COTY-09.30.14-10Q
Table of Contents

 
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 SEPTEMBER 30, 2014
 
 
 
 
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
 
 
 
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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer  ý
 
Accelerated filer   ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company   ¨
 
(Do not check if a smaller reporting company)
 
 

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 November 4, 2014, 91,945,763 shares of the registrant’s Class A Common Stock, $0.01 par value, and 263,752,817 shares of the registrant’s Class B Common Stock, $0.01 par value, were outstanding.
 

Table of Contents

COTY INC.
INDEX TO FORM 10-Q
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

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,
 
2014
 
2013
Net revenues
$
1,182.3

 
$
1,178.2

Cost of sales
482.2

 
472.0

Gross profit
700.1

 
706.2

Selling, general and administrative expenses
520.6

 
516.4

Amortization expense
18.9

 
22.6

Restructuring costs
40.5

 
1.6

Operating income
120.1

 
165.6

Interest expense, net
19.6

 
17.4

Loss on early extinguishment of debt
88.8

 
—

Other income, net
—

 
(0.2
)
Income before income taxes
11.7

 
148.4

(Benefit) provision for income taxes
(5.0
)
 
46.2

Net income
16.7

 
102.2

Net income attributable to noncontrolling interests
5.0

 
4.3

Net income attributable to redeemable noncontrolling interests
1.1

 
4.4

Net income attributable to Coty Inc.
$
10.6

 
$
93.5

Net income attributable to Coty Inc. per common share:
 

 
 

Basic
$
0.03

 
$
0.24

Diluted
0.03

 
0.24

Weighted-average common shares outstanding:
 

 
 

Basic
354.2

 
384.0

Diluted
364.3

 
393.5


See notes to Condensed Consolidated Financial Statements.


1
Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three Months Ended
September 30,
 
2014
 
2013
Net income
$
16.7

 
$
102.2

Other comprehensive (loss) income:
 

 
 

Foreign currency translation adjustment
(79.9
)
 
43.3

Net unrealized derivative gains on cash flow hedges, net of taxes of $(1.2) and nil during the three months, respectively
6.4

 
—

Pension and other post-employment benefits, net of tax of nil and $(0.1) during the three months, respectively
—

 
0.5

Total other comprehensive (loss) income, net of tax
(73.5
)
 
43.8

Comprehensive (loss) income
(56.8
)
 
146.0

Comprehensive income attributable to noncontrolling interests:
 

 
 

Net income
5.0

 
4.3

Foreign currency translation adjustment
—

 
0.2

Total comprehensive income attributable to noncontrolling interests
5.0

 
4.5

Comprehensive income attributable to redeemable noncontrolling interests:
 

 
 

Net income
1.1

 
4.4

Foreign currency translation adjustment
(0.2
)
 
0.1

Total comprehensive income attributable to redeemable noncontrolling interests
0.9

 
4.5

Comprehensive (loss) income attributable to Coty Inc.
$
(62.7
)
 
$
137.0


See notes to Condensed Consolidated Financial Statements.


2
Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
September 30,
2014
 
June 30,
2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,002.7

 
$
1,238.0

Trade receivables—less allowances of $19.2 and $16.7, respectively
805.3

 
664.8

Inventories
638.7

 
617.4

Prepaid expenses and other current assets
190.7

 
201.2

Deferred income taxes
62.5

 
63.4

Total current assets
2,699.9

 
2,784.8

Property and equipment, net
518.6

 
540.3

Goodwill
1,324.7

 
1,342.8

Other intangible assets, net
1,804.5

 
1,837.1

Deferred income taxes
8.5

 
11.4

Other noncurrent assets
70.5

 
76.1

TOTAL ASSETS
$
6,426.7

 
$
6,592.5

LIABILITIES AND EQUITY
 

 
 

Current liabilities:


 


Accounts payable
$
793.2

 
$
810.2

Accrued expenses and other current liabilities
853.8

 
723.6

Short-term debt and current portion of long-term debt
683.0

 
33.4

Income and other taxes payable
5.5

 
29.4

Deferred income taxes
0.5

 
0.7

Total current liabilities
2,336.0

 
1,597.3

Long-term debt
2,554.9

 
3,260.1

Pension and other post-employment benefits
263.6

 
272.5

Deferred income taxes
258.7

 
273.3

Other noncurrent liabilities
227.8

 
228.7

Total liabilities
5,641.0

 
5,631.9

COMMITMENTS AND CONTINGENCIES (Note 16)


 


REDEEMABLE NONCONTROLLING INTERESTS
85.5

 
106.2

EQUITY:
 

 
 

Preferred stock, $0.01 par value; 20.0 shares authorized; none issued and outstanding at September 30, 2014 and June 30, 2014
—

 
—

Class A Common Stock, $0.01 par value; 800.0 shares authorized, 126.1 and 125.1 issued, respectively and 91.2 and 90.2 outstanding, respectively at September 30, 2014 and June 30, 2014
1.2

 
1.2

Class B Common Stock, $0.01 par value; 263.7 shares authorized, issued and outstanding at September 30, 2014 and June 30, 2014
2.6

 
2.6

Additional paid-in capital
1,830.4

 
1,926.9

Accumulated deficit
(415.8
)
 
(426.4
)
Accumulated other comprehensive loss
(158.4
)
 
(85.1
)
Treasury stock—at cost, shares: 34.9 at September 30, 2014 and June 30, 2014
(575.4
)
 
(575.4
)
Total Coty Inc. stockholders’ equity
684.6

 
843.8

Noncontrolling interests
15.6

 
10.6

Total equity
700.2

 
854.4

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,426.7

 
$
6,592.5


See notes to Condensed Consolidated Financial Statements.

3
Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Three Months Ended September 30, 2014
(In millions, except per share data)
(Unaudited)
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid-in
 
(Accumulated
 
Accumulated
Other
Comprehensive
 
Treasury Stock
 
Total Coty Inc.
Stockholders’
 
Noncontrolling
 
Total
 
Redeemable
Noncontrolling
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit)
 
Income (Loss)
 
Shares
 
Amount
 
Equity
 
Interests
 
Equity
 
Interests
BALANCE—July 1, 2014
125.1

 
$
1.2

 
263.7

 
$
2.6

 
$
1,926.9

 
$
(426.4
)
 
$
(85.1
)
 
34.9

 
$
(575.4
)
 
$
843.8

 
$
10.6

 
$
854.4

 
$
106.2

Reclassification of common stock and stock options to liability
 
 
 
 
 
 
 
 
(29.5
)
 
 
 
 
 
 
 
 
 
(29.5
)
 
 
 
(29.5
)
 
 
Exercise of employee stock options and restricted stock units
1.0

 
—

 
 
 
 
 
7.8

 
 
 
 
