segments. Corporate primarily includes restructuring costs, costs related
to acquisition activities and certain other expense items not attributable to ongoing operating activities of the segments.
With the exception of goodwill and acquired intangible assets, 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 and acquired intangible assets by segment is presented in Note 10—Goodwill and Other
Intangible Assets, net.
F-22
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
SEGMENT DATA
Net revenues:
Luxury
Consumer Beauty
Professional Beauty
Total
Depreciation and amortization:
Luxury
Consumer Beauty
Professional Beauty
Corporate
Total
Operating income (loss):
Luxury
Consumer Beauty
Professional Beauty
Corporate
Total
Reconciliation:
Operating income (loss)
Interest expense, net
Loss on early extinguishment of debt
Other expense, net
(Loss) income before income taxes
Year Ended June 30,
2017
2016
2018
$
$
$
$
$
$
$
$
3,210.5
$
2,566.6
$
4,268.1
1,919.4
9,398.0
253.3
340.4
143.3
—
737.0
248.7
278.9
119.4
(485.8)
161.2
161.2
265.0
10.7
$
$
$
$
$
$
38.0
(152.5) $
3,688.2
1,395.5
7,650.3
203.5
256.2
95.4
—
555.1
158.0
$
$
$
$
261.2
78.5
(935.5)
(437.8) $
(437.8) $
218.6
—
1.6
(658.0) $
1,836.6
2,262.5
250.0
4,349.1
99.1
114.6
18.0
0.3
232.0
228.9
246.5
68.0
(289.2)
254.2
254.2
81.9
3.1
30.4
138.8
The Company has determined its geographical structure to be North America (Canada and the United States), Europe and
ALMEA (Asia, Latin America, the Middle East, Africa and Australia).
GEOGRAPHIC DATA
Net revenues:
North America
Europe
ALMEA
Total
Long-lived assets:
U.S.
Switzerland
Brazil
All other
Total
Year Ended June 30,
2017
2016
2018
$
$
$
$
2,966.0
4,201.6
2,230.4
9,398.0
7,408.5
8,000.2
718.2
2,441.1
18,568.0
$
$
$
$
2,506.9
3,325.7
1,817.7
7,650.3
7,662.4
6,899.8
863.3
3,187.3
18,612.8
$
$
$
$
1,413.0
1,924.6
1,011.5
4,349.1
2,688.7
508.0
882.7
830.9
4,910.3
For Net revenues, a major country is defined as a group of subsidiaries in a country with combined revenues greater than
10% of consolidated net revenues or as otherwise deemed significant. The United States is the only country that accounts for
more than 10% of total net revenues for fiscal years 2018, 2017, and 2016. The United States had net revenues of $2,704.6,
$2,220.4 and $1,256.0 in fiscal 2018, 2017 and 2016, respectively.
F-23
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
For Long-lived assets, a major country is defined as a group of subsidiaries within a country with combined long-lived
assets greater than 10% of consolidated long-lived assets or as otherwise deemed significant. Long-lived assets include property
and equipment, goodwill and other intangible assets.
No customer or group of affiliated customers accounted for more than 10% of the Company’s Net revenues in fiscal 2018,
2017 and 2016 or are otherwise deemed significant.
Presented below are the net revenues associated with Company’s product categories:
PRODUCT CATEGORY
Fragrances
Color Cosmetics
Skin & Body Care
Hair Care
Total
5. ACQUISITION-RELATED COSTS
Year Ended June 30,
2018
2017
2016
36.8%
28.2%
10.1%
24.9%
36.1%
29.6%
12.4%
21.9%
46.3%
35.9%
17.6%
0.2%
100.0%
100.0%
100.0%
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 $64.2, $355.4 and $174.0 for the fiscal years
ended 2018, 2017 and 2016, respectively, which have been recorded in Acquisition-related costs in the Consolidated Statements
of Operations. Acquisition-related costs incurred during the fiscal years ended 2018, 2017 and 2016 were primarily related to
the P&G Beauty Business acquisition.
6. RESTRUCTURING COSTS
Restructuring costs for the fiscal years ended June 30, 2018, 2017 and 2016 are presented below:
Global Integration Activities
Acquisition Integration Program
Other Restructuring
Total
Global Integration Activities
Year Ended June 30,
2018
2017
2016
$
$
106.5
(4.5)
71.2
$
364.2
$
2.3
5.7
173.2
$
372.2
$
—
42.3
44.6
86.9
In connection with the acquisition of the P&G Beauty Business, the Company has, and anticipates, that it will continue to
incur restructuring and related costs aimed at integrating and optimizing the combined organization (“Global Integration
Activities”).
Of the expected costs, the Company has incurred cumulative restructuring charges of $470.7 related to approved initiatives
through the fiscal year ended June 30, 2018, which have been recorded in Corporate. The following table presents aggregate
restructuring charges for the program:
Fiscal 2017
Fiscal 2018
Cumulative through June 30, 2018
Severance and
Employee
Benefits
$
$
333.9
67.5
401.4
Third-Party
Contract
Terminations
22.4
$
19.3
41.7
$
$
$
Fixed Asset
Write-offs
Other Exit
Costs
Total
4.6
14.3
18.9
$
$
3.3
5.4
8.7
$
$
364.2
106.5
470.7
Over the next two fiscal years, the Company expects to incur approximately $110.0 of additional restructuring charges
pertaining to the approved actions. Of the $110.0 of additional restructuring charges, the Company currently anticipates
spending equal amounts related to employee termination benefits, fixed asset write-offs, contract terminations, and other costs
to exit facilities and relocate employees.
F-24
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The related liability balance and activity for the Global Integration Activities restructuring costs are presented below:
Balance—July 1, 2017
Restructuring charges
Payments
Change in estimates
Non-cash utilization
Effect of exchange rates
Balance—June 30, 2018
Severance and
Employee
Benefits
$
$
310.8
81.3
(188.5)
(13.8)
—
13.2
203.0
Third-Party
Contract
Terminations
14.9
$
21.7
(17.0)
(2.4)
—
(0.2)
17.0
$
$
$
Fixed Asset
Write-offs
Other
Exit
Costs
Total
Program
Costs
— $
14.3
—
—
(14.3)
—
— $
2.8
5.4
(4.8)
—
—
(0.3)
3.1
$
$
328.5
122.7
(210.3)
(16.2)
(14.3)
12.7
223.1
The Company currently estimates that the total remaining accrual of $223.1 will result in cash expenditures of
approximately $202.6, $16.1 and $4.4 in fiscal 2019, 2020 and thereafter, respectively.
Acquisition Integration Program
In the first quarter of fiscal 2016, the Company’s Board of Directors (the “Board”) approved an expansion to a
restructuring program in connection with the acquisition of Bourjois (the “Acquisition Integration Program”). Actions
associated with the program were initiated after the acquisition of Bourjois and were substantially completed during fiscal 2017
with cash payments continuing through fiscal 2020. The Company incurred $55.4 of restructuring costs life-to-date as of June
30, 2018, which have been recorded in Corporate.
The related liability balance and activity for the Acquisition Integration Program costs are presented below:
Balance—July 1, 2017
Restructuring charges
Payments
Changes in estimates (a)
Effect of exchange rates
Balance—June 30, 2018
Severance and
Employee
Benefits
$
$
24.8
—
(16.9)
(7.8)
1.0
1.1
Third-Party
Contract
Terminations
1.5
$
—
—
—
—
1.5
$
$
$
Other
Exit
Costs(a)
Total
Program
Costs
4.1
3.3
(2.2)
—
(0.1)
5.1
$
$
30.4
3.3
(19.1)
(7.8)
0.9
7.7
(a) The decrease in severance and employee benefits is primarily attributable to favorable settlements with restructured employees.
The Company currently estimates that the total remaining accrual of $7.7 will result in cash expenditures of approximately
$2.5, $2.3 and $2.9 in fiscal 2019, 2020 and 2021, respectively.
Other Restructuring
The Company continues to analyze its cost structure and evaluate opportunities to streamline operations. Management is
considering a range of smaller initiatives and other cost reduction activities in order to reduce fixed costs and enable further
investment in the business (the “2018 Restructuring Actions”). Of the expected costs, the Company incurred restructuring
charges of $68.4 related to approved initiatives in fiscal 2018, primarily related to role eliminations in Europe and North
America, which have been recorded in Corporate. Over the next two fiscal years, the Company expects to incur approximately
$9.0 of additional restructuring charges that were approved during fiscal 2018, primarily related to employee termination
benefits. See Note 25—Subsequent Events for additional information.
The related liability balance and activity of restructuring costs for the 2018 Restructuring Actions are presented below:
F-25
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Balance—July 1, 2017
Restructuring charges
Payments
Changes in estimates
Non-cash utilization
Effect of exchange rates
Balance—June 30, 2018
Severance and
Employee
Benefits
Third-Party
Contract
Terminations
Fixed Asset
Write-offs
Other Exit
Costs
Total
Program
Costs
$
$
— $
63.7
(15.1)
(0.2)
—
(0.4)
48.0
$
— $
0.2
—
—
—
0.2
$
— $
1.3
—
—
(1.3)
—
— $
— $
3.4
(0.4)
—
0.3
—
3.3
$
—
68.6
(15.5)
(0.2)
(1.0)
(0.4)
51.5
The Company currently estimates that the total remaining accrual of $51.5 will result in cash expenditures of
approximately $48.9, $1.8 and $0.8 in fiscal 2019, 2020 and thereafter, respectively.
In connection with the acquisition of the Burberry Beauty Business, the Company recorded $3.9 of restructuring costs
relating to third party contract terminations, which have been recorded in Corporate. The related liability balance was $3.9 at
June 30, 2018. The Company currently estimates that the total accrual of $3.9 will result in cash expenditures of $3.9 in fiscal
2019.
The Company executed a number of other restructuring activities during 2013 and 2014, which focused primarily on work-
force reductions around a new organizational structure, and other productivity initiatives related to the integration of supply
chain and selling activities. These programs are substantially completed. The Company incurred (income) expenses of $(2.0),
$5.7 and $44.6 in fiscal 2018, 2017 and 2016, respectively. The related liability balances were $1.7 and $10.1 at June 30, 2018
and June 30, 2017, respectively. The Company currently estimates that the total remaining accrual of $1.7 will result in cash
expenditures in fiscal 2019.
In connection with the acquisition of the P&G Beauty Business, the Company assumed restructuring liabilities of
approximately $21.7 at October 1, 2016. The Company incurred expenses of $0.9 and nil during the fiscal years ended 2018
and 2017, respectively, primarily related to an adjustment for lease termination. The Company estimates that the remaining
accrual of $7.0 at June 30, 2018 will result in cash expenditures of $4.2, $2.1 and $0.7 in fiscal 2019, 2020 and thereafter,
respectively.
7. TRADE RECEIVABLES—FACTORING
The Company factors a portion of its trade receivables with unrelated third-party factoring companies on a non-recourse
basis. Trade receivables factored throughout the fiscal year amounted to $300.1 and $344.9 in fiscal 2018 and 2017,
respectively. Remaining balances due from factors amounted to $9.9 and $16.8 as of June 30, 2018 and 2017, respectively, and
are included in Trade receivables, net in the Consolidated Balance Sheets. Factoring fees paid under these arrangements were
$0.6, $0.7 and $0.8 in fiscal 2018, 2017 and 2016, respectively, which were recorded in Selling, general and administrative
expenses in the Consolidated Statements of Operations.
8. INVENTORIES
Inventories as of June 30, 2018 and 2017 are presented below:
June 30,
2018
June 30,
2017
$
$
278.6
$
21.8
848.5
256.4
33.4
762.8
1,148.9
$
1,052.6
Raw materials
Work-in-process
Finished goods
Total inventories
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net as of June 30, 2018 and 2017 are presented below:
F-26
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
June 30,
2018
June 30,
2017
Land, buildings and leasehold improvements
$
671.2
$
Machinery and equipment
Marketing furniture and fixtures
Computer equipment and software
Construction in progress
Property and equipment, gross
Accumulated depreciation and amortization
Property and equipment, net
866.3
514.2
699.1
230.8
646.1
851.5
432.8
459.0
286.1
2,981.6
(1,300.8)
1,680.8
$
2,675.5
(1,043.4)
1,632.1
$
Depreciation and amortization expense of property and equipment totaled $384.2, $280.0 and $152.4 in fiscal 2018, 2017
and 2016, respectively, and is recorded in Cost of sales and Selling, general and administrative expenses in the Consolidated
Statements of Operations.
During fiscal 2018, the Company recorded asset impairment charges of $15.6, primarily relating to the planned disposal of
certain manufacturing facilities, and the write-off of machinery and equipment in excess of our needs due to our Global
Integration Activities. The impairment charges are included in Restructuring costs in the Consolidated Statements of
Operations.
10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The Company tests goodwill and indefinite-lived intangible assets for impairment at least annually as of May 1, or more
frequently, if certain events or circumstances warrant. There were no impairments of goodwill at the Company’s reporting units
in fiscal 2018 and 2017.
Goodwill as of June 30, 2018, 2017 and 2016 is presented below:
F-27
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Gross balance at June 30, 2016
Accumulated impairments
Net balance at June 30, 2016
Changes during the year ended June 30, 2017
Acquisitions
Measurement period adjustments
Foreign currency translation
Dispositions
Gross balance at June 30, 2017
Accumulated impairments
Net balance at June 30, 2017
Changes during the year ended June 30, 2018
Acquisitions (a)
Measurement period adjustments (b)
Foreign currency translation
Dispositions
Gross balance at June 30, 2018
Accumulated impairments
Net balance at June 30, 2018
Luxury
Consumer
Beauty
Professional
Beauty
1,294.5
(403.7)
890.8
$
$
1,288.2
(237.1)
1,051.1
$
$
270.8
—
270.8
$
$
Total
2,853.5
(640.8)
2,212.7
1,866.1
308.0
28.2
—
3,285.2
124.7
36.3
(2.4)
665.5
12.0
19.2
—
3,496.8
(403.7)
3,093.1
$
$
4,732.0
(237.1)
4,494.9
$
$
967.5
—
967.5
$
$
68.2
(185.0)
(10.3)
(3.1)
—
228.8
(24.1)
(9.2)
2.6
(17.3)
1.0
—
5,816.8
444.7
83.7
(2.4)
9,196.3
(640.8)
8,555.5
70.8
26.5
(33.4)
(12.3)
3,366.6
(403.7)
2,962.9
$
$
4,927.5
(237.1)
4,690.4
$
$
953.8
—
953.8
$
$
9,247.9
(640.8)
8,607.1
$
$
$
$
$
$
(a) Includes goodwill resulting from the Burberry Beauty Business acquisition during the year ended June 30, 2018 (Refer to Note 3—
Business Combinations).
(b) Includes measurement period adjustments in connection with the P&G Beauty Business, ghd, Younique and Burberry Beauty Business
acquisitions (Refer to Note 3—Business Combinations).
