S-1/A 1 c72993_s1a.htm 3B2 EDGAR HTML -- c72993_s1a.htm

As filed with the Securities and Exchange Commission on May 28, 2013

Registration No. 333-182420



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


AMENDMENT NO. 6
TO

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)


(Cover continued on next page)

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.




(Cover continued from previous page)

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

 

 

 

Title of Each Class of
Securities to be Registered

 

Amount to be
Registered(1)

 

Proposed Maximum
Offering Price
Per Share

 

Proposed Maximum
Aggregate Offering Price(2)

 

Amount of
Registration Fee(3)

 

Class A common stock, $0.01 par value

 

65,714,285

 

$18.50

 

 

 

$1,215,714,272.50

   

$150,563.43

 

 

 

(1)

 

 

 

Includes 8,571,428 shares subject to the underwriters’ option to purchase additional shares.

 

(2)

 

 

 

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

 

(3)

 

 

 

Of this amount, $80,220 was previously paid in connection with the initial filing of this Registration Statement on June 29, 2012. The aggregate filing fee of $150,563.43 is being offset by the amount previously paid.


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 May 28, 2013.

PROSPECTUS

57,142,857 Shares

CLASS A COMMON STOCK

The selling stockholders are offering 57,142,857 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 $16.50 and $18.50. We intend to list the Class A common stock on 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 our 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 20 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 57,142,857 shares of Class A common stock, the underwriters have the option to purchase an additional 8,571,428 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  , 2013.

Joint Book-Running Managers

 

 

 

 

 

BofA Merrill Lynch

 

J.P. Morgan

 

Morgan Stanley

Barclays

 

Deutsche Bank Securities

 

Wells Fargo Securities

Lead Managers

Lazard Capital Markets

 

Piper Jaffray

 

RBC Capital Markets

 

 

 

 

 

 

 

Co-Managers

BNP PARIBAS

 

Credit Agricole CIB

 

HSBC

 

ING

Moelis & Company

 

RBS

 

Sanford C. Bernstein

 

Santander

 

 

 

 

 

Junior Co-Managers

Ramirez & Co., Inc.

 

Telsey Advisory Group

 

The Williams Capital Group, L.P.


Prospectus dated  , 2013



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

 

 

20

 

Use of Proceeds

 

 

41

 

Dividend Policy

 

 

41

 

Capitalization

 

 

42

 

Selected Consolidated Financial Data

 

 

 

44

 

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

 

 

 

46

 

Business

 

 

 

101

 

Management

 

 

119

 

Executive Compensation

 

 

127

 

Principal and Selling Stockholders

 

 

147

 

Certain Relationships and Related Party Transactions

 

 

150

 

Description of Indebtedness

 

 

152

 

Description of Capital Stock

 

 

154

 

Shares Eligible for Future Sale

 

 

161

 

Material United States Federal Income Tax Considerations

 

 

163

 

Underwriting

 

 

166

 

Legal Matters

 

 

172

 

Experts

 

 

172

 

Where You Can Find Additional Information

 

 

173

 

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,” “target” 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 as well as third party sources widely available to the public such as 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. We did not fund and are not otherwise affiliated with the third party sources that we cite. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management’s understanding of industry conditions, and such information has not been verified by any independent sources. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market, industry and other information included in this prospectus to be the most recently available and to be generally reliable, such information is inherently imprecise and we have not independently verified any third-party information or verified that more recent information is not available.

In this prospectus, we refer to North America, Western Europe and Japan as “developed markets,” and all other markets as “emerging markets.” Except as specifically indicated, all references to rankings are based on retail value market share.

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 2012” refer to the fiscal year ended June 30, 2012. 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 a 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”, generated 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.

Coty has transformed itself into a multi-segment beauty company with market leading positions in both North America and Europe through new product offerings, diversified sales channels and its global growth strategy. 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 and enabled by strategic acquisitions, such as the Calvin Klein fragrance business and Sally Hansen brand, and which recently include power brands OPI and philosophy. Today, our business has a diversified revenue base that generated net revenues for fiscal 2012 of 53%, 31% and 16% from Fragrances, Color Cosmetics and Skin & Body Care, respectively.

In fiscal 2012, we achieved net revenues of $4.6 billion, which represents an average annual growth rate of 16% from our fiscal 2010 net revenues of $3.5 billion, or 8% excluding the effects of recent acquisitions and foreign currency exchange translations. In fiscal 2012, we experienced $210 million of operating loss and $536 million of Adjusted Operating Income. For the same period, we experienced $324 million of net loss and $301 million of Adjusted Net Income. Adjusted Operating Income, Adjusted Net Income and our average annual growth rate excluding the effects of recent acquisitions and foreign currency 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 $282 billion in calendar year 2012. In fiscal 2012, Coty generated 77% of its net revenues in developed markets and 23% of its net revenues in emerging markets. The industry growth rate of the fragrances, color cosmetics and skin & body care segments in the geographic markets where Coty competes was 3.7% from 2011 to 2012, based on Euromonitor data.

The growth rate in the areas in which Coty competes is expected to be 3.0% to 4.0% between 2013 and 2016, based on Euromonitor data. We believe this growth will be driven primarily by innovation, changes in demographics, consumer preferences and fashion trends in developed markets,

1


and by a larger middle class, higher media and retail investment 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. 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 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 fiscal 2002 to 10 brands in fiscal 2012, with the net revenue contribution from these brands increasing from 40% of $1.4 billion to approximately 70% of $4.6 billion during the same time period.

Global leader 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 (including Calvin Klein, Marc Jacobs, Chloé, Roberto Cavalli, Balenciaga, Bottega Veneta and Guess?), Lifestyle (including Playboy and Davidoff) and Celebrity (including Jennifer Lopez and Beyoncé Knowles). Our Fragrances segment has been consistently profitable, with operating margins expanding in each of the last three fiscal years. 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 and Lady Gaga Fame launches.

One of the fastest growing players in color cosmetics. We have achieved our #6 ranking globally in color cosmetics, as well as a #2 position in Europe and a #5 position in the U.S., by transforming Rimmel from a regional player into a 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 achieved a #1 position globally in the combined retail and professional channels with Sally Hansen and OPI. Our growth in the nail category is fueled by outstanding innovations. As an example, Sally Hansen had the best-selling launches in the U.S. color cosmetics market in 2010 with the launch of Complete Salon Manicure and in 2011 with the launch of Salon Effects.

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 our licensed products in multiple points of distribution and in multiple geographies. Marc Jacobs and Chloé are examples of licensed designer brands that have organically grown from low revenue bases to be two of our most highly valued and fastest growing brands. 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 continue to build on the success of Glow by JLo, one of the first modern celebrity fragrances, by partnering with highly sought-after celebrities. We believe our success and scale make us a preferred licensee for potential partners and create even greater opportunities for us to further develop existing brand licenses.

Superior innovation driven by entrepreneurial culture. 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 fiscal years, sales from our new products accounted for approximately 17% of our

2


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.

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, travel retail, 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. In fiscal 2012 mass, prestige and travel retail represented 50%, 37% and 6% of our net revenues, respectively. 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 grew our net revenues by an average annual growth rate of 16%, or approximately 8% excluding the effects of acquisitions and foreign currency exchange translations. Due to our sales growth as well as optimization of our logistics infrastructure, supply chain and global procurement systems our gross profit grew from fiscal 2010 through fiscal 2012 by an average annual growth rate of 19%, while gross margin improved by 2.7 percentage points in the same period. For the three years ending fiscal 2012, our adjusted operating margin expanded by 3.4 percentage points, from 8.2% to 11.6%. During the same period, our operating margin declined by 9.8 percentage points, from 5.3% to (4.5%). 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 and development and other growth opportunities while also successfully reducing debt levels incurred to finance acquisitions. In fiscal 2012, we generated cash flow from operating activities of $589 million and from fiscal 2010 through fiscal 2012 we maintained an average operating income cash conversion ratio of over 100% of both operating income and Adjusted Operating Income.

Successful integration of acquired brands and companies. Since 2002, we have successfully completed a number of acquisitions to drive segment, geographic and distribution platform growth. In each acquisition we make, we seek to employ best practices and talent from both our organization and the acquired business to efficiently integrate these businesses to implement our strategy and maximize growth. Our track record of successful acquisitions reflects the strength of our entrepreneurial culture, our ability to attract and retain top management talent, our innovative approach to marketing and our focus on achieving supply chain and operational efficiencies.

We believe we are adept at identifying growth opportunities that complement our portfolio strategies and allow us to build on our core competencies. Following the acquisitions of the Marc Jacobs fragrance license and the Calvin Klein fragrance business, we developed these brands into power brands that expanded our global presence in fragrances. Under our ownership, the Sally Hansen brand has expanded our Color Cosmetics segment and developed a global reach. The OPI acquisition provided us with the leading professional nail care brand. 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 businesses that bring us new platforms, such as TJoy, which provided us with a broad manufacturing and distribution platform for our existing portfolio of brands in China. We are applying our past experience and practices as we integrate our recent OPI, Philosophy and TJoy acquisitions.

3


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

Our Strategy

Coty targets net revenue growth that is in line with or outperforms the industry average, and we believe our organic growth has in fact outpaced the industry over the past three years based on Euromonitor data. At the same time, Coty strives to expand margins and improve cash flow generation. Our continued net revenue growth is centered on improving our competitive position in all our segments, including through further developing power brands and diversifying our geographic presence into emerging markets and across distribution channels.

 

 

 

 

Continue to develop our power brands portfolio. We will seek to capitalize on our existing power brands through continued excellence in branding, innovation and execution. Over the past three fiscal years, we have added power brands in each of our segments. Net revenues from our power brands grew 18% in fiscal 2012 compared to the prior year, or 10% assuming the acquisitions of Philosophy and OPI had occurred on July 1, 2010.

 

 

 

 

 

We see growth opportunities for our existing power brands. 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 fragrance mass markets. Similarly, we acquired Chloé in fiscal 2006 and converted it into one of the fastest growing prestige fragrance brands for women over the past four years. From its relaunch in fiscal 2008 through fiscal 2012, Chloé has grown 1,184% as measured by net revenues. In the Color Cosmetics segment, we have grown the Sally Hansen brand 53% through fiscal 2012 as measured by net revenues from our acquisition of the brand in fiscal 2008.

 

 

 

 

Leverage innovation to strengthen our position in each distribution channel. 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 fiscal years, new product innovations represented approximately 17% of our annual net revenues, on average. We intend to continue to develop and bring to market unique and innovative products across price points and in various geographies and distribution channels that we believe will be modern, appealing and accessible to the consumer. For example, our recently launched Lady Gaga Fame fragrance is the first-ever black eau de parfum and contains a proprietary new technology that causes it to become invisible once airborne. Further, we will continue to develop new brands and to seek partnerships with highly sought-after celebrities and designer and lifestyle brands, leveraging our track record of successful licensing relationships.

 

 

 

 

Diversify our geographic presence into new and emerging markets. We seek to accelerate our sales growth by expanding and further diversifying our geographic footprint, including in emerging markets. In fiscal 2012, emerging markets represented 23% of our total net revenues. Our target is to generate more than one third of our net revenues from emerging markets five years from now. From fiscal 2010 to fiscal 2012, our net revenues from emerging markets grew by an average annual growth rate of 18%, or 14% excluding the effects of acquisitions and foreign currency exchange translations. During the same period, our net revenues from developed markets grew by an average annual growth rate of 14%, or 6% excluding the effects of acquisitions and foreign currency exchange translations.

We seek to strengthen our go-to-market capabilities in certain areas in Asia and Latin America, to fully leverage the potential of our current brand portfolio and to develop tailor-made products to better serve local needs and tastes. We are also leveraging our strong relationships with top global customers such as Sephora and AS Watson to accelerate

4


 

 

 

 

penetration and establishment of certain brands in the emerging markets. We also intend to leverage our current distribution to build our business in existing geographies with products that we believe are well-suited to the local consumer preferences. For example, we will seek, among other initiatives, to expand distribution of our brands in China by leveraging TJoy’s distribution network.

 

 

 

 

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 acquisitions. 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. Furthermore, sales of the adidas brand are growing in China as a result of the expanded distribution platform acquired with the TJoy business in fiscal 2011.

 

 

 

 

Leveraging our multi-channel distribution capabilities. We seek to continue to increase market presence, brand recognition and net revenues by offering certain products through multiple distribution channels to reach a broad spectrum of consumers, with different needs and expectations, and to capture growth opportunities at varying price points and diverse retail environments. Our balanced distribution network allows us also to effectively manage risks related to any single distribution channel, and to exploit growth in whichever channel the growth materializes. For example, we are expanding the OPI brand globally primarily through the professional channel where the brand enjoys strong leadership. We also are offering OPI through selective distribution channels as well as our growing travel retail business and offering Nicole by OPI through our mass distribution channels. 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 is an important component of our strategy to ensure our brands receive appropriate pricing and placement as we expand our distribution.

 

 

 

 

 

In addition to maintaining a strategic balance between prestige and mass distribution channels, 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. We seek continued margin expansion through strong net revenue growth, development of higher margin products, cost control, and supply chain integration and efficiency initiatives, such as optimization of our manufacturing footprint. In fiscal 2012, our adjusted operating margin improved as discussed above, and we generated cash flow from operating activities of $589 million, compared to $418 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 stockholder 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

5


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;

 

 

 

 

We may incur penalties and experience other adverse effects on our business as a result of possible U.S. Export Administration Regulations (“EAR”) violations;

 

 

 

 

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 have been subject to impairment and may continue to be subject to impairment in the future;

 

 

 

 

The purchase price of future acquisitions may not be representative of the operations acquired;

 

 

 

 

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;

 

 

 

 

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;

6


 

 

 

 

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;

 

 

 

 

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

 

 

 

 

Payment of dividends on our Class A common stock is entirely subject to the discretion of our Board of Directors. Our debt instruments and external factors beyond our control may limit our ability to pay dividends.

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.

7


THE OFFERING

 

 

 

Class A common stock offered by the selling stockholders

 

57,142,857 shares

 

Class A common stock to be outstanding after this offering

 

72,219,007 shares (80,790,435 shares if the underwriters exercise their option in full)

 

Class B common stock to be outstanding after this offering

 

310,611,513 shares (302,040,085 shares if the underwriters exercise their option in full)

 

Total common stock to be outstanding after this offering

 

382,830,520 shares (plus an additional 1,195,000 shares of Class A common stock that will be issued at closing of this offering upon vesting and settlement of certain IPO Units)

 

Option to purchase additional shares

 

The selling stockholders have granted the underwriters a 30-day option to purchase up to 8,571,428 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 or to certain unrelated third parties as described under “Description of Capital Stock—Conversion and Restrictions on Transfer.”

 

 

 

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.

 

 

 

8


 

 

 

 

 

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 2.3% of the combined voting power of our outstanding common stock and approximately 18.9% of our total equity ownership and (2) holders of Class B common stock will hold approximately 97.7% of the combined voting power of our outstanding common stock and approximately 81.1% of our total equity ownership.

 

 

 

If the underwriters exercise their option to purchase additional shares in full, (1) holders of Class A common stock will hold approximately 2.6% of the combined voting power of our outstanding common stock and approximately 21.1% of our total equity ownership and (2) holders of Class B common stock will hold approximately 97.4% of the combined voting power of our outstanding common stock and approximately 78.9% 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.

 

Reserved share program

 

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 2% of the shares offered by this prospectus for sale to some of our employees. Any purchases of reserved shares by these persons would reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

Dividends

 

We intend to pay an annual cash dividend at a rate initially equal to $0.15 per share of our Class A common stock, as well as our Class B common stock, in the second fiscal quarter of each fiscal year. Dividends will only be paid when, as and if declared by our Board of Directors. See “Dividend Policy” for additional information.

 

Proposed New York Stock Exchange symbol

 

“COTY”

Our outstanding common stock is currently all of the same class. In connection with the closing of this offering, we will amend and restate provisions of our Certificate of Incorporation to create a dual class common stock structure consisting of our Class B common stock and Class A common stock. As a result of that amendment and restatement, our stockholders will receive 15,076,150 shares of Class A common stock, except that affiliates of JAB Holdings II B.V., Berkshire Partners LLC and Rhône Capital L.L.C., which are the selling stockholders, will receive 367,754,370 shares of

9


Class B common stock, in each case in exchange for their current common stock holdings. When the selling stockholders consummate sales of Class B common stock in this offering, their shares of Class B common stock will automatically convert into shares of Class A common stock on a one-for-one basis. As a result, purchasers of our common stock in this offering will only receive Class A common stock, and only Class A common stock is being offered by this prospectus. Shares of Class B common stock that are not sold by the selling stockholders will remain Class B common stock unless otherwise converted into shares of Class A common stock as described under “Description of Capital Stock.”

