# Coty Inc.: Form 10-Q for the period ended Dec 31, 2021

- Company: [Coty Inc.](/companies/coty.md) (CIK 1024305)
- Form: 10-Q
- Filed: 2022-02-08
- Accepted by EDGAR: Feb 8, 2022, 16:02 ET
- Period: 2021-12-31
- Accession: 0001024305-22-000009
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1024305/000102430522000009/coty-20211231.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1024305/000102430522000009/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-10-01 to 2021-12-31 | $1.58bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2021-07-01 to 2021-12-31 | $2.95bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-10-01 to 2021-12-31 | $561.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2021-07-01 to 2021-12-31 | $1.07bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-10-01 to 2021-12-31 | $1.02bn | us-gaap:GrossProfit |
| Gross profit | 6 months, 2021-07-01 to 2021-12-31 | $1.88bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2021-10-01 to 2021-12-31 | $718.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2021-07-01 to 2021-12-31 | $1.50bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-10-01 to 2021-12-31 | $244.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-07-01 to 2021-12-31 | $261.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-10-01 to 2021-12-31 | $61.7m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-07-01 to 2021-12-31 | $124.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-10-01 to 2021-12-31 | $49.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2021-07-01 to 2021-12-31 | $164.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-10-01 to 2021-12-31 | $261.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-07-01 to 2021-12-31 | $487.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-10-01 to 2021-12-31 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2021-07-01 to 2021-12-31 | $0.36 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-10-01 to 2021-12-31 | $0.23 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2021-07-01 to 2021-12-31 | $0.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-10-01 to 2021-12-31 | 842,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2021-07-01 to 2021-12-31 | 815,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2021-07-01 to 2021-12-31 | $734.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2021-07-01 to 2021-12-31 | $86.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2021-07-01 to 2021-12-31 | $1.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2021-12-31 | $523.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-12-31 | $2.18bn | us-gaap:AssetsCurrent |
| Total assets | at 2021-12-31 | $13.43bn | us-gaap:Assets |
| Current liabilities | at 2021-12-31 | $2.90bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-12-31 | $9.54bn | us-gaap:Liabilities |
| Long-term debt | at 2021-12-31 | $4.88bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2021-12-31 | $23.8m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2021-12-31 | $0 | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2021-12-31 | $3.47bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 113,041 characters.

The following discussion and analysis of the financial condition and results of operations of Coty Inc. and its consolidated subsidiaries, should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and related notes included elsewhere in this document, and in our other public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (“Fiscal 2021 Form 10-K”). When used in this discussion, the terms “Coty,” the “Company,” “we,” “our,” or “us” mean, unless the context otherwise indicates, Coty Inc. and its majority and wholly-owned subsidiaries. Also, when used in this Quarterly Report on Form 10-Q, the term “includes” and “including” means, unless the context otherwise indicates, including without limitation. The following report includes certain non-GAAP financial measures. See “Overview—Non-GAAP Financial Measures” for a discussion of non-GAAP financial measures and how they are calculated.

All dollar amounts in the following discussion are in millions of United States (“U.S.”) dollars, unless otherwise indicated.

More information about potential risks and uncertainties that could affect our business and financial results is included under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and other periodic reports we have filed and may file with the SEC from time to time.

### Forward-looking Statements

Certain statements in this Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, the impact of COVID-19 and potential recovery scenarios, strategic planning, targets, segment reporting and outlook for future reporting periods (including the extent and timing of revenue, expense and profit trends and changes in operating cash flows and cash flows from operating activities and investing activities), the impact of the sale of a majority stake in Coty’s Professional and Retail Hair business, including the Wella, Clairol, OPI and ghd brands, (together, the “Wella Business”) and the related transition services (the “TSA”), the Company’s future operations and strategy (including the expected implementation and related impact of its strategic priorities), ongoing and future cost efficiency, optimization and restructuring initiatives and programs, strategic transactions (including their expected timing and impact), the Company’s capital allocation strategy and payment of dividends (including suspension of dividend payments and the duration thereof and any plans to resume cash dividends on common stock or to continue to pay dividends in cash on preferred stock), investments, licenses and portfolio changes, product launches, relaunches or rebranding (including the expected timing or impact thereof), synergies, savings, performance, cost, timing and integration of acquisitions, including the strategic partnerships with Kylie Jenner and Kim Kardashian West, future cash flows, liquidity and borrowing capacity (including any refinancing or deleveraging activities), timing and size of cash outflows and debt deleveraging, the timing and extent of any future impairments, and synergies, savings, impact, cost, timing and implementation of the Company’s Transformation Plan (as defined below), including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, supply chain changes, e-commerce and digital initiatives, the expected impact of global supply chain challenges or inflationary pressures, and the priorities of senior management. These forward-looking statements are generally identified by words or phrases, such as “anticipate”, “are going to”, “estimate”, “plan”, “project”, “expect”, “believe”, “intend”, “foresee”, “forecast”, “will”, “may”, “should”, “outlook”, “continue”, “temporary”, “target”, “aim”, “potential”, “goal” and similar words or phrases. These statements are based on certain assumptions and estimates that we consider reasonable, but are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual events or results (including our financial condition, results of operations, cash flows and prospects) to differ materially from such statements, including risks and uncertainties relating to:

