Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - COTY INC. | exhibit312-certificationof.htm |
| EX-32.2 - EXHIBIT 32.2 - COTY INC. | exhibit322-certificationof.htm |
| EX-32.1 - EXHIBIT 32.1 - COTY INC. | exhibit321-certificationof.htm |
| EX-31.1 - EXHIBIT 31.1 - COTY INC. | exhibit311-certificationof.htm |
| EX-21.1 - EXHIBIT 21.1 - COTY INC. | exhibit211-listofsignnific.htm |
| EX-10.3 - EXHIBIT 10.3 - COTY INC. | exhibit103-sideltrpdt.htm |
| EX-10.2 - EXHIBIT 10.2 - COTY INC. | exhibit102-sideltrcp.htm |
| EX-10.1 - EXHIBIT 10.1 - COTY INC. | exhibit101-tncperformances.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017 | |
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 Number) | |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer ¨ | ||
Non-accelerated filer ¨ | (Do not check if a smaller reporting company) | ||
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
At February 1, 2018, 749,864,475 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 December 31, | Six Months Ended December 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net revenues | $ | 2,637.6 | $ | 2,296.7 | $ | 4,875.9 | $ | 3,376.9 | |||||||
Cost of sales | 1,025.0 | 892.3 | 1,899.3 | 1,337.1 | |||||||||||
Gross profit | 1,612.6 | 1,404.4 | 2,976.6 | 2,039.8 | |||||||||||
Selling, general and administrative expenses | 1,319.9 | 1,170.2 | 2,511.7 | 1,649.1 | |||||||||||
Amortization expense | 89.6 | 95.2 | 167.8 | 116.4 | |||||||||||
Restructuring costs | 21.7 | 15.8 | 32.9 | 23.2 | |||||||||||
Acquisition-related costs | 7.0 | 135.9 | 61.1 | 217.4 | |||||||||||
Operating income (loss) | 174.4 | (12.7 | ) | 203.1 | 33.7 | ||||||||||
Interest expense, net | 60.3 | 57.9 | 126.7 | 98.3 | |||||||||||
Other expense (income), net | 3.4 | (0.6 | ) | 7.1 | 0.7 | ||||||||||
Income (loss) before income taxes | 110.7 | (70.0 | ) | 69.3 | (65.3 | ) | |||||||||
Benefit for income taxes | (7.9 | ) | (122.1 | ) | (33.2 | ) | (127.2 | ) | |||||||
Net income | 118.6 | 52.1 | 102.5 | 61.9 | |||||||||||
Net (loss) income attributable to noncontrolling interests | (1.9 | ) | 2.5 | (4.1 | ) | 10.7 | |||||||||
Net income attributable to redeemable noncontrolling interests | 11.3 | 2.8 | 17.1 | 4.4 | |||||||||||
Net income attributable to Coty Inc. | $ | 109.2 | $ | 46.8 | $ | 89.5 | $ | 46.8 | |||||||
Net income attributable to Coty Inc. per common share: | |||||||||||||||
Basic | $ | 0.15 | $ | 0.06 | $ | 0.12 | $ | 0.09 | |||||||
Diluted | 0.15 | 0.06 | 0.12 | 0.09 | |||||||||||
Weighted-average common shares outstanding: | |||||||||||||||
Basic | 749.6 | 746.6 | 749.1 | 539.8 | |||||||||||
Diluted | 752.7 | 752.4 | 752.5 | 545.8 | |||||||||||
See notes to Condensed Consolidated Financial Statements.
1
COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 118.6 | $ | 52.1 | $ | 102.5 | $ | 61.9 | |||||||
Other comprehensive income: | |||||||||||||||
Foreign currency translation adjustment | 32.0 | (90.4 | ) | 271.1 | (96.3 | ) | |||||||||
Net unrealized derivative gains on cash flow hedges, net of taxes of $(3.9) and $(8.8), and $(4.0) and $(8.7) during the three and six months ended, respectively | 7.4 | 33.4 | 7.3 | 41.9 | |||||||||||
Pension and other post-employment benefits adjustment, net of tax of $0.0 and $(5.0), and $0.0 and $(5.8) during the three and six months ended, respectively | 0.9 | 4.9 | 1.6 | 10.1 | |||||||||||
Total other comprehensive income (loss), net of tax | 40.3 | (52.1 | ) | 280.0 | (44.3 | ) | |||||||||
Comprehensive income | 158.9 | — | 382.5 | 17.6 | |||||||||||
Comprehensive (loss) income attributable to noncontrolling interests: | |||||||||||||||
Net (loss) income | (1.9 | ) | 2.5 | (4.1 | ) | 10.7 | |||||||||
Foreign currency translation adjustment | (0.1 | ) | (0.5 | ) | 0.5 | (0.5 | ) | ||||||||
Total comprehensive (loss) income attributable to noncontrolling interests | (2.0 | ) | 2.0 | (3.6 | ) | 10.2 | |||||||||
Comprehensive income attributable to redeemable noncontrolling interests: | |||||||||||||||
Net income | 11.3 | 2.8 | 17.1 | 4.4 | |||||||||||
Foreign currency translation adjustment | — | — | — | — | |||||||||||
Total comprehensive income attributable to redeemable noncontrolling interests | 11.3 | 2.8 | 17.1 | 4.4 | |||||||||||
Comprehensive income (loss) attributable to Coty Inc. | $ | 149.6 | $ | (4.8 | ) | $ | 369.0 | $ | 3.0 | ||||||
See notes to Condensed Consolidated Financial Statements.