 
 
 
 
 
7.8

 
 
 
7.8

 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
0.1

 
 
 
 
 
 
 
 
 
0.1

 
 
 
0.1

 
 
Dividends ($0.20 per common share)
 
 
 
 
 
 
 
 
(71.8
)
 
 
 
 
 
 
 
 
 
(71.8
)
 
 
 
(71.8
)
 
 
Net income
 
 
 
 
 
 
 
 
 
 
10.6

 
 
 
 
 
 
 
10.6

 
5.0

 
15.6

 
1.1

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(73.3
)
 
 
 
 
 
(73.3
)
 


 
(73.3
)
 
(0.2
)
Distribution to noncontrolling interests, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
—

 
(0.2
)
Dividend payable to redeemable noncontrolling interest holder
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(8.3
)
Redeemable noncontrolling interest purchase adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


 


 
(16.2
)
Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
 
(3.1
)
 
 
 
 
 
 
 
 
 
(3.1
)
 
 
 
(3.1
)
 
3.1

BALANCE—September 30, 2014
126.1

 
$
1.2

 
263.7

 
$
2.6

 
$
1,830.4

 
$
(415.8
)
 
$
(158.4
)
 
34.9

 
$
(575.4
)
 
$
684.6

 
$
15.6

 
$
700.2

 
$
85.5


See notes to Condensed Consolidated Financial Statements.


4
Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Three Months Ended September 30, 2013
(In millions, except per share data)
(Unaudited)
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid-in
 
(Accumulated
 
Accumulated
Other
Comprehensive
 
Treasury Stock
 
Total Coty Inc.
Stockholders’
 
Noncontrolling
 
Total
 
Redeemable
Noncontrolling
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit)
 
Income (Loss)
 
Shares
 
Amount
 
Equity
 
Interests
 
Equity
 
Interests
BALANCE—July 1, 2013
73.6

 
$
0.7

 
310.6

 
$
3.1

 
$
1,943.9

 
$
(329.0
)
 
$
(118.6
)
 
0.4

 
$
(6.1
)
 
$
1,494.0

 
$
15.7

 
$
1,509.7

 
$
105.8

Conversion of Class B to Class A Common Stock
8.0

 
0.1

 
(8.0
)
 
(0.1
)
 
 

 
 

 
 

 
 

 
 

 
—

 
 

 
—

 
 

Purchase of Class A Common Stock
 

 
 

 
 

 
 

 
0.2

 
 

 
 

 
—

 
(0.2
)
 
—

 
 

 
—

 
 

Exercise of employee stock options
0.3

 
—

 
 

 
 

 
1.6

 
 

 
 

 
 

 
 

 
1.6

 
 

 
1.6

 
 

Share-based compensation expense
 

 
 

 
 

 
 

 
12.8

 
 

 
 

 
 

 
 

 
12.8

 
 

 
12.8

 
 

Dividends ($0.20 per common share)
 

 
 

 
 

 
 

 
(77.4
)
 
 

 
 

 
 

 
 

 
(77.4
)
 
 

 
(77.4
)
 
 

Net (loss) income
 

 
 

 
 

 
 

 
 

 
93.5

 
 

 
 

 
 

 
93.5

 
4.3

 
97.8

 
4.4

Other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
43.5

 
 

 
 

 
43.5

 
0.2

 
43.7

 
0.1

Distribution to noncontrolling interests, net
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(3.6
)
 
(3.6
)
 
(4.0
)
Adjustment of redeemable noncontrolling interests to redemption value
 

 
 

 
 

 
 

 
(0.3
)
 
 

 
 

 
 

 
 

 
(0.3
)
 
 

 
(0.3
)
 
0.3

BALANCE—September 30, 2013
81.9

 
$
0.8

 
302.6

 
$
3.0

 
$
1,880.8

 
$
(235.5
)
 
$
(75.1
)
 
0.4

 
$
(6.3
)
 
$
1,567.7

 
$
16.6

 
$
1,584.3

 
$
106.6


See notes to Condensed Consolidated Financial Statements.

5
Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
16.7

 
$
102.2

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
58.8

 
64.8

Deferred income taxes
(12.9
)
 
30.9

Provision for bad debts
1.6

 
3.0

Provision for pension and other post-employment benefits
5.6

 
4.5

Share-based compensation
0.1

 
14.2

Loss on early extinguishment of debt
88.8

 
—

Other
6.0

 
2.5

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

 
 

Trade receivables
(167.0
)
 
(156.0
)
Inventories
(46.0
)
 
(45.2
)
Prepaid expenses and other current assets
3.1

 
23.0

Accounts payable
35.7

 
40.3

Accrued expenses and other current liabilities
56.3

 
21.4

Tax accruals
(24.4
)
 
(3.5
)
Other noncurrent assets
2.5

 
(1.4
)
Other noncurrent liabilities
1.3

 
0.5

Net cash provided by operating activities
26.2

 
101.2

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(59.9
)
 
(65.6
)
Payments for business combinations
(0.6
)
 
(25.0
)
Proceeds from sale of asset
0.1

 
—

Net cash used in investing activities
(60.4
)
 
(90.6
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from short-term debt, original maturity more than three months
609.8

 
5.2

Repayments of short-term debt, original maturity more than three months
(5.5
)
 
(13.3
)
Net proceeds from short-term debt, original maturity less than three months
29.7

 
4.2

Proceeds from revolving loan facilities
152.0

 
175.0

Repayments of revolving loan facilities
(341.5
)
 
(175.0
)
Proceeds from issuance of long-term debt
0.9

 
—

Repayment of Senior Notes
(584.6
)
 
—

Net proceeds from issuance of Common Stock
7.8

 
1.6

Payments for purchases of Common Stock held as Treasury Stock
—

 
(0.2
)
Net proceeds from (payments for) foreign currency contracts
3.5

 
(0.2
)
Payment for business combinations – contingent consideration
—

 
(1.1
)
Proceeds from mandatorily redeemable noncontrolling interests
—

 
2.2

Distributions to noncontrolling interests
—

 
(3.6
)
Purchase of additional noncontrolling interests
(14.9
)
 
—

Distributions to redeemable noncontrolling interests
(0.2
)
 
(4.0
)
Payment of deferred financing fees
(5.0
)
 
(0.5
)
Net cash used in financing activities
(148.0
)
 
(9.7
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(53.1
)
 
25.5

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(235.3
)
 
26.4

CASH AND CASH EQUIVALENTS—Beginning of period
1,238.0

 
920.4

CASH AND CASH EQUIVALENTS—End of period
$
1,002.7

 
$
946.8

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 

 
 

Cash paid during the year for interest
$
18.8

 
$
9.5

Cash paid during the year for income taxes, net of refunds received
26.6

 
17.7

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
 

 
 

Accrued capital expenditure additions
$
35.6

 
$
35.7


See notes to Condensed Consolidated Financial Statements.

