S-1 1 c69815_s1.htm

As filed with the Securities and Exchange Commission on June 28, 2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Form S-1
REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


COTY INC.
(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

2844
(Primary Standard Industrial
Classification Code Number)

 

13-3823358
(I.R.S. Employer
Identification Number)

2 Park Avenue
New York, NY 10016
(212) 479-4300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Jules Kaufman
General Counsel
Coty Inc.
2 Park Avenue
New York, NY 10016
(212) 479-4300

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

 

 

 

Andrew L. Fabens
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166
Tel: (212) 351-4000
Fax: (212) 351-4035

 

Michael Kaplan
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
Tel: (212) 450-4111
Fax: (212) 701-5111


Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: £

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£  Accelerated filer £   Non-accelerated filer S  Smaller reporting company £
(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

Title of Each Class of
Securities to be Registered

 

Proposed Maximum Aggregate
Offering Price
(1) (2)

 

Amount of
Registration Fee

 

Class A Common Stock, par value $0.01

 

$700,000,000

 

$80,220

 

 

(1)

 

 

 

Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(2)

 

 

 

Includes shares subject to the underwriters’ option to purchase additional shares.


The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.




The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and the selling stockholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, Dated June 28, 2012.

PROSPECTUS

CLASS A COMMON STOCK

The selling stockholders are offering   shares of Class A common stock. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

This is our initial public offering, and prior to this offering, there has been no public market for our Class A common stock. We anticipate that the initial public offering price per share will be between $  and $  . We intend to list the Class A common stock on either the NASDAQ Global Select Market or the New York Stock Exchange under the symbol “COTY.”

Upon consummation of this offering, we will have two classes of common stock: our Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting, conversion and transfer restrictions applicable to the Class B common stock. Each share of Class A common stock will be entitled to one vote. Each share of Class B common stock will be entitled to ten votes and will be convertible at any time into one share of Class A common stock.

See “Risk Factors” beginning on page 15 of this prospectus to read about factors you should consider before buying shares of the Class A common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

 

Per Share

 

 Total  

Initial public offering price

 

 

$

 

 

 

$

 

Underwriting discount

 

 

$

 

 

 

$

 

Proceeds, before expenses, to the selling stockholders

 

 

$

 

 

 

$

 

To the extent that the underwriters sell more than  shares of Class A common stock, the underwriters have the option to purchase an additional  shares from the selling stockholders at the initial offering price less the underwriting discount.

The underwriters expect to deliver the shares against payment in New York, New York on or about  , 2012.

Joint Book-Running Managers

 

 

 

 

 

BofA Merrill Lynch

 

J.P. Morgan

 

Morgan Stanley

Barclays

 

Deutsche Bank Securities

 

Wells Fargo Securities


Prospectus dated  , 2012


Neither we nor the selling stockholders have authorized anyone to provide any information other than that contained in this prospectus or to which we have referred you. We and the selling stockholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The selling stockholders and the underwriters are offering to sell, and seeking offers to buy, these securities only in jurisdictions where offers and sales are permitted. You should assume that the information in this prospectus is accurate only as of the date on the cover page, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock. Our business, prospects, financial condition and results of operations may have changed since that date.

TABLE OF CONTENTS

 

 

 

 

 

Page

Special Note Regarding Forward-Looking Statements

 

 

 

ii

 

Prospectus Summary

 

 

 

1

 

Risk Factors

 

 

 

15

 

Use of Proceeds

 

 

 

33

 

Dividend Policy

 

 

 

33

 

Capitalization

 

 

 

34

 

Dilution

 

 

 

36

 

Selected Consolidated Financial Data

 

 

 

37

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

39

 

Business

 

 

 

83

 

Management

 

 

 

99

 

Executive Compensation

 

 

 

107

 

Principal and Selling Stockholders

 

 

 

125

 

Certain Relationships and Related Party Transactions

 

 

 

127

 

Description of Indebtedness

 

 

 

129

 

Description of Capital Stock

 

 

 

131

 

Shares Eligible for Future Sale

 

 

 

138

 

Material United States Federal Income Tax Considerations

 

 

 

140

 

Underwriting

 

 

 

143

 

Legal Matters

 

 

 

148

 

Experts

 

 

 

148

 

Where You Can Find Additional Information

 

 

 

148

 

Index to Consolidated Financial Statements

 

 

 

F-1

 

i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, our operations and financial performance. All statements herein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases, such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “believe,” “intend,” “foresee,” “forecast,” “will,” “may,” “outlook” or other similar words or phrases. These statements discuss, among other things, our strategy, integration, future financial or operational performance, outcome or impact of pending or threatened litigation, domestic or international developments, nature and allocation of future capital expenditures, growth initiatives, inventory levels, cost of goods, future financings and other goals and targets and statements of the assumptions underlying or relating to any such statements. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations that we contemplate will be achieved.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, favorable circumstances or conditions, levels of activity or performance. Actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements, and you are cautioned not to place undue reliance on these statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include those described under “Risk Factors.” If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from our projections. These factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements included in this report.

We undertake no obligation to publicly update any forward-looking statements in light of new information, subsequent events or otherwise except as required by law.

Industry, Ranking and Market Data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations about our industry, market position, market opportunity and market size, is based on data from various sources including internal data and estimates, independent industry publications (including Euromonitor International Ltd, or “Euromonitor”), government publications, reports by market research firms or other published independent sources and on our assumptions based on that data and other similar sources. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management’s understanding of industry conditions, and such information has not been verified by any independent sources. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the industry, market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise and we have not independently verified any third-party information.

In this prospectus, we refer to North America, Western Europe and Japan as “developed markets”, and all other markets as “emerging markets”.

Our fiscal year ends on June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2011” refer to the fiscal year ended June 30, 2011. Any reference to a year not preceded by “fiscal” refers to a calendar year.

ii


PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. Before investing in our Class A common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Except where the context requires otherwise, in this prospectus the terms “Company,” “Coty,” “we,” “us” or “our” refer to Coty Inc. and, where appropriate, its direct and indirect subsidiaries.

Coty Inc.

Our Company

We are the new emerging leader in beauty. Founded in Paris in 1904, Coty is a pure play beauty company with a portfolio of well-known brands that compete in the three segments in which we operate: Fragrances, Color Cosmetics and Skin & Body Care. We hold the #2 global position in fragrances, the #6 global position in color cosmetics and have a strong regional presence in skin & body care. Our top 10 brands, which we refer to as our “power brands”, are expected to generate approximately 70% of our net revenues in fiscal 2012 and comprise the following globally recognized brands: adidas, Calvin Klein, Chloé, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen. Our brands compete in all key distribution channels across both prestige and mass markets, and in over 130 countries and territories.

Under the direction of our current management team, Coty has transformed itself from primarily a fragrance company into a multi-segment beauty company with market leading positions in both North America and Europe. Our entrepreneurial culture, driven by our “Faster. Further. Freer.” credo, has enabled us to gain market share in the beauty industry and provided us with the agility to deliver superior innovation, brand building and execution. Our strong organic growth has been complemented by strategic acquisitions, which most recently include OPI, Philosophy, TJoy and Dr. Scheller. Today, our business has a diversified revenue base that is expected to generate net revenues for fiscal 2012 of 53%, 30% and 17% from fragrances, color cosmetics and skin & body care, respectively.

In fiscal 2012, we expect to achieve net revenues in excess of $4.5 billion, which would represent an average annual growth rate of 14% from our fiscal 2010 net revenues of $3.5 billion, or 7% excluding the effects of recent acquisitions and foreign exchange translations. Over the twelve months ended March 31, 2012, we generated $304 million of operating income and $566 million of Adjusted Operating Income. Adjusted Operating Income and our average annual growth rate excluding the effects of recent acquisitions and foreign exchange translations are non-GAAP financial measures. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures” for a discussion of such measures.

Our Market Opportunity

According to Euromonitor, the three segments of the beauty industry in which Coty competes generated worldwide retail sales of approximately $259 billion in calendar year 2011. In calendar 2011, Coty generated 77% of its net sales in developed markets and 23% of its net sales in emerging markets, which are faster-growing. The industry growth rates of the fragrances, color cosmetics and skin & body care segments in the geographic markets where Coty competes was 4.8% from 2010 to 2011, based on Euromonitor data.

The growth rate in the areas in which Coty competes is expected to be 3.9% between 2011 and 2016, based on Euromonitor data. On a segment basis, the growth rate is expected to be 3.7%, 3.9% and 4.8% in fragrances, color cosmetics and skin & body care, respectively, over the same period, based on data from the same source. We believe this growth will be driven primarily by innovation,

1


changes in consumer preferences and fashion trends in developed markets, and by a larger middle class and increased accessibility of beauty products in emerging markets.

Our Competitive Strengths

A portfolio of strong, well recognized beauty brands anchored by our “power brands” across three key beauty segments. The strength of our brand portfolio provides the foundation of our success in the segments in which we compete. We believe our brands are valued by consumers across geographies and distribution channels. We believe consumers appreciate the quality and innovation of our products across various price points and our ability to quickly and cost-effectively innovate and draw excitement to our products. Our power brands, adidas, Calvin Klein, Chloé, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen, are at the core of our accomplishments. We invest aggressively behind our current and prospective power brands, which are our largest brands and those that we believe to have the greatest potential, to enhance our scale in the three beauty segments in which we compete. We have grown our power brands from three brands in 2002 to 10 brands in 2012, with the net revenue contribution from these brands increasing from 40% of $1.5 billion to approximately 70% of $4.5 billion during the same time period.

Global powerhouse in fragrances. Our #2 global position in fragrances is a result of the strength, scale and balance of our brands across all three key categories in the fragrances segment: Designer (Calvin Klein, Marc Jacobs, Chloé, Roberto Cavalli, Balenciaga, Bottega Veneta, Guess?), Lifestyle (Playboy, Davidoff) and Celebrity (Jennifer Lopez, Beyoncé Knowles). We have been a key innovator in fragrances across prestige and mass markets. Our recent successful launches include Roberto Cavalli and launches within the Chloé, Marc Jacobs and Playboy brands. With the launch of Glow by JLo in 2002, we reinvigorated the modern celebrity fragrances segment and built on that success to launch many other celebrity fragrances, including the recent Beyoncé Pulse launch and the upcoming launch of Lady Gaga Fame.

One of the fastest growing innovators in color cosmetics. We have achieved our #6 ranking globally in color cosmetics, as well as a #2 position in Europe, by transforming Rimmel from a regional player into a global power brand and by identifying and investing in the high growth potential of the nail care category. We continue to build on these foundations organically through new product innovations and strategically through acquisitions such as OPI. In nail care, we maintain a #1 market share in the combined North American and European markets and a #2 market share position globally with Sally Hansen and OPI. We have also held the #1 spot for new initiatives in nail and color in the U.S. mass market for the last three years.

Licensee of choice. We believe our success in partnering with Designer, Lifestyle, and Celebrity brands is due to our track record as brand architects who capture and translate each brand’s essence into successful products while respecting and preserving each licensor’s brand identity. In addition, our global scale allows us to offer licensor products in multiple points of distribution and in multiple geographies. Marc Jacobs and Chloé are examples of designer brands that have organically grown from low revenue bases to be two of our most highly valued and fastest growing licenses. Similarly, we grew Playboy from a low revenue base and expanded it globally. We will seek to replicate this success with high potential brands such as Roberto Cavalli. We also launched Glow by JLo, one of the first modern celebrity fragrances, and built on that success to launch many other fragrances linked to celebrities. We believe our success and scale make us a preferred licensee for potential partners and creates even greater opportunities for us to further develop existing brand licenses.

Entrepreneurial culture drives superior innovation. Our entrepreneurial culture is driven by our “Faster. Further. Freer.” credo that allows us to act faster and push marketing and creative boundaries further. Our past success demonstrates that we are poised to turn innovative ideas into realities with agility, decisiveness and calculated risk taking, all at a high level of execution. Over the last three years, sales from our new products accounted for approximately 20% of our total net revenues, on average. Historically, our strong track record with new products has been a key driver of our organic net revenue growth in excess of industry growth.

2


Product, channel and geographic diversity. We have breadth across beauty segments with product offerings in fragrances, color cosmetics and skin & body care. We have a balanced multi-channel distribution strategy and market products across price points in prestige and mass channels of distribution, including department stores, specialty retailers, traditional food, drug and mass retailers, salons, e-commerce and television sales, among others. We believe our commercial expertise enhances our capabilities when we enter new markets where products must suit local consumer preferences, incomes and demographics. Our beauty products are marketed, sold and distributed to consumers in over 130 countries and territories. We believe our diverse, globally recognized product portfolio positions us well to expand our leadership broadly into new geographies, in both developed and emerging markets.

Compelling financial profile. Our portfolio and superior execution have enabled us to achieve superior growth, profitability and cash flow generation. We have an exceptional track record of delivering strong and consistent net revenue growth ahead of average industry rates for the geographies in which we compete. From fiscal 2010 through fiscal 2012 we expect to grow our net revenues by an average annual growth rate of 14%, or approximately 7% excluding the effects of acquisitions and foreign exchange translations. Due to our sales growth as well as optimization of our logistics infrastructure and global procurement systems our gross profit is expected to have grown from fiscal 2010 through fiscal 2012 by an average annual growth rate of 16%, while gross margin is expected to improve by 2.5 percentage points in the same period. For the three years ending fiscal 2012, our adjusted operating income margin as a percentage of net revenue is expected to have expanded by 3.6 percentage points, from 8.2% to 11.8%. During the same period, our operating income margin is expected to improve by 0.7 percentage points, from 5.3% to 6.0%. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures” for a discussion of the differences between operating income and Adjusted Operating Income.

Our ability to generate organic revenue growth, deliver continued margin expansion and manage working capital effectively has resulted in a strong cash flow profile that allows us to invest in marketing, research & development and other growth opportunities while also successfully reducing debt levels incurred to finance acquisitions. In fiscal 2012, we expect to generate cash flow from operating activities in excess of $550 million and from fiscal 2010 through fiscal 2012 we expect to have maintained an average operating income cash conversion ratio of over 100% of both operating income and Adjusted Operating Income.

Skilled acquirer. Since 2001, we have successfully completed a number of acquisitions to drive segment, geographic and distribution platform growth. Acquisitions of the Calvin Klein fragrance business and the Sally Hansen brand have enabled us to expand our global reach. The OPI acquisition provided us with a leading professional nail care brand, a brand that is also viewed as a bridge between nail color, fashion houses, celebrities and entertainment franchises. The Philosophy acquisition enabled us to increase scale in skin & body care and enter new channels of distribution, like QVC and e- commerce. Additionally, we have selectively acquired brands that bring us new platforms, such as TJoy, which provided us with a broad distribution platform for our existing portfolio of brands in China.

We believe we are adept at identifying brands to complement our portfolio strategies. We rely on our entrepreneurial culture in order to attract and retain top management talent and drive innovative marketing approaches and operational efficiencies. Our strong track record of successful acquisitions is also based on our integration strategy that draws on our past experience. In each acquisition we make, we seek to employ best practices and talent from both our organization and the acquired business.

Experienced management team with proven industry track record. The majority of our management team has worked together for over a decade, and has an average of 20 years of industry experience. This team has been pivotal in institutionalizing our entrepreneurial culture and global strategic vision.

3


Our Strategy

Coty targets net revenue growth that outperforms the industry average, while at the same time striving to expand margins and improve cash flow generation. Our continued net revenue growth is centered on further developing power brands, strengthening our product segments and diversifying our geographic presence and distribution channels.

 

 

 

 

Continue to develop our global power brands portfolio. We will seek to capitalize on our existing power brands through continued excellence in branding, innovation and execution. We expect net revenues from our power brands to grow 17% in fiscal year 2012 compared to the prior year, or 9% assuming the acquisitions of Philosophy and OPI had occurred on July 1, 2010 in accordance with the presentation of the unaudited pro forma condensed consolidated statement of operations for the year ended June 30, 2011 contained elsewhere in this prospectus.

 

 

 

 

 

Additionally, we seek to identify and incubate new and existing brands that we believe have the potential to develop into power brands. For example, we launched Playboy in fiscal 2009 and have since built it into a power brand by identifying a unique brand positioning and leveraging our strengths. Playboy is now the #3 brand in the combined North American and European mass markets.

 

 

 

 

Broaden our segments through innovation, brand extension and new licenses. Innovation and new product development is essential to extending our global leadership position in fragrances, and to strengthening our global position in color cosmetics and skin & body care. Over the past three years, new product innovations represented approximately 20% of our annual net revenues, on average. We intend to continue to develop and bring to market unique and innovative products that we believe will be modern, appealing and accessible to the consumer. Further, we will continue to develop new brands, leveraging our track record of successful licensing relationships.

 

 

 

 

Expand and strengthen our position in skin & body care. Our skin & body care presence has been anchored by adidas, a brand we have grown organically, and Lancaster, a brand with technically advanced products that reflect our strong research and development capabilities. We continue to expand our presence in skin & body care through our recent acquisitions of TJoy and Philosophy. Through Philosophy, we have increased scale in skin & body care and entered new channels of distribution like direct television sales through QVC and e-commerce. TJoy contributed a manufacturing and distribution platform to leverage our existing brands in China.

 

 

 

 

Diversify our geographic presence. We seek to accelerate our sales growth by expanding and further diversifying our geographic footprint. We are focused on the development of branding and market execution strategies with our top global customers that enable us to enter and gain share in new markets. We also intend to leverage our current distribution to build our business in existing geographies with our full product line. For example, we will seek to, among other initiatives, expand distribution of Rimmel and adidas in China by leveraging TJoy’s distribution network, increase the presence of adidas body care products in other new international markets and expand our philosophy skin care business in international markets.

 

 

 

 

Extend product distribution. We will seek to continue to extend our distribution channels within existing geographies to increase market presence, brand recognition and net revenues. For example, we are expanding the OPI brand into global retail by offering Nicole by OPI through mass distribution channels and Sephora by OPI through Sephora’s U.S. and Canadian stores, while simultaneously maintaining the brand’s leadership in salons. We have also recently appointed Sephora as privileged retail partner for OPI in certain European and Middle Eastern countries and Russia. The development of branding and market execution strategies with our top global customers, such as Sephora, is an important component of our strategy to ensure our brands receive appropriate pricing and placement as we expand our distribution.

4


 

 

 

 

 

In addition, we are seeking to expand our presence through alternative distribution channels, including by leveraging the expertise of our philosophy brand (which sells products through its U.S. and U.K. websites, among other channels) in e-commerce, and direct television sales by expanding the distribution of appropriate brands into these channels.

 

 

 

 

Increase margins and continue to improve cash flow generation. We will remain focused on converting earnings into cash flow through effective working capital management, and seek continued margin expansion through strong net revenue growth, development of higher margin products, and supply chain integration and efficiency initiatives, such as optimization of our manufacturing footprint. In fiscal 2012, we expect our adjusted operating margin to have improved as discussed above, and we expect to generate cash flow from operating activities in excess of $550 million, compared to $417.5 million in the prior year.

While acquisitions are not essential to achieve our growth objectives, we will continue to evaluate targets that fit with our strategy and add shareholder value. Our approach to acquisitions has resulted in a successful track record of identifying targets aligned with our strategic objectives, executing acquisitions quickly and efficiently, and integrating the businesses successfully to both accelerate top line growth and improve the financial performance of the overall business.

Summary Risk Factors

Our business is subject to risks, as discussed more fully in the section entitled “Risk Factors.” You should carefully consider all of the risks discussed in the “Risk Factors” section before investing in our Class A common stock. The following risks, which are described more fully in the section entitled “Risk Factors”, may have an adverse effect on our business, which could cause a decrease in the price of our Class A common stock and result in a loss of all or a portion of your investment:

 

 

 

 

The beauty business is highly competitive, and if we are unable to compete effectively our results will suffer;

 

 

 

 

Rapid changes in market trends and consumer preferences could adversely affect our financial results;

 

 

 

 

Our success depends on our ability to achieve our global business strategy;

 

 

 

 

We may not be able to identify suitable acquisition targets or realize the full intended benefit of acquisitions we undertake;

 

 

 

 

Our acquisition activities may present managerial, integration, operational and financial risks;

 

 

 

 

Our operations and acquisitions in certain foreign areas expose us to political, regulatory, economic and reputational risks;

 

 

 

 

Our business is dependent upon certain licenses;

 

 

 

 

If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks, patents and copyrights, or if our brand partners and licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted;

 

 

 

 

Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of other parties;

 

 

 

 

Our goodwill and other assets could be subject to impairment;

 

 

 

 

A general economic downturn, the debt crisis and economic environment in Europe or a sudden disruption in business conditions may affect consumer purchases of our products, which could adversely affect our financial results;

 

 

 

 

A sudden disruption in business conditions or a general economic downturn may affect the financial strength of our customers that are retailers, which could adversely affect our financial results;

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Volatility in the financial markets could have a material adverse effect on our business;

 

 

 

 

Our debt facilities require us to comply with specified financial covenants that may restrict our current and future operations and limit our flexibility and ability to respond to changes or take certain actions;

 

 

 

 

We are subject to risks related to our international operations;

 

 

 

 

Fluctuations in currency exchange rates may negatively impact our financial condition and results of operations;

 

 

 

 

Our failure to protect our reputation, or the failure of our partners to protect their reputations, could have a material adverse effect on our brand images;

 

 

 

 

Our business is subject to seasonal variability;

 

 

 

 

We sell our products in a continually changing retail environment;

 

 

 

 

A disruption in operations could adversely affect our business;

 

 

 

 

Our decision to outsource certain functions means that we are dependent on the entities performing those functions;

 

 

 

 

Third-party suppliers provide, among other things, the raw materials used to manufacture our products, and the loss of these suppliers, damage to our third-party suppliers’ reputations or a disruption or interruption in the supply chain may adversely affect our business;

 

 

 

 

We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted;

 

 

 

 

Our success depends, in part, on our employees;

 

 

 

 

Our success depends, in part, on the quality, efficacy and safety of our products;

 

 

 

 

Our success depends, in part, on our ability to successfully manage our inventories;

 

 

 

 

Changes in laws, regulations and policies that affect our business or products could adversely affect our financial results;

 

 

 

 

Our new product introductions may not be as successful as we anticipate, which could have a material adverse effect on our business, financial condition and/or results of operations;

 

 

 

 

The illegal distribution and sale by third parties of counterfeit versions of our products could have a negative impact on our reputation and business; and

 

 

 

 

We are subject to environmental, health and safety laws and regulations that could affect our business or financial results.

Our Corporate Information

We were incorporated in Delaware in 1995. Our principal executive offices are located at 2 Park Avenue, New York, New York 10016 and our telephone number at this address is (212) 479-4300. Our website is www.coty.com. Information contained in, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.

“Coty” is the trademark of Coty Inc. in the United States and other countries. This prospectus also includes other trademarks of Coty, our partners and other persons. All trademarks or trade names referred to in this prospectus are the property of their respective owners.

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THE OFFERING

 

 

 

Class A common stock offered by the selling stockholders

 

 shares

Class A common stock to be outstanding after this offering

 

 shares (if the underwriters exercise their option in full)

Class B common stock to be outstanding after this offering

 

 shares

Total common stock to be outstanding after this offering

 

 shares

Option to purchase additional shares

 

The selling stockholders have granted the underwriters a 30-day option to purchase up to  additional shares of our Class A common stock at the initial offering price.

