NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(Unaudited)
1. DESCRIPTION OF BUSINESS
Coty Inc. and its subsidiaries (collectively, the “Company” or “Coty”) manufacture, market, sell and distribute branded beauty products, including fragrances, color cosmetics, hair care products and skin & body related products. Coty is a global beauty company and a new leader and challenger in the beauty industry.
On October 1, 2016, the Company completed its acquisition of certain assets and liabilities related to The Procter & Gamble Company’s (“P&G”) global fine fragrances, salon professional, cosmetics and retail hair color businesses, along with select hair styling brands (the “P&G Beauty Business”). The P&G Beauty Business manufactures, markets and sells various branded beauty products globally including professional and retail hair care, coloring and styling products, fine fragrances and color cosmetics primarily through salons, mass merchandisers, grocery stores, drug stores, department stores and distributors. Refer to Note 3—Business Combinations.
After the closing of the P&G Beauty Business acquisition, the Company reorganized its business into
three
new divisions: the Luxury division, focused on prestige fragrances, premium skin care and premium cosmetics; the Consumer Beauty division, focused on color cosmetics, retail hair coloring and styling products, mass fragrance, mass skin care and body care; and the Professional Beauty division, focused on hair and nail care products for professionals. In this new organizational structure, each division has full end-to-end responsibility to optimize consumers’ beauty experience in the relevant categories and channels. The
three
divisions also comprise the Company’s operating and reportable segments.
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
2017
” refer to the fiscal year ending
June 30, 2017
.
The Company’s revenues generally increase during the second fiscal quarter as a result of increased demand associated with the holiday season. Accordingly, the Company’s financial performance, working capital requirements, cash flow and borrowings experience seasonal variability during the three to six months preceding this season.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited interim Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended
June 30, 2016
. In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the
three and nine months ended March 31, 2017
are not necessarily indicative of the results of operations to be expected for the full fiscal year ending
June 30, 2017
. All dollar amounts (other than per share amounts) in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
Restricted Cash
Restricted cash represents funds that are not readily available for general purpose cash needs due to contractual limitations. Restricted cash is classified as a current or long-term asset based on the timing and nature of when or how the cash is expected to be used or when the restrictions are expected to lapse. As of
March 31, 2017
and June 30, 2016, the Company had restricted cash of
$25.0
and
$0.0
, respectively, included in Restricted cash in the Condensed Consolidated Balance Sheets. The restricted cash balance as of
March 31, 2017
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 Condensed Consolidated Statement of Cash Flows.
Customer Loans
Following the closing of the P&G Beauty Business acquisition, the Company now provides loans to certain customers to help finance salon openings, renovations and other improvements. In exchange for this financing, customers become contractually obligated to purchase products from the Company. Certain customer loans may be provided at favorable rates, including interest-free or with below-market interest rates. Customer loans are initially recorded at fair value not to exceed the face value of the loan. The fair value is based on a market based measurement using published market interest rates in the
country of loan origin. The difference between the face value (generally the amount advanced) and fair value of the loan at origination is reported as a reduction in net sales in the Condensed Consolidated Statements of Operations. The value of the loan after initial recognition is reduced for principal repayments, net of any allowances for uncollectibility. Customer loan payments are allocated between principal and related interest, as appropriate. Payments are received either in the form of scheduled cash payments or via partial or complete offset against rebates or other allowances earned by customers from product purchases. Allowances for uncollectible loans are recorded based on management’s assessment of objective evidence of potential uncollectibility. The portion of customer loans due within one year, net of an allowance for uncollectible loans was
$15.9
as of March 31, 2017 and is recorded within Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet. The portion of customer loans due in greater than one year, net of an allowance for uncollectible loans was
$17.0
as of March 31, 2017 and is recorded within Other noncurrent assets in the Condensed Consolidated Balance Sheet.
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, the fair value of share-based compensation, the fair value of the Company’s reporting units, and the assessment of goodwill, other intangible assets and long-lived assets for impairment, the valuation of redeemable noncontrolling interests, income taxes and pension and post-employment benefits. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the Condensed Consolidated Financial Statements in future periods.
Recently Adopted Accounting Pronouncements
In November 2016, the FASB issued authoritative guidance amending the classification and presentation of restricted cash on the statement of cash flows. The amendments will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company early adopted this guidance in the second quarter of fiscal 2017 and has applied a retrospective transition method for each period presented. Accordingly, restricted cash and restricted cash equivalents has been reclassified as a component of Cash, cash equivalents, and restricted cash in the Condensed Consolidated Statement of Cash Flows for all periods presented.
In April 2015, the FASB issued authoritative guidance on the treatment of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this guidance as of the first quarter ended September 30, 2016. With respect to the Company’s Revolving Credit Facility (as defined in Note 13 - Debt), the Company has elected to classify unamortized debt issuance costs within the liability section of the balance sheet (as a contra-liability). In circumstances where the unamortized debt issuance costs exceeds the outstanding balance of the Coty Revolving Credit Facility or the Galleria Revolving Credit Facility, the amount of unamortized debt issuance costs exceeding the outstanding balance will be reclassified to assets. The Company has applied the change in accounting principle with retrospective application to prior periods. As such, the amounts previously reported as Other noncurrent assets and Long-term debt, net in the Condensed Consolidated Balance Sheet as of June 30, 2016 were decreased by
$64.6
, respectively, for the reclassification of debt issuance costs from assets to liabilities. The change in accounting principle does not have an impact on the Company’s Condensed Consolidated Statements of Operations, Statements of Cash Flows and Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests.
In April 2015, the FASB issued authoritative guidance to clarify the accounting treatment for fees paid by a customer in cloud computing arrangements. Under the revised guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The revised guidance will not change a customer’s accounting for service contracts. The Company adopted this guidance as of the first quarter ended September 30, 2016 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In May 2017, 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. Early adoption is permitted and the amendment will be effective for the Company in fiscal 2019. The Company is currently evaluating the impact this guidance will have on the Company’s Consolidated Financial Statements.
In March 2017, 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. Early adoption is permitted and the amendment will be effective for the Company in fiscal 2019. The Company is currently evaluating the impact this guidance will have on the Company’s Consolidated Financial Statements.
In January 2017, 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. Early adoption is permitted and the amendment will be effective for the Company in fiscal 2021. The Company does not expect this guidance to impact the Company’s Consolidated Financial Statements.
In October 2016, 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 amendment will be effective for the Company in fiscal 2019 with early adoption permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The Company is currently evaluating the impact this guidance will have on the Company’s Consolidated Financial Statements.
In August 2016, the FASB issued authoritative guidance that 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 amendment will be effective for the Company in fiscal 2019 with early adoption permitted. The Company is currently evaluating the effect that this guidance will have on the Company’s Consolidated Financial Statements.
In June 2014, and as further amended, 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. The standard will be effective for the Company in fiscal 2019 with either retrospective or modified retrospective treatment applied. Early adoption is permitted for the Company beginning in fiscal 2018. The Company is in the early stages and has an implementation team in place that is performing a comprehensive evaluation of the impact this standard will have on its Consolidated Financial Statements and related disclosures. The Company has selected the modified retrospective transition method, but has not yet determined the effect of the standard on its ongoing financial reporting.
In February 2016, 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 amendment will be effective for the Company in fiscal 2020 with early adoption permitted. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company has not yet started its analysis of the impact this standard will have on the Company’s Consolidated Financial Statements.
3. BUSINESS COMBINATIONS
P&G Beauty Business Acquisition
On October 1, 2016, pursuant to the Transaction Agreement (as defined below), the Company completed the Transactions (as defined below) and 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 P&G Beauty Business acquisition was completed pursuant to the Transaction Agreement, dated July 8, 2015 (the “Transaction Agreement”), by and among the Company, P&G, Galleria Co. (“Galleria”) and Green Acquisition Sub Inc., a wholly-owned subsidiary of the Company (“Merger Sub”). On October 1, 2016, (i) Merger Sub was merged with and into Galleria, with Galleria continuing as the surviving corporation and a direct, wholly-owned subsidiary of the Company (the “Merger”) and (ii) each share of Galleria common stock was converted into the right to receive
one
share of the Company’s common stock (the Merger, together with the other transactions contemplated by the Transaction Agreement, the “Transactions”).
The Company issued
409.7 million
shares of common stock to the former holders of Galleria common stock, together with cash in lieu of fractional shares. Immediately after consummation of the Merger, approximately
54%
of the fully-diluted shares of the Company’s common stock was held by pre-Merger holders of Galleria common stock, and approximately
46%
of the fully-diluted shares of the Company’s common stock was held by pre-Merger holders of the Company’s common stock. Coty Inc. is considered to be the acquiring company for accounting purposes.
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 the assets and liabilities assumed in the Transactions. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The following table summarizes the estimated allocation of the purchase price to the net assets of the P&G Beauty Business as of the October 1, 2016 acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value as previously reported
(a)
|
|
Measurement period adjustments
(b)
|
|
Estimated fair value adjusted
|
|
Estimated
useful life
(in years)
|
Cash and cash equivalents
|
$
|
387.6
|
|
|
$
|
—
|
|
|
$
|
387.6
|
|
|
|
Inventories
|
506.7
|
|
|
(38.3
|
)
|
|
468.4
|
|
|
|
Property, plant and equipment
|
770.4
|
|
|
(8.0
|
)
|
|
762.4
|
|
|
3 - 40
|
Goodwill
|
5,081.8
|
|
|
60.2
|
|
|
5,142.0
|
|
|
Indefinite
|
Trademarks — indefinite
|
1,890.0
|
|
|
—
|
|
|
1,890.0
|
|
|
Indefinite
|
Trademarks — finite
|
879.1
|
|
|
5.6
|
|
|
884.7
|
|
|
10 - 30
|
Customer relationships
|
1,795.8
|
|
|
11.3
|
|
|
1,807.1
|
|
|
1.5 - 17
|
License agreements
|
1,836.0
|
|
|
1.0
|
|
|
1,837.0
|
|
|
10 - 30
|
Product formulations
|
183.8
|
|
|
—
|
|
|
183.8
|
|
|
5 - 29
|
Other net working capital
|
65.8
|
|
|
(27.6
|
)
|
|
38.2
|
|
|
|
Net other assets
|
54.9
|
|
|
(5.3
|
)
|
|
49.6
|
|
|
|
Unfavorable contract liabilities
|
(130.0
|
)
|
|
—
|
|
|
(130.0
|
)
|
|
|
Pension liabilities
|
(394.9
|
)
|
|
(9.8
|
)
|
|
(404.7
|
)
|
|
|
Tax indemnification liability
|
(55.0
|
)
|
|
—
|
|
|
(55.0
|
)
|
|
|
Deferred tax liability, net
|
(1,301.6
|
)
|
|
10.9
|
|
|
(1,290.7
|
)
|
|
|
Total purchase price
|
$
|
11,570.4
|
|
|
$
|
—
|
|
|
$
|
11,570.4
|
|
|
|
(a)
As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016.
