COTY-12.31.14-10Q
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 DECEMBER 31, 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 February 3, 2015, 80,180,719 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
December 31,
 
Six Months Ended
December 31,
 
2014
 
2013
 
2014
 
2013
Net revenues
$
1,259.6

 
$
1,323.2

 
$
2,441.9

 
$
2,501.4

Cost of sales
508.9

 
549.3

 
991.1

 
1,021.3

Gross profit
750.7

 
773.9

 
1,450.8

 
1,480.1

Selling, general and administrative expenses
536.5

 
603.0

 
1,057.1

 
1,119.4

Amortization expense
18.5

 
22.7

 
37.4

 
45.3

Restructuring costs
12.0

 
4.7

 
52.5

 
6.3

Operating income
183.7

 
143.5

 
303.8

 
309.1

Interest expense, net
19.1

 
16.7

 
38.7

 
34.1

Loss on early extinguishment of debt
—

 
—

 
88.8

 
—

Other expense (income), net
0.3

 
—

 
0.3

 
(0.2
)
Income before income taxes
164.3

 
126.8

 
176.0

 
275.2

Provision for income taxes
29.4

 
33.7

 
24.4

 
79.9

Net income
134.9

 
93.1

 
151.6

 
195.3

Net income attributable to noncontrolling interests
6.1

 
6.8

 
11.1

 
11.1

Net income attributable to redeemable noncontrolling interests
3.4

 
3.8

 
4.5

 
8.2

Net income attributable to Coty Inc.
$
125.4

 
$
82.5

 
$
136.0

 
$
176.0

Net income attributable to Coty Inc. per common share:
 

 
 

 
 

 
 

Basic
$
0.35

 
$
0.21

 
$
0.38

 
$
0.46

Diluted
0.35

 
0.21

 
0.37

 
0.45

Weighted-average common shares outstanding:
 

 
 

 
 

 
 

Basic
353.4

 
384.4

 
353.8

 
384.2

Diluted
362.6

 
393.3

 
363.5

 
393.5


See notes to Condensed Consolidated Financial Statements.


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Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2014
 
2013
 
2014
 
2013
Net income
$
134.9

 
$
93.1

 
$
151.6

 
$
195.3

Other comprehensive (loss) income:
 

 
 

 
 

 
 

Foreign currency translation adjustment
(54.1
)
 
15.8

 
(134.0
)
 
59.1

Net unrealized derivative gains (losses) on cash flow hedges, net of taxes of $(1.2) and $0.2, and $(2.4) and $ 0.2 during the three months and six months ended, respectively
8.2

 
(1.4
)
 
14.6

 
(1.4
)
Pension and other post-employment benefits, net of tax of $0.1 and $0.3, and $0.1 and $0.2 during the three months and six months ended, respectively
(0.2
)
 
(0.1
)
 
(0.2
)
 
0.4

Total other comprehensive (loss) income, net of tax
(46.1
)
 
14.3

 
(119.6
)
 
58.1

Comprehensive income
88.8

 
107.4

 
32.0

 
253.4

Comprehensive income attributable to noncontrolling interests:
 

 
 

 
 

 
 

Net income
6.1

 
6.8

 
11.1

 
11.1

Foreign currency translation adjustment
(0.6
)
 
(0.2
)
 
(0.6
)
 
—

Total comprehensive income attributable to noncontrolling interests
5.5

 
6.6

 
10.5

 
11.1

Comprehensive income attributable to redeemable noncontrolling interests:
 

 
 

 
 

 
 

Net income
3.4

 
3.8

 
4.5

 
8.2

Foreign currency translation adjustment
(0.1
)
 
(0.4
)
 
(0.3
)
 
(0.3
)
Total comprehensive income attributable to redeemable noncontrolling interests
3.3

 
3.4

 
4.2

 
7.9

Comprehensive income attributable to Coty Inc.
$
80.0

 
$
97.4

 
$
17.3

 
$
234.4


See notes to Condensed Consolidated Financial Statements.


