10-Q
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, 2015
 
 
 
 
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 3, 2015, 85,001,383 shares of the registrant’s Class A Common Stock, $0.01 par value, and 262,062,370 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,
 
2015
 
2014
Net revenues
$
1,112.3

 
$
1,182.3

Cost of sales
443.7

 
482.2

Gross profit
668.6

 
700.1

Selling, general and administrative expenses
484.3

 
520.6

Amortization expense
19.2

 
18.9

Restructuring costs
62.1

 
40.5

Acquisition-related costs
15.8

 
—

Asset impairment charges
5.5

 
—

Operating income
81.7

 
120.1

Interest expense, net
16.0

 
19.6

Loss on early extinguishment of debt
—

 
88.8

Other income, net
(0.3
)
 
—

Income before income taxes
66.0

 
11.7

Benefit for income taxes
(67.1
)
 
(5.0
)
Net income
133.1

 
16.7

Net income attributable to noncontrolling interests
4.4

 
5.0

Net income attributable to redeemable noncontrolling interests
3.0

 
1.1

Net income attributable to Coty Inc.
$
125.7

 
$
10.6

Net income attributable to Coty Inc. per common share:
 

 
 

Basic
$
0.35

 
$
0.03

Diluted
0.34

 
0.03

Weighted-average common shares outstanding:
 

 
 

Basic
360.0

 
354.2

Diluted
369.9

 
364.3


See notes to Condensed Consolidated Financial Statements.


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COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
Three Months Ended
September 30,
 
2015
 
2014
Net income
$
133.1

 
$
16.7

Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustment
(17.2
)
 
(79.9
)
Net unrealized derivative gains on cash flow hedges, net of taxes of $(0.8) and $(1.2), during the three months ended, respectively
4.5

 
6.4

Pension and other post-employment benefits, net of tax of nil and nil during the three months ended, respectively
0.2

 
—

Total other comprehensive loss, net of tax
(12.5
)
 
(73.5
)
Comprehensive income (loss)
120.6

 
(56.8
)
Comprehensive income attributable to noncontrolling interests:
 

 
 

Net income
4.4

 
5.0

Foreign currency translation adjustment
(0.5
)
 
—

Total comprehensive income attributable to noncontrolling interests
3.9

 
5.0

Comprehensive income attributable to redeemable noncontrolling interests:
 
Net income
3.0

 
1.1

Foreign currency translation adjustment
0.1

 
(0.2
)
Total comprehensive income attributable to redeemable noncontrolling interests
3.1

 
0.9

Comprehensive income (loss) attributable to Coty Inc.
$
113.6

 
$
(62.7
)

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)
 
September 30,
2015
 
June 30,
2015
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
416.0

 
$
341.3

Trade receivables—less allowances of $22.7 and $19.6, respectively
772.9

 
679.6

Inventories
585.9

 
557.8

Prepaid expenses and other current assets
178.4

 
191.0

Deferred income taxes
84.8

 
86.7

Total current assets
2,038.0

 
1,856.4

Property and equipment, net
483.6

 
500.2

Goodwill
1,528.7

 
1,530.7

Other intangible assets, net
1,888.6

 
1,913.6

Deferred income taxes
9.8

 
10.4

Other noncurrent assets
208.3

 
207.6

TOTAL ASSETS
$
6,157.0

 
$
6,018.9

LIABILITIES AND EQUITY
 

 
 

Current liabilities:


 


Accounts payable
$
773.1

 
$
748.4

Accrued expenses and other current liabilities
830.0

 
719.2

Short-term debt and current portion of long-term debt
41.9

 
28.8

Income and other taxes payable
32.6

 
22.4

Deferred income taxes
9.6

 
7.4

Total current liabilities
1,687.2

 
1,526.2

Long-term debt
2,750.6

 
2,605.9

Pension and other post-employment benefits
207.0

 
206.5

Deferred income taxes
334.5

 
352.6

Other noncurrent liabilities
200.0

 
256.7

Total liabilities
5,179.3

 
4,947.9

COMMITMENTS AND CONTINGENCIES (Note 17)


 


REDEEMABLE NONCONTROLLING INTERESTS
84.4

 
86.3

EQUITY:
 

 
 

Preferred Stock, $0.01 par value; 20.0 shares authorized; 1.9 issued and outstanding at September 30, 2015 and June 30, 2015
—

 
—

Class A Common Stock, $0.01 par value; 800.0 shares authorized, 135.1 and 134.0 issued and 94.5 and 98.8 outstanding at September 30, 2015 and June 30, 2015, respectively
1.4

 
1.3

Class B Common Stock, $0.01 par value; 262.0 shares authorized, issued and outstanding respectively, at September 30, 2015 and June 30, 2015
2.6

 
2.6

Additional paid-in capital
1,991.1

 
2,044.4

Accumulated deficit
(68.2
)
 
(193.9
)
Accumulated other comprehensive loss
(286.1
)
 
(274.0
)
Treasury stock—at cost, shares: 40.7 and 35.2 at September 30, 2015 and June 30, 2015, respectively
(766.3
)
 
(610.6
)
Total Coty Inc. stockholders’ equity
874.5

 
969.8

Noncontrolling interests
18.8

 
14.9

Total equity
893.3

 
984.7

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
$
6,157.0

 
$
6,018.9


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 Three Months Ended September 30, 2015
(In millions, except per share data)
(Unaudited)
 
Preferred Stock
 
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
 
Shares
 
Amount
 
Capital
 
Deficit)
 
Loss
 
Shares
 
Amount
 
Equity
 
Interests
 
Equity
 
Interests
BALANCE—July 1, 2015
1.9

 
—

 
134.0

 
$
1.3

 
262.0

 
$
2.6

 
$
2,044.4

 
$
(193.9
)
 
$
(274.0
)
 
35.2

 
$
(610.6
)
 