Other Intangible Assets, net
Other intangible assets, net as of June 30, 2018 and 2017 are presented below:
Indefinite-lived other intangible assets
Finite-lived other intangible assets, net
Total Other intangible assets, net
June 30,
2018
June 30,
2017
$
$
3,186.2
5,098.2
8,284.4
$
$
3,186.9
5,238.3
8,425.2
F-28
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The changes in the carrying amount of indefinite-lived other intangible assets are presented below:
Gross balance at June 30, 2016
Accumulated impairments
Net balance at June 30, 2016
Changes during the year ended June 30, 2017
Acquisitions
Measurement period adjustments
Foreign currency translation
Gross balance at June 30, 2017
Accumulated impairments
Net balance at June 30, 2017
Changes during the year ended June 30, 2018
Measurement period adjustments (a)
Foreign currency translation
Gross balance at June 30, 2018
Accumulated impairments
Net balance at June 30, 2018
Luxury
Consumer
Beauty
Professional
Beauty
401.2
(118.8)
282.4
—
—
8.6
551.5
(75.9)
475.6
1,390.0
(255.0)
9.9
662.1
(3.1)
659.0
663.8
(60.0)
12.6
$
$
$
409.8
(118.8)
291.0
$
1,696.4
(75.9)
1,620.5
$
1,278.5
(3.1)
1,275.4
—
4.8
—
6.7
(14.8)
2.6
414.6
(118.8)
295.8
$
1,703.1
(75.9)
1,627.2
$
1,266.3
(3.1)
1,263.2
$
Total
1,614.8
(197.8)
1,417.0
2,053.8
(315.0)
31.1
3,384.7
(197.8)
3,186.9
(14.8)
14.1
3,384.0
(197.8)
3,186.2
(a) Includes measurement period adjustments in connection with the ghd acquisition (Refer to Note 3—Business Combinations).
Intangible assets subject to amortization are presented below:
June 30, 2017
License agreements
Customer relationships
Trademarks
Product formulations and technology
Total
June 30, 2018
License agreements (a)(b)
Customer relationships (a)(b)
Trademarks
Product formulations and technology (a)
Total
Cost
Accumulated
Amortization
Accumulated
Impairment
Net
$
3,148.4
$
$
$
1,937.3
1,001.1
389.3
6,476.1
3,362.7
1,960.5
1,002.1
361.2
$
$
$
6,686.5
$
(653.3) $
(375.0)
(141.0)
(63.0)
(1,232.3) $
(792.9) $
(508.7)
(185.5)
(95.3)
(1,582.4) $
— $
(5.5)
—
—
(5.5) $
— $
(5.5)
(0.4)
—
(5.9) $
2,495.1
1,556.8
860.1
326.3
5,238.3
2,569.8
1,446.3
816.2
265.9
5,098.2
(a) Includes measurement period adjustments in connection with the P&G Beauty Business and ghd acquisitions during fiscal 2018.
(b) Includes License agreements and Customer relationships of $171.1 and $6.7, respectively resulting from the Burberry Beauty Business
acquisition during the fiscal year ended June 30, 2018 (see Note 3—Business Combinations).
During fiscal 2018, the Company sold assets related to the Playboy and Cerruti brands (including related licenses of $26.2
and goodwill of $12.3) for proceeds of $33.0, resulting in a noncash loss of $28.6. During fiscal 2017, the Company sold assets
related to the J.Lo brand for a total disposal price of $10.5. The Company allocated $2.4 of goodwill to the brand as part of the
F-29
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
sale. During fiscal 2016, the Company sold assets relating to the Cutex brand for a total disposal price of $29.2. The Company
allocated $4.2 of goodwill to the brand as part of the sale. The Company recorded losses (gains) of $28.6, $(3.1) and $(24.8),
which are reflected in Loss (gain) on sale of assets in the Consolidated Statements of Operations for the fiscal years ended June
30, 2018, 2017 and 2016, respectively.
In conjunction with the Company’s analysis of its go-to-market strategy in Southeast Asia during the first quarter of fiscal
2016, the Company evaluated future cash flows for this asset group and determined that the carrying value exceeded the
undiscounted cash flows. As a result, the Company evaluated the fair value of the long-lived assets in the asset group, through
an analysis of discounted future cash flows, and determined that the customer relationships were fully impaired and thus
recorded $5.5 of Asset impairment charges in the Consolidated Statements of Operations for the fiscal year ended June 30,
2016.
Amortization expense totaled $352.8, $275.1 and $79.5 for the June 30, 2018, 2017 and 2016, respectively.
Intangible assets subject to amortization are amortized principally using the straight-line method and have the following
weighted-average remaining lives:
Description
License agreements
Customer relationships
Trademarks
Product formulations and technology
24.6 years
15.9 years
22.0 years
10.5 years
As of June 30, 2018, the remaining weighted-average life of all intangible assets subject to amortization is 21.0 years.
The estimated aggregate amortization expense for each of the following fiscal years ending June 30 is presented below:
2019
2020
2021
2022
2023
License Agreements
$
353.9
349.1
344.8
326.5
304.4
The Company records assets for license agreements (“licenses”) acquired in transactions accounted for as business
combinations. These licenses provide the Company with the exclusive right to manufacture and market on a worldwide and/or
regional basis, certain of the Company’s products which comprise a significant portion of the Company’s revenues. These
licenses have initial terms covering various periods. Certain brand licenses provide for automatic extensions ranging from 2 to
10 year terms, at the Company’s discretion.
F-30
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of June 30, 2018 and 2017 are presented below:
June 30,
2018
June 30,
2017
Advertising, marketing and licensing
Compensation and other compensation related benefits
Customer returns, discounts, allowances and bonuses
Restructuring costs
VAT, sales and other non-income taxes
Mandatorily redeemable financial instrument liability (See Note 19)
Auditing, consulting, legal and litigation accruals
Interest
Deferred income
Tax indemnity liability
Unfavorable contract liability
Acquisition-related costs
Other
$
435.5
$
333.1
328.2
263.8
134.5
46.6
34.1
31.5
25.5
21.1
11.3
1.3
177.9
Total accrued expenses and other current liabilities
$
1,844.4
$
12. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities as of June 30, 2018 and 2017 are presented below:
445.1
328.2
307.3
301.0
97.7
8.1
32.6
17.8
15.8
38.0
11.0
23.5
170.3
1,796.4
Noncurrent income tax liabilities
Unfavorable contract liabilities
Deferred rent
Restructuring costs
Burberry contingent consideration
Mandatorily redeemable financial instrument liability (See Note 19)
Other
Total other noncurrent liabilities
June 30,
2018
June 30,
2017
$
137.7
$
104.1
54.2
31.1
8.3
6.7
46.4
154.2
113.2
49.0
82.3
—
46.4
28.3
$
388.5
$
473.4
F-31
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
13. DEBT
Short-term debt
2018 Coty Credit Agreement
2018 Coty Revolving Credit Facility due April 2023
2018 Coty Term A Facility due April 2023
2018 Coty Term B Facility due April 2025
Senior Unsecured Notes
2026 Dollar Notes due April 2026
2023 Euro Notes due April 2023
2026 Euro Notes due April 2026
Galleria Credit Agreement
Galleria Revolving Credit Facility due September 2021
Galleria Term Loan A Facility due September 2021
Galleria Term Loan B Facility due September 2023
2015 Coty Credit Agreement
Coty Revolving Credit Facility due October 2020
Coty Term Loan A Facility due October 2020
Coty Term Loan A Facility due October 2021
Coty Term Loan B Facility due October 2022
Other long-term debt and capital lease obligations
Total debt
Less: Short-term debt and current portion of long-term debt
Total Long-term debt
Less: Unamortized debt issuance costs (a) (b)
Less: Discount on Long-term debt
Total Long-term debt, net
June 30,
2018
June 30,
2017
$
9.2
$
3.7
368.1
3,371.5
2,390.5
550.0
640.9
291.4
—
—
—
—
—
—
—
1.6
7,623.2
(218.9)
7,404.3
(86.2)
(12.7)
7,305.4
$
$
—
—
—
—
—
—
—
944.3
1,000.0
810.0
1,792.8
950.6
1,712.5
1.7
7,215.6
(209.1)
7,006.5
(67.6)
(10.6)
6,928.3
(a) Balances as of June 30, 2018 consist of unamortized debt issuance costs of $31.4 for the 2018 Coty Revolving Credit Facility, $29.2 for the
2018 Coty Term A Facility, $10.9 for the 2018 Coty Term B Facility, $8.3 for the 2026 Dollar and Euro Notes and $6.4 for the 2023 Euro
Notes.
(b) Balances as of June 30, 2017 consist of unamortized debt issuance costs of $17.5 for the Coty Revolving Credit Facility, $33.2 for the
Coty Term Loan A Facility, $11.3 for the Coty Term Loan B Facility, $2.7 for the Galleria Term Loan A Facility and $3.0 for the Galleria
Term Loan B Facility. Unamortized debt issuance costs of $4.2 for the Galleria Revolving Credit Facility were classified as Other
noncurrent assets as of June 30, 2017.
Short-Term Debt
The Company maintains short-term lines of credit with financial institutions around the world. Total available lines of
credit were $129.2 and $132.4, of which $4.7 and $3.2 were outstanding at June 30, 2018 and 2017, respectively. Interest rates
on these short-term lines of credit vary depending on market rates for borrowings within the respective geographic locations
plus applicable spreads. Interest rates plus applicable spreads on these lines ranged from 0.2% to 10.7% and from 0.4% to
11.2% as of June 30, 2018 and 2017, respectively. The weighted-average interest rate on short-term debt outstanding was 2.2%
and 3.0% as of June 30, 2018 and 2017, respectively. In addition, the Company had undrawn letters of credit of $5.4 and $5.5
as of June 30, 2018 and 2017, respectively.
F-32
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Long-Term Debt
The Company’s long-term debt facilities consisted of the following as of June 30, 2018:
Facility
Maturity
Date
Borrowing
Capacity
(in
millions)
2018 Coty
Revolving Credit
Facility
April 2023
$3,250.0
April 2023
$1,000.0
April 2023
€2,035.0
2018 Coty Term
A Facility - USD
Portion
2018 Coty Term
A Facility - EUR
Portion
2018 Coty Term
B Facility - USD
Portion
2018 Coty Term
B Facility - EUR
Portion
Interest Rate Terms
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d) (e)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d)
Applicable
Interest Rate
Spread as of
June 30, 2018
Debt
Discount
Repayment Schedule
1.75%
N/A(b)
Payable in full at
maturity date
1.75%
N/A(b)
1.75%
N/A(b)
Quarterly repayments
beginning September 30,
2018 at 1.25% of original
principal amount
Quarterly repayments
beginning September 30,
2018 at 1.25% of original
principal amount
Quarterly repayments
beginning September 30,
2018 at 0.25% of original
principal amount
Quarterly repayments
beginning September 30,
2018 at 0.25% of original
principal amount
April 2025
$1,400.0
LIBOR(a) plus a margin of 2.25% per
annum or a base rate plus a margin of
1.25% per annum (d)
2.25%
0.25%
April 2025
€850.0
LIBOR(a) plus a margin of 2.50% per
annum (d)
2.50%
0.25%
2026 Dollar
Notes
April 2026
$550.0
2023 Euro Notes
April 2023
€550.0
2026 Euro Notes
April 2026
€250.0
6.5% per annum, payable semi-annually
in arrears on April 15 and October 15 of
each year, beginning on October 15,
2018
4.0% per annum, payable semi-annually
in arrears on April 15 and October 15 of
each year, beginning on October 15,
2018
4.75% per annum, payable semi-
annually in arrears on April 15 and
October 15 of each year, beginning on
October 15, 2018
N/A(b)
N/A(b)
Payable in full at
maturity date
N/A(b)
N/A(b)
Payable in full at
maturity date
N/A(b)
N/A(b)
Payable in full at
maturity date
(a) As defined below.
(b) N/A - Not Applicable.
(c) As defined per the 2018 Coty Credit Agreement.
(d) The selection of the applicable one, two, three, six or twelve month interest rate for the period is at the discretion of the Company.
(e) The Company will pay to the Revolving Credit Facility lenders an unused commitment fee calculated at a rate ranging
from 0.10% to 0.35% per annum, based on the Company’s total net leverage ratio(c). As of June 30, 2018, the applicable rate on the unused
commitment fee was 0.30%.
F-33
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The Company’s long-term debt facilities consisted of the following as of June 30, 2017:
Facility
Maturity
Date
Borrowing
Capacity
(in
millions)
Galleria
Revolving Credit
Facility(a)
September
2021
$1,500.0
Galleria Term
Loan A Facility(a)
September
2021
$2,000.0 (g)
Galleria Term
Loan B Facility(a)
September
2023
$1,000.0
Coty Revolving
Credit Facility(a)
October
2020
$1,500.0
Coty Term Loan A
Facility(a)
- USD Portion
Coty Term Loan A
Facility(a)
- Euro Portion
October
2020
October
2020
$1,750.0
€140.0
Incremental Term
A Facility(a)
October
2021
$975.0
Interest Rate Terms
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d) (f)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (f)
LIBOR(a) plus a margin of 3.00% or a
base rate, plus a margin of 2.00%(f)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d) (f)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (f)
EURIBOR(a) plus a margin of 1.00% to
2.00% per annum, based on the
Company’s total net leverage ratio (c) (f)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (f)
Applicable
Interest Rate
Spread as of
June 30, 2017
Debt
Discount
Repayment Schedule
1.75%
N/A(b)
Payable in full at
maturity date
1.75%
N/A(b)
3.00%
0.50%
Quarterly repayments
beginning December 31,
2017 at 1.25% of original
principal amount
Quarterly repayments
beginning December 31,
2017 at 0.25% of original
principal amount
1.75%
N/A(b)
Payable in full at
maturity date
1.75%
N/A(b)
1.75%
N/A(b)
1.75%
N/A(b)
Quarterly repayments
beginning June 30, 2016
at 1.25% of original
principal amount
Quarterly repayments
beginning September 30,
2016 at 1.25% of original
principal amount
Quarterly repayments
beginning March 31,
2017 at 1.25% of original
principal amount
Quarterly repayments
beginning June 30, 2016
at 0.25% of original
principal amount
Coty Term Loan B
Facility(a)(h)
- USD Portion
and Incremental
Term B Facility(a)
Coty Term Loan B
Facility(a)
- Euro Portion
October
2022
October
2022
$600.0
LIBOR(a) plus a margin of 2.50% or a
base rate, plus a margin of 2.00%(f)
2.50%
0.50%
€990.0(e)
EURIBOR(a) plus a margin of 2.75%
2.75%
0.50%
See below.(e)
(a) As defined below.
(b) N/A - Not Applicable.
(c) As defined per the respective loan agreement.
(d) Additionally the Company paid to the Revolving Credit Facility lenders an unused commitment fee calculated at a rate ranging
from 0.25% to 0.50% per annum, based on the Company’s total net leverage ratio(c). As of June 30, 2017, the applicable rate on the unused
commitment fee was 0.50%.
(e) Included €665.0 million of the Euro portion of Coty Term Loan B Facility originated on October 27, 2015, and the €325.0 million from the
Incremental Term Loans, as defined below, originated on April 8, 2016. Repayments on the €665.0 million portion were payable quarterly
beginning on June 30, 2016 at 0.25% of the original principal amount. Repayments on the €325.0 million Incremental Term Loan B were
payable quarterly beginning on September 30, 2016 at 0.25% of the original principal amount.
(f) The selection of the applicable interest rate for the period is at the discretion of the Company.
(g) At the closing of the P&G Beauty Business acquisition, $944.3 were assumed under the Galleria Credit Agreement. The remaining unused
loan commitments for the Galleria Term Loan A Facility expired.
(h) Refinanced as part of the Incremental Assumption Agreement(a) on October 28, 2016 and part of the Refinancing Facilities(a).