Voting rights

 

Upon consummation of this offering, the holders of our Class A common stock will be entitled to one vote per share, and the holders of our Class B common stock will be entitled to ten votes per share.

 

 

Each share of Class B common stock may be converted into one share of Class A common stock at the option of the holder.

 

 

If, on the record date for any meeting of the stockholders, the number of shares of Class B common stock then outstanding is less than 10% of the aggregate number of shares of Class A common stock and Class B common stock outstanding, then each share of Class B common stock will automatically convert into one share of Class A common stock.

 

 

In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon any transfer, except for certain transfers to other holders of Class B common stock or their affiliates.

 

 

Holders of Class A common stock and Class B common stock will vote together as a single class on all matters unless otherwise required by law.

 

 

Upon consummation of this offering, assuming no exercise of the underwriters’ option to purchase additional shares, (1) holders of Class A common stock will hold approximately  % of the combined voting power of our outstanding common stock and approximately  % of our total equity ownership and (2) holders of Class B common stock will hold approximately  % of the combined voting power of our outstanding common stock and approximately  % of our total equity ownership.

 

 

7


 

 

 

 

 

If the underwriters exercise their option to purchase additional shares in full, (1) holders of Class A common stock will hold approximately  % of the combined voting power of our outstanding common stock and approximately  % of our total equity ownership and (2) holders of Class B common stock will hold approximately  % of the combined voting power of our outstanding common stock and approximately  % of our total equity ownership. See “Description of Capital Stock—Voting Rights.”

 

 

The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting, conversion and transfer restrictions applicable to the Class B common stock. See “Description of Capital Stock—Common Stock” for a description of the material terms of our common stock.

Use of proceeds

 

We will not receive any proceeds from the offering.

Dividends

 

We do not currently intend to pay regular dividends on our common stock. See “Dividend Policy” for additional information.

Proposed NASDAQ Global Select Market or New York Stock Exchange symbol

 

“COTY”

Unless we specifically state otherwise or the context otherwise requires, the share information in this prospectus is as of  , 2012, and reflects or assumes:

 

 

 

 

the conversion of  shares of our common stock owned by our existing stockholders into   shares of Class A common stock and   shares of Class B common stock immediately prior to the offering, and the immediate conversion of  shares of our Class B common stock owned by the Class B holders into  shares of Class A common stock upon their sale in this offering;

 

 

 

 

the underwriters’ option to purchase up to an additional  shares of Class A common stock from the selling stockholders is not exercised; and

 

 

 

 

the filing and effectiveness of our restated certificate of incorporation and restated bylaws in connection with our initial public offering.

Unless we specifically state otherwise or the context otherwise requires, the share information in this prospectus does not give effect to or reflect the issuance of:

 

 

 

 

 shares issuable upon the exercise of outstanding stock options under our Long-Term Incentive Plan, Executive Ownership Plan and Stock Plan for Non-Employee Directors, at a weighted-average exercise price of $  per share;

 

 

 

 

 shares issuable upon settlement of restricted stock units and IPO Units under our Executive Ownership Plan and 2007 Stock Plan for Directors;

 

 

 

 

 shares reserved for future grants under our Long-Term Incentive Plan, Executive Ownership Plan and Stock Plan for Non-Employee Directors; or

 

 

 

 

 shares reserved for sale under our Executive Ownership Plan and Director Stock Purchase Plan.

8


SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary Consolidated Statements of Operations Data for the years ended June 30, 2011, 2010 and 2009 and the Consolidated Balance Sheet Data as of June 30, 2011, 2010 and 2009 from our audited Consolidated Financial Statements included elsewhere in this prospectus. The Consolidated Statements of Operations Data for the nine months ended March 31, 2012 and 2011 and Consolidated Balance Sheet Data as of March 31, 2012 have been derived from our unaudited Condensed Consolidated Financial Statements appearing elsewhere in this prospectus. The Consolidated Balance Sheet Data as of June 30, 2009 have been derived from our Consolidated Financial Statements which are not included in this prospectus. Our historical results are not necessarily indicative of our results in any future period. The Summary Consolidated Financial Data below should be read in conjunction with “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes included elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per share data)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011(a)

 

2010

 

2009

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

3,587.9

 

 

 

$

 

3,070.6

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

Gross profit

 

 

 

2,164.3

 

 

 

 

1,854.6

 

 

 

 

2,446.1

 

 

 

 

2,009.7

 

 

 

 

1,857.9

 

Operating income

 

 

 

275.9

 

 

 

 

252.7

 

 

 

 

280.9

 

 

 

 

184.5

 

 

 

 

241.4

 

Interest expense—related party

 

 

 

 

 

 

 

5.9

 

 

 

 

5.9

 

 

 

 

31.9

 

 

 

 

22.7

 

Interest expense, net

 

 

 

73.6

 

 

 

 

61.2

 

 

 

 

85.6

 

 

 

 

41.7

 

 

 

 

35.4

 

Other expense/(income), net

 

 

 

29.8

 

 

 

 

4.8

 

 

 

 

4.4

 

 

 

 

(8.8

)

 

 

 

 

1.2

 

Income before income taxes

 

 

 

172.5

 

 

 

 

180.8

 

 

 

 

185.0

 

 

 

 

119.7

 

 

 

 

182.1

 

Provision for income taxes

 

 

 

114.5

 

 

 

 

94.6

 

 

 

 

95.1

 

 

 

 

32.4

 

 

 

 

56.3

 

Net income

 

 

$

 

58.0

 

 

 

$

 

86.2

 

 

 

$

 

89.9

 

 

 

$

 

87.3

 

 

 

$

 

125.8

 

Net income attributable to noncontrolling interests

 

 

$

 

11.4

 

 

 

$

 

10.2

 

 

 

$

 

12.5

 

 

 

$

 

11.9

 

 

 

$

 

9.4

 

Net income attributable to redeemable noncontrolling interests

 

 

$

 

13.7

 

 

 

$

 

12.9

 

 

 

$

 

15.7

 

 

 

$

 

13.7

 

 

 

$

 

14.7

 

Net income attributable to Coty Inc.

 

 

$

 

32.9

 

 

 

$

 

63.1

 

 

 

$

 

61.7

 

 

 

$

 

61.7

 

 

 

$

 

101.7

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

371.5

 

 

 

 

317.0

 

 

 

 

329.4

 

 

 

 

280.2

 

 

 

 

280.2

 

Diluted

 

 

 

381.8

 

 

 

 

326.7

 

 

 

 

339.1

 

 

 

 

280.2

 

 

 

 

280.2

 

Cash dividends declared per common share

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.10

 

 

 

$

 

 

 

 

$

 

 

Net income attributable to Coty Inc. per common share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.09

 

 

 

$

 

0.20

 

 

 

$

 

0.19

 

 

 

$

 

0.22

 

 

 

$

 

0.36

 

Diluted

 

 

 

0.09

 

 

 

 

0.19

 

 

 

 

0.18

 

 

 

 

0.22

 

 

 

 

0.36

 

Consolidated Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

 

406.7

 

 

 

$

 

373.5

 

 

 

$

 

417.5

 

 

 

$

 

494.0

 

 

 

$

 

177.2

 

Net cash (used in) provided by investing activities

 

 

 

(293.5

)

 

 

 

 

(2,239.3

)

 

 

 

 

(2,252.5

)

 

 

 

 

(149.9

)

 

 

 

 

200.8

 

Net cash (used in) provided by financing activities

 

 

 

(69.2

)

 

 

 

 

1,819.4

 

 

 

 

1,903.8

 

 

 

 

(7.0

)

 

 

 

 

(376.0

)

 

Cash paid for income taxes(b)

 

 

 

50.2

 

 

 

 

45.9

 

 

 

 

60.3

 

 

 

 

55.3

 

 

 

 

33.6

 


 

 

(a)

 

 

 

Fiscal 2011 data includes results from the acquisitions of TJoy, Dr. Scheller, OPI, and Philosophy. See Note 4, “Acquisitions,” in our notes to Consolidated Financial Statements, for additional disclosures related to the acquisitions results and pro forma financial data.

 

(b)

 

 

 

Cash paid for taxes is less than the provision for income taxes for the nine months ended March 31, 2012 and 2011, and for fiscal 2011, primarily as the Company obtains benefits from the

9


 

 

 

 

amortization of goodwill and other intangible assets for tax purposes (primarily associated with the OPI and Philosophy acquisitions in fiscal 2011), from the carryforward of net operating losses in Germany and from the change in unrecognized tax benefits. In fiscal 2010, prior to those acquisitions, cash paid for taxes exceeded the provision for income taxes due to accelerated payment of estimated taxes. In fiscal 2009, cash paid for taxes was less than the provision for income taxes as the Company benefitted from the carryforward of net operating losses in the U.S. and Germany and the change in unrecognized tax benefits.

 

 

 

 

 

 

 

 

 

(in millions)

 

As of

 

As of June 30,

 

March 31, 2012

 

2011

 

2010

 

2009

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

520.4

 

 

 

$

 

510.8

 

 

 

$

 

387.5

 

 

 

$

 

91.1

 

Total assets

 

 

 

6,735.2

 

 

 

 

6,813.9

 

 

 

 

3,781.8

 

 

 

 

3,701.9

 

Total debt

 

 

 

2,477.1

 

 

 

 

2,622.4

 

 

 

 

1,416.0

 

 

 

 

1,402.2

 

Total Coty Inc. stockholders’ equity

 

 

 

1,313.0

 

 

 

 

1,361.9

 

 

 

 

419.7

 

 

 

 

473.6

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011

 

2010

 

2009

Adjusted Operating Income(a)

 

 

$

 

524.3

 

 

 

$

 

390.7

 

 

 

$

 

432.4

 

 

 

$

 

284.4

 

 

 

$

 

171.7

 

Adjusted Net Income Attributable to Coty Inc.(a)

 

 

 

303.0

 

 

 

 

239.3

 

 

 

 

235.0

 

 

 

 

153.4

 

 

 

 

66.0

 


 

 

(a)

 

 

 

See “Non-GAAP Financial Measures” below.

Non-GAAP Financial Measures

Adjusted Operating Income and Adjusted Net Income Attributable to Coty Inc. are non-GAAP financial measures which we believe investors may find helpful in understanding the ongoing performance of our operations, separate from items that we do not consider indicative of our core operating performance in any particular period. We believe these non-GAAP financial measures better enable management and investors to understand and analyze the underlying business results from period to period.

These non-GAAP financial measures should not be considered in isolation, or as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of our business as determined in accordance with GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis, and we provide reconciliations from the most directly comparable GAAP financial measures to the non- GAAP financial measures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Adjusted Operating Income and Adjusted Net Income Attributable to Coty Inc. provide an alternative view of performance used by management and we believe that an investor’s understanding of our performance is enhanced by disclosing these adjusted performance measures. In addition, our financial covenant compliance calculations under our debt agreements are substantially derived from these adjusted performance measures. The following are examples of how these adjusted performance measures are utilized by management:

 

 

 

 

senior management receives a monthly analysis of our operating results that are prepared on an adjusted performance basis;

 

 

 

 

strategic plans and annual budgets are prepared on an adjusted performance basis; and

 

 

 

 

senior management’s annual compensation is calculated, in part, using adjusted performance measures.

10


Adjusted Operating Income

We define Adjusted Operating Income as operating income adjusted for the following:

 

 

 

 

Share-based compensation adjustment, which consists of (i) the difference between share-based compensation expense/(income) accounted for under equity plan accounting and under liability plan accounting for the recurring nonqualified stock option awards and director-owned and employee-owned shares, restricted shares, and restricted stock units and (ii) all costs associated with the special incentive award granted in fiscal 2011, vesting of which is contingent upon completion of our initial public offering. Liability plan accounting is currently used by the Company to measure share-based compensation expense/(income) in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations. Equity plan accounting is currently used by the Company to measure the performance of the segments and will be used by the Company to measure share-based compensation expense/(income) following completion of our initial public offering; and

 

 

 

 

Other adjustments, which include:

 

 

 

 

asset impairment charges;

 

 

 

 

restructuring costs and business structure realignment programs;

 

 

 

 

acquisition-related costs and the effect of certain acquisition accounting adjustments; and

 

 

 

 

other adjustments that we do not consider indicative of our core operating performance.

Reconciliation of Operating Income to Adjusted Operating Income:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011

 

2010

 

2009

Reported Operating Income

 

 

$

 

275.9

 

 

 

$

 

252.7

 

 

 

$

 

280.9

 

 

 

$

 

184.5

 

 

 

$

 

241.4

 

% of Net revenues

 

 

 

7.7

%

 

 

 

 

8.2

%

 

 

 

 

6.9

%

 

 

 

 

5.3

%

 

 

 

 

7.1

%

 

Share-based compensation expense/(income) adjustment(a)

 

 

 

108.6

 

 

 

 

70.4

 

 

 

 

64.9

 

 

 

 

47.3

 

 

 

 

(133.6

)

 

Reported Operating Income adjusted for share-based compensation adjustment

 

 

 

384.5

 

 

 

 

323.1

 

 

 

 

345.8

 

 

 

 

231.8

 

 

 

 

107.8

 

% of Net revenues

 

 

 

10.7

%

 

 

 

 

10.5

%

 

 

 

 

8.5

%

 

 

 

 

6.7

%

 

 

 

 

3.2

%

 

Other adjustments:

 

 

 

 

 

 

 

 

 

 

Asset impairment charges(b)

 

 

 

102.0

 

 

 

 

 

 

 

 

 

 

 

 

5.3

 

 

 

 

20.5

 

Acquisition-related costs(c)

 

 

 

16.6

 

 

 

 

31.7

 

 

 

 

46.8

 

 

 

 

5.2

 

 

 

 

0.2

 

Business structure realignment programs(d)

 

 

 

10.5

 

 

 

 

7.9

 

 

 

 

9.3

 

 

 

 

11.5

 

 

 

 

4.1

 

Real estate consolidation program(e)

 

 

 

6.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring costs(f)

 

 

 

3.9

 

 

 

 

28.0

 

 

 

 

30.5

 

 

 

 

30.6

 

 

 

 

39.1

 

 

 

 

 

 

 

 

 

 

 

 

Total other adjustments to Reported Operating Income

 

 

 

139.8

 

 

 

 

67.6

 

 

 

 

86.6

 

 

 

 

52.6

 

 

 

 

63.9

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income

 

 

$

 

524.3

 

 

 

$

 

390.7

 

 

 

$

 

432.4

 

 

 

$

 

284.4

 

 

 

$

 

171.7

 

% of Net revenues

 

 

 

14.6

%

 

 

 

 

12.7

%

 

 

 

 

10.6

%

 

 

 

 

8.2

%

 

 

 

 

5.1

%

 


 

 

(a)

 

 

 

Consists of (i) the difference between share-based compensation expense/(income) accounted for under equity plan accounting and under liability plan accounting for the recurring nonqualified stock option awards and director-owned and employee-owned shares, restricted shares, and restricted stock units and (ii) all costs associated with the special incentive award granted in fiscal 2011, vesting of which is contingent upon completion of our initial public offering. Liability plan accounting is currently used by the Company to measure share-based compensation expense/(income) in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations. Equity plan accounting is currently used by the Company to measure the performance of the segments and will be used by the Company to measure share-based compensation expense/(income) following completion of our initial public offering. Included in

11


 

 

 

 

selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations in Corporate. Refer to “Adjusted Operating Income—Share-Based Compensation Adjustment” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2012 and 2011 and for fiscal 2011, 2010 and 2009.

 

(b)

 

 

 

Charges related to impairments of certain property and equipment and intangible assets. Included in asset impairment charges in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations in the Skin & Body Care and Color Cosmetics segments and in Corporate. Refer to “Adjusted Operating Income—Asset Impairment Charges” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2012 and for fiscal 2010 and 2009.

 

(c)

 

 

 

Charges related to transaction costs, integration costs and acquisition accounting adjustments for the 2011 Acquisitions, the acquisition of the Russian distribution business in fiscal 2010 and the acquisition of DLI Holdings LLC (“Del”), consisting of the Del Laboratories (Color Cosmetics) and Del Pharmaceuticals (“Del Pharma”) businesses, in fiscal 2008. Included in acquisition-related costs, selling, general and administrative expenses and amortization expense in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations in Corporate. Refer to “Adjusted Operating Income—Acquisition-Related Costs” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2012 and 2011 and for fiscal 2011, 2010 and 2009.

 

(d)

 

 

 

Charges related to preparation for public entity reporting, structural reorganization in Geneva, accelerated depreciation resulting from a change in the estimated useful life of a manufacturing facility, and the buy-back of distribution rights for a particular brand in selected EMEA markets. Included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations in Corporate. Refer to “Adjusted Operating Income—Business Structure Realignment Programs” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2012 and 2011 and for fiscal 2011, 2010 and 2009.

 

(e)

 

 

 

Charges related to lease loss in connection with the consolidation of real estate in New York. We expect to incur similar types of charges, but in larger amounts, in fiscal 2013 and 2014, the expected year of completion. Included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations in Corporate. Refer to “Adjusted Operating Income—Real Estate Consolidation Program” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2012 and 2011.

 

(f)

 

 

 

Charges related to business restructuring programs which primarily reflect employee-related costs, contract terminations and other exit charges. Included in restructuring costs in the Condensed Consolidated Statements of Operations and Consolidated Statements of Operations in Corporate. Refer to “Adjusted Operating Income—Restructuring Costs” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2012 and 2011 and for fiscal 2011, 2010 and 2009.

Adjusted Net Income Attributable to Coty Inc.

We define Adjusted Net Income Attributable to Coty Inc. as net income attributable to Coty Inc. adjusted for the following:

 

 

 

 

Adjustment made to reconcile operating income to Adjusted Operating Income, net of the income tax effect thereon (see Adjusted Operating Income);

 

 

 

 

Certain interest and other expense/(income), net of the income tax effect thereon, that we do not consider indicative of our performance; and

 

 

 

 

Certain tax effects that are not indicative of our performance.

12


Reconciliation of Net Income Attributable to Coty Inc. to Adjusted Net Income Attributable to Coty Inc.:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011

 

2010

 

2009

Reported Net Income Attributable to Coty Inc.

 

 

$

 

32.9

 

 

 

$

 

63.1

 

 

 

$

 

61.7

 

 

 

$

 

61.7

 

 

 

$

 

101.7

 

% of Net revenues

 

 

 

0.9

%

 

 

 

 

2.1

%

 

 

 

 

1.5

%

 

 

 

 

1.8

%

 

 

 

 

3.0

%

 

Share-based compensation expense/(income) adjustment(a)

 

 

 

108.6

 

 

 

 

70.4

 

 

 

 

64.9

 

 

 

 

47.3

 

 

 

 

(133.6

)

 

Change in tax provision due to share-based compensation expense/(income) adjustment(b)

 

 

 

20.1

 

 

 

 

(9.1

)

 

 

 

 

(14.4

)

 

 

 

 

(10.2

)

 

 

 

 

20.7

 

Reported Net Income adjusted for share-based compensation adjustment

 

 

 

161.6

 

 

 

 

124.4

 

 

 

 

112.2

 

 

 

 

98.8

 

 

 

 

(11.2

)

 

% of Net revenues

 

 

 

4.5

%

 

 

 

 

4.1

%

 

 

 

 

2.7

%

 

 

 

 

2.8

%

 

 

 

 

(0.3

%)

 

Other adjustments to Reported Net Income Attributable to Coty Inc.:

 

 

 

 

 

 

 

 

 

 

Other adjustments to Operating Income(a)

 

 

 

139.8

 

 

 

 

67.6

 

 

 

 

86.6

 

 

 

 

52.6

 

 

 

 

63.9

 

Loss on foreign currency contract(c)

 

 

 

37.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related interest expense(d)

 

 

 

8.5

 

 

 

 

6.5

 

 

 

 

9.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other adjustments to Reported Net Income Attributable to Coty Inc.

 

 

 

185.7

 

 

 

 

74.1

 

 

 

 

95.7

 

 

 

 

52.6

 

 

 

 

63.9

 

Change in tax provision due to other adjustments to Reported Net Income Attributable to Coty Inc.(b)

 

 

 

(53.3

)

 

 

 

 

(4.4

)

 

 

 

 

(28.8

)

 

 

 

 

(18.8

)

 

 

 

 

(21.9

)

 

Tax impact on foreign income inclusion(e)

 

 

 

9.0

 

 

 

 

45.2

 

 

 

 

41.9

 

 

 

 

45.3

 

 

 

 

 

Tax impact on intercompany borrowing(f)

 

 

 

 

 

 

 

 

 

 

 

14.0

 

 

 

 

(24.5

)

 

 

 

 

35.2

 

Adjusted Net Income Attributable to Coty Inc.

 

 

$

 

303.0

 

 

 

$

 

239.3

 

 

 

$

 

235.0

 

 

 

$

 

153.4

 

 

 

$

 

66.0

 

 

 

 

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

8.4

%

 

 

 

 

7.8

%

 

 

 

 

5.8

%

 

 

 

 

4.4

%

 

 

 

 

2.0

%

 


 

 

(a)

 

 

 

See “Reconciliation of Operating Income to Adjusted Operating Income.”

 

(b)

 

 

 

In accordance with ASC 740 (“Accounting for Income Taxes”), the Company is required to calculate its annual effective tax rate (“ETR”) utilizing the latest available information at each interim period and records its provision for income taxes using the ETR. The tax adjustments reflected in this table assumes that the ETR has been recalculated and normalized taking into account the elimination of the adjustments to operating income. The normalized ETR was utilized in calculating the net change to the interim tax expense as a result of such adjustments. Primarily due to the quarterly timing of our adjustments to operating income, the tax rate applicable to each individual adjustment to operating income is different than the implied rate presented herein.

 

(c)

 

 

 

Loss on foreign currency contract to hedge foreign currency exposure associated with a contemplated acquisition that was withdrawn. Included in other expense, net in the Condensed Consolidated Statements of Operations.

 

(d)

 

 

 

Interest expense for the nine months ended March 31, 2012 associated with the obligations related to the purchase of TJoy. For the nine months ended March 31, 2011 and fiscal 2011, interest expense associated with the obligations related to the purchase of TJoy and a one-time expense to secure availability of funds under a $700 90-day credit facility for the 2011 Acquisitions. Included in interest expense, net in the Condensed Consolidated Statements of Operations and the Consolidated Statements of Operations.

 

(e)

 

 

 

Effective fiscal 2012, the Company implemented certain changes to its organization structure, including manufacturing and product development processes. As a result of such structural changes, going forward tax expense associated with our foreign-based income will be reduced. Included in provision for income taxes in the Condensed Consolidated Statements of Operations and the Consolidated Statements of Operations.

13


 

(f)

 

 

 

Tax impact related to an intercompany loan. Transaction was treated as deemed dividend out of current year income for tax purposes. Included in provision for income taxes in the Consolidated Statements of Operations.