- the impact of COVID-19 (or future similar events), including demand for the Company’s products, illness, quarantines, government actions, facility closures, store closures or other restrictions in connection with the COVID-19 pandemic, and the extent and duration thereof, the availability and widespread distribution of a safe and effective vaccine, related impact on our ability to meet customer needs and on the ability of third parties on which we rely, including our suppliers, customers, contract manufacturers, distributors, contractors, commercial banks and joint-venture partners, to meet their obligations to us, in particular collections from customers, the extent that government funding and reimbursement programs in connection with COVID-19 are available to us, and the ability to successfully implement measures to respond to such impacts;
- our ability to successfully implement our multi-year Transformation Plan, including our management realignment, reporting structure changes, operational and organizational changes, and the initiatives to further reduce our cost base, and to develop and achieve our global business strategies (including mix management, select price increases, more disciplined promotions, and foregoing low value sales), compete effectively in the beauty industry, achieve the benefits contemplated by our strategic initiatives (including revenue growth, cost control, gross margin growth and debt deleveraging) and successfully implement our strategic priorities (including innovation performance in Prestige

and mass channels, strengthening our positions in core markets, accelerating our digital and e-commerce capabilities, building on our skincare portfolio, and expanding our presence in China) in each case within the expected time frame or at all;

- our ability to anticipate, gauge and respond to market trends and consumer preferences, which may change rapidly, and the market acceptance of new products, including new products related to Kylie Jenner’s or Kim Kardashian West’s existing beauty businesses, any relaunched or rebranded products and the anticipated costs and discounting associated with such relaunches and rebrands, and consumer receptiveness to our current and future marketing philosophy and consumer engagement activities (including digital marketing and media);
- use of estimates and assumptions in preparing our financial statements, including with regard to revenue recognition, income taxes (including the expected timing and amount of the release of any tax valuation allowance), the assessment of goodwill, other intangible and long-lived assets for impairments, the market value of inventory, the fair value of the equity investment, and the fair value of acquired assets and liabilities associated with acquisitions;
- the impact of any future impairments;
- managerial, transformational, operational, regulatory, legal and financial risks, including diversion of management attention to and management of cash flows, expenses and costs associated with the Company’s response to COVID-19, the Transformation Plan, the TSA, the integration of the strategic partnerships with Kylie Jenner and Kim Kardashian West, and future strategic initiatives, and, in particular, our ability to manage and execute many initiatives simultaneously including any resulting complexity, employee attrition or diversion of resources;
- the timing, costs and impacts of divestitures and the amount and use of proceeds from any such transactions;
- future divestitures and the impact thereof on, and future acquisitions, new licenses and joint ventures and the integration thereof with, our business, operations, systems, financial data and culture and the ability to realize synergies, manage supply chain challenges and avoid future supply chain and other business disruptions, reduce costs (including through our cash efficiency initiatives), avoid liabilities and realize potential efficiencies and benefits (including through our restructuring initiatives) at the levels and at the costs and within the time frames contemplated or at all;
- increased competition, consolidation among retailers, shifts in consumers’ preferred distribution and marketing channels (including to digital and Prestige channels), distribution and shelf-space resets or reductions, compression of go-to-market cycles, changes in product and marketing requirements by retailers, reductions in retailer inventory levels and order lead-times or changes in purchasing patterns, impact from COVID-19 on retail revenues, and other changes in the retail, e-commerce and wholesale environment in which we do business and sell our products and our ability to respond to such changes (including our ability to expand our digital, direct-to-consumer and e-commerce capabilities within contemplated timeframes or at all);
- our and our joint ventures’, business partners’ and licensors’ abilities to obtain, maintain and protect the intellectual property used in our and their respective businesses, protect our and their respective reputations (including those of our and their executives or influencers) and public goodwill, and defend claims by third parties for infringement of intellectual property rights;
- any change to our capital allocation and/or cash management priorities, including any change in our dividend policy or, if our Board declares dividends on common stock, our stock dividend reinvestment program (the “Stock Dividend Reinvestment Program”);
- any unanticipated problems, liabilities or integration or other challenges associated with a past or future acquired business, joint ventures or strategic partnerships which could result in increased risk or new, unanticipated or unknown liabilities, including with respect to environmental, competition and other regulatory, compliance or legal matters, and specifically in connection with the strategic partnerships with Kylie Jenner and Kim Kardashian West, risks related to the entry into a new distribution channel, the potential for channel conflict, risks of retaining customers and key employees, difficulties of integration (or the risks associated with limiting integration), ability to protect trademarks and brand names, litigation or investigations by governmental authorities, and changes in law, regulations and policies that affect KKW Holdings, LLC’s (“KKW Holdings”) business or products, including risk that direct selling laws and regulations may be modified, interpreted or enforced in a manner that results in a negative impact to KKW Holdings’ business model, revenue, sales force or business;
- our international operations and joint ventures, including enforceability and effectiveness of our joint venture agreements and reputational, compliance, regulatory, economic and foreign political risks, including difficulties and costs associated with maintaining compliance with a broad variety of complex local and international regulations;
- our dependence on certain licenses (especially in the fragrance category) and our ability to renew expiring licenses on favorable terms or at all;
- our dependence on entities performing outsourced functions, including outsourcing of distribution functions, and third-party manufacturers, logistics and supply chain suppliers, and other suppliers, including third-party software providers, web-hosting and e-commerce providers;
- administrative, product development and other difficulties in meeting the expected timing of market expansions, product launches, re-launches and marketing efforts, including in connection with new products related to Kylie Jenner’s or Kim Kardashian West’s existing beauty businesses;
- global political and/or economic uncertainties, disruptions or major regulatory or policy changes, and/or the enforcement thereof that affect our business, financial performance, operations or products, including the impact of Brexit (and related business or market disruption), the current U.S. administration, changes in the U.S. tax code, and recent changes and future changes in tariffs, retaliatory or trade protection measures, trade policies and other international trade regulations in the U.S., the European Union and Asia and in other regions where we operate;
- currency exchange rate volatility and currency devaluation and/or inflation;
- the number, type, outcomes (by judgment, order or settlement) and costs of current or future legal, compliance, tax, regulatory or administrative proceedings, investigations and/or litigation, including litigation relating to the tender offer by Cottage Holdco B.V. (the “Cottage Tender Offer”), product liability cases (including asbestos and talc-related litigation for which indemnities and/or insurance may not be available), distributor or licensor litigation, and compliance, litigation or investigations relating to our strategic partnerships;
- our ability to manage seasonal factors and other variability and to anticipate future business trends and needs;
- disruptions in operations, sales and in other areas, including due to disruptions in our supply chain, restructurings and other business alignment activities, the Wella Transaction and related carve-out and transition activities, manufacturing or information technology systems, labor disputes, extreme weather and natural disasters, impact from COVID-19 or similar global public health events, impact of global supply chain challenges, and the impact of such disruptions on our ability to generate profits, stabilize or grow revenues or cash flows, comply with our contractual obligations and accurately forecast demand and supply needs and/or future results;
- restrictions imposed on us through our license agreements, credit facilities and senior unsecured bonds or other material contracts, our ability to generate cash flow to repay, refinance or recapitalize debt and otherwise comply with our debt instruments, and changes in the manner in which we finance our debt and future capital needs;
- increasing dependency on information technology, including as a result of remote working in response to COVID-19, and our ability to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, including ransomware attacks, costs and timing of implementation and effectiveness of any upgrades or other changes to information technology systems, and the cost of compliance or our failure to comply with any privacy or data security laws (including the European Union General Data Protection Regulation (the “GDPR”), the California Consumer Privacy Act and the Brazil General Data Protection Law) or to protect against theft of customer, employee and corporate sensitive information;
- our ability to attract and retain key personnel and the impact of senior management transitions and organizational structure changes;
- the distribution and sale by third parties of counterfeit and/or gray market versions of our products;
- the impact of our Transformation Plan as well as the Wella Transaction on our relationships with key customers and suppliers and certain material contracts;
- our relationship with Cottage Holdco B.V., as our majority stockholder, and its affiliates, and any related conflicts of interest or litigation;
- our relationship with KKR, whose affiliate KKR Bidco, is an investor in the Wella Business, and any related conflicts of interest or litigation;
- future sales of a significant number of shares by our majority stockholder or the perception that such sales could occur; and
- other factors described elsewhere in this document and in documents that we file with the SEC from time to time.