6
Table of Contents

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”) engage in the manufacturing, marketing and distribution of fragrances, color cosmetics and skin & body care related products in numerous countries throughout the world.
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 2015” refer to the fiscal year ending June 30, 2015.
The Company’s revenues generally increase during the second fiscal quarter as a result of increased demand associated with the holiday season. Accordingly, the Company’s financial performance, working capital requirements, cash flow and borrowings experience seasonal variability during the three to six months preceding this 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 wholly-owned 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, 2014. 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, 2014 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2015.
During fiscal 2014, the Company revised its Condensed Consolidated Statements of Cash Flows to reflect other noncurrent assets and other noncurrent liabilities as separate line items within net cash flows provided by operating activities. At September 30, 2013, $(1.4) of Other noncurrent assets and $0.5 of Other noncurrent liabilities, respectively, related to fiscal 2014 were reclassified out of Prepaid and other assets and Accrued expenses and other liabilities, respectively on the Condensed Consolidated Statements of Cash Flows to conform to the current period presentation.
Related Parties
During the three months ended September 30, 2014, JAB Holdings B.V. (“JAB”) transferred all of its Coty Inc. Class B shares to JAB Cosmetics B.V. (“JABC”). As of September 30, 2014, the Company is a majority-owned subsidiary of JABC. Lucresca SE, Agnaten SE and JAB indirectly control JABC and the shares of the Company held by JABC.
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 fair value of share-based compensation, pension and other post-employment benefit costs, the fair value of our reporting units, and the assessment of goodwill, other intangible assets and long-lived assets for impairment, income taxes, derivatives and redeemable noncontrolling interests when calculating the impact on Earnings Per Share (“EPS”). 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 Consolidated Financial Statements in future periods.
Tax Information
The effective income tax rate for the three months ended September 30, 2014 and 2013 was (42.7)% and 31.1%, respectively. The variations in the effective tax rates for the three month periods were primarily due to the negative impact associated with the expiration of Internal Revenue Code Section 954(c)(6) and the tax expense associated with the planned

7
Table of Contents

intercompany transfer of certain license agreements substantially utilized in our foreign operations, offset by the positive impacts associated with decrease in the accrual for unrecognized tax benefits, a reversal of valuation allowance pursuant to the implementation of the Company’s tax planning strategy and the settlement of a tax audit in a foreign jurisdiction. The proportion of discrete benefits to pretax income was substantial, resulting in a negative tax rate for the quarter.
The effective income tax rates vary from the U.S. federal statutory rate of 35% 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 and (iv) valuation allowance changes.
As of September 30, 2014 and June 30, 2014, the gross amount of UTBs was $385.9 and $400.5, respectively. As of September 30, 2014, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $365.8. As of September 30, 2014 and June 30, 2014, the liability associated with UTBs, including accrued interest and penalties, was $150.5 and $159.4, 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 during the three months ended September 30, 2014 and 2013 was $(0.9) and $1.6, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30, 2014 and June 30, 2014 was $23.2 and $25.5, respectively. On the basis of the information available as of September 30, 2014, 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.

3. SEGMENT REPORTING
Operating segments include components of the enterprise for which separate financial information is available and evaluated regularly by the 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.
During the three months ended September 30, 2014, the Company evaluated the impact of the Organizational Redesign restructuring program (see Note 4) on the determination of its operating segments and reporting units. The Company concluded that its operating and reportable segments continue to be Fragrances, Color Cosmetics and Skin & Body Care (also referred to as “segments”). However, based on the organizational changes that result from the Organizational Redesign and the impact on the information provided to the CODM, the Company reclassified the revenues and costs associated with one brand from the Fragrances to the Skin & Body Care operating segment. Revenue and cost relating to a brand that generates revenues from more than one of the Company’s product categories are allocated in their entirety to one of the operating segments based on the Company’s reporting to the CODM, its organizational structure, and the product category that is deemed to be the strategic priority for the brand.
 
Three Months Ended
September 30,
SEGMENT DATA
2014
 
2013
Net revenues:
 
 
 
Fragrances
$
640.9

 
$
658.9

Color Cosmetics
344.1

 
311.5

Skin & Body Care
197.3

 
207.8

Total
$
1,182.3

 
$
1,178.2

Operating income (loss):
 
 
 
Fragrances
$
120.5

 
$
145.8

Color Cosmetics
42.5

 
36.8

Skin & Body Care
3.7

 
3.5

Corporate
(46.6
)
 
(20.5
)
Total
$
120.1

 
$
165.6

Reconciliation:
 
 
 
Operating income
$
120.1

 
$
165.6

Interest expense, net
19.6

 
17.4

Loss on early extinguishment of debt
88.8

 
—

Other income, net
—

 
(0.2
)
Income before income taxes
$
11.7

 
$
148.4


8
Table of Contents

Within the Company’s reportable segments, product categories exceeding 5% of consolidated net revenues are presented below:
 
Three Months Ended
September 30,
PRODUCT CATEGORY
2014
 
2013
Fragrances:
 
 
 
Designer
41.1
%
 
41.5
%
Lifestyle
6.8

 
7.3

Celebrity
6.3

 
7.1

Total
54.2
%
 
55.9
%
Color Cosmetics:
 
 
 
Nail Care
13.7
%
 
13.2
%
Other Color Cosmetics
15.4

 
13.2

Total
29.1
%
 
26.4
%
Skin & Body Care:
 
 
 
Body Care
11.5
%
 
12.6
%
Skin Care
5.2

 
5.1

Total
16.7
%
 
17.7
%
Total
100.0
%
 
100.0
%

4. RESTRUCTURING COSTS
Restructuring costs for the three months ended September 30, 2014 and 2013 are presented below:
 
Three Months Ended September 30,
 
2014
 
2013
Organizational Redesign
$
40.8

 
$
—

China Optimization
(0.1
)
 
—

Productivity Program
(0.2
)
 
1.6

Total
$
40.5

 
$
1.6

Organizational Redesign
During the fourth quarter of fiscal 2014, the Company’s Board of Directors approved a program associated with a new organizational structure (“Organizational Redesign”) that aims to reinforce the Company’s growth path and strengthen its position as a global leader in beauty. The Company anticipates that the Organizational Redesign will result in pre-tax restructuring and related costs of $145.0 to $180.0, all of which will result in cash payments. The Company anticipates substantial completion of all project activities by the end of fiscal 2017, with the remaining costs primarily charged to Corporate.
The Company incurred $53.8 of restructuring costs as of September 30, 2014 in Corporate.
The related liability balance and activity for the restructuring costs are presented below:
 