$
969.8

 
$
14.9

 
$
984.7

 
$
86.3

Purchase of Class A Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.5

 
(155.7
)
 
(155.7
)
 
 
 
(155.7
)
 
 
Reclassification of Class A Common Stock from liability to APIC
 
 
 
 
 
 
 
 
 
 
 
 
13.8

 
 
 
 
 
 
 
 
 
13.8

 
 
 
13.8

 
 
Exercise of employee stock options and restricted stock units
 
 
 
 
1.1

 
0.1

 
 
 
 
 
9.8

 
 
 
 
 
 
 
 
 
9.9

 
 
 
9.9

 
 
Series A Preferred Share based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
0.4

 
 
 
 
 
 
 
 
 
0.4

 
 
 
0.4

 
 
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
9.0

 
 
 
 
 
 
 
 
 
9.0

 
 
 
9.0

 
 
Dividends ($0.25 per common share)
 
 
 
 
 
 
 
 
 
 
 
 
(89.9
)
 
 
 
 
 
 
 
 
 
(89.9
)
 
 
 
(89.9
)
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
125.7

 
 
 
 
 
 
 
125.7

 
4.4

 
130.1

 
3.0

Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(12.1
)
 
 
 
 
 
(12.1
)
 
(0.5
)
 
(12.6
)
 
0.1

Distribution to noncontrolling interests, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
—

 
(2.9
)
Change in dividend payable to redeemable noncontrolling interest holder
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.5

Adjustment of redeemable noncontrolling interests to redemption value
 
 
 
 
 
 
 
 
 
 
 
 
3.6

 
 
 
 
 
 
 
 
 
3.6

 
 
 
3.6

 
(3.6
)
BALANCE—September 30, 2015
1.9

 
—

 
135.1

 
$
1.4

 
262.0

 
$
2.6

 
$
1,991.1

 
$
(68.2
)
 
$
(286.1
)
 
40.7

 
$
(766.3
)
 
$
874.5

 
$
18.8

 
$
893.3

 
$
84.4


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 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)
 
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 share 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 income
 

 
 

 
 

 
 

 
 

 
 

 
(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




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Table of Contents

COTY INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
133.1

 
$
16.7

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

 
 

Depreciation and amortization
57.5

 
58.8

Asset impairment charges
5.5

 
—

Deferred income taxes
(97.4
)
 
(12.9
)
Provision for bad debts
0.8

 
1.6

Provision for pension and other post-employment benefits
3.1

 
5.6

Share-based compensation
9.5

 
0.1

Loss on early extinguishment of debt
—

 
88.8

Other
7.4

 
6.0

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

 
 

Trade receivables
(104.7
)
 
(167.0
)
Inventories
(34.1
)
 
(46.0
)
Prepaid expenses and other current assets
11.9

 
3.1

Accounts payable
43.3

 
35.7

Accrued expenses and other current liabilities
44.5

 
56.3

Tax accruals
(10.2
)
 
(24.4
)
Other noncurrent assets
2.8

 
2.5

Other noncurrent liabilities
43.7

 
1.3

Net cash provided by operating activities
$
116.7

 
26.2

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(42.6
)
 
(59.9
)
Payments for business combinations
—

 
(0.6
)
Proceeds from sale of asset
0.1

 
0.1

Net cash used in investing activities
(42.5
)
 
(60.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from short-term debt, original maturity more than three months
9.2

 
609.8

Repayments of short-term debt, original maturity more than three months
(5.9
)
 
(5.5
)
Net proceeds from short-term debt, original maturity less than three months
10.7

 
29.7

Proceeds from revolving loan facilities
195.0

 
152.0

Repayments of revolving loan facilities
(50.0
)
 
(341.5
)
Proceeds from issuance of long-term debt
—

 
0.9

Repayment of Senior Notes
—

 
(584.6
)
Net proceeds from issuance of Common Stock
9.8

 
7.8

Payments for purchases of Common Stock held as Treasury Stock
(155.7
)
 
—

Net proceeds from foreign currency contracts
1.9

 
3.5

Purchase of additional noncontrolling interests
—

 
(14.9
)
Distributions to redeemable noncontrolling interests
(2.9
)
 
(0.2
)
Payment of deferred financing fees
(5.5
)
 
(5.0
)
Net cash provided by (used in) financing activities
6.6

 
(148.0
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
(6.1
)
 
(53.1
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
74.7

 
(235.3
)
CASH AND CASH EQUIVALENTS—Beginning of period
341.3

 
1,238.0

CASH AND CASH EQUIVALENTS—End of period
$
416.0

 
$
1,002.7

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
 

 
 

Cash paid during the year for interest
$
12.8

 
$
18.8

Cash paid during the year for income taxes, net of refunds received
36.8

 
26.6

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
 

 
 

Accrued capital expenditure additions
$
25.6

 
$
35.6

Non-cash capital contribution associated with special share purchase transaction

13.8

 
—


See notes to Condensed Consolidated Financial Statements.

