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 and skin & body related products throughout the world. Coty is a global beauty company with a rich entrepreneurial history and an iconic portfolio of brands.
The Company operates on a fiscal year basis with a year-end of June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2022” refer to the fiscal year ending June 30, 2022. When used in this Quarterly Report on Form 10-Q, the term “includes” and “including” means, unless the context otherwise indicates, including without limitation.
The Company’s sales generally increase during the second fiscal quarter as a result of increased demand associated with the winter holiday season. Financial performance, working capital requirements, sales, cash flows and borrowings generally experience variability during the three to six months preceding the holiday season. Product innovations, new product launches and the size and timing of orders from the Company’s customers may also result in variability.
On November 30, 2020, the Company completed the previously announced strategic transaction with Rainbow UK Bidco Limited (“KKR Bidco”) (an affiliate of funds and/or separately managed accounts (“KKR Funds”) advised and/or managed by Kohlberg Kravis Roberts & Co. L.P. and its affiliates (“KKR”)), for the sale of a majority stake in Coty’s Professional and Retail Hair businesses, including the Wella, Clairol, OPI and ghd brands, (together, the “Wella Business”). As a result, Coty owned a 40% stake in Rainbow JVCO LTD and subsidiaries (together, "Wella") as of September 30, 2021. See Note 8—Equity Investments for additional information.
As previously disclosed, the Company's chief operating decision maker ("CODM") has been in the process of finalizing her organization structure and how she will assess performance, and the Company has concurrently evaluated the potential impact to its segment reporting. Based on this evaluation, the Company has determined that it is appropriate to realign its reportable segments to a principally product category-based structure, comprised of a Prestige business segment and a Consumer Beauty business segment. See Note 4—Segment Reporting for information on the Company's segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include the Company’s consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited interim Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended June 30, 2021. In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three months ended September 30, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2022. All dollar amounts (other than per share amounts) in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
Restricted Cash
Restricted cash represents funds that are not readily available for general purpose cash needs due to contractual limitations. Restricted cash is classified as a current or long-term asset based on the timing and nature of when or how the cash is expected to be used or when the restrictions are expected to lapse. As of September 30, 2021 and June 30, 2021, the Company had restricted cash of $45.5 and $56.9, respectively, included in Restricted cash in the Condensed Consolidated Balance Sheets. The Restricted cash balance as of September 30, 2021 primarily provides collateral for certain bank guarantees on rent, customs and duty accounts and also consists of collections on factored receivables that remain unremitted to the factor as of September 30, 2021. Restricted cash is included as a component of Cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows.
Equity Investments
The Company elected the fair value option to account for its investment in Wella to align with the Company’s strategy for this investment. The fair value is updated on a quarterly basis. The investment is classified within Level 3 in the fair value hierarchy because the Company estimates the fair value of the investment using a combination of the income approach, the market approach and private transactions, when applicable. Changes in the fair value of equity investment under the fair value option are recorded in Other income, net within the Condensed Consolidated Statements of Operations (see Note 8—Equity Investments).
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 net realizable value of inventory, the fair value of acquired assets and liabilities associated with acquisitions, the fair value of equity investments, the assessment of goodwill, other intangible assets and long-lived assets for impairment and income taxes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the Condensed Consolidated Financial Statements in future periods.
Tax Information
The effective income tax rate for the three months ended September 30, 2021 and 2020 was 33.4% and 200.2%, respectively. The positive effective tax rate for the three months ended September 30, 2021 results from reporting income before taxes and a provision for income taxes. The positive effective tax rate for the three months ended September 30, 2020 results from reporting losses before income taxes and a benefit for income taxes. The change in the effective tax rate for the three months ended September 30, 2021, as compared with the three months ended September 30, 2020, is primarily due to the limitation on the deductibility of executive stock compensation in the current period as well as a benefit related to a change in the Company's main principal location of $220.5 recorded in the prior period. The benefit recorded in the prior period was the result of a tax rate differential on the deferred taxes recognized on the transfer of assets and liabilities, following the relocation of the Company's main principal location from Geneva to Amsterdam.
The effective income tax rates vary from the U.S. federal statutory rate of 21% due to the effect of (i) jurisdictions with different statutory rates, (ii) adjustments to the Company’s unrealized tax benefits (“UTBs”) and accrued interest, (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes.
As of September 30, 2021 and June 30, 2021, the gross amount of UTBs was $278.5 and $279.9, respectively. As of September 30, 2021, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $158.2. As of September 30, 2021 and June 30, 2021, the liability associated with UTBs, including accrued interest and penalties, was $180.6 and $181.2, respectively, which was recorded in Income and other taxes payable and Other noncurrent liabilities in the Condensed Consolidated Balance Sheets. The total interest and penalties recorded in the Condensed Consolidated Statements of Operations related to UTBs was $0.7 and $1.3 for the three months ended September 30, 2021 and 2020, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30, 2021 and June 30, 2021 was $22.4 and $21.7, respectively. On the basis of the information available as of September 30, 2021, it is reasonably possible that a decrease of up to $20.0 in UTBs may occur within twelve months as a result of projected resolutions of global tax examinations and a potential lapse of the applicable statutes of limitations.
Recently Adopted Accounting Pronouncements
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarifies certain interactions between the accounting for equity securities, equity method investments, and certain derivative instruments. The Company adopted this guidance in the first quarter of fiscal 2022. The adoption of this standard did not have a material impact on the Company's financial position and its results of operations.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance under ASU No. 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is in the process of assessing the impact, if any, that ASU No. 2020-04 is expected to have on the Company’s financial position, its results of operations and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt- Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40), which removes certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. The Company is evaluating the impact this guidance will have on the Company’s financial position, its results of operations and related disclosures.
3. DISCONTINUED OPERATIONS
On June 1, 2020, the Company entered into a definitive agreement with KKR Bidco, regarding a strategic transaction for the sale of the Wella Business, valuing the business at $4,300.0 on a cash- and debt-free basis. The transaction was completed on November 30, 2020 and Coty retained ownership of 40% of the Wella Business.
In accordance with applicable accounting guidance for the disposal of long-lived assets, the results of the Wella Business are presented as discontinued operations in the prior period leading up to the date of the sale, and, as such, have been excluded from both continuing operations and segment results for all periods presented. The Wella Business was comprised of the Professional Beauty and Retail Hair businesses.
The following table has selected financial information included in Net income from discontinued operations for the Wella Business.
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Three Months Ended September 30, 2020
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Net revenues
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$
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566.4
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Cost of sales
|
181.0
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Gross profit
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385.4
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Selling, general and administrative expenses
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240.0
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Operating income
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145.4
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Interest expense, net (a)
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11.8
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Other expense (income), net
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0.1
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(Loss) income from discontinued operations before income taxes
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133.5
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(Benefit) provision for income taxes on discontinued operations
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28.8
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Net income from discontinued operations
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$
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104.7
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(a)Interest expense was allocated to the discontinued operations due to a requirement in the 2018 Coty Credit Agreement, as amended (defined in Note 11—Debt), that cash generated from the sale of the Wella Business is utilized to reduce the Company’s debt within the twelve months following the sale completion date, other than a maximum of $500.0 that will be used for reinvestment in the Company's business, pursuant to the 2018 Coty Credit Agreement, as amended. See Note 11—Debt for more information.
The following is selected financial information included in cash flows from discontinued operations for the Wella Business held for sale:
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Three Months Ended September 30, 2020
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NON-CASH OPERATING ITEMS
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Depreciation and amortization
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$
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—
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CASH FLOW FROM INVESTING ACTIVITIES
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Capital expenditures
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$
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4.7
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4. SEGMENT REPORTING
Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the Company’s CODM in deciding how to allocate resources and assess performance. The Company has designated its Chief Executive Officer as the CODM.
As previously disclosed, the CODM has been in the process of finalizing her organization structure and how she will assess performance, and the Company has concurrently evaluated the potential impact to its segment reporting. Based on this evaluation, the Company has determined that it is appropriate to realign its reportable segments to a principally product category-based structure, comprised of a Prestige business segment and a Consumer Beauty business segment beginning in the first quarter of fiscal 2022. The Company has recast its results for fiscal 2021 to reflect the changes in its segments.
Certain income and shared costs and the results of corporate initiatives are managed by Corporate. Corporate primarily includes stock compensation expense, restructuring and realignment costs, costs related to acquisition and divestiture activities, and impairments of long lived assets, goodwill and intangibles that are not attributable to ongoing operating activities of the segments. Corporate costs are not used by the CODM to measure the underlying performance of the segments.
With the exception of goodwill, the Company does not identify or monitor assets by segment. The Company does not present assets by reportable segment since various assets are shared between reportable segments. The allocation of goodwill by segment is presented in Note 9—Goodwill and Other Intangible Assets, net.
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Three Months Ended
September 30,
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SEGMENT DATA
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2021
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2020
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Net revenues:
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Prestige
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$
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870.7
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$
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644.4
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Consumer Beauty
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501.0
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479.7
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Total
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$
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1,371.7
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$
|
1,124.1
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Operating income (loss):
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Prestige
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132.1
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34.0
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Consumer Beauty
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11.4
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(13.7)
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Corporate
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(126.3)
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(86.3)
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Total
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$
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17.2
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$
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(66.0)
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Reconciliation:
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Operating income (loss)
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17.2
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(66.0)
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Interest expense, net
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59.8
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62.1
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Other income, net
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(386.1)
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(5.8)
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Income (loss) from continuing operations before income taxes
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$
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343.5
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$
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(122.3)
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Presented below are the percentage of revenues associated with the Company’s product categories:
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Three Months Ended
September 30,
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PRODUCT CATEGORY
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2021
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2020
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Fragrance
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59.7
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%
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56.0
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%
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Color Cosmetics
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28.4
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30.1
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Body Care & Other
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11.9
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13.9
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Total
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100.0
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%
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100.0
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%
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5. ACQUISITION AND DIVESTITURE-RELATED COSTS
Acquisition-related costs, which are expensed as incurred, represent non-restructuring costs directly related to acquiring and integrating an entity, for both completed and contemplated acquisitions and can include finder’s fees, legal, accounting, valuation, other professional or consulting fees, and other internal costs which can include compensation related expenses for dedicated internal resources. The Company recognized no acquisition-related costs for the three months ended September 30, 2021 and 2020.