(b)
The Company recorded measurement period adjustments in the third quarter of fiscal 2017 to account for a decrease of
$38.3
in the estimated fair value of the P&G Beauty Business inventory primarily related to a decrease in the inventory step-up due to updated valuation assumptions. The measurement period adjustments of
$17.9
related to finite-lived trademarks, customer relationships and license
agreements was a result of the decrease in the estimated fair value of inventory acquired. Additional measurement period adjustments were recorded as a result of obtaining new facts and circumstances about certain acquired assets and liabilities that existed as of the acquisition date, primarily related to working capital. 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 Transactions. Goodwill is not expected to be deductible for tax purposes. Goodwill of
$351.6
,
$4,276.5
, and
$513.9
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 synergies.
For the
three months ended March 31, 2017
, Net revenues and Net income of the P&G Beauty Business included in the Company’s Condensed Consolidated Statements of Operations were
$975.7
and
$55.7
, respectively. For the
nine months ended March 31, 2017
, Net revenues and Net income of the P&G Beauty Business included in the Company’s Condensed Consolidated Statements of Operations from the date of acquisition were
$2,086.9
and
$110.9
, respectively. Net income for the
three and nine months ended March 31, 2017
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. Such amortization activity had an impact to Net income for the
three and nine months ended March 31, 2017
of
$(9.5)
and
$(37.6)
, net of tax, respectively.
The Company recognized acquisition-related costs of
$52.0
and
$35.1
during the
three months ended March 31, 2017 and 2016
, respectively and
$264.4
and
$91.1
for the
nine months ended March 31, 2017 and 2016
, respectively, which were included in Acquisition-related costs in the Condensed Consolidated Statements of Operations.
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, pursuant to a sale and purchase agreement. The ghd acquisition is expected to further strengthen 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, which was funded through cash on hand and available debt.
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 the assets and liabilities assumed from the ghd acquisition. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The following table summarizes the estimated allocation of the purchase price to the net assets of ghd as of the November 21, 2016 acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value as previously reported
(a)
|
|
Measurement period adjustments
(b)
|
|
Estimated fair value adjusted
|
|
Estimated
useful life
(in years)
|
Cash and cash equivalents
|
$
|
7.1
|
|
|
$
|
—
|
|
|
$
|
7.1
|
|
|
|
Inventories
|
79.8
|
|
|
—
|
|
|
79.8
|
|
|
|
Property, plant and equipment
|
11.3
|
|
|
—
|
|
|
11.3
|
|
|
3 - 10
|
Goodwill
|
175.5
|
|
|
(7.4
|
)
|
|
168.1
|
|
|
Indefinite
|
Indefinite-lived other intangibles assets
|
163.8
|
|
|
—
|
|
|
163.8
|
|
|
Indefinite
|
Customer relationships
|
44.2
|
|
|
(7.6
|
)
|
|
36.6
|
|
|
11 - 24
|
Technology
|
138.6
|
|
|
8.0
|
|
|
146.6
|
|
|
11 - 16
|
Other net working capital
|
(7.4
|
)
|
|
7.1
|
|
|
(0.3
|
)
|
|
|
Net other assets
|
0.9
|
|
|
—
|
|
|
0.9
|
|
|
|
Deferred tax liability, net
|
(75.3
|
)
|
|
(0.1
|
)
|
|
(75.4
|
)
|
|
|
Total purchase price
|
$
|
538.5
|
|
|
$
|
—
|
|
|
$
|
538.5
|
|
|
|
(a)
As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016.
(b)
The Company recorded measurement period adjustments in the third quarter of fiscal 2017 to account for a decrease to customer relationships of
$7.6
and an increase to technology of
$8.0
due to changes in valuation assumptions and an increase in the estimated other net working capital of
$7.1
as of the November 21, 2016 acquisition date. These 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.
For the
three months ended March 31, 2017
, Net revenues and Net income (loss) of ghd included in the Company’s Condensed Consolidated Statements of Operations were
$45.2
and
$(41.6)
, respectively. For the
nine months ended March 31, 2017
, Net revenues and Net income (loss) of ghd included in the Company’s Condensed Consolidated Statements of Operations from the date of acquisition were
$89.6
and
$(47.9)
, respectively. Net income for the
three and nine months ended March 31, 2017
was impacted by the amortization of certain asset values based on the estimated fair values of acquired assets as determined during the initial purchase accounting, such as the amortization of inventory step-up. Such amortization activity had an impact to Net income (loss) for the
three and nine months ended March 31, 2017
of
$(26.0)
and
$(39.8)
, net of tax, respectively.
The Company recognized acquisition-related costs of
$3.1
and
$4.9
during the
three and nine months ended March 31, 2017
, respectively, which are included in Acquisition-related costs in the Condensed Consolidated Statements of Operations.
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 debt assumed. The existing Younique membership holders contributed their
100%
membership interest in Younique to Foundation in exchange for a
40%
membership interest in Foundation and
$600.0
of cash consideration. The purchase consideration is subject to normal working capital adjustments. Younique is expected to strengthen the Consumer Beauty division’s color cosmetics and skin and body care product offerings. The acquisition was funded with a combination of cash on hand and borrowings under available debt facilities. The Company accounts for the noncontrolling interest portion of the acquisition as a redeemable noncontrolling interest. Refer to Note 21 — Noncontrolling Interests and Redeemable Noncontrolling Interests for information regarding valuation method and significant assumptions used to calculate the fair value.
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 the assets and liabilities assumed from the Younique acquisition. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The following table summarizes the estimated allocation of the purchase price to the net assets of Younique as of the February 1, 2017 acquisition date:
|
|
|
|
|
|
|
|
Estimated
fair value
|
|
Estimated
useful life
(in years)
|
Cash and cash equivalents
|
$
|
17.5
|
|
|
|
Inventories
|
106.5
|
|
|
|
Property, plant and equipment
|
64.1
|
|
|
3 - 7
|
Goodwill
|
559.5
|
|
|
Indefinite
|
Trademark — finite
|
121.0
|
|
|
20
|
Product formulations
|
0.6
|
|
|
5
|
Customer relationships
|
184.0
|
|
|
9 - 15
|
Other net working capital
|
(24.8
|
)
|
|
|
Short-term and long-term debt
|
(1.2
|
)
|
|
|
Total equity value
|
1,027.2
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
410.9
|
|
|
|
Net cash and debt acquired
|
16.3
|
|
|
|
Total purchase price
|
$
|
600.0
|
|
|
|
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.
For the
three and nine months ended March 31, 2017
, Net revenues and Net income (loss) of Younique were included in the Company’s Condensed Consolidated Statements of Operations from the date of acquisition were
$79.6
and
$(1.4)
, respectively. Net income for the
three and nine months ended March 31, 2017
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. Such amortization activity had an impact to Net income (loss) for the
three and nine months ended March 31, 2017
of
$(17.6)
, net of tax.
The Company recognized acquisition-related costs of
$0.1
and
$0.8
during the
three and nine months ended March 31, 2017
, respectively, which are included in Acquisition-related costs in the Condensed Consolidated Statements of Operations.
Brazil 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 “Brazil Acquisition”) pursuant to a share purchase agreement in order to further strengthen its position in the Brazilian beauty and personal care market. 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 Brazil Acquisition. The Company recognized certain measurement period adjustments as disclosed below during the quarter ended September 30, 2016. The measurement period for the Brazil Acquisition was closed as of September 30, 2016.
The following table summarizes the allocation of the purchase price to the net assets acquired as of the February 1, 2016 acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value as previously reported
(a)
|
|
Measurement period adjustments
(b)
|
|
Estimated
fair value as adjusted
|
|
Estimated
useful life
(in years)
|
Cash and cash equivalents
|
$
|
11.1
|
|
|
$
|
—
|
|
|
$
|
11.1
|
|
|
|
Inventories
|
45.6
|
|
|
—
|
|
|
45.6
|
|
|
|
Property, plant and equipment
|
95.4
|
|
|
—
|
|
|
95.4
|
|
|
2 - 40
|
Goodwill
|
553.7
|
|
|
(16.6
|
)
|
|
537.1
|
|
|
Indefinite
|
Trademarks — indefinite
|
147.1
|
|
|
—
|
|
|
147.1
|
|
|
Indefinite
|
Trademarks — finite
|
10.3
|
|
|
—
|
|
|
10.3
|
|
|
5 - 15
|
Customer relationships
|
44.6
|
|
|
—
|
|
|
44.6
|
|
|
13 - 28
|
Product formulations
|
12.8
|
|
|
—
|
|
|
12.8
|
|
|
3
|
Other net working capital
|
0.7
|
|
|
—
|
|
|
0.7
|
|
|
|
Net other assets
|
2.1
|
|
|
(0.7
|
)
|
|
1.4
|
|
|
|
Deferred tax liability, net
|
(21.5
|
)
|
|
17.3
|
|
|
(4.2
|
)
|
|
|
Total purchase price
|
$
|
901.9
|
|
|
$
|
—
|
|
|
$
|
901.9
|
|
|
|
(a)
As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016.
(b)
The Company recorded measurement period adjustments in the first quarter of fiscal 2017 to account for a
$0.7
asset retirement obligation, as well as a net decrease in net deferred tax liability of
$17.3
as of the February 1, 2016 acquisition date. These adjustments were offset against Goodwill.
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.
The Company recognized acquisition-related costs of
$0.0
and
$1.1
during the
three and nine months ended March 31, 2017
, respectively, and
$1.7
and
$2.3
during the three and nine months ended March 31, 2016, respectively which are included in Acquisition-related costs in the Condensed Consolidated Statements of Operations.
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 Brazil Acquisition (the “Pro Forma Acquisitions”) as though the companies had been combined on July 1, 2015. The
three and nine months ended March 31, 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 preliminary 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 Pro Forma Acquisitions had taken place on July 1, 2015 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 three months ended March 31, 2017 and 2016 and nine months ended March 31, 2017 and 2016, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
2017
(a)
|
|
2016
(b)
|
|
2017
(a)
|
|
2016
(b)
|
Pro forma Net revenues
|
$
|
2,063.7
|
|
|
$
|
2,070.4
|
|
|
$
|
6,647.9
|
|
|
$
|
7,049.4
|
|
Pro forma Net income (loss)
|
(77.5
|
)
|
|
(28.6
|
)
|
|
68.9
|
|
|
126.0
|
|
Pro forma Net income (loss) attributable to Coty Inc.
|
(89.7
|
)
|
|
(47.2
|
)
|
|
37.4
|
|
|
102.6
|
|
Pro forma Net income (loss) attributable to Coty Inc. per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
Diluted
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
|
$
|
0.13
|
|
(a)
For the
three and nine months ended March 31, 2017
, the pro forma information excluded
$62.2
and
$378.9
of non-recurring acquisition-related costs and
$34.5
and
$71.0
of amortization of inventory step up, respectively.
|
|
(b)
|
For the
three months ended March 31, 2016
, the pro forma information excluded
$64.8
of non-recurring acquisition-related costs and
$4.9
of amortization of inventory step up. For the
nine months ended March 31, 2016
, the pro forma information included
$54.7
of non-recurring acquisition-related costs and
$104.1
of amortization of inventory step up.
|
4. SEGMENT REPORTING
Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the 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.