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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 2016” refer to the fiscal year ending June 30, 2016.
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 consolidated domestic and international subsidiaries. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited interim Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Consolidated Financial Statements as of and for the year ended June 30, 2015. 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, 2015 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending June 30, 2016.
Related Parties
As of September 30, 2015, the Company is a majority-owned subsidiary of JAB Cosmetics B.V. (“JABC”). Both JABC and the shares of the Company are indirectly controlled by Lucresca SE, Agnaten SE and JAB Holdings B.V. (“JAB”). The Company does not generally enter into transactions with related parties other than certain share transactions with JABC and certain executives as described in Notes 14 and 15.
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 the Company’s 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 Condensed Consolidated Financial Statements in future periods.
Tax Information
The effective income tax rate for the three months ended September 30, 2015 and 2014 was (101.7)% and (42.7)%, respectively. The effective tax rate for the three months ended September 30, 2015 includes the net impact of the settlements with the Internal Revenue Service (“IRS”) as described below.  The effective income tax rate for the three months ended September 30, 2014 includes the net impact of favorable tax audit resolutions in multiple jurisdictions.
During first quarter of fiscal year 2016, the Company reached final settlement with the IRS in connection with the 2004–2012 examination periods. The settlement primarily relates to the acquisition of the Calvin Klein fragrance business. In connection with the settlement, the Company recognized a tax benefit of approximately $193.9 of which $164.2 is mainly due

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to the recognition of additional deferred tax assets related to the basis of the Calvin Klein trademark, and approximately $29.7 resulted from the reduction of gross unrecognized tax benefits. Of the $193.9 tax benefit, $113.0 was offset by a valuation allowance due to on-going operating losses in the U.S.
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, (iv) audit settlement and (v) valuation allowance changes.
As of September 30, 2015 and June 30, 2015, the gross amount of UTBs was $190.1 and $342.6, respectively. As of September 30, 2015, the total amount of UTBs that, if recognized, would impact the effective income tax rate is $92.6. As of September 30, 2015 and June 30, 2015, the liability associated with UTBs, including accrued interest and penalties, was $79.4 and $182.9, respectively, which was recorded in Income and other taxes payable and Other non-current liabilities in the Condensed Consolidated Balance Sheets. The total interest and penalties recorded in the Condensed Consolidated Statements of Operations related to UTBs for the three months ended September 30, 2015 and 2014 was $1.3 and $(0.9), respectively. The total gross accrued interest and penalties recorded in the Condensed Consolidated Balance Sheets as of September 30, 2015 and June 30, 2015 was $7.4 and $15.2, respectively. On the basis of the information available as of September 30, 2015, it is reasonably possible that a decrease of up to $3.0 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.
Recently Issued Accounting Pronouncements
In April 2015, the FASB issued authoritative guidance on the treatment of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This amendment will be effective for the Company’s interim and annual consolidated financial statements for fiscal 2017 using a retrospective approach.  Additionally, in August 2015, the FASB issued authoritative guidance related to the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The Company is evaluating the impact these amendments will have on the Company’s Consolidated Financial Statements.

In September 2015, the FASB issued authoritative guidance related to adjustments within the measurement period for business combinations. The amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendment requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendment also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments will be effective for the Company for fiscal 2017 using a prospective approach, with early adoption permitted. The Company is evaluating the impact this amendment will have on the Company’s Consolidated Financial Statements.

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. The Company’s operating and reportable segments are Fragrances, Color Cosmetics and Skin & Body Care (also referred to as “segments”). The reportable segments also represent the Company’s product groupings. The items within Corporate relate to corporate-based responsibilities and decisions and are not used by the CODM to measure the underlying performance of the segments. Corporate primarily includes a component of share-based compensation expense, restructuring costs and certain other expense items not attributable to ongoing operating activities of the segments.

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Three Months Ended
September 30,
SEGMENT DATA
2015
 
2014
Net revenues:
 
 
 
Fragrances
$
548.1

 
$
640.9

Color Cosmetics
390.9

 
344.1

Skin & Body Care
173.3

 
197.3

Total
$
1,112.3

 
$
1,182.3

Operating income (loss):
 
 
 
Fragrances
$
108.9

 
$
120.5

Color Cosmetics
57.7

 
42.5

Skin & Body Care
6.8

 
3.7

Corporate
(91.7
)
 
(46.6
)
Total
$
81.7

 
$
120.1

Reconciliation:
 
 
 
Operating income
$
81.7

 
$
120.1

Interest expense, net
16.0

 
19.6

Loss on early extinguishment of debt
—

 
88.8

Other income, net
(0.3
)
 
—

Income before income taxes
$
66.0

 
$
11.7

Within the Company’s reportable segments, product categories exceeding 5% of consolidated net revenues are presented below:
 
Three Months Ended
September 30,
PRODUCT CATEGORY
2015
 
2014
Fragrances:
 
 
 
Designer
38.0
%
 
41.1
%
Lifestyle
6.0

 
6.8

Celebrity
5.3

 
6.3

Total
49.3
%
 
54.2
%
Color Cosmetics:
 
 
 
Nail Care
15.1
%
 
13.7
%
Other Color Cosmetics
20.0

 
15.4

Total
35.1
%
 
29.1
%
Skin & Body Care:
 
 
 
Body Care
10.6
%
 
11.5
%
Skin Care
5.0

 
5.2

Total
15.6
%
 
16.7
%
Total
100.0
%
 
100.0
%

4. RESTRUCTURING COSTS
Restructuring costs for the three months ended September 30, 2015 and 2014 are presented below:

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Three Months Ended September 30,
 
2015
 
2014
Acquisition Integration Program
$
46.5

 
$
—

Organizational Redesign
15.6

 
40.8

Productivity Program
—

 
(0.2
)
Other (a)
—

 
(0.1
)
Total
$
62.1

 
$
40.5

(a) 
Other restructuring balance primarily relates to the Company’s China Optimization program.
Acquisition Integration Program
In the first quarter of fiscal 2016, the Company’s Board of Directors (the “Board”) approved an expansion to the Acquisition Integration Program in connection with the recent acquisition of the Bourjois brand.  Actions and cash payments associated with the program were initiated after the acquisition of Bourjois and are expected to be substantially completed by the end of fiscal 2017.  The Company anticipates the Acquisition Integration Program will result in pre-tax restructuring and related costs of approximately $67.0, all of which will result in cash payments. The Company incurred $61.8 of restructuring costs life-to-date as of September 30, 2015, which have been recorded in Corporate.
The related liability balance and activity for the Acquisition Integration Program costs are presented below:
 