Divestiture-related costs, which are expensed as incurred, represent non-restructuring costs directly related to divesting and selling an entity, for both completed and contemplated divestitures. These costs can include legal, accounting, information technology, other professional or consulting fees and other internal costs. Internal costs can include compensation related expenses for dedicated internal resources. Additionally, for divestitures, the Company includes write-offs of assets that are no longer recoverable and contract related costs due to the divestiture. The Company recognized divestiture-related costs of $4.0 and $46.3 for the three months ended September 30, 2021 and 2020, respectively. Divestiture-related costs incurred during the three months ended September 30, 2021 and 2020 were primarily related to the strategic transaction with KKR for the sale of a majority stake in the Wella Business.
6. RESTRUCTURING COSTS
Restructuring costs for the three months ended September 30, 2021 and 2020 are presented below:
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Three Months Ended
September 30,
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2021
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2020
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Transformation Plan
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$
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12.4
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$
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31.2
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Other Restructuring
|
—
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(1.1)
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Total
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$
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12.4
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$
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30.1
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Transformation Plan
In connection with the four-year plan announced on July 1, 2019 to drive substantial improvement and optimization in the Company's businesses (the “Turnaround Plan”), the Company has and expects to continue to incur restructuring and related costs. On May 11, 2020, the Company announced an expansion of the Turnaround Plan to further reduce fixed costs, (the “Transformation Plan”). Of the expected costs, the Company has incurred cumulative restructuring charges of $242.2 related to approved initiatives through September 30, 2021, which have been recorded in Corporate.
Over the next two fiscal years, the Company expects to incur approximately $65.0 of additional restructuring charges pertaining to the approved actions, primarily related to employee termination benefits, contract terminations and other exit-related costs.
The following table presents aggregate restructuring charges for the program:
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Severance and Employee Benefits
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Fixed Asset Write-offs
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Other Exit Costs
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Total
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Fiscal 2020
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$
|
151.2
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$
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(1.1)
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$
|
6.5
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$
|
156.6
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Fiscal 2021
|
73.4
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(0.5)
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0.3
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|
73.2
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Fiscal 2022
|
12.4
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|
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—
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—
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|
12.4
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Cumulative through September 30, 2021
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$
|
237.0
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|
|
$
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(1.6)
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|
$
|
6.8
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$
|
242.2
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The related liability balance and activity of restructuring costs for the Transformation Plan restructuring costs are presented below:
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Severance and Employee Benefits
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|
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Fixed Asset Write-offs
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Other Exit Costs
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Total
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Balance—July 1, 2021
|
$
|
122.5
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|
|
|
$
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—
|
|
|
$
|
0.3
|
|
|
$
|
122.8
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|
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Restructuring charges
|
14.9
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|
|
—
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|
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—
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14.9
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Payments
|
(11.7)
|
|
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|
|
—
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|
|
(0.3)
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|
|
(12.0)
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Changes in estimates
|
(2.5)
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—
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—
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(2.5)
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Non-cash utilization
|
—
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|
—
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|
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—
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—
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Effect of exchange rates
|
(2.2)
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|
|
—
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|
|
0.1
|
|
|
(2.1)
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Balance—September 30, 2021
|
$
|
121.0
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|
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
121.1
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The Company currently estimates that the total remaining accrual of $121.1 will result in cash expenditures of approximately $68.5, $52.0 and $0.6 in fiscal 2022, 2023 and thereafter, respectively.
7. INVENTORIES
Inventories as of September 30, 2021 and June 30, 2021 are presented below:
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|
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|
September 30,
2021
|
|
June 30,
2021
|
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Raw materials
|
$
|
162.1
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|
|
$
|
159.5
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|
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Work-in-process
|
8.3
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|
|
12.5
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|
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Finished goods
|
490.3
|
|
|
478.8
|
|
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Total inventories
|
$
|
660.7
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|
|
$
|
650.8
|
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8. EQUITY INVESTMENTS
The Company's equity investments, classified as Equity investments on the Condensed Consolidated Balance Sheets are represented by the following:
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|
September 30,
2021
|
|
June 30,
2021
|
|
Equity method investments:
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KKW Holdings (a)
|
$
|
15.6
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$
|
16.2
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Equity investments at fair value:
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|
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|
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Wella (b)
|
1,650.0
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|
|
1,260.0
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|
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Total equity investments
|
$
|
1,665.6
|
|
|
$
|
1,276.2
|
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(a)On January 4, 2021, the Company completed its purchase of 20% of the outstanding equity of KKW Holdings. The Company accounts for this minority investment under the equity method, given it has the ability to exercise significant influence over, but not control, the investee. The carrying value of the Company’s investment includes basis differences allocated to amortizable intangible assets.
During the three months ended September 30, 2021 and 2020, the Company recognized ($0.6) and nil, respectively, representing its share of the investee’s net loss in Other income, net within the Condensed Consolidated Statements of Operations.
(b)On November 30, 2020, the Company completed the previously announced strategic transaction with KKR for the sale of a majority stake in Coty’s Wella Business. As part of the transaction, Coty received initial cash proceeds of $2,451.7, and retained a 40% stake in Wella. The Company initially computed the fair value of its retained noncontrolling interest investment based on the fair value of the Wella Business exchanged with KKR. This resulted in an initial fair value of $1,634.5 for the retained noncontrolling interest investment in Wella. Immediately after closing, Wella drew down on their third party debt for $1,282.4 and used $448.0 of such funds to make a distribution to the Company, which the Company has accounted for as a return of capital. As of September 30, 2021 and June 30, 2021, the fair value of the Company's investment in Wella was estimated to be $1,650.0 and $1,260.0, respectively.
On October 20, 2021, the Company completed the sale of a 9.4% stake in Wella to an affiliate of KKR, KKR Rainbow Aggregator L.P. ("KKR Aggregator”) in exchange for the redemption of approximately half of KKR Aggregator's remaining Series B Convertible Preferred Stock shares in Coty and a portion of unpaid dividends, reducing the Company's total shareholding in Wella to approximately 30.6%. On November 6, 2021, Coty entered into a definitive agreement to sell an additional approximate 4.7% stake in Wella to KKR Aggregator in exchange for the redemption of approximately 56% of KKR Aggregator 's remaining convertible preferred shares in Coty, reducing the Company’s total shareholding in Wella to 25.9%. The transaction is expected close on November 30, 2021. Refer to Note 15—Equity and Convertible Preferred Stock.
The following table presents summarized financial information of the Company’s equity method investees for the period ending September 30, 2021. Amounts presented represent combined totals at the investee level and not the Company’s proportionate share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2021
|
|
|
|
Summarized Statements of Operations information:
|
|
|
|
|
Net revenues
|
$
|
619.2
|
|
|
|
|
Gross profit
|
429.7
|
|
|
|
|
Operating income
|
25.6
|
|
|
|
|
Income before income taxes
|
7.5
|
|
|
|
|
Net income
|
5.5
|
|
|
|
The following table summarizes movements in equity investments with fair value option that are classified within Level 3 for the period ended September 30, 2021. There were no internal movements to or from Level 3 from Level 1 or Level 2 for the period ended September 30, 2021.
|
|
|
|
|
|
|
|
Equity investments at fair value:
|
|
|
Balance as of June 30, 2021
|
$
|
1,260.0
|
|
|
Total gains/(losses) included in earnings - unrealized
|
390.0
|
|
|
Balance as of September 30, 2021
|
$
|
1,650.0
|
|
Level 3 significant unobservable inputs sensitivity
The following table summarizes the significant unobservable inputs used in Level 3 valuation of the Company's investments carried at fair value as of September 30, 2021. Included in the table are the inputs or range of possible inputs that have an effect on the overall valuation of the financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
Valuation Technique
|
|
Unobservable input
|
|
Range
|
|
Equity investments at fair value
|
$
|
1,650.0
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
11.00% (a)
|
|
|
|
Growth rate
|
|
1.5% - 4.2% (a)
|
|
|
|
|
|
|
|
|
|
Market multiple
|
|
Revenue multiple
|
|
2.0x (b)
|
|
|
|
EBITDA multiple
|
|
11.5x – 17.5x (b)
|
(a)The primary unobservable inputs used in the fair value measurement of the Company's equity investments with fair value option, when using a discounted cash flow method, are the discount rate and revenue growth rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. The Company estimates the discount rate based on the investees' projected cost of equity and debt. The revenue growth rate is forecasted for future years by the investee based on their best estimates. Significant increases (decreases) in the revenue growth rate in isolation would result in a significantly higher (lower) fair value measurement.
(b)The primary unobservable inputs used in the fair value measurement of the Company's equity investments with fair value option, when using a market multiple method, are the revenue multiple and EBITDA multiple. Significant increases (decreases) in the revenue multiple or EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. The market multiples are derived from a group of guideline public companies.
The Exchange Agreement, as discussed in Note 15—Equity and Convertible Preferred Stock, was also included and weighted for the valuation purposes. Going forward, the weighting of the valuation approaches could have a significant impact on the valuation of the investment.
9. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Goodwill as of September 30, 2021 and June 30, 2021 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prestige
|
|
Consumer Beauty
|
|
Total
|
|
Gross balance at June 30, 2021
|
$
|
6,384.0
|
|
|
$
|
1,774.2
|
|
|
$
|
8,158.2
|
|
|
Accumulated impairments
|
(3,110.3)
|
|
|
(929.8)
|
|
|
(4,040.1)
|
|
|
Net balance at June 30, 2021
|
$
|
3,273.7
|
|
|
$
|
844.4
|
|
|
$
|
4,118.1
|
|
|
|
|
|
|
|
|
|
Changes during the period ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
(63.9)
|
|
|
(16.8)
|
|
|
(80.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross balance at September 30, 2021
|
$
|
6,320.1
|
|
|
$
|
1,757.4
|
|
|
$
|
8,077.5
|
|
|
Accumulated impairments
|
(3,110.3)
|
|
|
(929.8)
|
|
|
(4,040.1)
|
|
|
Net balance at September 30, 2021
|
$
|
3,209.8
|
|
|
$
|
827.6
|
|
|
$
|
4,037.4
|
|
As described in Note 4—Segment Reporting, the Company changed its segments during the quarter ended September 30, 2021. 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.