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Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
December 31,
2014
 
June 30,
2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,203.2

 
$
1,238.0

Trade receivables—less allowances of $19.0 and $16.7, respectively
736.7

 
664.8

Inventories
526.7

 
617.4

Prepaid expenses and other current assets
193.9

 
201.2

Deferred income taxes
60.4

 
63.4

Total current assets
2,720.9

 
2,784.8

Property and equipment, net
500.5

 
540.3

Goodwill
1,313.7

 
1,342.8

Other intangible assets, net
1,777.8

 
1,837.1

Deferred income taxes
9.2

 
11.4

Other noncurrent assets
67.2

 
76.1

TOTAL ASSETS
$
6,389.3

 
$
6,592.5

LIABILITIES AND EQUITY
 

 
 

Current liabilities:


 


Accounts payable
$
700.0

 
$
810.2

Accrued expenses and other current liabilities
800.1

 
723.6

Short-term debt and current portion of long-term debt
691.6

 
33.4

Income and other taxes payable
31.7

 
29.4

Deferred income taxes
2.1

 
0.7

Total current liabilities
2,225.5

 
1,597.3

Long-term debt
2,713.5

 
3,260.1

Pension and other post-employment benefits
258.7

 
272.5

Deferred income taxes
260.8

 
273.3

Other noncurrent liabilities
181.7

 
228.7

Total liabilities
5,640.2

 
5,631.9

COMMITMENTS AND CONTINGENCIES (Note 16)


 


REDEEMABLE NONCONTROLLING INTERESTS
84.9

 
106.2

EQUITY:
 

 
 

Preferred stock, $0.01 par value; 20.0 shares authorized; none issued and outstanding at December 31, 2014 and June 30, 2014
—

 
—

Class A Common Stock, $0.01 par value; 800.0 shares authorized, 129.3 and 125.1 issued, respectively and 84.4 and 90.2 outstanding, respectively at December 31, 2014 and June 30, 2014
1.3

 
1.2

Class B Common Stock, $0.01 par value; 263.7 shares authorized, issued and outstanding at December 31, 2014 and June 30, 2014
2.6

 
2.6

Additional paid-in capital
1,898.2

 
1,926.9

Accumulated deficit
(290.4
)
 
(426.4
)
Accumulated other comprehensive loss
(203.8
)
 
(85.1
)
Treasury stock—at cost, shares: 44.9 at December 31, 2014 and 34.9 at June 30, 2014
(766.6
)
 
(575.4
)
Total Coty Inc. stockholders’ equity
641.3

 
843.8

Noncontrolling interests
22.9

 
10.6

Total equity
664.2

 
854.4

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,389.3

 
$
6,592.5


See notes to Condensed Consolidated Financial Statements.

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Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Six Months Ended December 31, 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)
 
(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

Purchase of Class A Common Stock
 
 
 
 
 
 
 
 
—

 
 
 
 
 
7.6

 
(149.2
)
 
(149.2
)
 
 
 
(149.2
)
 
 
Reclassification of common stock and stock options to liability
 
 
 
 
 
 
 
 
(29.5
)
 
 
 
 
 
 
 
 
 
(29.5
)
 
 
 
(29.5
)
 
 
Reclassification of Class A Common Stock from liability to APIC
 
 
 
 
 
 
 
 
29.5

 
 
 
 
 
 
 
 
 
29.5

 
 
 
29.5

 
 
Exercise of former CEO stock options
1.4

 
—

 
 
 
 
 
12.5

 
 
 
 
 
 
 
 
 
12.5

 
 
 
12.5

 
 
Purchase of Class A Common Stock from former CEO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.4

 
(42.0
)
 
(42.0
)
 
 
 
(42.0
)
 
 
Exercise of employee stock options and restricted stock units
2.8

 
0.1

 
 
 
 
 
22.3

 
 
 
 
 
 
 
 
 
22.4

 
 
 
22.4

 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
8.1

 
 
 
 
 
 
 
 
 
8.1

 
 
 
8.1

 
 
Dividends ($0.20 per common share)
 
 
 
 
 
 
 
 
(71.8
)
 
 
 
 
 
 
 
 
 
(71.8
)
 
 
 
(71.8
)
 
 
Net income
 
 
 