2
COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
December 31, 2017 | June 30, 2017 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 400.1 | $ | 535.4 | |||
Restricted cash | 25.6 | 35.3 | |||||
Trade receivables—less allowances of $90.6 and $58.5, respectively | 1,743.9 | 1,470.3 | |||||
Inventories | 1,155.3 | 1,052.6 | |||||
Prepaid expenses and other current assets | 554.3 | 487.9 | |||||
Total current assets | 3,879.2 | 3,581.5 | |||||
Property and equipment, net | 1,647.3 | 1,632.1 | |||||
Goodwill | 8,864.9 | 8,555.5 | |||||
Other intangible assets, net | 8,550.7 | 8,425.2 | |||||
Deferred income taxes | 199.1 | 72.6 | |||||
Other noncurrent assets | 304.4 | 281.3 | |||||
TOTAL ASSETS | $ | 23,445.6 | $ | 22,548.2 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 1,758.6 | $ | 1,732.1 | |||
Accrued expenses and other current liabilities | 2,007.3 | 1,796.4 | |||||
Short-term debt and current portion of long-term debt | 295.9 | 209.1 | |||||
Income and other taxes payable | 94.0 | 66.0 | |||||
Total current liabilities | 4,155.8 | 3,803.6 | |||||
Long-term debt, net | 7,145.8 | 6,928.3 | |||||
Pension and other post-employment benefits | 571.3 | 549.2 | |||||
Deferred income taxes | 933.9 | 924.9 | |||||
Other noncurrent liabilities | 572.0 | 473.4 | |||||
Total liabilities | 13,378.8 | 12,679.4 | |||||
COMMITMENTS AND CONTINGENCIES (Note 17) | |||||||
REDEEMABLE NONCONTROLLING INTERESTS | 638.3 | 551.1 | |||||
EQUITY: | |||||||
Preferred Stock, $0.01 par value; 20.0 shares authorized, 5.2 and 4.2 issued and outstanding, respectively, at December 31, 2017 and June 30, 2017 | — | — | |||||
Class A Common Stock, $0.01 par value; 1,000.0 shares authorized, 814.8 and 812.9 issued, respectively, and 749.8 and 747.9 outstanding, respectively, at December 31, 2017 and June 30, 2017 | 8.1 | 8.1 | |||||
Additional paid-in capital | 10,940.3 | 11,203.2 | |||||
Accumulated deficit | (361.4 | ) | (459.2 | ) | |||
Accumulated other comprehensive income | 283.9 | 4.4 | |||||
Treasury stock—at cost, shares: 65.0 at December 31, 2017 and June 30, 2017 | (1,441.8 | ) | (1,441.8 | ) | |||
Total Coty Inc. stockholders’ equity | 9,429.1 | 9,314.7 | |||||
Noncontrolling interests | (0.6 | ) | 3.0 | ||||
Total equity | 9,428.5 | 9,317.7 | |||||
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | $ | 23,445.6 | $ | 22,548.2 | |||
See notes to Condensed Consolidated Financial Statements.
3
COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Six Months Ended December 31, 2017
(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, 2017 | 4.2 | $ | — | 812.9 | $ | 8.1 | $ | 11,203.2 | $ | (459.2 | ) | $ | 4.4 | 65.0 | $ | (1,441.8 | ) | $ | 9,314.7 | $ | 3.0 | $ | 9,317.7 | $ | 551.1 | |||||||||||||||||||||||
Adjustment due to the adoption of ASU 2016-09 (see Note 2) | 8.3 | 8.3 | 8.3 | |||||||||||||||||||||||||||||||||||||||||||||
BALANCE as adjusted—July 1, 2017 | 4.2 | $ | — | 812.9 | $ | 8.1 | $ | 11,203.2 | $ | (450.9 | ) | $ | 4.4 | 65.0 | $ | (1,441.8 | ) | $ | 9,323.0 | $ | 3.0 | $ | 9,326.0 | $ | 551.1 | |||||||||||||||||||||||
Issuance of Preferred Stock | 1.0 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Exercise of employee stock options and restricted stock units | 1.9 | — | 13.7 | 13.7 | 13.7 | |||||||||||||||||||||||||||||||||||||||||||
Shares withheld for employee taxes | (3.4 | ) | (3.4 | ) | (3.4 | ) | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 17.1 | 17.1 | 17.1 | |||||||||||||||||||||||||||||||||||||||||||||
Dividends ($0.250 per Common Share) | (188.7 | ) | (188.7 | ) | (188.7 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 89.5 | 89.5 | (4.1 | ) | 85.4 | 17.1 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | 279.5 | 279.5 | 0.5 | 280.0 | ||||||||||||||||||||||||||||||||||||||||||||
Distribution to noncontrolling interests, net | — | — | (31.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Dilution of redeemable noncontrolling interest due to additional contribution (See Note 16) | 17.0 | 17.0 | 17.0 | (17.0 | ) | |||||||||||||||||||||||||||||||||||||||||||
Additional redeemable noncontrolling interests due to employee grants (See Note 16) | (8.3 | ) | (8.3 | ) | (8.3 | ) | 8.3 | |||||||||||||||||||||||||||||||||||||||||
Proceeds from redeemable noncontrolling interests | — | — | 0.2 | |||||||||||||||||||||||||||||||||||||||||||||
Adjustment of redeemable noncontrolling interests to redemption value | (110.3 | ) | (110.3 | ) | (110.3 | ) | 110.3 | |||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2017 | 5.2 | $ | — | 814.8 | $ | 8.1 | $ | 10,940.3 | $ | (361.4 | ) | $ | 283.9 | 65.0 | $ | (1,441.8 | ) | $ | 9,429.1 | $ | (0.6 | ) | $ | 9,428.5 | $ | 638.3 | ||||||||||||||||||||||
See notes to Condensed Consolidated Financial Statements.
