0001024305-19-000126.txt : 20191106 0001024305-19-000126.hdr.sgml : 20191106 20191106162256 ACCESSION NUMBER: 0001024305-19-000126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 104 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191106 DATE AS OF CHANGE: 20191106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COTY INC. CENTRAL INDEX KEY: 0001024305 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 133823358 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35964 FILM NUMBER: 191196625 BUSINESS ADDRESS: STREET 1: 350 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10118 BUSINESS PHONE: 212-389-7300 MAIL ADDRESS: STREET 1: 350 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10118 FORMER COMPANY: FORMER CONFORMED NAME: COTY INC / DATE OF NAME CHANGE: 19961004 10-Q 1 coty093019-10q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                    TO          
COMMISSION FILE NUMBER
001-35964
 
 
 
COTY INC.
(Exact name of registrant as specified in its charter)
Delaware
 
13-3823358
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
350 Fifth Avenue,
 
 
 New York,
NY
 
10118
(Address of principal executive offices)
 
(Zip Code)
(212) 389-7300
Registrant’s telephone number, including area code
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý      No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes ý      No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer   
 
Smaller reporting company
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No ý
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.01 par value
COTY
New York Stock Exchange
At October 30, 2019, 757,891,956 shares of the registrant’s Class A Common Stock, $0.01 par value, were outstanding.
 



COTY INC.
INDEX TO FORM 10-Q
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
Three Months Ended
September 30,
 
2019
 
2018
Net revenues
$
1,942.8

 
$
2,031.3

Cost of sales
738.4

 
809.1

Gross profit
1,204.4

 
1,222.2

Selling, general and administrative expenses
1,072.6

 
1,122.3

Gain on sale of business (See Note 5)
(84.5
)
 

Amortization expense
84.3

 
92.5

Restructuring costs
6.0

 
15.5

Asset impairment charges

 
12.6

Operating income (loss)
126.0

 
(20.7
)
Interest expense, net
77.4

 
64.1

Other expense, net
2.2

 
2.7

Income (loss) before income taxes
46.4

 
(87.5
)
Benefit for income taxes
(9.9
)
 
(77.4
)
Net income (loss)
56.3

 
(10.1
)
Net income attributable to noncontrolling interests
2.8

 
1.2

Net income attributable to redeemable noncontrolling interests
1.2

 
0.8

Net income (loss) attributable to Coty Inc.
$
52.3

 
$
(12.1
)
Net income (loss) attributable to Coty Inc. per common share:
 

 
 

Basic
$
0.07

 
$
(0.02
)
Diluted
0.07

 
(0.02
)
Weighted-average common shares outstanding:
 

 
 

Basic
754.2

 
750.8

Diluted
758.9

 
750.8


See notes to Condensed Consolidated Financial Statements.


1


COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
Three Months Ended
September 30,
 
2019
 
2018
Net income (loss)
$
56.3

 
$
(10.1
)
Other comprehensive (loss) income:
 

 
 

Foreign currency translation adjustment
(122.6
)
 
(48.9
)
Net unrealized derivative (loss) gain on cash flow hedges, net of taxes of $0.2 and $(0.3), during the three months ended, respectively
(1.2
)
 
1.0

Pension and other post-employment benefits adjustment, net of tax of $0.0 and $0.5 during the three months ended, respectively
(0.8
)
 
0.1

Total other comprehensive loss, net of tax
(124.6
)
 
(47.8
)
Comprehensive loss
(68.3
)
 
(57.9
)
Comprehensive income (loss) attributable to noncontrolling interests:
 

 
 

Net income
2.8

 
1.2

Foreign currency translation adjustment

 
0.2

Total comprehensive income attributable to noncontrolling interests
2.8

 
1.4

Comprehensive income attributable to redeemable noncontrolling interests:
 
 
 
Net income
1.2

 
0.8

Comprehensive loss attributable to Coty Inc.
$
(72.3
)
 
$
(60.1
)

See notes to Condensed Consolidated Financial Statements.