Other Intangible Assets, net
Other intangible assets, net as of September 30, 2021 and June 30, 2021 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
June 30,
2021
|
|
Indefinite-lived other intangible assets
|
$
|
1,008.1
|
|
|
$
|
1,018.7
|
|
|
Finite-lived other intangible assets, net
|
3,327.9
|
|
|
3,444.3
|
|
|
Total Other intangible assets, net
|
$
|
4,336.0
|
|
|
$
|
4,463.0
|
|
The changes in the carrying amount of indefinite-lived other intangible assets are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
Total
|
|
Gross balance at June 30, 2021
|
$
|
1,932.2
|
|
|
$
|
1,932.2
|
|
|
Accumulated impairments
|
(913.5)
|
|
|
(913.5)
|
|
|
Net balance at June 30, 2021
|
$
|
1,018.7
|
|
|
$
|
1,018.7
|
|
|
|
|
|
|
|
Changes during the period ended September 30, 2021
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
(10.6)
|
|
|
(10.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross balance at September 30, 2021
|
$
|
1,921.6
|
|
|
$
|
1,921.6
|
|
|
Accumulated impairments
|
(913.5)
|
|
|
(913.5)
|
|
|
Net balance at September 30, 2021
|
$
|
1,008.1
|
|
|
$
|
1,008.1
|
|
Intangible assets subject to amortization are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
License agreements and collaboration agreements
|
$
|
4,192.9
|
|
|
$
|
(1,229.1)
|
|
|
$
|
(19.6)
|
|
|
$
|
2,944.2
|
|
|
Customer relationships
|
803.1
|
|
|
(486.3)
|
|
|
(5.5)
|
|
|
311.3
|
|
|
Trademarks
|
330.2
|
|
|
(168.7)
|
|
|
(0.5)
|
|
|
161.0
|
|
|
Product formulations and technology
|
90.2
|
|
|
(62.4)
|
|
|
—
|
|
|
27.8
|
|
|
Total
|
$
|
5,416.4
|
|
|
$
|
(1,946.5)
|
|
|
$
|
(25.6)
|
|
|
$
|
3,444.3
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
License agreements and collaboration agreements
|
$
|
4,124.3
|
|
|
$
|
(1,251.1)
|
|
|
$
|
(19.6)
|
|
|
$
|
2,853.6
|
|
|
Customer relationships
|
765.7
|
|
|
(467.6)
|
|
|
(5.5)
|
|
|
292.6
|
|
|
Trademarks
|
327.9
|
|
|
(171.2)
|
|
|
(0.5)
|
|
|
156.2
|
|
|
Product formulations and technology
|
88.2
|
|
|
(62.7)
|
|
|
—
|
|
|
25.5
|
|
|
Total
|
$
|
5,306.1
|
|
|
$
|
(1,952.6)
|
|
|
$
|
(25.6)
|
|
|
$
|
3,327.9
|
|
Amortization expense was $57.0 and $65.4 for the three months ended September 30, 2021 and 2020, respectively.
10. LEASES
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between 10 and 25 years. The Company utilizes these leased office facilities for use by its employees in countries in which the Company conducts its business. Leases are negotiated with third parties and, in some instances contain renewal, expansion and termination options. The Company also subleases certain office facilities to third parties when the Company no longer intends to utilize the space. None of the Company’s leases restricts the payment of dividends or the incurrence of debt or additional lease obligations, or contain significant purchase options.
The following chart provides additional information about the Company’s operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
Lease Cost:
|
2021
|
|
2020
|
|
|
|
|
|
Operating lease cost
|
$
|
20.9
|
|
|
$
|
19.2
|
|
|
|
|
|
|
Short-term lease cost
|
0.3
|
|
|
0.2
|
|
|
|
|
|
|
Variable lease cost
|
8.9
|
|
|
13.9
|
|
|
|
|
|
|
Sublease income
|
(5.3)
|
|
|
(1.5)
|
|
|
|
|
|
|
Net lease cost
|
$
|
24.8
|
|
|
$
|
31.8
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
$
|
(22.5)
|
|
|
$
|
(31.4)
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
$
|
8.4
|
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - real estate
|
6.4 years
|
|
6.8 years
|
|
|
|
|
|
Weighted-average discount rate - real estate leases
|
3.53
|
%
|
|
3.20
|
%
|
|
|
|
|
During the three months ended September 30, 2021 and 2020, the Company recorded asset impairment charges of $1.0 and $0.0, respectively. The impairment charges are recorded in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and primarily relate to sublease arrangements.
Future minimum lease payments for the Company’s operating leases are as follows:
|
|
|
|
|
|
|
|
Fiscal Year Ending June 30,
|
|
|
|
|
|
2022, remaining
|
$
|
62.1
|
|
|
2023
|
67.9
|
|
|
2024
|
54.9
|
|
|
2025
|
43.4
|
|
|
2026
|
36.1
|
|
|
Thereafter
|
104.9
|
|
|
Total future lease payments
|
369.3
|
|
|
Less: imputed interest
|
(42.5)
|
|
|
Total present value of lease liabilities
|
326.8
|
|
|
Current operating lease liabilities
|
69.0
|
|
|
Long-term operating lease liabilities
|
257.8
|
|
|
Total operating lease liabilities
|
$
|
326.8
|
|
Table excludes obligations for leases with original terms of twelve months or less which have not been recognized as ROU assets or liabilities in the Condensed Consolidated Balance Sheets.
11. DEBT
The Company’s debt balances consisted of the following as of September 30, 2021 and June 30, 2021, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
June 30,
2021
|
|
Short-term debt
|
$
|
—
|
|
|
$
|
—
|
|
|
Senior Secured Notes
|
|
|
|
|
2026 Dollar Senior Secured Notes due April 2026
|
900.0
|
|
|
900.0
|
|
|
2026 Euro Senior Secured Notes due April 2026
|
812.2
|
|
|
833.3
|
|
|
2018 Coty Credit Agreement
|
|
|
|
|
2018 Coty Revolving Credit Facility due April 2023
|
590.0
|
|
|
670.0
|
|
|
2021 Coty Revolving Credit Facility due April 2025
|
—
|
|
|
—
|
|
|
2018 Coty Term A Facility due April 2023
|
111.1
|
|
|
114.0
|
|
|
2018 Coty Term B Facility due April 2025
|
1,440.3
|
|
|
1,461.7
|
|
|
Senior Unsecured Notes
|
|
|
|
|
2026 Dollar Notes due April 2026
|
550.0
|
|
|
550.0
|
|
|
2023 Euro Notes due April 2023
|
638.2
|
|
|
654.7
|
|
|
2026 Euro Notes due April 2026
|
290.1
|
|
|
297.6
|
|
|
Other long-term debt and capital lease obligations
|
0.1
|
|
|
0.2
|
|
|
Total debt
|
5,332.0
|
|
|
5,481.5
|
|
|
Less: Short-term debt and current portion of long-term debt
|
(24.0)
|
|
|
(24.2)
|
|
|
Total Long-term debt
|
5,308.0
|
|
|
5,457.3
|
|
|
Less: Unamortized financing fees
|
(46.9)
|
|
|
(51.7)
|
|
|
Less: Discount on long-term debt
|
(11.1)
|
|
|
(4.6)
|
|
|
Total Long-term debt, net
|
$
|
5,250.0
|
|
|
$
|
5,401.0
|
|
Short-Term Debt
The Company maintains short-term lines of credit and other short-term debt with financial institutions around the world. As of September 30, 2021, total short-term debt remained constant at $0.0 from June 30, 2021. In addition, the Company had undrawn letters of credit of $14.3 and $15.0, and bank guarantees of $21.6 and $31.2 as of September 30, 2021 and June 30, 2021, respectively.
Long-Term Debt
Recent Developments
On September 30, 2021, the Company entered into an amendment to permanently reduce the existing 2018 Coty Revolving Credit Facility by $700.0 and add a new class of incremental revolving facilities in an aggregate principal amount of $700.0 that matures on April 5, 2025 (the "2021 Coty Revolving Credit Facility"). In connection with the 2021 Coty Revolving Credit Facility, the Company capitalized $7.0 of original issue debt discounts and $0.1 of deferred financing fees, and wrote off $0.6 of unamortized deferred financing fees, which were recorded in Other income, net in the Condensed Consolidated Statement of Operations.
Offering of Senior Secured Notes
On June 16, 2021, the Company issued an aggregate principal amount of €700.0 million of 3.875% senior secured notes due 2026 (the “2026 Euro Senior Secured Notes”) in a private offering. Coty received gross proceeds of €700.0 million in connection with the offering of the 2026 Euro Senior Secured Notes.
On April 21, 2021, the Company issued an aggregate principal amount of $900.0 of 5.00% senior secured notes due 2026 (the “2026 Dollar Senior Secured Notes” and, together with the 2026 Euro Senior Secured Notes, the “Senior Secured Notes”). Coty received gross proceeds of $900.0 in connection with the offering of the 2026 Dollar Senior Secured Notes.
Coty used the gross proceeds of the offerings of the Senior Secured Notes to repay a portion of the term loans outstanding under the existing credit facilities and to pay related fees and expenses thereto.
The Senior Secured Notes are senior secured obligations of Coty and are guaranteed on a senior secured basis by each of Coty’s wholly-owned domestic subsidiaries that guarantees Coty’s obligations under its existing senior secured credit facilities and are secured by first priority liens on the same collateral that secures Coty’s obligations under its existing senior secured
credit facilities, as described below. The Senior Secured Notes and the guarantees are equal in right of payment with all of Coty’s and the guarantors’ respective existing and future senior indebtedness and are pari passu with all of Coty’s and the guarantors’ respective existing and future indebtedness that is secured by a first priority lien on the collateral, including the existing senior secured credit facilities, to the extent of the value of such collateral.
Optional Redemption
Applicable Premium
The indentures governing the Senior Secured Notes specify the Applicable Premium (as defined in the respective indentures) to be paid upon early redemption of some or all of the 2026 Euro Senior Secured Notes or 2026 Dollar Senior Secured Notes.
The Applicable Premium related to the 2026 Euro Senior Secured Notes or 2026 Dollar Senior Secured Notes on any redemption date and as calculated by the Company is the greater of:
(1)1.0% of the then outstanding principal amount of the respective 2026 Euro Senior Secured Notes or 2026 Dollar Senior Secured Notes; and
(2)the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 2026 Euro Senior Secured Notes or 2026 Dollar Senior Secured Notes that would apply if such 2026 Euro Senior Secured Notes or 2026 Dollar Senior Secured Notes were redeemed on April 15, 2023 (such redemption price is expressed as a percentage of the principal amount being set forth in the table appearing in the Redemption Pricing section below), plus (ii) all remaining scheduled payments of interest due on the 2026 Euro Senior Secured Notes or 2026 Dollar Senior Secured Notes to and including April 15, 2023 (excluding accrued but unpaid interest, if any, to, but excluding, the redemption date), with respect to each of subclause (i) and (ii), computed using a discount rate equal to the Treasury Rate in the case of the 2026 Dollar Senior Secured Notes or Bund Rate in the case of the 2026 Euro Senior Secured Notes (both Treasury Rate and Bund Rate as defined in the respective indentures) as of such redemption date plus 50 basis points; over (b) the principal amount of the respective 2026 Dollar Notes, 2023 Euro Notes or 2026 Euro Notes.