Unless we specifically state otherwise or the context otherwise requires, the share information in this prospectus is as of May 24, 2013, and reflects or assumes:

 

 

 

 

the conversion of the common stock owned by our existing stockholders, all of which shares are of the same class, into 15,076,150 shares of Class A common stock and 367,754,370 shares of Class B common stock immediately upon effectiveness of our restated certificate of incorporation filed in connection with our initial public offering;

 

 

 

 

the immediate conversion of 57,142,857 shares of our Class B common stock owned by the selling stockholders into 57,142,857 shares of Class A common stock upon their sale in this offering; and

 

 

 

 

the underwriters’ option to purchase up to an additional 8,571,428 shares of Class A common stock from the selling stockholders is not exercised.

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:

 

 

 

 

28,361,683 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 $9.04 per share;

 

 

 

 

5,095,678 shares issuable upon settlement of restricted stock units and IPO Units under our Executive Ownership Plan, Long-Term Incentive Plan and 2007 Stock Plan for Directors (including 1,195,000 shares of Class A common stock that will be issued at closing of this offering upon vesting and settlement of certain IPO Units); or

 

 

 

 

19,000,000 shares reserved for future grants or for sale under our Equity and Long-Term Incentive Plan and 2007 Stock Plan for Directors.

10


SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary Consolidated Statements of Operations Data and Consolidated Cash Flows Data for the years ended June 30, 2012, 2011 and 2010 and the Consolidated Balance Sheet Data as of June 30, 2012 and 2011 from our audited Consolidated Financial Statements included elsewhere in this prospectus. The Consolidated Statement of Operations Data and Consolidated Cash Flows Data for the nine months ended March 31, 2013 and 2012 and the Consolidated Balance Sheet Data as of March 31, 2013 have been derived from our unaudited Condensed Consolidated Financial Statements appearing elsewhere in this prospectus. The Consolidated Balance Sheet Data as of June 30, 2010 have been derived from our consolidated financial statements that 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,

 

2013

 

2012

 

2012

 

2011(a)

 

2010

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

3,590.3

 

 

 

$

 

3,587.9

 

 

 

$

 

4,611.3

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

Gross profit

 

 

 

2,168.4

 

 

 

 

2,164.3

 

 

 

 

2,787.3

 

 

 

 

2,446.1

 

 

 

 

2,009.7

 

Asset impairment charges

 

 

 

1.5

 

 

 

 

102.0

 

 

 

 

575.9

 

 

 

 

 

 

 

 

5.3

 

Operating income (loss)

 

 

 

418.3

 

 

 

 

275.9

 

 

 

 

(209.5

)

 

 

 

 

280.9

 

 

 

 

184.5

 

Interest expense—related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.9

 

 

 

 

31.9

 

Interest expense, net

 

 

 

55.5

 

 

 

 

73.6

 

 

 

 

89.6

 

 

 

 

85.6

 

 

 

 

41.7

 

Other (income) expense, net

 

 

 

(0.6

)

 

 

 

 

29.8

 

 

 

 

32.0

 

 

 

 

4.4

 

 

 

 

(8.8

)

 

Income (loss) before income taxes

 

 

 

363.4

 

 

 

 

172.5

 

 

 

 

(331.1

)

 

 

 

 

185.0

 

 

 

 

119.7

 

Provision (benefit) for income taxes

 

 

 

105.3

 

 

 

 

114.5

 

 

 

 

(37.8

)

 

 

 

 

95.1

 

 

 

 

32.4

 

Net income (loss)

 

 

$

 

258.1

 

 

 

$

 

58.0

 

 

 

$

 

(293.3

)

 

 

 

$

 

89.9

 

 

 

$

 

87.3

 

Net income attributable to noncontrolling interests

 

 

$

 

12.8

 

 

 

$

 

11.4

 

 

 

$

 

13.7

 

 

 

$

 

12.5

 

 

 

$

 

11.9

 

Net income attributable to redeemable noncontrolling interests

 

 

$

 

15.0

 

 

 

$

 

13.7

 

 

 

$

 

17.4

 

 

 

$

 

15.7

 

 

 

$

 

13.7

 

Net income (loss) attributable to Coty Inc.

 

 

$

 

230.3

 

 

 

$

 

32.9

 

 

 

$

 

(324.4

)

 

 

 

$

 

61.7

 

 

 

$

 

61.7

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

381.2

 

 

 

 

371.5

 

 

 

 

373.0

 

 

 

 

329.4

 

 

 

 

280.2

 

Diluted

 

 

 

396.7

 

 

 

 

381.8

 

 

 

 

373.0

 

 

 

 

339.1

 

 

 

 

280.2

 

Cash dividends declared per common share

 

 

$

 

0.15

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.10

 

 

 

$

 

 

Net income (loss) attributable to Coty Inc. per common share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.60

 

 

 

$

 

0.09

 

 

 

$

 

(0.87

)

 

 

 

$

 

0.19

 

 

 

$

 

0.22

 

Diluted

 

 

 

0.58

 

 

 

 

0.09

 

 

 

 

(0.87

)

 

 

 

 

0.18

 

 

 

 

0.22

 

Consolidated Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

 

362.5

 

 

 

$

 

406.7

 

 

 

$

 

589.3

 

 

 

$

 

417.5

 

 

 

$

 

494.0

 

Net cash used in investing activities

 

 

 

(184.7

)

 

 

 

 

(293.5

)

 

 

 

 

(333.9

)

 

 

 

 

(2,252.5

)

 

 

 

 

(149.9

)

 

Net cash (used in) provided by financing activities

 

 

 

(3.6

)

 

 

 

 

(69.2

)

 

 

 

 

(97.7

)

 

 

 

 

1,903.8

 

 

 

 

(7.0

)

 

Cash paid for income taxes(b)

 

 

 

66.7

 

 

 

 

50.2

 

 

 

 

67.4

 

 

 

 

60.3

 

 

 

 

55.3

 


 

 

(a)

 

 

 

Fiscal 2011 data includes results from the acquisitions of TJOY Holdings Co., Ltd. (“TJoy”), Dr. Scheller Cosmetics AG (“Dr. Scheller”), OPI Products, Inc. (“OPI”), and Philosophy Acquisition Company, Inc. (“Philosophy”) (collectively, “2011 Acquisitions”). See Note 4, “Acquisitions,” in our notes to Consolidated Financial Statements, for additional disclosures related to the acquisitions’ results and pro forma financial data.

11


 

(b)

 

 

 

As a result of U.S. losses that offset foreign income, we generated a pretax loss and a net tax benefit in our provision for income taxes in fiscal 2012. Cash paid for income taxes exceeded this amount, primarily due to taxes paid in profitable foreign jurisdictions that could not be offset against U.S. losses. Cash paid for income taxes was less than the provision for income taxes in fiscal 2011 and in the nine months ended March 31, 2013 and 2012, primarily as we obtain an ongoing annual tax benefit through fiscal 2022 of approximately $23.8 million from the amortization of goodwill and other intangible assets for tax purposes associated with the 2011 acquisitions of OPI and Philosophy and from the utilization of net operating losses in the United States and Germany. The benefits of $138.5 million and $26.1 million as of June 30, 2012 associated with net operating losses in the United States and Germany, respectively, will be realized as income is earned in such jurisdictions.

 

 

 

 

 

 

 

 

 

(in millions)

 

As of
March 31,

 

As of June 30,

 

2013

 

2012

 

2011

 

2010

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

Cash and cash equivalents(a)

 

 

$

 

782.9

 

 

 

$

 

609.4

 

 

 

$

 

510.8

 

 

 

$

 

387.5

 

Total assets

 

 

 

6,328.0

 

 

 

 

6,183.4

 

 

 

 

6,813.9

 

 

 

 

3,781.8

 

Total debt

 

 

 

2,533.6

 

 

 

 

2,460.3

 

 

 

 

2,622.4

 

 

 

 

1,416.0

 

Total Coty Inc. stockholders’ equity

 

 

 

1,100.9

 

 

 

 

857.2

 

 

 

 

1,361.9

 

 

 

 

419.7

 


 

(a)

 

 

 

In May 2013, we paid $113.8 million in cash related to stock option exercises and common stock redemptions. See Note 16, “Subsequent Events” in our Condensed Consolidated Financial Statements for further information.

Other Non-GAAP Financial Data:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011

 

2010

Adjusted Operating Income

 

 

$

 

527.4

 

 

 

$

 

524.3

 

 

 

$

 

535.9

 

 

 

$

 

432.4

 

 

 

$

 

284.4

 

Adjusted Net Income Attributable to Coty Inc.

 

 

 

313.3

 

 

 

 

303.0

 

 

 

 

300.7

 

 

 

 

235.0

 

 

 

 

153.4

 

Adjusted Net Income Attributable to Coty Inc. per Common Share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.82

 

 

 

$

 

0.82

 

 

 

$

 

0.81

 

 

 

$

 

0.71

 

 

 

$

 

0.55

 

Diluted

 

 

 

0.79

 

 

 

 

0.79

 

 

 

 

0.78

 

 

 

 

0.69

 

 

 

 

0.55

 

Non-GAAP Financial Measures

Adjusted Operating Income, Adjusted Income Before Income Taxes, Adjusted Net Income Attributable to Coty Inc. and Adjusted Net Income Attributable to Coty Inc. per Common Share are non-GAAP financial measures which we believe better enable management and investors to analyze and compare 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, Adjusted Income Before Income Taxes, Adjusted Net Income Attributable to Coty Inc. and Adjusted Net Income Attributable to Coty Inc. per Common Share 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

12


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.

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 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 awards granted in fiscal 2012 and 2011. Vesting of the special incentive awards is dependent upon the occurrence of (i) an initial public offering within five years of the grant date, or (ii) if an initial public offering has not occurred on the fifth anniversary of the grant date, upon achievement of a target fair value of our share price and the completion of five years of service subsequent to the grant date. During the nine months ended March 31, 2013, the target fair value of our share price was achieved. We currently use liability plan accounting to measure share-based compensation expense in the Consolidated Statements of Operations to the extent the holders have not retained the risks and rewards of share ownership for a reasonable period of time, as determined under applicable accounting guidance. Once the holders have retained these risks and rewards for a reasonable period of time, generally deemed to be a period of six months from vesting and issuance, the liability recorded in our Consolidated Balance Sheets is reclassified as redeemable common stock at fair value. Subsequent changes in fair value of the shares classified as redeemable common stock are recognized in retained earnings or, in the absence of retained earnings, in additional paid-in capital. We currently use equity plan accounting to measure the performance of the segments and we will use it to measure share-based compensation expense 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 certain acquisition accounting impacts; and

 

 

 

 

other adjustments that we believe investors may find useful.

13


Reconciliation of Operating Income (Loss) to Adjusted Operating Income:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months
Ended March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011

 

2010

Reported Operating Income (Loss)

 

 

$

 

418.3

 

 

 

$

 

275.9

 

 

 

$

 

(209.5

)

 

 

 

$

 

280.9

 

 

 

$

 

184.5

 

% of Net revenues

 

 

 

11.7

%

 

 

 

 

7.7

%

 

 

 

 

(4.5

%)

 

 

 

 

6.9

%

 

 

 

 

5.3

%

 

Share-based compensation expense adjustment(a)

 

 

 

89.1

 

 

 

 

108.6

 

 

 

 

109.9

 

 

 

 

64.9

 

 

 

 

47.3

 

 

 

 

 

 

 

 

 

 

 

 

Reported Operating Income (Loss) adjusted for share-based compensation adjustment

 

 

$

 

507.4

 

 

 

$

 

384.5

 

 

 

$

 

(99.6

)

 

 

 

$

 

345.8

 

 

 

$

 

231.8

 

% of Net revenues

 

 

 

14.1

%

 

 

 

 

10.7

%

 

 

 

 

(2.2

%)

 

 

 

 

8.5

%

 

 

 

 

6.7

%

 

Other adjustments:

 

 

 

 

 

 

 

 

 

 

Asset impairment charges(b)

 

 

 

1.5

 

 

 

 

102.0

 

 

 

 

575.9

 

 

 

 

 

 

 

 

5.3

 

Acquisition-related costs(c)

 

 

 

9.4

 

 

 

 

16.6

 

 

 

 

18.7

 

 

 

 

46.8

 

 

 

 

5.2

 

Business structure realignment programs(d)

 

 

 

5.0

 

 

 

 

9.9

 

 

 

 

12.9

 

 

 

 

7.2

 

 

 

 

11.5

 

Real estate consolidation program(e)

 

 

 

16.1

 

 

 

 

6.8

 

 

 

 

12.4

 

 

 

 

 

 

 

 

 

Restructuring costs(f)

 

 

 

3.1

 

 

 

 

3.9

 

 

 

 

11.1

 

 

 

 

30.5

 

 

 

 

30.6

 

Public entity preparedness costs(g)

 

 

 

4.2

 

 

 

 

0.6

 

 

 

 

4.5

 

 

 

 

2.1

 

 

 

 

 

Gain on sale of asset(h)

 

 

 

(19.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other adjustments to Reported Operating Income (Loss)

 

 

 

20.0

 

 

 

 

139.8

 

 

 

 

635.5

 

 

 

 

86.6

 

 

 

 

52.6

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Operating Income

 

 

$

 

527.4

 

 

 

$

 

524.3

 

 

 

$

 

535.9

 

 

 

$

 

432.4

 

 

 

$

 

284.4

 

 

 

 

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

14.7

%

 

 

 

 

14.6

%

 

 

 

 

11.6

%

 

 

 

 

10.6

%

 

 

 

 

8.2

%

 


 

 

(a)

 

 

 

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 option awards and director-owned and employee-owned shares, restricted shares and restricted stock units and (ii) all costs associated with the special incentive awards granted in fiscal 2012 and 2011. Vesting of the special incentive awards is dependent upon the occurrence of (i) an initial public offering within five years of the grant date, or (ii) if an initial public offering has not occurred on the fifth anniversary of the grant date, upon achievement of a target fair value of our share price and the completion of five years of service subsequent to the grant date. During the nine months ended March 31, 2013, the target fair value of our share price was achieved. We currently use liability plan accounting to measure share-based compensation expense in the Consolidated Statements of Operations to the extent the holders have not retained the risks and rewards of share ownership for a reasonable period of time, as determined under applicable accounting guidance. Once the holders have retained these risks and rewards for a reasonable period of time, generally deemed to be a period of six months from vesting and issuance, the liability recorded in our Consolidated Balance Sheets is reclassified as redeemable common stock at fair value.

 

 

 

 

 

Subsequent changes in fair value of the shares classified as redeemable common stock are recognized in retained earnings or, in the absence of retained earnings, in additional paid-in capital. We currently use equity plan accounting to measure the performance of the segments and we will use it to measure share-based compensation expense following the completion of our initial public offering. These amounts are included in selling, general and administrative expenses in the 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, 2013 and 2012 and for fiscal 2012, 2011 and 2010.

 

(b)

 

 

 

Charges related to impairments of certain property and equipment and intangible assets. These amounts are included in asset impairment charges in the Consolidated Statements of Operations in the Skin & Body Care and Color Cosmetics segments and in Corporate. In addition, in the fourth quarter of fiscal 2012, we recorded an impairment charge of $473.9 million, primarily related to goodwill ($384.4 million) and certain trademarks ($89.1 million) resulting in total asset impairment charges of $575.9 million in fiscal 2012. Refer to “Adjusted Operating Income—Asset Impairment Charges” in “Management’s Discussion and Analysis of Financial Condition and

14


 

 

 

 

Results of Operations” for the nine months ended March 31, 2013 and 2012 and for fiscal 2012, 2011 and 2010.

 

(c)

 

 

 

Charges related to transaction costs, integration costs and acquisition accounting impacts for the 2011 Acquisitions, certain due diligence and acquisition-related costs incurred in connection with certain completed and/or currently contemplated acquisition offers, contemplated acquisition offers that were withdrawn and the acquisition of the Russian distribution business in fiscal 2010. Transaction costs of $8.7 million and $8.4 million for the nine months ended March 31, 2013 and 2012, respectively and $10.3 million, $18.4 million and $5.2 million for fiscal 2012, 2011 and 2010, respectively, were recorded as acquisition-related costs in the Consolidated Statements of Operations in Corporate. Integration costs of $0.7 million and $7.7 million for the nine months ended March 31, 2013 and 2012, respectively and $7.9 million and $8.1 million for fiscal 2012 and 2011, respectively, were recorded as acquisition-related costs, selling, general and administrative expenses and amortization expense in the Consolidated Statements of Operations in Corporate. Charges of $0.5 million for the nine months ended March 31, 2012 and $0.5 million and $20.3 million for fiscal 2012 and 2011, respectively, related to acquisition accounting impacts of revaluation of acquired inventory were recorded in cost of sales in the Consolidated Statements of Operations in Corporate. Acquisition-related costs include items in addition to what is recorded in acquisition-related costs in the Consolidated Statements of Operations. Additional items include internal integration costs and acquisition accounting impacts. 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, 2013 and 2012 and for fiscal 2012, 2011 and 2010.