In connection with the Company’s acquisition of the P&G Beauty Business, the Company realigned its operations and determined management’s internal and external reporting based on the following
three
divisions – Luxury, Consumer Beauty and Professional Beauty. The new organizational structure is 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 consumers’ beauty experience in the relevant categories and channels. The Company has determined that its
three
divisions are its operating segments and reportable segments. The operating and reportable segments are:
Luxury — focused on prestige fragrances, premium skin care and premium cosmetics;
Consumer Beauty — focused on color cosmetics, retail hair coloring and styling products, mass fragrance, mass skin care and body care;
Professional Beauty — focused on hair and nail care products for professionals.
Additionally, in connection with the Company’s acquisition of the P&G Beauty Business, the Company reorganized its geographical structure into
three
regions: North America (Canada and the United States), Europe and ALMEA (Asia, Latin America, the Middle East, Africa and Australia).
As a result of this change in segment reporting, the Company restated prior period results, by segment, to conform to current period presentation. Prior to the realignment, the Company operated and managed its business as
four
operating and reportable segments: Fragrances, Color Cosmetics, Skin & Body Care, and the Brazil Acquisition.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
SEGMENT DATA
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net revenues:
|
|
|
|
|
|
|
|
Luxury
|
$
|
634.6
|
|
|
$
|
405.9
|
|
|
$
|
1,918.6
|
|
|
$
|
1,433.4
|
|
Consumer Beauty
|
988.6
|
|
|
488.5
|
|
|
2,562.2
|
|
|
1,653.7
|
|
Professional Beauty
|
408.9
|
|
|
56.3
|
|
|
928.2
|
|
|
186.4
|
|
Total
|
$
|
2,032.1
|
|
|
$
|
950.7
|
|
|
$
|
5,409.0
|
|
|
$
|
3,273.5
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
Luxury
|
$
|
60.9
|
|
|
$
|
29.7
|
|
|
$
|
203.6
|
|
|
$
|
206.1
|
|
Consumer Beauty
|
63.0
|
|
|
39.2
|
|
|
178.6
|
|
|
210.2
|
|
Professional Beauty
|
(18.2
|
)
|
|
12.8
|
|
|
81.5
|
|
|
53.4
|
|
Corporate
|
(298.2
|
)
|
|
(58.7
|
)
|
|
(622.5
|
)
|
|
(212.6
|
)
|
Total
|
$
|
(192.5
|
)
|
|
$
|
23.0
|
|
|
$
|
(158.8
|
)
|
|
$
|
257.1
|
|
Reconciliation:
|
|
|
|
|
|
|
|
Operating (loss) income
|
$
|
(192.5
|
)
|
|
$
|
23.0
|
|
|
$
|
(158.8
|
)
|
|
$
|
257.1
|
|
Interest expense, net
|
60.8
|
|
|
25.1
|
|
|
159.1
|
|
|
55.7
|
|
Loss on early extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
3.1
|
|
Other (income) expense, net
|
(0.5
|
)
|
|
6.6
|
|
|
0.2
|
|
|
30.4
|
|
(Loss) income before income taxes
|
$
|
(252.8
|
)
|
|
$
|
(8.7
|
)
|
|
$
|
(318.1
|
)
|
|
$
|
167.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
GEOGRAPHIC DATA
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net revenues:
|
|
|
|
|
|
|
|
North America
|
$
|
685.1
|
|
|
$
|
311.1
|
|
|
$
|
1,727.4
|
|
|
$
|
1,072.8
|
|
Europe
|
848.4
|
|
|
402.0
|
|
|
2,429.4
|
|
|
1,494.8
|
|
ALMEA
|
498.6
|
|
|
237.6
|
|
|
1,252.2
|
|
|
705.9
|
|
Total
|
$
|
2,032.1
|
|
|
$
|
950.7
|
|
|
$
|
5,409.0
|
|
|
$
|
3,273.5
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
March 31,
2017
|
|
June 30,
2016
|
United States
(a)
|
$
|
13,472.8
|
|
|
$
|
2,688.7
|
|
Switzerland
|
1,917.2
|
|
|
508.0
|
|
All other
|
3,246.4
|
|
|
1,713.6
|
|
Total
|
$
|
18,636.4
|
|
|
$
|
4,910.3
|
|
(a)
Includes the intangible assets recognized as part of the P&G Beauty Business acquisition which have not been allocated geographically out of the United States as of March 31, 2017. The Company is currently in the process of determining the geographic allocation of these intangible assets.
The table above presents long-lived assets, by our major countries and all other countries. 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.
Presented below are the revenues associated with Company’s product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
PRODUCT CATEGORY
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Fragrance
|
32.1
|
%
|
|
43.8
|
%
|
|
38.5
|
%
|
|
48.6
|
%
|
Color Cosmetics
|
31.4
|
|
|
39.6
|
|
|
28.9
|
|
|
34.9
|
|
Skin & Body Care
|
10.0
|
|
|
16.6
|
|
|
12.4
|
|
|
16.5
|
|
Hair Care
|
26.5
|
|
|
—
|
|
|
20.2
|
|
|
—
|
|
Total Coty Inc.
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
5. RESTRUCTURING COSTS
Restructuring costs for the
three and nine months ended March 31, 2017 and 2016
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Global Integration Activities
|
$
|
156.5
|
|
|
$
|
—
|
|
|
$
|
170.1
|
|
|
$
|
—
|
|
Acquisition Integration Program
|
(0.7
|
)
|
|
1.4
|
|
|
3.9
|
|
|
47.0
|
|
Organizational Redesign
|
(0.1
|
)
|
|
4.6
|
|
|
4.4
|
|
|
28.0
|
|
Other Restructuring
|
0.1
|
|
|
0.6
|
|
|
0.6
|
|
|
4.3
|
|
Total
|
$
|
155.8
|
|
|
$
|
6.6
|
|
|
$
|
179.0
|
|
|
$
|
79.3
|
|
Global Integration Activities
In connection with the acquisition of the P&G Beauty Business, the Company anticipates that it will incur restructuring and related costs aimed at integrating and optimizing the combined organization (“Global Integration Activities”).
Of the expected costs, the Company incurred
$183.7
related to approved initiatives in the
nine months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
(a)
|
|
Selling, general and administrative
(b)
|
|
Restructuring
|
|
Total
|
Nine months ended March 31,
|
$
|
8.1
|
|
|
$
|
5.5
|
|
|
$
|
170.1
|
|
|
$
|
183.7
|
|
(a)
Primarily related to inventory buyback associated with the conversion of P&G distributors and accelerated depreciation.
(b)
Other business realignment costs, including legal and consulting costs.
The related liability balance and activity for the Global Integration Activities restructuring costs are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Employee
Benefits
|
|
Third-Party
Contract
Terminations
|
|
Other
Exit
Costs
|
|
Total
Program
Costs
|
Balance—July 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring charges
|
158.7
|
|
|
10.6
|
|
|
0.8
|
|
|
170.1
|
|
Acquisition
(a)
|
1.8
|
|
|
—
|
|
|
10.0
|
|
|
11.8
|
|
Payments
|
(6.6
|
)
|
|
—
|
|
|
(2.1
|
)
|
|
(8.7
|
)
|
Effect of exchange rates
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
Balance—March 31, 2017
|
$
|
153.0
|
|
|
$
|
10.6
|
|
|
$
|
8.7
|
|
|
$
|
172.3
|
|
(a)
The Company incurred exit and disposal costs primarily related to an acquired lease, as well as employee separations initiated as a result of the P&G Beauty Business acquisition.
The Company currently estimates that the total remaining accrual of
$172.3
will result in cash expenditures of approximately
$32.9
,
$111.4
,
$22.5
and
$5.5
in fiscal 2017, 2018, 2019 and 2020, 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 the Bourjois brand (the “Acquisition Integration Program”). Actions associated with the program were initiated after the acquisition of Bourjois and are expected to be substantially completed by the end of fiscal 2017. The Company anticipates the Acquisition Integration Program will result in pre-tax restructuring and related costs of approximately
$65.0
, all of which will result in cash payments. The Company incurred
$61.5
of restructuring costs life-to-date as of
March 31, 2017
, which have been recorded in Corporate.
Restructuring costs in the Company’s Condensed Consolidated Statements of Operations for the three months ended September 30, 2016 included a curtailment gain of
$1.8
, recognized in connection with involuntary employee terminations as part of the Acquisition Integration Program. This gain resulted in a corresponding decrease to the net pension liability as of
March 31, 2017
. Refer to Note 16 — Employee Benefit Plans for further information.
The related liability balance and activity for the Acquisition Integration Program costs are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Employee
Benefits
|
|
Third-Party
Contract
Terminations
|
|
Other
Exit
Costs
|
|
Total
Program
Costs
|
Balance—July 1, 2016
|
$
|
35.7
|
|
|
$
|
7.6
|
|
|
$
|
0.1
|
|
|
$
|
43.4
|
|
Restructuring charges
|
0.8
|
|
|
—
|
|
|
6.6
|
|
|
7.4
|
|
Payments
|
(8.7
|
)
|
|
(3.7
|
)
|
|
(2.0
|
)
|
|
(14.4
|
)
|
Changes in estimates
|
(0.8
|
)
|
|
(0.9
|
)
|
|
—
|
|
|
(1.7
|
)
|
Effect of exchange rates
|
(1.0
|
)
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(1.5
|
)
|
Balance—March, 31, 2017
|
$
|
26.0
|
|
|
$
|
2.9
|
|
|
$
|
4.3
|
|
|
$
|
33.2
|
|
The Company currently estimates that the total remaining accrual of
$33.2
will result in cash expenditures of approximately
$4.5
,
$26.1
,
$1.3
and
$1.3
in fiscal 2017, 2018, 2019 and 2020, respectively.
Organizational Redesign
During the fourth quarter of fiscal 2014, the Board approved a program associated with a new organizational structure (“Organizational Redesign”) that aims to reinforce the Company’s growth path and strengthen its position as a new global leader and challenger in the beauty industry. The Company anticipates that the Organizational Redesign will result in pre-tax restructuring and related costs of
$145.0
to
$180.0
, all of which will result in cash payments. The Company anticipates substantial completion of all project activities by the end of fiscal 2017, with the remaining costs primarily charged to Corporate. The Company incurred
$110.5
of restructuring costs life-to-date as of
March 31, 2017
, which have been recorded in Corporate. The Company incurred
$35.3
of other business realignment costs life-to-date as of
March 31, 2017
which have been primarily reported in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations in Corporate.