2


COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
September 30,
2019
 
June 30,
2019
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
350.4

 
$
340.4

Restricted cash
31.0

 
40.0

Trade receivables—less allowances of $55.3 and $48.1, respectively
1,036.6

 
1,161.2

Inventories
1,150.8

 
1,153.3

Prepaid expenses and other current assets
563.9

 
577.8

Total current assets
3,132.7

 
3,272.7

Property and equipment, net
1,469.9

 
1,600.6

Goodwill
4,917.3

 
5,073.8

Other intangible assets, net
6,963.8

 
7,422.3

Operating lease right-of-use assets (See Note 3)
491.9

 

Deferred income taxes
156.0

 
146.3

Other noncurrent assets
151.9

 
149.7

TOTAL ASSETS
$
17,283.5

 
$
17,665.4

LIABILITIES AND EQUITY
 

 
 

Current liabilities:


 


Accounts payable
$
1,548.1

 
$
1,732.7

Accrued expenses and other current liabilities
1,343.7

 
1,483.7

Short-term debt and current portion of long-term debt
185.4

 
193.8

Current operating lease liabilities (See Note 3)
96.5

 

Income and other taxes payable
63.7

 
66.9

Total current liabilities
3,237.4

 
3,477.1

Long-term debt, net
7,453.5

 
7,469.9

Long-term operating lease liabilities (See Note 3)
457.9

 

Pension and other post-employment benefits
570.0

 
593.5

Deferred income taxes
630.9

 
652.5

Other noncurrent liabilities
374.9

 
427.2

Total liabilities
12,724.6

 
12,620.2

COMMITMENTS AND CONTINGENCIES (See Note 17)


 


REDEEMABLE NONCONTROLLING INTERESTS
94.6

 
451.8

EQUITY:
 

 
 

Preferred Stock, $0.01 par value; 20.0 shares authorized, 9.4 and 9.4 issued and outstanding, respectively, at September 30, 2019 and June 30, 2019
0.1

 
0.1

Class A Common Stock, $0.01 par value; 1,000.0 shares authorized, 822.5 and 819.2 issued and 757.0 and 754.2 outstanding, respectively, at September 30, 2019 and June 30, 2019
8.1

 
8.1

Additional paid-in capital
10,566.1

 
10,620.5

Accumulated deficit
(4,489.6
)
 
(4,541.2
)
Accumulated other comprehensive income
(183.4
)
 
(58.8
)
Treasury stock—at cost, shares: 65.5 and 65.0, respectively, at September 30, 2019 and June 30, 2019
(1,446.3
)
 
(1,441.8
)
Total Coty Inc. stockholders’ equity
4,455.0

 
4,586.9

Noncontrolling interests
9.3

 
6.5

Total equity
4,464.3

 
4,593.4

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
17,283.5

 
$
17,665.4

See notes to Condensed Consolidated Financial Statements.

3


COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Three Months Ended September 30, 2019
(In millions, except per share data)
(Unaudited)
 
Preferred Stock
 
Class A
Common Stock
 
Additional
Paid-in Capital
 
(Accumulated Deficit)
 
Accumulated Other Comprehensive (Loss) Income
 
Treasury Stock
 
Total Coty Inc.
Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Redeemable
Noncontrolling Interests
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
 
BALANCE as previously reported—July 1, 2019
9.4

 
$
0.1

 
819.2

 
$
8.1

 
$
10,620.5

 
$
(4,541.2
)
 
$
(58.8
)
 
65.0

 
$
(1,441.8
)
 
$
4,586.9

 
$
6.5

 
$
4,593.4

 
$
451.8

Adjustment due to the adoption of ASC 842 (See Note 2)
 
 
 
 
 
 
 
 
 
 
(0.7
)
 
 
 
 
 
 
 
(0.7
)
 
 
 
(0.7
)
 