 

(d)

 

 

 

Charges related to structural reorganization in Geneva, accelerated depreciation resulting from a change in the estimated useful life of a manufacturing facility, the buy-back of distribution rights for a brand in selected EMEA markets, position eliminations in certain administrative functions and certain other programs in North America. We incurred costs related to structural reorganization in Geneva of $0.7 million and $4.4 million for the nine months ended March 31, 2013 and 2012, respectively, and $7.0 million, $1.6 million and $1.0 million for fiscal 2012, 2011 and 2010, respectively. We incurred accelerated depreciation charges of $5.6 million and $10.5 million for fiscal 2011 and 2010, respectively. We incurred $4.5 million of costs in the nine months ended March 31, 2012 and $4.5 million of costs in fiscal 2012 related to the buy-back of certain distribution rights in selected EMEA markets. We incurred $2.2 million of costs in the nine months ended March 31, 2013 related to position eliminations in certain administrative functions. We incurred $2.1 million and $1.0 million of costs in the nine months ended March 31, 2013 and 2012, respectively, and $1.4 million of costs in fiscal 2012 related to certain other programs in North America. These amounts are included in selling, general and administrative expenses in the 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, 2013 and 2012 and for fiscal 2012, 2011 and 2010.

 

(e)

 

 

 

Charges related to the consolidation of real estate in New York. These amounts are included in selling, general and administrative expenses in the 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, 2013 and 2012 and for fiscal 2012, 2011 and 2010. We expect to continue to incur additional costs associated with the consolidation of real estate in New York during the remainder of fiscal 2013 and in fiscal 2014. We expect the real estate consolidation program to be completed in fiscal 2014.

 

(f)

 

 

 

Charges related to restructuring programs which primarily reflect employee-related costs, contract terminations and other exit charges. These amounts are included in restructuring costs in the 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, 2013 and 2012 and for fiscal 2012, 2011 and 2010.

15


 

(g)

 

 

 

Charges related to public entity preparedness costs, which primarily consist of consulting, audit, legal, filing and printing costs associated with preparation and filing of the registration statement, preparation for public entity reporting requirements and Sarbanes-Oxley compliance. These amounts are included in selling, general and administrative expenses in the Consolidated Statements of Operations in Corporate. Refer to “Adjusted Operating Income—Public Entity Preparedness Costs” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2013 and 2012 and for fiscal 2012, 2011 and 2010.

 

(h)

 

 

 

Gain related to the termination of one of our licenses by mutual agreement with the original licensor. This gain was recorded in gain on sale of asset in the Consolidated Statements of Operations and was included in Corporate. Refer to “Adjusted Operating Income—Gain on Sale of Asset” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the nine months ended March 31, 2013 and 2012.

Reconciliation of Reported Income (Loss) Before Income Taxes to Adjusted Income Before Income Taxes and Effective Tax Rates:

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31, 2013

 

Nine Months Ended
March 31, 2012

 

Income
Before
Income
Taxes

 

Provision
for Income
Taxes

 

Effective
Tax Rate

 

Income
Before
Income
Taxes

 

Provision
(Benefit)
for Income
Taxes

 

Effective
Tax Rate

Reported Income Before Income Taxes

 

 

$

 

363.4

 

 

 

$

 

105.3

 

 

 

 

29.0

%

 

 

 

$

 

172.5

 

 

 

$

 

114.5

 

 

 

 

66.4

%

 

Share-based compensation expense adjustment(a)

 

 

 

89.1

 

 

 

 

23.9

 

 

 

 

 

 

108.6

 

 

 

 

(20.1

)

 

 

 

Other adjustments to Operating Income(a)

 

 

 

20.0

 

 

 

 

2.2

 

 

 

 

 

 

139.8

 

 

 

 

40.1

 

 

 

Other adjustments(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

45.9

 

 

 

 

13.2

 

 

 

Tax impact on foreign income inclusion(c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Income Before Income Taxes(e)

 

 

$

 

472.5

 

 

 

$

 

131.4

 

 

 

 

27.8

%

 

 

 

$

 

466.8

 

 

 

$

 

138.7

 

 

 

 

29.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30, 2012

 

Year Ended June 30, 2011

 

(Loss)
Income
Before
Income
Taxes

 

Provision
(Benefit)
for Income
Taxes

 

Effective
Tax Rate

 

Income
Before
Income
Taxes

 

Provision
(Benefit)
for Income
Taxes

 

Effective
Tax Rate

Reported (Loss) Income Before Income Taxes

 

 

$

 

(331.1

)

 

 

 

$

 

(37.8

)

 

 

 

 

11.4

%

 

 

 

$

 

185.0

 

 

 

$

 

95.1

 

 

 

 

51.4

%

 

Share-based compensation expense adjustment(a)

 

 

 

109.9

 

 

 

 

12.0

 

 

 

 

 

 

64.9

 

 

 

 

14.4

 

 

 

Other adjustments to Operating Income(a)

 

 

 

635.5

 

 

 

 

152.2

 

 

 

 

 

 

86.6

 

 

 

 

26.9

 

 

 

Other adjustments(b)

 

 

 

44.4

 

 

 

 

15.4

 

 

 

 

 

 

9.1

 

 

 

 

1.9

 

 

 

Tax impact on foreign income inclusion(c)

 

 

 

 

 

 

 

(14.9

)

 

 

 

 

 

 

 

 

 

 

(41.9

)

 

 

 

Tax impact on intercompany borrowing(d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Income Before Income Taxes(e)

 

 

$

 

458.7

 

 

 

$

 

126.9

 

 

 

 

27.7

%

 

 

 

$

 

345.6

 

 

 

$

 

82.4

 

 

 

 

23.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(a)

 

 

 

See “Reconciliation of Operating Income (Loss) to Adjusted Operating Income.”

 

(b)

 

 

 

See “Reconciliation of Net Income (Loss) Attributable to Coty Inc. to Adjusted Net Income Attributable to Coty Inc.”

 

(c)

 

 

 

Reflects an adjustment to our tax provision equal to the tax expense associated with certain foreign income that was subject to tax in the U.S. during fiscal 2011 under the provisions of Internal Revenue Code Sections 951 through 954 (“Subpart F”), but that should no longer be

16


 

 

 

 

subject to Subpart F as a result of structural changes in our organization. This change is reflected in the provision for income taxes in the Consolidated Statements of Operations for periods following its implementation.

 

(d)

 

 

 

Reflects tax expense associated with short-term intercompany borrowing arrangements entered into between us and certain foreign subsidiaries during fiscal 2011 in connection with unanticipated acquisition and other opportunities. These amounts are included in provision for income taxes in the Consolidated Statements of Operations.

 

(e)

 

 

 

Cash paid and payable for income taxes for fiscal 2012 is less than the provision for income taxes for Adjusted Income Before Income Taxes primarily due to tax benefits associated with the amortization of goodwill and other intangible assets for the 2011 acquisitions of OPI and Philosophy of $23.8 million and utilization of net operating losses in the United States and Germany of $16.6 million.

The annual current tax benefit associated with the amortization of goodwill and other intangible assets for OPI and Philosophy is approximately $23.8 million through fiscal 2022. This tax benefit is not reflected in Adjusted Income Before Income Taxes. Under GAAP, the amortization of goodwill for tax purposes also creates a temporary difference that we must reflect as a deferred tax liability. However, this liability will only become a tax payable in the event we divest of the OPI or Philosophy businesses. Management has no intention to divest these businesses in the foreseeable future. This tax benefit approximated 4% of our Adjusted Income Before Income Taxes for the nine months ended March 31, 2013 and 2012, and 5% for the year ended June 30, 2012. Tax benefits of $138.5 million and $26.1 million as of June 30, 2012, associated with net operating losses in the United States and Germany, respectively, will be realized as income is earned in such jurisdictions.

Adjusted Net Income and Net Income per Common Share 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 (income) expense, 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.

Adjusted basic and diluted Net Income Attributable to Coty Inc. per Common Share is calculated as:

 

 

 

 

Adjusted Net Income Attributable to Coty Inc. divided by

 

 

 

 

Adjusted weighted-average basic and diluted common shares using the treasury stock method.

Reconciliation of Net Income (Loss) Attributable to Coty Inc. to Adjusted Net Income Attributable to Coty Inc.:

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months
Ended March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011

 

2010

Reported Net Income (Loss) Attributable to Coty Inc.  

 

 

$

 

230.3

 

 

 

$

 

32.9

 

 

 

$

 

(324.4

)

 

 

 

$

 

61.7

 

 

 

$

 

61.7

 

% of Net revenues

 

 

 

6.4

%

 

 

 

 

0.9

%

 

 

 

(7.0

%)

 

 

 

 

1.5

%

 

 

 

 

1.8

%

 

Share-based compensation expense adjustment(a)

 

 

 

89.1

 

 

 

 

108.6

 

 

 

 

109.9

 

 

 

 

64.9

 

 

 

 

47.3

 

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

 

 

 

(23.9

)

 

 

 

 

20.1

 

 

 

 

(12.0

)

 

 

 

 

(14.4

)

 

 

 

 

(10.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) adjusted for share-based compensation expense adjustment

 

 

 

295.5

 

 

 

 

161.6

 

 

 

 

(226.5

)

 

 

 

 

112.2

 

 

 

 

98.8

 

% of Net revenues

 

 

 

8.2

%

 

 

 

 

4.5

%

 

 

 

 

(4.9

%)

 

 

 

 

2.7

%

 

 

 

 

2.8

%

 

Other adjustments to Reported Net Income (Loss) Attributable to Coty Inc.:

 

 

 

 

 

 

 

 

 

 

Other adjustments to Operating Income(a)

 

 

 

20.0

 

 

 

 

139.8

 

 

 

 

635.5

 

 

 

 

86.6

 

 

 

 

52.6

 

Loss on foreign currency contract(c)

 

 

 

 

 

 

 

37.4

 

 

 

 

37.4

 

 

 

 

 

 

 

 

 

Acquisition-related interest expense(d)

 

 

 

 

 

 

 

8.5

 

 

 

 

7.0

 

 

 

 

9.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months
Ended March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011

 

2010

Total other adjustments to Reported Net Income (Loss) Attributable to Coty Inc.

 

 

 

20.0

 

 

 

 

185.7

 

 

 

 

679.9

 

 

 

 

95.7

 

 

 

 

52.6

 

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

 

 

 

(2.2

)

 

 

 

 

(53.3

)

 

 

 

 

(167.6

)

 

 

 

 

(28.8

)

 

 

 

 

(18.8

)

 

Tax impact on foreign income inclusion(e)

 

 

 

 

 

 

 

9.0

 

 

 

 

14.9

 

 

 

 

41.9

 

 

 

 

45.3

 

Tax impact on intercompany borrowing(f)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14.0

 

 

 

 

(24.5

)

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Income Attributable to Coty Inc.(h)  

 

 

$

 

313.3

 

 

 

$

 

303.0

 

 

 

$

 

300.7

 

 

 

$

 

235.0

 

 

 

$

 

153.4

 

 

 

 

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

8.7

%

 

 

 

 

8.4

%

 

 

 

 

6.5

%

 

 

 

 

5.8

%

 

 

 

 

4.4

%

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

Adjusted weighted-average common shares(g)

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

381.2

 

 

 

 

371.5

 

 

 

 

373.0

 

 

 

 

329.4

 

 

 

 

280.2

 

Diluted

 

 

 

396.7

 

 

 

 

381.8

 

 

 

 

384.6

 

 

 

 

339.1

 

 

 

 

280.2

 

Adjusted Net Income Attributable to Coty Inc. per Common Share(h):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.82

 

 

 

$

 

0.82

 

 

 

$

 

0.81

 

 

 

$

 

0.71

 

 

 

$

 

0.55

 

Diluted

 

 

 

0.79

 

 

 

 

0.79

 

 

 

 

0.78

 

 

 

 

0.69

 

 

 

 

0.55

 


 

 

(a)

 

 

 

See “Reconciliation of Operating Income (Loss) to Adjusted Operating Income.”

 

(b)

 

 

 

Reflects an adjustment to our tax provision equal to the net interim tax expense attributable to share based compensation in the nine months ended March 31, 2013 and 2012. In accordance with ASC 740 (“Accounting for Income Taxes”), we record our provision for income taxes using our annual effective tax rate (“AETR”), which is calculated utilizing the latest available information at each interim period. The tax adjustments reflected in this table apply a normalized AETR that has been recalculated to take into account the adjustments to operating income and determine what our rate would have been had these items not occurred. The actual tax rate applicable to each individual adjustment to operating income is different than the normalized AETR presented herein.

 

(c)

 

 

 

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

 

(d)

 

 

 

Interest expense for the nine months ended March 31, 2012 and for fiscal 2012 associated with the obligations related to the purchase of TJoy. For 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 $700.0 million 90-day credit facility for the 2011 Acquisitions. These amounts are included in interest expense, net in the Consolidated Statements of Operations.

 

(e)

 

 

 

Reflects an adjustment to our tax provision equal to the tax expense associated with certain foreign income that was subject to tax in the U.S. during fiscal 2011 and 2010 under the provisions of Internal Revenue Code Sections 951 through 954 (“Subpart F”), but that should no longer be subject to Subpart F as a result of structural changes in our organization. Effective fiscal 2012, we created a fragrance “Center of Excellence” for research and development and also centralized global supply chain management in Geneva, Switzerland. As a result of these changes to our organizational and management structure, Subpart F should no longer apply to income associated with our operations in Geneva and, accordingly, tax expense associated with certain foreign-based income will be reduced in the future. This change is reflected in the provision for income taxes in the Consolidated Statements of Operations for periods following its implementation.

 

(f)

 

 

 

Reflects tax expense associated with the short-term intercompany borrowing arrangements entered into between us and certain foreign subsidiaries during fiscal 2011 and 2009 in connection with unanticipated acquisition and other opportunities. Under the provisions of Internal Revenue Code Sections 951 through 956, these short-term borrowings were considered a deemed dividend and resulted in a tax expense of $14.0 million and $35.2 million in fiscal 2011 and 2009,

18


 

 

 

 

respectively. In fiscal 2010, a portion of the 2009 short-term borrowing was repaid, resulting in a tax benefit of $24.5 million. Both fiscal 2011 and 2009 borrowings have been repaid in full. The 2011 tax expenses and 2010 tax benefit are described in further detail in Note 14, “Income Taxes” to the Consolidated Financial Statements and are included in provision for income taxes in the Consolidated Statements of Operations.

 

(g)

 

 

 

For all periods presented the adjusted number of common shares used to calculate non-GAAP adjusted basic and diluted net income attributable to Coty Inc. per common share is identical to the number of common and diluted shares used to calculate GAAP net income (loss) per common share, except for fiscal 2012. For fiscal 2012, using the treasury stock method, the number of adjusted diluted common shares to calculate non-GAAP adjusted diluted net income per common share was 11.6 million higher than the number of common shares used to calculate GAAP diluted net loss per common share, due to the potentially dilutive effect of certain securities issuable under our share-based compensation plans, which were considered anti-dilutive for calculating GAAP diluted net loss per common share.

 

(h)

 

 

 

The annual current tax benefit associated with the amortization of goodwill and other intangible assets for OPI and Philosophy is approximately $23.8 million through fiscal 2022. This tax benefit is not reflected in Adjusted Net Income Attributable to Coty Inc. The impact of this tax benefit per share was $0.05 for the nine months ended March 31, 2013 and 2012, and $0.06 for the year ended June 30, 2012. Based on the number of outstanding shares at March 31, 2013, the impact will remain $0.06 per share through 2022.

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 currency 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
Annual
Growth
Rate

 

2012

 

2011

 

2010

 

2012/2011

 

2011/2010

Reported Net revenues

 

 

$

 

4,611.3

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

 

13

%

 

 

 

 

17

%

 

 

 

 

16

%

 

Revenues generated from 2011 Acquisitions

 

 

 

600.7

 

 

 

 

339.7

 

 

 

 

 

 

 

 

77

%

 

 

 

 

N/A

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues (excluding revenues related to 2011 Acquisitions)

 

 

$

 

4,010.6

 

 

 

$

 

3,746.4

 

 

 

$

 

3,482.9

 

 

 

 

7

%

 

 

 

 

8

%

 

 

 

 

8

%

 

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

 

 

$

 

4,030.6

 

 

 

$

 

3,743.0

 

 

 

$

 

3,482.9

   

 

 

8

%(b)

 

 

 

 

7

%

 

 

 

 

8

%

 


 

 

(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.

 

(b)

 

 

 

Excluding net revenues related to the 2011 Acquisitions, or $308.3 million, from only the first half of fiscal 2012, our net revenues at constant rates were $4,331.1 million compared to $4,044.5 million for the years ended June 30, 2012 and 2011, respectively, representing an annual growth rate of 7%.