Net Revenues at Constant Rates Excluding the Effects of Recent Acquisitions

Management further believes that presenting our average annual growth rate excluding the effects of recent acquisitions and foreign exchange translations enhances an investor’s understanding of our performance, and we have disclosed such measures herein. We believe this non-GAAP financial measure better enables management and investors to understand and analyze the underlying business results from period to period.

Reconciliation of Reported Net Revenues to Net Revenues excluding Acquisitions at Constant Rates:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30

 

Change %

 

Average
% Change

 

2012

 

2011

 

2010

 

2012/2011

 

2011/2010

Reported Net revenues

 

 

$

 

 

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

 

 

 

17

%

 

 

 

Revenues generated from 2011 Acquisition

 

 

 

 

 

339.7

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues (excluding revenues related to 2011 Acquisitions)

 

 

 

 

 

3,746.4

 

 

 

 

3,482.9

 

 

 

 

 

 

8

%

 

 

 

Net revenues at Constant Rates (excluding revenues related to 2011 Acquisitions)(a)

 

 

 

 

 

3,743.0

 

 

 

 

3,482.9

 

 

 

 

 

 

7

%

 

 

 


 

 

(a)

 

 

  For all periods, results are translated at 2010 exchange rates. We calculate constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using constant foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information we present may not be comparable to similarly titled measures reported by other companies.

14


RISK FACTORS

Investment in our Class A common stock involves a high degree of risk and uncertainty. You should carefully consider the following information about these risks together with the other information contained in this prospectus before making an investment decision. If any of the following risks occur, our business, financial condition, results of operations or future growth could suffer. In these circumstances, the market price of our Class A common stock could decline, and you may lose all or part of your investment. The risks described below are not the only risks facing the Company. Additional risks not currently known or deemed immaterial may also result in adverse results for the Company’s business.

Risks related to our business

The beauty business is highly competitive, and if we are unable to compete effectively our results will suffer.

We face vigorous competition from companies throughout the world, including large multinational consumer products companies. Some of our competitors have greater resources than we do and may be able to respond more effectively to changing business and economic conditions than we can. Most of our products compete with other widely advertised brands within each product segment. Competition in the beauty business is based on pricing of products, quality of products and packaging, perceived value and quality of brands, innovation, in-store presence and visibility, promotional activities, advertising, editorials, e-commerce and mobile-commerce initiatives and other activities. It is difficult for us to predict the timing and scale of our competitors’ actions in these areas or whether new competitors will emerge in the beauty business, including competitors who offer comparable products at more attractive prices. In particular, the fragrances segment in the United States is being influenced by the high volume of new product introductions by diverse companies across several different distribution channels, including private label brands and cheaper brands that have increased pricing pressure. In addition, further technological breakthroughs, new product offerings by competitors, and the strength and success of our competitors’ marketing programs may impede our growth and the implementation of our business strategy. Our ability to compete also depends on the continued strength of our products, both power brands and other brands, including our continued leadership in fragrances, growth and innovation in color cosmetics and growth in skin & body care, the success of our branding, innovation and execution strategies, our ability to acquire or enter into new licenses and to continue to act as licensee of choice for various brands, the continued diversity of our product offerings to help us compete effectively, the successful management of new product introductions and innovations, our success in entering new markets and expanding our business in existing geographies, the success of any future acquisitions and our ability to protect our intellectual property. If we are unable to continue to compete effectively on a global basis, it could have an adverse impact on our business, results of operations and financial condition.

Rapid changes in market trends and consumer preferences could adversely affect our financial results.

Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to industry trends and changes in consumer preferences for fragrances, color cosmetics and skin & body care products, consumer attitudes toward our industry and brands and in where and how consumers shop for those products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, achieve a favorable mix of products and refine our approach as to how and where we market and sell our products. Net revenues and margins on beauty products tend to decline as they advance in their life cycles, so our net revenues and margins could suffer if we do not successfully and continuously develop new products. While we devote considerable effort and resources to shape, analyze and respond to consumer preferences, consumer tastes cannot be predicted with certainty and can change rapidly. Additionally, due to the increasing use of social and digital media by consumers and the speed by which information and opinions are shared, trends and tastes may continue to change even more

15


quickly. If we are unable to anticipate and respond to trends in the market for beauty and related products and changing consumer demands, our financial results may suffer.

Our success depends on our ability to achieve our global business strategy.

Our future growth, profitability and cash flows depend upon our ability to successfully implement our global business strategy, which is dependent upon a number of factors, including our ability to:

 

 

 

 

develop our global power brands portfolio through branding, innovation and execution;

 

 

 

 

identify and incubate new and existing brands with the potential to develop into global power brands;

 

 

 

 

innovate and develop new products that are appealing to the consumer;

 

 

 

 

extend our brands into the other segments of the beauty industry in which we compete and develop new brands;

 

 

 

 

acquire or enter into new licenses;

 

 

 

 

expand our geographic presence to take advantage of opportunities in developed and emerging markets;

 

 

 

 

continue to expand our distribution channels within existing geographies to increase market presence, brand recognition and sales;

 

 

 

 

expand our market presence through alternative distribution channels;

 

 

 

 

expand margins through sales growth, the development of higher margin products and supply chain integration and efficiency initiatives;

 

 

 

 

effectively manage capital investments and working capital to improve the generation of cash flow; and

 

 

 

 

execute any acquisitions quickly and efficiently and integrate businesses successfully.

There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Further, achieving these objectives will require investments which may result in short-term costs without generating any current net revenues and, therefore, may be dilutive to our earnings, at least in the short term. In addition, we may decide to divest or discontinue certain brands or streamline operations and incur other costs or special charges in doing so. We cannot give any assurance that we will realize, in full or in part, the anticipated strategic benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to identify suitable acquisition targets or realize the full intended benefit of acquisitions we undertake.

During the past several years, we have explored and undertaken opportunities to acquire other companies and assets as part of our growth strategy. The assets we have acquired in the past several years represent a significant portion of our net assets. In fiscal 2011 we acquired four businesses: Philosophy, OPI, Dr. Scheller and TJoy. We will continue to evaluate and anticipate engaging in additional selected acquisitions that would complement our current product offerings, expand our distribution channels, increase the size and geographic scope of our operations or otherwise offer operating efficiency opportunities and growth potential. There can be no assurance that we will be able to continue to identify suitable acquisition candidates in the future or consummate acquisitions on favorable terms or otherwise realize the full intended benefit of such transactions. For example, we recently experienced an unanticipated leadership change at TJoy after we acquired it which, combined with less favorable trade conditions in China, has resulted in TJoy performing below our expectations and impairments of trademarks. Similarly, Philosophy earned lower net revenues than expected in the first fiscal year after its acquisition primarily due to delays in planned international market product distribution expansion, which also resulted in impairments of trademarks. See “—Our goodwill and other assets could be subject to impairment.” Our failure to achieve intended

16


benefits from any future acquisitions could cause a material adverse effect on our results, business or financial condition.

Our acquisition activities may present managerial, integration, operational and financial risks.

Our acquisition activities expose us to certain risks, including diversion of management attention from existing core businesses and potential loss of customers or key employees of acquired businesses. If required, the financing for an acquisition could increase our indebtedness, dilute the interests of our stockholders or both. Further, acquisitions of foreign businesses entail certain particular risks, including difficulties in markets and environments where we lack a significant presence, including inability to seize opportunities available in those markets in comparison to our global or local competitors. For example, our growth strategy may require us to seek market penetration through sales channels with which we are not familiar, which may be the dominant sales channels in the relevant geographies. To the extent we acquire businesses located in countries or jurisdictions with currencies other than the U.S. dollar, the U.S. dollar equivalent cost of the acquisition, as well as future profits and revenues, may be adversely impacted should exchange rates vary in unexpected ways. We may experience difficulties in integrating newly acquired businesses. For example, after our acquisition of TJoy, a significant portion of TJoy’s former management departed earlier than expected. Even if we are able to integrate our acquired businesses, such transactions involve the risk of unanticipated or unknown liabilities, including with respect to environmental matters. Our failure to successfully integrate any acquired business could have a material adverse effect on our business, financial condition and operating results.

Our operations and acquisitions in certain foreign areas expose us to political, regulatory, economic and reputational risks.

We currently have offices in more than 30 countries and market, sell and distribute our products in over 130 countries and territories. Our growth strategy depends in part on our ability to grow in emerging areas, including expanding our operations in China and Russia and building our business in Brazil. In addition, our acquisitions and operations in some developing countries may be subject to greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions than are common in established areas.

Some of our recent acquisitions have required us to integrate non-U.S. companies which had not, until our acquisition, been subject to U.S. law. In many countries outside of the United States, particularly in those with developing economies, it may be common for others to engage in business practices prohibited by laws and regulations applicable to us, such as the FCPA or similar local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our business, financial condition and results of operations.

In addition, the United States has imposed trade sanctions that prohibit U.S. companies from engaging in business activities with certain persons or foreign countries or governments that it determines are adverse to U.S. foreign policy interests. At any time, the U.S. may impose additional sanctions. If so, our existing activities may be adversely affected, or we may incur costs to respond to an executive order, depending on the nature of any further sanctions that are imposed.

Although we implement policies and procedures designed to ensure compliance with these laws and trade sanctions, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. We may incur costs or other penalties in the event that any such violations have occurred, which could have an adverse effect on our business and reputation.

Our business is dependent upon certain licenses.

Products covering a significant portion of our net revenues are marketed under exclusive license agreements which grant us and/or our subsidiaries the rights to use certain intellectual property

17


(trademarks, trade dress, names and likeness, etc.) in certain fields on a worldwide and/or regional basis. As of March 31, 2012, we maintained 54 license agreements, which collectively accounted for 61% of our net revenues in the first three quarters of fiscal 2012. For the first nine months of fiscal 2012, our top six licensed brands collectively accounted for 43% of our net revenues, and each represented between 3% and 18% of net revenues. The termination of one or more of our license agreements or the renewal of a license agreement on less favorable terms could have a material adverse effect on our business, financial condition and results of operations. While we may enter into additional license agreements in the future, the terms of such license agreements may be less favorable than the terms of our existing license agreements.

We rely on our licensors to manage and maintain their brands. Many of our licenses are with celebrities whose public personae we believe are in line with our business strategy. Since we do not maintain control over such celebrities’ brand and image, however, they are subject to change at any time without notice, and there can be no assurance that these celebrity licensors will maintain the appropriate celebrity status or positive association among the consumer public to maintain sales of products bearing their names and likeness at the projected sales levels. Similarly, since we are not responsible for the brand or image of our designer licensors, sales of related products or projected sales of related products could suffer if the designer suffers a general decline in the popularity of its brands due to mismanagement, changes in fashion or consumer preferences, or other factors beyond our control.

Our existing licenses run for varying periods with varying renewal options and may be terminated if certain conditions, such as royalty payments, are not met. These licenses impose various obligations on us which we believe are common to many licensing relationships in the beauty industry. These obligations include:

 

 

 

 

maintaining the quality of the licensed product and the applicable trademarks;

 

 

 

 

permitting the licensor’s involvement in and, in some cases, approval of advertising, packaging and marketing plans;

 

 

 

 

paying royalties at minimum levels and/or maintaining minimum sales levels;

 

 

 

 

actively promoting the sales of the licensed product;

 

 

 

 

spending a certain amount of net sales on marketing and advertising for the licensed product;

 

 

 

 

maintaining the integrity of the specified distribution channel for the licensed product;

 

 

 

 

expanding the sales of the product and/or the jurisdictions in which the product is sold;

 

 

 

 

agreeing not to enter into licensing arrangements with competitors of certain of our licensors;

 

 

 

 

indemnifying the licensor in the event of product liability or other claims related to our products;

 

 

 

 

limiting assignment and sub-licensing to third parties without the licensor’s consent; and

 

 

 

 

in some cases, requiring notice to the licensor or its approval of certain changes in control.

If we breach any of these obligations or any other obligations set forth in any of our license agreements, our rights under the license agreements that we have breached could be terminated, which could have a material adverse effect on our business, financial condition and results of operations.

Our success is also partially dependent on the reputation of our licensors and the goodwill associated with their intellectual property. Our licensors’ reputation or goodwill may be harmed due to factors outside our control, which could have a material adverse effect on our business, financial condition and results of operations. In addition, in the event that any of our licensors were to enter bankruptcy proceedings, we could lose our rights to use the intellectual property that the applicable licensors license us to use.

18



If we are unable to obtain, maintain and protect our intellectual property rights, in particular trademarks, patents and copyrights, or if our brand partners and licensors are unable to maintain and protect their intellectual property rights that we use in connection with our products, our ability to compete could be negatively impacted.

Our intellectual property is a valuable asset of our business. For example, the market for our products depends to a significant extent upon the value associated with our product innovations and our owned and licensed brands. Although certain of our intellectual property is registered in the United States and in several of the foreign countries in which we operate, there can be no assurances with respect to the rights associated with such intellectual property in those countries, including our ability to register, use or defend key trademarks. We rely on a combination of trademark, trade dress, patent, copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. However, these laws, procedures and restrictions provide only limited and uncertain protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated, including by counterfeiters as discussed under “—The illegal distribution and sale by third parties of counterfeit versions of our products could have a negative impact on our reputation and business”, which could adversely affect our competitive position or ability to sell our products. In addition, our intellectual property portfolio in many foreign countries is less extensive than our portfolio in the United States, and the laws of foreign countries, including many emerging markets in which we operate, such as China, may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and patents may be substantial.

In addition, we may fail to apply for, or be unable to obtain, intellectual property protection for certain aspects of our business. For example, we cannot provide assurance that our applications for patents, trademarks and other intellectual property rights will be granted, or, if granted, will provide meaningful protection. In addition, third parties have in the past and could in the future bring infringement, invalidity, co-inventorship, re-examination, opposition or similar claims with respect to any of our current trademarks, patents and copyrights, or any trademarks, patents or copyrights that we may seek to obtain in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s attention and resources, damage our reputation and brands, and substantially harm our business and results of operations. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations.

In order to protect or enforce our intellectual property and other proprietary rights, or to determine the enforceability, scope or validity of the intellectual or proprietary rights of others, we may initiate litigation or other proceedings against third parties, such as infringement suits, opposition proceedings or interference proceedings. Any lawsuits or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation and other proceedings also put our intellectual property at risk of being invalidated or interpreted narrowly. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits or other proceedings that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

In addition, many of our products bear, and the value of our brands is affected by, the trademarks and other intellectual property rights of our brand partners and licensors. Our brand partners’ and licensors’ ability to maintain and protect their trademark and other intellectual property rights is subject to risks similar to those described above with respect to our intellectual property. We do not control the protection of the trademarks and other intellectual property rights of our brand partners and licensors and cannot ensure that our brand partners and licensors will be able to secure or protect their trademarks and other intellectual property rights. The loss of any of our significant owned or licensed trademarks, patents, copyrights or other intellectual property in any jurisdiction where we conduct a material portion of our business or where we plan geographic

19


expansion could have a material adverse effect on our business, financial condition and results of operations.

Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of other parties.

Our commercial success depends at least in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and other proprietary rights of others. However, we cannot be certain that the conduct of our business does not and will not infringe, misappropriate or otherwise violate such rights. Many companies have employed intellectual property litigation as a way to gain a competitive advantage, and to the extent we gain greater visibility and market exposure as a public company, we may also face a greater risk of being the subject of such litigation. For these and other reasons, third parties may allege that our products, services or activities infringe, misappropriate or otherwise violate their trademark, patent, copyright or other proprietary rights. Defending against allegations and litigation could be expensive, take significant time, divert management’s attention from other business concerns, and delay getting our products to market. In addition, if we are found to be infringing, misappropriating or otherwise violating third party trademark, patent, copyright or other proprietary rights, we may need to obtain a license, which may not be available on commercially reasonable terms or at all, or redesign or rebrand our products, which may not be possible. We may also be required to pay substantial damages or be subject to a court order prohibiting us and our customers from selling certain products or engaging in certain activities. Our inability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of others could therefore have a material adverse effect on our business, financial condition and results of operations.

Our goodwill and other assets could be subject to impairment.

We are required, at least annually, or as facts and circumstances warrant, to test goodwill and other assets to determine if impairment has occurred. Impairment can occur due to adverse changes in net revenue growth rates, profitability or discount rates used for valuation purposes, among other factors. If the testing indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other assets and the implied fair value of the goodwill or the fair value of other assets in the period the determination is made. We cannot always accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other assets become impaired, it would have an adverse effect on our financial condition and results of operations. Any acquisitions we make may, as a result of how such acquisitions are accounted for, expose us to goodwill impairment and other intangible charges. For example, during the nine months ended March 31, 2012, the Company recorded a $99.5 million asset impairment charge on the philosophy and TJoy trademarks due to lower than expected revenues following their acquisition.

A general economic downturn, the debt crisis and economic environment in Europe or a sudden disruption in business conditions may affect consumer purchases of our products, which could adversely affect our financial results.

The general level of consumer spending is affected by a number of factors, including general economic conditions, inflation, interest rates, energy costs and consumer confidence, each of which is beyond our control. Consumer purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact sales of our products. For example, in the 2008–09 economic downturn, our net revenues declined. Global events beyond our control may impact our business, operating results and financial condition.

The ongoing eurozone debt crisis has caused, and is likely to continue to cause, disruptions both in local economies and in global financial markets, particularly if it leads to any future sovereign debt defaults or significant bank failures or defaults in the eurozone. Market disruptions in the eurozone could intensify or spread further, particularly if ongoing stabilization efforts prove

20


insufficient. Concerns have been raised as to the financial, political and legal ineffectiveness of measures taken to date. The effects of the eurozone debt crisis could be even more significant if they lead to a partial or complete breakup of the European Monetary Union (“EMU”). The partial or complete break-up of the EMU would be unprecedented and its impact highly uncertain. The resulting uncertainty and market stress could cause, among other things, potential failure or default of financial institutions, including those of systemic importance, a significant decrease in global liquidity, a freeze-up of global credit markets and worldwide recession.

Continuing or worsening recessionary environments in Europe and elsewhere could affect the demand for our products and may result in longer sales cycles, slower acceptance of new products and increased competition for sales. Calendar year 2012 sales in Europe in fragrances and categories of the color cosmetics industry have declined due to the economic slowdown, although our performance in the segments in which we compete have historically outperformed the industry. Deterioration of economic conditions in Europe or elsewhere could also impair collections on accounts receivable. In addition, sudden disruptions in business conditions, for example, as a consequence of events such as a pandemic, or as a result of a terrorist attack, retaliation and the threat of further attacks or retaliation, or as a result of adverse weather conditions or climate changes, can have a short- and, sometimes, long-term impact on consumer spending. Events that impact consumers’ willingness or ability to travel and/or purchase our products while traveling have impacted our travel retail business, and may continue to do so in the future. A downturn in the economies in which we sell our products or a sudden disruption of business conditions in those economies where our travel retail business is located could adversely affect our net revenues and profitability.

If consumer purchases decrease, we may not be able to generate enough cash flow to meet our obligations and commitments. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to raise necessary funds. We cannot predict whether we would be able to undertake any of these actions to raise funds on a timely basis or on satisfactory terms.

A sudden disruption in business conditions or a general economic downturn may affect the financial strength of our customers that are retailers, which could adversely affect our financial results.

A decline in consumer purchases tends to impact our retailer customers. The financial difficulties of a retailer could cause us to curtail or eliminate business with that customer. We may also decide to assume more credit risk relating to the receivables from that retailer. Our inability to collect receivables from one of our largest customers that is a retailer, or from a group of these customers, could have a material adverse effect on our business, results of operations and financial condition. If a retailer were to go into liquidation, we could incur additional costs if we choose to purchase the retailer’s inventory of our products to protect brand equity.

Volatility in the financial markets could have a material adverse effect on our business.

While we currently generate significant cash flows from our ongoing operations and have access to global credit markets through our various financing activities, credit markets may experience significant disruptions. Deterioration in global financial markets could make future financing difficult or more expensive. If any financial institutions that are parties to our senior secured credit facility or other financing arrangements, such as interest rate or foreign exchange hedging instruments, were to declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us. This could leave us with reduced borrowing capacity or could leave us unhedged against certain interest rate or foreign currency exposures, which could have an adverse impact on our business, financial condition and results of operations. In addition, the cost of certain items required by our operations, such as raw materials, transportation and freight, may be affected by changes in the value of the relevant currencies in which their price or cost is quoted or analyzed. We hedge certain exposures to foreign currency exchange rates arising in the ordinary course of business in order to mitigate the effect of such fluctuations.

21


Our debt facilities require us to comply with specified financial covenants that may restrict our current and future operations and limit our flexibility and ability to respond to changes or take certain actions.

We remain dependent upon others for our financing needs, and our debt agreements contain restrictive covenants. Our principal credit facility, which we refinanced on August 22, 2011, and the agreement governing our private placement of notes each contain covenants requiring us to maintain specific financial ratios and contain certain restrictions on us with respect to guarantees, liens, sales of certain assets, consolidations and mergers, affiliate transactions, indebtedness, dividends and other distributions and changes of control. There is a risk that these covenants could constrain our execution of our business strategy and growth plans. This principal credit facility will expire in August 2015 and the notes are due in 2017, 2020 and 2022. There is no assurance that alternative financing or financing on as favorable terms will be found when these agreements expire.

We are subject to risks related to our international operations.

We operate on a global basis, and the majority of our fiscal 2011 net revenues was generated outside the United States. We maintain offices in over 30 countries and have key operational facilities located outside the United States that manufacture, warehouse or distribute goods for sale throughout the world. As of June 30, 2011, approximately 70% of our total net sales, and approximately 26% of our long-lived assets were attributable to our foreign operations. Non-U.S. operations are subject to many risks and uncertainties, including:

 

 

 

 

fluctuations in foreign currency exchange rates, which can affect our results of operations, reported earnings, the value of our foreign assets, the relative prices at which we and foreign competitors sell products in the same markets and the cost of certain inventory and non-inventory items required by our operations;

 

 

 

 

changes in foreign laws, regulations and policies, including restrictions on foreign investment, trade, import and export license requirements, quotas, trade barriers and other protection measures imposed by foreign countries, and tariffs and taxes, as well as changes in U.S. laws and regulations relating to foreign trade and investment;

 

 

 

 

difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex domestic and international laws, treaties and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”), and different regulatory structures and unexpected changes in regulatory environments;

 

 

 

 

failure to effectively and immediately implement processes and policies across our diverse operations and employee base; and

 

 

 

 

adverse weather conditions, social, economic and geopolitical conditions, such as terrorist attacks, war or other military action or violent revolution.

We intend to reinvest undistributed earnings and profits from our foreign operations indefinitely, except where we are able to repatriate these earnings to the United States without material incremental tax provision. Any repatriation of funds currently held in foreign jurisdictions may result in higher effective tax rates for the Company. In addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. We cannot predict whether or in what form this proposed legislation may pass. If enacted, such legislation could have a material adverse impact on our tax expense and cash flow. Further, there have been expirations of certain U.S. tax provisions that, if not reinstated, could materially and adversely affect the tax positions of many U.S. multinationals, including ourselves.

Substantially all of our cash and cash equivalents that result from these earnings remain outside the United States. As of June 30, 2011 and 2010, cash and cash equivalents in foreign operations included $505.0 million and $382.6 million, or 98.9% and 98.7% of aggregate cash and cash equivalents, respectively.