The related liability balance and activity for the Organizational Redesign costs are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Employee
Benefits
|
|
Third-Party
Contract
Terminations
|
|
Other
Exit
Costs
|
|
Total
Program
Costs
|
Balance—July 1, 2016
|
$
|
33.6
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
34.5
|
|
Restructuring charges
|
6.2
|
|
|
—
|
|
|
—
|
|
|
6.2
|
|
Payments
|
(27.6
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(27.8
|
)
|
Changes in estimates
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
Effect of exchange rates
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Balance—March, 31, 2017
|
$
|
10.4
|
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
|
$
|
10.9
|
|
The Company currently estimates that the total remaining accrual of
$10.9
will result in cash expenditures of
$6.0
and
$4.9
in fiscal 2017 and 2018, respectively.
Other Restructuring
Other restructuring primarily relates to the Company’s programs to integrate supply chain and selling activities, which were substantially completed during fiscal 2016 with cash payments expected to continue through fiscal 2018. The Company incurred expenses of
$0.6
and
$4.3
during the
nine months ended March 31, 2017 and 2016
, respectively. The related liability balances were
$4.5
and
$6.2
at
March 31, 2017
and
June 30, 2016
, respectively. The Company currently estimates that the total remaining accrual of
$4.5
will result in cash expenditures of approximately
$3.2
and
$1.3
in fiscal 2017 and 2018, respectively.
In connection with the acquisition of the P&G Beauty Business, the Company assumed restructuring liabilities of approximately
$8.8
at October 1, 2016. The Company estimates that the remaining accrual of
$7.1
at
March 31, 2017
will result in cash expenditures of
$4.9
and
$2.2
in fiscal 2017 and 2018, respectively.
6. ACQUISITION-RELATED COSTS
Acquisition-related costs, which are expensed as incurred, represent non-restructuring costs directly related to acquiring and integrating an entity, for both completed and contemplated acquisitions and can include finder’s fees, legal, accounting, valuation, other professional or consulting fees, and other internal costs which can include compensation related expenses for dedicated internal resources. The Company recognized acquisition-related costs of
$57.7
and
$37.0
for the
three months ended March 31, 2017 and 2016
, respectively, and
$275.1
and
$98.3
for the
nine months ended March 31, 2017 and 2016
, respectively, which have been recorded in Acquisition-related costs in the Condensed Consolidated Statements of Operations.
7. INCOME TAXES
The effective income tax rate for the
three months ended March 31, 2017 and 2016
was
36.9%
and
(133.3)%
, respectively, and
69.3%
and
(25.3)%
for the
nine months ended March 31, 2017
and 2016, respectively.
The effective tax rate for the
three months ended March 31, 2017
includes an increase in the accrual for unrecognized tax benefits, the expiration of foreign statutes of limitation and audit settlements.
The effective income tax rate for the
three months ended March 31, 2016
includes the impact of additional U.S. losses with minimal tax benefit, the decrease in the accrual for unrecognized tax benefits, audit settlements and the expiration of foreign statutes of limitation.
The effective tax rate for the
nine months ended March 31, 2017
includes the release of a valuation allowance in the US as a result of the P&G Beauty Business acquisition of
$111.2
. The negative effective income tax rate for the
nine months ended March 31, 2016
was primarily the result of the net impact of the settlements with the Internal Revenue Service (“IRS”) as described below.
The effective income tax rate for the nine months ended March 31, 2016 included the final settlement with the IRS in connection with the 2004 - 2012 examination periods. The settlement primarily related to the acquisition of the Calvin Klein fragrance business. In connection with the settlement, the Company recognized a tax benefit of approximately
$193.9
of which
$164.2
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
$193.9
tax benefit,
$113.0
was offset by a valuation allowance due to on-going operating losses in the U.S.
There was an increase of
$1,042.6
in deferred tax liability for the
nine months ended March 31, 2017
compared to fiscal year ended June 30, 2016. The increase was primarily due to the acquisition of the P&G Beauty Business and the step up in the book basis of certain assets.
The effective income tax rates vary from the U.S. federal statutory rate of
35%
due to the effect of (i) jurisdictions with different statutory rates, (ii) adjustments to the Company’s unrealized tax benefits (“UTBs”) and accrued interest, (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes.
As of
March 31, 2017
and
June 30, 2016
, the gross amount of UTBs was
$237.4
and
$228.9
, respectively. As of
March 31, 2017
, the total amount of UTBs that, if recognized, would impact the effective income tax rate was
$226.6
. As of
March 31, 2017
and
June 30, 2016
, the liability associated with UTBs, including accrued interest and penalties, was
$154.7
and
$131.9
, respectively, which was recorded in Income and other taxes payable and Other non-current liabilities in the Condensed Consolidated Balance Sheets. The total interest and penalties recorded in the Condensed Consolidated Statements of Operations related to UTBs for the
three months ended March 31, 2017 and 2016
was
$(0.6)
and
$0.7
, and for the
nine months ended March 31, 2017 and 2016
was
$0.4
and
$2.7
, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of
March 31, 2017
and
June 30, 2016
was
$10.6
and
$9.9
, respectively. On the basis of the information available as of
March 31, 2017
, it is reasonably possible that a decrease of up to
$9.0
in UTBs may occur within 12 months as a result of projected resolutions of global tax examinations and a potential lapse of the applicable statutes of limitations.
8. INVENTORIES
Inventories as of
March 31, 2017
and
June 30, 2016
are presented below:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
Raw materials
|
$
|
241.9
|
|
|
$
|
159.8
|
|
Work-in-process
|
34.0
|
|
|
9.5
|
|
Finished goods
|
758.4
|
|
|
396.5
|
|
Total inventories
|
$
|
1,034.3
|
|
|
$
|
565.8
|
|
9. PROPERTY AND EQUIPMENT, NET
Property and equipment, net as of March 31, 2017 and June 30, 2016 are presented below:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
Land, buildings and leasehold improvements
|
$
|
623.7
|
|
|
$
|
284.8
|
|
Machinery and equipment
|
812.3
|
|
|
523.1
|
|
Marketing furniture and fixtures
|
427.8
|
|
|
295.2
|
|
Computer equipment and software
|
469.6
|
|
|
346.7
|
|
Construction in progress
|
244.6
|
|
|
79.6
|
|
Property and Equipment, gross
|
2,578.0
|
|
|
1,529.4
|
|
Accumulated depreciation and amortization
|
(1,022.2
|
)
|
|
(890.8
|
)
|
Property and equipment, net
|
$
|
1,555.8
|
|
|
$
|
638.6
|
|
Depreciation and amortization expense of property and equipment totaled
$82.0
and
$37.1
for the
three months ended March 31, 2017 and 2016
, respectively, and
$195.9
and
$111.9
for the
nine months ended March 31, 2017 and 2016
, respectively, and are recorded in Cost of sales and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
10. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Goodwill as of
March 31, 2017
and
June 30, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luxury
|
|
Consumer Beauty
|
|
Professional Beauty
|
|
Total
|
Gross balance at June 30, 2016
|
$
|
1,294.5
|
|
|
$
|
1,288.2
|
|
|
$
|
270.8
|
|
|
$
|
2,853.5
|
|
Accumulated impairments
|
(403.7
|
)
|
|
(237.1
|
)
|
|
—
|
|
|
(640.8
|
)
|
Net balance at June 30, 2016
|
$
|
890.8
|
|
|
$
|
1,051.1
|
|
|
$
|
270.8
|
|
|
$
|
2,212.7
|
|
|
|
|
|
|
|
|
|
Changes during the period ended March 31, 2017:
|
|
|
|
|
|
|
|
Measurement Period Adjustments
(a)
|
4.2
|
|
|
33.4
|
|
|
(1.4
|
)
|
|
36.2
|
|
Acquisitions
(b)
|
347.4
|
|
|
4,786.0
|
|
|
683.4
|
|
|
5,816.8
|
|
Foreign currency translation
|
4.8
|
|
|
37.0
|
|
|
4.3
|
|
|
46.1
|
|
|
|
|
|
|
|
|
|
Gross balance at March 31, 2017
|
$
|
1,650.9
|
|
|
$
|
6,144.6
|
|
|
$
|
957.1
|
|
|
$
|
8,752.6
|
|
Accumulated impairments
|
(403.7
|
)
|
|
(237.1
|
)
|
|
—
|
|
|
(640.8
|
)
|
Net balance at March 31, 2017
|
$
|
1,247.2
|
|
|
$
|
5,907.5
|
|
|
$
|
957.1
|
|
|
$
|
8,111.8
|
|
(a)
Includes measurement period adjustments in connection with the Brazil Acquisition, P&G Beauty Business and ghd acquisitions (Refer to Note 3 — Business Combinations).
(b)
Includes goodwill resulting from the P&G Beauty Business, ghd and Younique acquisitions during the nine months ended March 31, 2017 (Refer to Note 3 — Business Combinations).
As described in Note 4 — Segment Reporting, the Company changed its segments during the second quarter ended December 31, 2016. As a result, the Company allocated goodwill to the new segments using a relative fair value approach. In addition, the Company completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed. Further, the Company recast the goodwill and indefinite-lived intangible asset tables for the new segments.
Other Intangible Assets, net
Other intangible assets, net as of
March 31, 2017
and
June 30, 2016
are presented below:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2016
|
Indefinite-lived other intangible assets
|
$
|
3,442.8
|
|
|
$
|
1,417.0
|
|
Finite-lived other intangible assets, net
|
5,526.0
|
|
|
633.1
|
|
Total Other intangible assets, net
|
$
|
8,968.8
|
|
|
$
|
2,050.1
|
|
The changes in the carrying amount of indefinite-lived other intangible assets are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luxury
|
|
Consumer Beauty
|
|
Professional Beauty
|
|
Total
|
Gross balance at June 30, 2016
|
$
|
401.2
|
|
|
$
|
551.5
|
|
|
$
|
662.1
|
|
|
$
|
1,614.8
|
|
Accumulated impairments
|
(118.8
|
)
|
|
(75.9
|
)
|
|
(3.1
|
)
|
|
(197.8
|
)
|
Net balance at June 30, 2016
|
282.4
|
|
|
475.6
|
|
|
659.0
|
|
|
1,417.0
|
|
|
|
|
|
|
|
|
|
Changes during the period ended March 31, 2017:
|
|
|
|
|
|
|
|
Acquisitions
(a)
|
—
|
|
|
1,390.0
|
|
|
663.8
|
|
|
2,053.8
|
|
Foreign currency translation
|
(10.9
|
)
|
|
(14.2
|
)
|
|
(2.9
|
)
|
|
(28.0
|
)
|
|
|
|
|
|
|
|
|
Gross balance at March 31, 2017
|
390.3
|
|
|
1,927.3
|
|
|
1,323.0
|
|
|
3,640.6
|
|
Accumulated impairments
|
(118.8
|
)
|
|
(75.9
|
)
|
|
(3.1
|
)
|
|
(197.8
|
)
|
Net balance at March 31, 2017
|
$
|
271.5
|
|
|
$
|
1,851.4
|
|
|
$
|
1,319.9
|
|
|
$
|
3,442.8
|
|
(a)
Includes Indefinite-lived other intangible assets resulting from the P&G Beauty Business and ghd acquisitions during the nine months ended March 31, 2017 (Refer to Note 3 — Business Combinations).