Total
Program
Costs
Balance—July 1, 2015
$
15.3

Restructuring charges
46.5

Payments
(1.8
)
Effect of exchange rates
—

Balance—September 30, 2015
$
60.0

The Company currently estimates that the total remaining accrual of $60.0 will result in cash expenditures of approximately $14.9 and $45.1 in fiscal 2016 and 2017, respectively.
Organizational Redesign
During the fourth quarter of fiscal 2014, 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 $87.2 of restructuring costs life-to-date as of September 30, 2015, which have been recorded in Corporate.
The related liability balance and activity for the Organizational Redesign costs are presented below:
 
Severance and
Employee
Benefits
 
Third-Party
Contract
Terminations
 
Other
Exit
Costs
 
Total
Program
Costs
Balance—July 1, 2015
$
32.0

 
—

 
$
0.1

 
$
32.1

Restructuring charges
16.1

 
0.3

 
0.3

 
16.7

Payments
(6.6
)
 
—

 
(0.3
)
 
(6.9
)
Changes in estimates
(1.1
)
 
—

 
—

 
(1.1
)
Effect of exchange rates
—

 
—

 
—

 
—

Balance—September 30, 2015
$
40.4

 
$
0.3

 
$
0.1

 
$
40.8

The Company currently estimates that the total remaining accrual of $40.8 will result in cash expenditures of $22.5, $17.8, and $0.5 in fiscal 2016, 2017, and 2018 respectively.
Productivity Program

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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 that the Productivity Program will result in pre-tax restructuring and related costs of approximately $70.0. The Company anticipates completing the implementation of all project activities by the end of fiscal 2016. The Company incurred $41.6 of restructuring costs life-to-date as of September 30, 2015, which have been recorded in Corporate.
The related liability balance and activity for the Productivity Program costs are presented below:
 
Severance and
Employee
Benefits
 
Third-Party
Contract
Terminations
 
Other
Exit
Costs
 
Total
Program
Costs
Balance—July 1, 2015
$
7.0

 
$
—

 
$
—

 
$
7.0

Restructuring charges
—

 
—

 
—

 
—

Payments
(1.0
)
 
—

 
—

 
(1.0
)
Changes in estimates
—

 
—

 
—

 
—

Effect of exchange rates
(0.1
)
 
—

 
—

 
(0.1
)
Balance—September 30, 2015
$
5.9

 
$
—

 
$
—

 
$
5.9

The Company currently estimates that the total remaining accrual of $5.9 will result in cash expenditures of approximately $5.1, and $0.8 in fiscal 2016 and 2017.

5. BUSINESS COMBINATIONS
On April 1, 2015, the Company completed its purchase of 100% of the net assets of Bourjois from Chanel International B.V. (“CHANEL”) pursuant to the Stock Purchase Agreement, dated March 12, 2015, between the Company and CHANEL (the “Stock Purchase Agreement”) for a total purchase price of $376.8.
The fair value of assets acquired and liabilities assumed from the Company’s acquisition of Bourjois was based on a preliminary valuation and the Company’s estimates and assumptions are subject to change within the measurement period. For the three months ended September 30, 2015 there were no adjustments to the fair value of the Bourjois assets acquired or liabilities assumed. As of September 30, 2015, the Company is still evaluating the fair value of certain intangible assets and finalizing the accounting for income taxes. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period in fiscal 2016.
Goodwill is deductible for tax purposes and is attributable to expected synergies. Goodwill of $148.7, $11.1, and $35.0 was allocated to the Color Cosmetics, Skin & Body Care, and Fragrances segments, respectively.
The Company recognized $0.7 of transaction-related costs associated with this acquisition for the three months ended September 30, 2015, which are included in Acquisition-related costs in the Condensed Consolidated Statement of Operations.

6. ACQUISITION-RELATED COSTS
Transaction-related costs represent costs directly related to acquiring a company, for both completed and/or contemplated acquisition offers and can include finder’s fees, legal, accounting, valuation, other professional or consulting fees, and other internal costs which can include compensation related expenses for dedicated internal resources. The Company recognized $15.8 in transaction-related costs for the three months ended September 30, 2015 which have been recorded in Acquisition-related costs in the Condensed Consolidated Statement of Operations. Of the $15.8, $15.1 relates to the planned merger with The Procter & Gamble Company’s (“P&G”) fine fragrance, color cosmetics, and hair color businesses (the “P&G Specialty Beauty Business”), and $0.7 relates to costs associated with the Bourjois acquisition. The Company recognized no transaction-related costs during the three months ended September 30, 2014.

7. INVENTORIES

Inventories as of September 30, 2015 and June 30, 2015 are presented below:

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September 30,
2015
 
June 30,
2015
Raw materials
$
146.1

 
$
160.9

Work-in-process
6.9

 
8.4

Finished goods
432.9

 
388.5

Total inventories
$
585.9

 
$
557.8


8. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
Goodwill as of September 30, 2015 and June 30, 2015 is presented below:
 
Fragrances
 
Color Cosmetics
 
Skin & Body Care
 
Total
Gross balance at June 30, 2015
$
720.8

 
$
677.3

 
$
773.4

 
$
2,171.5

Accumulated impairments
—

 
—

 
(640.8
)
 
(640.8
)
Net balance at June 30, 2015
$
720.8

 
$
677.3

 
$
132.6

 
$
1,530.7

 
 
 
 
 
 
 
 
Changes during the period ended September 30, 2015:
 
 
 
 
 
 
     Foreign currency translation
(0.6
)
 
(1.4
)
 
—

 
(2.0
)
 
 
 
 
 
 
 
 
Gross balance at September 30, 2015
$
720.2

 
$
675.9

 
$
773.4

 
$
2,169.5

Accumulated impairments
—

 
—

 
(640.8
)
 
(640.8
)
Net balance at September 30, 2015
$
720.2

 
$
675.9

 
$
132.6

 
$
1,528.7


Other Intangible Assets
    
Other intangible assets, net as of September 30, 2015 and June 30, 2015 are presented below:
 
September 30, 2015
 
June 30, 2015
Indefinite-lived other intangible assets, net (a)
$
1,273.7

 
$
1,274.0

Finite-lived other intangible assets, net
614.9

 
639.6

Total Other intangible assets, net
$
1,888.6

 
$
1,913.6

 
 
(a) The balance of the Indefinite-lived other intangible assets is comprised solely of trademarks, net of accumulated impairments of $188.6 as of September 30, 2015 and June 30, 2015.