F-34
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The Company’s long term debt facilities consisted of the following as of June 30, 2016:
Facility
Maturity
Date
Borrowing
Capacity
(in
millions)
Coty Revolving
Credit Facility(a)
October
2020
$1,500.0
Coty Term Loan A
Facility(a)
- USD Portion
Coty Term Loan A
Facility(a)
- Euro Portion
Coty Term Loan B
Facility(a)
- USD portion
Coty Term Loan B
Facility(a)
- Euro portion
October
2020
October
2020
October
2022
October
2022
$1,750.0
€140.0
$500.0
Interest Rate Terms
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (d) (f)
LIBOR(a) plus a margin ranging
from 1.00% to 2.00% per annum or a
base rate plus a margin ranging
from 0.00% to 1.00% per annum, based
on the Company’s total net leverage
ratio (c) (f)
EURIBOR(a) plus a margin of 1.00% to
2.00% per annum, based on the
Company’s total net leverage ratio (c) (f)
LIBOR(a) (subject to a 0.75% floor) plus
a margin of 3.00% or a base rate
(subject to a 1.75% floor), plus a margin
of 2.00%(f)
Applicable
Interest Rate
Spread as of
June 30, 2016
Debt
Discount
Repayment Schedule
1.75%
N/A(b)
Payable in full at maturity
date
1.75%
N/A(b)
1.75%
N/A(b)
3.00%
0.50%
Quarterly repayments
beginning June 30, 2016
at 1.25% of original
principal amount
Quarterly repayments
beginning September 30,
2016 at 1.25% of original
principal amount
Quarterly repayments
beginning June 30, 2016
at 0.25% of original
principal amount
Quarterly repayments
beginning June 30, 2016
at 0.25% of original
principal amount (e)
€990.0 (e)
EURIBOR(a) (subject to a 0.75% floor)
plus a margin of 2.75%
2.75%
0.50%
(a) As defined below.
(b) N/A - Not Applicable.
(c) As defined per the respective loan agreement.
(d) Additionally the Company paid to the Coty Revolving Credit Facility and Galleria Revolving Facility lenders an unused commitment fee
calculated at a rate ranging from 0.25% to 0.50% per annum, based on the Company’s total net leverage ratio(c). As of June 30, 2016, the
applicable rate on the unused commitment fee was 0.50%.
(e) Included €665.0 million of the Euro portion of Term Loan B originated on October 27, 2015, and the €325.0 million from the Incremental
Term Loans, as defined below, originated on April 8, 2016. Repayments on the €325.0 million Incremental Term Loan B were payable
quarterly beginning on September 30, 2016 at 0.25% of the original principal amount.
(f) The selection of the applicable interest rate for the period is at the discretion of the Company.
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 million of 4.00% senior unsecured notes due 2023 (the “2023 Euro Notes”) and €250.0 million of 4.75% senior
unsecured notes due 2026 (the “2026 Euro Notes” and, together with the 2023 Euro Notes, the “Euro Notes,” and the Euro
Notes together with the 2026 Dollar Notes, the “Senior Unsecured Notes”) in a private offering to qualified institutional buyers
pursuant to Rule 144A under the Securities Act and to non-U.S. persons outside the U.S. pursuant to Regulation S under the
Securities Act. The net proceeds of this offering, together with borrowings under the Company’s 2018 Credit Agreement were
used to repay in full and refinance the indebtedness outstanding under the 2015 Coty Credit Agreement and Galleria Credit
Agreement and to pay accrued interest, related premiums, fees and expenses in connection therewith.
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.
In addition to the optional redemption outlined below, the Company may, at its option, redeem either series of the Euro
Notes, in whole but not in part, at a redemption price equal to 100% of the principal amount of the Euro Notes to be redeemed,
F-35
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
together with any accrued and unpaid interest thereon to, but excluding, the redemption date, at any time, upon the occurrence
of certain tax events.
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 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 Notes also provide for customary events of default.
Optional Redemption
Applicable Premium
The indenture governing the Senior Unsecured Notes (the “Indenture”) specifies the Applicable Premium (as defined in the
Indenture) to be paid upon early redemption of some or all of the 2026 Dollar Notes, 2023 Euro Notes or 2026 Euro Notes.
The Applicable Premium related to the 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes on any redemption date
and as calculated by the Company is the greater of:
(1) 1.0% of the then outstanding principal amount of the respective 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro
Notes; and
(2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 2026 Dollar
Notes, 2023 Euro Notes or 2026 Euro Notes that would apply if such 2026 Dollar Notes, 2023 Euro Notes or 2026
Euro Notes were redeemed on April 15, 2021, April 15, 2020 or April 15, 2021, respectively (such redemption price is
expressed as a percentage of the principal amount being set forth in the table appearing in the Redemption Pricing
section below), plus (ii) all remaining scheduled payments of interest due on the 2026 Dollar Notes, 2023 Euro Notes
or 2026 Euro Notes to and including April 15, 2021, April 15, 2020 and April 15, 2021, respectively (excluding
accrued but unpaid interest, if any, to, but excluding, the redemption date), with respect to each of subclause (i) and
(ii), computed using a discount rate equal to the Treasury Rate in the case of the 2026 Dollar Notes or Bund Rate in the
case of both the 2020 Euro Notes or 2026 Euro Notes (both Treasury Rate and Bund Rate as defined in the Indenture)
as of such redemption date plus 50 basis points; over (b) the principal amount of the respective 2026 Dollar Notes,
2023 Euro Notes or 2026 Euro Notes.
Redemption Pricing
At any time and from time to time prior to April 15, 2021, April 15, 2020 and April 15, 2021, the Company may redeem
some or all of the 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes, respectively, at redemption prices equal to 100%
of the respective principal amounts being redeemed plus the Applicable Premium, plus accrued and unpaid interest, if any, to,
but excluding, the redemption dates.
At any time on or after April 15, 2021, April 15, 2020 and April 15, 2021, the Company may redeem some or all of the
2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes, respectively, at the redemption prices (expressed in percentage of
principal amount) set forth below, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates, if redeemed
during the twelve-month period beginning on April 15 of each of the years indicated below:
Year
2020
2021
2022
2023
2024 and thereafter
2026 Dollar Notes
N/A
104.8750%
103.2500%
101.6250%
100.0000%
Price
2023 Euro Notes
102.0000%
101.0000%
100.0000%
100.0000%
N/A
2026 Euro Notes
N/A
103.5625%
102.3750%
101.1875%
100.0000%
In addition, at any time prior to April 15, 2021, April 15, 2020 and April 15, 2021, the Company may redeem up to 35% of
the aggregate principal amounts of the outstanding 2026 Dollar Notes, 2023 Euro Notes and 2026 Euro Notes, respectively,
using the net cash proceeds from certain equity offerings at redemption prices (expressed as a percentage of the principal
amount) of 106.50%, 104.00% and 104.75%, respectively, plus accrued and unpaid interest, if any, to, but excluding, the
F-36
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
redemption dates; provided that (i) at least 65% of the aggregate principal amount of 2026 Dollar Notes, 2023 Euro Notes and
2026 Euro Notes, respectively, originally issued on the date of the Indenture remain outstanding after each such redemption,
and (ii) notice of any such redemption is delivered to the Trustee within 90 days of the closing of each such equity offering.
2018 Coty Credit Agreement
On April 5, 2018, the Company entered into a new credit agreement (the “2018 Coty Credit Agreement”), which amended
and restated the previously existing 2015 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 million denominated in euros (the “2018 Coty Term A Facility”) and (2) a senior secured term
B facility in an aggregate principal amount of (i) $1,400.0 denominated in U.S. dollars and (ii) €850.0 million denominated in
euros (the “2018 Coty Term B Facility”) and (b) the incurrence by the Company and Coty B.V., a Dutch subsidiary of the
Company (the “Dutch Borrower” and, together with the Company, the “Borrowers”), of a senior secured revolving facility in an
aggregate principal amount of $3,250.0 denominated in U.S. dollars, specified alternative currencies or other currencies freely
convertible into U.S. dollars and readily available in the London interbank market (the “2018 Coty Revolving Credit Facility”)
(the 2018 Coty Term A Facility, together with the 2018 Coty Term B Facility and the 2018 Coty Revolving Credit Facility, the
“2018 Coty Credit Facilities”). 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 net proceeds of the Senior Unsecured Notes and the 2018 Coty Credit Facilities were used to repay in full and
refinance the indebtedness outstanding under the 2015 Coty Credit Agreement and Galleria Credit Agreement and to pay
accrued interest, related premiums, fees and expenses in connection therewith. Future borrowings under the 2018 Coty Credit
Agreement could be used for corporate purposes.
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.
2015 Coty Credit Agreement
On October 27, 2015, the Company entered into a Credit Agreement (the “2015 Coty Credit Agreement”) with JPMorgan
Chase Bank, N.A., as administrative agent. The 2015 Coty Credit Agreement provided for senior secured credit facilities
comprised of (i) a revolving credit facility in an aggregate principal amount up to $1,500.0 (the “Coty Revolving Credit
Facility”), which included up to $80.0 in swingline loans available for short term borrowings, (ii) a $1,750.0 term loan A
facility (“Coty Term Loan A Facility”) and (iii) a term loan B facility comprising of a $500.0 tranche and a €665.0 million
tranche (“Coty Term Loan B Facility”). The Coty Term Loan B Facility was issued at a 0.50% discount. The proceeds of the
Coty Credit Agreement were primarily used to refinance the Company’s previously existing debt, which included the 2015
Credit Agreement due March 2018 and facilities under the Coty Inc. Credit Facility (together, the “Prior Coty Inc. Credit
Facilities”).
On April 8, 2016, the Company entered into an Incremental Assumption Agreement and Amendment No. 1 (the
“Incremental Credit Agreement”) to the Coty Credit Agreement. The Incremental Credit Agreement provided for an additional
€140.0 million in commitments under the Coty Term Loan A Facility and an additional €325.0 million in commitments under
the Coty Term Loan B Facility of the Coty Credit Agreement (the “Incremental Term Loans”). The proceeds of the Incremental
Term Loans were used to partially repay outstanding balances under the Revolving Credit Facility. The terms of the €140.0
million and €325.0 million portions of the Incremental Term Loans were substantially the same as the respective existing Coty
Term Loan A Facility and Euro denominated portion of the Coty Term Loan B Facility.
On October 28, 2016, the Company entered into an Incremental Assumption Agreement and Refinancing Amendment (the
“Incremental and Refinancing Agreement”), which amended the Coty Credit Agreement. The Incremental and Refinancing
Agreement provided for: (i) an additional Coty Term Loan A Facility in aggregate principal amount of $975.0 in commitments
F-37
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(the “Incremental Term A Facility”), (ii) an additional Coty Term Loan B Facility in aggregate principal amount of $100.0 in
commitments (the “Incremental Term B Facility”) and (iii) a refinancing of the previously existing USD and Euro denominated
Coty Term Loan B Facility loans (the “Refinancing Facilities”) under the Coty Credit Agreement.
The loans made under the Incremental Term A Facility had terms that were substantially identical to the existing Coty Term
Loan A Facility except that the loans would have matured on the date that is five years after October 28, 2016. The loans under
the Incremental Term B Facility and the Refinancing Facilities had substantially identical terms as the term B loans existing
under the 2015 Coty Credit Agreement prior to effectiveness of the Incremental and Refinancing Agreement, except that,
among other things: (i) the interest rate with respect to the USD denominated tranche of the Refinancing Facilities and the
Incremental Term B Facility would have been, at the Company’s option, either the London Interbank Offered Rate (“LIBOR”)
plus an applicable margin of 2.50% or an alternate base rate (“ABR”) equal to the highest of (1) JPMorgan Chase Bank N.A.’s
prime rate, (2) the federal funds rate plus 0.50% and (3) one-month LIBOR plus 1.00%, in each case plus an applicable margin
of 1.50% and (ii) the LIBOR floor with respect to the LIBOR loans under the Incremental Term B Facility and the Refinancing
Facilities is 0.00%.
The Company recognized $13.0 of deferred debt issuance costs in connection with the Incremental and Refinancing
Agreement.
The 2015 Coty Credit Agreement was guaranteed by Coty Inc.’s wholly-owned domestic subsidiaries and secured by a first
priority lien on substantially all of Coty Inc. and its wholly-owned domestic subsidiaries’ assets, in each case subject to certain
carve outs and exceptions.
Galleria Credit Agreement
On October 1, 2016, at the closing of the P&G Beauty Business acquisition, the Company assumed the debt facilities
available under the Galleria Credit Agreement (the “Galleria Credit Agreement”), which was initially entered into by Galleria
on January 26, 2016. The Galleria Credit Agreement provided for the senior secured credit facilities comprised of (i) a $2,000.0
five year term loan A facility (“Galleria Term Loan A Facility”), (ii) a $1,000.0 seven year term loan B facility (“Galleria Term
Loan B Facility”) and (iii) a $1,500.0 five year revolving credit facility (“Galleria Revolving Facility”). The Galleria Term Loan
B Facility was issued at a 0.5% discount. In connection with the closing of the P&G Beauty Business acquisition, the Company
assumed $1,941.8 of aggregate debt outstanding consisting of $944.3 Galleria Term Loan A Facility, $995.0 Galleria Term Loan
B Facility, net of a discount and $0.0 outstanding under the Galleria Revolving Facility, as well as $2.5 in assumed fees
payable. At the closing of the P&G Beauty Business acquisition, the remaining unused loan commitments for the Galleria Term
Loan A Facility expired.
The Company recognized $11.4 of deferred debt issuance costs in connection with the Galleria Credit Agreement.
The Galleria Credit Agreement was guaranteed by Coty Inc. and its wholly-owned domestic subsidiaries (other than
Galleria) and secured by a first priority lien on substantially all of Coty Inc. and its wholly-owned domestic subsidiaries’ assets,
in each case subject to certain carve outs and exceptions.
Scheduled Amortization
The Company will make quarterly payments of 1.25% and 0.25%, beginning on September 30, 2018, 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.
Deferred Issuance Costs
For the fiscal years ended June 30, 2018, 2017 and 2016, the Company capitalized deferred financing fees of $37.8, $24.4,
and $59.0, respectively. As of June 30, 2018 and 2017, the Company had deferred financing fees of $0.0 and $4.2 recorded in
Other noncurrent assets on the Company’s Consolidated Balance Sheets. In connection with the refinancing of the 2015 Coty
Credit Agreement and Galleria Credit Agreement, the Company incurred $24.1 in third-party debt issuance costs during the
year ended June 30, 2018. These costs were recorded as Other expense, net in the Consolidated Statement of Operations.
Loss on Early Extinguishment on Debt
During the fiscal years ended June 30, 2018, 2017 and 2016, the Company wrote-off $8.7, $0.0 and $3.1 of unamortized
deferred financing fees. Also during the fiscal years ended June 30, 2018, 2017 and 2016, the Company wrote-off $2.0, $0.0
and $0.0 of unamortized original issue debt discounts. The write-offs of these unamortized deferred financing fees and
unamortized original issue debt discounts are included in Loss on early extinguishment of debt in the Consolidated Statements
of Operations.