Severance and
Employee
Benefits
 
Other
Exit
Costs
 
Total
Program
Costs
Balance—July 1, 2014
$
9.1

 
$
1.9

 
$
11.0

Charges
40.5

 
0.3

 
40.8

Payments
(0.5
)
 
(1.9
)
 
(2.4
)
Effect of exchange rates
1.0

 
—

 
1.0

Balance—September 30, 2014
$
50.1

 
$
0.3

 
$
50.4

The Company currently estimates that the total remaining accrual of $50.4 will result in cash expenditures of $35.8, $11.4, and $3.2 in fiscal 2015, 2016 and 2017, respectively.
China Optimization
During the fourth quarter of fiscal 2014, the Company entered into a distribution agreement with a third-party distributor for certain of the Company’s brands sold through the mass distribution channel in China and announced the discontinuation of the Company’s TJoy brand. In conjunction with these events, the Company commenced implementation of restructuring of the Company's mass business in China (“China Optimization”) that is expected to generate operating efficiencies. The Company anticipates that the China Optimization will result in pre-tax restructuring costs of approximately $10.0, all of which will result in cash payments. The Company incurred $9.7 of restructuring costs as of September 30, 2014 in Corporate. The Company expects to complete all program activities during fiscal 2015, with the remaining costs primarily charged to Corporate.
The related liability balance and activity for the restructuring costs are presented below:
 
Restructuring Costs
 
Severance and
Employee
Benefits
 
Other
Exit
Costs
 
Total
Restructuring Costs
Initial provision
$
9.6

 
$
0.2

 
$
9.8

Payments
(6.1
)
 
—

 
(6.1
)
Changes in estimates
(0.1
)
 
—

 
(0.1
)
Foreign currency translation
(0.5
)
 
—

 
(0.5
)
Balance—September 30, 2014
$
2.9

 
$
0.2

 
$
3.1

The Company currently estimates that the total remaining restructuring accrual of $3.1 will result in cash expenditures in fiscal 2015.
Productivity Program

9
Table of Contents

During the fourth quarter of fiscal 2013, the Company’s Board of Directors approved a number of business integration and productivity initiatives aimed at enhancing long-term operating margins (the “Productivity Program”). Such activities primarily relate to integration of supply chain and selling activities within the Skin & Body Care segment, as well as certain commercial organization redesign activities, primarily in Europe and optimization of selected administrative support functions.
The Company anticipates completing the implementation of all project activities by fiscal 2016. The total charge associated with the Productivity Program is expected to be approximately $70.0 to $75.0, of which $39.3 was incurred as of September 30, 2014.
The related liability balance and activity for the restructuring costs are presented below:
 
Severance and
Employee
Benefits
 
Third-Party
Contract
Terminations
 
Other
Exit
Costs
 
Total
Program
Costs
Balance—July 1, 2014
$
15.8

 
$
0.2

 
$
0.2

 
$
16.2

Payments
(2.9
)
 
—

 
—

 
(2.9
)
Changes in estimates
—

 
(0.2
)
 
—

 
(0.2
)
Balance—September 30, 2014
$
12.9

 
$
—

 
$
0.2

 
$
13.1

The Company currently estimates that the total remaining accrual of $13.1 will result in cash expenditures of approximately $9.9 and $3.2 in fiscal 2015 and 2016, respectively.

Other Restructuring Programs

During fiscal 2013 and 2012, the Company maintained several restructuring initiatives aimed at integrating acquired companies and reducing costs. The related liability was $0.3 and $6.6 as of September 30, 2014 and 2013, respectively, and related costs were nil and $4.1 for the three months ended September 30, 2014 and 2013, respectively. The Company paid $0.9 and $9.7 for the three months ended September 30, 2014 and 2013, respectively, related to its Other Restructuring Programs. The Company currently estimates that the total remaining accrual of $0.3 will result in cash expenditures in fiscal 2015.

5. INVENTORIES

Inventories as of September 30, 2014 and June 30, 2014 are presented below:

10
Table of Contents

 
September 30,
2014
 
June 30,
2014
Raw materials
$
163.2

 
$
189.3

Work-in-process
8.2

 
12.3

Finished goods
467.3

 
415.8

Total inventories
$
638.7

 
$
617.4


6. GOODWILL, OTHER INTANGIBLE ASSETS, NET AND OTHER ASSETS
As discussed in Note 3, the Company evaluated the impact of the Organizational Redesign (see Note 4) on the determination of its operating segments and its reporting units. Based on this evaluation, the Company concluded that its three reporting units are the same as its operating segments. It also moved the revenues and costs associated with one brand, along with its attributable goodwill of $69.1, from the Fragrances to the Skin & Body Care operating segment.
Goodwill
Goodwill as of September 30, 2014 and June 30, 2014 is presented below:
 
Fragrances
 
Color Cosmetics
 
Skin & Body Care
 
Total
Gross Balance at June 30, 2014
$
751.9

 
$
538.2

 
$
693.5

 
$
1,983.6

Accumulated Impairments
—

 
—

 
(640.8
)
 
(640.8
)
Net Balance at June 30, 2014
$
751.9

 
$
538.2

 
$
52.7

 
$
1,342.8

 
 
 
 
 
 
 
 
Changes during the period ended September 30, 2014:
 
 
 
 
 
 
     Foreign currency translation
(11.0
)
 
(6.9
)
 
(0.2
)
 
(18.1
)
     Reclassification (a)
(69.1
)
 
—

 
69.1

 
—

 
 
 
 
 
 
 
 
Gross Balance at September 30, 2014
$
671.8

 
$
531.3

 
$
762.4

 
$
1,965.5

Accumulated Impairments
—

 
—

 
(640.8
)
 
(640.8
)
Net Balance at September 30, 2014
$
671.8

 
$
531.3

 
$
121.6

 
$
1,324.7

 
 

(a) Pursuant to the Company’s Organizational Redesign announced during the three months ended September 30, 2014, a certain brand and its attributable goodwill of $69.1 was reclassified from the Fragrances segment to the Skin & Body Care segment. The Company calculated the fair value of the brand relative to the reporting unit using the same methodology utilized in the annual impairment analysis as discussed in the Fiscal 2014 Form 10-K.

Other Intangible Assets
    
Other intangible assets, net as of September 30, 2014 and June 30, 2014 are presented below:
 
September 30, 2014
 
June 30, 2014
Indefinite-lived other intangible assets (a)
$
1,163.7

 
$
1,167.8

Finite-lived other intangible assets, net (b)
640.8

 
669.3

Total Other intangible assets, net
$
1,804.5

 
$
1,837.1

 
 
(a) Net of accumulated impairments of $(188.6) as of September 30, 2014 and June 30, 2014.
(b) Net of accumulated impairments of $(21.0) and $(33.5) related to the TJoy trademark and customer relationships, respectively, recorded in fiscal 2014.