 
 
 
 
 
 
 
136.0

 
 
 
 
 
 
 
136.0

 
11.1

 
147.1

 
4.5

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(118.7
)
 
 
 
 
 
(118.7
)
 
(0.6
)
 
(119.3
)
 
(0.3
)
Distribution to noncontrolling interests, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.8

 
1.8

 
(3.2
)
Dividend payable to redeemable noncontrolling interest holder
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5.9
)
Redeemable noncontrolling interest purchase adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


 


 
(16.2
)
Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
 
0.2

 
 
 
 
 
 
 
 
 
0.2

 
 
 
0.2

 
(0.2
)
BALANCE—December 31, 2014
129.3

 
$
1.3

 
263.7

 
$
2.6

 
$
1,898.2

 
$
(290.4
)
 
$
(203.8
)
 
44.9

 
$
(766.6
)
 
$
641.3

 
$
22.9

 
$
664.2

 
$
84.9


See notes to Condensed Consolidated Financial Statements.


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Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
REDEEMABLE NONCONTROLLING INTERESTS
For the Six Months Ended December 31, 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
12.0

 
0.1

 
(12.0
)
 
(0.1
)
 
 

 
 

 
 

 
 

 
 

 
—

 
 

 
—

 
 

Purchase of Class A Common Stock
 

 
 

 
 

 
 

 
0.3

 
 

 
 

 
—

 
(0.3
)
 
—

 
 

 
—

 
 

Exercise of employee stock options
0.7

 
—

 
 

 
 

 
3.8

 
 

 
 

 
 

 
 

 
3.8

 
 

 
3.8

 
 

Share-based compensation expense
 

 
 

 
 

 
 

 
22.2

 
 

 
 

 
 

 
 

 
22.2

 
 

 
22.2

 
 

Dividends ($0.20 per common share)
 

 
 

 
 

 
 

 
(77.4
)
 
 

 
 

 
 

 
 

 
(77.4
)
 
 

 
(77.4
)
 
 

Net (loss) income
 

 
 

 
 

 
 

 
 

 
176.0

 
 

 
 

 
 

 
176.0

 
11.1

 
187.1

 
8.2

Other comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
58.4

 
 

 
 

 
58.4

 
—

 
58.4

 
(0.3
)
Distribution to noncontrolling interests, net
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
(8.3
)
 
(8.3
)
 
(4.0
)
Adjustment of redeemable noncontrolling interests to redemption value
 

 
 

 
 

 
 

 
5.6

 
 

 
 

 
 

 
 

 
5.6

 
 

 
5.6

 
(5.6
)
BALANCE—December 31, 2013
86.3

 
$
0.8

 
298.6

 
$
3.0

 
$
1,898.4

 
$
(153.0
)
 
$
(60.2
)
 
0.4

 
$
(6.4
)
 
$
1,682.6

 
$
18.5

 
$
1,701.1

 
$
104.1


See notes to Condensed Consolidated Financial Statements.

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Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended
December 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
151.6

 
$
195.3

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

 
 

Depreciation and amortization
116.7

 
126.6

Deferred income taxes
(10.3
)
 
(5.8
)
Provision for bad debts
2.3

 
4.4

Provision for pension and other post-employment benefits
10.2

 
9.3

Share-based compensation
8.1

 
23.5

Loss on early extinguishment of debt
88.8

 
—

Other
10.5

 
10.0

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

 
 

Trade receivables
(130.7
)
 
(142.5
)
Inventories
48.6

 
59.7

Prepaid expenses and other current assets
(3.3
)
 
8.6

Accounts payable
(29.0
)
 
30.2

Accrued expenses and other current liabilities
126.3

 
127.9

Tax accruals
(40.4
)
 
37.8

Other noncurrent assets
3.7

 
(27.9
)
Other noncurrent liabilities
1.9

 
(9.8
)
Net cash provided by operating activities
355.0

 
447.3

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(103.1
)
 
(116.6
)
Payments for business combinations
(0.6
)
 
(25.0
)
Proceeds from sale of asset
14.2

 
0.5

Net cash used in investing activities
(89.5
)
 