Redemption Pricing
At any time and from time to time prior to April 15, 2023, the Company may redeem some or all of the 2026 Dollar Senior Secured Notes and 2026 Euro Senior Secured Notes at redemption prices equal to 100% of the respective principal amounts being redeemed plus the Applicable Premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates.
At any time on or after April 15, 2023, the Company may redeem some or all of the 2026 Dollar Senior Secured Notes and 2026 Euro Senior Secured Notes at the redemption prices (expressed in percentage of principal amount) set forth below, plus accrued and unpaid interest, if any, to, but excluding, the redemption dates, if redeemed during the twelve-month period beginning on April 15 of each of the years indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
Year
|
2026 Dollar Senior Secured Notes
|
|
2026 Euro Senior Secured Notes
|
|
2023
|
102.5000%
|
|
101.9380%
|
|
2024
|
101.2500%
|
|
100.9690%
|
|
2025 and thereafter
|
100.0000%
|
|
100.0000%
|
2018 Coty Credit Agreement
On April 5, 2018, the Company entered into a new credit agreement (the "2018 Coty Credit Agreement"), which amended and restated the prior Coty credit agreement. The 2018 Coty Credit Agreement provides for (a) the incurrence by the Company of (1) a senior secured term A facility in an aggregate principal amount of (i) $1,000.0 denominated in U.S. dollars and (ii) €2,035.0 million denominated in euros (the “2018 Coty Term A Facility”) and (2) a senior secured term B facility in an aggregate principal amount of (i) $1,400.0 denominated in U.S. dollars and (ii) €850.0 million denominated in euros (the “2018 Coty Term B Facility”) and (b) the incurrence by the Company and Coty B.V., a Dutch subsidiary of the Company (the “Dutch Borrower” and, together with the Company, the “Borrowers”), of a senior secured revolving facility in an aggregate principal amount of $3,250.0 denominated in U.S. dollars, specified alternative currencies or other currencies freely convertible into U.S. dollars and readily available in the London interbank market (the “2018 Coty Revolving Credit Facility”) (the 2018 Coty Term A Facility, together with the 2018 Coty Term B Facility and the 2018 Coty Revolving Credit Facility, the “2018 Coty Credit Facilities”). Initial borrowings under the 2018 Coty Term B Facility were issued at a 0.250% discount.
The 2018 Coty Credit Agreement provides that with respect to the 2018 Coty Revolving Credit Facility, up to $150.0 is available for letters of credit and up to $150.0 is available for swing line loans. The 2018 Coty Credit Agreement also permits,
subject to certain terms and conditions, the incurrence of incremental facilities thereunder in an aggregate amount of (i) $1,700.0 plus (ii) an unlimited amount if the First Lien Net Leverage Ratio (as defined in the 2018 Coty Credit Agreement), at the time of incurrence of such incremental facilities and after giving effect thereto on a pro forma basis, is less than or equal to 3.00 to 1.00.
The obligations of the Company under the 2018 Coty Credit Agreement are guaranteed by the material wholly-owned subsidiaries of the Company organized in the U.S., subject to certain exceptions (the “Guarantors”) and the obligations of the Company and the Guarantors under the 2018 Coty Credit Agreement are secured by a perfected first priority lien (subject to permitted liens) on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions. The Dutch Borrower does not guarantee the obligations of the Company under the 2018 Coty Credit Agreement or grant any liens on its assets to secure any obligations under the 2018 Coty Credit Agreement.
On June 27, 2019, the Company entered into an amendment (“2019 Amendment”) to the 2018 Coty Credit Agreement. The 2019 Amendment modified the 2018 Coty Credit Agreement by amending the financial covenants to (i) delay until March 31, 2022 the total net leverage ratio step down from 5.25 to 5.0 (as further described in the Covenants section below), (ii) extend the applicable window for certain cost savings add-backs in the calculation of Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) for purpose of determining the total net leverage ratio, and (iii) amend the determination of the exchange rate to be used for purposes of calculating “Total Indebtedness” (as defined in the 2018 Coty Credit Agreement) for purposes of the total net leverage ratio, and decreasing the total commitments under the revolving credit facility by $500.0 to $2,750.0.
On April 29, 2020, the Company amended its existing credit agreement. The amendment (i) provided a net debt to EBITDA financial covenant "holiday" through March 31, 2021; (ii) established a minimum liquidity covenant through March 31, 2021 of $350.0, which increased to $500.0 for the prepayment event noted below; and (iii) effectively placed certain limitations on the ability to make certain investments and restricted payments (including limiting the Company's ability to pay dividends in cash through March 31, 2021) and on incurring additional secured indebtedness.
On November 30, 2020, the Company completed the strategic transaction with KKR for the sale of a majority stake in the Wella Business. As part of the transaction, Coty received initial cash proceeds of $2,451.7 for the sale of its 60% stake in Wella and its pro rata share of Wella's return of capital distribution of $448.0, and retained a 40% stake in Wella. In accordance with the 2018 Coty Credit Agreement, as amended, the Company utilized $2,015.5 of the net proceeds to pay down its 2018 Coty Term A and B Facilities on a pro rata basis and reserved a maximum of $500.0 for reinvestment in the business, as defined in the 2018 Coty Credit Agreement, as amended, ("the Reinvestment Balance"). If the Reinvestment Balance is not reinvested within twelve months, the Company is required to use the remainder to pay down its 2018 Coty Term A and B Facilities on a pro rata basis by December 2021. As a result of the prepayments, the outstanding balances of 2018 Coty Term A and B Facilities were reduced by $1,135.7 and $879.8, respectively. Additionally, in accordance with the 2018 Coty Credit Agreement, as amended, as a result of these prepayments, the minimum liquidity covenant increased from $350.0 to $500.0.
See above for the third amendment to the 2018 Coty Credit Agreement entered into on September 30, 2021.
Offering of Senior Unsecured Notes
On April 5, 2018 the Company issued, at par, $550.0 of 6.50% senior unsecured notes due 2026 (the “2026 Dollar Notes”), €550.0 million of 4.00% senior unsecured notes due 2023 (the “2023 Euro Notes”) and €250.0 million of 4.75% senior unsecured notes due 2026 (the “2026 Euro Notes” and, together with the 2023 Euro Notes, the “Euro Notes,” and the Euro Notes together with the 2026 Dollar Notes, the “Senior Unsecured Notes”) in a private offering.
The Senior Unsecured Notes are senior unsecured debt obligations of the Company and will be pari passu in right of payment with all of the Company’s existing and future senior indebtedness (including the 2018 Coty Credit Facilities described below). The Senior Unsecured Notes are guaranteed, jointly and severally, on a senior basis by the Guarantors. The Senior Unsecured Notes are senior unsecured obligations of the Company and are effectively junior to all existing and future secured indebtedness of the Company to the extent of the value of the collateral securing such secured indebtedness. The related guarantees are senior unsecured obligations of each Guarantor and are effectively junior to all existing and future secured indebtedness of such Guarantor to the extent of the value of the collateral securing such indebtedness.
The 2026 Dollar Notes will mature on April 15, 2026. The 2026 Dollar Notes will bear interest at a rate of 6.50% per annum. Interest on the 2026 Dollar Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
The 2023 Euro Notes will mature on April 15, 2023 and the 2026 Euro Notes will mature on April 15, 2026. The 2023 Euro Notes will bear interest at a rate of 4.00% per annum, and the 2026 Euro Notes will bear interest at a rate of 4.75% per annum. Interest on the Euro Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
Upon the occurrence of certain change of control triggering events with respect to a series of Senior Unsecured Notes, the Company will be required to offer to repurchase all or part of the Senior Unsecured Notes of such series at 101% of their
principal amount, plus accrued and unpaid interest, if any, to, but excluding, the purchase date applicable to such Senior Unsecured Notes.
The Senior Unsecured Notes contain customary covenants that place restrictions in certain circumstances on, among other things, incurrence of liens, entry into sale or leaseback transactions, sales of all or substantially all of the Company’s assets and certain merger or consolidation transactions. The Senior Unsecured Notes also provide for customary events of default.
Scheduled Amortization
The Company makes quarterly payments of 1.25% and 0.25%, of the initial aggregate principal amounts of the 2018 Coty Term A Facility and the 2018 Coty Term B Facility, respectively. The remaining balance of the initial aggregate principal amounts of the 2018 Coty Term A Facility and the 2018 Coty Term B Facility will be payable on the maturity date for each facility, respectively.
Interest
The 2018 Coty Credit Agreement facilities will bear interest at rates equal to, at the Company’s option, either:
(1)LIBOR of the applicable qualified currency, of which the Company can elect the applicable one, two, three, six or twelve month rate, plus the applicable margin; or
(2)Alternate base rate (“ABR”) plus the applicable margin.
In the case of the 2018 Coty Revolving Credit Facility and the 2018 Coty Term A Facility, the applicable margin means the lesser of a percentage per annum to be determined in accordance with the leverage-based pricing grid and the debt rating-based grid below:
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Pricing Tier
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Total Net Leverage Ratio:
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LIBOR plus:
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Alternative Base Rate Margin:
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1.0
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Greater than or equal to 4.75:1
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2.000%
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1.000%
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2.0
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Less than 4.75:1 but greater than or equal to 4.00:1
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1.750%
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0.750%
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3.0
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Less than 4.00:1 but greater than or equal to 2.75:1
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1.500%
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0.500%
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4.0
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Less than 2.75:1 but greater than or equal to 2.00:1
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1.250%
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0.250%
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5.0
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Less than 2.00:1 but greater than or equal to 1.50:1
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1.125%
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0.125%
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6.0
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Less than 1.50:1
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1.000%
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—%
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Pricing Tier
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Debt Ratings S&P/Moody’s:
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LIBOR plus:
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Alternative Base Rate Margin:
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5.0
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Less than BB+/Ba1
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2.000%
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1.000%
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4.0
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BB+/Ba1
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1.750%
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0.750%
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3.0
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BBB-/Baa3
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1.500%
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0.500%
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2.0
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BBB/Baa2
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1.250%
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0.250%
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1.0
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BBB+/Baa1 or higher
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1.125%
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0.125%
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In the case of the U.S. dollar portion of the 2018 Coty Term B Facility, the applicable margin means 2.25% per annum, in the case of LIBOR loans, and 1.25% per annum, in the case of ABR loans. In the case of the Euro portion of the 2018 Coty Term B Facility, the applicable margin means 2.50% per annum, in the case of EURIBOR loans. In no event will LIBOR be deemed to be less than 0.00% per annum.