 
BALANCE as adjusted—July 1, 2019
9.4

 
$
0.1

 
819.2

 
$
8.1

 
$
10,620.5

 
$
(4,541.9
)
 
$
(58.8
)
 
65.0

 
$
(1,441.8
)
 
$
4,586.2

 
$
6.5

 
$
4,592.7

 
$
451.8

Purchase of Class A Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.5

 
(4.5
)
 
(4.5
)
 
 
 
(4.5
)
 
 
Exercise of employee stock options and restricted stock units
 
 
 
 
0.1

 


 
0.6

 
 
 
 
 
 
 
 
 
0.6

 
 
 
0.6

 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
6.2

 
 
 
 
 
 
 
 
 
6.2

 
 
 
6.2

 
 
Dividends declared - Cash and Other ($0.125 per common share)
 
 
 
 
 
 
 
 
(63.5
)
 
 
 
 
 
 
 
 
 
(63.5
)
 
 
 
(63.5
)
 
 
Dividends declared - Stock ($0.125 per common share)
 
 
 
 
 
 
 
 
(30.9
)
 
 
 
 
 
 
 
 
 
(30.9
)
 
 
 
(30.9
)
 
 
Dividends settled in Shares of Class A Common Stock
 
 
 
 
3.2

 


 
30.9

 
 
 
 
 
 
 
 
 
30.9

 
 
 
30.9

 
 
Net income (loss)
 
 
 
 
 
 
 
 
 
 
52.3

 
 
 
 
 
 
 
52.3

 
2.8

 
55.1

 
1.2

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(124.6
)
 
 
 
 
 
(124.6
)
 


 
(124.6
)
 


Distribution to noncontrolling interests, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

 
(1.9
)
Adjustments related to the sale of business
 
 
 
 
 
 
 
 
6.2

 
 
 
 
 
 
 
 
 
6.2

 
 
 
6.2

 
(360.4
)
Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
 
(3.9
)
 
 
 
 
 
 
 
 
 
(3.9
)
 
 
 
(3.9
)
 
3.9

BALANCE—September 30, 2019
9.4

 
$
0.1

 
822.5

 
$
8.1

 
$
10,566.1

 
$
(4,489.6
)
 
$
(183.4
)
 
65.5

 
$
(1,446.3
)
 
$
4,455.0

 
$
9.3

 
$
4,464.3

 
$
94.6


See notes to Condensed Consolidated Financial Statements.

4


COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Three Months Ended September 30, 2018
(In millions, except per share data)
(Unaudited)
 
Preferred Stock
 
Class A
Common Stock
 
Additional
Paid-in Capital
 
(Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Coty Inc.
Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Redeemable
Noncontrolling Interests
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
 
BALANCE as previously reported—July 1, 2018
5.0

 
$

 
815.8

 
$
8.1

 
$
10,750.8

 
$
(626.2
)
 
$
158.8

 
65.0

 
$
(1,441.8
)
 
$
8,849.7

 
$
5.5

 
$
8,855.2

 
$
661.3

Adjustment due to the adoption of ASU No. 2016-16
 
 
 
 
 
 
 
 
 
 
(112.6
)
 
 
 
 
 
 
 
(112.6
)
 
 
 
(112.6
)
 
 
Adjustment due to the adoption of ASC 606
 
 
 
 
 
 
 
 
 
 
(18.2
)
 
 
 
 
 
 
 
(18.2
)
 
 
 
(18.2
)
 
 
BALANCE as adjusted—July 1, 2018
5.0

 
$

 
815.8

 
$
8.1

 
$
10,750.8

 
$
(757.0
)
 
$
158.8

 
65.0

 
$
(1,441.8
)
 
$
8,718.9

 
$
5.5

 
$
8,724.4

 
$
661.3

Exercise of employee stock options and restricted stock units
 
 
 
 

 

 
0.7

 
 
 
 
 
 
 
 
 
0.7

 
 
 
0.7

 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
6.4

 
 