19


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

20


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 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 have been subject to impairment and may continue to be subject

21


to impairment in the future” and “—The purchase price of future acquisitions may not be representative of the operations acquired.” Our failure to achieve intended 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. The assumptions we use to evaluate acquisition opportunities may not prove to be accurate, and intended benefits may not be realized. In addition, 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 and regulatory 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.

Although we have implemented policies and procedures designed to ensure compliance with anti-bribery laws, trade controls and economic sanctions, and similar regulations, 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 occur, which could have an adverse effect on our business and reputation.

The United States has imposed export controls and economic sanctions that prohibit export or re-export of products subject to U.S. jurisdiction to specified end users and destinations, and/or prohibit U.S. companies and other U.S. persons from engaging in business activities with certain persons, entities, countries or governments that it determines are adverse to U.S. foreign policy interests, including Iran and Syria. In 2012, we determined that our majority-owned subsidiary in the United Arab Emirates (“UAE”) had re-exported certain of our products manufactured in the U.S. to Syria, which may have been in violation of U.S. export control laws. We have taken remedial action to cease further sales to Syria. See “Legal Proceedings” for additional information regarding such sales and the status of the U.S. Department of Commerce’s Bureau of Industry and Security’s Office of Export Enforcement (“OEE”) investigation and “—We may incur penalties and experience other adverse effects on our business as a result of possible EAR violations” for additional information regarding risks related to such sales. In addition, some of the affiliate’s Syria sales were made to a party that was designated as a target of U.S. economic sanctions by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). We have also recently determined that

22


the same affiliate had re-exported some of our products to Iran through an intermediary UAE entity. We ceased all sales to the OFAC-designated party in January 2010 and have taken measures to cease all sales to Iran, Syria and OFAC-designated parties. We do not believe these sales constituted a violation of U.S. trade sanctions administered by OFAC. We may experience reputational harm and increased regulatory scrutiny as a result of our subsidiary’s sales to Syria and Iran. In addition, the U.S. may impose additional sanctions at any time on other countries where we sell our products. If so, our existing activities may be adversely affected, or we may incur costs in order to come into compliance with future sanctions, depending on the nature of any further sanctions that may be imposed.

Under U.S. law, U.S. companies and their controlled-in-fact foreign subsidiaries and affiliates are prohibited from participating in unsanctioned foreign boycotts. Currently, the United States considers the Arab League boycott of Israel to constitute an unsanctioned foreign boycott. In the course of our internal investigation into compliance with U.S. export laws by our majority-owned subsidiary in the UAE, we determined that the subsidiary may have violated U.S. anti-boycott laws by certifying on invoices (including some that involved goods manufactured in the United States) that the orders did not contain any materials of Israeli origin. See “—We may incur penalties and experience other adverse effects on our business as a result of possible EAR violations” for additional information regarding risks related to such certifications.

In addition, 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 persons to engage in business practices prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act (“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 by us and our subsidiaries to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our business, financial condition, cash flows and results of operations.

We may incur penalties and experience other adverse effects on our business as a result of possible EAR violations.

In 2012, we determined that our majority-owned subsidiary in the UAE had re-exported certain of our products to Syria in transactions that may constitute violations of the U.S. Export Administration Regulations (“EAR”) enforced by the OEE. We voluntarily reported the transactions to OEE in December 2012 and undertook remedial action to prevent any further such transactions, including auditing the subsidiary and notifying each of the subsidiary’s employees and distributors of the current U.S. sanctions and export control laws and asking that each distributor acknowledge the same. We also notified OFAC of our voluntary disclosure to the OEE.

OEE is in receipt of our initial voluntary report. Our investigation is continuing and, once we complete our review, we will supplement the initial voluntary report by filing a final disclosure with OEE. The agency is still reviewing the possible violations. The OEE investigation may take many months to complete, and we do not know when OEE will make a final determination.

In the course of our internal investigation into compliance by our majority-owned subsidiary in the UAE with U.S. export control laws, we also determined that the subsidiary may have violated EAR anti-boycott laws by including a legend on invoices confirming that the corresponding goods did not contain materials of Israeli origin. A number of the invoices involved U.S.-origin goods. We made an initial voluntary disclosure of the potential violations to the U.S. Department of Commerce, Bureau of Industry and Security, Office of Antiboycott Compliance (“OAC”) in January 2013 and undertook remedial action to prevent any further inclusion of the legends on invoices. Our investigation is continuing and we intend to submit a final voluntary disclosure to OAC when our review is complete.

Penalties for EAR violations can be significant and civil penalties can be imposed on a strict liability basis, without any showing of knowledge or willfulness. OEE and OAC each have wide discretion to settle claims for violations. We believe that a penalty or penalties that would result in a

23


material loss are reasonably possible. Irrespective of any penalty, we could suffer other adverse effects on our business as a result of any violations or the potential violations, including legal costs and harm to our reputation, and we also will incur costs associated with our efforts to improve our compliance procedures. We have not established a reserve for potential penalties. We do not know whether OEE or OAC will assess a penalty or what the amount of any penalty would be, if a penalty or penalties were assessed. See Note 15, “Commitments and Contingencies” in our notes to Condensed Consolidated Financial Statements for the nine months ended March 31, 2013.

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 (trademarks, trade dress, names and likeness, etc.) in certain fields on a worldwide and/or regional basis. As of June 30, 2012, we maintained 48 license agreements, which collectively accounted for 60% of our net revenues in fiscal 2012. In fiscal 2012, our top six licensed brands collectively accounted for 41% of our net revenues, and each represented between 3% and 17% 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,

24


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.

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.

25


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 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 have been subject to impairment and may continue to be subject to impairment in the future.

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 may result from any number of factors, including adverse changes in assumptions used for valuation purposes, such as actual or projected net revenue growth rates, profitability or discount rates, or other variables. 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. For example, during fiscal 2012, the Company recorded a $188.6 million asset impairment charge on the philosophy and TJoy trademarks due to lower than expected net revenues following their acquisition, as well as a related goodwill impairment charge of $384.4 million, each as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fiscal 2012 as Compared to Fiscal 2011 and Fiscal 2011 as Compared to Fiscal 2010—Net Revenues—Operating Income—Adjusted Operating Income—Asset Impairment Charges.”

26


The purchase price of future acquisitions may not be representative of the operations acquired.

During the past several years, we have taken advantage of selected acquisition opportunities that we believed 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. Among other acquisitions in fiscal 2011, we acquired 100% of Philosophy’s stock for $929.7 million cash, net of a $4.4 million receivable from the seller, and acquired TJoy via a stock purchase, for a total cash purchase price of RMB 2,400.0 million ($351.7 million at the January 14, 2011 date of purchase), subject to certain post-closing adjustments. Each of these acquisitions resulted in impairment charges in fiscal 2012. For Philosophy, where the trademark impairment charge was $130.6 million in fiscal 2012, reductions in our projections were caused by lower than projected net revenues in the U.S. market, due to an innovation plan that was smaller in scope and less successful than expected, and a slowdown of brand sales momentum in certain key retailers. Furthermore, the expansion of the Philosophy business into certain international markets anticipated in fiscal 2012 was delayed due to a longer than expected product registration process in certain countries, contributing significantly to a reduction in current and long-term projected net revenues of the business and its resultant fair value. We also incurred a goodwill impairment charge of $384.4 million in fiscal 2012, resulting from the events described above impacting Philosophy projections, coupled with a delay in anticipated cost savings associated with consolidating our worldwide research and development, manufacturing, distribution and marketing operations for the Philosophy business into our existing operations. For TJoy, where the trademark impairment charge was $58.0 million in fiscal 2012, our business performance was impacted by the retirement of the TJoy CEO, announced in August 2011 and effective as of December 31, 2011, and the related transition to new leadership during our third quarter of fiscal 2012. In addition, during the second and third quarters of fiscal 2012, certain key sales representatives departed with the former TJoy CEO.

We are not aware of any other impairments at this time, and we cannot accurately predict the amount and timing such impairments, if any. We may experience subsequent impairment charges with respect to goodwill, intangible assets or other items, as we did in fiscal 2012. It is possible that future acquisitions may result in acquisition of additional goodwill and/or other intangible assets. Any such goodwill or assets acquired may become subject to impairment, which would reflect that the purchase price paid or owed with respect to such acquisitions is not representative of the operations or business acquired, which could have an adverse effect on our financial condition and results of operations.

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 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

27


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 and 2013 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 credit facility or other financing arrangements, such as interest rate or foreign currency exchange hedging instruments, were to declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us. This could leave us with reduced borrowing capacity or could leave us unhedged against certain interest rate or foreign currency exposures, which could have an adverse impact on our business, 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.

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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 April 2, 2013, 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 execution of our business strategy and growth plans, including acquisitions. Should we decide to pursue an acquisition that requires financing that would result in a violation of our existing debt covenants, refusal of our current lenders to permit waivers or amendments to our existing covenants could delay or prevent consummation of our plans. This principal credit facility will expire in April 2018 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 2012 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, 2012, approximately 67% of our total net revenues, and approximately 25% 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 have affected and may in the future 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 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, certain U.S. tax provisions are due to expire within the next two years that, if not extended, 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, 2012, 2011 and 2010, cash and cash equivalents in foreign operations included $605.0 million, $505.0 million and $382.6 million, or 99.2%, 98.9% and 98.7% of aggregate cash and cash equivalents, respectively.

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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 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, the Australian dollar and the Canadian dollar. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar 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 in fiscal 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, including applicable U.S. trade sanctions, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. See “—Our operations and acquisitions in certain foreign areas expose us to political, regulatory, economic and reputational risks” and “—We may incur penalties and experience other adverse effects on our business as a result of possible EAR violations.” 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.

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Our business is subject to seasonal variability.

Our sales generally increase during our second fiscal quarter as a result of increased demand by retailers associated with the holiday season. Accordingly, our financial performance, sales, working capital requirements, cash flow and borrowings generally experience variability during the three to six months preceding the holiday period. 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 2012, 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 have been subject to impairment and may continue to be subject to impairment in the future.”

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

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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 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. For example, in the third quarter of fiscal 2013 we transitioned to a new third-party logistics provider in Europe, which negatively impacted our sales. 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

32


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 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.

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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 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.

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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, and the registration and evaluation of chemicals. Certain environmental laws and regulations also may impose liability for the costs of cleaning up 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. For example, prior to its acquisition by Coty, Del Labs sold its LaCross facility in Newark, New Jersey. The buyer gave Del Labs certain indemnities and agreed to remediate the property. Recently, Coty received a demand from the New Jersey Department of Environmental Protection to complete the remediation of the property. We are currently in discussions with the NJDEP. While there can be no assurances as to remediation costs, we do not expect the remediation to result in material expenditures. 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 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”), Parentes Holding SE (“Parentes”) and JAB Holdings B.V. 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 86.9% of our Class B common stock and, consequently, 84.9% of the combined voting power of our common stock. 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, continues 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 JAB’s obligations under the stockholders agreement. In addition, pursuant to the stockholders agreement, 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. In addition, the Class B common stock held by Berkshire and Rhône may be transferred to an unrelated third party

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if the holders of a majority of the shares of Class B common stock held by JAB and its affiliates have consented to that transfer in writing in advance.

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.

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 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

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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.

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 second Annual Report on Form 10-K, 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 second Annual Report on Form 10-K. 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 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.

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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, assuming the underwriters do not exercise their option to purchase additional shares, we will have outstanding 72,219,007 shares of Class A common stock and 310,611,513 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 57,142,857 shares of Class A common stock being sold in this offering, including any shares sold under our reserved share program, which may be resold immediately in the public market. We, our directors and officers, and substantially all of our stockholders have agreed 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.

As of May 24, 2013, 382,830,520 shares of our common stock were outstanding, all of which (other than the shares sold in this offering) are subject to restrictions on transfer, and 33,457,361 shares were issuable upon conversion of outstanding RSUs and IPO Units and exercise of outstanding options. Subject to the lapse of applicable transfer restrictions and the lock-up agreements, these shares will first become eligible for resale 180 days after the date of this prospectus except for 287,425 shares that may be sold during this 180-day restricted period pursuant to Rule 144 under the Securities Act. Sales of a substantial number of shares of our common stock could cause the market price of our Class A common stock to decline. Pursuant to a 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 81.1% of our common stock after this offering (and 95.4% of all shares not sold in this offering) or 78.9% 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.”

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 a majority of the combined voting power of our issued and outstanding capital

38


 

 

 

 

stock. This limits the ability of noncontrolling stockholders to take certain actions other than at an annual meeting of stockholders.

 

 

 

 

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 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 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 New York Stock Exchange.

Payment of dividends on our Class A common stock is entirely subject to the discretion of our Board of Directors. Our debt instruments and external factors beyond our control may limit our ability to pay dividends.

Our dividend policy has certain risks and limitations, and we cannot assure you that any dividends will be paid in the anticipated amounts and frequency set forth in this prospectus, or at all. We are not legally or contractually required to pay dividends. The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors, which retains the right to change our dividend policy at any time. Our Board of Directors may never declare a dividend, may decrease the level of dividends or may discontinue entirely the payment of dividends. Dividend payments are not mandatory or guaranteed.

39


In determining the amount of any future dividends, our Board of Directors may consider, among other factors it may deem relevant: (i) our financial condition and results of operations, (ii) our available cash and cash flows from operating activities, as well as anticipated cash requirements (including debt servicing), (iii) our capital requirements and the capital requirements of our subsidiaries, (iv) contractual, legal, tax and regulatory restrictions, including restrictions imposed by our outstanding indebtedness, if any, (v) general economic and business conditions and (vi) priority of preferred stock dividends, if any. In particular, the financial and restricted payment covenants in our credit agreement and the note purchase agreement governing our Senior Notes effectively limit our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-Term Debt.” Our operating cash flow and ability to pay dividends in compliance with these restricted payment covenants will depend on our future performance, which will be subject to prevailing economic conditions and to financial, business and other factors beyond our control. Future agreements governing our indebtedness may also limit or eliminate or ability to pay dividends.

As a result, your decision whether to purchase shares of our Class A common stock should allow for the possibility that no dividends will be paid. Any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our Class A common stock. There can be no assurance that shares of our Class A common stock will appreciate in value or even maintain the initial public offering price.

40


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

Subject to legally available funds, we intend to pay an annual cash dividend at a rate initially equal to $0.15 per share of our Class A common stock, as well as our Class B common stock, in the second fiscal quarter of each fiscal year. Our dividend policy has certain risks and limitations, and we cannot assure you that any dividends will be paid in the anticipated amounts and frequency set forth in this prospectus, or at all. Our Board of Directors retains the right to change our dividend policy at any time.

The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors. In determining the amount of any future dividends, our Board of Directors may consider, among other factors it may deem relevant: (i) our financial condition and results of operations, (ii) our available cash and cash flows from operating activities, as well as anticipated cash requirements (including debt servicing), (iii) our capital requirements and the capital requirements of our subsidiaries, (iv) contractual, legal, tax and regulatory restrictions, including restrictions imposed by our outstanding indebtedness, if any, (v) general economic and business conditions and (vi) priority of preferred stock dividends, if any. In particular, the restricted payment covenants in our credit agreement and the note purchase agreement governing our Senior Notes effectively limit our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-Term Debt.” Based on the 382,830,520 shares of common stock expected to be outstanding after the offering, an annual cash dividend at a rate equal to $0.15 per share would require approximately $57.4 million in cash per year.

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 was paid or is payable, as applicable, upon vesting of shares of restricted stock and settlement of restricted stock units that had not vested as of June 28, 2011.

On November 8, 2012, our Board of Directors declared a cash dividend of 15 cents per share, or approximately $57.8 million, on our common stock, of which $57.4 million was paid on December 10, 2012. The remaining $0.4 million is payable upon vesting of shares of restricted stock and settlement of restricted stock units that had not vested as of December 10, 2012.

41


CAPITALIZATION

The following table sets forth our cash and cash equivalents, and our total capitalization as of March 31, 2013:

 

 

 

 

on an actual basis; and

 

 

 

 

on an as adjusted basis to give effect to the impact of the initial public offering on our share-based plan award and other stock-related activities as follows:

 

 

 

 

an increase in accumulated deficit of $31.1 million, net of tax, relating to the share-based award 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 and other share-based compensation activity as discussed in note (a) to the table below;

 

 

 

 

an increase in additional paid-in capital of $465.3 million as a result of the reclassification of the share based compensation liability of $245.3 million (reflected in Accrued expenses and other current liabilities and Other noncurrent liabilities on our Consolidated Balance Sheets) and redeemable common stock of $220.0 million, to reflect the transition from liability plan accounting to equity plan accounting for our share-based plans upon completion of our initial public offering as discussed in note (a) to the table below;

 

 

 

 

a reduction in cash and cash equivalents of $113.8 million, reflecting stock option exercises and common stock redemptions that occurred in May 2013 (see Note 16, “Subsequent Events” in our Condensed Consolidated Financial Statements for further information), as well as a corresponding reduction in accrued expenses and other current liabilities not reflected in total capitalization;

 

 

 

 

a retirement of our treasury stock that occurred in April 2013 (see Note 16, “Subsequent Events” in our Condensed Consolidated Financial Statements for further information) that resulted in a reduction of our common stock and additional paid-in capital of $106.9 million; and

 

 

 

 

a decrease in common stock and increase in Class A and B common stock to reflect an automatic conversion at closing of the initial public offering of our common stock held immediately prior to the offering into shares of Class A and B common stock as discussed in note (e) to the table below.