F-38
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
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
• 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
2.0
3.0
4.0
5.0
6.0
Greater than or equal to
4.75:1
Less than 4.75:1 but greater
than or equal to 4.00:1
Less than 4.00:1 but greater
than or equal to 2.75:1
Less than 2.75:1 but greater
than or equal to 2.00:1
Less than 2.00:1 but greater
than or equal to 1.50:1
Less than 1.50:1
2.000%
1.750%
1.500%
1.250%
1.125%
1.000%
1.000%
0.750%
0.500%
0.250%
0.125%
—%
Pricing Tier
Debt Ratings S&P/Moody’s:
LIBOR plus:
Alternative Base Rate
Margin:
5.0
4.0
3.0
2.0
1.0
Less than BB+/Ba1
BB+/Ba1
BBB-/Baa3
BBB/Baa2
BBB+/Baa1 or higher
2.000%
1.750%
1.500%
1.250%
1.125%
1.000%
0.750%
0.500%
0.250%
0.125%
In the case of the USD 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
2018 Coty Credit Agreement
Senior Unsecured Notes
Galleria Credit Agreement
2015 Coty Credit Agreement
June 30, 2018
June 30, 2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
6,130.1
$
6,070.8
$
1,482.3
1,449.9
— $
—
—
—
—
—
1,944.3
5,265.9
—
—
1,944.0
5,275.4
The Company uses the market approach to value the 2018 Coty Credit Agreement and the Senior Unsecured Notes. The
Company used the market approach to value the 2015 Coty Credit Agreement and the Galleria Credit Agreement. The
Company obtains fair values from independent pricing services to determine the fair value of these debt instruments. Based on
F-39
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
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 all long-term debt, including current portion of long-term debt and excluding capital lease
obligations as of June 30, 2018, are presented below:
Fiscal Year Ending June 30,
2019
2020
2021
2022
2023
Thereafter
Total
Covenants
$
$
192.5
192.5
192.5
192.5
3,730.1
3,112.3
7,612.4
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 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
June 30, 2018
September 30, 2018 through December 31, 2018
March 31, 2019 through June 30, 2019
September 30, 2019 through December 31, 2019
March 31, 2020 through June 30, 2020
September 30, 2020 through December 31, 2020
March 31, 2021 through June 30, 2021
September 30, 2021 through June 30, 2023
Total Net Leverage Ratio(a)
5.50 to 1.00
5.50 to 1.00
5.25 to 1.00
5.00 to 1.00
4.75 to 1.00
4.50 to 1.00
4.25 to 1.00
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 cash 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 used within the definition of Total Net Leverage Ratio have the meanings
ascribed to them within the 2018 Coty Credit Agreement).
In the four fiscal quarters following the closing of any Material Acquisition (as defined in the 2018 Coty Credit
Agreement), 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.
14. LEASE COMMITMENTS
The Company has various buildings and equipment under leasing arrangements. The leases generally provide for payment
of additional rent based upon increases in items such as real estate taxes and insurance. Certain lease agreements have renewal
options for periods typically ranging between one and ten years. Certain lease agreements have escalation clauses for rent,
F-40
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
which have been straight-lined over the life of the respective lease agreements. The minimum rental lease commitments for
non-cancellable operating leases as of June 30, 2018 are presented below:
Fiscal Year Ending June 30,
2019
2020
2021
2022
2023
Thereafter
Less: sublease income
Total minimum payments required
$
$
128.9
112.1
97.0
80.4
71.8
339.3
829.5
(23.9)
805.6
The Company incurred rent expense of $208.2, $166.1 and $82.5 relating to operating leases in fiscal 2018, 2017 and
2016, respectively. The Company collected payments from sub-lessors relating to facilities no longer in use by the Company of
$6.2, $6.0 and $5.4 for fiscal 2018, 2017 and 2016, respectively. Included in rent expense are estimated net future minimum
lease payments (recoveries) and related costs for facilities no longer used in operations of $8.6, $9.2 and nil for fiscal 2018,
2017 and 2016, respectively.
15. INCOME TAXES
(Loss) income before income taxes in fiscal 2018, 2017 and 2016 is presented below:
United States
Foreign
Total
Year Ended June 30,
2017
2016
2018
$
$
(324.2) $
171.7
(152.5) $
(524.8) $
(133.2)
(658.0) $
(153.6)
292.4
138.8
The components of the Company’s total (benefit) provision for income taxes during fiscal 2018, 2017 and 2016 are
presented below:
(Benefit) provision for income taxes:
Current:
Federal
State and local
Foreign
Total
Deferred:
Federal
State and local
Foreign
Total
Benefit for income taxes
Year Ended June 30,
2017
2016
2018
$
$
$
0.2
9.8
67.0
77.0
25.2
(0.7)
(126.2)
(101.7)
(24.7) $
$
0.4
1.1
129.0
130.5
(256.9)
(24.2)
(108.9)
(390.0)
(259.5) $
(30.0)
(2.7)
131.5
98.8
(91.7)
(9.9)
(37.6)
(139.2)
(40.4)
During fiscal 2018, the Company incurred an expense of $41.0 as a result of the Tax Act.
During the second quarter of fiscal 2017, the Company released a valuation allowance in the U.S. as a result of the P&G
Beauty Business acquisition of $111.2.
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
During the first quarter of fiscal 2016, the Company reached final settlement with the IRS in connection with the 2004–
2012 examination periods. The settlement primarily relates to the acquisition of the Calvin Klein fragrance business. In
connection with the settlement, the Company recognized a tax benefit of approximately $194.4 of which $164.7 was mainly
due to the recognition of additional deferred tax assets related to the basis of the Calvin Klein trademark, and approximately
$29.7 resulted from the reduction of gross unrecognized tax benefits. Of the $194.4 tax benefit, $111.2 was offset by a valuation
allowance due to on-going operating losses in the U.S.
During fiscal 2015, the Company transferred certain international intellectual property rights to its wholly-owned
subsidiary in Switzerland in order to align the Company’s ownership of these international intellectual property rights with its
global operations. Although the transfer of foreign intellectual property rights between consolidated entities did not result in
any gain in the consolidated results of operations, the Company generated a taxable gain in the U.S. that was offset by net
operating loss carryforwards. Income taxes incurred related to the intercompany transactions are treated as a
prepaid income tax in the Company’s consolidated balance sheet and amortized to income tax expense over the life of the
intellectual property. For the fiscal years ending June 30, 2018 and 2017, the prepaid income taxes of $7.6 and $7.6,
respectively, are included in Prepaid expenses and other current assets and $120.6 and $128.2, respectively, are included in
Other noncurrent assets in the Consolidated Balance Sheets. The prepaid income taxes are amortized as a component of income
tax expense over twenty years.
The reconciliation of the U.S. Federal statutory tax rate to the Company’s effective income tax rate during fiscal 2018,
2017 and 2016 is presented below:
Income (loss) before income taxes
(Benefit) provision for income taxes at statutory rate
State and local taxes—net of federal benefit
Foreign tax differentials
Change in valuation allowances
Change in unrecognized tax benefit
U.S. audit settlement, net
Tax Act
Permanent differences—net
Amortization on intercompany sale
Other
(Benefit) provision for income taxes
Effective income tax rate
Year Ended June 30,
2017
2016
2018
$
$
(152.5)
(42.8)
9.9
(21.9)
8.6
(24.8)
—
41.0
(8.5)
5.4
8.4
(24.7)
16.2%
$
(658.0)
(230.3)
(15.0)
53.3
(108.2)
25.6
—
—
1.2
5.7
8.2
(259.5)
$
$
138.8
48.5
(8.3)
(50.8)
(7.6)
45.8
(83.2)
—
4.7
5.7
4.8
$
(40.4)
39.4%
(29.1)%
$
$
$
Significant components of deferred income tax assets and liabilities as of June 30, 2018 and 2017 are presented below:
F-42
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Deferred income tax assets:
Inventories
Accruals and allowances
Sales returns
Share-based compensation
Employee benefits
Net operating loss carry forwards and tax credits
Other
Less: valuation allowances
Net deferred income tax assets
Deferred income tax liabilities:
Intangible assets
Property, plant and equipment
Unrealized gain
Licensing rights
Other
Deferred income tax liabilities
Net deferred income tax liabilities
June 30,
2018
June 30,
2017
$
9.0
$
84.2
13.1
13.4
115.7
285.1
48.3
(104.6)
464.2
11.7
108.8
14.8
14.2
141.2
436.9
40.7
(60.3)
708.0
1,115.7
1,420.9
18.9
5.4
21.5
37.8
44.1
44.0
30.4
20.9
1,199.3
(735.1) $
1,560.3
(852.3)
$
The expirations of tax loss carry forwards, amounting to $1,134.1 as of June 30, 2018, in each of the fiscal years ending
June 30, are presented below:
Fiscal Year Ending June 30,
2019
2020
2021
2022
2023 and thereafter
Total
United States
Western
Europe
Rest of
World
— $
— $
—
—
—
1.7
1.7
—
0.8
1.9
828.9
$
831.6
$
300.8
$
15.2
75.3
12.4
21.4
176.5
Total
$
15.2
75.3
13.2
23.3
1,007.1
1,134.1
$
$
The total valuation allowances recorded are $104.6 and $60.3 as of June 30, 2018 and 2017, respectively. In fiscal 2018,
the change in the valuation allowance was due primarily to valuation allowances recorded on net operating losses and foreign
tax credits that are not expected to be utilized.
A reconciliation of the beginning and ending amount of UTBs is presented below:
Year Ended June 30,
2018
2017
2016
UTBs—July 1
$
257.9
$
228.9
$
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapses in statutes of limitations
Foreign currency translation
UTBs—June 30
44.1
97.4
(39.9)
(42.3)
(11.0)
(2.6)
303.6
$
43.6
0.4
—
(1.5)
(13.2)
(0.3)
257.9
$
$
F-43
342.6
60.4
—
(70.5)
(72.7)
(37.9)
7.0
228.9
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
As of June 30, 2018, the Company had $303.6 of UTBs of which $124.7 represents the amount that, if recognized, would
impact the effective income tax rate in future periods. As of June 30, 2018 and 2017, the liability associated with UTBs,
including accrued interest and penalties, is $135.4 and $154.6, respectively, which is recorded in Income and other taxes
payable and Other non-current liabilities in the Consolidated Balance Sheets.
During fiscal 2018, the Company accrued interest of $0.8, while in fiscal 2017 and 2016 the Company accrued and
released interest of $1.4 and $1.2, respectively. During fiscal 2018, the Company accrued penalty of $0.4, while in fiscal 2017
and 2016 the Company accrued and released penalty of $0.1 and $0.1, respectively. The total gross accrued interest and
penalties recorded in the Other noncurrent liabilities in the Consolidated Balance Sheets related to UTBs as of June 30, 2018
and 2017 is $13.1 and $11.7, respectively.
The Company is present in approximately 55 tax jurisdictions, and at any point in time is subject to several audits at
various stages of completion. As a result, the Company evaluates tax positions and establishes liabilities for UTBs that may be
challenged by local authorities and may not be fully sustained, despite a belief that the underlying tax positions are fully
supportable. UTBs are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including
progress of tax audits, developments in case law, and closing of statute of limitations. Such adjustments are reflected in the
provision for income taxes as appropriate. In fiscal 2018 and 2017, the Company recognized a tax benefit of $53.3 and $12.3
respectively associated with the settlement of tax audits in multiple jurisdictions and the expiration of foreign and state statutes
of limitation. The Company has open tax years ranging from 2009 and forward.
On the basis of information available at June 30, 2018, it is reasonably possible that a decrease of up to $9.0 in UTBs
related to U.S. and foreign exposures may be necessary within the coming year. It is also possible the ongoing audits by tax
authorities may result in increases or decreases to the balance of UTBs. Since it is common practice to extend audits beyond the
Statute of Limitations, the Company is unable to predict the timing or conclusion of these audits and, accordingly, the Company
is unable to estimate the amount of changes to the balance of UTBs that are reasonably possible at this time. However, the
Company believes it has adequately provided for its UTBs for all open tax years in each tax jurisdiction.
On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act” (“Tax Act”) was enacted. The Tax Act
significantly revises the U.S. corporate income tax system by, amongst other things, reducing the federal tax rate on U.S.
earnings to 21%, implementing a modified territorial tax system and imposing a one-time deemed repatriation tax on historical
earnings generated by foreign subsidiaries that have not been repatriated to the U.S.
As a result of the 2017 Tax Act changing the U.S. to a modified territorial tax system, the Company no longer asserts that
any of its undistributed foreign earnings are permanently reinvested. We do not expect to incur significant withholding or state
taxes on future distributions. To the extent there remains a basis difference between the financial reporting and tax basis of an
investment in a foreign subsidiary after the repatriation of the previously taxed income of $4,500.0, the Company is
permanently reinvested.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on
accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year
from the enactment date of the Tax Act for companies to complete the accounting under ASC 740. In accordance with SAB 118,
a company must reflect the income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete.
To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine
a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a
provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the
provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with the Company’s initial analysis of the impact of the Tax Act, the Company estimates the overall impact
to be approximately $41.0 from a financial statement perspective and neutral from a cash perspective for fiscal 2018. The
Company expects to fully offset the cash impact of the one-time deemed repatriation tax with tax attributes (e.g., net operating
loss carryforwards, net operating losses generated in fiscal 2018, foreign tax credits, etc.). The expense in the financial
statements as a result of utilizing these tax attributes of approximately $311.0 is expected to be largely offset by the tax benefit
estimated on the revaluation of its deferred taxes of approximately $270.0. For various reasons that are discussed more fully
below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. Where the
Company was able to make reasonable estimates of the effects of elements for which the analysis is not yet complete,
provisional adjustments were recorded. These provisional estimates may be affected by other elements related to the Tax Act,
including, but not limited to, the state tax effect of adjustments made to federal temporary differences, confirming the amount
of fiscal 2018 foreign earnings that will be subject to the one-time deemed repatriation tax, the division of foreign earnings
subject to the repatriation tax between cash and non-liquid assets, and validating the amount of tax attributes the Company
expects to utilize against the repatriation tax.
F-44
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
As the Company finalizes the analysis of the impact of the Tax Act, additional 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 Tax Act requires a U.S. shareholder of a foreign corporation to include in income its global intangible low-taxed
income (“GILTI”). In general, GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed
return on tangible assets. As a result of recently released FASB guidance, an entity may choose to recognize deferred taxes for
temporary differences expected to reverse as GILTI in future years or an entity can elect to treat GILTI as a period cost and
include it in the tax expense of the year it is incurred. As such, the Company has elected to treat the tax on GILTI as a tax
expense in the year it is incurred rather than recognizing deferred taxes.
16. INTEREST EXPENSE, NET
Interest expense, net for the years ended June 30, 2018, 2017 and 2016 is presented below:
Interest expense
Foreign exchange (gain) losses, net of derivative contracts (a)
Interest income
Total interest expense, net
Year Ended June 30,
2018
2017
2016
$
$
287.1
(8.5)
(13.6)
265.0
$
$
219.6
$
3.4
(4.4)
218.6
$
112.9
(26.9)
(4.1)
81.9
(a) In the years ended June 30, 2018 and 2016, the Company recorded gains of $1.4 and $11.1, respectively, related to short-term forward
contracts to exchange euros for U.S. dollars to facilitate the repayment of U.S. dollar denominated debt. Fluctuations in exchange rates
between the dates the short-term forward contracts were entered into and the settlement date resulted in a gain upon settlement of $1.4 and
$11.1 included within total Interest expense, net for the fiscal years end June 30, 2018 and 2016, respectively in the Company’s
Consolidated Statements of Operations.
17. EMPLOYEE BENEFIT PLANS
Savings and Retirement Plans - The Company’s Savings and Retirement Plans include a U.S. defined contribution plan
for employees primarily in the U.S. and international savings plans for employees in certain other countries. In the U.S., hourly
and salary based employees are eligible to participate in the plan after 90 days of service and the Company matches 100% of
employee contributions up to 6.0% of employee compensation. In addition, the Company makes contributions to the plan on
behalf of employees determined by their age and compensation.
During fiscal 2018, 2017 and 2016, the defined contribution expense for the U.S. defined contribution plan was $22.0,
$20.6 and $12.7, respectively, and the defined contribution expense for the international savings plans was $18.3, $13.3 and
$5.7, respectively.
Pension Plans - The Company sponsors contributory and noncontributory defined benefit pension plans covering certain
U.S. and international employees primarily in Austria, France, Germany, the Netherlands, Spain and Switzerland. Participants
in the U.S. defined benefit pension plan no longer accrue benefits. The Company measures defined benefit plan assets and
obligations as of the date of the Company’s fiscal year-end. The Company’s defined benefit pension plans are funded primarily
through contributions from the Company after consideration of recommendations from the pension plans’ independent actuaries
and are funded at levels sufficient to comply with local requirements.