(141.1
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from short-term debt, original maturity more than three months
625.6

 
14.7

Repayments of short-term debt, original maturity more than three months
(25.2
)
 
(28.9
)
Net proceeds from short-term debt, original maturity less than three months
14.6

 
2.1

Proceeds from revolving loan facilities
495.0

 
355.0

Repayments of revolving loan facilities
(494.5
)
 
(365.0
)
Proceeds from issuance of long-term debt
0.9

 
—

Repayment of Senior Notes
(584.6
)
 
—

Dividend Payment
(71.0
)
 
(76.9
)
Net proceeds from issuance of Common Stock
22.4

 
3.8

Net proceeds from issuance of Common Stock to former CEO
12.5

 
—

Purchase of Class A Common Stock from former CEO
(42.0
)
 
—

Payments for purchases of Common Stock held as Treasury Stock
(149.2
)
 
(0.3
)
Net proceeds from foreign currency contracts
6.8

 
1.1

Payment for business combinations – contingent consideration
(0.8
)
 
(1.1
)
Proceeds from mandatorily redeemable noncontrolling interests
—

 
2.2

Proceeds from noncontrolling interests
1.8

 
—

Distributions to noncontrolling interests
—

 
(8.3
)
Purchase of additional noncontrolling interests
(14.9
)
 
—

Distributions to redeemable noncontrolling interests
(3.2
)
 
(4.0
)
Payment of deferred financing fees
(5.0
)
 
(0.5
)
Net cash used in financing activities
(210.8
)
 
(106.1
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(89.5
)
 
33.5

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(34.8
)
 
233.6

CASH AND CASH EQUIVALENTS—Beginning of period
1,238.0

 
920.4

CASH AND CASH EQUIVALENTS—End of period
$
1,203.2

 
$
1,154.0

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 

 
 

Cash paid during the year for interest
$
32.8

 
$
32.3

Cash paid during the year for income taxes, net of refunds received
70.0

 
49.7

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
 

 
 

Accrued capital expenditure additions
$
27.6

 
$
36.4


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See notes to Condensed Consolidated Financial Statements.

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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 and six months ended December 31, 2014 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2015.
Related Parties
During the first quarter of fiscal 2015, JAB Holdings B.V. (“JAB”) transferred all of its Coty Inc. Class B shares to JAB Cosmetics B.V. (“JABC”). As of December 31, 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 December 31, 2014 and 2013 was 17.9% and 26.6%, and 13.9% and 29.0% for the six months ended December 31, 2014 and 2013, respectively. The variations in the effective tax rates from the prior year periods to the current year periods were primarily due to the positive impacts associated with a decrease in the reserve for unrecognized tax benefits, the settlement of tax audits in multiple foreign jurisdictions approximating $34.4 primarily during the six months ended December 31, 2014 and the accruals related to the expiration of foreign statutes of limitation, partially offset by the tax expense associated with the planned intercompany transfer of certain license agreements utilized substantially in our foreign operations and excess U.S. net deferred tax assets that cannot be recognized.

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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 December 31, 2014 and June 30, 2014, the gross amount of UTBs was $320.8 and $400.5, respectively. As of December 31, 2014, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $83.9. As of December 31, 2014 and June 30, 2014, the liability associated with UTBs, including accrued interest and penalties, was $97.7 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 for the three months ended December 31, 2014 and 2013 was $(2.3) and $0.8, and $(3.2) and $2.4 for the six months ended December 31, 2014 and 2013, respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of December 31, 2014 and June 30, 2014 was $19.0 and $25.5, respectively. On the basis of the information available as of December 31, 2014, it is reasonably possible that a decrease of up to $5.8 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.