All forward-looking statements made in this document are qualified by these cautionary statements. These forward-looking statements are made only as of the date of this document, and we do not undertake any obligation, other than as may be required by applicable law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise.

Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance unless expressed as such, and should only be viewed as historical data.

### Industry, Ranking and Market Data

Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations about our industry, market position, market opportunity and market sizes, is based on data from various sources including internal data and estimates as well as third-party sources widely available to the public, such as independent industry publications, government publications, reports by market research firms or other published independent sources and on our assumptions based on that data and other similar sources. We did not fund and are not otherwise affiliated with the third-party sources that we cite. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and management’s understanding of industry conditions, and such information has not been verified by any independent sources. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we generally believe the market, industry and other information included in this Quarterly Report on Form 10-Q to be the most recently available and to be reliable, such information is inherently imprecise and we have not independently verified any third-party information or verified that more recent information is not available.

Our fiscal year ends on 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 2022” refer to the fiscal year ending June 30, 2022. Any reference to a year not preceded by “fiscal” refers to a calendar year.

### OVERVIEW

We are one of the world’s largest beauty companies, with an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. Through targeted strategic transactions, we have strengthened and diversified our presence across the countries, categories and channels in which we compete, building a strong beauty platform. The King Kylie and Kim Kardashian West transactions complement our existing portfolio as personality-led Direct-to-Consumer (“DTC”) business models with strong social media engines. As we transform the Company, we continue to make progress on our strategic priorities, including stabilizing our Consumer Beauty brands through leading innovation and improved execution, accelerating our Prestige fragrance business and ongoing expansion into Prestige cosmetics, building a comprehensive skincare portfolio leveraging existing brands, enhancing our e-commerce and DTC capabilities, expanding our presence in China through Prestige products and select Consumer Beauty brands, and establishing Coty as an industry leader in sustainability.

The completion of the strategic Wella Transaction is a reflection of our intent to focus on our core go-to-market competencies and to simultaneously deleverage our balance sheet. During the six months ended December 31, 2021, we simplified our capital structure through a series of transactions with KKR Aggregator, as a result of which KKR Aggregator fully exited its ownership of Coty. Cumulatively, such transactions resulted in annual dividend savings of approximately $77.0. Refer to Note 16—Equity and Convertible Preferred Stock. As part of these transactions with KKR Aggregator, we exchanged a cumulative 14.1% interest in Wella to redeem a portion of the KKR Aggregator’s investment in our Series B Preferred Stock. The exchange transactions occurred at a premium to the value as of the date we sold Wella and illustrates the potential upside of the stand-alone business in the longer term. Our recent issuances of the senior secured notes and updated revolver facility further demonstrate our commitment to improve the maturity profile of our debt.