 
 
 
 
 
 
 
6.4

 
 
 
6.4

 
 
Dividends ($0.125 per common share)
 
 
 
 
 
 
 
 
(94.0
)
 
 
 
 
 
 
 
 
 
(94.0
)
 
 
 
(94.0
)
 
 
Net (loss) income
 
 
 
 
 
 
 
 
 
 
(12.1
)
 
 
 
 
 
 
 
(12.1
)
 
1.2

 
(10.9
)
 
0.8

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(48.0
)
 
 
 
 
 
(48.0
)
 
0.2

 
(47.8
)
 
 
Distribution to noncontrolling interests, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(1.3
)
 
(1.3
)
 
(4.3
)
Additional redeemable noncontrolling interests due to employee grants (See Note 16)
 
 
 
 
 
 
 
 
(1.6
)
 
 
 
 
 
 
 
 
 
(1.6
)
 
 
 
(1.6
)
 
1.6

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
 
37.2

 
 
 
 
 
 
 
 
 
37.2

 
 
 
37.2

 
(37.2
)
BALANCE—September 30, 2018
5.0

 
$

 
815.8

 
$
8.1

 
$
10,699.5

 
$
(769.1
)
 
$
110.8

 
65.0

 
$
(1,441.8
)
 
$
8,607.5

 
$
5.6

 
$
8,613.1

 
$
622.2


See notes to Condensed Consolidated Financial Statements.

5


COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
September 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income (loss)
$
56.3

 
$
(10.1
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
179.2

 
185.6

Operating lease right-of-use asset amortization (See Note 3)
26.1

 

Deferred income taxes
(32.6
)
 
(99.8
)
Provision for bad debts
9.8

 
6.1

Provision for pension and other post-employment benefits
9.0

 
9.1

Share-based compensation
6.2

 
6.4

Gain on sale of business (See Note 5)
(84.5
)
 

Asset impairment charges

 
12.6

Other
12.4

 
11.5

Change in operating assets and liabilities, net of effects from purchase of acquired companies and sale of business:
 

 
 

Trade receivables
71.7

 
35.6

Inventories
(72.9
)
 
(109.5
)
Prepaid expenses and other current assets
(12.1
)
 
40.2

Accounts payable
(103.2
)
 
(83.2
)
Accrued expenses and other current liabilities
4.0

 
(101.3
)
Operating lease liabilities
(26.7
)
 

Income and other taxes payable
4.4

 
7.6

Other noncurrent assets
(8.2
)
 
(5.0
)
Other noncurrent liabilities
1.0

 
12.3

Net cash provided by (used in) operating activities
39.9

 
(81.9
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(86.4
)
 
(133.6
)
Proceeds from sale of business, net of cash disposed
25.6

 

Payment for asset acquisitions

 
(40.8
)
Net cash used in investing activities
(60.8
)
 
(174.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net repayments of short-term debt, original maturity less than three months
(3.4
)
 
(17.8
)
Proceeds from revolving loan facilities
972.6

 
771.9

Repayments of revolving loan facilities
(776.5
)
 
(239.8
)
Repayments of term loans and other long-term debt
(46.1
)
 
(48.1
)
Dividend payment
(63.3
)
 
(93.8
)
Net proceeds from issuance of Class A Common Stock and Series A Preferred Stock
0.6

 
0.7

Payments for purchases of Class A Common Stock held as Treasury Stock
(4.5
)
 

Net proceeds from (payments of) foreign currency contracts
5.3

 
(3.7
)
Purchase of remaining mandatorily redeemable noncontrolling interest
(45.0
)
 

Distributions to noncontrolling interests, redeemable noncontrolling interests and mandatorily redeemable financial instruments
(2.6
)
 
(5.6
)
Payment of debt issuance costs

 
(10.0
)
All other
(0.4
)
 
(2.0
)
Net cash provided by financing activities
36.7

 
351.8

EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(14.8
)
 
(4.5
)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
1.0

 
91.0

CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period
380.4

 
362.2

CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period
$
381.4

 
$
453.2

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 

 
 

Cash paid during the period for interest
$
57.7

 
$
48.9

Cash received during the period for settlement of interest rate swaps

 
43.2

Cash paid during the period for income taxes, net of refunds received
39.7

 
23.9

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
 

 
 

Accrued capital expenditure additions
$
67.2

 
$
97.0

Non-cash Common Stock dividend
30.9

 

See notes to Condensed Consolidated Financial Statements.