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 first quarter of fiscal 2015, 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 used by 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 information used by the CODM, its organizational structure, and the product category that is deemed to be the strategic priority for the brand.
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
SEGMENT DATA
2014
 
2013
 
2014
 
2013
Net revenues:
 
 
 
 
 
 
 
Fragrances
$
691.7

 
$
728.5

 
$
1,332.6

 
$
1,387.4

Color Cosmetics
340.5

 
334.2

 
684.6

 
645.7

Skin & Body Care
227.4

 
260.5

 
424.7

 
468.3

Total
$
1,259.6

 
$
1,323.2

 
$
2,441.9

 
$
2,501.4

Operating income (loss):
 
 
 
 
 
 
 
Fragrances
$
145.5

 
$
133.4

 
$
266.0

 
$
279.2

Color Cosmetics
40.0

 
33.7

 
82.5

 
70.5

Skin & Body Care
15.1

 
16.2

 
18.8

 
19.7

Corporate
(16.9
)
 
(39.8
)
 
(63.5
)
 
(60.3
)
Total
$
183.7

 
$
143.5

 
$
303.8

 
$
309.1

Reconciliation:
 
 
 
 
 
 
 
Operating income
$
183.7

 
$
143.5

 
$
303.8

 
$
309.1

Interest expense, net
19.1

 
16.7

 
38.7

 
34.1

Loss on early extinguishment of debt
—

 
—

 
88.8

 
—

Other expense (income), net
0.3

 
—

 
0.3

 
(0.2
)
Income before income taxes
$
164.3

 
$
126.8

 
$
176.0

 
$
275.2

Within the Company’s reportable segments, product categories exceeding 5% of consolidated net revenues are presented below:

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Three Months Ended
December 31,
 
Six Months Ended
December 31,
PRODUCT CATEGORY
2014
 
2013
 
2014
 
2013
Fragrances:
 
 
 
 
 
 
 
Designer
39.2
%
 
39.3
%
 
40.1
%
 
40.3
%
Lifestyle
9.2

 
8.4

 
8.1

 
7.9

Celebrity
6.5

 
7.4

 
6.4

 
7.3

Total
54.9
%
 
55.1
%
 
54.6
%
 
55.5
%
Color Cosmetics:
 
 
 
 
 
 
 
Nail Care
11.7
%
 
10.5
%
 
12.7
%
 
11.7
%
Other Color Cosmetics
15.3

 
14.8

 
15.3

 
14.1

Total
27.0
%
 
25.3
%
 
28.0
%
 
25.8
%
Skin & Body Care:
 
 
 
 
 
 
 
Body Care
12.7
%
 
14.0
%
 
12.1
%
 
13.3
%
Skin Care
5.4

 
5.6

 
5.3

 
5.4

Total
18.1
%
 
19.6
%
 
17.4
%
 
18.7
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

4. RESTRUCTURING COSTS
Restructuring costs for the three and six months ended December 31, 2014 and 2013 are presented below:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Organizational Redesign
$
11.8

 
$
—

 
$
52.6

 
$
—

China Optimization
—

 
—

 
(0.1
)
 
—

Productivity Program
0.2

 
4.7

 
—

 
6.3

Total
$
12.0

 
$
4.7

 
$
52.5

 
$
6.3

Organizational Redesign
During the fourth quarter of fiscal 2014, the Company’s Board of Directors (“the Board”) 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 $65.6 of restructuring costs as of December 31, 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
52.9

 
1.1

 
54.0

Payments
(8.8
)
 
(2.2
)
 
(11.0
)
Changes in estimates (a)
(1.4
)
 
—

 
(1.4
)
Effect of exchange rates
(2.1
)
 
—

 
(2.1
)
Payables
—

 
(0.8
)
 
(0.8
)
Balance—December 31, 2014
$
49.7

 
$
—

 
$
49.7

 
 

10
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(a) 
The decrease in severance and employee benefits is primarily attributable to employees who have voluntarily left positions that were later eliminated.
The Company currently estimates that the total remaining accrual of $49.7 will result in cash expenditures of $23.8, $21.4, and $4.5 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 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 December 31, 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

Restructuring charges
—

 
0.2

 
0.2

Payments
(7.8
)
 
—

 
(7.8
)
Changes in estimates
(0.2
)
 
(0.1
)
 
(0.3
)
Foreign currency translation
(0.2
)
 
(0.1
)
 
(0.3
)
Balance—December 31, 2014
$
1.4

 
$
0.2

 
$
1.6

The Company currently estimates that the total remaining restructuring accrual of $1.6 will result in cash expenditures in fiscal 2015.