Intangible assets subject to amortization are presented below:


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Cost
 
Accumulated Amortization
 
Accumulated Impairment
 
Net
June 30, 2015
 
 
 
 
 
 
 
License agreements
$
800.7

 
$
(501.1
)
 
$
—

 
$
299.6

Customer relationships
559.1

 
(232.8
)
 
—

 
326.3

Trademarks
119.1

 
(108.2
)
 
—

 
10.9

Product formulations
32.7

 
(29.9
)
 
—

 
2.8

Total
$
1,511.6

 
$
(872.0
)
 
$
—

 
$
639.6

September 30, 2015
 
 
 
 
 
 
 
License agreements
$
801.6

 
$
(509.8
)
 
$
—

 
$
291.8

Customer relationships
558.5

 
(242.9
)
 
(5.5
)
 
310.1

Trademarks
117.9

 
(107.5
)
 
—

 
10.4

Product formulations
32.6

 
(30.0
)
 
—

 
2.6

Total
$
1,510.6

 
$
(890.2
)
 
$
(5.5
)
 
$
614.9


Amortization expense totaled $19.2 and $18.9 for the three months ended September 30, 2015 and 2014, respectively.

In conjunction with the Company’s analysis of its go-to-market strategy in Southeast Asia during the first quarter of fiscal 2016, the Company evaluated future cash flows for this asset group and determined that the carrying value exceeded the undiscounted cash flows. As a result, the Company evaluated the fair value of the long-lived assets in the asset group, through an analysis of discounted future cash flows, and determined that the customer relationships were fully impaired and thus recorded $5.5 of asset impairment charges in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2015.

9. DEBT
 
September 30, 2015
 
June 30, 2015
Short-term debt
$
23.3

 
$
22.1

2015 Credit Agreement due March 2018
800.0

 
800.0

Coty Inc. Credit Facility
 
 
 
2013 Term Loan due March 2018
1,050.0

 
1,050.0

Incremental Term Loan due April 2018
625.0

 
625.0

Revolving Loan Facility due April 2018
293.5

 
136.5

Other long-term debt and capital lease obligations
0.7

 
1.1

Total debt
2,792.5

 
2,634.7

Less: Short-term debt and current portion of long-term debt
(41.9
)
 
(28.8
)
Total Long-term debt
$
2,750.6

 
$
2,605.9

2015 Credit Agreement
On March 24, 2015, the Company entered into a Credit Agreement (the “2015 Credit Agreement”) which provides for a term loan of $800.0 (the “2015 Term Loan”), payable in full on March 31, 2018. The terms of the 2015 Term Loan are substantially the same as those of the term loan existing under the 2013 Credit Agreement, as defined below, after giving effect to the 2015 Amendment as discussed below.
Coty Inc. Credit Facility
On March 24, 2015, the Company entered into an amendment (“2015 Amendment”) to the 2013 Credit Agreement. The 2015 Amendment amends, among other things, the financial covenants in the 2013 Credit Agreement. After giving effect to the 2015 Amendment, the 2013 Credit Agreement permits the Company to maintain a quarterly base leverage ratio, as defined therein, equal to or less than 3.95 to 1.0 for each fiscal quarter through to December 31, 2015. After December 31, 2015, the quarterly base leverage ratio steps down to 3.75 to 1.0 through the period ending December 31, 2016, and to 3.50 to 1.0 through maturity of the facility.
On June 25, 2014, the Company entered into the Incremental Term Loan Amendment (“Incremental Amendment”) to the 2013 Credit Agreement. The Incremental Amendment provides for an incremental term loan of $625.0 ( the “Incremental Term

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Loan”) that has substantially the same terms and conditions as the 2013 Term Loan, except with respect to principal repayments. The Incremental Term Loan is payable in full on April 2, 2018.
On April 2, 2013, the Company refinanced its then-existing credit facility by entering into a Credit Agreement (the “2013 Credit Agreement”) which provides a term loan of $1,250.0 (the “2013 Term Loan”), which expires on March 31, 2018. The 2013 Credit Agreement additionally provides a revolving loan facility of $1,250.0 (the “2013 Revolving Loan Facility”) expiring on April 2, 2018, which includes up to $80.0 in swingline loans. Quarterly repayments for the 2013 Term Loan will commence on October 1, 2016 and will total $175.0, and $875.0 in fiscal years 2017, and 2018 respectively.

As of September 30, 2015, the Company is in compliance with all financial covenants within the credit agreements and related amendments as described above.
Senior Notes
On September 29, 2014, the Company prepaid its then existing Series A notes due June 2017, Series B notes due June 2020, and Series C notes due June 2022 (collectively 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.

10. INTEREST EXPENSE, NET

Interest expense, net for the three months ended September 30, 2015 and 2014 is presented below:
 
Three Months Ended
September 30,
 
2015
 
2014
Interest expense
$
15.0

 
$
19.4

Foreign exchange losses, net of derivative contracts
1.5

 
1.3

Interest income
(0.5
)
 
(1.1
)
Total interest expense, net
$
16.0

 
$
19.6


11. 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, 2015 and 2014:
 
Three Months Ended September 30,
 
Pension Plans
 
Other Post-
Employment
 
 
 
U.S.
 