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. 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, 2013

 

Actual

 

As adjusted(a)(b)

 

 

(in millions, except per share data)

Cash and cash equivalents

 

 

$

 

782.9

   

$

 

669.1

 

 

 

 

 

 

Debt:(c)

 

 

 

 

Short-term debt

 

 

$

 

42.2

   

$

 

42.2

 

Credit Facility

 

 

 

1,991.3

   

 

1,991.3

 

Senior Notes

 

 

 

500.0

   

 

500.0

 

Capital Lease Obligations

 

 

 

0.1

   

 

0.1

 

 

 

 

 

 

Total Debt

 

 

 

2,533.6

   

 

2,533.6

 

Redeemable common stock

 

 

 

220.0

   

 

 

Redeemable noncontrolling interests

 

 

 

114.6

   

 

114.6

 

 

 

 

 

 

 

 

 

 

42


 

 

 

 

 

 

 

As of March 31, 2013

 

Actual

 

As adjusted(a)(b)

 

 

(in millions, except per share data)

Equity:

 

 

 

 

Common stock, $0.01 par value, 800.0 shares authorized, 400.4 shares issued and 382.8 outstanding, actual(d); nil, as adjusted

 

 

 

4.0

   

 

 

Class A common stock, $0.01 par value, 800.0 shares authorized, 72.2 shares issued and outstanding, as adjusted(d)

 

 

 

   

 

0.7

 

Class B common stock, $0.01 par value, 367.8 shares authorized, 310.6 shares issued and outstanding, as adjusted(d)

 

 

 

   

 

3.1

 

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

 

 

 

   

 

 

Additional paid-in capital

 

 

 

1,475.3

   

 

1,833.9

 

Accumulated deficit

 

 

 

(160.0

)

 

 

 

(191.1

)

 

Accumulated other comprehensive loss

 

 

 

(129.4

)

 

 

 

(129.4

)

 

Treasury stock

 

 

 

(106.9

)

 

 

 

 

 

 

 

 

 

Total Coty Inc. stockholders’ equity

 

 

 

1,083.0

   

 

1,517.2

 

Noncontrolling interests

 

 

 

17.9

   

 

17.9

 

 

 

 

 

 

Total equity

 

 

 

1,100.9

   

 

1,535.1

 

 

 

 

 

 

Total Capitalization

 

 

$

 

3,969.1

   

 

$

 

4,183.3

 

 

 

 

 

 


 

(a)

 

 

 

The as adjusted data as of March 31, 2013 presents our cash and cash equivalents and total capitalization, and gives effect to the transition from liability plan accounting to equity plan accounting for our share-based plans. The effect includes the recognition of (1) share-based compensation expense of $31.1 million, net of tax, which will be recognized as an expense between April 1, 2013 and the completion of our initial public offering under liability plan 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 other share-based compensation activity, and (2) an increase to additional paid-in capital of $465.3 million as a result of the reclassification of the share-based compensation liability of $245.3 million and redeemable common stock of $220.0 million to reflect the transition from liability plan accounting to equity plan accounting for our share-based plans upon completion of our 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 $17.50 per share would have no net effect on total stockholders’ equity or total capitalization. However, additional paid-in capital and accumulated deficit would each increase (decrease) by approximately $14.4 million, net of tax, assuming the number of shares offered by the selling stockholders, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions.

 

(c)

 

 

 

In April 2013, we refinanced our existing Credit Agreement that was scheduled to expire on August 22, 2015. This refinancing had no impact on our outstanding debt balances reflected in the table above. See Note 16, “Subsequent Events” in our Condensed Consolidated Financial Statements for further information.

 

(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 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.

43


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 and Consolidated Cash Flows Data for the years ended June 30, 2012, 2011 and 2010 and the Consolidated Balance Sheet Data as of June 30, 2012 and 2011 from our audited Consolidated Financial Statements included elsewhere in this prospectus. The Consolidated Statement of Operations Data and Consolidated Cash Flows Data for the nine months ended March 31, 2013 and 2012 and the Consolidated Balance Sheet Data as of March 31, 2013 have been derived from our unaudited Condensed Consolidated Financial Statements appearing elsewhere in this prospectus. The Consolidated Statements of Operations Data and Consolidated Cash Flows Data for the years ended June 30, 2009 and 2008 and the Consolidated Balance Sheet Data as of June 30, 2010, 2009 and 2008 have been derived from our consolidated financial statements that 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 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,

 

2013

 

2012

 

2012

 

2011(a)

 

2010

 

2009

 

2008(b)

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

3,590.3

 

 

 

$

 

3,587.9

 

 

 

$

 

4,611.3

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

$

 

3,379.3

 

 

 

$

 

3,821.5

 

Gross profit

 

 

 

2,168.4

 

 

 

 

2,164.3

 

 

 

 

2,787.3

 

 

 

 

2,446.1

 

 

 

 

2,009.7

 

 

 

 

1,857.9

 

 

 

 

2,253.3

 

Asset impairment charges

 

 

 

1.5

 

 

 

 

102.0

 

 

 

 

575.9

 

 

 

 

 

 

 

 

5.3

 

 

 

 

23.6

 

 

 

 

25.5

 

Operating income (loss)

 

 

 

418.3

 

 

 

 

275.9

 

 

 

 

(209.5

)

 

 

 

 

280.9

 

 

 

 

184.5

 

 

 

 

241.4

 

 

 

 

239.6

 

Interest expense—related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.9

 

 

 

 

31.9

 

 

 

 

22.7

 

 

 

 

16.6

 

Interest expense, net

 

 

 

55.5

 

 

 

 

73.6

 

 

 

 

89.6

 

 

 

 

85.6

 

 

 

 

41.7

 

 

 

 

35.4

 

 

 

 

61.1

 

Other (income) expense, net

 

 

 

(0.6

)

 

 

 

 

29.8

 

 

 

 

32.0

 

 

 

 

4.4

 

 

 

 

(8.8

)

 

 

 

 

1.2

 

 

 

 

(16.6

)

 

Income (loss) before income taxes

 

 

 

363.4

 

 

 

 

172.5

 

 

 

 

(331.1

)

 

 

 

 

185.0

 

 

 

 

119.7

 

 

 

 

182.1

 

 

 

 

178.5

 

Provision (benefit) for income taxes

 

 

 

105.3

 

 

 

 

114.5

 

 

 

 

(37.8

)

 

 

 

 

95.1

 

 

 

 

32.4

 

 

 

 

56.3

 

 

 

 

32.8

 

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

 

 

 

258.1

 

 

 

 

58.0

 

 

 

 

(293.3

)

 

 

 

 

89.9

 

 

 

 

87.3

 

 

 

 

125.8

 

 

 

 

145.7

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11.9

 

Net income (loss)

 

 

$

 

258.1

 

 

 

$

 

58.0

 

 

 

$

 

(293.3

)

 

 

 

$

 

89.9

 

 

 

$

 

87.3

 

 

 

$

 

125.8

 

 

 

$

 

157.6

 

Net income attributable to noncontrolling interests

 

 

$

 

12.8

 

 

 

$

 

11.4

 

 

 

$

 

13.7

 

 

 

$

 

12.5

 

 

 

$

 

11.9

 

 

 

$

 

9.4

 

 

 

$

 

7.8

 

Net income attributable to redeemable noncontrolling interests

 

 

$

 

15.0

 

 

 

$

 

13.7

 

 

 

$

 

17.4

 

 

 

$

 

15.7

 

 

 

$

 

13.7

 

 

 

$

 

14.7

 

 

 

$

 

15.3

 

Net income (loss) attributable to Coty Inc.

 

 

$

 

230.3

 

 

 

$

 

32.9

 

 

 

$

 

(324.4

)

 

 

 

$

 

61.7

 

 

 

$

 

61.7

 

 

 

$

 

101.7

 

 

 

$

 

134.5

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

381.2

 

 

 

 

371.5

 

 

 

 

373.0

 

 

 

 

329.4

 

 

 

 

280.2

 

 

 

 

280.2

 

 

 

 

280.2

 

Diluted

 

 

 

396.7

 

 

 

 

381.8

 

 

 

 

373.0

 

 

 

 

339.1

 

 

 

 

280.2

 

 

 

 

280.2

 

 

 

 

280.2

 

Cash dividends declared per common share

 

 

$

 

0.15

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.10

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

Net income (loss) attributable to Coty Inc. per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

0.60

 

 

 

$

 

0.09

 

 

 

$

 

(0.87

)

 

 

 

$

 

0.19

 

 

 

$

 

0.22

 

 

 

$

 

0.36

 

 

 

$

 

0.48

 

Diluted

 

 

 

0.58

 

 

 

 

0.09

 

 

 

 

(0.87

)

 

 

 

 

0.18

 

 

 

 

0.22

 

 

 

 

0.36

 

 

 

 

0.48

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.04

 

Diluted

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

0.04

 

44


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months
Ended
March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011(a)

 

2010

 

2009

 

2008(b)

Consolidated Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

 

362.5

 

 

 

$

 

406.7

 

 

 

$

 

589.3

 

 

 

$

 

417.5

 

 

 

$

 

494.0

 

 

 

$

 

177.2

 

 

 

$

 

191.6

 

Net cash (used in) provided by investing activities

 

 

 

(184.7

)

 

 

 

 

(293.5

)

 

 

 

 

(333.9

)

 

 

 

 

(2,252.5

)

 

 

 

 

(149.9

)

 

 

 

 

200.8

 

 

 

 

(616.3

)

 

Net cash (used in) provided by financing activities

 

 

 

(3.6

)

 

 

 

 

(69.2

)

 

 

 

 

(97.7

)

 

 

 

 

1,903.8

 

 

 

 

(7.0

)

 

 

 

 

(376.0

)

 

 

 

 

471.3

 

Cash paid for income taxes(c)

 

 

 

66.7

 

 

 

 

50.2

 

 

 

 

67.4

 

 

 

 

60.3

 

 

 

 

55.3

 

 

 

 

33.6

 

 

 

 

34.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

As of
March 31,

 

As of June 30,

 

2013

 

2012

 

2011

 

2010

 

2009

 

2008

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents(d)

 

 

$

 

782.9

 

 

 

$

 

609.4

 

 

 

$

 

510.8

 

 

 

$

 

387.5

 

 

 

$

 

91.1

 

 

 

$

 

93.1

 

Total assets

 

 

 

6,328.0

 

 

 

 

6,183.4

 

 

 

 

6,813.9

 

 

 

 

3,781.8

 

 

 

 

3,701.9

 

 

 

 

4,573.8

 

Total debt

 

 

 

2,533.6

 

 

 

 

2,460.3

 

 

 

 

2,622.4

 

 

 

 

1,416.0

 

 

 

 

1,402.2

 

 

 

 

1,797.1

 

Total Coty Inc. stockholders’ equity

 

 

 

1,100.9

 

 

 

 

857.2

 

 

 

 

1,361.9

 

 

 

 

419.7

 

 

 

 

473.6

 

 

 

 

457.9

 


 

 

(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, we purchased DLI Holdings LLC, consisting of Del Laboratories and Del Pharmaceuticals (“Del Pharma”). On July 7, 2008, we sold certain assets of the Del Pharma business. Fiscal 2008 results are reflected as discontinued operations in accordance with U.S. GAAP.

 

(c)

 

 

 

As a result of U.S. losses that offset foreign income, we have generated a pretax loss and a net tax benefit in our provision for income taxes in 2012. Cash paid for income taxes exceeded this amount, however, primarily due to taxes paid in profitable foreign jurisdictions that could not be offset against U.S. losses. Cash paid for income taxes is less than the provision for income taxes in the nine months ended March 31, 2013 and 2012 and fiscal 2011, primarily as we obtain 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 income taxes exceeded the provision for income taxes due to accelerated payment of estimated taxes. In fiscal 2009, cash paid for income taxes was less than the provision for income taxes as we benefitted from the carryforward of net operating losses in the U.S. and Germany and the change in unrecognized tax benefits.

 

(d)

 

 

 

In May 2013, we paid $113.8 million in cash for stock option exercises and common stock redemptions. See Note 16, “Subsequent Events” in our Condensed Consolidated Financial Statements for further information.

45


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

The following discussion and analysis of the financial condition and results of operations of Coty Inc. and its 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. 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 are in millions of United States dollars, unless otherwise indicated.

OVERVIEW

We are a 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”, generated 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.

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. For example, our recently-launched Lady Gaga Fame fragrance is the first-ever black eau de parfum and contains a proprietary new technology that causes it to become invisible once airborne. We, therefore, need to maintain a sufficient level of research and development activities to enable the introduction of new products.

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 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.

46


Economic Environment

A significant portion of our products is 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 seek to accelerate our sales growth by expanding and further diversifying 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 may 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 charges 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 our 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 allowances, actual and expected returns (estimated based on returns history and position in product life cycle) and various trade spending activities. Trade spending activities primarily relate to advertising, product promotions and demonstrations, some of which involve cooperative relationships with 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.

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 expense is measured at the end of each reporting period based on the fair value of

47


the award on each reporting date and is recognized as an expense to the extent vested until the award is settled. Based on the terms of the share-based compensation plans, they are accounted for as liability plans through our initial public offering and as equity plans after our initial public offering. As a result, we will record share-based compensation expense of $31.1, net of tax, which will be recognized as an expense between April 1, 2013 and the completion of our initial public offering under liability plan 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 other share-based compensation activity. After our initial public offering, share-based compensation will be based on the amortization over the vesting period of the grant date fair value of share-based instruments at the date of our initial public offering, or grant date fair value for share-based instruments issued after our initial public offering. 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, 2013 and 2012 and fiscal 2012, 2011 and 2010, and reflects the basis of presentation described in Note 2, “Summary of Significant Accounting Policies” and Note 3, “Segment Reporting” in our notes to Consolidated Financial Statements for the nine months ended March 31, 2013 and 2012 and for fiscal 2012, 2011 and 2010 included elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011

 

2010

NET REVENUES

 

 

 

 

 

 

 

 

 

 

By Segment:

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

2,000.3

 

 

 

$

 

1,988.2

 

 

 

$

 

2,452.8

 

 

 

$

 

2,325.3

 

 

 

$

 

2,113.3

 

Color Cosmetics

 

 

 

1,083.4

 

 

 

 

1,044.3

 

 

 

 

1,430.6

 

 

 

 

1,143.2

 

 

 

 

891.0

 

Skin & Body Care

 

 

 

506.6

 

 

 

 

555.4

 

 

 

 

727.9

 

 

 

 

617.6

 

 

 

 

478.6

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

3,590.3

 

 

 

$

 

3,587.9

 

 

 

$

 

4,611.3

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)(a)

 

 

 

 

 

 

 

 

 

 

By Segment:

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

350.3

 

 

 

$

 

343.1

 

 

 

$

 

340.5

 

 

 

$

 

286.9

 

 

 

$

 

192.8

 

Color Cosmetics

 

 

 

180.7

 

 

 

 

170.0

 

 

 

 

200.2

 

 

 

 

115.7

 

 

 

 

68.9

 

Skin & Body Care(b)

 

 

 

(3.6

)

 

 

 

 

(88.3

)

 

 

 

 

(577.8

)

 

 

 

 

30.2

 

 

 

 

17.7

 

Corporate

 

 

 

(109.1

)

 

 

 

 

(148.9

)

 

 

 

 

(172.4

)

 

 

 

 

(151.9

)

 

 

 

 

(94.9

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

418.3

 

 

 

$

 

275.9

 

 

 

$

 

(209.5

)

 

 

 

$

 

280.9

 

 

 

$

 

184.5

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(a)

 

 

 

During the fourth quarter of fiscal 2012, we implemented a more precise methodology to estimate the allocation of certain shared costs and corporate overhead expenses to calculate operating income (loss) for our segments. Instead of estimating the allocation of such costs at a country level, the new methodology uses estimates at an operating activities level, which was deemed to be more precise. The new methodology was not retrospectively applied and had an immaterial impact on segment operating income for periods prior to 2012. The new methodology was applied to segment operating income (loss) reported for fiscal 2012 and the comparative segment

48


 

 

 

 

operating income (loss) for the nine months ended March 31, 2012 presented above was revised to present such information consistent with the new methodology used to determine segment operating income (loss) for fiscal 2012 and for the nine months ended March 31, 2013. Compared to the previously reported segment operating income (loss) for the nine months ended March 31, 2012, operating income increased by $20.9 for Fragrances, decreased by $6.0 for Color Cosmetics and the operating loss for Skin & Body Care increased by $14.9.