We are also subject to the interpretation and enforcement by governmental agencies of other foreign laws, rules, regulations or policies, including any changes thereto, such as restrictions on

22


trade, import and export license requirements, privacy and data protection laws, and tariffs and taxes, which may require us to adjust our operations in certain markets where we do business. We face legal and regulatory risks in the United States and, in particular, cannot predict with certainty the outcome of various contingencies or the impact that pending or future legislative and regulatory changes may have on our business. It is not possible to gauge what any final regulation may provide, its effective date or its impact at this time. These risks could have a material adverse effect on our business, prospects, financial condition and results of operations.

Fluctuations in currency exchange rates may negatively impact our financial condition and results of operations.

Exchange rate fluctuations may affect the costs that we incur in our operations. The main currencies to which we are exposed are the euro, the British pound, the Swiss franc, the Russian ruble, the Polish zloty and the Australian and the Canadian dollar. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from foreign operations reported in our consolidated financial statements and an appreciation of these currencies will result in a corresponding increase in such amounts. The cost of certain items, such as raw materials, transportation and freight, required by our operations may be affected by changes in the value of the relevant currencies. To the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our financial condition and results of operations. The financial difficulties experienced by Greece, Italy, Spain (where we operate a manufacturing facility) and Portugal have led to speculation that these or other countries could leave the EMU, or that the EMU could break up. Greece, Italy, Spain and Portugal collectively represented 7% of our net revenues for the nine months ended March 31, 2012. The partial or complete break-up of the EMU would be unprecedented and its impact highly uncertain. The exit of one or more countries from the EMU or the dissolution of the EMU could lead to redenomination of certain of our accounts receivable. Any such exit and redenomination could cause uncertainty with respect to outstanding amounts owed to us, amplify currency risks or have an adverse impact on our business.

Our failure to protect our reputation, or the failure of our partners to protect their reputations, could have a material adverse effect on our brand images.

Our ability to maintain our reputation is critical to our various brand images. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity or if we, or the third parties with whom we do business, do not comply with regulations or accepted practices. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations, such as animal testing, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. We are also dependent on the reputations of our brand partners and licensors, which can be affected by matters outside of our control. Damage to our reputation or the reputations of our brand partners or licensors or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.

Our business is subject to seasonal variability.

Our sales generally increase during our second fiscal quarter as a result of increased demand by retailers associated with the holiday season. Accordingly, our financial performance, working capital requirements, cash flow and borrowings experience variability during the three to six months preceding this holiday season. To a lesser extent, our third and fourth fiscal quarters have also

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generally reflected seasonal promotional sales, relating to Mother’s Day and Father’s Day and for sun care products. Any substantial decrease in net revenues, in particular during periods of increased sales due to seasonality, could have a material adverse effect on our financial condition, results of operations and cash flows.

We sell our products in a continually changing retail environment.

The retail industry, particularly in the United States and Europe, has continued to experience consolidation and other ownership changes, and the business environment for selling fragrances, color cosmetics, and skin & body care products may change further. During the last several years, significant consolidation has occurred. The trend toward consolidation, particularly in developed markets such as the United States and Western Europe, has resulted in us becoming increasingly dependent on key retailers that control a higher percentage of retail locations, including large-format retailers and consolidated entities that own retail chains in both the mass and prestige distribution channels, who have increased their bargaining strength. Major retailers may, in the future, continue to consolidate, undergo restructuring or realign their affiliations, which could decrease the number of stores that sell our products or increase ownership concentration within the retail industry. Further business combinations among retailers may impede our growth and the implementation of our business strategy. In addition, the highly competitive U.S. discount and drug store environment has resulted in financial difficulties and store closings for a number of retailers, several of whom have liquidated or been acquired as a result. In addition, retailers, particularly in North America, have been reducing to a substantial extent their inventories of products, including our products. In fiscal 2011, no retailer accounted for more than 10% of our global net revenues; however, certain retailers accounted for more than 10% of net revenues within certain geographic markets, including the United States.

This trend towards consolidation has also resulted in an increased risk related to the concentration of our customers with respect to which we do not have long-term sales agreements or other contractual assurances as to future sales. Accordingly, these customers could reduce their purchasing levels or cease buying products from us at any time and for any reason, which, in addition to a general deterioration of our customers’ business operations, could have a corresponding material adverse effect on our business.

As the retail industry changes, consumers may prefer to purchase their fragrances and cosmetics from other distribution channels than those we use, and we may not continue to be as successful in penetrating those channels as we currently are in other channels, or as successful as our competitors are. For example, we have not sold products through the direct sales channel in the markets where it is significant, and we are less experienced in e-commerce, direct response and door-to-door than in our more traditional distribution channels. Assuming e-commerce, direct response and door-to-door sales continue to grow worldwide, we will need to continue to develop related strategies in order to remain competitive. If we are not successful in the direct sales channel, we may experience lower than expected revenues or be required to recognize goodwill impairments, as we have recently done with respect to our Philosophy acquisition. See “—Our goodwill and other assets could be subject to impairment.”

In addition, as we expand into new markets, other distribution channels that we do not utilize may be more significant. Although we have been able to recognize and adjust to many such changes in the retail industry to date, we can make no assurance as to our ability to make such adjustments in the future or the future effect of any such changes, including any potential material adverse effect such changes could have on our business, results of operations and financial condition. This concern is also valid with respect to new markets with which we are less familiar. See “Our acquisition activities may present managerial, integration, operational and financial risks.” While many fragrance brands are distributed in either the prestige or mass-market, over the past several years “prestige” brands have become increasingly available in other outlets through unauthorized means. While we have taken actions and expended considerable resources to confront such “diversion” of our products and the unauthorized introduction of other prestige products into the mass-market sales channels, there can be no assurance that such actions will be successful or that “diversion” of our

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products will not have an adverse impact on our business, prospects, financial condition and results of operations.

A disruption in operations could adversely affect our business.

As a company engaged in manufacturing and distribution on a global scale, we are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems, loss or impairment of key manufacturing sites, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters, pandemics, border disputes, acts of terrorism, and other external factors over which we have no control. The loss of, or damage to, any of our manufacturing facilities or distribution centers could have a material adverse effect on our business, results of operations and financial condition.

Our decision to outsource certain functions means that we are dependent on the entities performing those functions.

As part of our long-term strategy, we are continually looking for opportunities to provide essential business services in a more cost-effective manner. In some cases, this requires the outsourcing of functions or parts of functions that can be performed more effectively by external service providers. We have outsourced significant portions of our logistics management for our European prestige and mass businesses and our U.S. mass business, as well as certain technology-related functions, to third-party service providers. The dependence on a third party could lessen our control over deliveries to our customers. While we believe we conduct appropriate due diligence before entering into agreements with outsourcing entities, the failure of one or more such entities to provide the expected services, provide them on a timely basis or provide them at the prices we expect, or the costs incurred in returning these outsourced functions to being performed under our management and direct control, may have a material adverse effect on our results of operations or financial condition.

Third-party suppliers provide, among other things, the raw materials used to manufacture our products, and the loss of these suppliers, damage to our third-party suppliers’ reputations or a disruption or interruption in the supply chain may adversely affect our business.

We manufacture and package a majority of our products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various third-party suppliers. The loss of multiple suppliers or a significant disruption or interruption in the supply chain could have a material adverse effect on the manufacturing and packaging of our products. Increases in the costs of raw materials or other commodities may adversely affect our profit margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost efficiencies in manufacturing and distribution. In addition, failure by our third-party suppliers to comply with ethical, social, product, labor and environmental laws, regulations or standards, or their engagement in politically or socially controversial conduct, such as animal testing, could negatively impact their reputations. Any of these failures or behaviors could lead to various adverse consequences, including damage to our reputation, decreased sales and consumer boycotts.

We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers and suppliers around the world. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing

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software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

In addition, if we are unable to prevent security breaches, we may suffer financial and reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers or suppliers. In addition, the unauthorized disclosure of non-public sensitive information could lead to the loss of intellectual property or damage our reputation and brand image or otherwise adversely affect our ability to compete.

Our success depends, in part, on our employees.

Our success depends, in part, on our ability to retain our employees, including our key personnel, such as our executive officers and senior management team and our research and development and marketing personnel. The unexpected loss of one or more of our key employees could adversely affect our business. Our success also depends, in part, on our continuing ability to identify, hire, train and retain other highly qualified personnel. Competition for these employees can be intense, and although our key personnel have signed non-compete agreements, it is possible that these agreements would be unenforceable in some jurisdictions, permitting employees in those jurisdictions to transfer their skills and knowledge to the benefit of our competitors with little or no restriction. We may not be able to attract, assimilate or retain qualified personnel in the future, and our failure to do so could adversely affect our business.

Our success depends, in part, on the quality, efficacy and safety of our products.

Product safety or quality failures, actual or perceived, or allegations of product contamination, even when false or unfounded, could tarnish the image of our brands and could cause consumers to choose other products. Allegations of contamination or other adverse effects on product safety or suitability for use by a particular consumer, even if untrue, may require us from time to time to recall a product from all of the markets in which the affected production was distributed. Such issues or recalls could negatively affect our profitability and brand image.

If our products are perceived to be defective or unsafe, or if they otherwise fail to meet our consumers’ standards, our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales or become subject to liability claims. In addition, safety or other defects in our competitors’ products could reduce consumer demand for our own products if consumers view them to be similar. Any of these outcomes could result in a material adverse effect on our business, financial condition and results of operations.

Our success depends, in part, on our ability to successfully manage our inventories.

We currently engage in a program seeking to improve control over our inventories. This program has identified, and may continue to identify, inventories that are not saleable in the ordinary course, and that may have an adverse effect on our financial results. Moreover, there is no assurance that any inventory management program will be successful. If we misjudge consumer preferences or demands or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard. If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected.

Changes in laws, regulations and policies that affect our business or products could adversely affect our financial results.

Our business is subject to numerous laws, regulations and policies. Changes in the laws, regulations and policies, including the interpretation or enforcement thereof, that affect, or will

26


affect, our business or products, including changes in accounting standards, tax laws and regulations, environmental or climate change laws, restrictions or requirements related to product content, labeling and packaging, regulations or accords, trade rules and customs regulations, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result, could adversely affect our financial results.

Our new product introductions may not be as successful as we anticipate, which could have a material adverse effect on our business, financial condition and/or results of operations.

We have a rigorous process for the continuous development and evaluation of new product concepts, led by executives in marketing, sales, research and development, product development, operations, law and finance. Each new product launch, including those resulting from this new product development process, carries risks, as well as the possibility of unexpected consequences, including:

 

 

 

 

our advertising, promotional and marketing strategies for our new products may be less effective than planned and may fail to effectively reach the targeted consumer base or engender the desired consumption;

 

 

 

 

product purchases by our consumers may not be as high as we anticipate;

 

 

 

 

we may experience out-of-stocks and/or product returns exceeding our expectations as a result of our new product launches or retailer space reconfigurations or our net revenues may be impacted by retailer inventory management or changes in retailer pricing or promotional strategies;

 

 

 

 

we may incur costs exceeding our expectations as a result of the continued development and launch of new products, including, for example, advertising, promotional and marketing expenses, sales return expenses or other costs related to launching new products; and

 

 

 

 

our product pricing strategies for new product launches may not be accepted by our retail customers or their consumers, which may result in our sales being less than anticipated.

The illegal distribution and sale by third parties of counterfeit versions of our products could have a negative impact on our reputation and business.

Third parties may illegally distribute and sell counterfeit versions of our products, which may be inferior or pose safety risks. Consumers could confuse our products with these counterfeit products, which could cause them to refrain from purchasing our brands in the future and in turn could adversely affect our business. The presence of counterfeit versions of our products in the market could also dilute the value of our brands or otherwise have a negative impact on our reputation and business.

We believe our trademarks, copyrights, patents, and other intellectual property rights are extremely important to our success and our competitive position. While we devote significant resources to the registration and protection of our intellectual property and are aggressive in pursuing entities involved in the trafficking and sale of counterfeit products, we have not been able to prevent, and may in the future be unable to prevent, the imitation and counterfeiting of our products or the infringement of our trademarks. In particular, in recent years, there has been an increase in the availability of counterfeit goods, including fragrances, in various markets by street vendors and small retailers, as well as on the internet.

We are subject to environmental, health and safety laws and regulations that could affect our business or financial results.

We are subject to various foreign, federal, provincial, state, municipal and local environmental, health and safety laws and regulations relating to or imposing liability with respect to, among other things, the use, storage, handling, transportation and disposal of hazardous substances and wastes as well as the emission and discharge of such into the ground, air or water at our facilities or off-site. Certain environmental laws and regulations also may impose liability for the costs of cleaning up

27


contamination, without regard to fault, on current or previous owners or operators of real property and any person who arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person. We are currently involved in investigation or removal and/or remediation activities at certain sites. While we have not had any material claims made against us with regard to these sites, third parties may also make claims for personal injuries and property damage associated with releases of hazardous substances from these or other sites in the future.

Environmental laws and regulations are also complex, change frequently and have tended to become increasingly stringent and, as a result, environmental liabilities, costs or expenditures could adversely affect our financial results or results of operations.

Risks Related to the Securities Markets and Ownership of Our Class A Common Stock

JAB and certain other stockholders will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including deterring a change of control.

We are controlled by, and after this offering is completed will continue to be controlled by, JAB Holdings II B.V. (“JAB”). Donata Holding SE (“Donata”) and Parentes Holding SE (“Parentes”) indirectly share voting and investment control over the shares held by JAB. After the completion of this offering, JAB will not hold any of our Class A common stock, but will hold  % of our Class B common stock and, consequently,  % of the combined voting power of our common stock (or  % if the underwriters exercise their option to purchase additional shares in full). Each share of our Class B common stock will have ten votes per share, and our Class A common stock, which is the stock the selling stockholders are selling in this offering, will have one vote per share. As a result, JAB will have control over decisions requiring stockholder approval, including the election of directors, amendments to our Certificate of Incorporation and significant corporate transactions, such as a merger or other sale of the Company or its assets, subject to JAB’s obligations under a stockholders agreement with other significant holders: affiliates of Berkshire Partners LLC (which affiliates we refer to as “Berkshire”) and affiliates of Rhône Capital L.L.C. (which affiliates we refer to as “Rhône”). See “Certain Relationships and Related Party Transactions—Stockholders Agreement”. JAB will be able to make these decisions regardless of whether others believe that such change or transaction is in our best interests. So long as JAB, or affiliates of JAB, continue to beneficially own a sufficient number of shares of Class B common stock, even if they own significantly less than 50% of the shares of our outstanding common stock, they will continue to be able to effectively control our decisions, subject to its obligations under the stockholders agreement. In addition, pursuant to a stockholders agreement entered into among us, JAB, Berkshire and Rhône, Berkshire and Rhône each has the right to nominate a director to our board of directors, and each of the parties has agreed to vote for the other parties’ nominees. Berkshire and Rhône each hold this right so long as they continue to own at least 13,586,957 shares of either class of our common stock in the aggregate, respectively, adjusted for any stock split, dividend or combination, or any reclassification, recapitalization, merger, consolidation, exchange or other similar reorganization.

The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of the Company, could deprive stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of the Company and may ultimately affect the market price of our Class A common stock. See “Description of Capital Stock—Common Stock” and “Description of Capital Stock—Voting Rights” for a more detailed discussion of the relative rights of the Class A and Class B common stock.

JAB, Berkshire and Rhône are also in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete indirectly with us. JAB, Berkshire and Rhône or their respective affiliates may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us.

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An active, liquid trading market for our Class A common stock may not develop.

Prior to this offering, there has not been a public market for our Class A common stock. Although we expect to list our Class A common stock on the NASDAQ Global Select Market or the New York Stock Exchange, we cannot predict whether an active public market for our Class A common stock will develop or be sustained after this offering. If an active and liquid trading market does not develop, you may have difficulty selling or may not be able to sell at all some or any of the shares of our Class A common stock that you purchase.

We cannot assure you that our stock price will not decline or not be subject to significant volatility after this offering.

The market price of our Class A common stock could be subject to significant fluctuations after this offering. The price of our stock may change in response to fluctuations in our operating results in future periods and also may change in response to other factors, including factors specific to companies in our industry, many of which are beyond our control. As a result, our share price may experience significant volatility and may not necessarily reflect the value of our expected performance. Among other factors that could affect our stock price are:

 

 

 

 

the financial projections that we may provide to the public, any changes in these projections or any failure for any reason to meet these projections;

 

 

 

 

the development and sustainability of an active trading market for our Class A common stock;

 

 

 

 

success of competitive products or services;

 

 

 

 

the public’s response to press releases or other public announcements by us or others, including our filings with the Securities and Exchange Commission (the “SEC”), announcements relating to litigation, significant changes to our management or to our license or brand portfolio;

 

 

 

 

the effectiveness of our internal controls over financial reporting;

 

 

 

 

speculation about our business in the press or the investment community;

 

 

 

 

future sales of our common stock by our significant stockholders, officers and directors;

 

 

 

 

changes in our capital structure, such as future issuances of debt or equity securities;

 

 

 

 

our entry into new markets;

 

 

 

 

regulatory and tax developments in the United States, Europe or other markets;

 

 

 

 

strategic actions by us or our competitors, such as acquisitions or restructurings; and

 

 

 

 

changes in accounting principles.

In particular, we cannot assure you that you will be able to resell any of your shares of our Class A common stock at or above the initial public offering price. The initial public offering price will be determined by negotiations between us, the selling stockholders and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market, if a trading market develops, after this offering.

The price of our Class A common stock could decline if securities analysts do not publish research or if securities analysts or other third parties publish inaccurate or unfavorable research about us.

The trading of our Class A common stock is influenced by the reports and research that industry or securities analysts publish about us or our business. The trading price of our stock would likely decrease if analysts stop covering us or if too few analysts cover us. If one or more of the analysts who cover us downgrade our stock, our stock price will likely decline. If one or more of these analysts cease coverage of the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our Annual Report on Form 10-K for the year ending June 30, 2013, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is required to express an opinion as to the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending June 30, 2014. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

We will face increased legal, accounting, administrative and other costs and expenses as a public company that, other than in relation to preparing this prospectus, we have not incurred as a private company. The Sarbanes-Oxley Act of 2002, as well as new rules and regulations subsequently implemented by the SEC, the Financial Industry Regulatory Authority, the Public Company Accounting Oversight Board and the NASDAQ Global Select Market or the New York Stock Exchange, as applicable, impose additional reporting and other obligations on public companies. We expect that compliance with these public company requirements will increase our costs and make some activities more time-consuming. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

You will incur immediate and substantial dilution in your investment if you purchase in this offering.

Investors purchasing shares of Class A common stock in this offering will incur immediate and substantial dilution in net tangible book value per share because the price that these investors pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution is due in large part to the fact that our existing investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, upon the completion of this offering, there will be options to purchase  shares of our common stock outstanding and restricted stock units with respect to shares of our common stock, based on the number of such awards outstanding on  , 2012. To the extent shares of common stock are issued with respect to such awards in the future, there will be further dilution to new investors.

The initial public offering price for the shares sold in this offering will be determined by negotiations between us, the selling stockholders and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. See “Underwriting” for a discussion of the determination of the initial public offering price.

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If we or our existing investors sell additional shares of our common stock after this offering, the market price of our Class A common stock could decline.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After the completion of this offering, we will have outstanding  shares of Class A common stock (if the underwriters exercise their option to purchase additional shares in full) and  shares of our Class B common stock that are convertible by the holders thereof at any time into an equal amount of shares of our Class A common stock. This number includes   shares being sold in this offering, which may be resold immediately in the public market. We expect that we, our directors and officers, and substantially all of our stockholders will agree not to offer, sell, dispose of or hedge, directly or indirectly, any common stock without the prior written consent of the representatives of the underwriters for a period of 180 days from the date of the public offering, subject to certain exceptions and automatic extension in certain circumstances.

In addition, pursuant to the registration rights agreement, we have granted certain stockholders the right to cause us, in certain instances, at our expense, to file registration statements under the Securities Act of 1933, as amended (the “Securities Act”) covering resales of our common stock held by them or to piggyback on a registration statement in certain circumstances. The stockholders will agree pursuant to contractual lock-ups not to exercise any of their rights under the registration rights agreement during the 180-day restricted period described above. The shares subject to the registration rights agreement will represent approximately  % of our common stock after this offering or  % if the underwriters exercise their option to purchase additional shares in full. These shares may also be sold pursuant to Rule 144 under the Securities Act, depending on their holding period and subject to restrictions in the case of shares held by persons deemed to be our affiliates. As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our Class A common stock could decline if the holders of restricted shares sell them or are perceived by the market as intending to sell them. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement,” “Shares Eligible for Future Sale” and “Underwriting.” As of June 28, 2012, 381,929,346 shares of our common stock were outstanding, all of which are subject to restrictions on transfer, and 59,657,020 shares were issuable upon conversion of outstanding RSUs and IPO Units and exercise of outstanding options. Subject to the lapse of applicable transfer restrictions, these shares will first become eligible for resale 180 days after the date of this prospectus. Sales of a substantial number of shares of our common stock could cause the market price of our Class A common stock to decline.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Provisions in our Certificate of Incorporation and By-laws, as amended and restated in connection with the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

 

 

 

We have a dual class common stock structure, which currently provides the holders of our Class B common stock with the ability to control the outcome of matters requiring stockholder approval, so long as they continue to beneficially own a sufficient number of shares of Class B common stock, even if they own significantly less than 50% of the shares of our outstanding common stock.

 

 

 

 

Special meetings of our stockholders may be called only by our Chairman, our Chief Executive Officer, our Board of Directors or by our Secretary upon the request of holders of not less than the majority of our issued and outstanding capital stock. This limits the ability of noncontrolling stockholders to take certain actions other than at an annual meeting of stockholders.

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Stockholders’ right to take action by less than unanimous written consent expires when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock.

 

 

 

 

Our Certificate of Incorporation prohibits cumulative voting in the election of directors. This limits the ability of noncontrolling stockholders to elect director candidates.

 

 

 

 

Stockholders must provide timely notice to nominate individuals for election to our Board of Directors or to propose matters that can be acted upon at an annual meeting of stockholders. These provisions may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of the Company.

 

 

 

 

Our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to authorize undesignated preferred stock makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder becomes an “interested” stockholder. For a description of our capital stock, see “Description of Capital Stock.”

We are a “controlled company” within the meaning of the NASDAQ Global Select Market or New York Stock Exchange rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, JAB will continue to control a majority of the voting power of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NASDAQ Global Select Market and New York Stock Exchange corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

 

 

 

a majority of the Board of Directors consist of independent directors;

 

 

 

 

the company has a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

 

 

 

the company has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

We intend to utilize certain of these exemptions following the offering, and may utilize any of these exemptions for so long as we are a “controlled company”. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Global Select Market or the New York Stock Exchange.

We do not intend to pay dividends and there is no assurance that we will ever declare dividends or have the available cash to make dividend payments.

We do not intend to have a policy of paying dividends on our common stock, and there can be no assurance that funds will be available for this purpose in the future. Any declaration and payment of dividends will be subject to the sole discretion of our Board of Directors, will not be cumulative and will depend upon our profitability, financial condition, capital needs, future prospects and other factors deemed relevant by our Board of Directors at the time.