4
COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Six Months Ended December 31, 2016
(In millions, except per share data)
(Unaudited)
Preferred Stock | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total Coty Inc. Stockholders’ Equity | Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
BALANCE—July 1, 2016 | 1.7 | — | 138.7 | $ | 1.4 | 262.0 | $ | 2.6 | $ | 2,038.4 | $ | (37.0 | ) | $ | (239.7 | ) | 63.6 | $ | (1,405.5 | ) | $ | 360.2 | $ | 6.9 | $ | 367.1 | $ | 73.3 | ||||||||||||||||||||||||||
Issuance of Class A Common Stock for business combination | 409.7 | 4.1 | 9,624.5 | 9,628.6 | 9,628.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Preferred Stock | 1.0 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A Common Stock | 262.0 | 2.6 | (262.0 | ) | (2.6 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Purchase of Class A Common Stock | 1.4 | (36.3 | ) | (36.3 | ) | (36.3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Exercise of employee stock options and restricted stock units and related tax benefits | 1.6 | — | 13.6 | 13.6 | 13.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | 8.9 | 8.9 | 8.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends ($0.40 per common share) | (187.3 | ) | (187.3 | ) | (187.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 46.8 | 46.8 | 10.7 | 57.5 | 4.4 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (43.8 | ) | (43.8 | ) | (0.5 | ) | (44.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Distribution to noncontrolling interests, net | — | — | — | (3.5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment of redeemable noncontrolling interests to redemption value | 2.4 | 2.4 | 2.4 | (2.4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of redeemable noncontrolling interests | (0.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2016 | 2.7 | — | 812.0 | $ | 8.1 | — | $ | — | $ | 11,500.5 | $ | 9.8 | $ | (283.5 | ) | 65.0 | $ | (1,441.8 | ) | $ | 9,793.1 | $ | 17.1 | $ | 9,810.2 | $ | 70.9 | |||||||||||||||||||||||||||
See notes to Condensed Consolidated Financial Statements.
5
COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six Months Ended December 31, | |||||||
2017 | 2016 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income | $ | 102.5 | $ | 61.9 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 350.5 | 230.3 | |||||
Deferred income taxes | (75.1 | ) | (111.2 | ) | |||
Provision for bad debts | 9.0 | 5.8 | |||||
Provision for pension and other post-employment benefits | 22.2 | 28.5 | |||||
Share-based compensation | 16.2 | 9.1 | |||||
Other | (5.1 | ) | (2.7 | ) | |||
Change in operating assets and liabilities, net of effects from purchase of acquired companies: | |||||||
Trade receivables | (246.6 | ) | (293.7 | ) | |||
Inventories | (22.2 | ) | 103.3 | ||||
Prepaid expenses and other current assets | (47.6 | ) | 22.6 | ||||
Accounts payable | 18.7 | 322.6 | |||||
Accrued expenses and other current liabilities | 185.6 | 369.8 | |||||
Income and other taxes payable | 19.5 | (59.0 | ) | ||||
Other noncurrent assets | (14.9 | ) | 11.4 | ||||
Other noncurrent liabilities | (4.9 | ) | (35.3 | ) | |||
Net cash provided by operating activities | 307.8 | 663.4 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Capital expenditures | (232.2 | ) | (198.2 | ) | |||
Payment for business combinations, net of cash acquired | (264.6 | ) | (143.8 | ) | |||
Proceeds from sale of asset | 2.8 | — | |||||
Net cash used in investing activities | (494.0 | ) | (342.0 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from short-term debt, original maturity more than three months | — | 5.6 | |||||
Repayments of short-term debt, original maturity more than three months | — | (5.8 | ) | ||||
Net proceeds (repayments) of short-term debt, original maturity less than three months | 71.5 | (39.5 | ) | ||||
Proceeds from revolving loan facilities | 1,437.0 | 934.4 | |||||
Repayments of revolving loan facilities | (1,166.4 | ) | (1,384.4 | ) | |||
Proceeds from term loans | — | 1,075.0 | |||||
Repayments of term loans | (95.5 | ) | (55.7 | ) | |||
Dividend payment | (188.1 | ) | (185.8 | ) | |||
Net proceeds from issuance of Class A Common Stock and Series A Preferred Stock | 13.7 | 13.6 | |||||
Payments for employee taxes related to net settlement of equity awards (see Note 2) | (3.4 | ) | — | ||||
Payments for purchases of Class A Common Stock held as Treasury Stock | — | (36.3 | ) | ||||
Net proceeds from foreign currency contracts | 8.2 | 14.8 | |||||
Purchase of additional noncontrolling interests | — | (9.8 | ) | ||||
Proceeds from noncontrolling interests | 0.2 | — | |||||
Distributions to noncontrolling interests, redeemable noncontrolling interests and mandatorily redeemable financial instruments | (40.0 | ) | (3.5 | ) | |||
Payment of deferred financing fees | (4.0 | ) | (23.4 | ) | |||
Net cash provided by financing activities | 33.2 | 299.2 | |||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | 8.0 | (28.8 | ) | ||||
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (145.0 | ) | 591.8 | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period | 570.7 | 372.4 | |||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period | $ | 425.7 | $ | 964.2 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | |||||||
6
Cash paid during the period for interest | $ | 129.4 | $ | 79.5 | |||
Cash paid during the period for income taxes, net of refunds received | 57.5 | 38.4 | |||||
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: | |||||||
Accrued capital expenditure additions | $ | 72.6 | $ | 56.2 | |||
Non-cash Common Stock issued for business combination | — | 9,628.6 | |||||
Non-cash debt assumed for business combination | — | 1,941.8 | |||||
Non-cash contingent consideration for business combination (see Note 4) | 5.0 | — | |||||
See notes to Condensed Consolidated Financial Statements.
7
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. Coty is a global beauty company with a strategic vision to be a new global leader and challenger in the beauty industry.
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 2018” refer to the fiscal year ending June 30, 2018.
The Company’s revenues generally increase during the second fiscal quarter as a result of increased demand associated with the holiday season. Working capital requirements, sales, and cash flows generally experience variability during the three to six months buildup preceding the holiday season. Product innovations, new product launches and the size and timing of certain orders from the Company’s customers may also result in variability. The Company also generally experiences higher sales during its fourth fiscal quarter in its Professional Beauty segment as a result of higher demand prior to the summer holiday season.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim Condensed Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include 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, 2017. In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the Condensed Consolidated Financial Statements. The results of operations for the three and six months ended December 31, 2017 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2018. All dollar amounts (other than per share amounts) in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.
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, pension benefit costs, the assessment of goodwill, other intangible assets and long-lived assets for impairment, income taxes and the fair value of redeemable noncontrolling interests. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates and assumptions. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the Condensed Consolidated Financial Statements in future periods.