 

(b)

 

 

 

In the nine months ended March 31, 2012, we recorded an impairment charge of $102.0, primarily related to certain trademarks. In addition, in the fourth quarter of fiscal 2012, we recorded an impairment charge of $473.9, primarily related to goodwill of $384.4 and certain trademarks of $89.1, resulting in total asset impairment charges of $575.9 in fiscal 2012.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended
March 31,

 

Year Ended June 30,

 

2013

 

2012

 

2012

 

2011

 

2010

Net revenues

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

 

 

 

100.0

%

 

Cost of sales

 

 

 

39.6

 

 

 

 

39.7

 

 

 

 

39.6

 

 

 

 

40.1

 

 

 

 

42.3

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

60.4

 

 

 

 

60.3

 

 

 

 

60.4

 

 

 

 

59.9

 

 

 

 

57.7

 

Selling, general and administrative expenses

 

 

 

47.1

 

 

 

 

47.3

 

 

 

 

49.8

 

 

 

 

49.8

 

 

 

 

49.5

 

Amortization expense

 

 

 

1.8

 

 

 

 

2.1

 

 

 

 

2.2

 

 

 

 

1.9

 

 

 

 

1.8

 

Restructuring costs

 

 

 

0.1

 

 

 

 

0.1

 

 

 

 

0.2

 

 

 

 

0.8

 

 

 

 

0.9

 

Acquisition-related costs

 

 

 

0.2

 

 

 

 

0.2

 

 

 

 

0.2

 

 

 

 

0.5

 

 

 

 

0.1

 

Asset impairment charges(a)

 

 

 

 

 

 

 

2.9

 

 

 

 

12.5

 

 

 

 

 

 

 

 

0.1

 

Gain on sale of asset

 

 

 

(0.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

11.7

 

 

 

 

7.7

 

 

 

 

(4.5

)

 

 

 

 

6.9

 

 

 

 

5.3

 

Interest expense-related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.2

 

 

 

 

0.9

 

Interest expense, net

 

 

 

1.6

 

 

 

 

2.1

 

 

 

 

1.9

 

 

 

 

2.1

 

 

 

 

1.2

 

Other (income) expense, net

 

 

 

 

 

 

 

0.8

 

 

 

 

0.8

 

 

 

 

0.1

 

 

 

 

(0.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

 

 

10.1

 

 

 

 

4.8

 

 

 

 

(7.2

)

 

 

 

 

4.5

 

 

 

 

3.4

 

Provision (benefit) for income taxes

 

 

 

2.9

 

 

 

 

3.2

 

 

 

 

(0.8

)

 

 

 

 

2.3

 

 

 

 

0.9

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

 

7.2

 

 

 

 

1.6

 

 

 

 

(6.4

)

 

 

 

 

2.2

 

 

 

 

2.5

 

Net income attributable to noncontrolling interests

 

 

 

0.4

 

 

 

 

0.3

 

 

 

 

0.2

 

 

 

 

0.3

 

 

 

 

0.3

 

Net income attributable to redeemable noncontrolling interests

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Coty Inc.

 

 

 

6.4

%

 

 

 

 

0.9

%

 

 

 

 

(7.0

%)

 

 

 

 

1.5

%

 

 

 

 

1.8

%

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(a)

 

 

 

In the nine months ended March 31, 2012, we recorded an impairment charge of $102.0, primarily related to certain trademarks. In addition, in the fourth quarter of fiscal 2012, we recorded an impairment charge of $473.9, primarily related to goodwill of $384.4 and certain trademarks of $89.1, resulting in total asset impairment charges of $575.9 in fiscal 2012.

Discussed below are our consolidated results of operations and the results of operations for each reportable segment.

We made four acquisitions in fiscal 2011 (the “2011 Acquisitions”). We strengthened our position in color cosmetics through our acquisitions of OPI Products, Inc. (“OPI”) and Dr. Scheller Cosmetics AG (“Dr. Scheller”), the owner of the Manhattan brand. We increased our presence in skin & body care through our acquisitions of the Philosophy Acquisition Company, Inc. (“Philosophy”), owner of the philosophy brand, and TJOY Holdings Co., Ltd. (“TJoy”), the owner of a Chinese skin care company that has provided us with a broad distribution platform for our existing portfolio of brands in China. In order to enhance an investor’s understanding of our performance, certain fiscal 2012 and 2011 financial measures are presented excluding the impact of the consolidation of the 2011 Acquisitions: OPI and Dr. Scheller, operating in the Color Cosmetics

49


segment, and Philosophy and TJoy, operating in the Skin & Body Care segment. See Note 3, “Segment Reporting” in our notes to Consolidated Financial Statements for the nine months ended March 31, 2013 and 2012 and for fiscal 2012, 2011 and 2010. Our 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 Consolidated Financial Statements for fiscal 2012, 2011 and 2010.

We acquired 100% of Dr. Scheller’s stock for 40.3 million ($53.9) cash, and acquired 100% of the net assets of OPI for $948.8 cash, net of a $2.3 receivable from the seller. We acquired 100% of Philosophy’s stock for $929.7 cash, net of a $4.4 receivable from the seller, and acquired TJoy via a stock purchase, for a total purchase price of RMB 2,400.0 million ($351.7 at the January 14, 2011 date of purchase) cash, subject to certain post-closing adjustments.

NINE MONTHS ENDED MARCH 31, 2013 AS COMPARED TO NINE MONTHS ENDED MARCH 31, 2012

NET REVENUES

In the nine months ended March 31, 2013, net revenues increased $2.4, to $3,590.3 from $3,587.9 in the nine months ended March 31, 2012. By segment, higher net revenues in Color Cosmetics and Fragrances offset lower net revenues in Skin & Body Care. By geographic region, higher net revenues in Americas and Asia Pacific were partially offset by lower net revenues in EMEA. Excluding the negative impact of foreign currency exchange translations, net revenues increased 2%. The negative impact of foreign currency exchange translations primarily reflects the weakening of the Euro in the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012.

In addition to foreign currency exchange translations, net revenues were negatively impacted by continued economic weakness in our Southern European markets and the impact of cancelled and unshipped orders due to certain issues arising during the quarter ended March 31, 2013 as a result of the transition to a new third-party logistics provider. These logistics issues negatively impacted total net revenues by approximately 1% and impacted the Fragrances and Skin & Body Care segments in EMEA and Asia Pacific in the nine months ended March 31, 2013. This situation with the logistics provider is steadily improving and we expect to resolve these logistics issues in the three months ended June 30, 2013.

Net Revenues by Segment

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Change %

 

2013

 

2012

NET REVENUES

 

 

 

 

 

 

Fragrances

 

 

$

 

2,000.3

 

 

 

$

 

1,988.2

 

 

 

 

1

%

 

Color Cosmetics

 

 

 

1,083.4

 

 

 

 

1,044.3

 

 

 

 

4

%

 

Skin & Body Care

 

 

 

506.6

 

 

 

 

555.4

 

 

 

 

(9

%)

 

 

 

 

 

 

 

 

Total

 

 

$

 

3,590.3

 

 

 

$

 

3,587.9

 

 

 

 

0

%

 

 

 

 

 

 

 

 

Fragrances

In the nine months ended March 31, 2013, net revenues of Fragrances increased 1%, or $12.1, to $2,000.3 from $1,988.2 in the nine months ended March 31, 2012. The increase was primarily the result of unit volume growth of 5%, partially offset by a price and mix impact of 3% and an impact of foreign currency exchange translations of 2%. Excluding the negative impact of foreign currency exchange translations, net revenues of Fragrances increased 2% reflecting our continued focus on introducing new products into the market. Segment growth was primarily driven by net revenues from newly established brand Lady Gaga Fame, the strengthening of the Roberto Cavalli brand through new launches Just Cavalli, Roberto Cavalli Acqua and our special edition fragrance for the

50


Middle East, Roberto Cavalli Oud, and growth in our power brands Marc Jacobs and Chloé, driven by the successful new launches DOT Marc Jacobs and See by Chloé. The segment also benefitted from the acquisition of licensing rights to distribute Katy Perry’s existing fragrance portfolio. Partially offsetting this growth were lower net revenues from brands such as Calvin Klein and Davidoff, primarily due to challenging market conditions in Southern Europe and in our travel retail business, a lower level of new launch activity in the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012, the expiration of the Kenneth Cole license and existing celebrity brands that are later in their life cycles. The segment was also impacted by the logistics issues with a certain provider, as previously discussed. The negative price and mix impact primarily reflects higher relative volumes of lower-priced products for select brands and an overall increase in customer discounts and allowances in the segment.

Color Cosmetics

In the nine months ended March 31, 2013, net revenues of Color Cosmetics increased 4%, or $39.1, to $1,083.4 from $1,044.3 in the nine months ended March 31, 2012. The increase was primarily the result of a positive price and mix impact of 3% and unit volume growth of 2%, partially offset by a negative impact of foreign currency exchange translations of 1%. Excluding the negative impact of foreign currency exchange translations, net revenues of Color Cosmetics increased 5%, primarily driven by strong growth in Rimmel and Sally Hansen. Rimmel brand growth reflects the success of new launch Rimmel Scandal’eyes mascara along with higher net revenues in Rimmel Match Perfection foundation and Rimmel Kate lipstick. Higher net revenues in Rimmel also reflect expanded distribution in one of our key retailers in the U.S., expanded distribution in France and expansion in the pharmacy and grocery retail channels in Australia. Growth in Sally Hansen was primarily driven by higher net revenues from new launches Sally Hansen Insta Gel, Sally Hansen Salon Pro Gel and the re-launch of Sally Hansen Complete Salon Manicure. Partially offsetting these increases were lower net revenues of Sally Hansen Salon Effects and Sally Hansen Crackle Overcoat, which generated strong net revenues in the nine months ended March 31, 2012 as new launches. The Sally Hansen brand also benefitted from its introduction into the German market along with strong net revenues growth in Mexico and Argentina primarily driven by new launches and expanded distribution. Higher net revenues in N.Y.C. New York Color and OPI also contributed to growth in the Color Cosmetics segment. Higher net revenues in N.Y.C. New York Color was primarily driven by strong growth in the U.S. along with increased net revenues in Canada and certain EMEA markets. Increased net revenues in OPI primarily reflect expanded distribution in Europe and in our travel retail businesses in all three geographic regions, partially offset by lower net revenues of OPI Shatter and OPI GelColor, which generated strong net revenues in the nine months ended March 31, 2012 as new launches. Partially offsetting segment growth was a decline in Astor, primarily due to lower net revenues in Spain which primarily reflected difficult economic conditions, and in Germany as results in the nine months ended March 31, 2012 reflected the rollout of the brand in one of our key customers in Germany. The positive price and mix impact for the segment was primarily driven by the growth of higher than segment average priced Sally Hansen and OPI products.

Skin & Body Care

In the nine months ended March 31, 2013, net revenues of Skin & Body Care decreased 9%, or $48.8, to $506.6 from $555.4 in the nine months ended March 31, 2012. The decrease was primarily the result of a decline in unit volume of 9% and a negative impact of foreign currency exchange translations of 2%, partially offset by a positive price and mix impact of 1%. Excluding the negative impact of foreign currency exchange translations, net revenues of Skin & Body Care decreased 7%. Lower net revenues in adidas primarily reflected decreases in EMEA, in part due to the negative impact of foreign currency exchange translations, the challenging market conditions in Southern Europe and the lack of mega promotions related to major sports events compared to the nine months ended March 31, 2012, which benefitted from UEFA European Football Championship promotional activities. Partially offsetting these declines were double digit growth in the U.S., primarily due to the reintroduction of shower gels, body sprays and deodorants with a key customer in the market in January 2012, expansion in China through the TJoy distribution channel and strong

51


growth in Russia. The decline in philosophy was primarily due to lower net revenues from one of our key customers in the U.S., inventory control programs from selected customer accounts and philosophy’s e-commerce website philosophy.com. These decreases in philosophy were partially offset by increased net revenues from several existing customers in the U.S. and expanded international distribution. The decline in TJoy partially reflects the impact of a sales force reorganization which has been completed as of December 30, 2012 and reduced customer orders. The positive price and mix impact for the segment was primarily driven by positive product mix in philosophy and lower returns on Lancaster products compared to the nine months ended March 31, 2012 when there were higher returns due to 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).

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Change %

 

2013

 

2012

NET REVENUES

 

 

 

 

 

 

Americas

 

 

$

 

1,485.1

 

 

 

$

 

1,440.0

 

 

 

 

3

%

 

EMEA

 

 

 

1,690.7

 

 

 

 

1,744.7

 

 

 

 

(3

%)

 

Asia Pacific

 

 

 

414.5

 

 

 

 

399.2

 

 

 

 

4

%

 

 

 

 

 

 

 

 

Total

 

 

$

 

3,590.3

 

 

 

$

 

3,587.9

 

 

 

 

0

%

 

 

 

 

 

 

 

 

Americas

In the nine months ended March 31, 2013, net revenues in the Americas increased 3%, or $41.1, to $1,485.1 from $1,444.0 in the nine months ended March 31, 2012. Foreign currency exchange translations had an immaterial impact on net revenues in the Americas. The increase in net revenues reflects growth in virtually all countries in the region, with the largest increase in our U.S. operating subsidiary, primarily reflecting strong growth in the Fragrances and Color Cosmetics segments. Higher net revenues in Fragrances in the U.S. were primarily driven by new launches DOT Marc Jacobs, Lady Gaga Fame, Encounter Calvin Klein and Calvin Klein Eternity Aqua for Her, partially offset by lower net revenues due to the expiration of the Kenneth Cole license and lower net revenues from existing celebrity brands that are later in their life cycles. The increase in Color Cosmetics in the U.S. is primarily due to growth in Rimmel, Sally Hansen and N.Y.C. New York Color partially offset by lower net revenues of OPI. The decline in OPI primarily reflects lower net revenues of OPI Shatter and OPI GelColor, which generated strong net revenues in the nine months ended March 31, 2012 as new launches. Partially offsetting this growth in the U.S. were lower net revenues in Skin & Body Care in the U.S. reflecting a decline in philosophy partially offset by higher net revenues in adidas. Growth in adidas reflects the successful reintroduction of shower gels, body sprays and deodorants with a key customer in the U.S. market in January 2012. Partially offsetting growth in the Americas were lower net revenues in our travel retail business in the region primarily due to stock reductions by key customers and lower reorders in the six months ended December 31, 2012, partially offset by improved trends in the three months ended March 31, 2013.

EMEA

In the nine months ended March 31, 2013, net revenues in EMEA decreased 3%, or $54.0, to $1,690.7 from $1,744.7 in the nine months ended March 31, 2012. Excluding the negative impact of foreign currency exchange translations, net revenues in EMEA remained flat compared to the nine months ended March 31, 2012. Results in the region primarily reflect lower net revenues in our Southern European markets, particularly in Spain and Italy, and in our travel retail business in the region along with the negative impact of foreign currency exchange translations and the impact of

52


the logistics issues with a certain provider, as previously discussed. The decline in Southern Europe primarily reflects difficult economic conditions and lower levels of new launch activity in Fragrances in the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012. The decrease in our travel retail business primarily reflects the negative impact of foreign currency exchange transactions, a slowdown in growth of airport traffic, stock reductions by key customers, difficult economic conditions, particularly in Southern Europe, and the negative impact of the logistics issues with a certain provider, as previously discussed. Partially offsetting these decreases in EMEA were higher net revenues in the Middle East, the U.K. and Russia. Higher net revenues in the Middle East primarily reflect strong growth from new launches within the Roberto Cavalli brand and double digit growth in Color Cosmetics. The increase in net revenues in the U.K. was primarily driven by new fragrance launches DOT Marc Jacobs, Lady Gaga and Roberto Cavalli, and growth in Rimmel. Higher net revenues in Russia primarily reflect the introduction of OPI in the Russian market, growth in adidas and new fragrance launch Roberto Cavalli. Net revenues in Germany were negatively impacted by the logistics issues with a certain provider, as previously discussed, and foreign currency translations. Excluding the impact of foreign currency translations, net revenues growth in Germany was strong, primarily reflecting higher net revenues in Fragrances and Color Cosmetics.