Fair Value of Debt
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September 30, 2021
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June 30, 2021
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Carrying
Amount
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Fair
Value
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Carrying
Amount
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Fair
Value
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Senior Secured Notes
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$
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1,712.2
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$
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1,755.9
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$
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1,733.3
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$
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1,749.1
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2018 Coty Credit Agreement
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2,141.4
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2,094.0
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2,245.7
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2,188.5
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Senior Unsecured Notes
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1,478.3
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1,502.3
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1,502.3
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1,500.5
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The Company uses the market approach to value its debt instruments. The Company obtains fair values from independent pricing services to determine the fair value of these debt instruments. Based on the assumptions used to value these liabilities at fair value, these debt instruments are categorized a Level 2 in the fair value hierarchy.
Debt Maturities Schedule
Aggregate maturities of the Company’s long-term debt, including the current portion of long-term debt and excluding capital lease obligations as of September 30, 2021, are presented below:
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Fiscal Year Ending June 30,
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2022, remaining
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$
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17.9
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2023
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1,363.1
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2024
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23.9
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2025
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1,374.7
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2026
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2,552.3
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Thereafter
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—
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Total
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$
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5,331.9
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Covenants
The 2018 Coty Credit Agreement contains affirmative and negative covenants. The negative covenants include, among other things, limitations on debt, liens, dispositions, investments, fundamental changes, restricted payments and affiliate transactions. With certain exceptions as described below, the 2018 Coty Credit Agreement, as amended, includes a financial covenant that requires us to maintain a Total Net Leverage Ratio (as defined below), equal to or less than the ratios shown below for each respective test period.
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Quarterly Test Period Ending
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Total Net Leverage Ratio (a)
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September 30, 2021 through December 31, 2021
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5.25 to 1.00
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March 31, 2022
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5.00 to 1.00
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June 30, 2022
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4.75 to 1.00
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September 30, 2022
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4.50 to 1.00
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December 31, 2022
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4.25 to 1.00
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March 31, 2023 through June 30, 2023
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4.00 to 1.00
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(a) Total Net Leverage Ratio means, as of any date of determination, the ratio of: (a) (i) Total Indebtedness minus (ii) unrestricted and Cash Equivalents of the Parent Borrower and its Restricted Subsidiaries as determined in accordance with GAAP to (b) Adjusted EBITDA for the most recently ended Test Period (each of the defined terms, including Adjusted EBITDA, used within the definition of Total Net Leverage Ratio have the meanings ascribed to them within the 2018 Coty Credit Agreement, as amended). Adjusted EBITDA, as defined in the 2018 Coty Credit Agreement, as amended, includes certain add backs related to cost savings, unusual events such as COVID-19, operating expense reductions and future unrealized synergies subject to certain limits and conditions as specified in the 2018 Coty Credit Agreement, as amended.
In the four fiscal quarters following the closing of any Material Acquisition (as defined in the 2018 Coty Credit Agreement, as amended), including the fiscal quarter in which such Material Acquisition occurs, the maximum Total Net Leverage Ratio shall be the lesser of (i) 5.95 to 1.00 and (ii) 1.00 higher than the otherwise applicable maximum Total Net Leverage Ratio for such quarter (as set forth in the table above). Immediately after any such four fiscal quarter period, there shall be at least two consecutive fiscal quarters during which the Company's Total Net Leverage Ratio is no greater than the maximum Total Net Leverage Ratio that would otherwise have been required in the absence of such Material Acquisition, regardless of whether any additional Material Acquisitions are consummated during such period.
As of September 30, 2021, the Company was in compliance with all covenants contained within the 2018 Coty Credit Agreement, as amended.
12. INTEREST EXPENSE, NET
Interest expense, net for the three months ended September 30, 2021 and 2020, respectively, is presented below:
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Three Months Ended
September 30,
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2021
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2020
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Interest expense
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$
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62.8
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$
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59.0
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Foreign exchange (gains) losses, net of derivative contracts
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(2.3)
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4.4
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Interest income
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(0.7)
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(1.3)
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Total interest expense, net
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$
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59.8
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$
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62.1
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13. EMPLOYEE BENEFIT PLANS
As part of the Transformation Plan, the Company concluded that restructuring actions resulted in a significant reduction of future services of active employees in certain of the Company's non-U.S. pension plans. As a result, the Company recognized curtailment gains of $0.0 and $5.3 for the three months ended September 30, 2021 and 2020, respectively. The impact of the curtailment activity on the current and prior comparative periods is included in Other income, net in the Condensed Consolidated Statements of Operations.
The components of net periodic benefit cost for pension plans and other post-employment benefit plans recognized in the Condensed Consolidated Statements of Operations are presented below:
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Three Months Ended September 30,
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Pension Plans
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Other Post-
Employment Benefits
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U.S.
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International
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Total
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2021
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2020
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2021
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2020
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2021
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2020
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2021
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2020
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Service cost
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$
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—
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$
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—
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|
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$
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2.4
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|
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$
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6.7
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$
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0.2
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$
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0.3
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$
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2.6
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$
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7.0
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Interest cost
|
0.1
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0.1
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1.6
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2.5
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0.3
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0.3
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2.0
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2.9
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Expected return on plan assets
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—
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—
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(1.1)
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|
(1.9)
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—
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—
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(1.1)
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|
(1.9)
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Amortization of prior service credit
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—
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—
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—
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(0.1)
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|
|
(0.1)
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|
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(0.9)
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(0.1)
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(1.0)
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Amortization of net loss
|
0.1
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0.4
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|
|
(0.1)
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—
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—
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—
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|
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—
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|
0.4
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|
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Settlement loss recognized
|
—
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|
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—
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|
|
0.7
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|
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—
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|
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—
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|
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—
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|
|
0.7
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|
|
—
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|
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Curtailment gain recognized
|
—
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|
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—
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|
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—
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(5.3)
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—
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|
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—
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|
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—
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|
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(5.3)
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Net periodic benefit cost (credit)
|
$
|
0.2
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|
|
$
|
0.5
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|
|
$
|
3.5
|
|
|
$
|
1.9
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|
|
$
|
0.4
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|
|
$
|
(0.3)
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|
|
$
|
4.1
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|
|
$
|
2.1
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Net periodic benefit costs include amounts related to discontinued operations of $3.7 for the three months ended September 30, 2020.
14. DERIVATIVE INSTRUMENTS
Foreign Exchange Risk Management
The Company is exposed to foreign currency exchange fluctuations through its global operations. The Company may reduce its exposure to fluctuations in the cash flows associated with changes in foreign exchange rates by creating offsetting positions through the use of derivative instruments and also by designating foreign currency denominated borrowings and cross-currency swaps as hedges of net investments in foreign subsidiaries. The Company expects that through hedging, any gain or loss on the derivative instruments would generally offset the expected increase or decrease in the value of the underlying forecasted transactions.
The Company is exposed to foreign currency exchange rate fluctuations in the normal course of business, including through exposure to inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the transaction currency. To manage this exposure, beginning in June 2021, the Company entered into non-deliverable forward foreign-exchange contracts (the “NDF contracts”) that are intended to offset changes in cash flow attributable to currency exchange movements. The NDF contracts have been designated as foreign exchange cash flow hedges.
The Company entered into these contracts with counterparties that are banks or other financial institutions, and the Company considers the risk of non-performance by such counterparties not to be material.
The Company also continued to use certain derivatives as economic hedges of foreign currency exposure on firm commitments, which do not qualify for hedge accounting. Although these derivatives were not designated for hedge accounting, the overall objective of mitigating foreign currency exposure is the same for all derivative instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. For derivatives not designated as hedging instruments, changes in fair value are recorded in the line item in the Condensed Consolidated Statements of Operations to which the derivative relates.
In September 2020, the Company terminated its existing net investment cross currency swap derivatives with notional amount of $550.0 in exchange for cash payment of $37.6. The related loss from this termination is included in accumulated other comprehensive income (loss) (“AOCI/(L)”) until the sale or substantial liquidation of the underlying net investments.
Beginning in July 2021, the Company entered into foreign exchange forward contracts to naturally hedge up to 80% of the Company's euro denominated external debt as part of management's strategy to minimize the impact of currency movements on those debt instruments. The notional amount of those contracts was €1,600.0 million as of September 30, 2021. As a result, foreign currency denominated borrowings designated as net investment hedges decreased from nominal exposures of €1,809.5 million as of June 30, 2021 to €207.1 million as of September 30, 2021.
Interest Rate Risk
The Company is exposed to interest rate fluctuations related to its variable rate debt instruments. The Company may reduce its exposure to fluctuations in the cash flows associated with changes in the variable interest rates by entering into offsetting positions through the use of derivative instruments, such as interest rate swap contracts. The interest rate swap contracts result in recognizing a fixed interest rate for the portion of the Company’s variable rate debt that was hedged. This will reduce the negative and positive impact of increases in the variable rates over the term of the contracts. Hedge effectiveness of interest rate swap contracts is based on a long-haul hypothetical derivative methodology and includes all changes in value.
During September 2019, the Company entered into incremental interest rate swap contracts in the notional amount of $1,000.0, which extended the maturity of the interest rate swap portfolio from 2021 through 2023. These interest rate swaps are designated and qualify as cash flow hedges. As of September 30, 2021 and June 30, 2021, the Company had interest rate swap contracts designated as effective hedges in the notional amount of $1,000.0 and $1,900.0, respectively.
Derivative and non-derivative financial instruments which are designated as hedging instruments:
The accumulated (loss)/gain on foreign currency borrowings classified as net investment hedges in the foreign currency translation adjustment component of AOCI/(L) was $22.1 and $5.4 as of September 30, 2021 and June 30, 2021, respectively.
The accumulated loss on derivative instruments classified as net investment hedges in the foreign currency translation adjustment component of AOCI/(L) was $(37.6) as of September 30, 2021 and June 30, 2021.