Tax Information
The effective income tax rate for the three months ended December 31, 2017 and 2016 was (7.1)% and 174.4%, respectively, and (47.9)% and 194.8% for the six months ended December 31, 2017 and 2016, respectively. The decrease in the effective tax rate as compared to the same periods in fiscal 2017 is primarily the result of (i) the resolution of foreign uncertain tax positions of approximately $43.0 ($41.8 in tax and $1.2 in interest) in the three and six months ended December 31, 2017 and (ii) the release of a valuation allowance of $111.2 in the U.S. in the three and six months ended December 31, 2016 as a result of The Procter & Gamble Company’s (“P&G”) Beauty Business acquisition.
The effective income tax rates vary from the U.S. federal statutory rate of approximately 28% 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 January 1, 2018, the
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U.S. federal statutory rate decreased from 35% to 21%. As the Company has a June 30 fiscal year-end, the lower rate will be phased in, resulting in a blended rate of approximately 28% for the fiscal year ending June 30, 2018.
On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act” (“Tax Act”) was enacted. The Tax Act significantly revises the U.S. corporate income tax system by, amongst other things, reducing the federal tax rate on U.S. earnings to 21%, implementing a modified territorial tax system and imposing a one-time deemed repatriation tax on historical earnings generated by foreign subsidiaries that have not been repatriated to the U.S.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No 118 (“SAB 118”) which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date of the Tax Act for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with the Company’s initial analysis of the impact of the Tax Act, the Company estimates the overall impact to be neutral from both a cash and financial statement perspective for fiscal 2018. The Company expects to fully offset the cash impact of the one-time deemed repatriation tax with tax attributes (e.g., net operating loss carryforwards, foreign tax credits, etc.). The expense in the financial statements as a result of utilizing these tax attributes of approximately $300.0 is expected to be offset by the tax benefit estimated on the revaluation of its deferred taxes of approximately $300.0. For various reasons that are discussed more fully below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. Where the Company was able to make reasonable estimates of the effects of elements for which the analysis is not yet complete, provisional adjustments were recorded. These provisional estimates may be affected by other elements related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences, confirming the amount of foreign earnings that have not been repatriated to the U.S., division of these earnings between cash and non-liquid assets, and validating the amount of tax attributes available.
As the Company finalizes the analysis of the impact of the Tax Act, additional adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The Tax Act requires a U.S. shareholder of a foreign corporation to include in income its global intangible low-taxed income (“GILTI”). In general, GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets. As a result of recently released FASB guidance, an entity may choose to recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or an entity can elect to treat GILTI as a period cost and include it in the tax expense of the year it is incurred. As such, the Company has elected to treat the tax on GILTI as a tax expense in the year it is incurred rather than recognizing deferred taxes.
As of December 31, 2017 and June 30, 2017, the gross amount of UTBs was $260.6 and $257.9, respectively. As of December 31, 2017, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $224.0. As of December 31, 2017 and June 30, 2017, the liability associated with UTBs, including accrued interest and penalties, was $231.3 and $154.6, 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 $1.0 and $0.8 for the three months ended December 31, 2017 and 2016, respectively, and $2.1 and $1.0 for the six months ended December 31, 2017 and 2016, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of December 31, 2017 and June 30, 2017 was $13.0 and $11.7, respectively. On the basis of the information available as of December 31, 2017, it is reasonably possible that a decrease of up to $8.8 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.
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Recently Adopted Accounting Pronouncements
During the first quarter of fiscal 2018, the Company adopted the amended Financial Accounting Standard Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for share-based payment transactions. The adoption of the ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements. The primary impact of the new standard was the recognition of previously unrecognized excess tax benefits as an $8.3 cumulative-effect adjustment to Accumulated deficit as of July 1, 2017 to reflect a modified retrospective application. Prospectively, the excess tax benefits will be recorded as a component of Income tax expense as required, whereas they were previously recorded in Additional paid-in capital (“APIC”). Additionally, the ASU required that $3.4 related to shares withheld for employee taxes to be reported in Cash flows from financing activities for the six months ended December 31, 2017 with an insignificant impact to prior periods.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which simplifies the measurement of inventories by requiring inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU No. 2015-11 during the first quarter of fiscal 2018. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
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 amendment will be effective for the Company in fiscal 2020 with early adoption permitted. The Company is evaluating the impact this guidance will have on the Company’s Consolidated Financial Statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which implements a common revenue model that will enhance comparability across industries and require enhanced disclosures. The new standard introduces a five step principles based process to determine the timing and amount of revenue ultimately expected to be recorded. In March 2016, the FASB issued authoritative guidance amending certain portions of this standard to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued authoritative guidance amending certain portions of this standard to clarify the considerations for identifying performance obligations and to clarify the implementation guidance for revenue recognized from licensing arrangements. In May 2016, the FASB issued authoritative guidance amending certain portions of the standard to narrow the scope over, or to provide practical expedients, for assessing pending collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The Company will adopt the standard on July 1, 2018 using the modified retrospective transition method of adoption. The Company’s preliminary evaluation indicated that the adoption impact is expected to be primarily related to the timing of certain accruals associated with customer incentives and potential reclassifications of certain costs between Selling, general and administrative expenses and expenses recorded as a reduction of revenue resulting from changes in the accounting treatment of store fixtures under the new standard. The Company continues to finalize its assessment of the final impact of this ASU on the Company’s Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company plans to adopt the standard on July 1, 2019. The Company is in the early stages of its evaluation of the standard and has an implementation team in place that is performing an evaluation of the impact this standard will have on the Company’s Consolidated Financial Statements and related disclosures.
3. SEGMENT REPORTING
Operating and reportable segments (referred to as “segments”) reflect the way the Company is managed and for which separate financial information is available and evaluated regularly by the Company’s 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.
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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 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.
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 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 8—Goodwill and Other Intangible Assets, net.