International
 
Benefits
 
Total
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
—

 
$
—

 
$
1.7

 
$
1.5

 
$
0.3

 
$
0.6

 
$
2.0

 
$
2.1

Interest cost
0.8

 
0.9

 
0.9

 
1.2

 
0.5

 
1.0

 
2.2

 
3.1

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

 
—

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

 
—

 
0.1

 
0.1

 
(1.4
)
 
—

 
(1.3
)
 
0.1

Amortization of net loss
0.3

 
0.5

 
0.8

 
0.9

 
—

 
—

 
1.1

 
1.4

Net periodic benefit cost (credit)
$
0.5

 
$
0.6

 
$
3.2

 
$
3.4

 
$
(0.6
)
 
$
1.6

 
$
3.1

 
$
5.6

In June 2015, the Board approved the termination of the U.S. Del Labs pension plan with a proposed plan termination date of September 30, 2015. On July 31, 2015, the Company filed a determination letter request with the IRS to approve the termination of the U.S. Del Labs pension plan. As of September 30, 2015, the Company has not received notification from the IRS in response to the determination letter request. The Company expects the termination of the plan will be completed during fiscal 2017. The Company intends to fully fund the plan to provide for all plan benefits prior to the date assets are distributed with the plan termination. Settlement gain or loss, if any, resulting from the termination will be recognized at that time.
12. FAIR VALUE MEASUREMENT

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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 September 30, 2015 and June 30, 2015 are presented below:
 
Level 1
 
Level 2
 
Level 3
 
September 30, 2015
 
June 30, 2015
 
September 30, 2015
 
June 30, 2015
 
September 30, 2015
 
June 30, 2015
Financial assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
—

 
$
9.7

 
$
12.4

 
$
—

 
$
—

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
$
—

 
$
—

 
$
2.4

 
$
6.3

 
$
—

 
$
—

Contingent consideration - business combination
—

 
—

 
—

 
—

 
0.8

 
0.9

Total Liabilities
$
—

 
$
—

 
$
2.4

 
$
6.3

 
$
0.8

 
$
0.9

Total recurring fair value measurements
$
—

 
$
—

 
$
7.3

 
$
6.1

 
$
(0.8
)
 
$
(0.9
)
The fair values of the Company’s financial instruments estimated as of September 30, 2015 and June 30, 2015 are presented below:
 
September 30, 2015
 
June 30, 2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Coty Inc. Credit Agreements
$
2,768.5

 
$
2,771.6

 
$
2,611.5

 
$
2,614.2

Dividends payable
2.3

 
1.8

 
1.4

 
1.1


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 companies’ 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 Agreements — The Company uses the income approach to value 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

15
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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.

13. DERIVATIVE INSTRUMENTS

The Company is exposed to foreign currency exchange fluctuations through its global operations. 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. The Company entered into derivatives for which hedge accounting treatment has been applied during fiscal 2016 and 2015 which the Company anticipates realizing in the Condensed Consolidated Statements of Operations in fiscal 2016 and 2017. The Company also continued to use certain derivatives as economic hedges of foreign currency exposure on firm commitments and forecasted transactions, which do not qualify for hedge accounting. 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. 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, 2015, foreign exchange forward contracts in net liability positions that contained credit-risk-related features were $2.4.
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, 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 used to hedge anticipated transactions have been designated as foreign exchange cash-flow hedges and have varying maturities through the end of June 2016. Hedge effectiveness of foreign exchange forward contracts is based on the forward-to-forward hypothetical derivative methodology and includes all changes in value.

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. As of September 30, 2015, all of the Company’s foreign exchange forward contracts designated as hedges were highly effective.

The Company also attempts to minimize credit exposure to counterparties by entering into derivative contracts with counterparties that are major financial institutions and utilizing master netting arrangements. 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 under master netting arrangements, which totaled $9.7 at September 30, 2015. Accordingly, management of the Company believes risk of material loss under these hedging contracts is remote.
Quantitative Information
Derivatives are recognized in the balance sheet at their fair values. The following table presents the fair value of derivative instruments outstanding at September 30, 2015 and June 30, 2015:

16
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Asset
 
Liability
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30, 2015
 
June 30, 2015
 
 
 
September 30, 2015
 
June 30, 2015
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and
other current assets
 
$
8.9

 
$
6.8

 
Accrued expenses and
other current liabilities
 
$
1.2

 
$
4.8

Total derivatives designated as hedges
 
 
$
8.9

 
$
6.8

 
 
 
$
1.2

 
$
4.8

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and
other current assets
 
$
0.8

 
$
5.6

 
Accrued expenses and
other current liabilities
 
$
1.2

 
$
1.5

Total derivatives not designated as hedges
 
 
$
0.8

 
$
5.6

 
 
 
$
1.2

 
$
1.5

Total derivatives
 
 
$
9.7

 
$
12.4

 
 
 
$
2.4

 
$
6.3

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, 2015:
 
 
 
 
 
 
 
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
$
11.1

 
$
(1.4
)
 
$
9.7

 
$
—

 
$
—

 
$
9.7

Liabilities
$
(2.9
)
 
$
0.5

 
$
(2.4
)
 
$
—

 
$
—

 
$
(2.4
)
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, 2015:
 
 
 
 
 
 
 
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
$
16.1

 
$
(3.7
)
 
$
12.4

 
$
—

 
$
—

 
$
12.4

Liabilities
$
(6.5
)
 
$
0.2

 
$
(6.3
)
 
$
—

 
$
—

 
$
(6.3
)
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, 2015 and 2014 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,
 
2015
 
2014
Interest expense, net
$
(2.8
)
 
$
1.8

Selling, general and administrative
$
1.3

 
$
0.9

As of September 30, 2015 and June 30, 2015, the Company had foreign exchange forward contracts not designated as hedges with a notional value of $710.4 and $1,297.6, respectively, which mature at various dates through June 2016.