32


USE OF PROCEEDS

The selling stockholders are selling all the shares of Class A common stock being sold in this offering, including any shares sold upon exercise of the underwriters’ option to purchase additional shares. Accordingly, we will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.

DIVIDEND POLICY

Our Board of Directors does not currently intend to pay regular dividends on our common stock, and with the exception of fiscal 2011, has not historically paid dividends. We expect to re-evaluate our dividend policy on a regular basis following this offering and may, subject to compliance with the covenants contained in our debt agreements and other considerations, decide to pay additional dividends in the future. These considerations may include our financial condition, results of operations, general business conditions, legal requirements, priority of preferred stock dividends, if any, and other factors our Board of Directors deems relevant. Our Board of Directors retains the right to change our dividend policy at any time.

On June 14, 2011, our Board of Directors declared a cash dividend of 25.0 million, or approximately $35.7 million, on our common stock, of which $35.3 million was paid on June 28, 2011. The remaining $0.4 million is payable upon vesting of shares of restricted stock and settlement of restricted stock units.

33


CAPITALIZATION

The following table sets forth our cash and cash equivalents, and our total capitalization as of March 31, 2012:

 

 

 

 

on an actual basis;

 

 

 

 

on an as adjusted basis to give effect to:

 

 

 

 

a reduction in retained earnings of $  , net of tax, relating to the share-based compensation expense that we expect to record prior to the completion of our initial public offering to reflect changes in the fair value of the share-based awards as discussed in note (a) to the table below; and

 

 

 

 

an increase in additional paid-in capital of $  as a result of the reclassification of the share based compensation liability to equity, to reflect the transition from liability plan accounting to equity plan accounting for our share-based compensation plans upon completion of our initial public offering as discussed in note (a) to the table below.

You should read the information in this table together with our Consolidated Financial Statements and related notes and the information set forth under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

 

 

 

 

 

 

As of March 31, 2012

 

Actual

 

As adjusted (a)(b)(c)

 

 

(in millions, except per share data)

Cash and cash equivalents

 

 

$

 

520.4

 

 

 

 

 

 

 

 

 

 

 

Debt:

 

 

 

 

Short-term debt

 

 

 

58.0

 

 

 

 

 

Credit Facility

 

 

 

1,919.0

 

 

 

 

 

Senior Secured Notes

 

 

 

500.0

 

 

 

 

 

Capital Lease Obligations

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

Total Debt

 

 

 

2,477.1

 

 

 

 

 

Redeemable noncontrolling interests

 

 

 

94.7

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

Common stock, $0.01 par value, 800.0 shares authorized, 381.9 shares issued and outstanding, actual(d)

 

 

 

4.0

 

 

 

 

 

Class A common stock, $0.01 par value, shares authorized, shares issued and outstanding, actual(d)

 

 

 

 

 

 

 

 

Class B common stock, $0.01 par value, shares authorized, shares issued and outstanding, actual(d)

 

 

 

 

 

 

 

 

Preferred stock $0.01 par value; 20 shares authorized, actual; nil shares authorized, nil shares issued and outstanding

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

 

1,515.2

 

 

 

 

 

Accumulated deficit

 

 

 

(33.0

)

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

(67.7

)

 

 

 

 

 

Treasury stock

 

 

 

(105.5

)

 

 

 

 

 

 

 

 

 

 

Total Coty Inc. stockholders’ equity

 

 

 

1,313.0

 

 

 

 

 

Noncontrolling interests

 

 

 

13.2

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

 

1,326.2

 

 

 

 

 

Total Capitalization

 

 

$

 

3,898.0

 

 

 

$

 

 

 

 

 

 

 


 

 

(a)

 

 

 

The as adjusted data as of March 31, 2012 presents our retained earnings, additional paid-in capital, total equity and total capitalization, and gives effect to the transition from liability accounting to equity accounting for our share-based compensation plans. The effect includes the recognition of (1) a share-based compensation expense of $  , which will be recognized as

34


 

 

 

 

an expense between March 31, 2012 and the completion of our initial public offering under liability accounting, which reflects the change in the estimated fair value of outstanding share-based awards based on the midpoint of the price range on the cover page of this prospectus and (2) an increase to additional paid-in capital of $   as a result of the reclassification of the awards from liability awards to equity awards upon completion of our initial public offering, due to changes to the right of the holders of our share-based awards that result from the initial public offering. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Share-based Compensation”.

 

(b)

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $  per share would increase (decrease) each of additional paid-in capital, retained earnings, total stockholders’ equity and total capitalization by approximately $  million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions.

 

(c)

 

 

 

The as adjusted information below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

 

(d)

 

 

 

Our certificate of incorporation will be amended in connection with our initial public offering to provide that shares of our common stock held immediately prior to the offering will convert automatically at closing of the initial public offering into shares of Class B common stock, in the case of shares held by JAB, Berkshire and Rhône, and into shares of Class A common stock, in the case of shares held by other stockholders, in each case on a one-for-one basis. All shares of Class B common stock sold in the offering by the selling stockholders will convert automatically into shares of Class A common stock on a one-for-one basis upon their sale in the offering.

35


DILUTION

If you invest in our Class A common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the as adjusted net tangible book value per share of our Class A common stock immediately after completion of this offering. Dilution occurs because the per share offering price of our Class A common stock in this offering is substantially in excess of the net tangible book value per share attributable to our existing owners. Net tangible book value represents net book equity excluding intangible assets, if any.

Our as adjusted net tangible book value as of March 31, 2012 was $  million, or $  per share, based on the total number of shares of our common stock outstanding as of March 31, 2012. As adjusted net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock, after giving effect to the adjustments referenced under “Capitalization”.

Assuming an initial public offering price of $  per share, the midpoint of the price range on the cover page of this prospectus, our as adjusted net tangible book value as of March 31, 2012 would have been $  million or $  per share. Dilution per share to new investors is determined by subtracting net tangible book value per share after this offering from the initial public offering price per share paid by a new investor, as illustrated in the following table:

 

 

 

Assumed initial public offering price per share of Class A common stock

 

 

$

 

 

 

As adjusted net tangible book value per share of Class A common stock as of March 31, 2012

 

 

$

 

 

 

 

Dilution of net tangible book value per share to new investors

 

 

$

 

The following table presents, on an as adjusted basis as of March 31, 2012, as discussed above, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of Class A common stock in this offering. The table reflects an initial public offering price of $  per share (the midpoint of the price range on the cover page of this prospectus) before deducting underwriting discounts and commissions and estimated offering expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased

 

Total consideration

 

Average price
per share

 

Number

 

Percent

 

Amount

 

Percent

Existing stockholders

 

 

 

 

 

 

 

 

%

 

 

 

$

 

 

 

 

 

 

 

%

 

 

 

$

 

 

 

New investors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

100

%

 

 

 

$

 

 

 

 

100

%

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $  per share, the midpoint of the price range on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors in this offering and by all investors by $  , and would increase or decrease the average price per share paid by, and dilution to, new investors by $1.00, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares of our Class A common stock in full, our existing stockholders will own  % and our new investors will own  % of the total number of shares of Class A common stock and Class B common stock on an as converted basis outstanding immediately after this offering.

36


SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for Coty Inc. and its consolidated subsidiaries for the periods presented below. We have derived the Consolidated Statements of Operations Data for the years ended June 30, 2011, 2010 and 2009 and the Consolidated Balance Sheet Data as of June 30, 2011 and 2010 from our audited Consolidated Financial Statements included elsewhere in this prospectus. The Consolidated Statements of Operations Data for the nine months ended March 31, 2012 and 2011 and Consolidated Balance Sheet Data as of March 31, 2012 have been derived from our unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus. The Consolidated Statements of Operations Data for the years ended June 30, 2008 and 2007 and the Consolidated Balance Sheet Data as of June 30, 2009, 2008 and 2007 have been derived from our Consolidated Financial Statements, which are not included in this prospectus.

The selected consolidated financial data below should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited Consolidated Financial Statements and our unaudited Condensed Consolidated Financial Statements and the related notes included elsewhere in this prospectus. The Consolidated Selected Financial Data included in this section are not intended to act as a substitute for the Consolidated Financial Statements and the related notes included elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per share data)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011(a)

 

2010

 

2009

 

2008(b)

 

2007

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

3,587.9

 

 

 

$

 

3,070.6

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

$

 

3,821.5

 

 

 

$

 

3,114.8

 

Gross profit

 

 

 

2,164.3

 

 

 

 

1,854.6

 

 

 

 

2,446.1

 

 

 

 

2,009.7

 

 

 

 

1,857.9

 

 

 

 

2,253.3

 

 

 

 

1,925.3

 

Operating income

 

 

 

275.9

 

 

 

 

252.7

 

 

 

 

280.9

 

 

 

 

184.5

 

 

 

 

241.4

 

 

 

 

239.6

 

 

 

 

207.7

 

Interest expense—related party

 

 

 

 

 

 

 

5.9

 

 

 

 

5.9

 

 

 

 

31.9

 

 

 

 

22.7

 

 

 

 

16.6

 

 

 

 

3.9

 

Interest expense, net

 

 

 

73.6

 

 

 

 

61.2

 

 

 

 

85.6

 

 

 

 

41.7

 

 

 

 

35.4

 

 

 

 

61.1

 

 

 

 

50.3

 

Other expense/(income), net

 

 

 

29.8

 

 

 

 

4.8

 

 

 

 

4.4

 

 

 

 

(8.8

)

 

 

 

 

1.2

 

 

 

 

(16.6

)

 

 

 

 

(7.9

)

 

Income before income taxes

 

 

 

172.5

 

 

 

 

180.8

 

 

 

 

185.0

 

 

 

 

119.7

 

 

 

 

182.1

 

 

 

 

178.5

 

 

 

 

161.4

 

Provision for income taxes

 

 

 

114.5

 

 

 

 

94.6

 

 

 

 

95.1

 

 

 

 

32.4

 

 

 

 

56.3

 

 

 

 

32.8

 

 

 

 

84.5

 

Income before discontinued operations and cumulative effect of change in accounting principle

 

 

 

58.0

 

 

 

 

86.2

 

 

 

 

89.9

 

 

 

 

87.3

 

 

 

 

125.8

 

 

 

 

145.7

 

 

 

 

76.9

 

Discontinued operations (net of $7.0 tax provision)(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11.9

 

 

 

 

 

Cumulative effect of change in accounting principle (net of $4.7 tax benefit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19.8

)

 

Net income

 

 

$

 

58.0

 

 

 

$

 

86.2

 

 

 

$

 

89.9

 

 

 

$

 

87.3

 

 

 

$

 

125.8

 

 

 

$

 

157.6

 

 

 

$

 

57.1

 

Net income attributable to noncontrolling interests

 

 

$

 

11.4

 

 

 

$

 

10.2

 

 

 

$

 

12.5

 

 

 

$

 

11.9

 

 

 

$

 

9.4

 

 

 

$

 

7.8

 

 

 

$

 

5.5

 

Net income attributable to redeemable noncontrolling interests

 

 

$

 

13.7

 

 

 

$

 

12.9

 

 

 

$

 

15.7

 

 

 

$

 

13.7

 

 

 

$

 

14.7

 

 

 

$

 

15.3

 

 

 

$

 

11.0

 

Net income attributable to Coty Inc.

 

 

$

 

32.9

 

 

 

$

 

63.1

 

 

 

$

 

61.7

 

 

 

$

 

61.7

 

 

 

$

 

101.7

 

 

 

$

 

134.5

 

 

 

$

 

40.6

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

371.5

 

 

 

 

317.0

 

 

 

 

329.4

 

 

 

 

280.2

 

 

 

 

280.2

 

 

 

 

280.2

 

 

 

 

280.2

 

Diluted

 

 

 

381.8

 

 

 

 

326.7

 

 

 

 

339.1

 

 

 

 

280.2

 

 

 

 

280.2

 

 

 

 

280.2

 

 

 

 

280.2

 

Cash dividends declared per common share

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.10

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

Net income attributable to Coty Inc. per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.09

 

 

 

$

 

0.20

 

 

 

$

 

0.19

 

 

 

$

 

0.22

 

 

 

$

 

0.36

 

 

 

$

 

0.48

 

 

 

$

 

0.14

 

Diluted

 

 

 

0.09

 

 

 

 

0.19

 

 

 

 

0.18

 

 

 

 

0.22

 

 

 

 

0.36

 

 

 

 

0.48

 

 

 

 

0.14

 

Net income from discontinued operations and cumulative effect of change in accounting principle per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.04

 

 

 

$

 

(0.07

)

 

Diluted

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.04

 

 

 

$

 

(0.07

)

 

37


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions, except per share data)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011(a)

 

2010

 

2009

 

2008(b)

 

2007

Consolidated Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

 

406.7

 

 

 

$

 

373.5

 

 

 

$

 

417.5

 

 

 

$

 

494.0

 

 

 

$

 

177.2

 

 

 

$

 

191.6

 

 

 

$

 

299.5

 

Net cash (used in) provided by investing activities

 

 

 

(293.5

)

 

 

 

 

(2,239.3

)

 

 

 

 

(2,252.5

)

 

 

 

 

(149.9

)

 

 

 

 

200.8

 

 

 

 

(616.3

)

 

 

 

 

(68.8

)

 

Net cash (used in) provided by financing activities

 

 

 

(69.2

)

 

 

 

 

1,819.4

 

 

 

 

1,903.8

 

 

 

 

(7.0

)

 

 

 

 

(376.0

)

 

 

 

 

471.3

 

 

 

 

(223.7

)

 

Cash paid for income taxes(c)

 

 

 

50.2

 

 

 

 

45.9

 

 

 

 

60.3

 

 

 

 

55.3

 

 

 

 

33.6

 

 

 

 

34.3

 

 

 

 

30.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

As of March 31,

 

As of June 30,

 

2012

 

2011

 

2010

 

2009

 

2008

 

2007

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

520.4

 

 

 

$

 

510.8

 

 

 

$

 

387.5

 

 

 

$

 

91.1

 

 

 

$

 

93.1

 

 

 

$

 

41.9

 

Total assets

 

 

 

6,735.2

 

 

 

 

6,813.9

 

 

 

 

3,781.8

 

 

 

 

3,701.9

 

 

 

 

4,573.8

 

 

 

 

3,056.7

 

Total debt

 

 

 

2,477.1

 

 

 

 

2,622.4

 

 

 

 

1,416.0

 

 

 

 

1,402.2

 

 

 

 

1,797.1

 

 

 

 

755.5

 

Total Coty Inc. stockholders’ equity

 

 

 

1,313.0

 

 

 

 

1,361.9

 

 

 

 

419.7

 

 

 

 

473.6

 

 

 

 

457.9

 

 

 

 

415.5

 


 

 

(a)

 

 

 

Fiscal 2011 data includes results from the acquisitions of TJoy, Dr. Scheller, OPI and Philosophy. See Note 4, “Acquisitions,” in the notes to Consolidated Financial Statements for additional disclosures related to the acquisitions’ results and pro forma financial data.

 

(b)

 

 

 

On December 31, 2007, the Company purchased Del. On July 7, 2008, the Company sold certain assets of the Del Pharma business. The fiscal 2007 results are reflected as discontinued operations in accordance with US GAAP.

 

(c)

 

 

 

Cash paid for taxes is less than the provision for income taxes for the nine months ended March 31, 2012 and 2011, and for fiscal 2011, primarily as the Company obtains benefits from the amortization of goodwill and other intangible assets for tax purposes (primarily associated with the OPI and Philosophy acquisitions in fiscal 2011), from the carryforward of net operating losses in Germany and from the change in unrecognized tax benefits. In fiscal 2010, prior to those acquisitions, cash paid for taxes exceeded the provision for income taxes due to accelerated payment of estimated taxes. In fiscal 2009, cash paid for taxes was less than the provision for income taxes as the Company benefitted from the carryforward of net operating losses in the U.S. and Germany and the change in unrecognized tax benefits.

38


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion of results of the operations of Coty Inc. and its majority and wholly owned subsidiaries, should be read in conjunction with the information contained in the Consolidated Financial Statements and related notes included elsewhere in this prospectus. When used in this discussion, the terms “Coty,” the “Company,” “we,” “our,” or “us” mean, unless the context otherwise indicates, Coty Inc. and its majority and wholly owned subsidiaries, and all dollar figures refer to millions of dollars unless otherwise specified. The following discussion contains forward-looking statements. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion on the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements. The following discussion includes certain non-GAAP financial measures. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures” for a discussion of non-GAAP financial measures and how they are calculated.

All dollar amounts in the following discussion of the results of operations are in millions of United States dollars, unless otherwise indicated.

OVERVIEW

We are the new emerging leader in beauty. Founded in Paris in 1904, Coty is a pure play beauty company with a portfolio of well-known brands that compete in the three segments in which we operate: Fragrances, Color Cosmetics and Skin & Body Care. We hold the #2 global position in fragrances, the #6 global position in color cosmetics and have a strong regional presence in skin & body care. Our top 10 brands, which we refer to as our “power brands”, are expected to generate approximately 70% of our net revenues in fiscal 2012 and comprise the following globally recognized brands: adidas, Calvin Klein, Chloé, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen. Our brands compete in all key distribution channels across both prestige and mass markets, and in over 130 countries and territories globally.

We made four strategic acquisitions in fiscal 2011 (the “2011 Acquisitions”). We strengthened our position in color cosmetics through our acquisitions of Dr. Scheller Cosmetics AG (“Dr. Scheller”), the owner of the Manhattan brand, and O P I Products Inc. (“OPI”). As measured by unit volume of sales, Manhattan is one of the leading brands in the German and Eastern European mass color cosmetics markets. OPI is a leader in professional nail care. We increased our presence in skin & body care through our acquisitions of Philosophy Acquisition Company, Inc. (“Philosophy”), owner of the fast- growing philosophy brand, and Chinese skin care company TJoy Holdings, Ltd. (“TJoy”). Through Philosophy, we have increased scale in skin & body care and entered new channels of distribution like QVC and e-commerce. Our acquisition of TJoy provided us with a broad distribution platform for our existing portfolio of brands in China. Results for OPI and Dr. Scheller are reported in the Color Cosmetics segment. Results for Philosophy and TJoy are reported in the Skin & Body Care segment. See Note 3 “Segment Reporting” in our notes to the Condensed Consolidated Financial Statements and the Consolidated Financial Statements.

Factors Affecting Our Performance

Product Innovations

Our innovation and new product development remain essential components of maintaining and increasing our global leadership position in fragrances and to strengthening our global position in color cosmetics and skin & body care. We intend to continue to develop and bring to market unique and innovative products that we believe will be modern, appealing and accessible to the consumer. We therefore need to maintain a sufficient level of research and development activities to enable the introduction of new products.

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Product Promotion

We need to maintain a sufficient level of marketing activities, since we operate in highly competitive consumer markets where net revenues are sensitive to the level of promotional support. Advertising and promotion spending fluctuates based on the type, timing and level of activities related to product launches and rollouts, as well as the markets being emphasized. As a result, we have experienced, and expect to continue to experience, fluctuations in selling, general and administrative expenses as a percentage of net revenues. Since certain promotional activities are a component of sales and the timing and level of promotions vary with our promotional calendar, we have experienced, and expect to continue to experience, fluctuations in the cost of sales as a percentage of net revenues. In addition, future costs of sales mix may be impacted by the inclusion of potential new brands or channels of distribution (or a change in mix of existing products) which have margin and product cost structures different from those of our current mix of business.

Economic Environment

A significant portion of our products is significantly impacted by the general level of consumer spending, since consumer purchases of discretionary items tend to decline during recessionary periods.

Business Development and Acquisitions

We will continue to expand into new markets as we seek to accelerate our sales growth and further diversify our geographic footprint. In addition, we will seek to continue to diversify our distribution channels within existing geographies to increase market presence, brand recognition and sales. Our acquisitions will affect our future financial results due to factors such as the amortization of acquired intangible assets or other potential charges such as restructuring costs or impairment expense and may affect comparability of results across periods on a GAAP basis.

Share-Based Compensation

We have implemented various share-based compensation plans for our employees and members of our Board of Directors. Prior to the initial public offering, our share-based compensation is highly impacted by the changes in the estimated value of our common stock. See “Critical Accounting Policies and Estimates—Share-Based Compensation” for more detail regarding share-based compensation.

Components of Results of Operations

Net Revenues

We generate revenues from the sale of our products in our Fragrances, Color Cosmetics and Skin & Body Care segments to retailers, distributors and direct sales to end users through e-commerce and other forms of direct marketing. Net revenues consist of gross revenues less customer discounts and allowance, actual and expected returns (estimated based on returns history and position in product life cycle) and various trade spending activities. Trade spending activities primarily relate to advertising, product promotions and demonstrations, some of which involve cooperative relationships with retailers and distributors.

Cost of Sales

Cost of sales includes all of the costs to manufacture our products. For products manufactured in our own facilities, such costs include raw materials and supplies, direct labor and factory overhead. For products manufactured for us by third-party contractors, such costs represent the amounts invoiced by the contractors. Cost of sales also includes royalty expense associated with license agreements. Additionally, shipping costs and depreciation expense related to manufacturing equipment and facilities are included in cost of sales.

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In order to provide essential business services in a cost-effective manner, in some cases we outsource functions or parts of functions that can be performed more effectively by external service providers. For example, we have outsourced significant portions of our logistics management for our European business and for a component of our U.S. business, as well as certain technology-related functions, to third-party service providers.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include advertising and consumer promotion costs, fixed costs (i.e., personnel and related expenses, research and development costs, certain warehousing fees, non-manufacturing overhead, rent on operating leases and professional fees), share-based compensation and other operating expenses.

Selling, general and administrative expenses include the expense or benefit relating to our share-based compensation plans that are accounted for as liability plans. Accordingly, share-based compensation is measured at the end of each reporting period based on the fair value of the award on the reporting date and is recognized as an expense until the award is settled. Based on the terms of the share-based compensation plans, they are accounted for as liability plans through the initial public offering and as equity plans after the initial public offering. As a result, we will record a compensation expense of $  during the period from April 1, 2012 through completion of the initial public offering, reflecting the increase in the value of our vested shares during that period. After the initial public offering, share-based compensation will be based on the amortization over the vesting period of the grant date fair value of the share-based instrument at the date of the initial public offering, or grant date fair value for share-based compensation issued after the initial public offering. Based on the midpoint of the price range on the cover page of this prospectus, we will record $  of such expense over the period from  to  . See “Critical Accounting Policies and Estimates—Share-Based Compensation.”

Income Taxes

The provision for income taxes represents federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax audit settlements and the interaction of various global tax strategies. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.

RESULTS OF OPERATIONS

The following table is a comparative summary of operating results for the nine months ended March 31, 2012 and 2011 and fiscal 2011, 2010 and 2009, and reflects the basis of presentation described in Note 2, “Summary of Significant Accounting Policies” and Note 3, “Segment Reporting” in our notes to Condensed Consolidated Financial Statements and notes to Consolidated Financial Statements included elsewhere in this prospectus.