We expect that our reported net revenues for fiscal year 2022 will grow at the upper end of our low to mid-teens growth range versus the prior year, excluding the impact of foreign exchange. The gross margin for the full year is expected to be favorable to the comparable period gross margin, however we expect our margin for the second half of 2022 to be lower than the first half due to seasonality in our business.

#### COVID-19 Impacts Update

The COVID-19 pandemic has had material effects on all our product categories across all segments and geographies. Most markets have recently shown encouraging signs of emergence from the pandemic; however, sporadic containment measures and travel restrictions continue to impact volume trends in certain markets. However, the recent loosening of social distancing protocols and the gradual removal or reduction of travel restrictions in certain key markets have contributed to increased demand and sales growth, in most of the countries we operate in, with the Prestige segment and the travel retail channel in particular experiencing positive volume trends over the comparative period. We also continue to experience growth in e-commerce. During the current quarter, our Consumer Beauty segment has also shown strong signs of recovery over the comparative period. However, many of our Consumer Beauty product categories continue to experience negative effects on sales volume due to changes in consumer behavior as a result of the pandemic and continued social distancing measures in certain regions.

As previously reported, we have implemented several key measures in response to the COVID-19 pandemic which continue to be in place. We have also amplified our Transformation Plan, discussed below, to address the potentially longer-lasting impacts of the COVID-19, the intermittent lockdowns and possible economic uncertainty resulting from COVID-19 that continue in many markets. We anticipate the recovery to be non-linear until COVID-19 containment measures are discontinued across all regions and normal consumer traffic resumes on a consistent basis. We currently expect that any easing of containment measures and recovery of the impacted sectors of the economy will be gradual and uneven, as regions face resurgence of COVID-19 and related uncertainties, and the availability and widespread distribution of a safe and effective vaccine varies across regions. As a result, we anticipate that consumer spending habits and consumer confidence will continue to shift, causing future sales and volume trends to be non-linear. Further, inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. The impact on the current quarter was not significant, but we expect a more material headwind from inflation in the second half of the fiscal year. We intend to offset the incremental inflation impacts by increasing prices in selected markets. Currently, we are implementing mitigation strategies and price increases to offset these trends; however, such measures may not fully offset the impact to our operating performance. After the resumption of more typical business conditions, the economics of developing, producing, launching, supporting and discontinuing products will continue to impact the timing of our sales and operating performance each period. In addition, as product life cycles shorten, results are driven primarily by successfully developing, introducing and marketing new, innovative products.

#### Transformation Plan Update

As previously reported, we are implementing a comprehensive transformation agenda (the “Transformation Plan”), which aims to stabilize and accelerate revenue growth, improve our profitability through gross margin growth and cost control, optimize our operating model for speed and agility, accelerate e-commerce and digital growth, and deleverage our balance sheet. This Transformation Plan is designed to adjust our cost base to allow us to exit the post-COVID recovery phase as a financially and operationally stronger, more nimble company, which is well positioned to capture growth opportunities. We are continually reviewing ways to accelerate and amplify the transformation of the Company, including through the implementation of additional initiatives in connection with our Transformation Plan. These organizational, business and structural changes are still being operationalized, which introduces additional risk and complexity as we roll out several initiatives simultaneously, including exit from the TSA and the related ramp down services.

#### Other Matters

During the first quarter of fiscal 2022, our CODM finalized the Company's organizational structure and how performance will be assessed, and we realigned our reportable segments to a principally product category-based structure, comprised of a Prestige business segment and a Consumer Beauty business segment beginning in the first quarter of fiscal 2022.

#### Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures for continuing operations and Coty Inc. including Adjusted operating income (loss), Adjusted EBITDA, Adjusted net income (loss), and Adjusted net income (loss) attributable to Coty Inc. to common stockholders (collectively, the “Adjusted Performance Measures”). The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies, including companies in the beauty industry, may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Despite the limitations of these non-GAAP financial measures, our management uses the Adjusted Performance Measures as key metrics in the evaluation of our performance and annual budgets and to benchmark performance of our business against our competitors. The following are examples of how these Adjusted Performance Measures are utilized by our management:

- strategic plans and annual budgets are prepared using the Adjusted Performance Measures;
- senior management receives a monthly analysis comparing budget to actual operating results that is prepared using the Adjusted Performance Measures; and
- senior management’s annual compensation is calculated, in part, by using some of the Adjusted Performance Measures.

In addition, our financial covenant compliance calculations under our debt agreements are substantially derived from these Adjusted Performance Measures.

Our management believes that Adjusted Performance Measures are useful to investors in their assessment of our operating performance and the valuation of the Company. In addition, these non-GAAP financial measures address questions we routinely receive from analysts and investors and, in order to ensure that all investors have access to the same data, our management has determined that it is appropriate to make this data available to all investors. The Adjusted Performance Measures exclude the impact of certain items (as further described below) and provide supplemental information regarding our operating performance. By disclosing these non-GAAP financial measures, our management intends to provide investors with a supplemental comparison of our operating results and trends for the periods presented. Our management believes these measures are also useful to investors as such measures allow investors to evaluate our performance using the same metrics that our management uses to evaluate past performance and prospects for future performance. We provide disclosure of the effects of these non-GAAP financial measures by presenting the corresponding measure prepared in conformity with GAAP in our financial statements, and by providing a reconciliation to the corresponding GAAP measure so that investors may understand the adjustments made in arriving at the non-GAAP financial measures and use the information to perform their own analyses.