The accumulated gain (loss) on derivative instruments classified as cash flow hedges in AOCI, net of tax, was $4.4 and $(0.1) as of September 30, 2015 and June 30, 2015, respectively. The estimated net gain related to these effective hedges that is expected to be reclassified from AOCI into earnings, net of tax, within the next twelve months is $4.3.


17
Table of Contents

The amount of gains and losses reclassified from AOCI to the Condensed Consolidated Statements of Operations related to the Company’s derivative financial instruments which are designated as hedging instruments during the three months ended September 30, 2015 and 2014 is presented below:
Condensed Consolidated Statements of Operations Classification of Gain (Loss) Reclassified from AOCI/(L)
Gain (Loss) Recognized
in Operations
Three Months
Ended September 30,
 
2015
 
2014
Net revenue
$
1.4

 
$
—


As of September 30, 2015, the Company had foreign exchange forward contracts designated as effective hedges in the notional amount of $202.4, which mature at various dates through June 2016. 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 ($71.9), Euro ($80.9), Australian Dollar ($13.2), Canadian Dollar ($21.9), and Russian Ruble ($7.1). As of June 30, 2015, the Company had a notional value of $277.0 in foreign exchange forward contracts designated as effective hedges.

14. EQUITY
Common Stock
As of September 30, 2015, the Company’s common stock consisted of Class A Common Stock, and Class B Common 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. As of September 30, 2015, total authorized shares of Class A Common Stock and Class B Common Stock are 800.0 million and 262.0 million, respectively, and total outstanding shares of Class A and Class B Common Stock are 94.5 million and 262.0 million, respectively.

In fiscal 2015, the Company recognized compensation expense of $13.9 million and a related liability for 1.4 million shares which its parent JABC agreed to repurchase from an individual originally intended to become an executive of the Company.  From June 30, 2015 until the date the liability was settled by JABC, the value of the obligation declined $0.1 and was recorded as a reduction of stock compensation expense.  On July 8, 2015 JABC repurchased the shares and the settlement of the liability of $13.8 is considered a non-cash capital contribution to the Company and therefore was recorded in Additional paid-in capital.
Preferred Stock
As of September 30, 2015, the Company’s preferred stock consisted of Series A Preferred Stock with a par value of $0.01. The Series A Preferred Stock is not entitled to receive any dividends and has no voting rights except as required by law. As of September 30, 2015, total authorized shares of preferred stock are 20.0 million and total outstanding shares of Series A Preferred Stock are 1.9 million. The outstanding 1.9 million Series A Preferred Stock generally vest on April 15, 2020. Under the terms provided in the various subscription agreements, the holders of the vested Series A Preferred Stock are entitled to exchange the Series A Preferred Stock at the election of the Company into either: (i) cash equal to the market value of a share of Class A Common Stock on the date of conversion less $27.97 or (ii) the number of whole shares whose value is equal to the aggregate market value of a share of Class A Common Stock on the date of conversion less $27.97. If the holder does not exchange the vested Series A Preferred Stock by a certain expiration date, the Company must automatically exchange the Series A Preferred Stock into cash for the pro-rata portion of the grants attributable to services rendered by the holder within the United States. Therefore, these grants are accounted for using the liability plan accounting at issuance. As a holder provides service outside the U.S., a pro-rata portion of the grants are converted to equity awards to the extent the Company is not required to settle the award in cash, which are measured and fixed at the quarter end date that such services are provided, based on the estimated fair value of the award and recognized on a straight-line basis, net of estimated forfeitures, over the employee’s requisite service period. As of September 30, 2015, the Company classified $0.4 Series A Preferred Stock as equity,
and $0.1 as a liability recorded in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet.

Accumulated Other Comprehensive Income (Loss)

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Table of Contents

 
(Losses) Gains on Cash Flow Hedges
 
Pension and Other Post-Employment Benefit Plans
 
Foreign Currency Translation Adjustments
 
Total
Balance—July 1, 2015
$
(0.1
)
 
$
(24.6
)
 
$
(249.3
)
 
$
(274.0
)
Other comprehensive income (loss) before reclassifications
5.7

 
0.2

 
(16.8
)
 
(10.9
)
Less: Net amounts reclassified from AOCI
1.2

 
—

 
—

 
1.2

Net current-period other comprehensive income (loss)
4.5

 
0.2

 
(16.8
)
 
(12.1
)
Balance—September 30, 2015
$
4.4

 
$
(24.4
)
 
$
(266.1
)
 
$
(286.1
)

Treasury Stock
On August 13, 2015, the Company’s Board of Directors authorized the Company to repurchase up to $700.0 of its Class A Common Stock, inclusive of any amounts remaining under the Company’s previously announced share repurchase program (the “Repurchase Program”). Repurchases will be made from time to time at the Company’s discretion, based on ongoing assessments of the capital needs of the business, the market price of its common stock, and general market conditions. No time has been set for the completion of the Repurchase Program and the program may be suspended or discontinued at any time.
In connection with the Company’s Repurchase Program, the Company repurchased 5.5 million shares of its Class A Common Stock during the three months ended September 30, 2015. The shares were purchased in multiple transactions at prices ranging from $26.91 to $30.23. The aggregate fair value of shares repurchased during the three months ended September 30, 2015 was $155.7, and was recorded as an increase to Treasury stock in the Company’s Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests.

Dividends
On September 11, 2015, the Company declared a cash dividend of $0.25 per share, or $90.1 on its Class A and Class B Common Stock, RSUs and Phantom units. Of the $90.1, $89.0 was paid on October 15, 2015 to holders of record of Class A and Class B Common Stock on October 1, 2015 and was recorded as a decrease to APIC in the Condensed Consolidated Balance Sheet as of September 30, 2015. The remaining $1.1 is payable upon settlement of the RSUs and Phantom units outstanding as of October 1, 2015, 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 $0.2 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, 2015. Total accrued dividends on unvested RSUs and Phantom Units of $2.3 are included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2015.