The amount of gains and losses recognized in Other comprehensive income (loss) (“OCI”) in the Condensed Consolidated Balance Sheets related to the Company’s derivative and non-derivative financial instruments which are designated as hedging instruments is presented below:
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|
Gain (Loss) Recognized in OCI
|
Three Months Ended
September 30,
|
|
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|
|
2021
|
|
2020
|
|
|
|
|
|
Foreign exchange forward contracts
|
$
|
1.7
|
|
|
$
|
(1.2)
|
|
|
|
|
|
|
Interest rate swap contracts
|
(0.6)
|
|
|
0.2
|
|
|
|
|
|
|
Cross-currency swap contracts
|
—
|
|
|
(25.1)
|
|
|
|
|
|
|
Net investment hedges
|
16.7
|
|
|
(173.1)
|
|
|
|
|
|
The accumulated loss on derivative instruments classified as cash flow hedges in AOCI/(L), net of tax, was $(11.1) and $(15.5) as of September 30, 2021 and June 30, 2021, 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 $(7.6). As of September 30, 2021, all of the Company's remaining foreign currency forward contracts designated as hedges were highly effective.
The amount of gains and losses reclassified from AOCI/(L) to the Condensed Consolidated Statements of Operations related to the Company’s derivative financial instruments which are designated as hedging instruments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
Net revenues
|
|
|
|
Interest expense, net
|
|
Net revenues
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCI into income
|
$
|
0.1
|
|
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCI into income
|
—
|
|
|
|
|
(5.0)
|
|
|
—
|
|
|
|
|
(9.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging:
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Operations
Classification of Gain (Loss) Recognized in Operations
|
Three Months Ended
September 30,
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Foreign exchange contracts
|
Selling, general and administrative expenses
|
$
|
—
|
|
|
$
|
0.1
|
|
|
|
|
|
|
Foreign exchange contracts
|
Interest expense, net
|
7.3
|
|
|
5.3
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other expense, net
|
(0.2)
|
|
|
(0.3)
|
|
|
|
|
|
15. EQUITY AND CONVERTIBLE PREFERRED STOCK
Common Stock
As of September 30, 2021, the Company’s common stock consisted of Class A Common Stock with a par value of $0.01 per share. The holders of Class A Common Stock are entitled to one vote per share. As of September 30, 2021, total authorized shares of Class A Common Stock was 1,250.0 million and total outstanding shares of Class A Common Stock was 817.0 million.
As of September 30, 2021, the Company’s largest stockholder was Cottage Holdco B.V., which owned approximately 57% of Coty’s outstanding Class A Common Stock. Cottage Holdco B.V., a wholly-owned subsidiary of JAB Cosmetics B.V. (“JABC”), is indirectly controlled by Lucresca SE, Agnaten SE and JAB Holdings B.V. (“JAB”). During the three months ended September 30, 2021, JABC did not acquire any shares of Class A Common Stock.
Series A and A-1 Preferred Stock
As of September 30, 2021, total authorized shares of preferred stock are 20.0 million. There are two classes of Preferred Stock, Series A Preferred Stock and Series A-1 Preferred Stock, both with a par value of $0.01 per share.
As of September 30, 2021, there were 1.5 million shares of Series A and no shares of Series A-1 Preferred Stock authorized, issued and outstanding. Series A Preferred Stock and Series A-1 Preferred Stock are not entitled to receive any dividends and have no voting rights except as required by law.
As of September 30, 2021, the Company has $1.2 Series A Preferred Stock classified as a liability recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
Convertible Series B Preferred Stock
On May 11, 2020, the Company entered into an Investment Agreement with KKR Aggregator, relating to the issuance and sale by the Company to KKR Aggregator of up to 1,000,000 shares of the Company’s new Convertible Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), for an aggregate purchase price of up to $1,000.0, or $1,000 per share (the “Issuance”). The Issuance was proposed to be issued in two tranches: (i) an initial issuance of 750,000 shares of Series B Preferred Stock (the “Initial Issuance”) and (ii) a subsequent issuance of 250,000 shares of Series B Preferred Stock (the “Second Issuance”), which was subject to the execution and delivery of a definitive purchase agreement between the Company and KKR Aggregator or certain of its affiliates in respect of the Wella Business.
On May 26, 2020 (the “Closing Date”), the Company and KKR Aggregator completed the issuance and sale of 750,000 shares of Series B Preferred Stock for an aggregate purchase price of $750.0. On July 31, 2020, the Company completed the sale of 250,000 shares of the Company’s Series B Preferred Stock to KKR Aggregator for an aggregate purchase price of $250.0.
On November 16, 2020, KKR Aggregator and affiliated investment funds agreed to sell 146,057 shares of Series B Preferred Stock, to HFS Holdings S.à r.l, that is beneficially owned by Peter Harf, a director of the Company. The transaction, which was subject to customary closing conditions, closed on August 27, 2021.
On September 10, 2021, KKR Aggregator converted 285,576 shares of Series B Preferred Stock, and $26.4 of unpaid dividends into 50,000,088 shares of Class A common stock. Immediately after the conversion, KKR Aggregator completed the public secondary offering of 50,000,088 shares of Class A common stock. The Company did not receive any proceeds from the sale of the shares of Class A Common Stock by KKR Aggregator. As a result of the conversion, the Company measured the accrued dividends at fair value, which resulted in an increase of $6.7. Such adjustment is considered a deemed dividend for purposes of calculating basic and diluted EPS.
On September 30, 2021, the Company entered into a definitive agreement to sell a 9.4% stake in Wella to KKR Aggregator in exchange for the redemption of 290,465 shares of Series B Preferred Stock, and $22.5 of unpaid dividends (the "Exchange Agreement"). The transaction was completed on October 20, 2021. As a result of the Exchange Agreement, the Series B Preferred Stock, net of issuance costs, and related accrued dividends were reclassified from temporary equity to liability as Mandatorily redeemable Convertible Series B Preferred Stock, as of September 30, 2021. Upon reclassification, the Company measured the Series B Preferred Stock and accrued dividends at fair value, which resulted in an increase of $93.6. Such adjustment is considered a deemed dividend for purposes of calculating basic and diluted EPS. A key input in determining the fair value of the liability is based on the Company's share price as of September 30, 2021. As this liability is not actively traded, it is classified as Level 2 fair value measurements. See Note 8—Equity Investments for additional information.
On November 6, 2021, Coty entered into a definitive agreement to sell an additional approximate 4.7% stake in Wella to KKR Aggregator in exchange for the redemption of 154,683 shares of Series B Preferred Stock. The transaction is expected close on November 30, 2021. See Note 8—Equity Investments for additional information.
Cumulative preferred dividends accrue daily on the Series B Preferred Stock at a rate of 9.0% per year. On September 30, 2021, the Board of Directors declared a dividend on the Series B Preferred Stock of $22.7, of which $3.5 was paid. The Series B Preferred Stock had accrued unpaid dividends of $66.8 and $74.1 as of September 30, 2021 and June 30, 2021, respectively.
In October 2021, the Company paid the remaining accrued unpaid dividends on the Series B Preferred Stock, totaling $44.3.
Treasury Stock
Share Repurchase Program
Since February 2014, the Board has authorized the Company to repurchase its Class A Common Stock under approved repurchase programs. On February 3, 2016, the Board authorized the Company to repurchase up to $500.0 of its Class A Common Stock (the “Incremental Repurchase Program”). Repurchases may be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, the market price of its Class A Common Stock, and general market conditions. For the three months ended September 30, 2021, the Company did not repurchase any shares of its Class A Common Stock. As of September 30, 2021, the Company had authority for $396.8 remaining under the Incremental Repurchase Program.
Other Repurchases
There were no other stock repurchases during the three months ended September 30, 2021 and 2020.
Dividends
On April 29, 2020, the Board of Directors suspended the payment of dividends.
During fiscal 2020, prior to the Board’s decision to suspend the payment of dividends, the Company maintained a Stock Dividend Reinvestment Program and had registered a total of 19.3 million shares of Class A Common Stock for purchase under the program. All holders of records of Class A Common Stock had the opportunity to participate in the program; if a holder elected to participate in the program fifty percent (50%) of their cash dividends were reinvested in additional shares of Class A Common Stock.
The change in dividends accrued recorded to additional paid-in capital (“APIC”) in the Condensed Consolidated Balance Sheet as of September 30, 2021 was $0.5, which represent dividends no longer expected to vest as a result of forfeitures of
outstanding restricted stock units (“RSUs”). In addition to the activity noted above, the Company made a payment of $0.8 for the previously accrued dividends on RSUs that vested during the three months ended September 30, 2021.
Total accrued dividends on unvested RSUs and phantom units of $1.6 and $1.1 are included in Accrued expenses and other current liabilities and Other noncurrent liabilities, respectively, in the Condensed Consolidated Balance Sheet as of September 30, 2021.
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
|
|
|
|
(Loss) gain on Cash Flow Hedges
|
|
(Loss) gain on Net Investment Hedge
|
|
Other Foreign Currency Translation Adjustments
|
|
Pension and Other Post-Employment Benefit Plans (a)
|
|
Total
|
|
Balance—July 1, 2021
|
$
|
(15.5)
|
|
|
$
|
(32.2)
|
|
|
$
|
(259.3)
|
|
|
$
|
(14.9)
|
|
|
$
|
(321.9)
|
|
|
Other comprehensive income (loss) before reclassifications
|
0.6
|
|
|
16.7
|
|
|
(159.6)
|
|
|
—
|
|
|
(142.3)
|
|
|
Net amounts reclassified from AOCI/(L)
|
3.8
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
4.3
|
|
|
Net current-period other comprehensive income (loss)
|
4.4
|
|
|
16.7
|
|
|
(159.6)
|
|
|
0.5
|
|
|
(138.0)
|
|
|
Balance—September 30, 2021
|
$
|
(11.1)
|
|
|
$
|
(15.5)
|
|
|
$
|
(418.9)
|
|
|
$
|
(14.4)
|
|
|
$
|
(459.9)
|
|
(a) For the three months ended September 30, 2021, net amounts reclassified from AOCI/(L) related to pensions and other post-employment benefit plans included amortization of prior service credits and actuarial loss of $0.5, net of tax of nil.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
|
|
|
|
Loss on Cash Flow Hedges
|
|
Gain (loss) on Net Investment Hedge
|
|
Other Foreign Currency Translation Adjustments
|
|
Pension and Other Post-Employment Benefit Plans
|
|
Total
|
|
Balance—July 1, 2020
|
$
|
(43.0)
|
|
|
$
|
261.9
|
|
|
$
|
(683.8)
|
|
|
$
|
8.7
|
|
|
$
|
(456.2)
|
|
|
Other comprehensive (loss) income before reclassifications
|
(1.0)
|
|
|
(210.7)
|
|
|
200.3
|
|
|
—
|
|
|
(11.4)
|
|
|
Net amounts reclassified from AOCI/(L)
|
6.7
|
|
|
—
|
|
|
—
|
|
|
(1.2)
|
|
|
5.5
|
|
|
Net current-period other comprehensive income (loss)
|
5.7
|
|
|
(210.7)
|
|
|
200.3
|
|
|
(1.2)
|
|
|
(5.9)
|
|
|
Balance—September 30, 2020
|
$
|
(37.3)
|
|
|
$
|
51.2
|
|
|
$
|
(483.5)
|
|
|
$
|
7.5
|
|
|
$
|
(462.1)
|
|
16. SHARE-BASED COMPENSATION PLANS
Share-based compensation expense is recognized on a straight-line basis over the requisite service period. Total share-based compensation is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Equity plan expense (a)
|
$
|
107.8
|
|
|
$
|
4.9
|
|
|
|
|
|
|
Equity plan modified and cash settled
|
—
|
|
|
0.9
|
|
|
|
|
|
|
Liability plan (income) expense
|
0.4
|
|
|
(0.1)
|
|
|
|
|
|
|
Fringe expense
|
0.1
|
|
|
—
|
|
|
|
|
|
|
Total share-based compensation expense
|
$
|
108.3
|
|
|
$
|
5.7
|
|
|
|
|
|
(a) Equity plan shared-based compensation expense of $107.8 and $6.2 were recorded to additional paid in capital and presented in the Condensed Consolidated Statements of Equity for the three months ended September 30, 2021 and 2020, respectively. Of the $6.2 for the three months ended September 30, 2020, $1.3 was reclassified to discontinued operations.