Intangible assets subject to amortization are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net
|
June 30, 2016
|
|
|
|
|
|
|
|
License agreements
|
$
|
798.3
|
|
|
$
|
(532.2
|
)
|
|
$
|
—
|
|
|
$
|
266.1
|
|
Customer relationships
|
611.7
|
|
|
(274.2
|
)
|
|
(5.5
|
)
|
|
332.0
|
|
Trademarks
|
128.3
|
|
|
(108.6
|
)
|
|
—
|
|
|
19.7
|
|
Product formulations
|
48.0
|
|
|
(32.7
|
)
|
|
—
|
|
|
15.3
|
|
Total
|
$
|
1,586.3
|
|
|
$
|
(947.7
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
633.1
|
|
March 31, 2017
|
|
|
|
|
|
|
|
License agreements
(a)
|
$
|
2,542.7
|
|
|
$
|
(585.5
|
)
|
|
$
|
—
|
|
|
$
|
1,957.2
|
|
Customer relationships
(a)
|
2,633.5
|
|
|
(389.4
|
)
|
|
(5.5
|
)
|
|
2,238.6
|
|
Trademarks
(a)
|
1,133.0
|
|
|
(131.2
|
)
|
|
—
|
|
|
1,001.8
|
|
Product formulations and technology
(a)
|
380.6
|
|
|
(52.2
|
)
|
|
—
|
|
|
328.4
|
|
Total
|
$
|
6,689.8
|
|
|
$
|
(1,158.3
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
5,526.0
|
|
(a)
Includes License agreements, Customer relationships, Trademarks, and Product formulations and technology of
$1,837.0
,
$2,027.7
,
$1,005.7
and
$331.0
, respectively resulting from the P&G Beauty Business, ghd and Younique acquisitions during the nine months ended March 31, 2017 (Refer to Note 3 — Business Combinations).
Amortization expense totaled
$102.6
and
$20.9
, for the
three months ended March 31, 2017 and 2016
, respectively, and
$219.0
and
$59.0
for the
nine months ended March 31, 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
|
25.9 years
|
Customer relationships
|
13.5 years
|
Trademarks
|
23.5 years
|
Product formulations and technology
|
11.1 years
|
As of
March 31, 2017
, the remaining weighted-average life of all intangible assets subject to amortization is
19.6 years
.
The estimated aggregate amortization expense for each of the following fiscal years ending June 30 is presented below:
|
|
|
|
|
2017, remaining
|
$
|
104.4
|
|
2018
|
403.3
|
|
2019
|
359.9
|
|
2020
|
354.7
|
|
2021
|
346.0
|
|
2022
|
329.0
|
|
License Agreements
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 licenses provide for automatic extensions ranging from
2
to
18
year terms, at the Company’s discretion.
11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of
March 31, 2017
and June 30, 2016 are presented below:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
Advertising, marketing and licensing
|
$
|
430.2
|
|
|
$
|
180.2
|
|
Customer returns, discounts, allowances and bonuses
|
306.5
|
|
|
164.8
|
|
Compensation and other compensation related benefits
|
270.6
|
|
|
157.5
|
|
Restructuring costs
|
183.4
|
|
|
60.8
|
|
VAT, sales and other non-income taxes
|
58.4
|
|
|
36.2
|
|
Tax indemnification liability
|
55.0
|
|
|
—
|
|
Acquisition-related costs
|
39.4
|
|
|
42.4
|
|
Deferred income
|
25.3
|
|
|
3.8
|
|
Interest
|
17.4
|
|
|
9.4
|
|
Audit and consulting
|
9.1
|
|
|
6.3
|
|
Lease related liabilities
|
4.4
|
|
|
3.7
|
|
Derivative liabilities
|
3.0
|
|
|
20.9
|
|
Other
|
156.0
|
|
|
62.4
|
|
Total accrued expenses and other current liabilities
|
$
|
1,558.7
|
|
|
$
|
748.4
|
|
12. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities as of
March 31, 2017
and June 30,
2016
are presented below:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
June 30,
2016
|
Noncurrent income tax liabilities
|
$
|
154.2
|
|
|
$
|
131.9
|
|
Unfavorable contract liabilities
|
108.2
|
|
|
—
|
|
Deferred rent
|
47.5
|
|
|
47.2
|
|
Restructuring
|
44.6
|
|
|
23.5
|
|
Other
|
31.0
|
|
|
31.2
|
|
Total other noncurrent liabilities
|
$
|
385.5
|
|
|
$
|
233.8
|
|
13. DEBT
The Company’s debt balances consisted of the following as of
March 31, 2017
and
June 30, 2016
, respectively:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30,
2016
|
Short-term debt
|
$
|
3.4
|
|
|
$
|
19.8
|
|
Galleria Credit Agreement
|
|
|
|
Galleria Revolving Credit Facility due September 2021
|
—
|
|
|
—
|
|
Galleria Term Loan A Facility due September 2021
|
944.3
|
|
|
—
|
|
Galleria Term Loan B Facility due September 2023
|
1,000.0
|
|
|
—
|
|
Coty Credit Agreement
|
|
|
|
Coty Revolving Credit Facility due October 2020
|
825.0
|
|
|
670.0
|
|
Coty Term Loan A Facility due October 2020
|
1,806.3
|
|
|
1,883.6
|
|
Coty Term Loan A Facility due October 2021
|
962.8
|
|
|
—
|
|
Coty Term Loan B Facility due October 2022
|
1,641.6
|
|
|
1,596.0
|
|
Other long-term debt and capital lease obligations
|
1.4
|
|
|
0.7
|
|
Total debt
|
7,184.8
|
|
|
4,170.1
|
|
Less: Short-term debt and current portion of long-term debt
|
(193.0
|
)
|
|
(161.8
|
)
|
Total Long-term debt
|
6,991.8
|
|
|
4,008.3
|
|
Less: Unamortized debt issuance costs
(a) (b)
|
(71.7
|
)
|
|
(64.6
|
)
|
Less: Discount on Long-term debt
|
(10.8
|
)
|
|
(7.3
|
)
|
Total Long-term debt, net
|
$
|
6,909.3
|
|
|
$
|
3,936.4
|
|
(a)
Consists of unamortized debt issuance costs of
$18.8
and
$22.7
for the Coty Revolving Credit Facility,
$34.9
and
$30.3
for the Coty Term Loan A Facility and
$11.6
and
$11.6
for the Coty Term Loan B Facility as of
March 31, 2017
and June 30, 2016, respectively.
(b)
Consists of unamortized debt issuance costs of
$3.1
and
$0.0
for the Galleria Term Loan A Facility and
$3.3
and
$0.0
for the Galleria Term Loan B Facility as of
March 31, 2017
and June 30, 2016, respectively. Unamortized debt issuance costs of
$4.9
for the Galleria Revolving Credit Facility were classified as Other noncurrent assets in the Condensed Consolidated Balance Sheets as of
March 31, 2017
.
Coty Credit Agreement
On October 27, 2015, the Company entered into a Credit Agreement (the “Coty Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent. The Coty Credit Agreement provides 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 includes 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.
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 provides 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 terms of the
€140.0
million and
€325.0
million portions of the Incremental Term Loans are 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 provides for: (i) an additional Coty Term Loan A Facility in aggregate principal amount of
$975.0
in commitments (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 have terms that are substantially identical to the existing Coty Term Loan A Facility except that the loans will mature on the date that is
five
years after October 28, 2016. The loans under the Incremental Term B Facility and the Refinancing Facilities have substantially identical terms as the term B loans existing under the 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 will be, 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
1.0%
, 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
$12.4
of deferred debt issuance costs in connection with the Incremental and Refinancing Agreement.
The Coty Credit Agreement is guaranteed by Coty Inc.’s wholly-owned domestic subsidiaries and secured by a first priority lien on substantially all of the assets of Coty Inc. and its wholly-owned domestic subsidiaries, in each case subject to certain carve outs and exceptions.
Galleria Credit Agreement
On October 1, 2016, at the closing of the Transactions, 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 provides 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 Transactions, 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 Transactions, the remaining unused loan commitments for the Galleria Term Loan A Facility expired.
The Company recognized
$12.4
of deferred debt issuance costs in connection with the Galleria Credit Agreement.
The Galleria Credit Agreement is guaranteed by Coty Inc. and its wholly-owned domestic subsidiaries (other than Galleria) and secured by a first priority lien on substantially all of the assets of Coty Inc. and its wholly-owned domestic subsidiaries, in each case subject to certain carve outs and exceptions.
Interest Terms:
The Galleria Credit Agreement facilities will bear interest at rates equal to, at the Company’s option, either:
|
|
•
|
the LIBOR of the applicable qualified currency plus the applicable margin; or
|
|
|
•
|
ABR plus the applicable margin.
|
In the case of the Galleria Term Loan A Facility and Galleria Revolving Facility, the applicable margin means a percentage per annum to be determined in accordance with a leverage-based pricing grid below:
|
|
|
|
|
|
|
|
Pricing Tier
|
|
Total Net Leverage Ratio:
|
|
LIBOR plus:
|
|
Alternative Base Rate Margin:
|
1.0
|
|
Greater than or equal to 5.00:1
|
|
2.000%
|
|
1.000%
|
2.0
|
|
Less than 5.00:1 but greater than or equal to 4.00:1
|
|
1.750%
|
|
0.750%
|
3.0
|
|
Less than 4.00:1 but greater than or equal to 2.75:1
|
|
1.500%
|
|
0.500%
|
4.0
|
|
Less than 2.75:1 but greater than or equal to 2.00:1
|
|
1.250%
|
|
0.250%
|
5.0
|
|
Less than 2.00:1 but greater than or equal to 1.50:1
|
|
1.125%
|
|
0.125%
|
6.0
|
|
Less than 1.50:1
|
|
1.000%
|
|
—%
|
In the case of the Galleria Term Loan B Facility, the applicable margin means
3.00%
per annum, in the case of LIBOR loans, and
2.00%
per annum, in the case of ABR loans. With respect to the Galleria Term Loan B Facility, in no event will (i) LIBOR be deemed to be less than
0.75%
per annum and (ii) ABR be deemed to be less than
1.75%
per annum.
Scheduled Amortization
Beginning in the second quarter of fiscal 2018 and ending at maturity, the Company will make quarterly repayments of
1.25%
and
0.25%
of the initial aggregate Galleria Term Loan A Facility and Galleria Term Loan B Facility, respectively. The remaining balance of the initial aggregate Galleria Term Loan A Facility and Galleria Term Loan B Facility amount will be payable on the maturity date for each facility, respectively.
Fair Value of Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
June 30, 2016
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Galleria Credit Agreement
|
$
|
1,944.3
|
|
|
$
|
1,949.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Coty Credit Agreement
|
5,235.7
|
|
|
5,244.9
|
|
|
4,149.6
|
|
|
4,106.9
|
|
The Company uses the market approach to value the Coty Credit Agreement and the Galleria Credit Agreement. The Company obtains market values for comparable instruments from independent pricing services and infers the fair value of these debt instruments. Based on the assumptions used to value these liabilities at fair value, these debt instruments are categorized a Level 2 in the fair value hierarchy.