15. SHARE-BASED COMPENSATION PLANS
The Company has various share-based compensation programs (the “Plans”) under which awards, including non-qualified stock options, Series A Preferred Stock, RSUs and other share-based awards, may be granted or shares of Class A Common Stock may be purchased. As of September 30, 2015, approximately 18.8 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 of $11.7 and $1.3 for the three months ended September 30, 2015 and 2014, respectively, is included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. As of September 30, 2015, the total unrecognized share-based compensation expense related to unvested stock options, Series A Preferred Stock, and restricted and other share awards is $8.6, $9.0 and $44.5, respectively. The unrecognized share-based compensation expense related to unvested stock options, Series A Preferred stock, and restricted and other share awards is expected to be recognized over a weighted-average period of 1.99, 4.55 and 3.16 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.
The Company’s outstanding nonqualified stock options as of September 30, 2015 and activity during the three months then ended are presented below:

19
Table of Contents

 
Shares
(in millions)
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term
Outstanding at July 1, 2015
14.0

 
$
11.32

 
 
 
 
Exercised
(1.1
)
 
8.99

 
 
 
 
Canceled or expired
(0.1
)
 
10.40

 
 
 
 
Outstanding at September 30, 2015
12.8

 
$
11.53

 
 
 
 
Vested and expected to vest at September 30, 2015
10.2

 
$
9.89

 
$
175.1

 
4.49
Exercisable at September 30, 2015
5.9

 
$
8.79

 
$
107.2

 
3.40
The Company did not grant any nonqualified stock options during the three months ended September 30, 2015. The grant prices of the outstanding options as of September 30, 2015 ranged from $6.00 to $24.13. The grant prices for exercisable options ranged from $6.00 to $10.50.
A summary of the total intrinsic value of stock options exercised for the three months ended September 30, 2015 and 2014 is presented below:
 
September 30,
 
2015
 
2014
Intrinsic value of options exercised
$
21.2

 
$
10.0

The share-based compensation expense recognized on the nonqualified stock options was $2.7 and $2.0 during the three months ended September 30, 2015 and 2014, respectively.
Series A Preferred Stock
Shares of Series A Preferred Stock generally become exercisable 5 years from the date of the grant and have a 2-year exercise period from the date the grant becomes fully vested for a total contractual life of 7 years. The Company did not grant any shares of Series A Preferred stock during the three months ended September 30, 2015.
The Series A Preferred Stock are accounted for partially as a liability as of September 30, 2015 and the Company recognized $0.5 and no expense for the three months ended September 30, 2015, and 2014, respectively.
Restricted Share Units
During the three months ended September 30, 2015 and 2014, the Company granted 1.0 million and 1.6 million RSUs under the Omnibus LTIP. The share-based compensation expense (income) recorded in connection with the RSUs was $0.6 and $(0.2) for the three months ended September 30, 2015 and 2014, respectively.
The Company’s outstanding RSUs as of September 30, 2015 and activity during the three months then ended are presented below:
 
Shares
(in millions)
 
Aggregate Intrinsic Value
 
Weighted
Average
Grant Date
Fair Value
Outstanding at July 1, 2015
4.3

 
 
 
 
Granted
1.0

 
 
 
 
Settled
—

 
 
 
 
Canceled
(0.2
)
 
 
 
 
Outstanding at September 30, 2015
5.1

 
 
 
 
Vested and expected to vest at September 30, 2015
3.6

 
$
97.6

 
$
3.29

Phantom Units
On July 21, 2015, the Company’s Board of Directors granted Lambertus J.H. Becht (“Mr. Becht”), the Company’s Chairman of the Board and interim Chief Executive Officer, an award of 300,000 phantom units, in consideration of Mr. Becht’s increased and continuing responsibilities as interim Chief Executive Officer of the Company. At the time of grant, the phantom units had a value of $8.1 based on the closing price of the Company’s Class A Common Stock on July 21, 2015, and each phantom unit has an economic value equivalent to one share of the Company’s Class A Common Stock settleable in cash

20
Table of Contents

or shares at the election of Mr. Becht. The award to Mr. Becht was made outside of the Company’s Equity and Long-Term Incentive Plan. On July 24, 2015 Mr. Becht elected to receive payment of the phantom units in the form of shares of Class A Common Stock and the phantom units were valued at $8.0. The phantom units will be settled in shares of Class A Common Stock on the fifth anniversary of the grant date or, in the event of a change of control or Mr. Becht’s death or disability, immediately.
The Company recognized $8.0 of share-based compensation expense during the three months ended September 30, 2015 as there are no service or performance conditions with respect to the phantom units. No phantom units were awarded during the three months ended September 30, 2014.
Restricted Shares
Share-based compensation expense (income) recorded in connection with restricted shares was nil and $(0.5) for the three months ended September 30, 2015 and 2014, respectively.
Special Share Purchase Transaction
In fiscal 2015, the Company recognized compensation expense of $13.9 million and a related liability for 1.4 million shares which its parent JABC agreed to repurchase from an individual originally intended to become an executive of the Company.  From June 30, 2015 until the date the liability was settled by JABC, the value of the obligation declined $0.1 and was recorded as a reduction of stock compensation expense.  On July 8, 2015 JABC repurchased the shares and the settlement of the liability of $13.8 is considered a non-cash capital contribution to the Company and therefore was recorded in Additional paid-in capital.

16. 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,
 
2015
 
2014
 
(in millions, except per share data)
Net income attributable to Coty Inc.
$
125.7

 
$
10.6

Weighted-average common shares outstanding—Basic
360.0

 
354.2

Effect of dilutive stock options and Series A Preferred Stock (a)
6.7