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||
SEGMENT DATA | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net revenues: | |||||||||||||||
Luxury | $ | 951.2 | $ | 835.0 | $ | 1,715.6 | $ | 1,284.0 | |||||||
Consumer Beauty | 1,138.6 | 1,001.7 | 2,182.0 | 1,573.6 | |||||||||||
Professional Beauty | 547.8 | 460.0 | 978.3 | 519.3 | |||||||||||
Total | $ | 2,637.6 | $ | 2,296.7 | $ | 4,875.9 | $ | 3,376.9 | |||||||
Operating income (loss): | |||||||||||||||
Luxury | $ | 85.1 | $ | 66.6 | $ | 141.8 | $ | 142.7 | |||||||
Consumer Beauty | 99.3 | 62.9 | 161.2 | 115.6 | |||||||||||
Professional Beauty | 73.5 | 83.3 | 71.8 | 99.7 | |||||||||||
Corporate | (83.5 | ) | (225.5 | ) | (171.7 | ) | (324.3 | ) | |||||||
Total | $ | 174.4 | $ | (12.7 | ) | $ | 203.1 | $ | 33.7 | ||||||
Reconciliation: | |||||||||||||||
Operating income (loss) | $ | 174.4 | $ | (12.7 | ) | $ | 203.1 | $ | 33.7 | ||||||
Interest expense, net | 60.3 | 57.9 | 126.7 | 98.3 | |||||||||||
Other expense (income), net | 3.4 | (0.6 | ) | 7.1 | 0.7 | ||||||||||
Income (loss) before income taxes | $ | 110.7 | $ | (70.0 | ) | $ | 69.3 | $ | (65.3 | ) | |||||
Presented below are the percentage of revenues associated with the Company’s product categories:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||
PRODUCT CATEGORY | 2017 | 2016 | 2017 | 2016 | |||||||
Fragrance | 40.7 | % | 40.8 | % | 39.1 | % | 42.3 | % | |||
Color Cosmetics | 24.1 | 24.3 | 26.3 | 27.3 | |||||||
Hair Care | 24.5 | 23.8 | 24.2 | 16.3 | |||||||
Skin & Body Care | 10.7 | 11.1 | 10.4 | 14.1 | |||||||
Total Coty Inc. | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
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4. BUSINESS COMBINATIONS
P&G Beauty Business Acquisition
On October 1, 2016, the Company acquired the P&G Beauty Business in order to further strengthen the Company’s position in the global beauty industry. The purchase price was $11,570.4 and consisted of $9,628.6 of total equity consideration and $1,941.8 of assumed debt.
The Company issued 409.7 million shares of common stock to the former holders of Galleria Co. (“Galleria”) (which held the assets of the P&G Beauty Business) common stock, together with cash in lieu of fractional shares. Coty Inc. is considered to be the acquiring company for accounting purposes.
The Company has finalized the valuation of assets acquired and liabilities assumed for the P&G Beauty Business acquisition. The Company recognized certain measurement period adjustments as disclosed below during the quarter ended September 30, 2017. The measurement period for the P&G Beauty Business acquisition closed at the end of the first quarter of fiscal 2018.
The following table summarizes the allocation of the purchase price to the net assets of the P&G Beauty Business as of the October 1, 2016 acquisition date:
Estimated fair value as previously reported (a) | Measurement period adjustments (b) | Final fair value as adjusted | Estimated useful life (in years) | ||||||||||
Cash and cash equivalents | $ | 387.6 | $ | — | $ | 387.6 | |||||||
Inventories | 465.5 | — | 465.5 | ||||||||||
Property, plant and equipment | 742.9 | (16.9 | ) | 726.0 | 3 - 40 | ||||||||
Goodwill | 5,528.4 | 35.5 | 5,563.9 | Indefinite | |||||||||
Trademarks — indefinite | 1,575.0 | — | 1,575.0 | Indefinite | |||||||||
Trademarks — finite | 747.7 | — | 747.7 | 10 - 30 | |||||||||
Customer relationships | 1,074.2 | 18.8 | 1,093.0 | 2 - 26 | |||||||||
License agreements | 2,299.0 | 12.0 | 2,311.0 | 4 - 30 | |||||||||
Product formulations | 183.8 | (10.0 | ) | 173.8 | 5 - 28 | ||||||||
Other net working capital | (23.2 | ) | — | (23.2 | ) | ||||||||
Net other assets (liabilities) | 64.6 | (33.7 | ) | 30.9 | |||||||||
Unfavorable contract liabilities | (130.0 | ) | — | (130.0 | ) | ||||||||
Pension liabilities | (404.1 | ) | — | (404.1 | ) | ||||||||
Deferred tax liability, net | (941.0 | ) | (5.7 | ) | (946.7 | ) | |||||||
Total purchase price | $ | 11,570.4 | $ | — | $ | 11,570.4 | |||||||
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. The business combination was completed in fiscal 2017.
(b) The Company recorded measurement period adjustments in the first quarter of fiscal 2018. The measurement period adjustments related to Customer relationships, License agreements and Product formulations, collectively, of $20.8, were a result of changes in assumptions that were used at the date of acquisition for valuation purposes including allocation of costs and synergies. The measurement period adjustments related to Property, plant and equipment and Net other assets of ($16.9) and ($33.7), respectively, primarily related to obtaining new facts and circumstances about acquired assets and liabilities that existed at the acquisition date. The decrease to Deferred tax liability, net was primarily a result of the change of the jurisdictional allocation of the tangible and intangible assets. All measurement period adjustments were offset against Goodwill.
Goodwill is primarily attributable to the anticipated company-specific synergies and economies of scale expected from the operations of the combined company. The synergies include certain cost savings, operating efficiencies, and leverage of the acquired brand recognition to be achieved as a result of the P&G Beauty Business acquisition. Goodwill is not expected to be deductible for tax purposes. Goodwill of $1,889.8, $3,188.1 and $486.0 is allocated to the Luxury, Consumer Beauty and Professional Beauty segments, respectively. The allocation of goodwill to segments was based on the relative fair values of expected future cash flows.
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ghd Acquisition
On November 21, 2016, the Company completed the acquisition of 100% of the equity interest of Lion/Gloria Topco Limited which held the net assets of ghd (“ghd”) which stands for “Good Hair Day”, a premium brand in high-end hair styling appliances. The ghd acquisition further strengthens the Company’s professional hair category and is included in the Professional Beauty segment’s results after the acquisition date. The total cash consideration paid net of acquired cash and cash equivalents was £430.2 million, the equivalent of $531.5, at the time of closing.