The share-based compensation expense for the three months ended September 30, 2021 and 2020, respectively, of $108.3 and $5.7, includes $108.3 and $6.4 of expense offset by nil and $(0.7) of income primarily due to significant executive forfeitures of share-based compensation instruments.
As of September 30, 2021, the total unrecognized share-based compensation expense related to stock options, Series A Preferred Stock, restricted stock, and restricted stock units and other share awards is $4.9, $0.0, $1.8 and $210.8, respectively. The unrecognized share-based compensation expense related to stock options, Series A Preferred stock, restricted stock, and restricted stock units and other share awards is expected to be recognized over a weighted-average period of 2.30, 0.00, 1.68 and 1.95 years, respectively.
Restricted Stock Units and Other Share Awards
The Company granted no shares of RSUs and other share awards during the three months ended September 30, 2021. The Company recognized share-based compensation expense of $106.9 and $5.3 for the three months ended September 30, 2021 and 2020, respectively.
The Company’s CEO, Sue Nabi, was granted a one-time sign-on award of restricted stock units (the “Award”) on June 30, 2021. The Award will vest and settle in 10,000,000 shares of the Company’s Class A Common Stock, par value $0.01 per share, on each of August 31, 2021, August 31, 2022 and August 31, 2023, subject to her continued employment through each such date. The Company will recognize approximately $273.2 of share-based compensation expense, on a straight-line basis over the vesting period, based on the fair value on the grant date. The amount of compensation cost recognized at each vesting date must at least equal the portion of the award legally vested. As such, $168.3, $89.9 and $15.0 will be recognized in the fiscal years ending 2022, 2023 and 2024, respectively.
In connection with this Award, Cottage Holdco B.V., the Company’s largest stockholder and a wholly-owned subsidiary of JAB Holding Company S.à r.l., has agreed, pursuant to an equity transfer agreement, to transfer to Ms. Nabi (either directly or through contributing to the Company) 10,000,000 shares of Common Stock no later than sixty days following the first vesting date. If, however, Ms. Nabi is terminated without cause or due to death or disability on or following the first vesting date but prior to the second vesting date, the Company has agreed to issue to Cottage Holdco B.V. the number of shares of Common Stock determined on pro-rata basis in accordance with the equity transfer agreement. In the event Ms. Nabi remains employed through the third vesting date, Cottage Holdco B.V. has agreed to transfer an additional 5,000,000 shares of Common Stock to Ms. Nabi. On October 29, 2021, Cottage Holdco B.V. completed the transfer of 10,000,000 shares of Common Stock to Ms. Nabi.
The Company recognized share-based compensation expense of $100.8 and nil for Ms. Nabi's award for the three months ended September 30, 2021 and 2020, respectively.
Restricted Stock
The Company granted no shares of restricted stock during the three months ended September 30, 2021. The Company recognized share-based compensation expense of $0.2 and $(0.1) for the three months ended September 30, 2021 and 2020, respectively.
Series A Preferred Stock and Series A-1 Preferred Stock
The Company granted no shares of Series A Preferred Stock and no shares of Series A-1 Preferred Stock during the three months ended September 30, 2021. The Company recognized share-based compensation expense (income) of $0.4 and $(0.1) for the three months ended September 30, 2021 and 2020, respectively.
Non-Qualified Stock Options
The Company granted no non-qualified stock options during the three months ended September 30, 2021. The Company recognized share-based compensation expense of $0.8 and $0.6 for the three months ended September 30, 2021 and 2020, respectively.
17. NET INCOME ATTRIBUTABLE TO COTY INC. PER COMMON SHARE
Reconciliation between the numerators and denominators of the basic and diluted income per share (“EPS”) computations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
Amounts attributable to Coty Inc.:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
226.0
|
|
|
$
|
116.7
|
|
|
|
|
|
|
Convertible Series B Preferred Stock dividends
|
(123.0)
|
|
|
(20.8)
|
|
|
|
|
|
|
Net income from continuing operations attributable to common stockholders
|
103.0
|
|
|
95.9
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax
|
—
|
|
|
104.7
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
103.0
|
|
|
$
|
200.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—Basic
|
777.6
|
|
|
763.9
|
|
|
|
|
|
|
Effect of dilutive stock options and Series A/A-1 Preferred Stock(a)
|
—
|
|
|
—
|
|
|
|
|
|
|
Effect of restricted stock and RSUs(b)
|
10.1
|
|
|
1.4
|
|
|
|
|
|
|
Effect of Convertible Series B Preferred Stock(c)
|
—
|
|
|
151.4
|
|
|
|
|
|
|
Weighted-average common shares outstanding—Diluted
|
787.7
|
|
|
916.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Earnings from continuing operations per common share - basic
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
|
|
|
|
Earnings from continuing operations per common share - diluted(d)
|
0.13
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations - basic
|
—
|
|
|
0.13
|
|
|
|
|
|
|
Earnings from discontinued operations - diluted
|
—
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - basic
|
0.13
|
|
|
0.26
|
|
|
|
|
|
|
Earnings per common share - diluted(d)
|
0.13
|
|
|
0.24
|
|
|
|
|
|
(a) For the three months ended September 30, 2021 and 2020, outstanding stock options and Series A/A-1 Preferred Stock with purchase or conversion rights to purchase 11.4 and 16.8 million shares of Common Stock, respectively, were anti-dilutive and excluded from the computation of diluted EPS.
(b) For the three months ended September 30, 2021 and 2020 , there were 5.0 and 10.9 million anti-dilutive RSUs, respectively, excluded from the computation of diluted EPS.
(c) For the three months ended September 30, 2021, there were 163.1 million dilutive shares of Convertible Series B Preferred Stock excluded from the computation of diluted EPS as their inclusion would be anti-dilutive.
(d) Diluted EPS is adjusted by the effect of dilutive securities, including awards under the Company's equity compensation plans and the convertible Series B Preferred Stock. When calculating any potential dilutive effect of stock options, Series A Preferred Stock, restricted stock and RSUs, the Company uses the treasury method and the if-converted method for the Convertible Series B Preferred Stock. The treasury method typically does not adjust the net income attributable to Coty Inc., while the if-converted method requires an adjustment to reverse the impact of the preferred stock dividends of $123.0 and $20.8 for the three months ended September 30, 2021 and 2020, respectively, on net income applicable to common stockholders during the period.
18. MANDATORILY REDEEMABLE FINANCIAL INTERESTS AND REDEEMABLE NONCONTROLLING INTERESTS
Mandatorily Redeemable Financial Interest
Convertible Series B Preferred Stock
As a result of the Exchange Agreement, discussed in Note 15—Equity and Convertible Preferred Stock, Series B Preferred Stock and related accrued dividends were reclassified from temporary equity to liability as Mandatorily redeemable Convertible Series B Preferred Stock, as of September 30, 2021.
United Arab Emirates subsidiary
In July 2021, the Company purchased the remaining 25% noncontrolling interest of a certain subsidiary in the United Arab Emirates from the noncontrolling interest holder for $7.1, pursuant to the related U.A.E. Shareholders Agreement. The termination was effective on December 31, 2020 and immediately prior to the cash payment, the noncontrolling interest balance was recorded as a mandatorily redeemable financial instrument liability.
Redeemable Noncontrolling Interests
Subsidiary in the Middle East
As of September 30, 2021, the noncontrolling interest holder in the Company’s subsidiary in the Middle East had a 25% ownership share. The Company adjusts the redeemable noncontrolling interests (“RNCI”) to redemption value at the end of each reporting period with changes recognized as adjustments to APIC. The Company recognized $83.4 and $84.1 as the RNCI balances as of September 30, 2021 and June 30, 2021, respectively.
19. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved, from time to time, in various litigation, administrative and other legal proceedings, including regulatory actions, incidental or related to its business, including consumer class or collective actions, personal injury (including asbestos claims related to the Company’s talc-based cosmetic products), intellectual property, competition, compliance and advertising claims litigation and disputes, among others (collectively, “Legal Proceedings”). While the Company cannot predict any final outcomes relating thereto, management believes that the outcome of current Legal Proceedings will not have a material effect upon its business, prospects, financial condition, results of operations, cash flows or the trading price of the Company’s securities. However, management’s assessment of the Company’s current Legal Proceedings is ongoing, and could change in light of the discovery of additional facts with respect to Legal Proceedings not presently known to the Company, further legal analysis, or determinations by judges, arbitrators, juries or other finders of fact or deciders of law which are not in accord with management’s evaluation of the probable liability or outcome of such Legal Proceedings. From time to time, the Company is in discussions with regulators, including discussions initiated by the Company, about actual or potential violations of law in order to remediate or mitigate associated legal or compliance risks and liabilities or penalties. As the outcomes of such proceedings are unpredictable, the Company can give no assurance that the results of any such proceedings will not materially affect its reputation, business, prospects, financial condition, results of operations, cash flows or the trading price of its securities.