The effect of foreign currency translation in the carrying amount of indefinite-lived intangible assets is $(4.2) as of September 30, 2014.
    
Intangible assets subject to amortization are presented below:

11
Table of Contents

 
Cost
 
Accumulated Amortization
 
Accumulated Impairment
 
Net
June 30, 2014
 
 
 
 
 
 
 
License agreements
$
835.0

 
$
(490.8
)
 
$
—

 
$
344.2

Customer relationships
510.8

 
(169.4
)
 
(33.5
)
 
307.9

Trademarks
125.8

 
(90.1
)
 
(21.0
)
 
14.7

Product formulations
31.8

 
(29.3
)
 
—

 
2.5

Total
$
1,503.4

 
$
(779.6
)
 
$
(54.5
)
 
$
669.3

September 30, 2014
 
 
 
 
 
 
 
License agreements
$
821.7

 
$
(490.9
)
 
$
—

 
$
330.8

Customer relationships
503.2

 
(175.5
)
 
(33.5
)
 
294.2

Trademarks
123.3

 
(88.8
)
 
(21.0
)
 
13.5

Product formulations
31.8

 
(29.5
)
 
—

 
2.3

Total
$
1,480.0

 
$
(784.7
)
 
$
(54.5
)
 
$
640.8


Amortization expense totaled $18.9 and $22.6 for the three months ended September 30, 2014 and 2013.

7. DEBT
 
September 30, 2014
 
June 30, 2014
Short-term debt
$
51.8

 
$
18.8

Credit Agreement due September 2015
600.0

 
—

Coty Inc. Credit Facility due April 2018
 
 
 
Term Loan
1,875.0

 
1,875.0

Revolving Loan Facility
710.0

 
899.5

Senior Notes
 
 
 
5.12% Series A notes due June 2017
—

 
100.0

5.67% Series B notes due June 2020
—

 
225.0

5.82% Series C notes due June 2022
—

 
175.0

Other long-term debt and capital lease obligations
1.1

 
0.2

Total debt
3,237.9

 
3,293.5

Less: Short-term debt and current portion of long-term debt
(683.0
)
 
(33.4
)
Total Long-term debt
$
2,554.9

 
$
3,260.1

Short-Term Debt
On September 29, 2014, the Company entered into a Credit Agreement (the “2014 Credit Agreement”) with JP Morgan Chase Bank, N.A. as administrative agent and Bank of America, N.A., Morgan Stanley MUFG Loan Partners, LLC and Wells Fargo Bank, N.A., as syndication agents. The 2014 Credit Agreement provides for a term loan of $600.0 and expires on September 28, 2015 at which time it is payable in full. Rates of interest on amounts borrowed under the 2014 Credit Agreement are based on the London Interbank Offered Rate (“LIBOR”), a qualified Eurocurrency LIBOR, an alternative base rate, or a qualified local currency rate, as applicable to the borrowings, plus applicable spreads determined by the consolidated leverage ratio. Applicable spreads on the borrowings under the 2014 Credit Agreement may range from 0.0% to 1.75% based on the Company’s consolidated leverage ratio, as defined in the 2014 Credit Agreement. The applicable spread on the borrowings under the 2014 Credit Agreement in effect as of September 30, 2014 was 1.50%. The 2014 Credit Agreement also contains affirmative and negative covenants that are substantially the same as those contained in the 2013 Credit Agreement, as amended, as disclosed below. The Company used the borrowings under the 2014 Credit Agreement to prepay the outstanding principal amount of the Senior Notes, prior to their maturity date (the “Note Repurchase”) as described below. Deferred financing fees of $1.9 were recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet.
Coty Inc. Credit Facility
On September 29, 2014, the Company entered into an Amendment (the “2014 Amendment”) to its existing Credit Agreement, dated April 2, 2013, as amended (the “2013 Credit Agreement”). The 2014 Amendment permits the Company to

12
Table of Contents

maintain a consolidated leverage ratio equal to or less than 4.5 to 1.0 for the 12-month period following an acquisition, as defined in the 2013 Credit Agreement. As of September 30, 2014, the Company recorded deferred financing fees of $3.1 in Other noncurrent assets in the Condensed Consolidated Balance Sheet in connection with the 2014 Amendment. As of September 30, 2014, the Company had $540.0 available for borrowings under the 2013 Credit Agreement, as amended.
Senior Notes
On September 29, 2014, the Company prepaid the Senior Notes. The prepayment included the principal amount of Senior Notes of $500.0, accrued interest of $8.0 and a make-whole amount of $84.6. In connection with the prepayment, the Company incurred a loss on early extinguishment of debt of $88.8 in the three months ended September 30, 2014, which included the make-whole amount and the write-off of $4.2 of deferred financing fees related to the Senior Notes.

8. INTEREST EXPENSE, NET

Interest expense, net for the three months ended September 30, 2014 and 2013 is presented below:
 
Three Months Ended
September 30,
 
2014
 
2013
Interest expense
$
19.4

 
$
17.4

Foreign exchange losses, net of derivative contracts
1.3

 
0.9

Interest income
(1.1
)
 
(0.9
)
Total interest expense, net
$
19.6

 
$
17.4


9. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost for pension plans and other post-employment benefit plans recognized in the Condensed Consolidated Statements of Operations are presented below for the three months ended September 30, 2014 and 2013:
 
Three Months Ended September 30,
 
Pension Plans
 
Other Post-
Employment
 
 
 
U.S.
 
International
 
Benefits
 
Total
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
—

 
$
—

 
$
1.5

 
$
1.4

 
$
0.6

 
$
0.6

 
$
2.1

 
$
2.0

Interest cost
0.9

 
0.8

 
1.2

 
1.3

 
1.0

 
1.0

 
3.1

 
3.1

Expected return on plan assets
(0.8
)
 
(0.6
)
 
(0.3
)
 
(0.3
)
 
—

 
—

 
(1.1
)
 
(0.9
)
Amortization of prior service credit
—

 
—

 
0.1

 
—

 
—

 
—

 
0.1

 
—

Amortization of net loss
0.5

 
0.2

 
0.9

 
0.5

 
—

 
—

 
1.4

 
0.7

Net periodic benefit cost
$
0.6

 
$
0.4

 
$
3.4

 
$
2.9

 
$
1.6

 
$
1.6

 
$
5.6

 
$
4.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10. FAIR VALUE MEASUREMENT

The following fair value hierarchy is used in selecting inputs for those assets and liabilities measured at fair value and distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1—Valuation based on quoted market prices in active markets for identical assets or liabilities;
Level 2—Valuation based on inputs other than Level 1 inputs that are observable for the assets or liabilities either directly or indirectly;
Level 3—Valuation based on prices or valuation techniques that require inputs that are both significant to the fair value measurement and supported by little or no observable market activity.