Settlements and Curtailments for Pension Plans
The Company settled obligations to U.S. Del Laboratories, Inc. pension plan (the “Del Plan”) participants during the first
and second quarters of fiscal year 2017 resulting in the recognition of pre-tax settlement losses of $15.9, included in Selling,
general and administrative expenses in the Consolidated Statement of Operations for the year ended June 30, 2017. As of
December 31, 2016, the Del Plan had been fully terminated as a result of these actions.
Additionally during fiscal year 2017, the Company recognized a curtailment gain of $1.8 in connection with involuntary
employee terminations as part of the Acquisition Integration Program, which significantly reduced the expected years of future
service of employees within one of the Company’s international pension plans. The curtailment gain is included in
Restructuring costs in the Company’s Consolidated Statements of Operations for the year ended June 30, 2017. Refer to Note 6
—Restructuring Costs for further information about the Acquisition Integration Program.
F-45
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
P&G Beauty Business Employee Benefit Plans
In connection with the P&G Beauty Business acquisition, the Company assumed certain international pension and other
post-employment benefit plan obligations and assets. The assumed benefit plans resulted in liabilities of $404.1, representing
the aggregate funded status of these plans as of the date of acquisition.
As part of Global Integration Activities initiated during fiscal 2017, we concluded that our restructuring actions resulted in
a significant reduction of future services of active employees primarily in our non-U.S. pension plans. As a result, we
recognized net settlement and curtailment gains of $0.4 and $0.4, respectively, in restructuring costs during fiscal 2017.
Other Post-Employment Benefit Plans (“OPEB”) - The Company provides certain post-employment health and life
insurance benefits for certain employees and spouses principally in the U.S., France, and Canada if certain age and service
requirements are met. Estimated benefits to be paid by the Company are expensed over the service period of each employee
based on calculations performed by an independent actuary. In addition, the Company has a supplemental retirement plan and a
termination benefit plan for selected salaried employees.
Settlements and Curtailments for OPEB Plans
The Company amended one of our non-U.S. postretirement healthcare plans during fiscal 2018, which significantly
reduced the expected years of future service for employees participating in the plan. The amendment triggered a curtailment
gain of $10.4, which is included in Selling, general and administrative expenses in the Consolidated Statement of Operations
for the year ended June 30, 2018.
The aggregate reconciliation of the projected benefit obligations, plan assets, funded status and amounts recognized in the
Company’s Consolidated Financial Statements related to the Company’s pension plans and other post-employment benefit
plans is presented below:
F-46
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Pension Plans
U.S.
International
Other Post-
Employment Benefits
Total
2018
2017
2018
2017
2018
2017
2018
2017
Change in benefit obligation
Benefit obligation—July 1
$
18.8
$
82.1
$
708.8
$
203.6
$
63.8
$
47.7
$
791.4
$
333.4
Service cost
Interest cost
Plan participants’ contributions
Benefits paid
Premiums paid
Pension curtailment
Pension settlements
Actuarial (gain) loss
Acquired obligations(a)
Effect of exchange rates
Other
—
0.7
—
—
1.6
—
38.8
12.6
7.1
(1.3)
(2.5)
(29.6)
—
—
—
(0.7)
—
—
—
—
—
(60.2)
(2.2)
—
—
—
(2.7)
0.3
(1.0)
(6.3)
—
4.6
—
34.8
6.6
15.0
(9.6)
(2.9)
(2.2)
(23.0)
(80.9)
557.4
10.1
(0.1)
1.4
2.0
0.2
(1.6)
—
(10.4)
—
(2.5)
—
0.3
—
1.9
1.8
0.2
(2.0)
—
—
—
(1.4)
15.4
0.1
0.1
40.2
15.3
7.3
(32.5)
(2.7)
(10.1)
(1.0)
(9.5)
—
4.9
—
36.7
10.0
15.2
(14.1)
(2.9)
(2.2)
(83.2)
(84.5)
572.8
10.2
—
Benefit obligation—June 30
$
17.5
$
18.8
$
732.6
$
708.8
$
53.2
$
63.8
$
803.3
$
791.4
Change in plan assets
Fair value of plan assets—July 1
$
— $
53.2
$
234.2
$
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Premiums paid
Plan settlements
Acquired plan assets(a)
Effect of exchange rates
Other
Fair value of plan assets—June 30
—
1.3
—
(1.3)
—
—
—
—
—
—
(0.8)
10.1
—
(2.5)
—
(60.2)
—
—
0.2
—
18.8
37.1
7.1
(29.2)
(2.7)
(1.0)
—
(2.5)
—
42.4
10.6
29.8
15.0
(9.6)
(2.9)
(23.0)
168.3
3.6
—
$
0.4
—
1.4
0.2
$
— $
234.6
$
—
1.8
0.2
18.8
39.8
7.3
(1.6)
(2.0)
(32.1)
—
—
—
—
—
0.4
—
—
0.4
—
—
0.4
(2.7)
(1.0)
—
(2.5)
—
95.6
9.8
41.7
15.2
(14.1)
(2.9)
(83.2)
168.7
3.6
0.2
261.8
234.2
262.2
234.6
Funded status—June 30
$
(17.5) $
(18.8) $ (470.8) $ (474.6) $
(52.8) $
(63.4) $ (541.1) $ (556.8)
(a) As a result of the acquisition of the P&G Beauty Business, the Company acquired certain international pension plans during Fiscal 2017.
See Note 3—Business Combinations for additional information.
With respect to the Company’s pension plans and other post-employment benefit plans, amounts recognized in the
Company’s Consolidated Balance Sheets as of June 30, 2018 and 2017, are presented below:
Noncurrent assets
Current liabilities
Noncurrent liabilities
Funded status
AOC(L)/I
Pension Plans
U.S.
International
Other Post-
Employment
Benefits
Total
2018
2017
2018
2017
2018
2017
2018
2017
$
— $
— $
1.1
$
0.5
$
— $
— $
1.1
$
0.5
(1.3)
(16.2)
(17.5)
1.7
(1.3)
(17.5)
(18.8)
2.5
(5.5)
(4.9)
(466.4)
(470.2)
(470.8)
(474.6)
44.7
25.1
(2.1)
(50.7)
(52.8)
20.1
(1.9)
(61.5)
(63.4)
23.9
(8.9)
(8.1)
(533.3)
(549.2)
(541.1)
(556.8)
66.5
51.5
Net amount recognized
$
(15.8) $
(16.3) $ (426.1) $ (449.5) $
(32.7) $
(39.5) $ (474.6) $ (505.3)
F-47
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The accumulated benefit obligation for the U.S. defined benefit pension plans was $17.5 and $18.8 as of June 30, 2018 and
2017, respectively. The accumulated benefit obligation for international defined benefit pension plans was $669.1 and $640.6 as
of June 30, 2018 and 2017, respectively.
Pension plans with accumulated benefit obligations in excess of plan assets and projected benefit obligations in excess of
plan assets are presented below:
Pension plans with accumulated benefit
obligations in excess of plan assets
Pension plans with projected benefit
obligations in excess of plan assets
U.S.
International
U.S.
International
2018
2017
$
17.5
17.5
—
18.8
18.8
—
2018
$ 713.9
2017
$ 695.0
$
657.8
247.0
631.6
223.9
2018
2017
$
17.5
17.5
—
18.8
18.8
—
2018
$ 725.0
2017
$ 705.6
669.1
254.2
640.6
230.4
Projected benefit obligation
$
Accumulated benefit obligation
Fair value of plan assets
Net Periodic Benefit Cost
The components of net periodic benefit cost for pension plans and other post-employment benefit plans recognized in the
Consolidated Statements of Operations are presented below:
Year Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service (credit)
cost
Amortization of net loss (gain)
Settlements loss (gain) recognized
Curtailment (gain) loss recognized
Net periodic benefit cost
Pension Plans
U.S.
2017
2016
2018
2018
$ — $ — $ — $38.8
12.6
(7.5)
0.7
1.6
— (0.9)
3.4
(2.6)
International
2017
$34.8
6.6
(6.3)
2016
$ 6.5
3.6
(1.1)
Other Post-
Employment Benefits
2018
2016
2017
2018
$40.2
$ 1.1
$ 1.9
$ 1.4
1.9
1.8
2.0
15.3
— (7.5)
—
—
Total
2017
$36.7
10.0
(7.2)
—
(0.7)
—
2.3
— 15.9
—
—
$ — $18.9
—
1.2
—
—
$ 2.0
0.2
0.2
1.2
4.2
— (0.5)
(2.2)
0.1
$36.8
$45.4
(5.9)
0.2
(0.1)
2.6
0.1
—
— (10.4)
(5.9)
(5.9)
—
0.1
—
—
— (1.8)
(10.3)
$(13.0) $ (2.1) $ (4.7) $32.4
$11.9
(5.7)
(5.7)
0.4
6.6
— 15.4
(2.2)
$53.6
2016
$ 7.6
8.9
(3.7)
(5.7)
3.8
0.1
(1.8)
$ 9.2
Pre-tax amounts recognized in AOC(L)/I, which have not yet been recognized as a component of net periodic benefit cost
are presented below:
Pension Plans
U.S.
International
Other Post-
Employment
Benefits
Total
2018
2017
2018
2017
2018
2017
2018
2017
Net actuarial (loss) gain
Prior service (cost) credit
Total recognized in AOC(L)/I
$
$
1.7
—
1.7
$
$
2.5
—
2.5
$
$
46.7
$
27.4
$
3.8
$
1.7
$
52.2
$
(2.0)
(2.3)
16.3
22.2
14.3
44.7
$
25.1
$
20.1
$
23.9
$
66.5
$
31.6
19.9
51.5
Changes in plan assets and benefit obligations recognized in OCI/(L) during the fiscal year are presented below:
F-48
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Pension Plans
U.S.
International
Other Post-
Employment Benefits
Total
2018
2017
2018
2017
2018
2017
2018
2017
Net actuarial (loss) gain
$
0.7
$
0.4
$
17.8
$
85.2
$
2.3
$
1.4
$
20.8
$
87.0
Amortization of prior service
cost (credit)
Recognized net actuarial loss
(gain)
Effect of exchange rates
Total recognized in OCI/(L)
$
—
(0.6)
—
0.1
—
17.6
—
0.2
1.2
0.3
0.2
3.7
2.7
(5.9)
(0.1)
0.1
(5.9)
(5.7)
(5.7)
0.1
0.3
0.5
0.4
21.4
3.0
$
18.0
$
19.5
$
91.8
$
(3.6) $
(4.1) $
16.0
$
105.7
Amounts in AOCI/(L) expected to be amortized as components of net periodic benefit cost during fiscal 2019 are presented
below:
Pension Plans
U.S.
International
Other Post-
Employment
Benefits
Total
Prior service (cost) credit
Net gain (loss)
Total
$
$
— $
0.7
0.7
$
(0.2) $
(0.4)
(0.6) $
5.9
0.1
6.0
$
$
5.7
0.4
6.1
Pension and Other Post-Employment Benefit Assumptions
The weighted-average assumptions used to determine the Company’s projected benefit obligation above are presented
below:
Pension Plans
U.S.
International
Other Post-Employment
Benefits
Discount rates
Future compensation
growth rates
2018
4.0%
N/A
2017
3.6%
N/A
2018
2017
2018
2017
0.6%-8.0%
0.4%-7.5%
2.3%-4.2%
1.9%-7.6%
1.5%-5.8%
0%-6.0%
N/A
N/A
The weighted-average assumptions used to determine the Company’s net periodic benefit cost in fiscal 2018, 2017 and
2016 are presented below:
2018
U.S.
2017
Pension Plans
International
Other Post-
Employment Benefits
2016
2018
2017
2016
2018
2017
2016
Discount rates
3.6%
3.3%-3.8% 4.1%-4.5%
0.4%-7.5%
0.2%-7.8% 1.0%-2.7% 1.9%-7.6% 1.4%-8.0% 4.1%-4.6%
Future compensation
growth rates
Expected long-term
rates of return on
plan assets
N/A
N/A
N/A
1.5%-6.0%
1.5%-5.8% 1.5%-2.5%
N/A
N/A
N/A
N/A
N/A
5.1%
1.8%-8.2%
1.6%-6.0% 2.3%-4.3%
N/A
N/A
N/A
F-49
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The health care cost trend rate assumptions have a significant effect on the amounts reported.
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend
rate)
Year that the rate reaches the ultimate trend rate
Year Ended June 30,
2018
7.4%-8.5%
2017
7.2%-7.4%
2016
7.2%-7.4%
5%
2026
5%
2025
5%
2024 - 2025
A one-percentage point change in assumed health care cost trend rates would have the following effects:
Effect on total service cost and interest cost
Effect on post-employment benefit obligation
Pension Plan Investment Policy
One
Percentage
Point Increase
6.1
$
0.4
One
Percentage
Point Decrease
(5.3)
$
(0.4)
The Company’s investment policies and strategies for plan assets are to achieve the greatest return consistent with the
fiduciary character of the plan and to maintain a level of liquidity that is sufficient to meet the need for timely payment of
benefits. The goals of the investment managers include minimizing risk and achieving growth in principal value so that the
purchasing power of such value is maintained with respect to the rate of inflation.
The pension plan’s return on assets is based on management’s expectations of long-term average rates of return to be
achieved by the underlying investment portfolios. In establishing this assumption, management considers historical and
expected returns for the assets in which the plan is invested, as well as current economic and market conditions.
The asset allocation decision includes consideration of future retirements, lump-sum elections, growth in the number of
participants, the Company’s contributions and cash flow. These actual characteristics of the plan place certain demands upon
the level, risk and required growth of trust assets. Actual asset allocation is regularly reviewed and periodically rebalanced to
the strategic allocation when considered appropriate.
The target asset allocations for the Company’s pension plans as of June 30, 2018 and 2017, by asset category are presented
below:
Equity securities
Fixed income securities
Cash and other investments
Fair Value of Plan Assets
% of Plan Assets at Year Ended
Target
2018
2017
40%
50%
10%
41%
42%
17%
41%
39%
20%
The international pension plan assets that the Company measures at fair value on a recurring basis, based on the fair value
hierarchy as described in Note 2—Summary of Significant Accounting Policies, as of June 30, 2018 and 2017 are presented
below:
F-50
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Level 1
Level 2
Level 3
Total
2018
$ 63.0
2017
$ 53.4
2017
2018
2018
2018
$ — $ — $ — $ — $ 63.0
2017
2017
$ 53.4
54.6
50.5
0.9
—
0.5
—
—
—
—
—
—
—
—
—
—
54.6
50.5
0.9
0.5
— 143.7
130.2
143.7
130.2
$118.5
$104.4
$ — $ — $143.7
$130.2
$262.2
$234.6
Equity securities
Fixed income securities:
Corporate securities
Other:
Cash and cash equivalents
Insurance contracts and other
Total pension plan assets
The following is a description of the valuation methodologies used for plan assets measured at fair value:
Equity securities-The fair values reflect the closing price reported on a major market where the individual securities are
traded. These investments are classified within Level 1 of the valuation hierarchy.
Corporate securities-The fair values are based on a compilation of primarily observable market information or a broker
quote in a non-active market. These investments are primarily classified within Level 1 of the valuation hierarchy.
Cash and cash equivalents-The carrying amount approximates fair value, primarily because of the short maturity of cash
equivalent instruments. These investments are classified within Level 1 of the valuation hierarchy.
Insurance contracts and other- Includes contracts issued by insurance companies and other investments that are not
publicly traded. These investments are generally classified as Level 3 as there are neither quoted prices nor other observable
inputs for pricing. Insurance contracts are valued at cash surrender value, which approximates the contract fair value. Other
Level 3 plan assets include real estate and other alternative investment funds requiring inputs that cannot be readily derived
from observable market data due to the infrequency with which the underlying assets trade.