41


 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011

 

2010

 

2009

NET REVENUES

 

 

 

 

 

 

 

 

 

 

By Segment:

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

1,988.2

 

 

 

$

 

1,875.7

 

 

 

$

 

2,325.3

 

 

 

$

 

2,113.3

 

 

 

$

 

2,041.2

 

Color Cosmetics

 

 

 

1,044.3

 

 

 

 

767.5

 

 

 

 

1,143.2

 

 

 

 

891.0

 

 

 

 

830.0

 

Skin & Body Care

 

 

 

555.4

 

 

 

 

427.4

 

 

 

 

617.6

 

 

 

 

478.6

 

 

 

 

508.1

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

3,587.9

 

 

 

$

 

3,070.6

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME/(LOSS)

 

 

 

 

 

 

 

 

 

 

By Segment:

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

322.2

 

 

 

$

 

273.0

 

 

 

$

 

286.9

 

 

 

$

 

192.8

 

 

 

$

 

136.4

 

Color Cosmetics

 

 

 

176.0

 

 

 

 

91.2

 

 

 

 

115.7

 

 

 

 

68.9

 

 

 

 

20.1

 

Skin & Body Care

 

 

 

(73.4

)

 

 

 

 

26.9

 

 

 

 

30.2

 

 

 

 

17.7

 

 

 

 

(5.2

)

 

Corporate

 

 

 

(148.9

)

 

 

 

 

(138.4

)

 

 

 

 

(151.9

)

 

 

 

 

(94.9

)

 

 

 

 

90.1

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

275.9

 

 

 

$

 

252.7

 

 

 

$

 

280.9

 

 

 

$

 

184.5

 

 

 

$

 

241.4

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents our Statement of Operations, expressed as a percentage of net revenues:

 

 

 

 

 

 

 

 

 

 

 

   

Nine Months Ended March 31,

 

Year Ended June 30,

 

2012

 

2011

 

2011

 

2010

 

2009

Net revenues

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

Cost of sales

 

 

 

39.7

 

 

 

 

39.6

 

 

 

 

40.1

 

 

 

 

42.3

 

 

 

 

45.0

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

60.3

 

 

 

 

60.4

 

 

 

 

59.9

 

 

 

 

57.7

 

 

 

 

55.0

 

Selling, general and administrative expenses

 

 

 

47.3

 

 

 

 

48.9

 

 

 

 

49.8

 

 

 

 

49.5

 

 

 

 

44.2

 

Amortization expense

 

 

 

2.1

 

 

 

 

1.8

 

 

 

 

1.9

 

 

 

 

1.8

 

 

 

 

1.9

 

Asset impairment charges

 

 

 

2.9

 

 

 

 

 

 

 

 

 

 

 

 

0.1

 

 

 

 

0.6

 

Restructuring costs

 

 

 

0.1

 

 

 

 

0.9

 

 

 

 

0.8

 

 

 

 

0.9

 

 

 

 

1.2

 

Acquisition-related costs

 

 

 

0.2

 

 

 

 

0.6

 

 

 

 

0.5

 

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

7.7

 

 

 

 

8.2

 

 

 

 

6.9

 

 

 

 

5.3

 

 

 

 

7.1

 

Interest expense-related party

 

 

 

 

 

 

 

0.2

 

 

 

 

0.2

 

 

 

 

0.9

 

 

 

 

0.7

 

Interest expense, net

 

 

 

2.1

 

 

 

 

2.0

 

 

 

 

2.1

 

 

 

 

1.2

 

 

 

 

1.0

 

Other expense/(income), net

 

 

 

0.8

 

 

 

 

0.1

 

 

 

 

0.1

 

 

 

 

(0.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

 

 

4.8

 

 

 

 

5.9

 

 

 

 

4.5

 

 

 

 

3.4

 

 

 

 

5.4

 

Provision for income taxes

 

 

 

3.2

 

 

 

 

3.1

 

 

 

 

2.3

 

 

 

 

0.9

 

 

 

 

1.7

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

1.6

 

 

 

 

2.8

 

 

 

 

2.2

 

 

 

 

2.5

 

 

 

 

3.7

 

Net income attributable to
noncontrolling interests

 

 

 

0.3

 

 

 

 

0.3

 

 

 

 

0.3

 

 

 

 

0.3

 

 

 

 

0.3

 

Net income attributable to redeemable noncontrolling interests

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Coty Inc.

 

 

 

0.9

%

 

 

 

 

2.1

%

 

 

 

 

1.5

%

 

 

 

 

1.8

%

 

 

 

 

3.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Discussed below are our consolidated results of operations and the results of operations for each reportable segment. In order to enhance an investor’s understanding of our performance, certain fiscal 2011 financial measures are presented excluding the impact of the consolidation of the four companies we acquired in fiscal 2011: OPI and Dr. Scheller, operating in the Color Cosmetics segment, and Philosophy and TJoy, operating in the Skin & Body Care segment. Our Condensed Consolidated Statements of Operations and Consolidated Statements of Operations include the results of the 2011 Acquisitions from the date they were acquired, which was January 14, 2011 for TJoy, January 3, 2011 for Dr. Scheller, December 20, 2010 for OPI and December 17, 2010 for Philosophy. See Note 4, “Acquisitions” in our notes to Condensed Consolidated Statements of Operations and Consolidated Financial Statements.

42


NINE MONTHS ENDED MARCH 31, 2012 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2011

NET REVENUES

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

Net revenues (excluding revenues related
to 2011 Acquisitions)

 

 

$

 

3,130.4

 

 

 

$

 

2,904.6

 

 

 

 

8

%

 

Revenues generated from 2011 Acquisitions

 

 

 

457.5

 

 

 

 

166.0

   

 

>100

%

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

3,587.9

 

 

 

$

 

3,070.6

 

 

 

 

17

%

 

 

 

 

 

 

 

 

In the nine months ended March 31, 2012, net revenues increased 17%, or $517.3, to $3,587.9 from $3,070.6 in the nine months ended March 31, 2011, approximately 1% of which was the result of foreign exchange rate fluctuations. The combined acquisitions of OPI, Philosophy, Dr. Scheller and TJoy contributed $291.5 to this increase. The increase for the 2011 Acquisitions was primarily due to the inclusion of the 2011 Acquisitions for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, the 2011 Acquisitions were only included in net revenues from the respective dates of acquisition.

Net Revenues by Segment

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

NET REVENUES

 

 

 

 

 

 

Fragrances

 

 

$

 

1,988.2

 

 

 

$

 

1,875.7

 

 

 

 

6

%

 

 

 

 

 

 

 

 

Color Cosmetics (excluding revenues related to 2011 Acquisitions)

 

 

$

 

779.9

 

 

 

$

 

678.8

 

 

 

 

15

%

 

Revenues generated from 2011 Acquisitions

 

 

 

264.4

 

 

 

 

88.7

   

 

>100

%

 

 

 

 

 

 

 

 

Color Cosmetics

 

 

$

 

1,044.3

 

 

 

$

 

767.5

 

 

 

 

36

%

 

 

 

 

 

 

 

 

Skin & Body Care (excluding revenues related to 2011 Acquisitions)

 

 

$

 

362.3

 

 

 

$

 

350.1

 

 

 

 

3

%

 

Revenues generated from 2011 Acquisitions

 

 

 

193.1

 

 

 

 

77.3

   

 

>100

%

 

 

 

 

 

 

 

 

Skin & Body Care

 

 

$

 

555.4

 

 

 

$

 

427.4

 

 

 

 

30

%

 

 

 

 

 

 

 

 

Total

 

 

$

 

3,587.9

 

 

 

$

 

3,070.6

 

 

 

 

17

%

 

 

 

 

 

 

 

 

Fragrances

In the nine months ended March 31, 2012, net revenues of Fragrances increased 6%, or $112.5, to $1,988.2 from $1,875.7 in the nine months ended March 31, 2011, approximately 1% of which was the result of foreign exchange rate translation. The increase was primarily due to strong growth of our products in the prestige market resulting from new product launches. Higher net revenues from Calvin Klein and Marc Jacobs and new launches Roberto Cavalli and Bottega Veneta contributed to that increase. The incremental growth in Calvin Klein was driven by the launches of CK One Shock and Forbidden Euphoria, while growth in Marc Jacobs was driven by new launches Oh Lola! and Daisy Marc Jacobs Eau So Fresh along with higher net revenues in existing brand Daisy Marc Jacobs. Higher net revenues from Playboy, Beyoncé and new launch Shine by Heidi Klum in the mass market also contributed to segment growth. Improved results from Playboy reflect the success of recent launches Play it Rock and Playboy London while growth in Beyoncé is primarily due to new launch Beyoncé Pulse. These increases in net revenues were partially offset by lower net revenues from existing brands that are later in their life cycles.

Color Cosmetics

In the nine months ended March 31, 2012, net revenues of Color Cosmetics increased 36%, or $276.8, to $1,044.3 from $767.5 in the nine months ended March 31, 2011, approximately 1% of

43


which was the result of foreign exchange rate fluctuation. The increase for this segment includes an increase in net revenues from the acquisitions of OPI and Dr. Scheller of $175.7. The increase for the 2011 Acquisitions was primarily due to the inclusion of OPI and Dr. Scheller in net revenues for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, OPI and Dr. Scheller were only included in net revenues from the respective dates of acquisition. For the nine months ended March 31, 2011, net revenues included $12.0 of third party product distribution by Dr. Scheller that did not reoccur in fiscal 2012.

Excluding the incremental net revenues from the 2011 Acquisitions, the Color Cosmetics segment grew 15%. Sally Hansen drove growth for the segment primarily reflecting increased net revenues in Salon Effects, Xtreme Wear and new launch Crackle Overcoat. Strong net revenues in the U.S. made up more than half of the Sally Hansen brand’s increase, while the brand also benefitted from expanded distribution in Russia and Australia. Increased net revenues in Rimmel reflect the success of new launches Rimmel Wake Me Up and Rimmel Kate along with growth in existing Rimmel products Glam’eyes and Volume Flash. Higher net revenues in the Rimmel brand were also due to expanded distribution in Australia and France, expansion of the brand in China through the TJoy distribution channel, and growth in the U.K. as a result of strong promotional activity to keep in line with competitor activity and achieve share growth. Also contributing to segment growth were higher net revenues in Astor, following its rollout in one of our key retailers in Germany, and N.Y.C. New York Color, primarily driven by higher net revenues in existing brands in the U.S.

Skin & Body Care

In the nine months ended March 31, 2012, net revenues of Skin & Body Care increased 30%, or $128.0, to $555.4 from $427.4 in the nine months ended March 31, 2011, approximately 1% of which was the result of foreign exchange rate translation. The increase in this segment includes an increase as a result of the acquisitions of Philosophy and TJoy, which contributed incremental net revenues to the segment of $115.8. The increase for the 2011 Acquisitions was primarily due to the inclusion of TJoy and Philosophy in net revenues for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, TJoy and Philosophy were only included in net revenues from the respective dates of acquisition.

Excluding the impact of the acquisitions, Skin & Body Care net revenues increased 3%, or $12.2. This increase is due to higher net revenues of adidas as the brand benefitted from expansion in China through the TJoy distribution channel and growth in Russia. adidas growth also reflected the launch of an exclusive program with one of our key customers in the U.S. in January 2012, as well as success of the re-launch program that was implemented in fiscal 2010 in developed European markets. Offsetting growth from adidas were declines in net revenues in the Lancaster brand primarily reflecting lower sales of sun care products as the European prestige sun care market experienced a difficult summer season.

Net Revenues by Geographic Regions

In addition to our reporting segments, management also analyzes our net revenues by geographic region. We define our geographic regions as Americas (comprising North, Central and South America), EMEA (comprising Europe, the Middle East and Africa) and Asia Pacific (comprising Asia and Australia).

44


 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

NET REVENUES

 

 

 

 

 

 

Americas (excluding revenues related to 2011 Acquisitions)

 

 

$

 

1,086.3

 

 

 

$

 

1,002.9

 

 

 

 

8

%

 

Revenues generated from 2011 Acquisitions

 

 

 

357.7

 

 

 

 

114.5

   

 

>100

%

 

 

 

 

 

 

 

 

Americas

 

 

$

 

1,444.0

 

 

 

$

 

1,117.4

 

 

 

 

29

%

 

 

 

 

 

 

 

 

EMEA (excluding revenues related to 2011 Acquisitions)

 

 

$

 

1,690.4

 

 

 

$

 

1,610.4

 

 

 

 

5

%

 

Revenues generated from 2011 Acquisitions

 

 

 

54.3

 

 

 

 

26.9

   

 

>100

%

 

 

 

 

 

 

 

 

EMEA

 

 

$

 

1,744.7

 

 

 

$

 

1,637.3

 

 

 

 

7

%

 

 

 

 

 

 

 

 

Asia Pacific (excluding revenues related to 2011 Acquisitions)

 

 

$

 

353.7

 

 

 

$

 

291.3

 

 

 

 

21

%

 

Revenues generated from 2011 Acquisitions

 

 

 

45.5

 

 

 

 

24.6

 

 

 

 

85

%

 

 

 

 

 

 

 

 

Asia Pacific

 

 

$

 

399.2

 

 

 

$

 

315.9

 

 

 

 

26

%

 

 

 

 

 

 

 

 

Total

 

 

$

 

3,587.9

 

 

 

$

 

3,070.6

 

 

 

 

17

%

 

 

 

 

 

 

 

 

Americas

In the nine months ended March 31, 2012, net revenues in the Americas increased 29%, or $326.6, to $1,444.0 from $1,117.4 in the nine months ended March 31, 2011. OPI and Philosophy contributed $243.2 to the increase. The increase for OPI and Philosophy was primarily due to the inclusion of these acquisitions in net revenues for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, these acquisitions were only included in net revenues from the respective dates of acquisition.

Excluding incremental revenues from OPI and Philosophy, net revenues increased 8% primarily driven by higher net revenues in our U.S. operating subsidiary. The improvement in the U.S. reflects strong net revenues growth in the Color Cosmetics segment driven by successful nail product launches from Sally Hansen. Fragrances also contributed to higher net revenues in the U.S., primarily reflecting net revenues growth in the Calvin Klein and Playboy brands. Net revenues in our travel retail and export business in the region increased, reflecting recent Calvin Klein fragrance launches, increased net revenues in Marc Jacobs and Chloé and new launch Roberto Cavalli. Growth in Canada primarily reflects higher net revenues in the Color Cosmetics segment, driven by Sally Hansen and Rimmel, and the positive impact of foreign currency translation. Foreign currency translation had an overall immaterial impact on net revenues in the Americas.

EMEA

In the nine months ended March 31, 2012, net revenues in EMEA increased 7%, or $107.4, to $1,744.7 from $1,637.3 in the nine months ended March 31, 2011, approximately 1% of which was the result of foreign exchange rate translation. Dr. Scheller, Philosophy and OPI contributed $27.4 to the increase. The increase for Dr. Scheller, Philosophy and OPI was primarily due to the inclusion of these acquisitions in net revenues for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, these acquisitions were only included in net revenues from the respective dates of acquisition. For the nine month period ended March 31, 2011, net revenues included $12.0 of third party product distribution by Dr. Scheller that did not reoccur in fiscal 2012.

Excluding incremental net revenues related to the acquisitions, net revenues increased 5% reflecting growth in most key markets in the region, primarily in Germany, the U.K. and France. Improvement in Germany primarily reflects higher net revenues in the Fragrances segment primarily driven by recent launches in Heidi Klum, Chloé, Jil Sander and Marc Jacobs, and higher revenues in the Color Cosmetics segment following the successful rollout of Astor in one of our key retailers. Net revenues growth in the U.K. reflects growth in each of the segments with the largest increases

45


primarily driven by the Calvin Klein, Rimmel, Beyoncé, adidas and Marc Jacobs brands, while higher net revenues in France primarily reflect growth in Playboy, Calvin Klein and Rimmel.

Asia Pacific

In the nine months ended March 31, 2012, net revenues in Asia Pacific increased 26%, or $83.3, to $399.2 from $315.9 in the nine months ended March 31, 2011, approximately 4% of which was the result of foreign exchange rate translation. The increase reflects the implementation of our strategy to strengthen existing distribution and expand our geographic presence in Asia, particularly in China. TJoy and OPI contributed $20.9 to the increase. The increase for TJoy and OPI was primarily due to the inclusion of these acquisitions in net revenues for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, these acquisitions were only included in net revenues from the respective dates of acquisition.

Excluding incremental net revenues related to the acquisitions, net revenues in the region increased 21%, reflecting growth in all countries and each product segment. Net revenues in China continue to grow, primarily due to the expansion of the adidas brand through the TJoy distribution channel. Higher net revenues in our travel retail and export business in the region reflect strong growth in the Fragrances segment primarily due to Marc Jacobs, Calvin Klein and higher net revenues in the adidas brand. Higher net revenues in Australia reflect expanded distribution of Rimmel, Sally Hansen and Playboy, innovation in Calvin Klein and Marc Jacobs, and favorable impact from foreign currency translation.

COST OF SALES

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

Cost of sales (excluding 2011 Acquisitions)

 

 

$

 

1,236.2

 

 

 

$

 

1,140.1

 

 

 

 

8

%

 

% of Net revenues

 

 

 

39.5

%

 

 

 

 

39.3

%

 

 

 

2011 Acquisitions

 

 

 

187.4

 

 

 

 

75.9

   

 

>100

%

 

 

 

 

 

 

 

 

Reported Cost of sales

 

 

$

 

1,423.6

 

 

 

$

 

1,216.0

 

 

 

 

17

%

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

39.7

%

 

 

 

 

39.6

%

 

 

 

In the nine months ended March 31, 2012, cost of sales increased 17%, or $207.6, to $1,423.6 from $1,216.0 in the nine months ended March 31, 2011. Cost of sales as a percentage of total net revenues increased to 39.7% in the nine months ended March 31, 2012 from 39.6% in the nine months ended March 31, 2011, resulting in a gross margin decline of 0.1 percentage points as a percentage of net revenues. Excluding acquisitions, gross margin declined 0.2 percentage points reflecting a negative mix impact due to higher growth in products with lower than average gross margins, such as Playboy products in Fragrances and products in Color Cosmetics, partially offset by lower obsolescence and freight expense as a percentage of net revenues along with savings reflecting the continued success of our supply chain savings program. The increase of cost of sales relating to the 2011 Acquisitions was primarily due to the inclusion of these acquisitions in cost of sales for the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, these acquisitions were only included in cost of sales from the respective dates of acquisition.

46


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

Selling, general and administrative expenses (excluding 2011 Acquisitions)

 

 

$

 

1,542.7

 

 

 

$

 

1,445.7

 

 

 

 

7

%

 

% of Net revenues

 

 

 

49.3

%

 

 

 

 

49.8

%

 

 

 

2011 Acquisitions

 

 

 

154.7

 

 

 

 

55.6

   

 

>100

%

 

 

 

 

 

 

 

 

Reported Selling, general and administrative expenses

 

 

$

 

1,697.4

 

 

 

$

 

1,501.3

 

 

 

 

13

%

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

47.3

%

 

 

 

 

48.9

%

 

 

 

Selling, general and administrative expenses as a percentage of net revenues decreased to 47.3% in the nine months ended March 31, 2012 as compared with 48.9% in the nine months ended March 31, 2011. Excluding acquisitions, selling, general and administrative expenses decreased 0.5 points as a percentage of net revenues primarily reflecting lower fixed costs as a percentage of net revenues offset by higher share-based compensation expense as a percentage of net revenues. The increase in share-based compensation expense primarily reflects the impact of an increase in the estimated value of our common stock, with most of the change attributable to the fair value adjustment on common stock purchased by directors as part of a share purchase program introduced in September 2011. See “Critical Accounting Policies and Estimates—Common Stock Valuations” for a description of the factors that impact the valuation of our common stock. The reduction in fixed costs as a percentage of net revenues reflects our focus on cost containment and tight controls on spending.

The increase in selling, general and administrative expenses for the 2011 Acquisitions was primarily due to the inclusion of these acquisitions in the full nine month period ended March 31, 2012. For the nine month period ended March 31, 2011, these acquisitions were only included in selling, general and administrative expenses from the respective dates of acquisition.

OPERATING INCOME

In the nine months ended March 31, 2012, operating income increased 9%, or $23.2, to $275.9 from 252.7 in the nine months ended March 31, 2011. Operating margin, or operating income as a percentage of net revenues, decreased by 0.5 percentage points to 7.7% of net revenues in the nine months ended March 31, 2012 as compared to 8.2% in the nine months ended March 31, 2011. This margin deterioration primarily reflects a 3.2 percentage point increase in asset impairment charges and amortization, partially offset by a 2.8 percentage point improvement due to lower selling, general and administrative expenses, restructuring costs and acquisition-related costs.

Operating Income by Segments

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

OPERATING (LOSS)/INCOME

 

 

 

 

 

 

Fragrances

 

 

$

 

322.2

 

 

 

$

 

273.0

 

 

 

 

18

%

 

 

 

 

 

 

 

 

Color Cosmetics (excluding 2011 Acquisitions)

 

 

$

 

82.7

 

 

 

$

 

64.9

 

 

 

 

27

%

 

2011 Acquisitions

 

 

 

93.3

 

 

 

 

26.3

   

 

>100

%

 

 

 

 

 

 

 

 

Color Cosmetics

 

 

$

 

176.0

 

 

 

$

 

91.2

 

 

 

 

93

%

 

 

 

 

 

 

 

 

Skin & Body Care (excluding 2011
Acquisitions)

 

 

$

 

30.0

 

 

 

$

 

17.1

 

 

 

 

75

%

 

2011 Acquisitions

 

 

 

(103.4

)

 

 

 

 

9.8

   

 

<(100

%)

 

 

 

 

 

 

 

 

Skin & Body Care

 

 

$

 

(73.4

)

 

 

 

$

 

26.9

   

 

<(100

%)

 

 

 

 

 

 

 

 

Corporate

 

 

$

 

(148.9

)

 

 

 

$

 

(138.4

)

 

 

 

 

(8

%)

 

 

 

 

 

 

 

 

Total

 

 

$

 

275.9

 

 

 

$

 

252.7

 

 

 

 

9

%

 

 

 

 

 

 

 

 

47


Fragrances

In the nine months ended March 31, 2012, operating income for Fragrances increased 18%, or $49.2, to $322.2 from $273.0 in the nine months ended March 31, 2011. Improved results reflect increased net revenues, primarily from recently launched fragrances with higher margins in the prestige market, and improvements in selling, general and administrative expenses as a percentage of net revenues. These improvements were partially offset by higher cost of sales as a percentage of net revenues.

Color Cosmetics

In the nine months ended March 31, 2012, operating income for Color Cosmetics increased 93%, or $84.8, to $176.0 from $91.2 in the nine months ended March 31, 2011. Excluding results from OPI and Dr. Scheller, operating income for the segment increased 27%. This increase reflects higher net revenues and improvement in cost of sales as a percentage of net revenues and in selling, general and administrative expenses as a percentage of net revenues.