Debt Maturities Schedule
Aggregate maturities of the Company’s long-term debt, including current portion of long-term debt and excluding capital lease obligations as of March 31, 2017, are presented below:
|
|
|
|
|
Fiscal Year Ending June 30
|
|
2017, remaining
|
$
|
40.0
|
|
2018
|
203.2
|
|
2019
|
217.5
|
|
2020
|
217.5
|
|
2021
|
2,445.2
|
|
Thereafter
|
4,056.6
|
|
Total
|
$
|
7,180.0
|
|
Debt Covenants
The Company is required to comply with certain affirmative and negative covenants contained within the Coty Credit Agreement and the Galleria Credit Agreement (collectively the “Agreements”). The Agreements include a financial covenant that requires the Company to maintain a total net leverage ratio (as defined therein), equal to or less than
5.25
to 1.00 for each fiscal quarter through June 30, 2017 subject to certain agreed step-downs thereafter. In the four fiscal quarters following the closing of any material acquisition (as defined in the Agreements respectively), 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 described in the prior sentence). Immediately after any such four fiscal quarter period, there shall be at least two consecutive fiscal quarters during which the Company's total net leverage ratio is no greater than the maximum total net leverage ratio that would otherwise have been required in the absence of such material acquisition, regardless of whether any additional material acquisitions are consummated during such period. As of
March 31, 2017
, the Company was in compliance with all covenants within the Agreements.
14. LEASE COMMITMENTS
The Company leases various buildings and equipment. 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
two
and
five years
. Certain lease agreements have escalation clauses for rent, 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
March 31, 2017
are presented below:
|
|
|
|
|
Fiscal Year Ending June 30
|
|
2017, remaining
|
$
|
32.6
|
|
2018
|
124.0
|
|
2019
|
110.4
|
|
2020
|
94.4
|
|
2021
|
81.6
|
|
Thereafter
|
375.2
|
|
|
818.2
|
|
Less: sublease income
|
(32.3
|
)
|
Total minimum payments required
|
$
|
785.9
|
|
The Company incurred rent expense of
$42.9
and
$20.5
relating to operating leases during the
three months ended March 31, 2017 and 2016
respectively and
$103.6
and
$60.2
during the
nine months ended March 31, 2017 and 2016
respectively.
15. INTEREST EXPENSE, NET
Interest expense, net for the
three and nine months ended March 31, 2017 and 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest expense
|
$
|
59.0
|
|
|
$
|
33.1
|
|
|
$
|
157.9
|
|
|
$
|
73.4
|
|
Foreign exchange (gains) losses, net of derivative contracts
(a)
|
2.6
|
|
|
(6.2
|
)
|
|
3.8
|
|
|
(14.9
|
)
|
Interest income
|
(0.8
|
)
|
|
(1.8
|
)
|
|
(2.6
|
)
|
|
(2.8
|
)
|
Total interest expense, net
|
$
|
60.8
|
|
|
$
|
25.1
|
|
|
$
|
159.1
|
|
|
$
|
55.7
|
|
(a)
During the nine months ended March 31, 2016 the Company recorded a gain of
$11.1
related to short-term forward contracts to exchange Euros for U.S. Dollars related to the Euro tranche of the Coty Term Loan B Facility debt issued during the quarter. These short-term forward contracts were entered into to facilitate the repayment of the Company’s then existing U.S. Dollar denominated term loans as part of the Company’s fiscal 2016 debt refinancing. 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
$11.1
included within Foreign exchange (gains) losses, net of derivative contracts for the nine months ended March 31, 2016.
16. EMPLOYEE BENEFIT PLANS
The components of net periodic benefit cost for pension plans and other post-employment benefit plans recognized in the Condensed Consolidated Statements of Operations are presented below for the
three and nine months ended March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Pension Plans
|
|
Other Post-
Employment Benefits
|
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
Total
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15.4
|
|
|
$
|
1.7
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
16.0
|
|
|
$
|
2.0
|
|
Interest cost
|
0.2
|
|
|
0.8
|
|
|
2.0
|
|
|
0.9
|
|
|
0.4
|
|
|
0.5
|
|
|
0.1
|
|
|
—
|
|
|
2.7
|
|
|
2.2
|
|
Expected return on plan assets
|
—
|
|
|
(0.6
|
)
|
|
(2.6
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.6
|
)
|
|
(0.9
|
)
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
(1.5
|
)
|
|
(1.4
|
)
|
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
|
(1.3
|
)
|
Amortization of net loss
|
0.4
|
|
|
0.3
|
|
|
1.1
|
|
|
0.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
|
1.1
|
|
Settlement loss recognized
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost (credit)
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
16.0
|
|
|
$
|
3.2
|
|
|
$
|
(0.8
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
16.2
|
|
|
$
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
Pension Plans
|
|
Other Post-
Employment Benefits
|
|
|
|
U.S.
|
|
International
|
|
U.S.
|
|
International
|
|
Total
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24.5
|
|
|
$
|
5.1
|
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
26.0
|
|
|
$
|
6.0
|
|
Interest cost
|
1.5
|
|
|
2.4
|
|
|
4.7
|
|
|
2.7
|
|
|
1.2
|
|
|
1.5
|
|
|
0.2
|
|
|
—
|
|
|
7.6
|
|
|
6.6
|
|
Expected return on plan assets
|
(0.9
|
)
|
|
(1.8
|
)
|
|
(4.4
|
)
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.3
|
)
|
|
(2.7
|
)
|
Amortization of prior service cost (credit)
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
(4.5
|
)
|
|
(4.2
|
)
|
|
—
|
|
|
—
|
|
|
(4.2
|
)
|
|
(3.9
|
)
|
Amortization of net loss
|
1.4
|
|
|
0.9
|
|
|
3.3
|
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.7
|
|
|
3.3
|
|
Settlement loss recognized
|
15.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.9
|
|
|
—
|
|
Net periodic benefit cost (credit)
|
$
|
17.9
|
|
|
$
|
1.5
|
|
|
$
|
28.4
|
|
|
$
|
9.6
|
|
|
$
|
(2.4
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
44.7
|
|
|
$
|
9.3
|
|
U.S. Del Laboratories, Inc. Pension Plan Settlement
The Company settled obligations to U.S. Del Laboratories, Inc. pension plan (the “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 Condensed Consolidated Statement of Operations for the
nine months ended March 31, 2017
. The settlement occurred in
two
phases as described below. In the first phase, lump sum payments were made to a group of plan participants and in the second phase, the Company transferred the remainder of the Plan’s obligation to a third-party insurance company by purchasing annuity contracts. As of December 31, 2016 the Plan had been fully terminated as a result of these actions.
In the first phase, which occurred during the three months ended September 30, 2016, the Plan’s assets and benefit obligation were remeasured, immediately prior to lump sum payments, using a discount rate of
3.7%
compared to
3.8%
as of June 30, 2016. As a result of the re-measurement, the net pension liability decreased by
$2.9
as compared to the June 30, 2016 net pension liability. The net pension liability decrease was primarily a result of differences in interest rate and mortality assumptions used by Company to measure the plan liability as of June 30, 2016 compared to those assumptions used to determine lump sum benefits to be paid to participants, as mandated by the IRS. The decrease in the Plan’s net pension liability resulted in a corresponding increase in other comprehensive (loss) income for the three months ended September 30, 2016. In connection with this partial settlement the Company recognized a pre-tax settlement loss of
$3.1
, during the three months ended September 30, 2016, due to accelerated recognition of losses previously deferred within accumulated other comprehensive loss.
In the second phase, which occurred during the three months ended December 31, 2016, the Company transferred the remainder of the Plan’s pension obligation to a third-party insurance provider by purchasing annuity contracts. The settlement was facilitated by a cash contribution of
$8.8
followed by liquidation of the Plan’s assets totaling
$47.0
at the settlement date. As a result of this transaction the Company recognized a pre-tax settlement loss of
$12.8
, during the three months ended December 31, 2016, due to accelerated recognition of losses previously deferred within accumulated other comprehensive loss.
During the three months ended September 30, 2016, 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 Condensed Consolidated Statements of Operations for the
nine months ended March 31, 2017
. Refer to Note 5 - Restructuring Costs for further information about the Acquisition Integration Program.
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 following is a summary of the preliminary fair value of the acquired pension and other post-employment plan obligations and assets as of the October 1, 2016 acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Post-Employment Benefits
|
|
Total
|
Benefit obligation
|
$
|
545.9
|
|
|
$
|
15.4
|
|
|
$
|
561.3
|
|
Fair value of plan assets
|
156.2
|
|
|
0.4
|
|
|
156.6
|
|
Funded status
|
$
|
(389.7
|
)
|
|
$
|
(15.0
|
)
|
|
$
|
(404.7
|
)
|
With respect to the acquired pension and other post-employment benefit plans, amounts recognized in the Company’s Condensed Consolidated Balance Sheet as of October 1, 2016 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Post-Employment Benefits
|
|
Total
|
Noncurrent assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
Noncurrent liabilities
|
(388.8
|
)
|
|
(15.0
|
)
|
|
(403.8
|
)
|
Funded Status
|
(389.7
|
)
|
|
(15.0
|
)
|
|
(404.7
|
)
|
Net amount recognized
|
$
|
(389.7
|
)
|
|
$
|
(15.0
|
)
|
|
$
|
(404.7
|
)
|
The accumulated benefit obligation for the defined benefit pension plans acquired was
$479.1
as of October 1, 2016.
Pension plans acquired with accumulated benefit obligations in excess of plan assets and projected benefit obligations in excess of plan assets as of October 1, 2016 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
|
Projected benefit obligation
|
$
|
545.9
|
|
|
$
|
545.9
|
|
Accumulated benefit obligation
|
479.1
|
|
|
479.1
|
|
Fair value of plan assets
|
156.2
|
|
|
156.2
|
|
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
|
|
Other Post-Employment Benefits
|
Discount rates
|
1.1
|
%
|
|
1.6
|
%
|
Future compensation growth rates
|
2.5
|
%
|
|
4.2
|
%
|
The weighted-average assumptions used to determine the Company’s net periodic benefit cost for the three months ended
March 31, 2017
are presented below:
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Post-Employment Benefits
|
Discount rates
|
1.1
|
%
|
|
1.6
|
%
|
Future compensation growth rates
|
2.5
|
%
|
|
4.2
|
%
|
Expected long-term rates of return on plan assets
|
4.4
|
%
|
|
6.0
|
%
|
Asset Allocations
The target asset allocations for the acquired P&G Beauty Business pension plans as of
March 31, 2017
and by asset category are presented below:
|
|
|
|
|
|
|
|
Target
|
|
% of Plan Assets
|
|
|
|
October 1, 2016
|
Equity securities
|
56.3
|
%
|
|
32.9
|
%
|
Fixed income securities
|
35.7
|
%
|
|
20.8
|
%
|
Cash and other investments
|
8.1
|
%
|
|
46.3
|
%
|
Contributions
The Company plans to contribute approximately
$16.0
to fund the acquired pension plans in fiscal 2017.