Adjusted operating income/Adjusted EBITDA from continuing operations excludes restructuring costs and business structure realignment programs, amortization, acquisition- and divestiture-related costs and acquisition accounting impacts, stock-based compensation, and asset impairment charges and other adjustments as described below. For adjusted EBITDA, in addition to the preceding, we exclude adjusted depreciation as defined below. We do not consider these items to be reflective of our core operating performance due to the variability of such items from period-to-period in terms of size, nature and significance. They are primarily incurred to realign our operating structure and integrate new acquisitions, and implement divestitures of components of our business, and fluctuate based on specific facts and circumstances. Additionally, Adjusted net income attributable to Coty Inc. and Adjusted net income attributable to Coty Inc. per common share are adjusted for certain interest and other (income) expense items and preferred stock deemed dividends, as described below, and the related tax effects of each of the items used to derive Adjusted net income as such charges are not used by our management in assessing our operating performance period-to-period.

Adjusted Performance Measures reflect adjustments based on the following items:

- Costs related to acquisition and divestiture activities: We have excluded acquisition- and divestiture-related costs and the accounting impacts such as those related to transaction costs and costs associated with the revaluation of acquired inventory in connection with business combinations because these costs are unique to each transaction. Additionally, for divestitures, we exclude write-offs of assets that are no longer recoverable and contract related costs due to the divestiture. The nature and amount of such costs vary significantly based on the size and timing of the acquisitions and divestitures, and the maturities of the businesses being acquired or divested. Also, the size, complexity and/or volume of past transactions, which often drives the magnitude of such expenses, may not be indicative of the size, complexity and/or volume of any future acquisitions or divestitures.
- Restructuring and other business realignment costs: We have excluded costs associated with restructuring and business structure realignment programs to allow for comparable financial results to historical operations and forward-looking guidance. In addition, the nature and amount of such charges vary significantly based on the size and timing of the programs. By excluding the referenced expenses from our non-GAAP financial measures, our management is able to further evaluate our ability to utilize existing assets and estimate their long-term value. Furthermore, our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
- Asset impairment charges: We have excluded the impact of asset impairments as such non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
- Amortization expense: We have excluded the impact of amortization of finite-lived intangible assets, as such non-cash amounts are inconsistent in amount and frequency and are significantly impacted by the timing and/or size of acquisitions. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance. Although we exclude amortization of intangible assets from our non-GAAP expenses, our management believes that it is important for investors to understand that such intangible assets contribute to revenue generation. Amortization of intangible assets that relate to past acquisitions will recur in future periods until such intangible assets have been fully amortized. Any future acquisitions may result in the amortization of additional intangible assets.
- Loss/(Gain) on divestitures and Gain on sale of real estate: We have excluded the impact of Loss/(gain) on divestitures and Gain on sale of real estate as such amounts are inconsistent in amount and frequency and are significantly

impacted by the size of divestitures and sale of real estate. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.

- Stock-based compensation: Although stock-based compensation is a key incentive offered to our employees, we have excluded the effect of these expenses from the calculation of adjusted operating income and adjusted EBITDA. This is due to their primarily non-cash nature; in addition, the amount and timing of these expenses may be highly variable and unpredictable, which may negatively affect comparability between periods.
- Depreciation and Adjusted depreciation: Our adjusted operating income excludes the impact of accelerated depreciation for certain restructuring projects that affect the expected useful lives of Property, Plant and Equipment, as such charges vary significantly based on the size and timing of the programs. Further, we have excluded adjusted depreciation, which represents depreciation expense net of accelerated depreciation charges, from our adjusted EBITDA. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
- Other (income) expense: We have excluded the write-off of deferred financing fees and discounts that resulted from the pay down of our term debt from the proceeds of the Wella sale, due to the requirements of the 2018 Coty Credit Agreement, as amended. Our management believes these costs do not reflect our underlying ongoing business, and the adjustment of such costs helps investors and others compare and analyze performance from period to period. We have also excluded the impact of pension curtailment (gains) and losses and pension settlements as such events are triggered by our restructuring and other business realignment activities and the amount of such charges vary significantly based on the size and timing of the programs. Further, we have excluded the change in fair value of the investment in Wella, as our management believes these unrealized (gains) and losses do not reflect our underlying ongoing business, and the adjustment of such impact helps investors and others compare and analyze performance from period to period. We have excluded the gain on the exchange of Series B Preferred Stock. The transaction was entered into to simplify our capital structure and do not reflect our underlying ongoing business.
- Noncontrolling interest: This adjustment represents the after-tax impact of the non-GAAP adjustments included in Net income attributable to noncontrolling interests based on the relevant non-controlling interest percentage.
- Tax: This adjustment represents the impact of the tax effect of the pretax items excluded from Adjusted net income. The tax impact of the non-GAAP adjustments is based on the tax rates related to the jurisdiction in which the adjusted items are received or incurred. Additionally, adjustments are made for the tax impact of any intra-entity transfer of assets and liabilities.
- Deemed Preferred Stock Dividends: We have excluded preferred stock deemed dividends related to the First Exchange and the Second Exchange (as defined in Note 16—Equity and Convertible Preferred Stock) from our calculation of adjusted net income attributable to Coty Inc. These deemed dividends are nonmonetary in nature, the transactions were entered into to simplify our capital structure and do not reflect our underlying ongoing business. Management believes that this adjustment helps investors and others compare and analyze our performance from period to period.