In October 2014, the Company agreed to sell certain TJoy assets for cash of 86.0 million RMB ($14.1) in conjunction with China Optimization. The agreement allowed the Company to continue using the facility through the completion of the sale in January 2015. A gain of approximately $7.3 will be recognized in the Company’s Condensed Consolidated Statement of Operations in the third quarter of fiscal 2015.
Productivity Program
During the fourth quarter of fiscal 2013, the Board 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 implementing 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 $39.5 was incurred as of December 31, 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

Restructuring charges
0.2

 
—

 
0.2

 
0.4

Payments
(5.1
)
 
—

 
(0.2
)
 
(5.3
)
Changes in estimates
(0.4
)
 
—

 
—

 
(0.4
)
Effect of exchange rates
(0.5
)
 
(0.2
)
 
(0.1
)
 
(0.8
)
Balance—December 31, 2014
$
10.0

 
$
—

 
$
0.1

 
$
10.1

The Company currently estimates that the total remaining accrual of $10.1 will result in cash expenditures of approximately $6.9 and $3.2 in fiscal 2015 and 2016, respectively.


11
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5. INVENTORIES

Inventories as of December 31, 2014 and June 30, 2014 are presented below:
 
December 31,
2014
 
June 30,
2014
Raw materials
$
149.0

 
$
189.3

Work-in-process
6.9

 
12.3

Finished goods
370.8

 
415.8

Total inventories
$
526.7

 
$
617.4


6. GOODWILL, OTHER INTANGIBLE ASSETS, NET AND OTHER ASSETS
As discussed in Note 3, during the first quarter of fiscal 2015, 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 reclassified 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 December 31, 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 December 31, 2014:
 
 
 
 
 
 
     Foreign currency translation
(17.5
)
 
(11.4
)
 
(0.2
)
 
(29.1
)
     Reclassification (a)
(69.1
)
 
—

 
69.1

 
—

 
 
 
 
 
 
 
 
Gross Balance at December 31, 2014
$
665.3

 
$
526.8

 
$
762.4

 
$
1,954.5

Accumulated Impairments
—

 
—

 
(640.8
)
 
(640.8
)
Net Balance at December 31, 2014
$
665.3

 
$
526.8

 
$
121.6

 
$
1,313.7

 
 

(a) As a result of the Company’s Organizational Redesign program announced on July 9, 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 December 31, 2014 and June 30, 2014 are presented below:
 
December 31, 2014
 
June 30, 2014
Indefinite-lived other intangible assets (a)
$
1,161.2

 
$
1,167.8

Finite-lived other intangible assets, net (b)
616.6

 
669.3

Total Other intangible assets, net
$
1,777.8

 
$
1,837.1

 
 
(a) Net of accumulated impairments of $(188.6) as of December 31, 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.

12
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The effect of foreign currency translation on the carrying amount of indefinite-lived intangible assets is $(6.6) as of December 31, 2014.
    
Intangible assets subject to amortization are presented below:
 
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

December 31, 2014
 
 
 
 
 
 
 
License agreements
$
814.1

 
$
(494.1
)
 
$
—

 
$
320.0

Customer relationships
498.2

 
(182.8
)
 
(33.5
)
 
281.9

Trademarks
121.5

 
(87.9
)
 
(21.0
)
 
12.6

Product formulations
31.7

 
(29.6
)
 
—

 
2.1

Total
$
1,465.5

 
$
(794.4
)
 
$
(54.5
)
 
$
616.6


Amortization expense totaled $18.5 and $22.7 for the three months ended December 31, 2014 and 2013 and $37.4 and $45.3 for the six months ended December 31, 2014 and 2013.