Skin & Body Care

In the nine months ended March 31, 2012, operating income for Skin & Body Care decreased $100.3, to ($73.4) from $26.9 in the nine months ended March 31, 2011, primarily reflecting current year asset impairment charges of certain trademarks related to the TJoy and Philosophy acquisitions of $58.0 and $41.5, respectively. Asset impairment charges reflect lower actual and projected sales than originally anticipated at the time of the respective acquisitions. See “Asset Impairment Charges.” Excluding results from Philosophy and TJoy, operating income for the segment increased 75% reflecting higher net revenues and lower selling, general and administrative expenses.

Corporate

Corporate primarily includes share-based compensation expense adjustment, restructuring charges and other corporate expenses not directly relating to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance of the segments.

Corporate includes share-based compensation expense adjustment of $108.6 and $70.4 for the nine months ended March 31, 2012 and 2011 respectively, relating to (i) the difference between share-based compensation expense accounted for under equity plan accounting and under liability plan accounting for the recurring nonqualified stock option awards and director-owned and employee-owned shares, restricted shares, and restricted stock units and (ii) all costs associated with the special incentive award granted in fiscal 2011, vesting of which is contingent upon completion of our initial public offering.

Adjusted Operating Income

We believe that Adjusted Operating Income further enhances the investors’ understanding of our operating performance. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures.”

48


Reconciliation of reported operating income to Adjusted Operating Income:

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Change %

 

2012

 

2011

Reported Operating Income

 

 

$

 

275.9

 

 

 

$

 

252.7

 

 

 

 

9

%

 

% of Net revenues

 

 

 

7.7

%

 

 

 

 

8.2

%

 

 

 

Share-based compensation expense adjustment

 

 

 

108.6

 

 

 

 

70.4

 

 

 

 

54

%

 

Reported Operating Income adjusted for share-based compensation adjustment

 

 

$

 

384.5

 

 

 

$

 

323.1

 

 

 

 

19

%

 

% of Net revenues

 

 

 

10.7

%

 

 

 

 

10.5

%

 

 

 

Other adjustments:

 

 

 

 

 

 

Asset impairment charges

 

 

 

102.0

 

 

 

 

 

 

 

 

N/A

 

Acquisition-related costs(a)

 

 

 

16.6

 

 

 

 

31.7

 

 

 

 

(47

%)

 

Business structure realignment programs

 

 

 

10.5

 

 

 

 

7.9

 

 

 

 

33

%

 

Real estate consolidation program

 

 

 

6.8

 

 

 

 

 

 

 

 

N/A

 

Restructuring costs

 

 

 

3.9

 

 

 

 

28.0

 

 

 

 

(86

%)

 

 

 

 

 

 

 

 

Total other adjustments to Reported Operating Income

 

 

 

139.8

 

 

 

 

67.6

   

 

>100

%

 

 

 

 

 

 

 

 

Adjusted Operating Income

 

 

$

 

524.3

 

 

 

$

 

390.7

 

 

 

 

34

%

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

14.6

%

 

 

 

 

12.7

%

 

 

 


 

 

(a)

 

 

 

Acquisition-related costs include items in addition to what is recorded in acquisition-related costs of $8.4 and $18.3 for the nine months ended March 31, 2012 and 2011, respectively, in the Condensed Consolidated Statements of Operations. Additional items include internal integration costs and acquisition accounting adjustments. See “Acquisition-Related Costs.”

In the nine months ended March 31, 2012, Adjusted Operating Income increased 34%, or $133.6, to $524.3 from $390.7 in the nine months ended March 31, 2011. Adjusted operating margin improved 1.9 points as a percentage of net revenues to 14.6% of net revenues in the nine months ended March 31, 2012 as compared with 12.7% in the nine months ended March 31, 2011. Excluding operating income attributable to the acquisitions, Adjusted Operating Income increased 23%, or $80.4, to $435.0 in the nine months ended March 31, 2012 from $354.6 in the nine months ended March 31, 2011. This increase reflects strong net revenues growth and improvement in operating margin of 1.7 points as a percentage of net revenues primarily reflecting lower selling, general and administrative expenses as a percentage of net revenues.

Share-Based Compensation Adjustment

Share-based compensation expense as currently calculated under liability plan accounting was $132.9 and $87.9 in the nine months ended March 31, 2012 and 2011, respectively, included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The change in share-based compensation expense primarily reflects the impact of an increase in the underlying value of common stock on the share-based awards, with most of the change attributable to the fair value adjustment on common stock purchased by directors as part of a share purchase program introduced in September 2011. See “Critical Accounting Policies and Estimates—Common Stock Valuations” for a description of the factors that impact the valuation of our common stock.

Share-based compensation expense adjustment included in the calculation of the Adjusted Operating Income was $108.6 and $70.4 in the nine months ended March 31, 2012 and 2011, respectively. Share-based compensation expense adjustment consists of (i) the difference between share-based compensation expense accounted for under equity plan accounting and under liability plan accounting for the recurring nonqualified stock options and director-owned and employee-owned shares, restricted shares, and restricted stock units and (ii) all costs associated with the special incentive award granted in fiscal 2011, vesting of which is contingent upon completion of our initial public offering. See “Critical Accounting Policies and Estimates—Share-Based Compensation.”

49


Senior management evaluates operating performance of our segments based on the share-based expense calculated under equity plan accounting for the recurring stock option awards, share-based awards, and director-owned and employee-owned shares, and we follow the same treatment of the share-based compensation for the financial covenant compliance calculations under our debt agreements. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures.” Share-based compensation expense calculated under equity plan accounting for the recurring nonqualified stock option awards and director-owned and employee-owned shares, restricted shares and restricted stock units is reflected in the operating results of the segments. Share-based compensation adjustment is included in Corporate. See Note 3 “Segment Reporting” in our notes to Condensed Consolidated Financial Statements.

Upon completion of the initial public offering, we will account for share-based compensation under equity plan accounting. See “Critical Accounting Policies and Estimates—Share-Based Compensation.” To improve consistency of results before and after the initial public offering, as well as to improve comparability with other publicly traded companies, we only include share-based compensation under equity plan accounting on the recurring awards in Adjusted Operating Income.

Asset Impairment Charges

In the nine months ended March 31, 2012, asset impairment charges of $102.0 were reported in the Condensed Consolidated Statements of Operations and were included in the Skin & Body Care segment and Corporate of $99.5 and $2.5, respectively. The impairment in the Skin & Body Care segment represents a reduction in the carrying value of certain trademarks with indefinite lives. This impairment was primarily attributable to reductions in both actual and projected revenues, reflecting weaker volumes of selected Skin & Body Care products related to the TJoy and Philosophy acquisitions. For TJoy, where the trademark impairment charge was $58.0, our business performance was impacted by unanticipated leadership changes and less favorable trade conditions than anticipated in the projections at the time of the acquisition. For Philosophy, where the trademark impairment charge was $41.5, reductions in our projections were caused by lower sales growth during the first nine months of fiscal 2012, relative to the projections used at the time of the acquisition, primarily due to lower than expected levels of new product introductions, and delays in the timing for distribution expansion into certain international markets.

Acquisition-Related Costs

In the nine months ended March 31, 2012, the Company incurred acquisition-related costs of $16.6 in connection with the acquisitions of OPI, Philosophy, Dr. Scheller, TJoy and certain due diligence and acquisition-related costs incurred in connection with certain contemplated acquisitions that were withdrawn. These costs include internal integration costs of $7.7, transaction-related costs of $8.4, and acquisition accounting adjustments of $0.5. The internal integration costs include $6.8 of expense related to amortization of a deferred brand growth charge in connection with the TJoy acquisition which is included in amortization expense in the Condensed Consolidated Statements of Operations and $0.9 of costs related to travel and consulting included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Transaction-related costs represent external costs directly related to acquiring a company, for both completed and contemplated business combinations, and can include expenditures for finder’s fees, legal, accounting, valuation and other professional or consulting fees which are included in acquisition-related costs in the Condensed Consolidated Statements of Operations. In connection with the acquisitions, the Company recorded acquired net assets at fair value, including a fair value increase of inventories acquired of $0.5. This fair value increase of inventory resulted in an increase in cost of sales in the Condensed Consolidated Statements of Operations as the inventory was sold following the acquisition.

In the nine months ended March 31, 2011, the Company incurred acquisition-related costs of $31.7 in connection with the acquisitions of OPI, Philosophy, Dr. Scheller and TJoy. These costs include transaction-related and integration costs of $18.3, acquisition accounting adjustments of $11.7, and internal integration costs of $1.7. Transaction-related costs represent external costs directly

50


related to acquiring a company, for both completed and contemplated business combinations, and can include expenditures for finder’s fees, legal, accounting, valuation and other professional or consulting fees. Integration costs are external, incremental costs directly related to integrating acquired businesses and can include expenditures for consulting, system integration and other professional services. Transaction-related costs and integration costs are included in acquisition-related costs in the Condensed Consolidated Statements of Operations. In connection with the acquisitions, the Company recorded acquired net assets at fair value, including a fair value increase of inventories acquired of $11.7. This fair value increase of inventory resulted in an increase in cost of sales in the Condensed Consolidated Statements of Operations as the inventory was sold following the acquisition. The internal integration costs include $1.6 of expense related to amortization of a deferred asset in connection with the TJoy acquisition which is included in amortization expense in the Condensed Consolidated Statements of Operations and $0.1 of costs related to travel and consulting included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

In all reported periods, all acquisition-related costs are reported in Corporate.

Business Structure Realignment Programs

In the nine months ended March 31, 2012, business structure realignment program costs of $10.5 consisted of $6.0 primarily related to structural reorganization in Geneva and preparation for public entity reporting and $4.5 related to costs incurred by the Company in connection with the buy-back of distribution rights for a particular brand in selected EMEA markets.

In the nine months ended March 31, 2011, business structure realignment program costs of $7.9 consisted of accelerated asset depreciation resulting from a change in the estimated useful life of a manufacturing facility of $5.6 and $2.3 of costs related to structural reorganization in Geneva and preparation for public entity reporting.

In all reported periods, all business structure realignment program costs are recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and were included in Corporate.

Real Estate Consolidation Program

In the nine months ended March 31, 2012, real estate consolidation program costs of $6.8 consist of a lease loss in connection with the consolidation of real estate in New York. These costs were recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and were included in Corporate. We expect to incur additional costs associated with the consolidation of real estate in New York in fiscal 2013 and 2014 and we anticipate these costs to be larger than those expensed in the current fiscal year. We expect the real estate consolidation program to be completed in fiscal 2014.

Restructuring Costs

Restructuring costs consist of the following:

 

 

 

 

 

 

 

Nine Months Ended March 31,

 

2012

 

2011

Acquisition Integration Programs

 

 

$

 

2.6

 

 

 

$

 

16.9

 

2009 Cost Savings Program

 

 

 

1.3

 

 

 

 

11.1

 

 

 

 

 

 

 

 

$

 

3.9

 

 

 

$

 

28.0

 

 

 

 

 

 

Acquisition Integration Programs

In fiscal 2011, in connection with the acquisition of Dr. Scheller, we initiated an Acquisition Integration Program. Actions and cash payments associated with the program were initiated after the acquisition and are expected to be completed by fiscal 2012. Also, in connection with the TJoy, OPI

51


and Philosophy acquisitions, we terminated manufacturing and distribution agreements with several third parties. These terminations resulted in fees which are also included in restructuring costs and acquisition-related costs in the fiscal 2011 Consolidated Statements of Operations.

Total expenses of $2.6 and $16.9 for the nine months ended March 31, 2012 and 2011, respectively, were recorded as restructuring costs and are included in Corporate. The following table presents aggregate restructuring costs for the Acquisition Integration Program:

 

 

 

 

 

 

 

 

 

 

 

Severance and
Employee
Benefits

 

Third-Party
Contract
Terminations

 

Other Exit
Costs

 

Total

Fiscal 2011

 

 

$

 

8.2

 

 

 

$

 

10.0

 

 

 

$

 

0.3

 

 

 

$

 

18.5

 

Nine months ended March 31, 2012

 

 

 

0.2

 

 

 

 

2.4

 

 

 

 

 

 

 

 

2.6

 

 

 

 

 

 

 

 

 

 

Charges recorded through March 31, 2012

 

 

$

 

8.4

 

 

 

$

 

12.4

 

 

 

$

 

0.3

 

 

 

$

 

21.1

 

 

 

 

 

 

 

 

 

 

2009 Cost Savings Program

During 2009, our Board of Directors approved a multi-faceted cost savings program designed to reduce ongoing costs and improve our operating profit margins. The program is expected to result in aggregate restructuring charges of approximately $85.0 before taxes. The program includes organizational headcount reductions, workforce realignments and the outsourcing of certain North American manufacturing and distribution operations. The program, which commenced in fiscal 2009, is substantially completed and reflects a workforce reduction of approximately 1,000 employees.

Total expenses of $1.3 and $11.1 for the nine months ended March 31, 2012 and 2011, respectively, were recorded as restructuring costs and are included in Corporate. The following table presents aggregate restructuring costs for the Program:

 

 

 

 

 

 

 

 

 

 

 

Severance and
Employee
Benefits

 

Third-Party
Contract
Terminations

 

Other Exit
Costs

 

Total

Fiscal 2009

 

 

$

 

35.3

 

 

 

$

 

2.4

 

 

 

$

 

1.4

 

 

 

$

 

39.1

 

Fiscal 2010

 

 

 

26.5

 

 

 

 

1.6

 

 

 

 

2.5

 

 

 

 

30.6

 

Fiscal 2011

 

 

 

5.8

 

 

 

 

0.6

 

 

 

 

5.6

 

 

 

 

12.0

 

Nine months ended March 31, 2012

 

 

 

0.9

 

 

 

 

0.1

 

 

 

 

0.3

 

 

 

 

1.3

 

 

 

 

 

 

 

 

 

 

Charges recorded through March 31, 2012

 

 

$

 

68.5

 

 

 

$

 

4.7

 

 

 

$

 

9.8

 

 

 

$

 

83.0

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

Interest expense, which includes interest expense-related party and interest expense, net, was $73.6 for the nine months ended March 31, 2012 compared to $67.1 for the prior year period. Interest expense increased primarily due to the increase of debt balances related to the funding of the 2011 Acquisitions. For the nine months ended March 31, 2012, interest expense includes $8.5 primarily related to the accretion of the obligations related to the purchase of TJoy compared to $2.9 in the nine months ended March 31, 2011. The nine months ended March 31, 2011 also include a one-time acquisition-related expense of $3.6 to secure availability of funds for the 2011 Acquisitions.

OTHER EXPENSE, NET

Other expense, net for the nine months ended March 31, 2012 was $29.8 as compared with $4.8 in the nine months ended March 31, 2011, primarily driven by increased net losses of $30.9 on foreign exchange contracts. Expense for the nine months ended March 31, 2012 includes a loss of $37.4 on a foreign currency contract to hedge foreign currency exposure associated with a contemplated acquisition opportunity that was withdrawn.

52


INCOME TAXES

The effective rate for income taxes for the nine months ended March 31, 2012 was 66.4% as compared with 52.3% in the nine months ended March 31, 2011. The difference in the effective tax rates substantially reflects a decrease in the accrual for unrecognized tax benefits as a result of the completion of the restructuring of the Company’s international business in Geneva, Switzerland, offset by the negative tax consequences associated with TJoy’s ongoing operating losses, its impairment of trademarks and an increase in non-deductible expenses.

The effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) jurisdictions with different statutory rates, (2) adjustments to our unrecognized tax benefits and accrued interest, (3) non-deductible expenses, and (4) valuation allowance changes.

NET INCOME ATTRIBUTABLE TO COTY INC.

In the nine months ended March 31, 2012, net income attributable to Coty Inc. decreased 48%, or $30.2, to $32.9, from $63.1 in the nine months ended March 31, 2011. This decrease primarily reflects increased other expense, net, income tax expense and interest expense (as discussed above), partially offset by higher operating income.

We believe that Adjusted Net Income Attributable to Coty Inc. provides an enhanced understanding of our performance.

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Change %

 

2012

 

2011

Reported Net Income Attributable to Coty Inc.

 

 

$

 

32.9

 

 

 

$

 

63.1

 

 

 

 

(48

%)

 

% of Net revenues

 

 

 

0.9

%

 

 

 

 

2.1

%

 

 

 

Share-based compensation expense adjustment(a)

 

 

 

108.6

 

 

 

 

70.4

 

 

 

 

54

%

 

Change in tax provision due to share-based compensation expense adjustment(b)

 

 

 

20.1

 

 

 

 

(9.1

)

 

 

 

>100

%

 

Reported Net Income adjusted for share-based compensation adjustment

 

 

 

161.6

 

 

 

 

124.4

 

 

 

 

30

%

 

% of Net revenues

 

 

 

4.5

%

 

 

 

 

4.1

%

 

 

 

Other adjustments to Reported Net Income Attributable to Coty Inc.:

 

 

 

 

 

 

Other adjustments to Operating Income(a)

 

 

 

139.8

 

 

 

 

67.6

   

 

>100

%

 

Loss on foreign currency contract(c)

 

 

 

37.4

 

 

 

 

 

 

 

 

N/A

 

Acquisition-related interest expense(d)

 

 

 

8.5

 

 

 

 

6.5

 

 

 

 

31

%

 

 

 

 

 

 

 

 

Total other adjustments to Reported Net Income Attributable to Coty Inc.

 

 

 

185.7

 

 

 

 

74.1

   

 

>100

%

 

Change in tax provision due to other adjustments to Reported Net Income Attributable to Coty Inc.(b)

 

 

 

(53.3

)

 

 

 

 

(4.4

)

 

 

 

<(100

%)

 

Tax impact on foreign income inclusion(e)

 

 

 

9.0

 

 

 

 

45.2

 

 

 

 

(80

%)

 

 

 

 

 

 

 

 

Adjusted Net Income Attributable to Coty Inc.

 

 

$

 

303.0

 

 

 

$

 

239.3

 

 

 

 

27

%

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

8.4

%

 

 

 

 

7.8

%

 

 

 


 

 

(a)

 

 

 

See “Reconciliation of Operating Income to Adjusted Operating Income.”

 

(b)

 

 

 

In accordance with ASC 740 (“Accounting for Income Taxes”), the Company is required to calculate its annual effective tax rate (“ETR”) utilizing the latest available information at each interim period and records its provision for income taxes using the ETR. The tax adjustments reflected in this table assumes that the ETR has been recalculated and normalized taking into account the elimination of the adjustments to operating income. The normalized ETR was utilized in calculating the net change to the interim tax expense as a result of such adjustments. Primarily due to the quarterly timing of our adjustments to operating income, the tax rate applicable to each individual adjustment to operating income is different than the implied rate presented herein.

53


 

(c)

 

 

 

Loss on foreign currency contract to hedge foreign currency exposure associated with a contemplated acquisition opportunity that was withdrawn. Included in other expense, net in the Condensed Consolidated Statements of Operations.

 

(d)

 

 

 

Interest expense for the nine months ended March 31, 2012 associated with the obligations related to the purchase of TJoy. For the nine months ended March 31, 2011, interest expense associated with the obligations related to the purchase of TJoy and a one-time expense to secure availability of funds under a $700 90-day credit facility for the 2011 Acquisitions. Included in interest expense, net in the Condensed Consolidated Statements of Operations.

 

(e)

 

 

 

Effective fiscal 2012, the Company implemented certain changes to its organization structure, including manufacturing and product development processes. As a result of such structural changes, going forward tax expense associated with our foreign-based income will be reduced. Included in provision for income taxes in the Condensed Consolidated Statements of Operations.

FISCAL 2011 AS COMPARED TO FISCAL 2010 AND FISCAL 2010 AS COMPARED TO FISCAL 2009

NET REVENUES

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

Net revenues (excluding revenues related to 2011 Acquisitions)

 

 

$

 

3,746.4

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

 

8

%

 

 

 

 

3

%

 

Revenues generated from 2011 Acquisitions

 

 

 

339.7

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

 

17

%

 

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

In fiscal 2011, net revenues increased 17%, or $603.2, to $4,086.1 from $3,482.9 in fiscal 2010, approximately 1% of which was the result of foreign exchange rate translation. The acquisitions of OPI, Philosophy, Dr. Scheller and TJoy contributed 9%, or $339.7, to the increase. Excluding incremental net revenues from the acquisitions, net revenues increased 8% to $3,746.4 in fiscal 2011. Fragrances drove organic growth among segments followed by Color Cosmetics reflecting new product launches in both segments. The increase also reflects growth across all three geographic regions, with the largest increase in EMEA.

In fiscal 2010, net revenues increased 3%, or $103.6, to $3,482.9, from $3,379.3 in fiscal 2009, approximately 1% of which was the result of foreign exchange rate translation. The increase was primarily the result of general improvement in the global economy, success of new product launches in Fragrances and Color Cosmetics, and our expansion in Russia.

Net Revenues by Segment

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

NET REVENUES

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

2,325.3

 

 

 

$

 

2,113.3

 

 

 

$

 

2,041.2

 

 

 

 

10

%

 

 

 

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

Color Cosmetics (excluding revenues related to 2011 Acquisitions)

 

 

$

 

948.0

 

 

 

$

 

891.0

 

 

 

$

 

830.0

 

 

 

 

6

%

 

 

 

 

7

%

 

Revenues generated from 2011 Acquisitions

 

 

 

195.2

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Color Cosmetics

 

 

$

 

1,143.2

 

 

 

$

 

891.0

 

 

 

$

 

830.0

 

 

 

 

28

%

 

 

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

Skin & Body Care (excluding revenues related to 2011 Acquisitions)

 

 

$

 

473.1

 

 

 

$

 

478.6

 

 

 

$

 

508.1

 

 

 

 

(1

%)

 

 

 

 

(6

%)

 

Revenues generated from 2011 Acquisitions

 

 

 

144.5

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Skin & Body Care

 

 

$

 

617.6

 

 

 

$

 

478.6

 

 

 

$

 

508.1

 

 

 

 

29

%

 

 

 

 

(6

%)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

 

17

%

 

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

54


Fragrances

In fiscal 2011, net revenues of Fragrances increased 10%, or $212.0, to $2,325.3 from $2,113.3 in fiscal 2010. Increased net revenues from Calvin Klein, Chloé, Davidoff and Marc Jacobs in the prestige market contributed to the total increase in the segment, in part due to the launches of Calvin Klein Beauty, Love, Chloé, Davidoff Champion, Marc Jacobs Bang and Daisy Marc Jacobs Eau So Fresh. Products in the mass market also contributed to segment growth with higher net revenues from the Playboy, Guess? and Beyoncé brands, including recent launches of Playboy Female, Playboy New York, Guess? Seductive and Beyoncé Heat Rush. The segment also benefitted from the global roll-out of Beyoncé Heat and a full year of sales of that product whose effect was only partially observed in fiscal 2010 as a result of a mid-year launch. These increased net revenues were partially offset by lower net revenues from existing brands that are later in their life cycles.

In fiscal 2010, net revenues of Fragrances increased 4%, or $72.1, to $2,113.3 from $2,041.2 in fiscal 2009, approximately 2% of which reflects the positive foreign currency translation impact and growth through the launch of new products. Higher net revenues from the Marc Jacobs, Calvin Klein and Balenciaga brands in the prestige market were primarily driven by the launches of Marc Jacobs Lola, ck Free by Calvin Klein and Balenciaga. Products in the mass market contributed to segment growth with increased net revenues from Playboy brand launches Hollywood, Vegas, Miami, Malibu and Ibiza along with the launches of Beyoncé, Guess? and Faith Hill. The segment also benefitted from continued success of the Chloé Signature and Halle Berry fragrances. These increases were partially offset by lower net revenues from existing brands.