Certain Litigation. A consolidated purported stockholder class action and derivative complaint concerning the tender offer by Cottage Holdco B.V. (the “Cottage Tender Offer”) and the Schedule 14D-9 is pending against certain current and former directors of the Company, JAB Holding Company S.à r.l., JAB Holdings B.V., JAB Cosmetics B.V., and Cottage Holdco B.V. in the Court of Chancery of the State of Delaware. The Company was named as a nominal defendant. The case, which was filed on May 6, 2019, was captioned Massachusetts Laborers’ Pension Fund v. Harf et al., Case No. 2019-0336-AGB. On June 14, 2019, plaintiffs in the consolidated action filed a Verified Amended Class Action and Derivative Complaint (“Amended Complaint”). After defendants responded to the Amended Complaint, on October 21, 2019, plaintiffs filed a Verified Second Amended Class Action and Derivative Complaint (the “Second Amended Complaint”), alleging that the directors and JAB Holding Company S.à r.l., JAB Holdings B.V., JAB Cosmetics B.V., and Cottage Holdco B.V. breached their fiduciary duties to the Company’s stockholders and breached the Stockholders Agreement. The Second Amended Complaint seeks, among other things, monetary relief. On November 21, 2019, the defendants moved to dismiss certain claims asserted in the Second Amended Complaint, and certain of the director defendants also answered the complaint. On May 7, 2020, plaintiffs stipulated to the dismissal without prejudice of JAB Holding Company S.à r.l. from the action. On August 17, 2020, the court denied the remaining motions to dismiss. The case is currently at the discovery stage with a trial date scheduled for November 2022.
A purported stockholder class action complaint, alleging violations of the U.S. securities laws in connection with the P&G beauty brands acquisition is pending against the Company as well as certain current and former officers of the Company in the U.S. District Court for the Southern District of New York. The case, which was filed on September 4, 2020, is captioned
Crystal Garrett-Evans v. Coty Inc. et al., Case No. 1:20-cv-07277 (the “Evans Action”). On November 23, 2020, the court appointed the individual Susan Nock as lead plaintiff and the Rosen Firm as lead counsel. The plaintiff filed an amended complaint on January 22, 2021. The Amended Complaint asserts claims under the federal securities laws and seeks, among other things, monetary relief. On March 8, 2021, the Company filed a motion to dismiss the amended complaint, and on August 4, 2021 the court dismissed the amended complaint, holding that it failed to set forth a valid claim. There has been no appeal of the dismissal and the Evans Action has been concluded.
A second purported stockholder class action and derivative complaint, alleging violations of the U.S. securities laws in connection with the P&G beauty brands acquisition and the Kylie Brands transaction as well as claims for breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets by certain current and former officers and directors of the Company, is pending in the U.S. District Court for the Southern District of New York. The case, which was filed on November 17, 2020, is captioned Chris Lewis v. Becht et al., Case No. 1:20-cv-09685 (the “Lewis Action”). The Company was named as a nominal defendant. The plaintiff seeks, among other things, injunctive and/or monetary relief. This action was voluntarily stayed during the pendency of the motion to dismiss the Evans Action. Following the dismissal of the Evans Action, counsel for the plaintiff in the Lewis Action agreed to dismiss the case and the court has approved the dismissal of the action as of October 2021.
At this time, the Company cannot reasonably estimate a range of loss, if any, not covered by available insurance, that may result given the current status of these lawsuits.
Brazilian Tax Assessments
The Company’s Brazilian subsidiaries receive tax assessments from local, state and federal tax authorities in Brazil from time to time. Current open tax assessments as of September 30, 2021 are:
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Assessment received
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Type of assessment
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Type of Tax
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Tax period impacted
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Estimated amount, including interest and penalties as of
September 30, 2021
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Mar-18
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State sales tax credits, which the Treasury Office of the State of Goiás considers as improperly registered
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ICMS
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2016-2017
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R$1.0 million (approximately $0.2) (a)
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Aug-20
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ICMS
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2017-2019
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R$671.2 million (approximately $123.9)
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Oct-20
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Federal excise taxes, which the Treasury Office of the Brazil’s Internal Revenue Service considers as improperly calculated
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IPI
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2016-2017
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R$344.4 million (approximately $63.6)
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Nov-20
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State sales taxes, which the Treasury Office of the State of Minas Gerais considers as improperly calculated
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ICMS
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2016-2019
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R$188.1 million (approximately $34.7)
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Jun-21
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State sales tax, which the Treasury Office of the State of Goiás considers as improperly calculated
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ICMS
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2016-2020
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R$76.0 million (approximately $14.0)
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(a) During the first quarter of fiscal 2022, assessments amounting in R$360.7 million (approximately $66.6) were dismissed by the Goiás State Treasury's Attorney Office in favor of the Company.
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All cases are currently in the administrative process. The Company is seeking favorable administrative decisions on the tax enforcement actions filed by the tax authorities for these assessments. The Company believes it has meritorious defenses and it has not recognized a loss for these assessments as the Company does not believe a loss is probable. Due to the fiscal environment in Brazil, the possibility of further tax assessments related to the same or similar matters cannot be ruled out.
20. RELATED PARTY TRANSACTIONS
Equity Transfer Agreement
In connection with the Award granted to the Company’s CEO on June 30, 2021, Cottage Holdco B.V. has agreed to transfer to her (either directly or through contributing to the Company) one-half of the total number of shares of Common Stock owed to her if and when the Award vests. See Note 16—Share-Based Compensation Plans for more information on the Award.
Relationship with KKR
As noted in Note 15—Equity and Convertible Preferred Stock, in fiscal 2020 KKR Aggregator purchased Series B Preferred Stock. This preferred stock conveys to KKR Aggregator the right to designate two directors to the Company’s Board of Directors and voting rights on an as-converted basis.
In June of 2020, KKR Bidco and Coty entered into a separate definitive agreement regarding a strategic transaction (“Wella Transaction”) for the sale of the Company’s Professional and Retail Hair business, which was completed on November 30, 2020. As of September 30, 2021 KKR owned 60% of this separately managed entity and Coty owned the remaining 40%. Refer to Note 15—Equity and Convertible Preferred Stock for the definitive agreement entered into with KKR that closed on October 20, 2021.
On September 10, 2021, KKR Aggregator converted a portion of its Series B Preferred Stock into Class A common stock of the Company and completed a secondary public offering of the converted shares of Class A common stock. Refer to Note 15—Equity and Convertible Preferred Stock.
Assuming full conversion of its remaining preferred stock (and accrued dividends through September 30, 2021) and no other changes to the Company’s capitalization, KKR Aggregator would be the second largest shareholder, with a 10.9% stake as of September 30, 2021.
On October 20, 2021, the Company completed the sale of a 9.4% stake in the Wella Business to KKR Aggregator in exchange for the Series B Preferred Stock Redemption, reducing the Company's total shareholding in the Wella Business to approximately 30.6% as of October 20, 2021. Additionally, on November 6, 2021, Coty entered into a definitive agreement to sell an additional approximate 4.7% stake in Wella to KKR Aggregator in exchange for the redemption of approximately 56% of KKR Aggregator 's remaining convertible preferred shares in Coty, reducing the Company’s total shareholding in Wella to 25.9%. The transaction is expected close on November 30, 2021. Refer to Note 15—Equity and Convertible Preferred Stock.
During fiscal 2021, fees of $7.6 were incurred with KKR in connection with the second closing of the Series B Preferred Stock; these fees reduced the carrying value of the stock.
The Company also entered into agreements with KKR for potential consulting and advisory services. No fees were incurred under such agreements in fiscal 2022 or 2021.
From time to time, certain funds held by KKR may hold the Company’s Senior Secured and Unsecured Notes (as defined in Note 11—Debt). These funds may receive principal and interest payments on the same terms as other investors in the Company’s Senior Secured and Unsecured Notes.
Wella
As of September 30, 2021, Coty owned 40% of the Wella Business as an equity investment and performs certain services to Wella. Refer to Note 8— Equity Investments.
In connection with the sale of the Wella Business, the Company and Wella entered into a Transitional Services Agreement (“TSA”). Subject to the terms of this TSA, the Company will perform services for Wella in exchange for related service fees. Such services include billing and collecting from Wella customers, certain logistics and warehouse services, as well as other administrative and systems support. The various TSA services will be provided for a period of up to eighteen months and can be extended for another three month period. The Company and Wella may mutually agree to end certain TSA services before the contractual end date and may ramp down or phase out certain TSA services in the months leading up to the contractual end date. The Company and Wella have also entered into other manufacturing and distribution arrangements to facilitate the Wella Business transition in the U.S. and Brazil. TSA fees and other fees earned were $33.2 and $1.5, respectively, for the three months ended September 30, 2021. The TSA fees are principally invoiced on a cost plus basis. The TSA fees and other fees were included in Selling, general and administrative expenses and Cost of sales, respectively, in the Company's Condensed Consolidated Statement of Operations. As of September 30, 2021, accounts receivable from and accounts payable to Wella of $160.7 and $46.2, respectively, were included in Prepaid expenses and other current assets and Accrued expenses and other current liabilities, respectively, in the Company's Condensed Consolidated Balance Sheets.
In accordance with the separation agreement with Wella, Coty shall retain and be solely responsible for any amounts payable to former Coty employees transferred to Wella (“Wella employees”), who participated in the Coty Long-Term Incentive Plan. The Wella employees will continue to participate and vest on the current terms for the remaining vesting period after the separation. As such, Coty will continue to recognize the share-based compensation expense for Wella employees until the existing equity awards reach their vesting date. For the three months ended September 30, 2021, Coty recorded $1.6 of share-based compensation expense related to Wella employees, which was presented as part of Other income, net in the Condensed Consolidated Statements of Operations.
The Company has certain sublease arrangements with Wella after the sale. For the three months ended September 30, 2021, the Company reported sublease income of $2.4 from Wella.
21. SUBSEQUENT EVENTS
KKR Definitive Agreement
On October 20, 2021, the Company completed the sale of 9.4% stake in the Wella Business to KKR in exchange for the redemption of approximately half of KKR's remaining Series B Convertible Preferred Stock shares in Coty and a portion of unpaid dividends, reducing the Company's total shareholding in the Wella Business to approximately 30.6%. Additionally, on November 6, 2021, Coty entered into a definitive agreement to sell an additional approximate 4.7% stake in Wella to KKR Aggregator in exchange for the redemption of approximately 56% of KKR Aggregator 's remaining convertible preferred shares in Coty, reducing the Company’s total shareholding in Wella to 25.9%. The transaction is expected close on November 30, 2021. Refer to Note 15—Equity and Convertible Preferred Stock.