13
Table of Contents

The financial assets and liabilities that the Company measures at fair value on a recurring basis based on the fair value hierarchy, as of September 30, 2014 and June 30, 2014 are presented below:
 
Level 1
 
Level 2
 
Level 3
 
September 30, 2014
 
June 30, 2014
 
September 30, 2014
 
June 30, 2014
 
September 30, 2014
 
June 30, 2014
Financial assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
—

 
$
3.0

 
$
2.1

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
—

 
$
3.5

 
$
11.5

 
$
—

 
$
—

Contingent consideration - business combination
—

 
—

 
—

 
—

 
1.1

 
1.1

Total Liabilities
$
—

 
$
—

 
$
3.5

 
$
11.5

 
$
1.1

 
$
1.1

Total recurring fair value measurements
$
—

 
$
—

 
$
(0.5
)
 
$
(9.4
)
 
$
(1.1
)
 
$
(1.1
)
The reconciliation of Level 3 liabilities recorded at fair value for the three months ended September 30, 2014 is presented below.
 
September 30, 2014
Contingent consideration - business combination:
 
Fair Value - July 1, 2014
$
1.1

Additions
—

Realized gains
—

Effect of exchange rates
—

Transfers out of Level 3
—

Fair value - September 30, 2014
$
1.1

The fair values of the Company’s financial instruments estimated as of September 30, 2014 and June 30, 2014 are presented below:
 
September 30, 2014
 
June 30, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Coty Inc. Credit Facility
$
2,553.8

 
$
2,541.3

 
$
2,774.5

 
$
2,763.2

Dividends payable
1.7

 
1.3

 
0.9

 
0.7

Senior Notes - Series A
—

 
—

 
100.0

 
109.7

Senior Notes - Series B
—

 
—

 
225.0

 
256.3

Senior Notes - Series C
—

 
—

 
175.0

 
199.9


The Company has concluded that the carrying amounts of cash and cash equivalents, trade receivables, accounts payable, certain accrued expenses, short-term debt, and current portion of long-term debt approximate their fair values due to their short-term nature.

The following methods and assumptions were used to estimate the fair value of the Company’s other financial instruments for which it is practicable to estimate that value:

Foreign exchange contracts—The Company uses currency spot and forward rates to value the foreign exchange contracts, which were obtained from an independent pricing service. Based on the assumptions used to value foreign exchange contracts at fair value, these assets and/or liabilities are categorized as Level 2 in the fair value hierarchy.

Contingent consideration - business combination — The Company uses an industry standard valuation model within the option pricing framework to value the contingent consideration. The inputs used to measure the fair value included weighted net sales projections through the settlement date of the contingent consideration, revenue volatility using comparable co

14
Table of Contents

mpanies’ historical performance and a present value calculation to discount the expected settlement. Based on the assumptions used to value the contingent consideration, these liabilities are categorized as Level 3 in the fair value hierarchy.

Coty Inc. Credit Facility and Senior Notes —The Company uses the income approach to value the each of the aforementioned debt instruments. The Company uses a present value calculation to discount interest payments and the final maturity payment on these liabilities using a discounted cash flow model based on observable inputs. The Company discounts these debt instruments based on what the current market rates would offer the Company as of the reporting date. Based on the assumptions used to value these liabilities at fair value, these debt instruments are categorized as Level 2 in the fair value hierarchy.

Dividends payable — The Company uses the income approach to value the long-term portion of dividends payable by utilizing a present value calculation to discount future payments using a discounted cash flow model based on observable inputs. The Company discounts the liability based on an internally developed discount rate as of the reporting date. Based on the assumptions used to value the long-term portion of dividends payable at fair value, this debt is categorized as Level 3 in the fair value hierarchy.

11. DERIVATIVE INSTRUMENTS

The Company is exposed to foreign currency exchange fluctuations through its global operations, with manufacturing and distribution facilities in various countries around the world. The Company may reduce its exposure to fluctuations in the cash flows associated with changes in foreign exchange rates by creating offsetting positions through the use of derivative instruments. The Company expects that through hedging, any gain or loss on the derivative instruments would generally offset the expected increase or decrease in the value of the underlying forecasted transactions. During fiscal 2014, the Company launched a program to qualify derivatives for hedge accounting treatment. The Company began entering into derivatives for which hedge accounting treatment was applied in the second quarter of fiscal 2014 which the Company began realizing in the Condensed Consolidated Statement of Operations in fiscal 2015. The Company also continued to use certain derivatives as economic hedges of foreign currency exposure on firm commitments and forecasted transactions. Although these derivatives were not designated for hedge accounting, the overall objective of mitigating foreign currency exposure is the same for all derivative instruments. The Company does not enter into derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives.

For derivatives accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of specific underlying forecasted transactions, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the Company formally assesses both at inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial instrument's change in fair value is immediately recognized into earnings. If it is determined that a derivative is not highly effective as a hedge, the Company will discontinue hedge accounting for the affected derivative in the related period. Additionally, all of the master agreements governing the Company’s derivative contracts contain standard provisions that could trigger early termination of the contracts in certain circumstances which would require the Company to discontinue hedge accounting, including if the Company were to merge with another entity and the creditworthiness of the surviving entity were to be “materially weaker” than that of the Company prior to the merger. As of September 30, 2014, foreign exchange forward contracts in net liability positions that contained credit-risk-related features were $3.5.

The Company also attempts to minimize credit exposure to counterparties by entering into derivative contracts with counterparties that are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the fair value of contracts in net asset positions, which totaled $3.0 at September 30, 2014. Accordingly, management of the Company believes risk of material loss under these hedging contracts is remote.
Quantitative Information
Derivatives are recognized on the balance sheet at their fair values. The following table presents the fair value of derivative instruments outstanding at September 30, 2014 and June 30, 2014:

15
Table of Contents

 
Asset
 
Liability
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30, 2014
 
June 30, 2014
 
 
 
September 30, 2014
 
June 30, 2014
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and
other current assets
 
$
2.5

 
$
—

 
Accrued expenses and
other current liabilities
 
$
2.7

 
$
10.5

Total derivatives designated as hedges
 
 
$
2.5

 
$
—

 
 
 
$
2.7

 
$
10.5

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and
other current assets
 
$
0.5

 
$
2.1

 
Accrued expenses and
other current liabilities
 
$
0.8

 
$
1.0

Total derivatives not designated as hedges
 
 
$
0.5

 
$
2.1

 
 
 
$
0.8

 
$
1.0

Total derivatives
 
 
$
3.0

 
$
2.1

 
 