Asia Pacific

In the nine months ended March 31, 2013, net revenues in Asia Pacific increased 4%, or $15.3, to $414.5 from $399.2 in the nine months ended March 31, 2012. Foreign currency exchange translations had an immaterial impact on net revenues in Asia Pacific. The increase in the region was primarily driven by higher net revenues in Australia, primarily reflecting growth due to higher net revenues from new launch Lady Gaga Fame and expanded distribution of certain fragrances into the pharmacy retail channel and Rimmel color cosmetics products into the pharmacy and grocery retail channels. Higher net revenues in Singapore, Hong Kong and our travel retail business also contributed to growth in Asia Pacific. The increase in net revenues in Singapore and Hong Kong primarily reflect growth in Calvin Klein. Our travel retail business in the region primarily reflects higher net revenues from new launch Lady Gaga Fame and the introduction of OPI, partially offset by the negative impact of the logistics issues with a certain provider, as previously discussed. Partially offsetting these increases were lower net revenues in Japan, primarily driven by difficult economic conditions, and in China, driven by a decline in net revenues from TJoy.

COST OF SALES

In the nine months ended March 31, 2013, cost of sales decreased $1.7, to $1,421.9 from $1,423.6 in the nine months ended March 31, 2012. Cost of sales as a percentage of net revenues decreased to 39.6% in the nine months ended March 31, 2013 from 39.7% in the nine months ended March 31, 2012, resulting in a gross margin improvement of approximately 10 basis points. This improvement primarily reflects continued success of our supply chain savings program and a positive impact from a change in the mix of products sold, partially offset by higher customer discounts and allowances necessary to compete in the difficult market environment. Since its implementation in fiscal 2010, the supply chain savings program has contributed to 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.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In the nine months ended March 31, 2013, selling, general and administrative expenses decreased $7.7, to $1,689.7 from $1,697.4 in the nine months ended March 31, 2012. Selling, general and administrative expenses as a percentage of net revenues decreased to 47.1% in the nine months ended March 31, 2013 from 47.3% in the nine months ended March 31, 2012. This decrease of approximately 20 basis points primarily reflects lower share-based compensation expense, partially offset by an increase in advertising consumer and promotion spending and other operating expenses. The decrease in share- based compensation expense primarily reflects the impact of fewer shares

53


subject to fair value adjustment on common stock purchased by directors in the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012, partially offset by a larger increase in the value of common stock in the nine months ended March 31, 2013, as compared to the increase in the value of common stock in the nine months ended March 31, 2012 and a charge recorded in the nine months ended March 31, 2013 resulting from an amendment to the Executive Ownership Plan (“EOP”), which governs certain share-based compensation instruments. See “Critical Accounting Policies and Estimates—Common Stock Valuations” for a description of the factors that impact the valuation of our common stock and Note 12, “Common, Redeemable Common and Preferred Stock” in our Condensed Consolidated Financial Statements for a description of factors that impact the shares subject to fair value adjustment.

OPERATING INCOME

In the nine months ended March 31, 2013, operating income increased 52%, or $142.4, to $418.3 from $275.9 in the nine months ended March 31, 2012. Operating margin, or operating income as a percentage of net revenues, increased to 11.7% of net revenues in the nine months ended March 31, 2013 as compared to 7.7% in the nine months ended March 31, 2012. This increase primarily reflects margin improvement of 280 basis points driven by lower asset impairment charges and 120 basis points of margin improvement primarily driven by the gain on sale of assets, lower amortization expense, lower selling, general and administrative expenses and improvement in cost of sales.

Operating Income by Segments

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Change %

 

2013

 

2012(a)

OPERATING INCOME

 

 

 

 

 

 

Fragrances

 

 

$

 

350.3

 

 

 

$

 

343.1

 

 

 

 

2

%

 

Color Cosmetics

 

 

 

180.7

 

 

 

 

170.0

 

 

 

 

6

%

 

Skin & Body Care

 

 

 

(3.6

)

 

 

 

 

(88.3

)

 

 

 

 

96

%

 

Corporate

 

 

 

(109.1

)

 

 

 

 

(148.9

)

 

 

 

 

27

%

 

 

 

 

 

 

 

 

Total

 

 

$

 

418.3

 

 

 

$

 

275.9

 

 

 

 

52

%

 

 

 

 

 

 

 

 


 

 

(a)

 

 

 

During the fourth quarter of fiscal 2012, we implemented a more precise methodology to estimate the allocation of certain shared costs and corporate overhead expenses to calculate operating income (loss) for our segments. Instead of estimating the allocation of such costs at a country level, the new methodology uses estimates at an operating activities level, which was deemed to be more precise. The comparative segment operating income for the nine months ended March 31, 2012 presented above was revised to present such information consistent with the new methodology used to determine segment operating income (loss) for the nine months ended March 31, 2013. Compared to the previously reported segment operating income (loss) for the nine months ended March 31, 2012, operating income increased by $20.9 for Fragrances, decreased by $6.0 for Color Cosmetics and the operating loss for Skin & Body Care increased by $14.9.

Fragrances

In the nine months ended March 31, 2013, operating income for Fragrances increased 2%, or $7.2, to $350.3 from $343.1 in the nine months ended March 31, 2012. The increase in operating income reflects higher net revenues and improved operating margin. Operating margin increased to 17.5% of net revenues in the nine months ended March 31, 2013 as compared to 17.3% in the nine months ended March 31, 2012, primarily driven by lower amortization expense as a percentage of net revenues reflecting the end of the amortization period for a certain license, partially offset by higher cost of sales as a percentage of net revenues.

54


Color Cosmetics

In the nine months ended March 31, 2013, operating income for Color Cosmetics increased 6%, or $10.7, to $180.7 from $170.0 in the nine months ended March 31, 2012. The increase in operating income reflects higher net revenues and improved operating margin. Operating margin increased to 16.7% of net revenues in the nine months ended March 31, 2013 as compared to 16.3% in the nine months ended March 31, 2012, primarily driven by lower selling, general and administrative expenses as a percentage of net revenues, partially offset by higher cost of sales as a percentage of net revenues.

Skin & Body Care

In the nine months ended March 31, 2013, operating loss for Skin & Body Care decreased 96%, or $84.7 to $3.6 from $88.3 in the nine months ended March 31, 2012. Despite lower net revenues, operating loss decreased, primarily due to improvement in operating margin. Operating margin increased to (0.7%) of net revenues in the nine months ended March 31, 2013 as compared to (15.9%) in the nine months ended March 31, 2012, primarily due to lower asset impairment charges as a percentage of net revenues. No asset impairment charges were recorded in the nine months ended March 31, 2013, compared to asset impairment charges of certain trademarks related to the TJoy and Philosophy acquisitions of $58.0 and $41.5, respectively, recorded in the nine months ended March 31, 2012.

Corporate

Corporate primarily includes share-based compensation expense 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 included in the calculation of Adjusted Operating Income of $89.1 and $108.6 in the nine months ended March 31, 2013 and 2012, 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 awards granted in fiscal 2012 and 2011. Vesting of the special incentive awards is dependent upon the occurrence of (i) an initial public offering within five years of the grant date, or (ii) if an initial public offering has not occurred on the fifth anniversary of the grant date, upon achievement of a target fair value of our share price and the completion of five years of service subsequent to the grant date. During the nine months ended March 31, 2013, the target fair value of our share price was achieved.

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.”

55


Reconciliation of reported operating income to Adjusted Operating Income:

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Change %

 

2013

 

2012

Reported Operating Income

 

 

$

 

418.3

 

 

 

$

 

275.9

 

 

 

 

52

%

 

% of Net revenues

 

 

 

11.7

%

 

 

 

 

7.7

%

 

 

 

Share-based compensation expense adjustment

 

 

 

89.1

 

 

 

 

108.6

 

 

 

 

(18

%)

 

 

 

 

 

 

 

 

Reported Operating Income adjusted for share-based compensation adjustment

 

 

$

 

507.4

 

 

 

$

 

384.5

 

 

 

 

32

%

 

% of Net revenues

 

 

 

14.1

%

 

 

 

 

10.7

%

 

 

 

Other adjustments:

 

 

 

 

 

 

Real estate consolidation program

 

 

 

16.1

 

 

 

 

6.8

   

 

>100

%

 

Acquisition-related costs (a)

 

 

 

9.4

 

 

 

 

16.6

 

 

 

 

(43

%)

 

Business structure realignment programs

 

 

 

5.0

 

 

 

 

9.9

 

 

 

 

(49

%)

 

Public entity preparedness costs

 

 

 

4.2

 

 

 

 

0.6

   

 

>100

%

 

Restructuring costs

 

 

 

3.1

 

 

 

 

3.9

 

 

 

 

(21

%)

 

Asset impairment charges

 

 

 

1.5

 

 

 

 

102.0

 

 

 

 

(99

%)

 

Gain on sale of asset

 

 

 

(19.3

)

 

 

 

 

 

 

 

 

N/A

 

 

 

 

 

 

 

 

Total other adjustments to Reported Operating Income

 

 

 

20.0

 

 

 

 

139.8

 

 

 

 

(86

%)

 

 

 

 

 

 

 

 

Adjusted Operating Income

 

 

$

 

527.4

 

 

 

$

 

524.3

 

 

 

 

1

%

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

14.7

%

 

 

 

 

14.6

%

 

 

 


 

 

(a)

 

 

 

Acquisition-related costs include items in addition to amounts recorded in the acquisition-related costs line item in the Condensed Consolidated Statements of Operations of $8.7 and $8.4 for the nine months ended March 31, 2013 and 2012, respectively. Additional items include internal integration costs and acquisition accounting adjustments. See “Acquisition-Related Costs.”

In the nine months ended March 31, 2013, Adjusted Operating Income increased 1%, or $3.1, to $527.4 from $524.3 in the nine months ended March 31, 2012. Adjusted operating margin increased to 14.7% of net revenues in the nine months ended March 31, 2013 as compared to 14.6% in the nine months ended March 31, 2012. This margin improvement reflects approximately 20 basis points lower amortization expense and cost of sales, partially offset by approximately 10 basis points of higher selling, general and administrative expenses.

Share-Based Compensation Adjustment

Share-based compensation expense, as currently calculated under liability plan accounting, was $106.7 and $132.9 in the nine months ended March 31, 2013 and 2012, respectively, and was included in selling, general and administrative expenses in the Consolidated Statements of Operations. The decrease in the share-based compensation expense in the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012 primarily reflects the impact of fewer shares subject to fair value adjustment on common stock purchased by directors in the nine months ended March 31, 2013 as compared to the nine months ended March 31, 2012, partially offset by a larger increase in the value of common stock in the nine months ended March 31, 2013, as compared to the increase in the value of common stock in the nine months ended March 31, 2012 and a charge of $4.2 recorded in the nine months ended March 31, 2013 resulting from an amendment to the EOP, which governs certain share-based compensation instruments. See “Critical Accounting Policies and Estimates—Common Stock Valuations” for a description of the factors that impact the valuation of our common stock and Note 12, “Common, Redeemable Common and Preferred Stock” in our Condensed Consolidated Financial Statements for a description of factors that impact the shares subject to fair value adjustment.

Share-based compensation expense adjustment included in the calculation of the Adjusted Operating Income was $89.1 and $108.6 in the nine months ended March 31, 2013 and 2012, respectively. Share-based compensation expense adjustment consists of (i) the difference between

56


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 awards granted in fiscal 2012 and 2011. Vesting of the special incentive awards is dependent upon the occurrence of (i) an initial public offering within five years of the grant date, or (ii) if an initial public offering has not occurred on the fifth anniversary of the grant date, upon achievement of a target fair value of our share price and the completion of five years of service subsequent to the grant date. During the nine months ended March 31, 2013, the target fair value of our share price was achieved. See “Critical Accounting Policies and Estimates—Share-Based Compensation.” 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 the Condensed Consolidated Financial Statements.

Upon completion of our 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 our 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.

Real Estate Consolidation Program

In the nine months ended March 31, 2013, we incurred $16.1 of costs in connection with the consolidation of real estate in New York. The real estate consolidation program costs primarily consist of $12.1 of accelerated depreciation and $3.1 of duplicative rent expense. We expect to continue to incur additional costs associated with the consolidation of real estate in New York during the remainder of fiscal 2013 and in fiscal 2014. We expect the real estate consolidation program to be completed in fiscal 2014.

In the nine months ended March 31, 2012, we incurred $6.8 of costs in connection with the consolidation of real estate in New York which primarily consists of $5.0 of lease loss expenses and $1.5 of accelerated depreciation.

In all reported periods, all real estate consolidation costs were recorded in selling, general and administrative expenses in the Consolidated Statements of Operations and were included in Corporate.

Acquisition-Related Costs

In the nine months ended March 31, 2013, we incurred acquisition-related costs of $9.4. These costs include $6.7 of costs related to an additional charge related to the revised estimated arbitration settlement amount based on the progress of the proceedings between us and the seller of TJoy (see Note 15, “Commitments and Contingencies” in our notes to the Condensed Consolidated Financial Statements) and $2.0 of external costs directly related to contemplated business combinations which are included in acquisition-related costs in the Consolidated Statements of Operations. Also included are internal integration costs of $0.7 which are included in selling, general and administrative expenses in the Consolidated Statements of Operations. All acquisition-related costs were reported in Corporate.

In the nine months ended March 31, 2012, we incurred acquisition-related costs of $16.6 in connection with the 2011 Acquisitions as well as certain due diligence and acquisition-related costs incurred in connection with certain contemplated acquisitions that were withdrawn. These costs

57


include transaction-related costs of $8.4, internal integration costs of $7.7, and acquisition accounting impacts of $0.5. 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 Consolidated Statements of Operations. The internal integration costs include $6.8 of expense related to amortization of a deferred brand growth charge in connection with the TJoy acquisition that was included in amortization expense in the Consolidated Statements of Operations and $0.9 of costs related to consulting, legal services and travel included in selling, general and administrative expenses in the Consolidated Statements of Operations. In connection with the 2011 Acquisitions, we 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 Consolidated Statements of Operations as the inventory was sold following the acquisition. All acquisition-related costs were reported in Corporate.

Business Structure Realignment Programs

In the nine months ended March 31, 2013, we incurred business structure realignment program costs of $5.0 which consist of costs related to position eliminations in certain administrative functions of $2.2, costs related to structural reorganization in Geneva related to the creation of a fragrance “Center of Excellence” for research and development and the centralization of global supply chain management in Geneva of $0.7 and costs related to certain other programs in North America of $2.1, of which $0.8 consisted of accelerated depreciation.

In the nine months ended March 31, 2012, we incurred business structure realignment program costs of $9.9 which consist of costs incurred in connection with the buy-back of certain distribution rights in selected EMEA markets of $4.5, costs related to structural reorganization in Geneva, as discussed above, of $4.4, of which $0.5 consisted of accelerated depreciation, and costs related to certain other programs in North America of $1.0.

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

Public Entity Preparedness Costs

In the nine months ended March 31, 2013, we incurred public entity preparedness costs of $4.2 primarily consisting of consulting and legal fees associated with preparation and filing of the registration statement.

In the nine months ended March 31, 2012, we incurred public entity preparedness costs of $0.6 primarily consisting of consulting fees associated with Sarbanes-Oxley compliance.

In all reported periods, all public entity preparedness costs were recorded in selling, general and administrative expenses in the Consolidated Statements of Operations and were included in Corporate.

Restructuring Costs

In the nine months ended March 31, 2013, we incurred restructuring costs of $3.1 primarily reflecting a mutual agreement to end a long-term service agreement with another fragrance company, where we provided selected selling, distribution and administrative services in return for a commission based fee. As a result of the service agreement termination, we eliminated several positions and rationalized certain other support activities to reflect this change.

In the nine months ended March 31, 2012, we incurred restructuring costs of $3.9 primarily reflecting employee-related costs and third-party contract terminations associated with the 2011 Acquisitions and a multi-faceted cost savings program designed to reduce ongoing costs and improve our operating margins.

58


In all reported periods, all restructuring costs were recorded in restructuring costs in the Consolidated Statements of Operations and were included in Corporate.

Asset Impairment Charges

In the nine months ended March 31, 2013, we sold a manufacturing facility for $2.0, which had a net book value of $3.5 resulting in an asset impairment charge of $1.5. These costs were recorded in asset impairment charges in the Consolidated Statements of Operations and were included in Corporate.

In the nine months ended March 31, 2012, asset impairment charges of $102.0 were recorded in the 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, which recognized a trademark impairment charge of $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, which recognized a trademark impairment charge of $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. In addition, in the fourth quarter of fiscal 2012, we recorded an impairment charge of $473.9, primarily in the Skin & Body Care segment related to goodwill of $384.4 and certain trademarks of $89.1.

Gain on Sale of Asset

In the nine months ended March 31, 2013, we received $25.0 related to the termination of one of our licenses by mutual agreement with the original licensor. The license had a net book value of $5.7 and, therefore, we recorded a gain of $19.3 in the Consolidated Statements of Operations and included in Corporate.

INTEREST EXPENSE

In the nine months ended March 31, 2013, net interest expense was $55.5 as compared with $73.6 in the nine months ended March 31, 2012. The decrease primarily reflects lower accretion of the obligations related to the purchase of TJoy of $8.3, lower expense of $4.9 due to the maturity of interest rate swaps, lower interest expense on our debt instruments of $2.1, lower losses of $1.9 related to foreign exchange contracts and lower expense related to amortization of deferred financing fees due to the write off of $1.4 in the nine months ended March 31, 2012 that did not reoccur during the nine months ended March 31, 2013.