The Company has finalized the valuation of assets acquired and liabilities assumed for the ghd acquisition. The Company recognized certain measurement period adjustments as disclosed below during the six months ended December 31, 2017. The measurement period for the ghd acquisition closed on November 21, 2017.
The following table summarizes the allocation of the purchase price to the net assets of ghd as of the November 21, 2016 acquisition date:
Estimated fair value as previously reported (a) | Measurement period adjustments (b) | Final fair value as adjusted | Estimated useful life (in years) | ||||||||||
Cash and cash equivalents | $ | 7.1 | $ | — | $ | 7.1 | |||||||
Inventories | 79.6 | — | 79.6 | ||||||||||
Property, plant and equipment | 10.0 | — | 10.0 | 3 - 10 | |||||||||
Goodwill | 174.4 | 24.6 | 199.0 | Indefinite | |||||||||
Indefinite-lived other intangible assets | 163.8 | (14.8 | ) | 149.0 | Indefinite | ||||||||
Customer relationships | 36.6 | (2.3 | ) | 34.3 | 11 - 25 | ||||||||
Technology | 146.6 | (17.2 | ) | 129.4 | 11 - 17 | ||||||||
Other net working capital | (16.6 | ) | 4.7 | (11.9 | ) | ||||||||
Net other assets | 0.9 | (0.9 | ) | — | |||||||||
Deferred tax liability, net | (63.9 | ) | 5.9 | (58.0 | ) | ||||||||
Total purchase price | $ | 538.5 | $ | — | $ | 538.5 | |||||||
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. The business combination was completed in fiscal 2017.
(b) The Company recorded measurement period adjustments in the first and second quarters of fiscal 2018. The measurement period adjustments related to decreases to Technology, Indefinite-lived other intangible assets and Customer relationships of $17.2, $14.8 and $2.3, respectively, and a decrease to the deferred tax liability of $5.9 were a result of changes in assumptions that were used at the date of acquisition for valuation purposes. The measurement period adjustments related to Other net working capital of $4.7 were a result of obtaining new facts and circumstances about acquired accrued expenses that existed as of the acquisition date. All measurement period adjustments were offset against Goodwill.
Goodwill is not expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from integrating ghd’s products into the Company’s existing sales channels. Goodwill of $49.0, $42.0 and $108.0 is allocated to the Luxury, Consumer Beauty and Professional Beauty segments, respectively. The allocation of goodwill to the segments were due to the reduction in corporate and regional overhead allocated to these segments due to the addition of the ghd acquisition.
Younique Acquisition
On February 1, 2017, the Company completed its acquisition of 60% of the membership interest in Foundation, LLC (“Foundation”) which held the net assets of Younique, LLC, a Utah limited liability company (“Younique”), for cash consideration of $600.0, net of acquired cash and assumed debt, and an additional payment of $7.5 for working capital adjustments paid in the six months ended December 31, 2017. The existing Younique membership holders contributed their 100% membership interest in Younique to Foundation in exchange for a 40% membership interest in Foundation and $607.5 of cash consideration. Younique strengthens the Consumer Beauty segment’s product offerings. The Company accounts for the noncontrolling interest portion of the acquisition as a redeemable noncontrolling interest.
The Company estimated the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. The preliminary fair values are substantially complete with the exception of accrued expenses and goodwill. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price
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adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
The following table summarizes the estimated allocation of the purchase price to the net assets of Younique as of the February 1, 2017 acquisition date:
Estimated fair value as previously reported (a) | Measurement period adjustments (b) | Estimated fair value as adjusted | Estimated useful life (in years) | ||||||||||
Cash and cash equivalents | $ | 17.5 | $ | — | $ | 17.5 | |||||||
Inventories | 88.1 | — | 88.1 | ||||||||||
Property, plant and equipment | 67.1 | — | 67.1 | 3 - 8 | |||||||||
Goodwill | 575.3 | (0.2 | ) | 575.1 | Indefinite | ||||||||
Trademark — finite | 123.0 | — | 123.0 | 20 | |||||||||
Product formulations | 0.6 | — | 0.6 | 5 | |||||||||
Customer relationships | 197.0 | — | 197.0 | 7 - 10 | |||||||||
Other net working capital | (27.7 | ) | 0.2 | (27.5 | ) | ||||||||
Short-term and long-term debt | (1.2 | ) | — | (1.2 | ) | ||||||||
Total equity value | 1,039.7 | — | 1,039.7 | ||||||||||
Redeemable noncontrolling interest | 415.9 | — | 415.9 | ||||||||||
Net cash and debt acquired | 16.3 | — | 16.3 | ||||||||||
Total purchase price | $ | 607.5 | $ | — | $ | 607.5 | |||||||
(a) As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017. The business combination was completed in fiscal 2017.
(b) The Company recorded measurement period adjustments in the first and second quarters of fiscal 2018 to account for an increase in the estimated other net working capital of $0.2 as of the February 1, 2017 acquisition date. This adjustment is offset against Goodwill.
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from certain manufacturing and supply chain cost savings. Goodwill of $95.0, $420.1 and $60.0 is allocated to the Luxury, Consumer Beauty and Professional Beauty segments, respectively. The allocation of goodwill to the segments were due to the reduction in corporate and regional overhead allocated to these segments due to the addition of the Younique acquisition.
Burberry Beauty Business Acquisition
On October 2, 2017, the Company acquired the exclusive global license rights and other related assets for the Burberry Limited (“Burberry”) luxury fragrances, cosmetics and skincare business (the “Burberry Beauty Business”). The Burberry Beauty Business acquisition is expected to further strengthen the Company’s position in the global beauty industry. Total purchase consideration, after post-closing adjustments, was £187.1 million, the equivalent of $250.1, at the time of closing. Included in the purchase price was cash consideration of £183.3 million, the equivalent of $245.1, at the time of closing, in addition to £3.8 million, the equivalent of $5.0, of estimated contingent consideration, at the time of closing.