 
$
3.5

 
$
11.5

The table below presents the gross amount of foreign exchange contract hedges recorded as assets and liabilities in Prepaid expenses and other current assets and Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet, respectively, as of September 30, 2014:
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Condensed Consolidated Statement of Operations
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Assets
$
6.8

 
$
(3.8
)
 
$
3.0

 
$
—

 
$
—

 
$
3.0

Liabilities
$
(4.6
)
 
$
1.1

 
$
(3.5
)
 
$
—

 
$
—

 
$
(3.5
)
The table below presents the gross amount of foreign exchange contract hedges recorded as assets and liabilities in Prepaid expenses and other current assets and Accrued expenses and other current liabilities in the Consolidated Balance Sheet, respectively, as of June 30, 2014:
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts Recognized
 
Gross Amounts Offset in the Condensed Consolidated Statement of Operations
 
Net Amount Presented in the Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Assets
$
2.2

 
$
(0.1
)
 
$
2.1

 
$
—

 
$
—

 
$
2.1

Liabilities
$
(12.9
)
 
$
1.4

 
$
(11.5
)
 
$
—

 
$
—

 
$
(11.5
)
The amount of gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments during the three months ended September 30, 2014 and 2013 is presented below:
Condensed Consolidated Statements of Operations
Classification of Gain (Loss) Recognized in Operations
Gain (Loss) Recognized
in Operations
Three Months
Ended September 30,
 
2014
 
2013
Interest expense, net
$
1.8

 
$
—

Cost of sales
$
—

 
$
(1.5
)
Selling, general and administrative
$
0.9

 
$
—


The Company enters into foreign exchange forward contracts to hedge anticipated transactions for periods consistent with the Company’s identified exposures to minimize the effect of foreign exchange rate movements on revenues and costs and on the cash flows that the Company receives from foreign subsidiaries and third parties where there is a high probability that anticipated exposures will materialize. The foreign exchange forward contracts entered into to hedge anticipated transactions have been designated as foreign exchange cash-flow hedges and have varying maturities through the end of June 2015. Hedge effectiveness of foreign exchange forward contracts is based on the forward-to-forward hypothetical derivative methodology and includes all changes in value.

16
Table of Contents


The ineffective portion of foreign exchange forward contracts is recorded in current-period earnings. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in Other comprehensive income (loss) (“OCI”) are reclassified to earnings when the underlying forecasted transaction occurs. If it is no longer probable that the forecasted transaction will occur, then any gains or losses in accumulated OCI (“AOCI”) are reclassified to current-period earnings. During the three months ended September 30, 2014, as a result of a change in forecast, the Company de-designated a portion of its hedges and reclassified a loss of $0.1 from AOCI to Cost of goods sold in the Condensed Consolidated Statement of Operations. As of September 30, 2014, all of the Company’s foreign exchange forward contracts designated as hedges were highly effective in all material respects. The accumulated loss on these derivative instruments in AOCI, net of tax, was $(2.5) and (8.9) as of September 30, 2014 and June 30, 2014, respectively. The estimated net loss related to these effective hedges that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $(2.5). During the three months ended September 30, 2014, a gain of $0.6 was reclassified from AOCI into earnings related to effective hedge contracts that have settled.

As of September 30, 2014, the Company had foreign exchange forward contracts designated as effective hedges with a notional value of $266.3, which mature at various dates through June 2015. The foreign currencies of the counterparties in the hedged foreign exchange forward contracts (notional value stated in U.S. dollars) are principally the British Pound ($75.2), Euro ($60.2), Australian Dollar ($32.3), Canadian Dollar ($35.5), Russian Ruble $(27.0), Polish Zloty ($20.7), and Japanese Yen ($1.8). As of June 30, 2014, the Company had $361.3 in foreign exchange forward contracts designated as effective hedges.

As of September 30, 2014 and June 30, 2014, the Company had foreign exchange forward contracts not designated as hedges with a notional value of $194.8 and $535.4, respectively, which mature at various dates through June 2015.

12. NONCONTROLLING INTERESTS AND REDEEMABLE NONCONTROLLING INTERESTS

Redeemable Noncontrolling Interests

The Company has the right to purchase the redeemable noncontrolling interests (“RNCI”) in certain subsidiaries from the RNCI holders (each such right, a “Call right”) at certain points in time. On September 20, 2013, the Company gave notice to purchase 7% of a certain Middle East (M.E.) subsidiary. The Company and the RNCI holder amended the M.E. subsidiary’s Shareholders' Agreement resulting in the Company recording an additional 7% interest in the M.E. subsidiary as of July 1, 2014 and consummated the purchase during the three months ended September 30, 2014 for a purchase price of $16.2. The $16.2 is recorded as a reduction to Redeemable Noncontrolling interest in the Company’s Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests as of September 30, 2014. Of the $16.2, the Company has paid $14.9 and recorded the remaining $1.3 as Accrued expense and other current liabilities of the Condensed Consolidated Balance Sheet as of September 30, 2014.

The Company also has the ability to exercise the Call right for the remaining noncontrolling interest of 33% on July 1, 2028, with such transaction to close on July 1, 2029.

13. EQUITY
Common Stock

During the three months ended September 30, 2014, the Company issued 1.0 million shares of its Class A Common Stock and received $7.8 in cash in connection with the exercise of employee stock options and the settlement of restricted stock units (“RSUs”).

On September 29, 2014, the Company entered into an agreement with Mr. Scannavini, the former Chief Executive Officer in connection with his resignation. The agreement requires the Company to purchase on or before January 27, 2015 all Class A Common Stock Mr. Scannavini holds directly or indirectly, including shares of Class A Common Stock obtained upon the exercise of certain stock options, for a share price of $17.21, which is the average closing value of the Class A Common Stock on the New York Stock Exchange over five business days immediately preceding September 29, 2014. As a result of the agreement, the Company reclassified the value of Class A Common Stock to be purchased of $29.5 from Additional paid-in capital (“APIC”) to Accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests.


17
Table of Contents

As of September 30, 2014, the Company’s capital structure consisted of Class A Common Stock, Class B Common Stock and Preferred Stock, each with a par value of $0.01. Class A and Class B Common Stock are identical in all respects except for voting rights, certain conversion rights, and transfer restrictions in respect to the shares of Class B Common Stock. The holders of Class A Common Stock are entitled to one vote per share and the holders of Class B Common Stock are entitled to ten votes per share. Holders of Class A and Class B Common Stock are entitled to pro rata distribution of dividends if and when declared by the Board of Directors. As of September 30, 2014, total authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock are 800.0 million, 263.7 million and 20.0 million, respectively, and total outstanding shares of Class A and Class B Common Stock are 91.2 million and 263.7 million, respectively. There was no Preferred Stock outstanding as of September 30, 2014.