OTHER EXPENSE, NET

In the nine months ended March 31, 2013, other (income) expense, net was $(0.6) as compared with $29.8 in the nine months ended March 31, 2012. The expense in the nine months ended March 31, 2012 primarily reflects a loss of $37.4 on a foreign currency contract to hedge foreign currency exposure associated with an acquisition opportunity that was withdrawn, partially offset by a gain of $3.8 related to other foreign currency exchange contracts.

INCOME TAXES

The effective rate for income taxes for the nine months ended March 31, 2013 was 29.0% as compared with 66.4% in the nine months ended March 31, 2012. The difference in the effective tax rates reflects a decrease in the accrual for unrecognized tax benefits as a result of the completion of the restructuring of our international business in Geneva, Switzerland, the expiration of certain

59


statutes of limitations, a decrease of certain nondeductible expenses, and a decrease of expenses incurred during 2012, primarily related to impairments and a foreign currency contract to hedge foreign currency exposure associated with an acquisition opportunity that was withdrawn, offset by the negative tax consequences associated with ongoing operating losses at our subsidiaries in China and a gain on sale of asset.

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, 2013, net income attributable to Coty Inc. increased almost sevenfold, or $197.4, to $230.3, from $32.9 in the nine months ended March 31, 2012. This increase primarily reflects higher operating income and lower other expense, net, interest expense and tax expense (as discussed above).

We believe that Adjusted Net Income Attributable to Coty Inc. provides an enhanced understanding of our performance. See “Summary Consolidated Financial Data—Non-GAAP Financial Measures.”

 

 

 

 

 

 

 

(in millions)

 

Nine Months Ended
March 31,

 

Change %
2013/2012

 

2013

 

2012

Reported Net Income Attributable to Coty Inc.

 

 

$

 

230.3

 

 

 

$

 

32.9

   

 

>100

%

 

% of Net revenues

 

 

 

6.4

%

 

 

 

 

0.9

%

 

 

 

Share-based compensation expense adjustment(a)

 

 

 

89.1

 

 

 

 

108.6

 

 

 

 

(18

%)

 

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

 

 

 

(23.9

)

 

 

 

 

20.1

   

 

<(100

%)

 

 

 

 

 

 

 

 

Net Income adjusted for share-based compensation adjustment

 

 

 

295.5

 

 

 

 

161.6

 

 

 

 

83

%

 

% of Net revenues

 

 

 

8.2

%

 

 

 

 

4.5

%

 

 

 

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

 

 

 

 

 

 

Other adjustments to Operating Income(a)

 

 

 

20.0

 

 

 

 

139.8

 

 

 

 

(86

%)

 

Loss on foreign currency contract(c)

 

 

 

 

 

 

 

37.4

 

 

 

 

(100

%)

 

Acquisition-related interest expense(d)

 

 

 

 

 

 

 

8.5

 

 

 

 

(100

%)

 

 

 

 

 

 

 

 

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

 

 

 

20.0

 

 

 

 

185.7

 

 

 

 

(89

%)

 

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

 

 

 

(2.2

)

 

 

 

 

(53.3

)

 

 

 

 

96

%

 

Tax impact on foreign income inclusion(e)

 

 

 

 

 

 

 

9.0

 

 

 

 

(100

%)

 

 

 

 

 

 

 

 

Adjusted Net Income Attributable to Coty Inc.  

 

 

$

 

313.3

 

 

 

$

 

303.0

 

 

 

 

3

%

 

 

 

 

 

 

 

 

% of Net revenues

 

 

 

8.7

%

 

 

 

 

8.4

%

 

 

 


 

 

(a)

 

 

 

See “Reconciliation of Operating Income to Adjusted Operating Income” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

(b)

 

 

 

Reflects an adjustment to our tax provision equal to the net interim tax expense attributable to share based compensation in the nine months ended March 31, 2013 and March 31, 2012. In accordance with ASC 740 (“Accounting for Income Taxes”), we record our provision for income taxes using our annual effective tax rate (“AETR”), which is calculated utilizing the latest available information at each interim period. The tax adjustments reflected in this table apply a normalized AETR that has been recalculated to take into account the adjustments to operating income and determine what our rate would have been had these items not occurred. The actual tax rate applicable to each individual adjustment to operating income is different than the normalized AETR presented herein.

60


 

(c)

 

 

 

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

 

(d)

 

 

 

Interest expense associated with the obligations related to the purchase of TJoy. This amount is included in interest expense, net in the Condensed Consolidated Statements of Operations.

 

(e)

 

 

 

Reflects an adjustment to our tax provision equal to the tax expense associated with certain foreign income that was subject to tax in the U.S. during fiscal 2011 and 2010 under the provisions of Internal Revenue Code Sections 951 through 954 (“Subpart F”), but that should no longer be subject to Subpart F as a result of structural changes in our organization. Effective fiscal 2012, we created a fragrance “Center of Excellence” for research and development and centralized global supply chain management in Geneva, Switzerland. As a result of these changes to our organizational and management structure, Subpart F should no longer apply to income associated with our operations in Geneva and, accordingly, tax expense associated with certain foreign-based income will be reduced in the future. This change is reflected in the provision for income taxes in the Consolidated Statements of Operations for periods following its implementation.

FISCAL 2012 AS COMPARED TO FISCAL 2011 AND FISCAL 2011 AS COMPARED TO FISCAL 2010

NET REVENUES

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2012

 

2011

 

2010

 

2012/2011

 

2011/2010

Net revenues (excluding revenues related to 2011 Acquisitions)

 

 

$

 

4,010.6

 

 

 

$

 

3,746.4

 

 

 

$

 

3,482.9

 

 

 

 

7

%

 

 

 

 

8

%

 

Revenues generated from 2011 Acquisitions

 

 

 

600.7

 

 

 

 

339.7

 

 

 

 

 

 

 

 

77

%

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

 

4,611.3

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

 

13

%

 

 

 

 

17

%

 

 

 

 

 

 

 

 

 

 

 

 

In fiscal 2012, net revenues increased 13%, or $525.2, to $4,611.3 from $4,086.1 in fiscal 2011, which includes the negative impact of foreign currency exchange translations of approximately 1%. The 2011 Acquisitions contributed $261.0 to this increase. The increase for the 2011 Acquisitions was primarily due to the inclusion of the 2011 Acquisitions for full fiscal 2012. In fiscal 2011, the 2011 Acquisitions were only included in net revenues from the respective dates of acquisition.

Excluding net revenues from the 2011 Acquisitions, net revenues increased 7% to $4,010.6 in fiscal 2012. Color Cosmetics drove organic growth among segments followed by Fragrances. The increase also reflects growth across all three geographic regions. New launches represented approximately 17% of our net revenues for fiscal 2012. The contribution from new launches was partially offset by an approximate 11% decline in net revenues from existing products that are later in their life cycles.

In fiscal 2011, net revenues increased 17%, or $603.2, to $4,086.1 from $3,482.9 in fiscal 2010. The 2011 Acquisitions contributed 9%, or $339.7, to the increase.

Excluding incremental net revenues from the 2011 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. New launches represented approximately 18% of our net revenues for fiscal 2011. The contribution from new launches was partially offset by an approximate 12% decline in net revenues from existing products that are later in their life cycles.

61


Net Revenues by Segment

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2012

 

2011

 

2010

 

2012/2011

 

2011/2010

NET REVENUES

 

 

 

 

 

 

 

 

 

 

Fragrances

 

 

$

 

2,452.8

 

 

 

$

 

2,325.3

 

 

 

$

 

2,113.3

 

 

 

 

5

%

 

 

 

 

10

%

 

 

 

 

 

 

 

 

 

 

 

 

Color Cosmetics (excluding revenues related to 2011 Acquisitions)

 

 

$

 

1,080.2

 

 

 

$

 

948.0

 

 

 

$

 

891.0

 

 

 

 

14

%

 

 

 

 

6

%

 

Revenues generated from 2011 Acquisitions

 

 

 

350.4

 

 

 

 

195.2

 

 

 

 

 

 

 

 

80

%

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Color Cosmetics

 

 

$

 

1,430.6

 

 

 

$

 

1,143.2

 

 

 

$

 

891.0

 

 

 

 

25

%

 

 

 

 

28

%

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

 

477.6

 

 

 

$

 

473.1

 

 

 

$

 

478.6

 

 

 

 

1

%

 

 

 

 

(1

%)

 

Revenues generated from 2011 Acquisitions

 

 

 

250.3

 

 

 

 

144.5

 

 

 

 

 

 

 

 

73

%

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

Skin & Body Care

 

 

$

 

727.9

 

 

 

$

 

617.6

 

 

 

$

 

478.6

 

 

 

 

18

%

 

 

 

 

29

%

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

4,611.3

 

 

 

$

 

4,086.1

 

 

 

$

 

3,482.9

 

 

 

 

13

%

 

 

 

 

17

%

 

 

 

 

 

 

 

 

 

 

 

 

Fragrances

In fiscal 2012, net revenues of Fragrances increased 5%, or $127.5, to $2,452.8 from $2,325.3 in fiscal 2011. The increase was primarily due to strong growth of our products in the prestige market primarily resulting from new product launches. Higher net revenues from Calvin Klein, Marc Jacobs, Chloé and new launches Roberto Cavalli, Bottega Veneta and Truth or Dare by Madonna contributed to that increase. The incremental growth in Calvin Klein was driven by the launches of ck one Shock and Forbidden Euphoria. Growth in Marc Jacobs was driven by new launch Oh Lola!, a full year of sales of Daisy Marc Jacobs Eau So Fresh, the effect of which was only partially observed in fiscal 2011 as a result of a mid-year launch, and higher net revenues in the existing brand Daisy Marc Jacobs. Higher net revenues of Chloé were driven by new launch Eau de Chloé. In the mass market, higher net revenues from Playboy, Beyoncé, Guess? and new launch Shine by Heidi Klum also contributed to segment growth. Improved results from Playboy primarily reflected the success of recent launches of Playboy London and Play it Rock. Growth in Beyoncé was primarily due to the new launch of Beyoncé Pulse, and the increase in Guess? was driven by Guess? Seductive Homme and Guess? Seductive Intense Love. These increases in net revenues were partially offset by lower net revenues from existing celebrity brands that are later in their life cycles and a decline in Davidoff due to strong innovation in fiscal 2011 that was not replicated in fiscal 2012. Net revenues growth for the segment reflects unit volume growth of 10%, partially offset by a negative price and mix impact of 4%, primarily reflecting an increase in the proportion of the segment’s net revenues from lower than segment average priced Playboy products.

In fiscal 2011, net revenues of Fragrances increased 10%, or $212.0, to $2,325.3 from $2,113.3 in fiscal 2010 on unit volume growth of 11% partially offset by a negative price and mix impact of 1%. 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, the effect of which was only partially observed in fiscal 2010 as a result of a mid-year launch. These increases in net revenues were partially offset by lower net revenues from existing products with the largest declines contributed by Gwen Stefani, David Beckham, Stetson and Kate Moss.

62


Color Cosmetics

In fiscal 2012, net revenues of Color Cosmetics increased 25%, or $287.4, to $1,430.6 from $1,143.2 in fiscal 2011, which includes the negative impact of foreign currency exchange translations of approximately 1%. The increase in this segment includes an increase in net revenues related to the acquisitions of OPI and Dr. Scheller of $155.2. The increase for the 2011 Acquisitions in Color Cosmetics was primarily due to the inclusion of OPI and Dr. Scheller in net revenues for the full fiscal year of 2012. In fiscal 2011, OPI and Dr. Scheller were only included in net revenues from the respective dates of acquisition. Fiscal 2011 net revenues attributable to the 2011 Acquisitions include $25.0 of third party product distribution by Dr. Scheller that did not reoccur in fiscal 2012. On a pro forma basis, assuming that the net revenues for the 2011 Acquisitions had been included from the beginning of fiscal 2011, net revenues for the 2011 Acquisitions in Color Cosmetics increased 18% in fiscal 2012 compared to fiscal 2011, driven by 21% growth in OPI and 4% growth in Dr. Scheller.

Excluding incremental net revenues from the 2011 Acquisitions, the Color Cosmetics segment grew 14%, which includes the negative impact of foreign currency exchange translations of approximately 1%. The increase was driven by unit volume growth of 14% and a positive price and mix impact of 1%. Sally Hansen drove growth for the segment with the U.S. generating approximately 70% of the brand’s growth. Higher net revenues in the U.S. reflect a full year of sales of Sally Hansen Salon Effects and Sally Hansen Crackle Overcoat, the effect of which was only partially observed in fiscal 2011 as a result of mid-year launches, as well as higher net revenues of Sally Hansen Xtreme Wear and new launch Sally Hansen Magnetic Nail Color. The Sally Hansen brand also benefitted from expanded distribution in Russia and Australia. Increased net revenues in Rimmel reflect the success of new launches Rimmel Kate, Rimmel Wake Me Up and Rimmel Scandal’eyes along with growth in Rimmel Volume Flash. Higher net revenues in the Rimmel brand were also due to expanded distribution in Australia and France 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 the U.S. Partially offsetting growth in the segment were lower net revenues of Esprit Color due to the termination of the license.

In fiscal 2011, net revenues of Color Cosmetics increased 28%, or $252.2, to $1,143.2 from $891.0 in fiscal 2010, which includes the positive impact of foreign currency exchange translations of approximately 1%. 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%, which includes the positive impact of foreign currency exchange translations of approximately 1%, and with all key brands contributing to growth. 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 the continued success of Rimmel Match Perfection. 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. Net revenues growth for the segment reflects unit volume growth of 1% and a positive price and mix impact of 5% primarily driven by the launches of higher than segment average priced products, such as Rimmel Lash Accelerator and Sally Hansen Salon Effects. Partially offsetting growth in the segment were lower net revenues of Esprit Color.

Skin & Body Care

In fiscal 2012, net revenues of Skin & Body Care increased 18%, or $110.3, to $727.9 from $617.6 in fiscal 2011, which includes the negative impact of foreign currency exchange translations of approximately 1%. 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 $105.8. The increase for the 2011 Acquisitions in Skin & Body Care was primarily due to the inclusion of TJoy and Philosophy in net revenues for the full fiscal year of 2012. In fiscal 2011, TJoy and Philosophy

63


were only included in net revenues from the respective dates of acquisition. On a pro forma basis, assuming that the net revenues for the 2011 Acquisitions had been included from the beginning of fiscal 2011, net revenues for the 2011 Acquisitions in Skin & Body Care decreased 16% in fiscal 2012 compared to 2011, driven by a decline of 52% in TJoy, partially offset by 1% growth in Philosophy.

Excluding the impact of the 2011 Acquisitions, Skin & Body Care net revenues increased 1%, or $4.5, which includes the negative impact of foreign currency exchange translations of approximately 2%. Unit volume growth of 13% was almost entirely offset by a negative price and mix impact of 10%. This unit volume growth was driven by adidas as the brand benefitted from expansion in China through the TJoy distribution channel. Expanded distribution and an increase in media spending helped drive growth for the adidas brand in Russia and our travel retail and export business in Asia Pacific. adidas growth also reflected the reintroduction of shower gels, body sprays and deodorants in a key customer in the U.S. in January 2012, the positive impact of UEFA European Football Championship promotional activities and the re-launch of shower gels in EMEA. Offsetting growth from adidas were declines in shipment volumes for the Lancaster brand primarily reflecting lower sales of European Prestige sun care products due to generally adverse weather conditions during the summer season. Difficult economic conditions in key Lancaster brand countries, such as Spain, Italy and Greece, and an inventory reduction program by one of our key customers in Russia also contributed to the decline in net revenues for the brand. A negative price and mix impact for the segment primarily reflects an increase in the proportion of the segment’s net revenues from adidas, which has a lower price point than Lancaster, and higher promotional activity for both brands compared to fiscal 2011.

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 2011 Acquisitions, the Skin & Body Care segment experienced a decline of 1% in net revenues primarily driven by a negative price and mix impact of 1%. The decline in the segment was driven primarily by lower net revenues from the adidas brand, 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. Net revenues attributable to the Lancaster brand increased 5% reflecting solid performance of sun care products.

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).

64


 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Year Ended June 30,

 

Change %

 

2012

 

2011

 

2010

 

2012/2011

 

2011/2010

NET REVENUES

 

 

 

 

 

 

 

 

 

 

Americas (excluding revenues related to 2011 Acquisitions)

 

 

$

 

1,403.9

 

 

 

$

 

1,288.9

 

 

 

$

 

1,244.3

 

 

 

 

9

%

 

 

 

 

4

%

 

Revenues generated from 2011 Acquisitions

 

 

 

470.6

 

 

 

 

233.0