17. DERIVATIVE INSTRUMENTS
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 Accumulated other comprehensive income (loss) (“AOCI/(L)”) was
$26.6
and
$(2.5)
as of
March 31, 2017
and June 30, 2016, respectively.
The amount of gains and losses recognized in Other comprehensive income (loss) (“OCI”) in the Condensed Consolidated Balance Sheets related to the Company’s derivative and non-derivative financial instruments which are designated as hedging instruments for the three and nine months ended
March 31, 2017
and 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in OCI
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign exchange forward contracts
|
$
|
(0.9
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
5.5
|
|
Interest rate swap contracts
|
2.8
|
|
|
(22.1
|
)
|
|
48.1
|
|
|
(19.6
|
)
|
Net investment hedge
|
(9.0
|
)
|
|
(26.1
|
)
|
|
29.1
|
|
|
(17.0
|
)
|
As of
March 31, 2017
, all of the Company’s remaining foreign currency forward contracts designated as hedges were highly effective. The accumulated gain (loss) on derivative instruments classified as cash flow hedges in AOCI/(L), net of tax, was
$16.0
and
$(28.9)
as of
March 31, 2017
and
June 30, 2016
, respectively. The estimated net loss related to these effective hedges that is expected to be reclassified from AOCI/(L) into earnings, net of tax, within the next twelve months is
$1.2
.
The amount of gains and losses reclassified from AOCI/(L) to the Condensed Consolidated Statements of Operations related to the Company’s derivative financial instruments which are designated as hedging instruments during the
three and nine months ended March 31, 2017 and 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations Classification of Gain (Loss) Reclassified from AOCI/(L)
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign exchange forward contracts:
|
|
|
|
|
|
|
|
Net revenue
|
$
|
0.5
|
|
|
$
|
1.7
|
|
|
$
|
2.1
|
|
|
$
|
4.5
|
|
Cost of sales
|
(1.5
|
)
|
|
0.3
|
|
|
(1.2
|
)
|
|
0.4
|
|
Interest rate swap contracts:
|
|
|
|
|
|
|
|
Interest expense
|
$
|
(1.9
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(4.1
|
)
|
Derivatives not designated as hedging:
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments during the
three and nine months ended March 31, 2017 and 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
Classification of Gain (Loss) Recognized in Operations
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Selling, general and administrative expenses
|
$
|
(2.3
|
)
|
|
$
|
(0.1
|
)
|
|
(1.9
|
)
|
|
1.2
|
|
Interest expense, net
|
(5.9
|
)
|
|
(39.3
|
)
|
|
4.1
|
|
|
(15.6
|
)
|
Other (expense) income, net
(a)
|
(0.1
|
)
|
|
(5.4
|
)
|
|
(0.5
|
)
|
|
(29.6
|
)
|
(a)
During the three and nine months ended March 31, 2016, the Company recognized
$5.4
and
$29.6
of realized losses, respectively, on foreign currency forward contracts related to an advance payment for the Brazil Acquisition.
18. EQUITY
Common Stock
As of
March 31, 2017
, 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, which had special voting rights.
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 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.
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”). On August 1, 2016, JABC, began to purchase the Company’s Class A Common Stock in open market purchases on the New York Stock Exchange. During the nine months ended March 31, 2017, JABC acquired
2.6 million
shares of Class A Common Stock. The Company did not receive any proceeds from these stock purchases conducted by JABC.
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.
On October 1, 2016 the Company issued
409.7 million
shares of Class A Common Stock in connection with the closing of the Transactions as described in
Note 3 — Business Combinations.
As of
March 31, 2017
, total authorized shares of Class A Common Stock was
1,000.0 million
and total outstanding shares of Class A Common Stock was
747.6 million
. As of
March 31, 2017
, the Company was no longer a majority-owned subsidiary of JAB.
Preferred Stock
As of
March 31, 2017
, the Company’s preferred stock consisted of Series A Preferred Stock with a par value of
$0.01
per share. The Series A Preferred Stock is not entitled to receive any dividends and has
no
voting rights except as required by law. Series A Preferred Stock were accounted for partially as a liability and partially as equity as of
March 31, 2017
.
On November 25, 2016, the Company sold
1.0 million
shares of Series A Preferred Stock for
$0.01
par value to Camillo Pane (“Mr. Pane”), the Company’s Chief Executive Officer. Under the terms provided in the subscription agreement, the holder of the vested Series A Preferred Stock is entitled to exchange the Series A Preferred Stock into either cash or shares, at the election of the Company, equal to the fair market value of a share of Class A Common Stock based on the 10-day trailing average closing price on the date of conversion less
$22.34
. If the holder does not exchange the vested Series A Preferred Stock by a certain expiration date, the Company must automatically exchange the Series A Preferred Stock into cash or shares, at the election of the Company. Additionally, Mr. Pane is entitled to a cash bonus of
$2.60
per share upon exchanging shares of Series A Preferred stock if the market value of Class A Common Stock on the date of conversion exceeds
$22.34
.
On December 21, 2016, the Company filed with the Secretary of State of the State of Delaware (i) a Certificate of Retirement with respect to
5,493,894
shares of Series A Preferred Stock previously retired, cancelled and redeemed by the Company and (ii) filed a Certificate of Increase to increase the number of shares designated as Series A Preferred Stock from
3,506,106
to
6,506,106
.
On February 16, 2017, the Company sold
0.5 million
shares of Series A Preferred Stock for
$0.01
par value to Sebastien Froidefond (“Mr. Froidefond”), the Company’s Chief Human Resources Officer. Under the terms provided in the subscription agreement, the holder of the vested Series A Preferred Stock is entitled to exchange the Series A Preferred Stock into either cash or shares, at the election of the Company, equal to the fair market value of a share of Class A Common Stock based on the 10-day trailing average closing price on the date of conversion less
$22.66
. If the holder does not exchange the vested Series A Preferred Stock by a certain expiration date, the Company must automatically exchange the Series A Preferred Stock into cash or shares, at the election of the Company. Additionally, Mr. Froidefond is entitled to a cash bonus of
$2.62
per share upon exchanging shares of Series A Preferred Stock if the market value of Class A Common Stock on the date of conversion exceeds
$22.66
.
On March 27, 2017, the Company sold
1.0 million
shares of Series A Preferred Stock for
$0.01
par value 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 vests on the grant date and the holder is entitled to exchange the vested Series A Preferred Stock after the fifth anniversary of the grant date into either cash or shares, at the election of the Company equal to the fair market value of a share of Class A Common Stock based on the 10-day trailing average closing price on the date of conversion less
$22.39
. If the holder does not exchange the vested Series A Preferred Stock by a certain expiration date, the Company must automatically exchange the Series A Preferred Stock into cash or shares, at election of the Company. The Company requires shareholder approval to settle the conversion in shares. The award is accounted for as a liability as of March 31, 2017 and recorded an expense of
$3.6
in Selling, general and administrative expense on the Condensed Consolidated Statements of Operations.
As of
March 31, 2017
, total authorized shares of Series A Preferred Stock are
6.5 million
and total outstanding shares of Series A Preferred Stock are
4.2 million
. Of the
4.2 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 and
0.5 million
shares vest on February 16, 2022. As of
March 31, 2017
, the Company classified
$1.1
Series A Preferred Stock as equity, and
$4.7
as a liability recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
Treasury Stock - Share Repurchase Program
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, as amended, 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. For the
three and nine months ended March 31, 2017
, the Company has repurchased
nil
and
1.4
million shares, respectively, of its Class A Common Stock. The shares were purchased in multiple transactions at prices ranging from
$25.35
to
$27.40
. The aggregate fair value of shares repurchased during the nine months ended
March 31, 2017
was
$36.3
, and was recorded as an increase to Treasury stock in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests. As of March 31, 2017, the Company had
$396.8
remaining under the Incremental Repurchase Program.
Dividend
s
On August 1, 2016, the Company declared an annual cash dividend of
$0.275
per share, or
$93.4
on its Common Stock, restricted stock units (the “RSUs”) and phantom units. Of the
$93.4
,
$92.4
was paid on August 19, 2016 to holders of record of Common Stock on August 11, 2016. The remaining
$1.0
is payable upon settlement of the RSUs and phantom units outstanding as of August 11, 2016.
On December 9, 2016, the Company declared a quarterly cash dividend of
$0.125
per share, or
$94.0
on its Common Stock, RSUs and phantom units. Of the
$94.0
,
$93.4
was paid on December 28, 2016 to holders of record of Common Stock on December 19, 2016. The remaining
$0.6
is payable upon settlement of the RSUs and phantom units outstanding as of December 19, 2016.
On February 9, 2017, the Company declared a quarterly cash dividend of
$0.125
per share, or
$94.0
on its Common Stock, RSUs and phantom units. Of the
$94.0
,
$93.4
was paid on March 10, 2017 to holders of record of Common Stock on February 28, 2017. The remaining
$0.6
is payable upon settlement of the RSUs and phantom units outstanding as of February 28, 2017.
Additionally, the Company decreased the dividend accrual recorded in a prior period by
$0.2
to adjust for accrued dividends on RSUs no longer expected to vest, which was recorded as an increase to APIC in the Condensed Consolidated Balance Sheet as of
March 31, 2017
. Total accrued dividends on unvested RSUs and phantom units of
$1.0
and
$2.8
are included in Accrued expense and other current liabilities and Other noncurrent liabilities, respectively, in the Condensed Consolidated Balance Sheet as of
March 31, 2017
.