The Company sponsors a qualified defined benefit pension plan for all eligible Swiss employees. Retirement benefits are
provided based on employees’ years of service and earnings, or in accordance with applicable employee regulations. Consistent
with typical Swiss practice, the pension plan is funded through a guaranteed insurance contract with an insurance company
(“IC”). The IC is responsible for the investment strategy of the insurance premiums that the Company submits and does not
hold individual assets per participating employer. Assets are invested in accordance with the IC’s own strategies and risk
assessments. Under the terms of the contract, the interest rate as well as the capital value is guaranteed for each participant, with
the IC assuming any risk to the value of the underlying assets. The IC is a member of a security fund, whose purpose is to cover
any shortfall in the event they are not able to fulfill its contractual agreements. The plan assets of the Swiss plan are included in
the Level 3 valuation.
The Company also sponsors qualified defined benefit pension plans for certain eligible German employees. The
Company’s German pension plans are partially funded with plan assets held in a Contractual Trust Arrangement, under which
Company assets have been irrevocably transferred to a registered association for the exclusive purpose of securing and funding
pension obligations in Germany. The association invests primarily in publicly tradable equity and fixed income securities,
using a funding strategy that is reviewed on a regular basis.
Plan assets are also held in the Company’s other non-U.S. defined benefit pension plans. The other non-U.S. defined
benefit pension plans provide benefits primarily based on earnings and years of service and are funded in compliance with local
laws and practices. The plan assets are invested in various asset classes that are expected to produce a sufficient level of
diversification and investment return over the long term at an acceptable level of risk.
The reconciliations of Level 3 plan assets measured at fair value in fiscal 2018 and 2017 are presented below:
F-51
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
June 30,
2018
June 30,
2017
Insurance contracts:
Fair value—July 1
Plan assets from acquisitions
Return on plan assets
Purchases, sales and settlements, net
Effect of exchange rates
Fair value—June 30
Contributions
$
130.2
$
—
14.0
3.9
(4.4)
143.7
$
42.4
75.7
4.7
5.3
2.1
$
130.2
The Company plans to contribute approximately $1.3 to its remaining U.S. pension plan and expects to contribute
approximately $36.8 and $2.1 to its international pension and other post-employment benefit plans, respectively, during fiscal
2019.
Estimated Future Benefit Payments
Expected benefit payments, which reflect expected future service, as appropriate, are presented below:
Fiscal Year Ending June 30,
2019
$
2020
2021
2022
2023
2024 - 2027
Pension Plans
U.S.
International
Other Post-
Employment
Benefits
$
1.3
1.3
1.3
1.3
1.2
5.9
$
40.5
26.6
26.5
29.1
28.0
167.2
2.1
2.5
2.9
3.1
3.3
17.5
Total
$
43.9
30.4
30.7
33.5
32.5
190.6
18. DERIVATIVE INSTRUMENTS
Foreign Exchange Risk
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 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 derivatives for which hedge accounting treatment has been applied which the Company anticipates
realizing in the Consolidated Statements of Operations through fiscal 2019.
The Company enters into foreign exchange forward contracts to hedge anticipated transactions for periods consistent with
the Company’s identified exposures to minimize the effect of foreign exchange rate movements on revenues, costs and on the
cash flows that the Company receives from foreign subsidiaries and third parties where there is a high probability that
anticipated exposures will materialize. The foreign exchange forward contracts used to hedge anticipated transactions have been
designated as foreign exchange cash-flow hedges. Hedge effectiveness of foreign exchange forward contracts is based on the
forward-to-forward hypothetical derivative methodology and includes all changes in value.
The Company also continued to use certain derivatives as economic hedges of foreign currency exposure on firm
commitments and forecasted transactions, which do not qualify for hedge accounting. Although these derivatives were not
designated for hedge accounting, the overall objective of mitigating foreign currency exposure is the same for all derivative
instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes, nor is the
Company a party to leveraged derivatives. For derivatives not designated as hedging instruments, changes in fair value are
recorded in the line item in the Consolidated Statements of Operations to which the derivative relates.
Interest Rate Risk
F-52
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
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 impact of increases in the variable rates over the term of the contracts. During fiscal 2016, the Company entered into
interest rate swap contracts that have been designated as cash-flow hedges. Hedge effectiveness of interest rate swap contracts
is based on a long-haul hypothetical derivative methodology and includes all changes in value.
As of June 30, 2018 and 2017, the Company had interest rate swap contracts designated as effective hedges in the notional
amount of $2,000.0.
Hedge Accounting
Derivative financial instruments are recorded as either assets or liabilities on the Consolidated Balance Sheets and are
measured at fair value.
For derivatives accounted for as hedging instruments, the Company formally designates and documents, at inception, the
financial instrument as a hedge of specific underlying forecasted transactions, the risk management objective and the strategy
for undertaking the hedge transaction. In addition, the Company formally assesses both at inception and at least quarterly
thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair
values or cash flows of the related underlying exposures. Additionally, all of the master agreements governing the Company’s
derivative contracts contain standard provisions that could trigger early termination of the contracts in certain circumstances
which would require the Company to discontinue hedge accounting, including if the Company were to merge with another
entity and the creditworthiness of the surviving entity were to be “materially weaker” than that of the Company prior to the
merger.
For derivatives designated as cash flow hedges, changes in the fair value are recorded in AOCI/(L). Gains and losses
deferred in AOCI/(L) are then recognized in Net income (loss) in a manner that matches the timing of the actual income or
expense related to the hedging instruments with the hedged transaction. The gains and losses related to designated hedging
instruments are also recorded in the line item in the Consolidated Statements of Operations to which the derivative relates. Cash
flows from derivative instruments designated as cash flow hedges are recorded in the same category as the cash flows from the
items being hedged in the Consolidated Statements of Cash Flows.
The ineffective portion of foreign exchange forward and interest rate swap contracts are recorded in current-period
earnings. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses
accumulated in Other comprehensive income (loss) (“OCI”) are reclassified to earnings when the underlying forecasted
transaction occurs. If it is no longer probable that the forecasted transaction will occur, then any gains or losses in AOCI/(L) are
reclassified to current-period earnings. For fiscal 2018, all of the Company’s foreign exchange forward and interest rate swap
contracts designated as hedges were highly effective.
The Company also attempts to minimize credit exposure to counterparties by entering into derivative contracts with
counterparties that are major financial institutions and utilizing master netting arrangements. Exposure to credit risk in the event
of nonperformance by any of the counterparties with respect to the Company’s foreign exchange forward contracts is limited to
the fair value of contracts in net asset positions under master netting arrangements. Exposure to credit risk in the event of
nonperformance by any of the counterparties with respect to the Company’s interest rate swap contracts is limited to the fair
value of contracts in net asset positions. Accordingly, management of the Company believes risk of material loss under these
hedging contracts is remote.
Net Investment Hedge
Foreign currency gains and losses on borrowings designated as a net investment hedge, except ineffective portions, are
reported in the cumulative translation adjustment (“CTA”) component of AOCI/(L), along with the foreign currency translation
adjustments on those investments. Foreign currency denominated borrowings designated as net investment hedges had nominal
exposures of €3,204.1 million and €656.7 million as of June 30, 2018 and 2017, respectively.
Net investment hedge effectiveness is assessed based on the change in the spot rate of the foreign currency denominated
loans payable. The critical terms (underlying notional and currency) of the loans payable match the portion of the net
investments designated as being hedged. The net investment hedges were equal to the designated portions of the international
subsidiaries’ investment balances as of June 30, 2018. As such, the net investment hedges were considered to be effective, and,
as a result, the changes in the fair value were recorded within CTA on the Company’s Consolidated Balance Sheets.
F-53
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Derivative and non-derivative financial instruments which are designated as hedging instruments:
The accumulated gain (loss) on foreign currency borrowings classified as net investment hedges in the foreign currency
translation adjustment component of AOCI/(L) was $115.0 and $(23.7) as of June 30, 2018 and 2017, respectively.
The amount of gains and losses recognized in OCI in the 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
Foreign exchange forward contracts
Interest rate swap contracts
Net investment hedges
Fiscal Year Ended June 30,
2018
2017
2016
$
(0.3) $
27.0
138.7
(0.8) $
40.8
(21.2)
6.0
(36.6)
(2.5)
The accumulated gain on derivative instruments classified as cash flow hedges in AOCI/(L), net of tax, was $31.7 and
$12.6 as of June 30, 2018 and 2017, respectively. The estimated net gain related to these effective hedges that is expected to be
reclassified from AOCI/(L) into earnings, net of tax, within the next twelve months is $13.0.
The amount of gains and losses reclassified from AOCI/(L) to the Consolidated Statements of Operations related to the
Company’s derivative financial instruments which are designated as hedging instruments is presented below:
Consolidated Statements of Operations
Classification of Gain (Loss) Reclassified from AOCI/(L)
Foreign exchange forward contract:
Net revenues
Cost of sales
Interest rate swap contracts:
Interest income (expense), net
Derivatives not designated as hedging instruments:
Fiscal Year Ended June 30,
2017
2018
2016
$
(0.8) $
(0.7)
$
2.4
(2.2)
5.5
0.7
6.9
(9.3)
(7.7)
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging
instruments is presented below:
Consolidated Statements of Operations
Classification of Gain (Loss) Recognized in Operations
Fiscal Year Ended June 30,
2017
2016
2018
Selling, general and administrative
Interest income (expense), net
Other income (expense), net (a)
$
(0.8) $
17.5
0.2
(0.1) $
(6.5)
(1.1)
1.8
(11.3)
(29.3)
(a) During fiscal 2016, the Company recognized $29.6 of realized losses on foreign currency forward contracts related to an advanced payment
for the Hypermarcas Brands.
19. MANDATORILY REDEEMABLE FINANCIAL INTEREST
United Arab Emirates subsidiary
The Company is required under a 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. The Company has determined such shares to be a mandatorily redeemable financial
instrument (“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 June 30, 2018 and 2017, the liability amounted to $8.2 and
$5.2, respectively, of which $6.7 and $4.7, respectively, was recorded in Other noncurrent liabilities and $1.5 and $0.5,
respectively, was recorded in Accrued expenses and other current liabilities.
F-54
The assets of the U.A.E. subsidiary are restricted in that they are not available for general business use outside the context
of the U.A.E. subsidiary and creditors (or beneficial interest holders) do not have recourse to the Company or to its other assets.
The U.A.E. subsidiary has total assets and total liabilities of $33.2 and $20.2 as of June 30, 2018, and $22.8 and $16.5 as of
June 30, 2017, respectively.
Southeast Asian subsidiary
On May 23, 2017, the Company entered into the Sale of Shares and Termination Deed (the “Termination Agreement”) to
purchase the remaining 49% noncontrolling interest from the noncontrolling interest holder of a certain Southeast Asian
subsidiary for a purchase price of $45.0. Additionally, all remaining retained earnings will be paid out as dividends prior to the
purchase. The payment and termination will be effective on June 30, 2019. As a result of the Termination Agreement, the
noncontrolling interest balance is recorded as an MRFI. The MRFI balance will be accreted to the redemption value until the
effective date of the purchase with changes in the balance being reflected in Other income (expense) in the Consolidated
Statements of Operations.
As of June 30, 2018 and 2017, the MRFI liability amounted to $45.1 and $49.3, respectively, of which $0.0 and $41.7,
respectively, was recorded in Other noncurrent liabilities and $45.1 and $7.6, respectively, was recorded in Accrued expenses
and other current liabilities.
20. REDEEMABLE NONCONTROLLING INTERESTS
As of June 30, 2018, the redeemable noncontrolling interests (“RNCI”) consist of interests in a consolidated subsidiary in
the Middle East and in the consolidated subsidiaries related to the Younique acquisition. See Note 3—Business Combinations.
Younique
On February 1, 2017, after the close of the acquisition, the pre-acquisition Younique membership holders had a 40.0%
membership interest in Foundation. On October 15, 2017, shares of Foundation were issued to employees of Younique under a
stock ownership program and incentive stock grants were granted, resulting in a 0.7% increase to the noncontrolling interest
ownership percentage. During the quarter ended March 31, 2018, additional shares of Foundation were issued and additionally
shares were forfeited under the program resulting in a net decrease of 0.1% to the noncontrolling interest ownership percentage.
The cumulative impact of the additional shares for the nine months ended March 31, 2018 was recorded as an increase to RNCI
of $7.6, a decrease in APIC of $7.4 and cash proceeds of $0.2.
The Company accounts for the 40.6% noncontrolling interest portion of Foundation as RNCI due to the noncontrolling
interest holder’s ability to put their shares to the Company in certain circumstances. While Foundation is a majority-owned
consolidated subsidiary, the Company records income tax expense based on the Company’s 59.4% membership interest in
Foundation due to its treatment as a partnership for U.S. income tax purposes. Accordingly, Foundation’s net income
attributable to RNCI is equal to the 40.6% noncontrolling interest of Foundation’s net income excluding a provision for income
taxes. On December 22, 2017, the Tax Act was enacted, which included a reduction of the U.S. corporate tax rate. The tax rate
change was the primary driver of a $79.2 adjustment to the fair value of the RNCI balance for the quarter ended December 31,
2017. The Company recognized $597.7 and $481.6 as the redeemable noncontrolling interest balances as of June 30, 2018 and
2017, respectively.
The Company has the right to purchase the RNCI in Foundation from the RNCI holders (each such right, a “Foundation
Call right”) upon the occurrence of certain events that are not in the Company’s control. In addition to the Foundation Call right
features, the noncontrolling interest holders of Foundation have the right to sell the noncontrolling interests to the Company
upon the occurrence of certain events (each such right, a “Foundation Put right”).
The amount at which the Foundation Put right and Foundation Call right can be exercised is based on a fair value at the
exercise date, multiplied by the noncontrolling interest holder’s percentage interest in Foundation. In certain circumstances the
Foundation Put right or the Foundation Call right may be exercised at a discount or a premium. Currently management views
the possibility of these circumstances occurring as remote. The noncontrolling interests are redeemable outside of the
Company’s control and are recorded in the Consolidated Balance Sheets at the estimated fair value. The Company adjusts
Foundation’s RNCI to the fair values at the end of each reporting period with changes recognized as adjustments to APIC.
The Company uses an income approach, a market approach or a combination of these approaches to estimate the fair value
of the Foundation RNCI. The income approach is used to determine the fair value of the Foundation RNCI using a discounted
cash flow method, projecting future cash flows of the business, as well as a terminal value, and discounting such cash flows at a
rate of return that reflects the relative risk of the cash flows. For the market approach the Company uses a selected multiple
based on comparable companies multiplied by the forecasted cash flows. The key estimates and factors used in this approach
F-55
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
include, but are not limited to, revenue growth rates and profit margins based on our internal forecasts and the entity specific
weighted-average cost of capital used to discount future cash flows.
Subsidiary in the Middle East
As of July 1, 2017, the amended shareholders’ agreement relating to the Company’s subsidiary in the Middle East (“Middle
East Subsidiary”) reduced the percentage of the noncontrolling interest holder’s share to 25% in exchange for Coty contributing
the brands acquired as part of the P&G Beauty Business acquisition to the subsidiary’s portfolio of brands. This resulted in a
dilution of the RNCI that resulted in a decrease of the RNCI and an increase of APIC of $17.0. The Company has the ability to
exercise the Call right for the remaining noncontrolling interest of 25% on December 31, 2028, with such transaction to close
on December 31, 2029. In addition to the Call right feature, the noncontrolling interest holder has the right to sell the
noncontrolling interest to the Company on December 31, 2028, with such transaction to close on December 31, 2029 (a “Put
right”). The amount at which the Put right and Call right can be exercised is based on a formula prescribed by the amended
shareholders’ agreement as summarized in the table below, multiplied by the noncontrolling interest holder’s percentage interest
in the Middle East Subsidiary. Given the provision of the Put right, the entire noncontrolling interest is redeemable outside of
the Company’s control and is recorded in the Consolidated Balance Sheets at the estimated redemption value. The Company
adjusts the redeemable noncontrolling interest to the redemption values at the end of each reporting period with changes
recognized as adjustments to APIC. The Company recognized $63.6 and $70.2 as the redeemable noncontrolling interest
balances as of June 30, 2018 and 2017, respectively.