6


COTY INC. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
(Unaudited)

1. DESCRIPTION OF BUSINESS
Coty Inc. and its subsidiaries (collectively, the “Company” or “Coty”) manufacture, market, sell and distribute branded beauty products, including fragrances, color cosmetics, hair care products and skin & body related products throughout the world. Coty is a global beauty company with a rich entrepreneurial history and an iconic portfolio of brands.
The Company operates on a fiscal year basis with a year-end of June 30. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended June 30 of that year. For example, references to “fiscal 2020” refer to the fiscal year ending June 30, 2020. When used in this Quarterly Report on Form 10-Q, the term “includes” and “including” means, unless the context otherwise indicates, including without limitation.
The Company’s sales generally increase during the second fiscal quarter as a result of increased demand associated with the winter holiday season. Financial performance, working capital requirements, sales, cash flows and borrowings generally experience variability during the three to six months preceding the holiday season. Product innovations, new product launches and the size and timing of orders from the Company’s customers may also result in variability. The Company also generally experiences an increase in sales during its fourth fiscal quarter in its Professional Beauty segment as a result of higher demand prior to the summer holiday season. See Note 18Subsequent Events for information on the Company’s turnaround plan update announced on October 21, 2019.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include the Company’s consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited interim Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended June 30, 2019. In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2020. All dollar amounts (other than per share amounts) in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
Restricted Cash
Restricted cash represents funds that are not readily available for general purpose cash needs due to contractual limitations. Restricted cash is classified as a current or long-term asset based on the timing and nature of when or how the cash is expected to be used or when the restrictions are expected to lapse. As of September 30, 2019 and June 30, 2019, the Company had restricted cash of $31.0 and $40.0, respectively, included in Restricted cash in the Condensed Consolidated Balance Sheets. The Restricted cash balance as of September 30, 2019 primarily provides collateral for certain bank guarantees on rent, customs and duty accounts and also consists of collections on factored receivables that remain unremitted to the factor as of September 30, 2019. Restricted cash is included as a component of Cash, cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Significant accounting policies that contain subjective management estimates and assumptions include those related to revenue recognition, the market value of inventory, the fair value of acquired assets and liabilities associated with acquisitions, the assessment of goodwill, other intangible assets and long-lived assets for impairment and income taxes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates

7


and assumptions resulting from continuing changes in the economic environment will be reflected in the Condensed Consolidated Financial Statements in future periods.
Tax Information
The effective income tax rate for the three months ended September 30, 2019 and 2018 was (21.3)% and 88.5%, respectively. The negative effective tax rate in the three months ended September 30, 2019 results from reporting income before taxes and a benefit for income taxes. The positive effective tax rate in the three months ended September 30, 2018 results from reporting losses before income taxes and a benefit for income taxes. The change in the effective tax rate for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, is primarily due to the U.S. GAAP treatment of the Younique disposition in the current period and a $30.0 favorable Swiss tax ruling in the prior period.
The effective income tax rates vary from the U.S. federal statutory rate of 21% due to the effect of (i) jurisdictions with different statutory rates, (ii) adjustments to the Company’s unrealized tax benefits (“UTBs”) and accrued interest, (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes.
As of September 30, 2019 and June 30, 2019, the gross amount of UTBs was $340.3 and $336.1, respectively. As of September 30, 2019, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $165.3. As of September 30, 2019 and June 30, 2019, the liability associated with UTBs, including accrued interest and penalties, was $184.0 and $179.9, respectively, which was recorded in Income and other taxes payable and Other non-current liabilities in the Condensed Consolidated Balance Sheets. The total interest and penalties recorded in the Condensed Consolidated Statements of Operations related to UTBs was $1.4 and $1.2 for the three months ended September 30, 2019 and 2018, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019 was $18.7 and $17.3, respectively. On the basis of the information available as of September 30, 2019, it is reasonably possible that a decrease of up to $12.9 in UTBs may occur within 12 months as a result of projected resolutions of global tax examinations and a potential lapse of the applicable statutes of limitations.
Factoring of Receivables
On September 25, 2019, the Company entered into a factoring agreement with a financial institution, which allows for the transfer of receivables from certain European Coty subsidiaries, in exchange for cash (the “European Receivables Purchase Agreement”). The total outstanding amount permitted among such subsidiaries is 93.0 million. Eligible trade receivables are purchased by the financial institution for cash at net invoice value less a factoring fee. Pursuant to the European Receivables Purchase Agreement, the Company acts as collections agent for the financial institution and is responsible for the collection, and remittance to the financial institution, of all customer payments related to trade receivables factored under this arrangement. Factoring of such receivables under the European Receivables Purchase Agreement is executed on a non-recourse basis.
The Company accounts for trade receivable transfers under the European Receivables Purchase Agreement as sales and derecognizes the sold receivables from the Condensed Consolidated Balance Sheets. The fair value of sold receivables approximated their book value due to their short-term nature. The Company estimated that the fair value of its servicing responsibilities was not material. Cash received from the selling of receivables under the European Receivables Purchase Agreement are presented as a change in trade receivables within the operating activities section of the Condensed Consolidated Statements of Cash Flows.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lease assets and liabilities to be recorded on the balance sheet. The Company adopted this ASU and related amendments as of July 1, 2019 using the modified retrospective method. Under this approach, prior periods were not restated. Rather, lease balances and other disclosures for prior periods were provided in the notes to the financial statements as previously reported, and the cumulative effect of initially applying the guidance was recognized in the Condensed Consolidated Balance Sheets. The adoption resulted in a cumulative-effect adjustment to retained earnings of approximately $0.7.
The new leasing standard includes several optional practical expedients available that entities may elect to apply upon transition. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allows a lessee to carry forward its population of existing leases, the classification of each lease, as well as the treatment of initial direct costs as of the period of adoption. In addition, the Company elected the practical expedient related to lease and non-lease components, as an accounting policy election for all asset classes, which allows a lessee to not separate non-lease from lease components and instead account for consideration paid in a contract as a single lease component. Lastly, the Company did not elect the practical expedient