Color Cosmetics

In fiscal 2011, net revenues of Color Cosmetics increased 28%, or $252.2, to $1,143.2 from $891.0 in fiscal 2010, approximately 1% of which was the result of foreign currency translations. The increase was primarily due to net revenues earned from the acquisitions of OPI and Dr. Scheller of $195.2 in fiscal 2011. Excluding these incremental net revenues, the Color Cosmetics segment grew 6%. Rimmel drove growth for the segment with increased net revenues reflecting the success of the Rimmel Lash Accelerator mascara launch and higher net revenues from existing Rimmel products. Strong net revenues in the U.S. made up half of the Rimmel brand’s increase in fiscal 2011 driven by successful product launches. Also contributing to segment growth were higher net revenues of Sally Hansen, reflecting new launches and expansion into international markets, primarily Russia and Australia. N.Y.C. New York Color, Astor, Miss Sporty and Cutex brands also contributed to the segment growth.

In fiscal 2010, net revenues of Color Cosmetics increased 7%, or $61.0, to $891.0 from $830.0 in fiscal 2009, primarily reflecting growth due to new product launches. Sally Hansen drove growth for the segment with increased net revenues, reflecting the strong product launches of Insta Dri Fast Dry Nail Color, Complete Salon Manicure, Special Effects and Diamond Strength Nail Color. Increased net revenues of Rimmel, due to the brand’s launch in Russia, and increased net revenues of New York Color also contributed to segment growth. These increases were partially offset by lower net revenues of Astor, particularly in Spain and Germany.

Skin & Body Care

In fiscal 2011, net revenues of Skin & Body Care increased 29%, or $139.0, to $617.6 from $478.6 in fiscal 2010. The acquisitions of Philosophy and TJoy contributed incremental net revenues to the segment of $144.5 in fiscal 2011. Excluding the impact of the acquisitions, the Skin & Body Care segment experienced a decline of 1% in net revenues driven primarily by lower net revenues from the adidas brand. However, this decline was partially offset by growth of the Lancaster brand. Unfavorable trends in net revenues for adidas reflected the impact of market pressures in developed markets. In fiscal 2010, we initiated a strategically focused re-launch program in developed markets aimed at increased investment spending for the adidas brand. While the program had some success, it was not sufficient to reverse the negative trends affecting the adidas brand in fiscal 2011 in those markets. The adidas brand continued to benefit from expansion in Russia, and we have further

55


expansion plans for this brand in emerging markets, particularly in China. Net revenues attributable to the Lancaster brand increased 5% reflecting solid performance of sun care products.

In fiscal 2010, net revenues of Skin & Body Care decreased 6%, or $29.5 to $478.6 from $508.1 in fiscal 2009. This decline was primarily due to lower net revenues of adidas. The adidas brand experienced a decline in most established markets due to competitive market pressures arising from the launch of new male skin and body care brands. As discussed above, the Company initiated a strategically focused re-launch program aimed at increasing investment spending for the brand in fiscal 2010. Also contributing to the decline in the segment was a decrease in net revenues from Lancaster. While the brand benefitted from higher net revenues of Lancaster Retinology and incremental net revenues from the launch of Lancaster Skin Therapy, this improvement only partially offset the net revenues decline in other existing Lancaster skin care lines.

Net Revenues by Geographic Regions

In addition to our reporting segments, management also analyzes our revenues by geographic region. We define our geographic regions as Americas (comprising North, Central and South America), EMEA (comprising Europe, the Middle East and Africa) and Asia Pacific (comprising Asia and Australia).

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

NET REVENUES

 

 

 

 

 

 

 

 

 

 

Americas (excluding revenues related to 2011 Acquisitions)

 

 

$

 

1,288.9

 

 

 

$

 

1,244.3

 

 

 

$

 

1,241.5

 

 

 

 

4

%

 

 

 

 

0

%

 

Revenues generated from 2011 Acquisitions

 

 

 

233.0

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

 

$

 

1,521.9

 

 

 

$

 

1,244.3

 

 

 

$

 

1,241.5

 

 

 

 

22

%

 

 

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

EMEA (excluding revenues related to 2011 Acquisitions)

 

 

$

 

2,069.1

 

 

 

$

 

1,917.3

 

 

 

$

 

1,871.7

 

 

 

 

8

%

 

 

 

 

2

%

 

Revenues generated from 2011 Acquisitions

 

 

 

59.9

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

EMEA

 

 

$

 

2,129.0

 

 

 

$

 

1,917.3

 

 

 

$

 

1,871.7

 

 

 

 

11

%

 

 

 

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific (excluding revenues related to 2011 Acquisitions)

 

 

$

 

388.4

 

 

 

$

 

321.3

 

 

 

$

 

266.1

 

 

 

 

21

%

 

 

 

 

21

%

 

Revenues generated from 2011 Acquisitions

 

 

 

46.8

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific

 

 

$

 

435.2

 

 

 

$

 

321.3

 

 

 

$

 

266.1

 

 

 

 

35

%

 

 

 

 

21

%

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

 

17

%

 

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

Americas

In fiscal 2011, net revenues in the Americas increased 22%, or $277.6, to $1,521.9 from $1,244.3 in fiscal 2010. OPI and Philosophy contributed $233.0 to this increase compared to fiscal 2010. Excluding incremental net revenues from OPI and Philosophy, growth in the region of 4% was driven by higher net revenues in our travel retail and export business in the region and our U.S. operating subsidiaries, reflecting an improved retail environment and successful launches in the Fragrances and Color Cosmetics segments. Net revenues in travel retail and export in the Americas grew approximately 24% compared to the prior fiscal year, as the business benefitted from increased airport passenger traffic and strong growth from Calvin Klein. Higher net revenues of recent fragrance launches in the prestige market also contributed to the growth in travel retail and export in the Americas. In the U.S., net revenues were up 2%, or $23.2, to $957.3 from $934.1 in fiscal 2010, driven primarily by growth of our mass market products. Full-year sales of Guess? and Beyoncé brand products whose effect was only partially observed in fiscal 2010 as a result of a mid-year launch, combined with new launches for these brands in fiscal 2011, contributed to growth in the U.S., along with incremental net revenues of Rimmel driven by new product launches. These increases were partially offset by lower net revenues of existing brands Beckham, Stetson, Jovan and adidas. Higher fragrances net revenues in the prestige market reflected an improved retail environment in U.S. department stores compared to prior year. Contributing to the increase were

56


incremental net revenues from the launches of Calvin Klein Beauty and Love, Chloé along with higher net revenues from existing brands Vera Wang and Davidoff Cool Water. These increased net revenues in the U.S. were partially offset by declining net revenues of Harajuku Lovers by Gwen Stefani.

In fiscal 2010, net revenues in the Americas of $1,244.3 were flat compared to fiscal 2009 as growth in travel retail and export in the region and Canada along with a positive impact of foreign currency exchange fluctuation of 1% were offset by a decline in the U.S. market. Net revenues in travel retail and export in the Americas increased 27% from fiscal 2009 as the business benefitted from an increase in global airline passenger traffic and new product launches. Canada contributed to regional growth, driven by new product launches and the favorable impact of foreign currency translation. In the U.S., net revenues declined 3%, or $31.5, to $934.1 from $965.6 in fiscal 2009 due to general economic conditions that had a negative impact on net revenues. This negative impact was primarily in the prestige market where certain of our department store customers faced ongoing challenges. The decline in net revenues for our existing fragrances in the prestige market was partially offset by incremental net revenues from the recent launches of Marc Jacobs Lola and SJP NYC, the launch of Balenciaga, and higher net revenues from existing brand Chloé. Performance of our products in U.S. mass retail was less affected by the economic crisis than those in prestige retail, resulting in a slight increase in our net revenues in the U.S. mass market compared to the prior fiscal year. Strong growth for Sally Hansen, along with the launch of Faith Hill and Beyoncé fragrances, contributed to growth in the U.S. These increases were almost entirely offset by declines in net revenues of our existing fragrances in the mass market, decline in net revenues in the adidas brand and a decrease in distribution and service fee income.

EMEA

In fiscal 2011, net revenues in EMEA increased 11%, or $211.7, to $2,129.0 from $1,917.3 in fiscal 2010, which includes the negative impact of foreign currency exchange translation of 1%. Excluding incremental net revenues from the acquisition of Dr. Scheller of $59.9, net revenues increased 8%, driven by travel retail and export in the region and Russia. Higher net revenues in our travel retail and export business in EMEA reflected continued net revenues growth in upscale designer fragrances and increased airport travel. The opening of our Russian subsidiary in fiscal 2010 contributed to our results driven by the launch of the Sally Hansen brand and net revenues growth in adidas, Rimmel, Calvin Klein and Chloé. Strong growth in the U.K., the Middle East, Spain, Italy and the Netherlands also generated incremental net revenues for the region. These increases were partially offset by declines in Greece and Portugal where the economic conditions remained difficult, as well as lower net revenues in Romania and Hungary. Despite the unfavorable impact of foreign currency translation resulting from the decline of the euro exchange rate, eurozone countries still contributed strong growth to the region.

In fiscal 2010, net revenues in EMEA increased 2%, or $45.6, to $1,917.3 from $1,871.7 in fiscal 2009. Reflecting our strategy to strengthen our geographical presence in emerging markets, the opening of our new Russian subsidiary drove growth in the region. Increased net revenues in Germany, France, the Middle East and Italy reflected an improved retail environment, the impact of the global roll-out of the Playboy brand and the success of new launches. Partially offsetting these increases were lower net revenues in Spain, Greece and Eastern Europe, reflecting the economic situation in those markets. In addition, results for Eastern Europe were impacted by currency devaluations in the Czech Republic and Hungary.

Asia Pacific

In fiscal 2011, net revenues in Asia Pacific increased 35%, or $113.9, to $435.2 from $321.3 in fiscal 2010, approximately 6% of which was the result of foreign currency translations. The increase reflects our strategy to strengthen and expand our geographical presence in Asia. TJoy and OPI contributed $46.8 to the increase. Excluding incremental net revenues related to acquisitions, growth in the region was driven by strong performance in travel retail and export in the region and in Australia. Our travel retail and export business in Asia Pacific contributed to the increase, driven by

57


continued demand for upscale designer fragrances. Strong performance in travel retail and export in Korea, Taiwan and China outpaced declining net revenues in Japan after the March 2011 earthquake. Net revenues growth in Australia reflects strong performance of Rimmel, Sally Hansen, Calvin Klein and Marc Jacobs as well as a significant benefit from foreign currency translation.

In fiscal 2010, net revenues in Asia Pacific increased 21%, or $55.2, to $321.3 from $266.1 in fiscal 2009 approximately 8% of which was the result of foreign exchange rate translation. The increase reflects higher net revenues in Australia, travel retail and export in the region and Hong Kong, as well as the positive impact of the strengthening Australian dollar. Net revenues growth in Australia resulted in equal measure from the strong performance of Marc Jacobs, Calvin Klein, Playboy, Sally Hansen and Rimmel and from foreign currency translation. Our travel retail and export business in Asia Pacific contributed to the net revenues increase driven by continued demand for Calvin Klein, Sally Hansen, Nautica and Playboy. Net revenues in Hong Kong increased behind strong performance of Calvin Klein. Partially offsetting these increases were lower net revenues in China as the country was impacted by destocking in the mass retail market.

COST OF SALES

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

Cost of sales (excluding 2011 Acquisitions)

 

 

$

 

1,480.1

 

 

 

$

 

1,473.2

 

 

 

$

 

1,521.4

 

 

 

 

0

%

 

 

 

 

(3

%)

 

% of Net revenues

 

 

 

39.5

%

 

 

 

 

42.3

%

 

 

 

 

45.0

%

 

 

 

 

 

2011 Acquisitions

 

 

 

159.9

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Reported Cost of sales

 

 

$

 

1,640.0

 

 

 

 

1,473.2

 

 

 

 

1,521.4

 

 

 

 

11

%

 

 

 

 

(3

%)

 

 

 

 

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

40.1

%

 

 

 

 

42.3

%

 

 

 

 

45.0

%

 

 

 

 

 

In fiscal 2011, cost of sales as a percentage of total net revenues decreased to 40.1% from 42.3% in fiscal 2010, resulting in a gross profit improvement of 2.2 points as a percentage of net revenues. Excluding acquisitions, cost of sales remained flat despite an 8% increase in net revenues which resulted in gross margin improving by 2.8 percentage points. This improvement reflected continued success of our supply chain savings. The supply chain savings program contributed to significant improvements in manufacturing costs resulting from more streamlined manufacturing processes, procurement savings programs with suppliers, and supply chain redesign, including improved management of third-party contractors.

In fiscal 2010, cost of sales as a percentage of total net revenues decreased to 42.3% from 45.0% in fiscal 2009, resulting in a gross profit improvement of 2.7 points as a percentage of net revenues. The gross margin improvement reflects improved gross to net revenues ratio and implementation of the supply chain savings program that contributed 1.6 percentage points to gross margin improvement. The improvement in gross to net revenues ratio was primarily due to lower returns as a percentage of net revenues in fiscal 2010 reflecting improved economic conditions compared to fiscal 2009. Also contributing to the improvement in cost of sales margin was a decrease in excess and obsolete inventory charges of approximately 1.1 points as a percentage of net revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

Selling, general and administrative expenses (excluding 2011 Acquisitions)

 

 

$

 

1,928.6

 

 

 

$

 

1,723.0

 

 

 

$

 

1,493.9

 

 

 

 

12

%

 

 

 

 

15

%

 

% of Net revenues

 

 

 

51.5

%

 

 

 

 

49.5

%

 

 

 

 

44.2

%

 

 

 

 

 

2011 Acquisitions

 

 

 

105.6

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Reported Selling, general and administrative expenses

 

 

$

 

2,034.2

 

 

 

$

 

1,723.0

 

 

 

$

 

1,493.9

 

 

 

 

18

%

 

 

 

 

15

%

 

 

 

 

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

49.8

%

 

 

 

 

49.5

%

 

 

 

 

44.2

%

 

 

 

 

 

58


In fiscal 2011, selling, general and administrative expenses as a percentage of net revenues increased to 49.8% as compared with 49.5% in fiscal 2010. Excluding acquisitions, selling, general and administrative expenses increased 2.0 points as a percentage of net revenues principally reflecting higher advertising and consumer promotion spending and share-based compensation expense. The increase in advertising and consumer promotion spending of 1.6 percentage points reflects our strategy to support our brands by investing in media spending as well as other advertising and promotional activities. Share-based compensation expense increased 0.5 points as a percentage of net revenues compared to fiscal 2010 reflecting the impact of a higher value of common stock primarily resulting from strong operating results. See “Critical Accounting Policies and Estimates—Common Stock Valuations” for a description of the factors that impact the valuation of our common stock. Fixed costs and other operating expenses did not have a material impact on the increase in selling, general and administrative expenses in fiscal 2011.

In fiscal 2010, selling, general and administrative expenses as a percentage of net revenues increased to 49.5% compared with 44.2% in fiscal 2009. This change primarily reflects higher share-based compensation expense of 5.7 points as a percentage of net revenues. This was the result of a significant drop in the estimated fair value of our common shares in 2009, followed by a significant recovery of the estimated fair value of our common shares in fiscal 2010. See “Critical Accounting Policies and Estimates—Common Stock Valuations” for a description of the factors that impact the valuation of our common stock. Higher fixed costs as a percentage of net revenues, driven by higher accruals related to the management incentive programs, also contributed to the increase in selling, general and administrative expenses as a percentage of net revenues. Partially offsetting these increases was a reduction in advertising and consumer promotion as a percentage of net revenues, reflecting a more efficient use of the advertising budget, and net gains from foreign exchange transactions.

OPERATING INCOME

In fiscal 2011, operating income increased 52%, or $96.4, to $280.9, from $184.5 in fiscal 2010. Operating margin, or operating income as a percentage of net revenues, increased to 6.9% compared to 5.3% in fiscal 2010, reflecting strong savings in cost of sales, partially offset by an increase in selling, general and administrative expenses discussed above.

In fiscal 2010, operating income decreased 24%, or $56.9, to $184.5, from $241.4 in fiscal 2010. Operating margin decreased to 5.3% of net revenues as compared with 7.1% in fiscal 2009, reflecting the increase in selling, general and administrative expenses margin as previously discussed.

Operating Income by Segments

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

OPERATING (LOSS)/INCOME

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

286.9

 

 

 

$

 

192.8

 

 

 

$

 

136.4

 

 

 

 

49

%

 

 

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

 

Color Cosmetics (excluding 2011 Acquisitions)

 

 

$

 

58.7

 

 

 

$

 

68.9

 

 

 

 

20.1

 

 

 

 

(15

%)

 

 

 

>100

%

 

2011 Acquisitions

 

 

 

57.0

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Color Cosmetics

 

 

$

 

115.7

 

 

 

$

 

68.9

 

 

 

 

20.1

 

 

 

 

68

%

 

 

 

>100

%

 

 

 

 

 

 

 

 

 

 

 

 

Skin & Body Care (excluding 2011 Acquisitions)

 

 

$

 

9.0

 

 

 

$

 

17.7

 

 

 

 

(5.2

)

 

 

 

 

(49

%)

 

 

 

>100

%

 

2011 Acquisitions

 

 

 

21.2

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Skin & Body Care

 

 

$

 

30.2

 

 

 

$

 

17.7

 

 

 

 

(5.2

)

 

 

 

 

71

%

 

 

 

>100

%

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

$

 

(151.9

)

 

 

 

$

 

(94.9

)

 

 

 

 

90.1

 

 

 

 

60

%

 

 

 

<(100

%)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

280.9

 

 

 

$

 

184.5

 

 

 

$

 

241.4

 

 

 

 

52

%

 

 

 

 

(24

%)

 

 

 

 

 

 

 

 

 

 

 

 

Fragrances

In fiscal 2011, operating income for Fragrances increased 49%, or $94.1, to $286.9, from $192.8 in fiscal 2010. Improved results primarily reflect recently launched prestige fragrances with higher

59


margins. Significant improvements in cost of sales as a percentage of net revenues also contributed to the increase.

In fiscal 2010, operating income for Fragrances increased 41%, or $56.4 to $192.8, from $136.4 in fiscal 2009. Improved results reflect increased net revenues, primarily from recently launched prestige fragrances with higher margins. Improvements in cost of sales also contributed to the increase. Selling, general and administrative expenses increased 2% driven by higher investment in advertising and consumer promotion. However, selling, general and administrative expenses decreased as a percentage of net revenues, contributing to operating income margin improvement.

Color Cosmetics

In fiscal 2011, Color Cosmetics’ operating income increased 68%, or $46.8, to $115.7 from $68.9 in fiscal 2010. Excluding results from OPI and Dr. Scheller of $57.0, operating income for the segment decreased 15% compared to fiscal 2010. Despite higher net revenues and improvement in cost of sales as a percentage of net revenues, there was a decrease in operating income driven by higher selling, general and administrative expenses, primarily due to increased investment in Sally Hansen and Rimmel through advertising and consumer promotion spending.

In fiscal 2010, Color Cosmetics’ operating income more than doubled, increasing $48.8 over prior year, to $68.9, from $20.1 in fiscal 2009. Improved results reflect higher net revenues driven by new products and significant savings in cost of sales as a percentage of net revenues, as well as lower asset impairment charges. Selling, general and administrative expenses increased 3% from fiscal 2009 driven by higher investment in advertising and consumer promotion. However, selling, general and administrative expenses decreased as a percentage of net revenues, contributing to the improvement in operating margin. Operating income also benefited from lower amortization expense in fiscal 2010 compared to fiscal 2009 as we fully amortized product formulations resulting from our acquisition of Del Laboratories on December 31, 2007.

Skin & Body Care

In fiscal 2011, operating income for Skin & Body Care increased 71%, or $12.5, to $30.2 from $17.7 in fiscal 2010. Excluding results from Philosophy and TJoy of $21.2, operating income for the segment decreased 49% compared to fiscal 2010. Despite improvement in cost of sales and lower asset impairment charges, operating income for the segment was lower compared to fiscal 2010 driven by a decline in net revenues for the segment and higher selling, general and administrative expenses.

In fiscal 2010, operating income for Skin & Body Care increased $22.9, to $17.7, from ($5.2) in fiscal 2009. The increase primarily reflects a reduction in selling, general and administrative expenses, driven by lower advertising and consumer promotion spending on Lancaster, adidas and the discontinued brand Home Skin Labs, as well as lower asset impairment charges. Improvement in cost of sales also contributed to favorable results compared to fiscal 2009.

Corporate

Corporate primarily includes share-based compensation expense/(income) adjustment, restructuring charges and other corporate expenses not directly relating to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance of the segments.

Corporate includes share-based compensation expense/(income) adjustment included in the calculation of Adjusted Operating Income of $64.9, $47.3, and ($133.6) in fiscal 2011, 2010 and 2009, respectively, relating to (i) the difference between share-based compensation expense/(income) accounted for under equity plan accounting, and under liability plan accounting for the recurring nonqualified stock option awards and director-owned and employee-owned shares, restricted shares, and restricted stock units and (ii) all costs associated with the special incentive award granted in fiscal 2011, vesting of which is contingent upon completion of our initial public offering.

60


Adjusted Operating Income

We believe that Adjusted Operating Income further enhances the investor’s understanding of our performance. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures.”

Reconciliation of reported operating income to Adjusted Operating Income:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2011

 

2010

 

2009

 

2011/2010

 

2010/2009

Reported Operating Income

 

 

$

 

280.9

 

 

 

$

 

184.5

 

 

 

$

 

241.4

 

 

 

 

52

%

 

 

 

 

(24

%)

 

% of Net revenues

 

 

 

6.9

%

 

 

 

 

5.3

%

 

 

 

 

7.1

%

 

 

 

 

 

Share-based compensation expense/(income) adjustment

 

 

 

64.9

 

 

 

 

47.3

 

 

 

 

(133.6

)

 

 

 

 

37

%

 

 

 

>100

%

 

Reported Operating Income adjusted for share-based compensation adjustment

 

 

$

 

345.8

 

 

 

$

 

231.8

 

 

 

$

 

107.8

 

 

 

 

49

%

 

 

 

>100

%

 

% of Net revenues

 

 

 

8.5

%

 

 

 

 

6.7

%

 

 

 

 

3.2

%

 

 

 

 

 

Other adjustments:

 

 

 

 

 

 

 

 

 

 

Acquisition-related costs(a)

 

 

 

46.8

 

 

 

 

5.2

 

 

 

 

0.2

   

 

>100

%

 

 

 

>100

%

 

Restructuring costs

 

 

 

30.5

 

 

 

 

30.6

 

 

 

 

39.1

 

 

 

 

0

%

 

 

 

 

(22

%)

 

Business structure realignment programs

 

 

 

9.3

 

 

 

 

11.5

 

 

 

 

4.1

 

 

 

 

(19

%)

 

 

 

>100

%

 

Asset impairment charges