Percentage of redeemable noncontrolling interest
Earliest exercise date(s)
Formula of redemption value
Middle East
25.0% (a)
December 2028 (b)
3-year average of EBIT (c) * 6
(a) Upon the effective date of the amendment (July 1, 2017), the parties will be entitled to call or put the remaining interest in July 2028. The
Put right and Call right will be exercised in respect of the noncontrolling interest holder’s percentage of shares of the Middle East
subsidiary at the time of the exercise.
(b) Upon the effective date of the amendment (July 1, 2017), the parties will be entitled to call or put the noncontrolling interest holder’s
percentage of shares of the subsidiary in December 2028.
(c) EBIT is defined in the amended shareholders’ agreement as the consolidated net earnings before interest and income tax.
21. EQUITY
Common Stock
As of June 30, 2018, 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. Prior to September 30, 2016, the Company had
Class B Common Stock outstanding. As of June 30, 2018, total authorized shares of Class A Common Stock was 1,000.0
million and total outstanding shares of Class A Common Stock was 750.7 million.
In the fiscal years ended June 30, 2018, 2017, and 2016, the Company issued 2.9 million, 2.5 million, and 4.7 million
shares of its Class A Common Stock, respectively, and received $22.6, $21.3, and $40.9, in cash, respectively, in connection
with the exercise of employee stock options and settlement of RSUs and special incentive awards.
On October 1, 2016, the Company issued 409.7 million shares of Class A Common Stock in connection with the closing of
the P&G Beauty Business acquisition as described in Note 3—Business Combinations.
On September 30, 2016, JABC converted all of its shares of Class B Common Stock of the Company into shares of Class A
Common Stock of the Company. The Company issued approximately 262.0 million shares of Class A Common Stock to JABC
upon the conversion of JABC’s shares of Class B Common Stock.
Prior to October 1, 2016, the Company was a majority-owned subsidiary of JAB Cosmetics B.V. (“JABC”). Both JABC
and the shares of the Company held by JABC are indirectly controlled by Lucresca SE, Agnaten SE and JAB Holdings B.V.
(“JAB”). During the fiscal years ended June 30, 2018 and 2017, JABC acquired 14.9 million and 2.6 million shares,
respectively, of Class A Common Stock in the open market. The Company did not receive any proceeds from these stock
purchases conducted by JABC. As of June 30, 2018, the Company was not a majority-owned subsidiary of JAB.
On September 29, 2016, the Company filed with the Secretary of State of the State of Delaware a Certificate of
Amendment to the Company’s Amended and Restated Certificate of Incorporation amending the Amended and Restated
F-56
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Certificate of Incorporation of the Company to increase the number of authorized shares of Class A Common Stock from 800.0
million shares to 1,000.0 million shares.
Preferred Stock
As of June 30, 2018, the Company’s preferred stock consisted of Series A Preferred Stock with a par value of $0.01. The
Series A Preferred Stock is not entitled to receive any dividends and has no voting rights except as required by law.
On May 18, 2018, the Company reduced the total authorized number of shares of Series A Preferred Stock from 6,506,106
to 6,319,641.
The Series A Preferred Stock are issued to executive officers and directors under subscription agreements. Generally, the
subscription agreements entitle the holder of the vested Series A Preferred Stock to exchange the Series A Preferred Stock into
either cash or shares of Class A Common Stock, at the election of the Company, at the exchange value. The exchange value
generally is equal to the difference between the 10-day trailing average closing price of a share of Class A Common Stock on
the date of exchange and a predetermined hurdle price. The Series A Preferred Stock generally vests on the fifth anniversary of
issuance, subject to continued employment with the Company and investment by the holder in shares of Class A Common
Stock throughout the vesting period. To the extent the Company controls whether such shares will be settled in cash or equity
and intends to settle the grant in equity, the grant is treated as an equity grant, otherwise the grant is treated as a liability grant.
The following table summarizes the key terms of each issuance of Series A Preferred Stock:
Issuance Date
Number of Shares
Awarded at Grant Date
(millions of shares)
Number of Shares
Outstanding (millions
of shares)
April 2015 (a)
April 2015 (a)
November 25, 2016 (b)
February 16, 2017 (b)
March 27, 2017 (b) (c)
November 16, 2017 (b)
6.8
0.6
1.0
0.5
1.0
1.0
1.1
0.6
1.0
0.3
1.0
1.0
Hurdle Price per Share
27.97
$
$
$
$
$
$
26.87
22.34
22.66
22.39
19.85
(a) If the holder does not exchange the vested Series A Preferred Stock by a specified expiration date, the Company must automatically
exchange the Series A Preferred Stock into cash for the pro-rata portion of the grants attributable to services rendered by the holder within
the United States. The portion related to service outside the United States, may be settled in cash or shares, at election of the Company.
(b) If the holder does not exchange the vested Series A Preferred Stock by a specified expiration date, the Company must automatically
exchange the Series A Preferred Stock into cash or shares, at election of the Company.
(c) This grant was sold to Lambertus J.H. Becht (“Mr. Becht”), the Company’s Chairman of the Board. Under the terms provided in the
subscription agreement, the Series A Preferred Stock immediately vested on the grant date and the holder may exchange the vested shares
after the fifth anniversary of the date of issuance. The Company requires shareholder approval in order to settle the exchange in shares of
Class A Common Stock. Therefore, the award is classified as a liability as of June 30, 2018. An expense (income) of $(1.7) and $3.8 was
recorded during fiscal 2018 and 2017, respectively, and has been included in Selling, general and administrative expense on the
Consolidated Statements of Operations.
As of June 30, 2018, total authorized shares of Series A Preferred Stock are 6.3 million and total outstanding shares of
Series A Preferred Stock are 5.0 million. Of the 5.0 million outstanding shares of Series A Preferred Stock, 1.0 million shares
vested on March 27, 2017, 1.7 million shares vest on April 15, 2020, 1.0 million shares vest on November 25, 2021, 0.3 million
shares vest on February 16, 2022 and 1.0 million shares vest on November 16, 2022. As of June 30, 2018, the Company
classified $2.7 Series A Preferred Stock as equity and $4.3 as a liability, inclusive of the related cash bonuses, recorded in Other
noncurrent liabilities in the Consolidated Balance Sheet.
Dividends
Prior to October 2016, the Company declared annual cash dividends in the first quarter of the fiscal year. Beginning after
October 2016, the Company began declaring cash dividends on a quarterly basis.
The Transaction Agreement restricted the Company’s ability to declare, make or pay any dividends, other than in the
ordinary course and for an amount not to exceed $0.25 per share prior to the closing of the P&G Beauty Business transaction,
without P&G consent. In July 2016, P&G provided consent to the Company’s dividend declared on August 1, 2016.
The following dividends were declared during fiscal years 2018, 2017 and 2016:
F-57
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Dividend
Type
Dividend
Per
Share
Holders of Record
Date
Dividend
Value
Dividend Payment
Date
Dividends
Paid
Dividends
Payable (a)
Quarterly
Quarterly
Quarterly
Quarterly
Annual
Quarterly
Quarterly
Quarterly
$
$
$
$
$
$
$
$
$
$
0.125
September 1, 2017
0.125 November 30, 2017
February 28, 2018
May 31, 2018
0.125
0.125
0.500
0.275
August 11, 2016
0.125 December 19, 2016
February 28, 2017
May 31, 2017
0.125
0.125
0.650
$
$
$
$
$
$
$
$
$
$
94.4
September 14, 2017
94.6 December 14, 2017
March 15, 2018
June 14, 2018
94.6
94.6
378.2
93.4
August 19, 2016
94.0 December 28, 2016
March 10, 2017
June 13, 2017
94.0
94.0
375.4
$
$
$
$
$
$
$
$
$
$
93.6
93.7
93.8
93.8
374.9
92.4
93.4
93.4
93.4
372.6
$
$
$
$
$
$
$
$
$
$
0.8
0.9
0.8
0.8
3.3
1.0
0.6
0.6
0.6
2.8
Declaration Date
Fiscal 2018
August 22, 2017
November 9, 2017
February 8, 2018
May 9, 2018
Fiscal 2018
Fiscal 2017
August 1, 2016
December 9, 2016
February 9, 2017
May 10, 2017
Fiscal 2017
Fiscal 2016
September 11, 2015
Annual
$
0.250
October 1, 2015
$
90.1
October 15, 2015
$
89.0
$
1.1
(a) The dividend payable is the value of the remaining dividends payable upon settlement of the RSUs and phantom units outstanding as of the
Holders of Record Date. Dividends payable are recorded as Accrued expense and other current liabilities and Other noncurrent liabilities in
the Consolidated Balance Sheet.
The Company decreased the dividend accrual recorded in a prior period by $0.9 to adjust for the payment of previously
accrued dividends on RSUs that vested during the twelve months ended June 30, 2018. Additionally, the Company decreased
the dividend accrual recorded in a prior period by $0.6, $0.4 and $0.3 to adjust for accrued dividends on RSUs no longer
expected to vest, which was recorded as an increase to APIC in the Consolidated Balance Sheet as of June 30, 2018, 2017 and
2016, respectively.
Total accrued dividends on unvested RSUs and phantom units of $0.8 and $5.2, $1.0 and $3.2 and nil and $1.8 are included
in Accrued expense and other current liabilities and Other noncurrent liabilities, respectively, in the Condensed Consolidated
Balance Sheet as of June 30, 2018, 2017 and 2016, respectively.
F-58
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Accumulated Other Comprehensive Income (Loss)
Foreign Currency Translation
Adjustments
(Losses) Gains
on Cash Flow
Hedges
(Losses) Gains
on Net
Investment
Hedge
Foreign
Currency
Translation
Adjustments
Pension and
Other Post-
Employment
Benefit Plans
Total
(28.9) $
(2.5) $
(164.0) $
(44.3) $
(239.7)
$
$
Beginning balance at July 1, 2016
Other comprehensive income before
reclassifications
Net amounts reclassified from AOCI/(L) (a)
Net current-period other comprehensive
income
Ending balance at June 30, 2017
Other comprehensive income before
reclassifications
Net amounts reclassified from AOCI/(L) (a)
Net current-period other comprehensive
income
Adjustment due to the adoption of ASU
2018-02 (Note 2)
$
35.9
5.6
41.5
12.6
19.2
(4.0)
15.2
3.9
(21.2)
—
(21.2)
(23.7) $
138.7
—
138.7
—
143.2
—
143.2
(20.8) $
(23.5)
—
(23.5)
—
$
80.5
0.1
80.6
36.3
20.8
(3.3)
17.5
2.6
238.4
5.7
244.1
4.4
155.2
(7.3)
147.9
6.5
158.8
Ending balance at June 30, 2018
$
31.7
$
115.0
$
(44.3) $
56.4
$
(a) Amortization of actuarial gains (losses) of $5.2 and $0.4, net of taxes of $1.9 and $0.3, were reclassified out of AOCI/(L) and included in
the computation of net period pension costs for the fiscal years ended June 30, 2018 and 2017, respectively (see Note 17—Employee
Benefit Plans).
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”). Subject to certain restrictions on repurchases of shares through
September 30, 2018 imposed by the tax matters agreement, dated October 1, 2016, between the Company and P&G entered into
in connection with the P&G Beauty Business acquisition, 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. As of June 30, 2018, the Company has $396.8 remaining under the Incremental Repurchase
Program. The following table summarizes the share repurchase activities during the years ended June 30, 2018, 2017 and 2016:
Period
Fiscal Year Ended June 30, 2018
Fiscal Year Ended June 30, 2017
Fiscal Year Ended June 30, 2016
Treasury Stock - Other Repurchases
Number of
shares
repurchased
(in millions)
Cost of shares
repurchased
(in millions)
Lowest fair
value of shares
repurchased
per share
Highest fair
value of shares
repurchased
per share
— $
1.4
27.4
$
$
— $
36.3
767.0
$
$
— $
25.35
25.10
$
$
—
27.40
30.35
In addition to the above mentioned repurchase activities, on December 3, 2015, the Company entered into a stock purchase
agreement with a shareholder holding more than 5% of the Company’s Class A Common Stock to repurchase 1.0 million shares
of its Class A Common Stock. On December 17, 2015, the Company remitted payment for the repurchased shares at a price of
$27.91 per share. The fair value of shares repurchased was approximately $27.9, which was recorded as an increase to Treasury
stock in the Consolidated Balance Sheets and Consolidated Statements of Equity and Redeemable Noncontrolling Interests.
22. SHARE-BASED COMPENSATION PLANS
The Company has various share-based compensation programs (the “the Compensation Plans”) under which awards,
including non-qualified stock options, Series A Preferred Stock, RSUs and other share-based awards, may be granted or shares
F-59
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
of Class A Common Stock may be purchased. As of June 30, 2018, approximately 58.6 million shares of the Company's Class A
Common Stock were available to be granted pursuant to these Plans.
The Company accounts for its share-based compensation plans for common stock as equity plans. The share-based
compensation for equity plans is estimated and fixed at the grant date, based on the estimated fair value of the award. Series A
Preferred Stock is accounted for partially as equity and partially using liability plan accounting to the extent the award is
expected to be settled in cash. Accordingly, share-based compensation expense for the liability plan awards are measured at the
end of each reporting period based on the fair value of the award on each reporting date and recognized as an expense to the
extent earned.
Total share-based compensation expense for fiscal 2018, 2017 and 2016 of $33.4, $29.0 and $35.4, respectively, is included
in Selling, general and administrative expenses in the Consolidated Statements of Operations. The related tax benefits for share-
based compensation are $2.8, $4.4, and $6.7 for fiscal 2018, 2017 and 2016, respectively. As of June 30, 2018, the total
unrecognized share-based compensation expense related to unvested stock options, Series A Preferred Stock and restricted
stock units and other share awards is $38.4, $6.4 and $72.6, respectively. The unrecognized share-based compensation expense
related to unvested stock options, Series A Preferred Stock, restricted stock units and other share awards is expected to be
recognized over a weighted-average period of 3.91, 3.38 and 3.26 years, respectively.
Nonqualified Stock Options
During fiscal 2018 and 2017, the Company granted 5.9 million and 9.3 million nonqualified stock option awards,
respectively. These options are accounted for using equity accounting whereby the share-based compensation expense is
estimated and fixed at the grant date based on the estimated value of the options using the Black-Scholes valuation model.
There were no stock options accounted for under equity plans granted during fiscal 2016.
During fiscal 2018 and 2017, the share-based compensation expense recognized on nonqualified stock options is based
upon the fair value on the grant date estimated using the Black-Scholes valuation model with the following weighted-average
assumptions:
Expected life
Risk-free interest rate
Expected volatility
Expected dividend yield
2018
7.50 years
2.19%
36.03%
2.98%
2017
7.50 years
1.60%
36.74%
1.62%
Expected life—The expected life represents the period of time (years) that options granted are expected to be outstanding,
which the Company calculates using a formula based on the vesting term and the contractual life of the respective option.
Risk-free interest rate—The Company bases the risk-free interest rate on the implied yield available on a U.S. Treasury
note with a term equal to the expected term of the underlying options.