The future contingent consideration payments will range from zero to £16.7 million and will be payable on a quarterly basis to Burberry as certain items of inventory transferred to the Company at the acquisition date are subsequently used or sold. The amount of the contingent consideration recorded was estimated as of the acquisition date and is subject to change based on the related inventory usage. The fair value of the contingent consideration was determined by estimating the future inventory usage and corresponding payments over a four-year period, with the contingent payments being made in each of the respective years. The estimate of the contingent consideration payable is recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
The Company estimated the preliminary fair value of acquired assets and liabilities as of the date of acquisition based on information currently available. The Company is still evaluating the fair value of the assets and liabilities assumed from the Burberry Beauty Business acquisition. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized.
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The following table summarizes the estimated allocation of the purchase price to the net assets of the Burberry Beauty Business as of the October 2, 2017 acquisition date:
Estimated fair value | Estimated useful life (in years) | ||||
Inventories | $ | 55.1 | |||
Property, plant and equipment | 5.8 | 1 - 3 | |||
License and distribution rights | 129.7 | 3 - 15 | |||
Goodwill | 68.2 | Indefinite | |||
Net other liabilities | (8.7 | ) | |||
Total purchase price | $ | 250.1 | |||
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from integrating the Burberry Beauty Business products into the Company’s existing sales channels.
For the three and six months ended December 31, 2017, Net revenues and Net income of the Burberry Beauty Business included in the Company’s Condensed Consolidated Statements of Operations from the date of acquisition were $8.2 and $(9.8), respectively.
Unaudited Pro Forma Information
The unaudited pro forma financial information in the table below summarizes the combined results of the Company and the P&G Beauty Business and Younique (the “Pro Forma Acquisitions”) as though the companies had been combined on July 1, 2015. The three and six months ended December 31, 2016 include pro forma adjustments for all of the Pro Forma Acquisitions.
The pro forma adjustments include incremental amortization of intangible assets and depreciation of property, plant and equipment, based on allocated fair values of each asset as well as costs related to financing the Pro Forma Acquisitions. The unaudited pro forma information also includes non-recurring acquisition-related costs. Pro forma adjustments were tax-effected at the Company’s statutory rates. For the pro forma basic and diluted earnings per share calculation, 409.7 million shares issued in connection with the P&G Beauty Business acquisition were considered as if issued on July 1, 2015. The pro forma information is presented for informational purposes only and may not be indicative of the results of operations that would have been achieved if the Pro Forma Acquisitions had taken place on July 1, 2015 or that may occur in the future, and does not reflect future synergies, integration costs, or other such costs or savings. The pro forma information for the three and six months ended December 31, 2016 is as follows:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||
2016 (a) | 2016 (a) | ||||||
Pro forma Net revenues | $ | 2,394.6 | $ | 4,584.2 | |||
Pro forma Net income (loss) | 123.9 | 8.5 | |||||
Pro forma Net income (loss) attributable to Coty Inc. | 118.6 | (6.0 | ) | ||||
Pro forma Net income (loss) attributable to Coty Inc. per common share: | |||||||
Basic | $ | 0.16 | $ | (0.01 | ) | ||
Diluted | $ | 0.16 | $ | (0.01 | ) | ||
(a) The pro forma information for the three months ended December 31, 2016 excluded $134.9 of non-recurring acquisition-related costs and excluded $36.5 of amortization of inventory step up. The pro forma information for the six months ended December 31, 2016 excluded $316.6 of non-recurring acquisition-related costs and excluded $36.5 of amortization of inventory step up.
5. ACQUISITION-RELATED COSTS
Acquisition-related costs, which are expensed as incurred, represent non-restructuring costs directly related to acquiring and integrating an entity, for both completed and contemplated acquisitions. These costs can include finder’s fees, legal, accounting, valuation, other professional or consulting fees, including fees related to transitional services, and other internal costs which can include compensation related expenses for dedicated internal resources. The Company recognized acquisition-related costs of $7.0 and $135.9 for the three months ended December 31, 2017 and 2016, respectively, and $61.1 and $217.4
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for the six months ended December 31, 2017 and 2016, respectively, which have been recorded in Acquisition-related costs in the Condensed Consolidated Statements of Operations. Acquisition-related costs incurred during the three months ended December 31, 2017 and 2016 were primarily related to the Burberry Beauty Business and P&G Beauty Business acquisitions, respectively. Acquisition-related costs incurred during both the six months ended December 31, 2017 and 2016 were primarily related to the P&G Beauty Business acquisition.
6. RESTRUCTURING COSTS
Restructuring costs for the three and six months ended December 31, 2017 and 2016 are presented below:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Global Integration Activities | $ | 27.1 | $ | 13.6 | $ | 36.9 | $ | 13.6 | |||||||
Acquisition Integration Program | (3.3 | ) | 1.4 | (3.3 | ) | 4.6 | |||||||||
Other Restructuring | (2.1 | ) | 0.8 | (0.7 | ) | 5.0 | |||||||||
Total | $ | 21.7 | $ | 15.8 | $ | 32.9 | $ | 23.2 | |||||||
Global Integration Activities
In connection with the acquisition of the P&G Beauty Business, the Company has incurred and anticipates that it will continue to incur restructuring and related costs aimed at integrating and optimizing the combined organization (“Global Integration Activities”).
Of the expected costs, the Company has incurred cumulative restructuring charges of $401.1 related to approved initiatives through December 31, 2017, which have been recorded in Corporate. The following table presents aggregate restructuring charges for the program:
Severance and Employee Benefits | Third-Party Contract Terminations | Fixed Asset Write-offs | Other Exit Costs | Total | |||||||||||||||
Fiscal 2017 | $ | 333.9 | $ | 22.4 | $ | 4.6 | $ | 3.3 | $ | 364.2 | |||||||||
Fiscal 2018 | 24.2 | 9.4 | 0.2 | 3.1 | 36.9 | ||||||||||||||
Cumulative through December 31, 2017 | $ | 358.1 | $ | 31.8 | $ | 4.8 | $ | 6.4 | $ | 401.1 | |||||||||
Over the next two fiscal years, the Company expects to incur approximately $130.0 of additional restructuring charges pertaining to the approved actions. Of the $130.0 of additional restructuring charges, the Company currently anticipates spending equal amounts related to employee termination benefits, fixed asset write-offs, third-party contract terminations and other costs to exit facilities and relocate employees.