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Post-Employment Benefit Plans
|
|
Total
|
|
|
Gain (Loss) on Net Investment Hedges
|
|
Other Foreign Currency Translation Adjustments
|
|
|
Balance—July 1, 2016
|
$
|
(28.9
|
)
|
|
$
|
(2.5
|
)
|
|
$
|
(164.0
|
)
|
|
$
|
(44.3
|
)
|
|
$
|
(239.7
|
)
|
Other comprehensive (loss) income before reclassifications
|
40.7
|
|
|
29.1
|
|
|
(38.1
|
)
|
|
0.4
|
|
|
32.1
|
|
Net amounts reclassified from AOCI/(L)
|
4.2
|
|
|
—
|
|
|
—
|
|
|
9.7
|
|
|
13.9
|
|
Net current-period other comprehensive (loss)
income
|
44.9
|
|
|
29.1
|
|
|
(38.1
|
)
|
|
10.1
|
|
|
46.0
|
|
Balance—March 31, 2017
|
$
|
16.0
|
|
|
$
|
26.6
|
|
|
$
|
(202.1
|
)
|
|
$
|
(34.2
|
)
|
|
$
|
(193.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses on Cash Flow Hedges
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Other Post-Employment Benefit Plans
|
|
Total
|
|
|
Loss on Net Investment Hedge
|
|
Foreign Currency Translation Adjustments
|
|
|
Balance—July 1, 2015
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
(249.3
|
)
|
|
$
|
(24.6
|
)
|
|
$
|
(274.0
|
)
|
Other comprehensive (loss) income before reclassifications
|
(14.7
|
)
|
|
(17.0
|
)
|
|
54.5
|
|
|
0.2
|
|
|
23.0
|
|
Net amounts reclassified from AOCI/(L)
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Net current-period other comprehensive (loss)
income
|
(14.6
|
)
|
|
(17.0
|
)
|
|
54.5
|
|
|
0.2
|
|
|
23.1
|
|
Balance—March 31, 2016
|
$
|
(14.7
|
)
|
|
$
|
(17.0
|
)
|
|
$
|
(194.8
|
)
|
|
$
|
(24.4
|
)
|
|
$
|
(250.9
|
)
|
19. SHARE-BASED COMPENSATION PLANS
Total share-based compensation expense was
$10.4
and
$12.4
for the three months ended
March 31, 2017
and 2016, respectively,
$22.7
and
$29.3
for the
nine months ended March 31, 2017 and 2016
, respectively, which is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. As of
March 31, 2017
, the total unrecognized share-based compensation expense related to unvested stock options, Series A Preferred Stock, and restricted and other share awards is
$27.1
,
$5.2
and
$61.8
, respectively. The unrecognized share-based compensation expense related to unvested stock options, Series A Preferred stock, and restricted and other share awards is expected to be recognized over a weighted-average period of
4.62
,
4.02
and
3.20
years, respectively.
Restricted Share Units
The Company granted approximately
nil
and
2.8 million
RSUs during the
three and nine months ended March 31, 2017
, respectively, with a weighted-average grant date fair value per share of
$24.60
, which vests on the fifth anniversary of the grant date. The RSUs granted are accompanied by dividend equivalent rights and, as such, were valued at the closing market price of the Company’s Class A Common Stock on the date of grant. The Company recognized share-based compensation expense of
$4.4
and
$12.7
for the
three and nine months ended March 31, 2017
, respectively. The Company recognized share-based compensation expense of
$4.0
and
$15.4
for the
three and nine months ended March 31, 2016
, respectively.
Series A Preferred Stock
The Company granted
1.5 million
and
2.5 million
shares of Series A Preferred Stock during the
three and nine months ended March 31, 2017
, respectively, which are accounted for partially as a liability and partially as equity. Refer to Note 18 — Equity for additional information about Series A Preferred grants during the period. The Company recognized share-based compensation expense of
$4.0
and
$3.3
for the
three and nine months ended March 31, 2017
, respectively. The Company recognized share-based compensation expense of
$0.6
and
$1.3
for the
three and nine months ended March 31, 2016
, respectively.
The Series A Preferred Stock have previously been accounted for using the Black-Scholes valuation model. During the nine months ended March 31, 2017, the Company granted Series A Preferred Stock that include cash bonus payments tied to the exercise of the awards. Due 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 as of March 31, 2017. The lattice structure the Company uses to value the exchange option 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. The significant assumptions the Company uses in its binomial lattice model are further described below.
|
|
|
|
March 31, 2017
|
Historical volatility
|
30.9%
|
Implied volatility
|
32.3%
|
Risk-free rate of return
|
1.94% - 2.22%
|
Dividend yield on Class A Common Stock
|
2.8%
|
Yield on cash
|
4.9%
|
Historical volatility
- The Company calculates historical volatility based on volatility of the daily historical prices of the common stock for the longest look-back period with available data.
Implied volatility
- The Company calculates implied volatility based on publicly traded at the market options maturing January 2019 that track the Company’s Class A Common Stock.
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 calculates the dividend yield on shares using the annualized dividend rate calculated based on the per share cash dividend paid quarterly and the stock price as of the valuation date.
Yield on cash
- The Company calculates the yield of comparable securities with a similar credit rating to the Company.
Non-Qualified Stock Options
The Company granted
nil
and
8.2 million
non-qualified stock options during the
three and nine months ended March 31, 2017
, respectively, with a weighted average grant date fair value of
$6.42
per share. The options become exercisable
five
years from the date of the grant. The Company recognized share-based compensation expense of
$2.0
and
$6.7
for the
three and nine months ended March 31, 2017
, respectively. The Company recognized share-based compensation expense of
$7.8
and
$12.6
for the
three and nine months ended March 31, 2016
, respectively.
20. NET INCOME ATTRIBUTABLE TO COTY INC. PER COMMON SHARE
Reconciliation between the numerators and denominators of the basic and diluted EPS computations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in millions, except per share data)
|
Net income (loss) attributable to Coty Inc.
|
$
|
(164.2
|
)
|
|
$
|
(26.8
|
)
|
|
$
|
(117.4
|
)
|
|
$
|
187.9
|
|
Weighted-average common shares outstanding—Basic
|
747.3
|
|
|
337.9
|
|
|
607.9
|
|
|
347.8
|
|
Effect of dilutive stock options and Series A Preferred Stock
(a)
|
—
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
Effect of restricted stock and RSUs
(b)
|
—
|
|
|
—
|
|
|
—
|
|
|
3.0
|
|
Weighted-average common shares outstanding—Diluted
|
747.3
|
|
|
337.9
|
|
|
607.9
|
|
|
356.9
|
|
Net income attributable to Coty Inc. per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.22
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.54
|
|
Diluted
|
(0.22
|
)
|
|
(0.08
|
)
|
|
(0.19
|
)
|
|
0.53
|
|
|
|
(a)
|
For the
three and nine months ended March 31, 2017
and the
three months ended March 31, 2016
,
no
outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase shares of common stock were included in the computation of diluted loss per share due to the net loss incurred during the respective periods. For the nine months ended March 31, 2016, outstanding stock options and Series A Preferred Stock with purchase or conversion rights to purchase
3.2 million
options were excluded in the computation of EPS as their inclusion would be anti-dilutive.
|
|
|
(b)
|
For the
three and nine months ended March 31, 2017
and the
three months ended March 31, 2016
,
no
RSU were excluded in the computation of diluted loss per share due to the net loss incurred during the period. For the nine months ended March 31, 2016,
0.1 million
RSU were excluded in the computation of diluted loss per share as their inclusion would be anti-dilutive.
|
21. NONCONTROLLING INTERESTS AND REDEEMABLE NONCONTROLLING INTERESTS
Noncontrolling Interests
The Company has the right to purchase the noncontrolling interests in certain subsidiaries from the noncontrolling interest holders at certain points in time.
In December 2014, the Company gave notice of intent to exercise its right to purchase the noncontrolling interest for
14%
of a certain Singapore subsidiary from the noncontrolling interest holder at an estimated purchase price of approximately
$10.7
for this
14%
. In addition, on September 29, 2015, the Company gave notice of intent to exercise its option to terminate the Shareholders’ Agreement with the noncontrolling interest holder and to purchase the remaining
35%
of the noncontrolling interest holder’s interest in the Singapore subsidiary. The noncontrolling interest holder indicated the desire to continue its participation and to retain an equity investment in the joint venture. The Company and the noncontrolling interest holder are exploring alternative options of restructuring the joint venture.
Redeemable Noncontrolling Interests
As of March 31, 2017, the redeemable noncontrolling interests (“RNCI”) consisted of a
33.0%
interest in consolidated subsidiaries in the United Arab Emirates and a
40.0%
interest in the consolidated subsidiaries related to the Younique acquisition. See Note 3 — Business Combinations.
On February 1, 2017, the Company completed its acquisition of
60%
of the membership interest in Foundation which held the net assets of Younique, for cash consideration of
$600.0
, net of acquired cash and debt assumed. The existing Younique membership holders contributed their
100%
membership interest in Younique to Foundation in exchange for a
40%
membership interest in Foundation and
$600.0
of cash consideration. The Company accounts for the noncontrolling interest portion of the Foundation as RNCI due to the noncontrolling interest holder’s ability to put their shares to the Company in certain circumstances. The Company recognized
$410.9
and
$433.6
as the redeemable noncontrolling interest balances as of February 1, 2017 (acquisition date) and
March 31, 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 Condensed 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 both an income approach and a market approach 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 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.
On February 12, 2016, the Company gave notice of intent to exercise our option to purchase as of June 30, 2016 the noncontrolling interest in a certain Hong Kong subsidiary at the purchase price of
$9.8
for the remaining
45%
interest. The transaction was effective as of June 30, 2016 and the payment was completed during the three months ended December 31, 2016.
22. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved, from time to time, in litigation, other regulatory actions and other legal proceedings incidental to its business, including consumer class action, personal injury, intellectual property and advertising claims litigation, among others. While the Company cannot predict any final outcomes relating thereto, management believes that the outcome of current litigation, regulatory actions and legal proceedings will not have a material effect upon its business, results of operations, financial condition or cash flows. However, management’s assessment of the Company’s current litigation, regulatory actions and other legal proceedings, especially those related to the P&G Beauty Business, is ongoing, and could change in light of the discovery of facts with respect to litigation, regulatory actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, arbitrators, juries or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation, regulatory actions and legal proceedings. As the outcomes of such proceedings are unpredictable, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, financial condition, results of operations or cash flows.
Noncontrolling Interests and Redeemable Noncontrolling Interests
Refer to Note 21 — Noncontrolling Interests and Redeemable Noncontrolling Interests for commitments and contingencies related to certain noncontrolling and redeemable controlling interests the Company holds as of March 31, 2017.
23. SUBSEQUENT EVENTS
Burberry Beauty Business
On April 3, 2017, the Company entered in an agreement with Burberry Limited (“Burberry”) to acquire the exclusive long-term global license rights to develop, manufacture, advertise, promote and distribute Burberry Beauty luxury fragrances, cosmetics and skincare (the “Burberry License Agreement”). Upfront consideration for this license will total
£130.0 million
and is expected to be paid at the commencement of the licensing arrangement, in the second quarter of fiscal 2018. The Company will be required to make annual license fee payments, subject to license fee minimums, to Burberry over the term of the Burberry License Agreement. The Company is also expected to pay to Burberry approximately
£50.0 million
for inventory at the closing.
Restructuring
As described in Note 5 – Restructuring, in connection with the acquisition of the P&G Beauty Business, the Company is evaluating actions associated with Global Integration Activities. As part of these actions, on May 9, 2017, the Board approved plans to optimize the Company’s global supply chain capabilities. The Company estimates these actions will result in total pre-tax restructuring and related costs of approximately
$300.0
, to be incurred over the next
two
years.
The estimate includes costs for employee termination benefits, costs to exit facilities, and other costs directly related to the restructuring activities. The cash portion of the total pre-tax charges associated with supply chain optimization is expected to be approximately
$250.0
.
Quarterly Dividend
On May 10, 2017, 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 paid on June 13, 2017 to holders of record of Common Stock on May 31, 2017.