Expected volatility—The Company calculates expected volatility based on median volatility for peer companies using
expected life daily stock price history equal to the expected life.
Expected dividend yield—The weighted-average expected dividend yield is based upon the Company’s expectation to pay
dividends over the contractual term of the options.
Nonqualified stock options generally become exercisable 5 years from the date of the grant and have a 5-year exercise
period from the date the grant becomes fully vested for a total contractual life of 10 years.
F-60
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The Company’s outstanding nonqualified stock options as of June 30, 2018 and activity during the fiscal year then ended
are presented below:
Shares
(in millions)
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Weighted
Average
Remaining
Contractual
Term (in
years)
Outstanding at July 1, 2017
Granted
Exercised
Forfeited
Outstanding at June 30, 2018
Vested and expected to vest at June 30, 2018
Exercisable at June 30, 2018
12.0
5.9
(2.3)
(2.2)
13.4
10.5
1.7
$
$
$
$
15.64
16.86
9.76
18.45
16.75
16.63
9.71
$
$
—
7.4
7.73
1.96
The grant prices of the outstanding options as of June 30, 2018 ranged from $6.40 to $20.42. The grant prices for
exercisable options ranged from $6.40 to $10.50.
A summary of the aggregated weighted-average grant date fair value of stock options granted and total intrinsic value of
stock options exercised for fiscal 2018, 2017 and 2016 is presented below:
Weighted-average grant date fair value of stock options
$
Intrinsic value of options exercised
2018
2017
2016
$
4.87
32.2
$
6.34
26.3
—
87.6
The Company’s non-vested nonqualified stock options as of June 30, 2018 and activity during the fiscal year then ended
are presented below:
Non-vested at July 1, 2017
Granted
Forfeited
Non-vested at June 30, 2018
Shares
(in millions)
Weighted
Average
Grant Date
Fair Value
8.0
$
5.9
(2.2)
11.7
$
6.33
4.87
6.27
5.60
The share-based compensation expense recognized on the nonqualified stock options is $11.9, $9.1 and $14.7 during fiscal
2018, 2017 and 2016, respectively.
Executive Ownership Programs
The Company encourages executive stock ownership through various programs. These programs govern shares of Class A
Common Stock purchased by employees (“Purchased Shares”). Employees purchased 2.0 million, 0.8 million and 0.1 million
shares in fiscal 2018, 2017 and 2016, respectively, and received matching nonqualified stock options or RSUs in accordance
with the terms of the Compensation Plans under the Omnibus LTIP. There was no share-based compensation (income) expense
recorded in connection with Purchased Shares for fiscal 2018, 2017 and 2016. Additionally, share-based compensation expense
recorded in connection with matching stock awards granted in accordance with the Compensation Plans are noted in their
respective section of this footnote.
Series A Preferred Stock
In addition to the Executive Ownership Programs discussed above, the Series A Preferred Stock are accounted for partially
as equity and partially as a liability as of June 30, 2018, 2017 and 2016 and the Company recognized an expense of $0.1, $4.4
and $2.0 in fiscal 2018, 2017 and 2016, respectively. See Note 21—Equity for additional information.
The Series A Preferred Stock were accounted for using the Black-Scholes valuation model in fiscal 2016. In fiscal 2017,
the Company granted Series A Preferred Stock that included cash bonus payments tied to the exercisability of the awards. Due
F-61
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
to the addition of cash bonus payments in connection with the grant of Series A Preferred Stock to certain executives in fiscal
2017, the Company began estimating the fair value of the Series A Preferred Stock using a binomial lattice model to value the
equity and cash bonus components of the combined instrument. The lattice structure the Company uses to value the awards
consists of (i) a common stock lattice that models the possible stock price movements from the valuation date to the maturity
date consistent with the stock price and estimated volatility on the valuation date; (ii) a share exchange lattice that calculates the
value of the common stock received on conversion; (iii) a cash exchange lattice that calculates the value of the cash bonus; and
(iv) a continuation value lattice that tracks the holding value of the combined instrument. As of June 30, 2018, the fair value of
the Company’s outstanding Series A Preferred Stock that are liability accounted were estimated with the following weighted-
average assumptions.
Expected life, in years
Expected volatility
Risk-free rate of return
Dividend yield on Class A Common Stock
Yield on cash
2018
4.52 years
35.00%
2.70%
3.55%
N/A
2017
5.86 years
30.00%
1.99%
2.67%
4.70%
Expected life, in years - The expected life represents the period of time (years) that Series A Preferred Stock granted are
expected to be outstanding, which the Company calculates using a formula based on the vesting term and the contractual life of
the respective Series A Preferred Stock.
Expected volatility - The Company calculates expected volatility based on the average of historical and implied volatilities.
Risk-free rate of return - The Company bases the risk-free rate of return on the US Constant Maturity Treasury Rate.
Dividend yield on Class A Common Stock - The Company calculated the weighted-average dividend yield on shares using
the annualized dividend rate calculated on the per share cash dividend paid quarterly and the stock price as of the valuation
date.
Yield on cash - The Company calculated the weighted-average yield of comparable securities with a similar credit rating to
the Company as of June 30, 2018 and 2017, respectively.
The fair value of the Company’s outstanding Series A Preferred Stock liability on June 30, 2016 was estimated using the
Black-Scholes valuation model with the following assumptions:
Expected life
Risk-free interest rate
Expected volatility
Expected dividend yield
2016
4.79 years
1.01%
36.74%
0.96%
Expected life -The expected life represents the period of time (years) that Series A Preferred Stock granted are expected to
be outstanding, which the Company calculates using a formula based on the vesting term and the contractual life of the
respective Series A Preferred Stock.
Risk-free interest rate-The Company bases the risk-free interest rate on the implied yield available on a U.S. Treasury note
with a term equal to the expected term of the underlying Series A Preferred Stock.
Expected volatility-The Company calculates expected volatility based on median volatility for peer companies using 4.79
years of daily stock price history as of June 30, 2016.
Expected dividend yield-The Company used an expected dividend yield based upon the Company’s expectation to pay
dividends over the contractual term of the shares of Series A Preferred Stock.
Shares of Series A Preferred Stock generally become exercisable 5 years from the date of the grant and have a 2-year
exercise period from the date the grant becomes fully vested for a total contractual life of 7 years. See Note 21—Equity for
additional information.
The Company’s outstanding Series A Preferred Shares as of June 30, 2018 and activity during the fiscal year then ended are
presented below:
F-62
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Outstanding at July 1, 2017
Granted
Forfeited
Outstanding at June 30, 2018
Vested and expected to vest at June 30, 2018
Weighted
Average
Exercise Price
24.66
$
Aggregate
Intrinsic Value
Weighted
Average
Remaining
Contractual
Term (in
years)
19.85
22.66
23.62
23.57
$
—
5.17
$
$
Shares
(in millions)
4.2
1.0
(0.2)
5.0
4.4
The Company’s non-vested shares of Series A Preferred Stock as of June 30, 2018 and activity during the fiscal year then
ended are presented below:
Non-vested at July 1, 2017
Granted
Forfeited
Non-vested at June 30, 2018
Restricted Share Units
Shares
(in millions)
Weighted
Average
Grant Date
Fair Value
3.2
$
1.0
(0.2)
4.0
$
5.19
4.12
3.63
4.99
During fiscal 2018, 3.7 million RSUs were granted under the Omnibus LTIP and 0.1 million RSUs were granted under the
2007 Stock Plan for Directors. During fiscal 2017, 2.7 million RSUs were granted under the Omnibus LTIP and 0.1 million
RSUs were granted under the 2007 Stock Plan for Directors.
The Company’s outstanding RSUs as of June 30, 2018 and activity during the fiscal year then ended are presented below:
Outstanding at July 1, 2017
Granted
Settled
Cancelled
Outstanding at June 30, 2018
Vested and expected to vest at June 30, 2018
Shares
(in millions)
Aggregate
Intrinsic
Value
Weighted
Average
Remaining
Contractual
Term
5.6
3.8
(0.7)
(1.2)
7.5
6.1
$
84.5
3.12
The share-based compensation expense recorded in connection with the RSUs was $21.4, $15.4 and $18.2 during fiscal
2018, 2017 and 2016, respectively.
F-63
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
The Company’s outstanding and non-vested RSUs as of June 30, 2018 and activity during the fiscal year then ended are
presented below:
Outstanding and nonvested at July 1, 2017
Granted
Vested
Cancelled
Outstanding and nonvested at June 30, 2018
Shares
(in millions)
Weighted
Average
Grant Date
Fair Value
5.3
$
3.8
(0.7)
(1.2)
7.2
$
21.76
16.53
16.40
20.94
19.57
The total intrinsic value of RSUs vested and settled during fiscal 2018, 2017 and 2016 is $12.5, $3.5 and $4.0, respectively.
Phantom Units
On July 21, 2015, the Board granted Lambertus J.H. Becht (“Mr. Becht”), the Company’s Chairman of the Board and
interim Chief Executive Officer (“CEO”), an award of 300,000 phantom units, in consideration of Mr. Becht’s increased and
continuing responsibilities as interim CEO of the Company. At the time of grant, the phantom units had a value of $8.1 based
on the closing price of the Company’s Class A Common Stock on July 21, 2015. Each phantom unit has an economic value
equivalent to one share of the Company’s Class A Common Stock settleable in cash or shares at the election of Mr. Becht. The
award to Mr. Becht was made outside of the Company’s Omnibus LTIP. On July 24, 2015, Mr. Becht elected to receive
payment of the phantom units in the form of shares of Class A Common Stock and the phantom units were valued at $8.0. The
phantom units will be settled in shares of Class A Common Stock on the fifth anniversary of the grant date or, in the event of a
change of control or Mr. Becht’s death or disability, immediately. The Company recognized $8.0 of share-based compensation
expense during the fiscal year ended June 30, 2016 as there are no service or performance conditions with respect to the
phantom units.
23. NET (LOSS) INCOME ATTRIBUTABLE TO COTY INC. PER COMMON SHARE
Net (loss) income attributable to Coty Inc. per common share (“basic EPS”) is computed by dividing net income (loss)
attributable to Coty Inc. by the weighted-average number of common shares outstanding during the period. Net income (loss)
attributable to Coty Inc. per common share assuming dilution (“diluted EPS”) is computed by using the basic EPS weighted-
average number of common shares and the effect of potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of nonqualified stock options, Series A Preferred Stock and RSUs as of June 30, 2018 and 2017. The
dilutive effect of these outstanding instruments is reflected in diluted EPS by application of the treasury stock method.
Net (loss) income attributable to Coty Inc. is adjusted through the application of the two-class method of income per share
to reflect a portion of the periodic adjustment of the redemption value in excess of fair value of the redeemable noncontrolling
interests. There is no excess of redemption value over fair value of the redeemable noncontrolling interests in fiscal 2018, 2017
and 2016. In addition, there are no participating securities requiring the application of the two-class method of income per
share.
Reconciliation between the numerators and denominators of the basic and diluted EPS computations is presented below:
Net (loss) income attributable to Coty Inc.
Weighted-average common shares outstanding—Basic
Effect of dilutive stock options and Series A Preferred Stock(a)
Effect of restricted stock and RSUs(b)
Weighted-average common shares outstanding—Diluted
Net (loss) income attributable to Coty Inc. per common share:
Basic
Diluted
F-64
Year Ended June 30,
2017
2016
2018
$
$
(168.8) $
749.7
(422.2) $
642.8
—
—
749.7
—
—
642.8
(0.23) $
(0.23)
(0.66) $
(0.66)
156.9
345.5
5.7
3.0
354.2
0.45
0.44
COTY INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(a) As of June 30, 2018 and 2017, outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase
shares of common stock were excluded in the computation of diluted loss per share due to the net loss incurred during the period. As of
June 30, 2016, outstanding stock options and Series A Preferred Stock to purchase 3.0 million shares of Common Stock are excluded from
the computation of diluted EPS as their inclusion would be anti-dilutive.
(b) As of June 30, 2018 and 2017, RSUs were excluded in the computation of diluted loss per share due to the net loss incurred during the
period. As of June 30, 2016, there were 0.1 million anti-dilutive RSUs excluded from the computation of diluted EPS as their inclusion
would be anti-dilutive.
24. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved, from time to time, in various litigation and administrative and other legal proceedings including
regulatory actions, incidental or related to its business, including consumer class or collective action, personal injury,
intellectual property, competition, and advertising claims litigation, 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, as
well as the trading price of the Company’s securities. However, management’s assessment of the Company’s Legal Proceedings
is ongoing, and could change in light of the discovery of additional facts with respect to Legal Proceedings pending against the
Company not presently known to the Company 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. 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, its business, prospects, financial condition, results of operations, cash flows, as well as
the trading price of its securities.
Brazilian Tax Assessments
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 improperly registered for 2016-2017 tax periods. The Company is currently seeking a favorable administrative
decision on the tax enforcement action filed by the Treasury Office of the State of Goiás. These tax assessments, including
estimated interest and penalties, through June 30, 2018 amount to a total R$249.0 million (approximately $65.0 as of June 30,
2018). 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.
25. SUBSEQUENT EVENTS
Quarterly Dividend
On August 21, 2018, the Company announced a quarterly cash dividend of $0.125 per share on its Common Stock,
restricted stock units (the “RSUs”) and phantom units. The dividend will be payable on September 14, 2018 to holders of
record of Common Stock on August 31, 2018.
Trademark Acquisition
On July 3, 2018, the Company acquired the Escada trademark for €35.0 million, the equivalent of $40.8 at the time of
closing, from an existing licensor. The acquired trademark covers the world wide use of the trademark for cosmetics, perfumes
and beauty products. Escada will continue to be included in the Company’s Luxury division.
2018 Restructuring Actions
As described in Note 6—Restructuring Costs, in connection with the combination and expansion of the 2018 Restructuring
Actions, the Company is evaluating initiatives to reduce fixed costs and enable further investment in the business. As part of
these initiatives, on August 20, 2018, Management approved plans to rationalize headcount and fixed cost commitments with
estimated pre-tax restructuring and related costs of approximately $250.0, to be incurred over the next three years. The estimate
includes costs primarily related to employee termination benefits, all of which will result in cash payments.
F-65
COTY INC. & SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 2018, 2017, and 2016
($ in millions, except per share data)
Valuation and Qualifying Accounts
Description
Allowance for doubtful accounts:
2018
2017
2016
Allowance for customer returns:
2018
2017
2016
Deferred tax valuation allowances:
2018
2017
2016
Three Years Ended June 30,
Balance at
Beginning of
Period
Balance
Received
through
Acquisition
Charged to
Costs and
Expenses
Deductions
Balance at
End of Period
$
$
$
$
$
58.5
35.2
19.6
67.3
57.3
59.9
— $
—
—
$
10.1
11.4
—
16.3
32.8
21.9
169.8
165.7
132.8
$
7.0 (a)(b)
(9.5) (b)
(6.3) (b)
$ (166.1)
(167.1)
(135.4)
60.3
$
— $
54.7 (c)
$
179.2
81.9
—
—
9.2 (c)
117.9 (c)
(10.4)
(128.1)
(20.6)
$
$
$
81.8
58.5
35.2
81.1
67.3
57.3
104.6
60.3
179.2
(a) Includes reclassification between the allowance for doubtful accounts and gross trade receivables for presentation purposes.
(b) Includes amounts written-off, net of recoveries and cash discounts.
(c) Includes foreign currency translation adjustments unless otherwise noted.
S-1
C O T Y C O N S U M E R
B E A U T Y
C O T Y
L U X U R Y
C O T Y P R O F E S S I O N A L
B E A U T Y
www.coty.com