The related liability balance and activity for the Global Integration Activities restructuring costs are presented below:
Severance and Employee Benefits | Third-Party Contract Terminations | Fixed Asset Write-offs | Other Exit Costs | Total Program Costs | |||||||||||||||
Balance—July 1, 2017 | $ | 310.8 | $ | 14.9 | $ | — | $ | 2.8 | $ | 328.5 | |||||||||
Restructuring charges | 30.4 | 9.4 | 0.2 | 3.1 | 43.1 | ||||||||||||||
Payments | (68.0 | ) | (5.4 | ) | — | (2.4 | ) | (75.8 | ) | ||||||||||
Changes in estimates | (6.2 | ) | — | — | — | (6.2 | ) | ||||||||||||
Non-cash utilization | — | — | (0.2 | ) | — | (0.2 | ) | ||||||||||||
Effect of exchange rates | 17.4 | (0.1 | ) | — | — | 17.3 | |||||||||||||
Balance—December 31, 2017 | $ | 284.4 | $ | 18.8 | $ | — | $ | 3.5 | $ | 306.7 | |||||||||
The Company currently estimates that the total remaining accrual of $306.7 will result in cash expenditures of approximately $161.8, $135.5, $8.2 and $1.2 in fiscal 2018, 2019, 2020 and 2021, respectively.
Acquisition Integration Program
In the first quarter of fiscal 2016, the Company’s Board of Directors (the “Board”) approved an expansion to a restructuring program in connection with the acquisition of Bourjois (the “Acquisition Integration Program”). Actions associated with the program were initiated after the acquisition of Bourjois and were substantially completed during fiscal 2017
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with cash payments continuing through fiscal 2020. The Company incurred $56.6 of restructuring costs life-to-date as of December 31, 2017, which have been recorded in Corporate.
The related liability balance and activity for the Acquisition Integration Program costs are presented below:
Severance and Employee Benefits | Third-Party Contract Terminations | Other Exit Costs | Total Program Costs | ||||||||||||
Balance—July 1, 2017 | $ | 24.8 | $ | 1.5 | $ | 4.1 | $ | 30.4 | |||||||
Restructuring charges | — | — | 2.1 | 2.1 | |||||||||||
Payments | (16.5 | ) | — | (1.2 | ) | (17.7 | ) | ||||||||
Changes in estimates (a) | (5.4 | ) | — | — | (5.4 | ) | |||||||||
Effect of exchange rates | 0.8 | — | 0.2 | 1.0 | |||||||||||
Balance—December 31, 2017 | $ | 3.7 | $ | 1.5 | $ | 5.2 | $ | 10.4 | |||||||
(a) The decrease in severance and employee benefits is primarily attributable to favorable settlements with restructured employees.
The Company currently estimates that the total remaining accrual of $10.4 will result in cash expenditures of approximately $6.2, $2.6 and $1.6 in fiscal 2018, 2019 and 2020, respectively.
Other Restructuring
The Company executed a number of other restructuring activities during 2013 and 2014, which focused primarily on work-force reductions around a new organizational structure, and other productivity initiatives related to the integration of supply chain and selling activities. These programs are substantially completed. The Company incurred expenses of $(0.7) and $5.0 during the six months ended December 31, 2017 and 2016, respectively. The related liability balances were $4.7 and $10.1 at December 31, 2017 and June 30, 2017, respectively. The Company currently estimates that the total remaining accrual of $4.7 will result in cash expenditures in fiscal 2018.
In connection with the acquisition of the P&G Beauty Business, the Company assumed restructuring liabilities of approximately $21.7 at October 1, 2016. The Company estimates that the remaining accrual of $12.0 at December 31, 2017 will result in cash expenditures of $6.2, $4.6 and $1.2 in fiscal 2018, 2019 and 2020, respectively.
7. INVENTORIES
Inventories as of December 31, 2017 and June 30, 2017 are presented below:
December 31, 2017 | June 30, 2017 | ||||||
Raw materials | $ | 305.3 | $ | 256.4 | |||
Work-in-process | 22.6 | 33.4 | |||||
Finished goods | 827.4 | 762.8 | |||||
Total inventories | $ | 1,155.3 | $ | 1,052.6 | |||
8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Goodwill as of December 31, 2017 and June 30, 2017 is presented below:
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Luxury | Consumer Beauty | Professional Beauty | Total | ||||||||||||
Gross balance at June 30, 2017 | $ | 3,496.8 | $ | 4,732.0 | $ | 967.5 | $ | 9,196.3 | |||||||
Accumulated impairments | (403.7 | ) | (237.1 | ) | — | (640.8 | ) | ||||||||
Net balance at June 30, 2017 | $ | 3,093.1 | $ | 4,494.9 | $ | 967.5 | $ | 8,555.5 | |||||||
Changes during the period ended December 31, 2017: | |||||||||||||||
Acquisitions (a) | 68.2 | — | — | 68.2 | |||||||||||
Measurement period adjustments (b) | (140.3 | ) | 222.7 | (22.5 | ) | 59.9 | |||||||||
Foreign currency translation | 55.9 | 99.8 | 25.6 | 181.3 | |||||||||||
Gross balance at December 31, 2017 | $ | 3,480.6 | $ | 5,054.5 | $ | 970.6 | $ | 9,505.7 | |||||||
Accumulated impairments | (403.7 | ) | (237.1 | ) | — | (640.8 | ) | ||||||||
Net balance at December 31, 2017 | $ | 3,076.9 | $ | 4,817.4 | $ | 970.6 | $ | 8,864.9 | |||||||
(a) Includes goodwill resulting from the Burberry Beauty Business acquisition (Refer to Note 4—Business Combinations).
(b) Includes measurement period adjustments in connection with the P&G Beauty Business, ghd and Younique acquisitions (Refer to Note 4—Business Combinations).
Other Intangible Assets, net
Other intangible assets, net as of December 31, 2017 and June 30, 2017 are presented below:
December 31, 2017 | June 30, 2017 | ||||||
Indefinite-lived other intangible assets | $ | 3,210.1 | $ | 3,186.9 | |||