While acquiring brands and licenses comprises a part of our overall growth strategy, along with targeting organic growth opportunities, we have excluded acquisition-related costs and acquisition accounting impacts in connection with business combinations because these costs are unique to each transaction and the amount and frequency are not consistent and are significantly impacted by the timing and size of our acquisitions. Our management assesses the success of an acquisition as a component of performance using a variety of indicators depending on the size and nature of the acquisition, including:

- the scale of the combined company by evaluating consolidated and segment financial metrics;
- the expansion of product offerings by evaluating segment, brand, and geographic performance and the respective strength of the brands;
- the evaluation of share expansion in categories and geographies;
- the earnings per share accretion and substantial incremental free cash flow generation providing financial flexibility for us; and
- the comparison of actual and projected results, including achievement of projected synergies, post integration; provided that timing for any such comparison will depend on the size and complexity of the acquisition.

#### Constant Currency

We operate on a global basis, with the majority of our net revenues generated outside of the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented in “constant currency”, excluding the impact of foreign currency exchange translations to provide a framework for assessing how our underlying businesses performed excluding the impact of foreign currency exchange translations. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using prior year foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information we present may not be comparable to similarly titled measures reported by other companies.

#### Basis of Presentation of Acquisitions, Divestitures and Terminations

During the period when we complete an acquisition, divestiture or early license termination, the financial results of the current year period are not comparable to the financial results presented in the prior year period. When explaining such changes from period to period and to maintain a consistent basis between periods, we exclude the financial contribution of: (i) the acquired brands or businesses in the current year period until we have twelve months of comparable financial results and (ii) the divested brands or businesses or early terminated brands, to maintain comparable financial results with the current fiscal year period. There are no acquisitions, divestitures or early license terminations in the comparable periods that would impact the comparability of financial results between periods presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As the sale of the Wella Business was completed on November 30, 2020, no net revenues or operating expenses from discontinued operations were recorded in the three and six months ended December 31, 2021. Net income from discontinued operations for the three and six months ended December 31, 2021 reflects certain purchase price working capital adjustments net of the related income tax impact. Financial results for the Wella Business for fiscal year 2021 are presented as discontinued operations.

**Unless otherwise noted, the following section pertains to the results of continuing operations.**

### THREE MONTHS ENDED DECEMBER 31, 2021 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2020

NET REVENUES

In the three months ended December 31, 2021, net revenues increased 12%, or $162.6, to $1,578.2 from $1,415.6 in the three months ended December 31, 2020, reflecting an increase in unit volume of 7%, and a positive price and mix impact of 5%. The overall increase in net revenues primarily reflects the reopening of stores across regions and increased leisure travel due to reduced COVID restrictions. A number of countries continued to experience rolling lockdowns; however, these lockdowns were confined to certain localities. Increased foot traffic and demand had a favorable impact on both the Prestige and Consumer Beauty segments, with the highest impact on the Prestige segment. In addition, the Prestige segment benefited from various strong and successful launches such as *Gucci Flora, Burberry Hero, Tiffany Rose Gold*, and the relaunch of *Kylie* cosmetics. Consumer Beauty segment also experienced significant net revenue increase due to market share gain as a result of a repositioning and reinvestment in key color cosmetics brands. Furthermore, the growth of e-commerce and continued expansion in the U.S. and China contributed to the net revenue increase.

### Net Revenues by Segment

*(in millions)*

| NET REVENUES | Three Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | ---: |
| Prestige | $1,008.0 | $903.8 | 12% |
| Consumer Beauty | 570.2 | 511.8 | 11% |
| **Total** | **$1,578.2** | **$1,415.6** | **12%** |

#### Prestige

In the three months ended December 31, 2021, net revenues from the Prestige segment increased 12%, or $104.2 to $1,008.0 compared to $903.8 in the three months ended December 31, 2020, reflecting an increase in unit volume of 7%, and a positive price and mix impact of 5%. This increase in net revenues primarily reflects:

(i) an increase in net revenues from the travel retail business as many localities, particularly in North America, Europe, and China, have reduced travel restrictions and reopened for leisure travel as they emerge from the COVID-19 pandemic;

(ii) an increase in net revenues from the new launches of *Gucci Flora, Burberry Hero, Tiffany Rose Gold*, and the global relaunch of *Kylie* cosmetics in the current fiscal year, as well as the continued success of *Gucci Guilty* and *Gucci Makeup;*

(iii) an increase in net revenues due to growth of e-commerce across the regions, distribution expansion in China, and additional shelf space in the U.S. retail stores; and

(iv) an incremental increase in net revenues from *Kylie* cosmetics due to a shelf reset for a major customer in the prior year which did not occur in the current year.

These increases in net revenue were partially offset by:

(i) lower net revenues due to strategic initiatives to reduce sales through lower priced channels; and

(ii) lower net revenues from *Philosophy* due to decreased holiday program and a change in the timing of shipments to the first quarter of fiscal 2022.

#### Consumer Beauty

In the three months ended December 31, 2021, net revenues from the Consumer Beauty segment increased 11%, or $58.4, to $570.2 from $511.8 in the three months ended December 31, 2020, reflecting an increase in unit volume of 7%, and a positive price and mix impact of 5%, partially offset by a negative foreign currency exchange translation impact of 1%. The increase in net revenues primarily reflects:

(i) an increase in net revenues due to market share gain from the key color cosmetics brands as a result of new brand positioning and enhanced support for these brands;

(ii) an increase in net revenues due to reduction in sales returns, discounts and allowances as a result of fewer shelf resets in the period and improvements in forecasting sales and better focus on planning for new products; and

(iii) an increase in net revenues due to market recovery from COVID-19, increasing customer demand and store traffic, which positively impacted all brands within the segment.