7. DEBT
 
December 31, 2014
 
June 30, 2014
Short-term debt
$
28.9

 
$
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
900.0

 
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
1.2

 
0.2

Total debt
3,405.1

 
3,293.5

Less: Short-term debt and current portion of long-term debt
(691.6
)
 
(33.4
)
Total Long-term debt
$
2,713.5

 
$
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 December 31, 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

13
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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 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 December 31, 2014, the Company had $350.0 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, 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 and six months ended December 31, 2014 and 2013 is presented below:
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
2014
 
2013
 
2014
 
2013
Interest expense
$
17.4

 
$
17.5

 
$
36.8

 
$
34.9

Foreign exchange losses, net of derivative contracts
2.4

 
0.2

 
3.7

 
1.1

Interest income
(0.7
)
 
(1.0
)
 
(1.8
)
 
(1.9
)
Total interest expense, net
$
19.1

 
$
16.7

 
$
38.7

 
$
34.1


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 and six months ended December 31, 2014 and 2013:
 
Three Months Ended December 31,
 
Pension Plans
 
Other Post-
Employment
 
 
 
U.S.
 
International
 
Benefits
 
Total
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
—

 
$
—

 
$
1.5

 
$
1.4

 
$
0.7

 
$
0.6

 
$
2.2

 
$
2.0

Interest cost
0.8

 
0.9

 
1.2

 
1.4

 
1.0

 
0.9

 
3.0

 
3.2

Expected return on plan assets
(0.7
)
 
(0.6
)
 
(0.4
)
 
(0.2
)
 
—

 
—

 
(1.1
)
 
(0.8
)
Amortization of prior service credit
—

 
—

 
—

 
—

 
(0.1
)
 
(0.1
)
 
(0.1
)
 
(0.1
)
Amortization of net loss
0.5

 
0.2

 
0.9

 
0.5

 
—

 
—

 
1.4

 
0.7

Curtailment gain
—

 
—

 
(0.8
)
 
—

 
—

 
—

 
(0.8
)
 
—

Net periodic benefit cost
$
0.6

 
$
0.5

 
$
2.4

 
$
3.1

 
$
1.6

 
$
1.4

 
$
4.6

 
$
5.0


14
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended December 31,
 
Pension Plans
 
Other Post-
Employment
 
 
 
U.S.
 
International
 
Benefits
 
Total
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
—

 
$
—

 
$
3.0

 
$
2.8

 
$
1.3

 
$
1.2

 
$
4.3

 
$
4.0

Interest cost
1.7

 
1.7

 
2.4

 
2.7

 
2.0

 
1.9

 
6.1

 
6.3

Expected return on plan assets
(1.5
)
 
(1.2
)
 
(0.7
)
 
(0.5
)
 
—

 
—

 
(2.2
)
 
(1.7
)
Amortization of prior service credit
—

 
—

 
0.1

 
—

 
(0.1
)
 
(0.1
)
 
—

 
(0.1
)
Amortization of net loss
1.0

 
0.4

 
1.8

 
1.0

 
—

 
—

 
2.8

 
1.4

Curtailment gain
—

 
—

 
(0.8
)
 
—

 
—

 
—

 
(0.8
)
 
—

Net periodic benefit cost
$
1.2

 
$
0.9

 
$
5.8

 
$
6.0

 
$
3.2

 
$
3.0

 
$
10.2

 
$
9.9


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.

The financial assets and liabilities that the Company measures at fair value on a recurring basis based on the fair value hierarchy, as of December 31, 2014 and June 30, 2014 are presented below:
 
Level 1
 
Level 2
 
Level 3
 
December 31, 2014
 
June 30, 2014
 
December 31, 2014
 
June 30, 2014
 
December 31, 2014
 
June 30, 2014
Financial assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
—

 
$
11.4

 
$
2.1

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
—

 
$
1.4

 
$
11.5

 
$
—

 
$
—

Contingent consideration - business combination
—

 
—

 
—

 
—

 
0.9

 
1.1

Total Liabilities
$
—

 
$
—

 
$
1.4

 
$
11.5

 
$
0.9

 
$
1.1

Total recurring fair value measurements
$
—

 
$
—

 
$
10.0

 
$
(9.4
)
 
$
(0.9
)
 
$
(1.1
)
The fair values of the Company’s financial instruments estimated as of December 31, 2014 and June 30, 2014 are presented below:
 
December 31, 2014
 
June 30, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Coty Inc. Credit Facility
$