Accumulated Other Comprehensive Income (Loss)
 
(Losses) Gains on Cash Flow Hedges
 
Pension and Other Post-Employment Benefit Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning Balance
$
(8.9
)
 
$
(54.7
)
 
$
(21.5
)
 
$
(85.1
)
Other comprehensive income (loss) before reclassifications
6.9

 
—

 
(79.7
)
 
(72.8
)
Less: Net amounts reclassified from AOCI
0.5

 
—

 
—

 
0.5

Net current-period other comprehensive income (loss)
6.4

 
—

 
(79.7
)
 
(73.3
)
Ending balance
$
(2.5
)
 
$
(54.7
)
 
$
(101.2
)
 
$
(158.4
)

Dividends
On September 16, 2014, the Company announced a cash dividend of $0.20 per share, or $71.9 on its Class A and Class B Common Stock. Of the $71.9, $71.0 was paid on October 15, 2014 to holders of record of Class A and Class B Common Stock on October 1, 2014 and was recorded as a decrease to APIC in the Condensed Consolidated Balance Sheet as of September 30, 2014. The remaining $0.9 is payable upon settlement of the RSUs outstanding as of October 1, 2014, and is recorded as Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.
Additionally, the Company reduced the dividend accrual recorded in a prior period by $0.1 to adjust for accrued dividends on RSUs no longer expected to vest, which was recorded as an increase to APIC in the Condensed Consolidated Balance Sheet as of September 30, 2014. Total accrued dividends on unvested RSUs of $1.7 are included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2014.

14. SHARE-BASED COMPENSATION PLANS

The Company has various share-based compensation programs (the “Plans”) under which awards, including non-qualified stock options, RSUs and other share-based awards, may be granted or shares of Class A Common Stock may be purchased. As of September 30, 2014, approximately 15.1 million shares of the Company’s Class A Common Stock were reserved and available to be granted pursuant to these Plans.

Total share-based compensation expense for the three months ended September 30, 2014 and 2013 of $1.3 and $14.2, respectively, is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The share-based compensation expense for the three months ended September 30, 2014 of $1.3 includes $6.3 expense for the period offset by $(5.0) income for the period due to forfeitures of share-based compensation instruments as a result of Mr. Scannavini’s resignation on September 29, 2014.

As of September 30, 2014, the total unrecognized share-based compensation expense related to unvested stock options and restricted and other share awards is $22.5 and $46.9, respectively. The unrecognized share-based compensation expense related to unvested stock options and restricted and other share awards is expected to be recognized over a weighted-average period of 1.66 and 4.00 years, respectively.

Nonqualified Stock Options

Nonqualified stock options generally become exercisable 5 years from the date of the grant and have a 5-year exercise period from the date the grant becomes fully vested for a total contractual life of 10 years.


18
Table of Contents

The Company’s outstanding nonqualified stock options as of September 30, 2014 and activity during the three months then ended are presented below:
 
Shares
(in millions)
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term
Outstanding at July 1, 2014
23.2

 
$
9.32

 
 
 
 
Exercised
(1.0
)
 
7.55

 
 
 
 
Forfeited
(1.2
)
 
10.18

 
 
 
 
Outstanding at September 30, 2014
21.0

 
$
9.36

 
 
 
 
Vested and expected to vest at September 30, 2014
18.2

 
$
9.24

 
$
133.1

 
4.84
Exercisable at September 30, 2014
9.0

 
$
8.56

 
$
71.9

 
3.59

There were no options granted in the current year. The grant prices of the outstanding options as of September 30, 2014 ranged from $5.10 to $11.60. The grant prices for exercisable options ranged from $5.10 to $10.50.

A summary of the total intrinsic value of stock options exercised for the three months ended September 30, 2014 and 2013 is presented below:
 
September 30,
 
2014
 
2013
Intrinsic value of options exercised
$
10.0

 
$
2.9


The Company’s non-vested nonqualified stock options as of September 30, 2014 and activity during the three months then ended are presented below:
 
Shares
(in millions)
 
Weighted
Average
Grant Date
Fair Value
Non-vested at July 1, 2014
16.2

 
$
3.81

Vested
(3.0
)
 
3.51

Forfeited
(1.2
)
 
4.02

Non-vested at September 30, 2014
12.0

 
$
3.86


The share-based compensation expense recognized on the nonqualified stock options was $2.0 and $9.6 during the three months ended September 30, 2014 and 2013, respectively.

Restricted Share Units

During the three months ended September 30, 2014, 1.6 million RSUs were granted under the Omnibus LTIP. During the three months ended September 30, 2013, the Company granted 1.8 million RSUs under the LTIP.

The Company’s outstanding RSUs as of September 30, 2014 and activity during the three months then ended are presented below:
 
Shares
(in millions)
 
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term
Outstanding at July 1, 2014
4.4

 
 
 
 
Granted
1.6

 
 
 
 
Cancelled
(0.5
)
 
 
 
 
Outstanding at September 30, 2014
5.5

 
 
 
 
Vested and expected to vest at September 30, 2014
3.9

 
$
65.3

 
3.66


19
Table of Contents

The share-based compensation (income) expense recorded in connection with the RSUs was $(0.2) and $2.1 during the three months ended September 30, 2014 and 2013, respectively.

The Company’s outstanding and non-vested RSUs as of September 30, 2014 and activity during the three months then ended are presented below:
 
Shares
(in millions)
 
Weighted
Average
Grant Date
Fair Value
Outstanding and nonvested at July 1, 2014
4.0

 
$
15.77

Granted
1.6

 
16.55

Cancelled
(0.5
)
 
15.78

Outstanding and nonvested at September 30, 2014
5.1

 
$
16.02


Less than 0.1 million RSUs vested and settled during the three months ended September 30, 2014 and 2013.

Restricted Shares

Share-based compensation (income) expense recorded in connection with restricted shares was $(0.5) and nil for the three months ended September 30, 2014 and 2013, respectively. During the three months ended September 30, 2014, the former CEO forfeited less than 0.1 million restricted shares.

Special Incentive Award

Share-based compensation expense recorded in connection with special incentive awards is nil and $2.5 for the three months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there were no special incentive awards outstanding as all special incentive awards vested as of June 13, 2014. As of September 30, 2013, 1.2 million special incentive awards were outstanding with a weighted average grant date fair value of $6.82. There was no vesting or forfeiture activity during the three months ended September 30, 2014 and 2013.

15. NET INCOME ATTRIBUTABLE TO COTY INC. PER COMMON SHARE

Reconciliation between the numerators and denominators of the basic and diluted EPS computations is presented below:
 
Three Months Ended
September 30,
 
2014
 
2013
 
(in millions, except per share data)
Net income attributable to Coty Inc.
$
10.6