COST OF SALES

In the three months ended December 31, 2021, cost of sales decreased 4%, or $22.9, to $561.1 from $584.0 in the three months ended December 31, 2020. Cost of sales as a percentage of net revenues decreased to 35.6% in the three months ended December 31, 2021 from 41.3% in the three months ended December 31, 2020, resulting in a gross margin increase of approximately 570 basis points, primarily reflecting:

(i) approximately 310 basis points related to positive product and category mix associated with increased contribution from higher margin Prestige products, reduced sales of products through lower priced channels, as well as price increases within our product portfolio;

(ii) approximately 90 basis points related to decreased excess and obsolescence expense on inventory due to improvements in the current fiscal year in forecasting sales and better focus on planning for new products;

(iii) approximately 90 basis points primarily related to a shelf reset for a major customer in the prior year which did not occur in the current year;

(iv) approximately 70 basis points primarily related to reductions in Consumer Beauty, as a percentage of revenues, in promotional allowances and other trade spend items, which are recorded as adjustments to net sales; and

(v) approximately 60 basis points related to decrease in designer license fees due to higher royalty minimum paid in the prior year.

These increases were partially offset by approximately 50 basis points related to increases in material costs, after consideration of our cost containment projects.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In the three months ended December 31, 2021, selling, general and administrative expenses increased 12%, or $77.4, to $718.9 from $641.5 in the three months ended December 31, 2020. Selling, general and administrative expenses as a percentage of net revenues increased to 45.6% in the three months ended December 31, 2021 from 45.3% in the three months ended December 31, 2020, or approximately 30 basis points. This increase primarily reflects:

(i) 880 basis points due to increase in advertising and consumer promotional costs related to support for certain key brands and product launches, as well as increased store promotions coinciding with store reopenings as COVID restrictions ease; and

(ii) 80 basis points in stock-based compensation primarily related to the CEO grant made on June 30, 2021.

These increases were partially offset by the following decreases:

(i) 590 basis points related to gain on sale of real estate;

(ii) 310 basis points in administrative costs primarily due to a decrease in compensation related to a reduction in employee headcount; and

(iii) 40 basis points related to lower logistics costs as a percentage of net revenue.

OPERATING INCOME (LOSS)

In the three months ended December 31, 2021, operating income was $244.0 compared to income of $17.0 in the three months ended December 31, 2020. Operating income as a percentage of net revenues, increased to 15.5% in the three months ended December 31, 2021 as compared to an operating income as a percentage of net revenues of 1.2% in the three months ended December 31, 2020. The improved operating margin is largely driven by gain recognized on sale of real estate, lower cost of goods sold as a percentage of net revenues, decrease in restructuring expense, a reduction in fixed costs, decrease in acquisition and divestiture related expenses, and lower amortization expense, partially offset by an increase in advertising and consumer promotional costs and higher stock-based compensation.

### Operating Income by Segment

*(in millions)*

| Operating income (loss) | Three Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | ---: |
| Prestige | $141.6 | $110.8 | 28% |
| Consumer Beauty | 43.3 | 30.4 | 42% |
| Corporate | 59.1 | (124.2) | \>100% |
| **Total** | **$244.0** | **$17.0** | **\>100%** |

#### Prestige

In the three months ended December 31, 2021, operating income for Prestige was $141.6 compared to income of $110.8 in the three months ended December 31, 2020. Operating margin increased to 14.0% of net revenues in the three months ended December 31, 2021 as compared to 12.3% in the three months ended December 31, 2020, driven by higher sales volume, lower cost of goods sold as a percentage of net revenues, a reduction in fixed costs, and a decrease in amortization expense, partially offset by an increase in advertising and consumer promotional costs.

#### Consumer Beauty

In the three months ended December 31, 2021, operating income for Consumer Beauty was $43.3 compared to income of $30.4 in the three months ended December 31, 2020. Operating margin increased to 7.6% of net revenues in the three months ended December 31, 2021 as compared to 5.9% in the three months ended December 31, 2020, driven by higher sales volume, a reduction in fixed costs and lower cost of goods sold as a percentage of net revenues, partially offset by an increase in advertising and consumer promotional costs.

#### Corporate

Corporate primarily includes income and expenses not directly relating to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance of the segments.

In the three months ended December 31, 2021, the operating income for Corporate was $59.1 compared to a loss of $124.2 in the three months ended December 31, 2020, as described under “Adjusted Operating Income (Loss) for Continuing Operations” below. The increase in the operating income for Corporate was primarily driven by gain recognized on the sale of real estate, lower restructuring expense, and a decrease in acquisition and divestiture related expenses, partially offset by an increase in share-based compensation expense.