8


related to hindsight analysis which allows a lessee to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use (“ROU”) assets.
The Company has made a policy election to not recognize ROU assets and lease liabilities that arise from leases with an initial term of twelve months or less on the Condensed Consolidated Balance Sheets. However, the Company will recognize these lease payments in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation is incurred. The Company has chosen to apply this accounting policy across all classes of underlying assets. Additionally, upon adoption, the Company utilized a discount rate to determine the present value of the lease payments based on information available as of July 1, 2019.
On July 1, 2019, the Company recognized a lease liability of $617.8 and a corresponding ROU asset of $551.3, including the reclassification of approximately $66.4 of unamortized lease incentives and lease loss liabilities, upon the adoption of this standard, with minimal impact on the Condensed Consolidated Statements of Operations.
See Note 3 for further information related to Leases.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which provided guidance for improvements to accounting for hedging activities under ASC 815. The amendments better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The Company adopted the standard in the first quarter of fiscal 2020 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which permitted the use of the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes. The Company adopted the standard concurrently with the adoption of ASU No. 2017-12 in the first quarter of fiscal 2020 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which requires that a financial asset (or a group of financial assets) measured at an amortized cost basis be presented at the net amount expected to be collected. This approach to estimating credit losses applies to most financial assets measured at amortized cost and certain other instruments, including but not limited to, trade and other receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies the scope of the guidance in ASU No. 2016-13. The amendment will be effective for the Company in fiscal 2021 with early adoption permitted. The Company is evaluating the impact this guidance will have on the Company’s Condensed Consolidated Financial Statements and related disclosures.
3. LEASES
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company determines if an arrangement is a lease at lease inception. For operating leases entered into prior to July 1, 2019, the ROU assets and operating lease liabilities are recognized in the balance sheet based on the present value of the remaining future minimum payments over the lease term from the implementation date of the standard, July 1, 2019. For leases entered into subsequent to July 1, 2019, the operating lease ROU asset and operating lease liabilities are based on the present value of minimum payments over the lease term at the commencement date of the lease.
The Company uses discount rates to determine the present value of future lease payments. The Company uses its secured incremental borrowing rate, based on the information available for leases, including the lease term and interest rate environment in the country in which the lease exists. The lease terms used to calculate the ROU asset and lease liability may include options to extend or terminate when it is reasonably certain that the Company will exercise that option.
The Company leases office facilities under non-cancelable operating leases with terms generally ranging between 10.0 and 25.0 years. The Company utilizes these leased office facilities for use by its employees in countries in which the Company conducts its business. Leases are negotiated with third parties and, in some instances contain renewal, expansion and termination options. The Company also subleases certain office facilities to third parties when the Company no longer intends to utilize the space. None of the Company’s leases restrict the payment of dividends or the incurrence of debt or additional lease obligations, or contain significant purchase options. A portion of our real estate lease portfolio contains base rents subject to annual changes in the Consumer Price Index (“CPI”) as well as charges for operating expenses which are reimbursable to the landlord based on actual usage. Changes to the CPI and payments for such reimbursable operating expenses that are not defined

9


with a minimum rate increase are considered variable and are recognized as variable lease costs in the period in which the obligation for those payments was incurred.
As a practical expedient, the Company has elected an accounting policy not to separate non-lease components from lease components and instead, account for these components as a single lease component. The Company has made an accounting policy election not to recognize ROU assets and lease liabilities for leases that, at the commencement date, are for 12 months or less. Approximately 92% of the Company’s lease obligations are for the use of office space. All of the Company’s material leases are operating leases.
The following chart provides additional information about the Company’s operating leases for the three months ended September 30, 2019:
Lease Cost:
 
Operating lease cost
$
31.7

Short-term lease cost
0.7

Variable lease cost
12.4

Sublease income
(2.2
)
Net lease cost
$
42.6

Other information:
 
Operating cash outflows from operating leases
$
31.9

Right-of-use assets obtained in exchange for lease obligations
(25.0
)
Weighted-average remaining lease term - real estate
7.7 years

Weighted-average discount rate - real estate leases
4.07
%

Future minimum lease payments for the Company’s operating leases as of September 30, 2019 are as follows:
Fiscal Year Ending June 30,
 
2020, remaining
$
89.9

2021
103.6

2022
87.2

2023
72.4

2024
62.4

Thereafter
240.1

Total future lease payments
655.6

Less: imputed interest
(101.2
)
Total present value of lease liabilities
554.4

Current operating lease liabilities
96.5

Long-term operating lease liabilities
457.9

Total operating lease liabilities
$
554.4

 
 
Table excludes obligations for leases with original terms of 12 months or less which have not been recognized as a right-of-use asset or liability in the consolidated balance sheets.
As of September 30, 2019, the Company had additional operating real estate leases that had not yet commenced of $55.0. These operating leases will commence over the next 3 months.

10


At June 30, 2019, the aggregate future minimum rental commitments under all non-cancelable operating lease agreements were as follows:
Fiscal Year Ending June 30,
 
2020
$
122.2

2021
111.2

2022
91.3

2023
76.7

2024
67.8

Thereafter
252.3

Total
721.5

Less: sublease income
(20.1
)
Total payments
$
701.4


4. SEGMENT REPORTING
The Company’s organizational structure is category focused, putting the consumers first, by specifically targeting how and where they shop and what and why they purchase. Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company has designated its Chief Executive Officer as the CODM.
The Company has the following three divisions which represent its operating segments and reportable segments:
Luxury — primarily focused on prestige fragrances, premium skin care and premium color cosmetics;
Consumer Beauty — primarily focused on color cosmetics, retail hair coloring and styling products, mass fragrance, mass skin care and body care;
Professional Beauty — primarily focused on hair and nail care products for professionals.
On July 1, 2019, the Company announced its turnaround plan, which includes planned changes to the reporting structure to the CODM. As part of these reporting structure changes, management expects to move from the current organizational structure into regional commercial business units in Europe, Middle East & Africa (“EMEA”) and Americas and Asia Pacific for the combined Luxury and Consumer Beauty businesses. Such regional business units will be supported by central Luxury and Consumer Beauty marketing teams. Professional Beauty is a distinct business unit. The Company anticipates that its operating and reporting segments would change upon completion of such reporting structure changes and the related changes in the financial information provided to the CODM, which is expected to occur in the third quarter of fiscal 2020. See Note 18Subsequent Events for information on the Company’s turnaround plan update announced on October 21, 2019.
Certain revenues and shared costs and the results of corporate initiatives are managed outside of the three segments by Corporate. The items within Corporate relate to corporate-based responsibilities and decisions and are not used by the CODM to measure the underlying performance of the segments. Corporate primarily includes restructuring and realignment costs, costs related to acquisition activities and certain other expense items not attributable to ongoing operating activities of the segments.
With the exception of goodwill and acquired intangible assets, the Company does not identify or monitor assets by segment. The Company does not present assets by reportable segment since various assets are shared between reportable segments. The allocation of goodwill and acquired intangible assets by segment is presented in Note 8Goodwill and Other Intangible Assets, net.

11


 
Three Months Ended
September 30,
SEGMENT DATA
2019
 
2018
Net revenues:
 
 
 
Luxury
$
806.7

 
$
792.9

Consumer Beauty
716.5

 
828.8

Professional Beauty
419.6

 
409.6

Total
$
1,942.8

 
$
2,031.3

Operating income (loss):
 
 
 
Luxury
$
90.3

 
$
48.7

Consumer Beauty
(43.3
)
 
(18.6
)
Professional Beauty
24.4

 
5.0

Corporate
54.6

 
(55.8
)
Total
$
126.0

 
$
(20.7
)
Reconciliation:
 
 
 
Operating income (loss)
$
126.0

 
$
(20.7
)
Interest expense, net
77.4

 
64.1

Other expense, net
2.2

 
2.7

Income (loss) before income taxes
$
46.4

 
$
(87.5
)

Presented below are the percentage of revenues associated with the Company’s product categories:
 
Three Months Ended
September 30,
PRODUCT CATEGORY
2019
 
2018
Fragrance
42.1
%
 
40.8
%
Color Cosmetics
24.4

 
26.4

Hair Care
24.6

 
24.1

Skin & Body Care
8.9

 
8.7

Total Coty Inc.
100.0
%
 
100.0
%

5. BUSINESS COMBINATIONS AND DIVESTITURES
Business Combinations
The Company did not acquire any businesses during the three months ended September 30, 2019.
Business Divestitures
Younique
On August 27, 2019, the Company entered into a Contribution and Redemption Agreement to transfer all of its membership interest in Foundation, LLC (“Foundation”), which held the net assets of Younique, LLC (“Younique”), to an existing noncontrolling interest holder. On September 16, 2019 (the “Closing Date”) the Company completed the sale of all of its membership interest in Foundation. Consideration received at the Closing Date consisted of $50.0 cash and a secured promissory note with a face value of $