### Adjusted Operating Income (Loss) by Segment

We believe that adjusted operating income (loss) by segment further enhances an investor’s understanding of our performance. See “Overview—Non-GAAP Financial Measures.” A reconciliation of reported operating income (loss) to adjusted operating income is presented below, by segment:

*(in millions)*

| Operating income (loss) | Three Months Ended December 31, 2021 Reported (GAAP) | Adjustments (a) | Adjusted (Non-GAAP) |
| --- | ---: | ---: | ---: |
| Prestige | $141.6 | $40.4 | $182.0 |
| Consumer Beauty | 43.3 | 11.0 | 54.3 |
| Corporate | 59.1 | (59.1) | — |
| **Total** | **$244.0** | **$(7.7)** | **$236.3** |
|  | **Three Months Ended December 31, 2020** |  |  |
| **(in millions)** | **Reported (GAAP)** | **Adjustments (a)** | **Adjusted (Non-GAAP)** |
| **Operating income (loss)** |  |  |  |
| Prestige | $110.8 | $49.8 | $160.6 |
| Consumer Beauty | 30.4 | 12.0 | 42.4 |
| Corporate | (124.2) | 124.2 | — |
| **Total** | **$17.0** | **$186.0** | **$203.0** |

(a) See a reconciliation of reported operating income to adjusted operating income and a description of the adjustments under “Adjusted Operating Income (Loss) for Continuing Operations” below. All adjustments are reflected in Corporate, except for amortization and asset impairment charges on goodwill, indefinite-lived intangible assets, and finite-lived intangible assets, which are reflected in the Prestige and Consumer Beauty segments.

### Adjusted Operating Income (Loss) and Adjusted EBITDA for Continuing Operations

We believe that adjusted operating income (loss) further enhances an investor’s understanding of our performance. See “Overview—Non-GAAP Financial Measures.” Reconciliation of reported operating income to adjusted operating income is presented below:

*(in millions)*

|  | Three Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | ---: |
| **Reported operating income (loss)** | **$244.0** | **$17.0** | **\>100%** |
| % of net revenues | 15.5% | 1.2% |  |
| Amortization expense | 51.4 | 61.8 | (17)% |
| Restructuring and other business realignment costs | (1.8) | 57.9 | \<(100%) |
| Stock-based compensation | 27.5 | 14.6 | 88% |
| Costs related to acquisition and divestiture activities | 6.9 | 51.7 | (87)% |
| (Gain) on sale of real estate | (91.7) | — | N/A |
| Total adjustments to reported operating income | (7.7) | 186.0 | \<(100%) |
| **Adjusted operating income** | **$236.3** | **$203.0** | **16%** |
| % of net revenues | 15.0% | 14.3% |  |
| Adjusted depreciation | 75.6 | 81.5 | (7)% |
| **Adjusted EBITDA** | **$311.9** | **$284.5** | 10% |
| % of net revenues | 19.8% | 20.1% |  |

In the three months ended December 31, 2021, adjusted operating income increased $33.3 to $236.3 from $203.0 in the three months ended December 31, 2020. Adjusted operating margin increased to 15.0% of net revenues in the three months ended December 31, 2021 from 14.3% in the three months ended December 31, 2020. In the three months ended December 31, 2021, adjusted EBITDA increased $27.4 to $311.9 from $284.5 in the three months ended December 31, 2020, primarily driven by a reduction in fixed costs and lower cost of goods sold as a percentage of net revenues, partially offset by an increase in advertising and consumer promotional costs. Adjusted EBITDA margin decreased to 19.8% of net revenues in the three months ended December 31, 2021 from 20.1% in the three months ended December 31, 2020.

#### Amortization Expense

In the three months ended December 31, 2021, amortization expense decreased to $51.4 from $61.8 in the three months ended December 31, 2020. In the three months ended December 31, 2021, amortization expense of $40.4 and $11.0 was reported in the Prestige and Consumer Beauty segments, respectively. In the three months ended December 31, 2020, amortization expense of $49.8 and $12.0 was reported in the Prestige and Consumer Beauty segments, respectively. The decrease was primarily driven by finite intangible assets that are fully amortized as of fiscal 2021, partially offset by amortization for the KKW collaboration agreement acquired in the third quarter of fiscal 2021.

#### Restructuring and Other Business Realignment Costs

We continue to analyze our cost structure, including opportunities to simplify and optimize operations. In connection with the four-year Turnaround plan announced on July 1, 2019 to drive substantial improvement and optimization in our business, we have and expect to continue to incur restructuring and other business realignment costs. On May 11, 2020, we announced an expansion of the Turnaround Plan to further reduce fixed costs, the Transformation Plan. We incurred $399.6 of cash costs life-to-date as of December 31, 2021, which have been recorded in Corporate.

In the three months ended December 31, 2021, we incurred a credit in restructuring and other business structure realignment costs of $(1.8), as follows:

- We incurred a credit in restructuring costs of $(4.1) primarily related to the Transformation Plan due to the change in estimate, included in the Condensed Consolidated Statements of Operations; and
- We incurred business structure realignment costs of $2.3 primarily related to the Transformation Plan and certain other programs. This amount includes $(0.3) reported in Selling, general and administrative expenses, and $2.6 reported in Cost of sales in the Condensed Consolidated Statement of Operations.

In the three months ended December 31, 2020, we incurred restructuring and other business structure realignment costs of $57.9 as follows:

- We incurred restructuring costs of $59.6 primarily related to the Transformation Plan, included in the Condensed Consolidated Statements of Operations; and
- We incurred a credit in business structure realignment costs of $(1.7) primarily related to the Transformation Plan and certain other programs. This amount includes $(1.7) reported in Selling, general and administrative expenses, and nil reported in Cost of sales in the Condensed Consolidated Statement of Operations.

In all reported periods, all restructuring and other business realignment costs were reported in Corporate.

#### Stock-Based Compensation

In the three months ended December 31, 2021, stock-based compensation was $27.5 as compared with $14.6 in the three months ended December 31, 2020. The increase in stock-based compensation is primarily related to the CEO grant made on June 30, 2021.

In all reported periods, all costs related to stock-based compensation were reported in Corporate.

#### Acquisition and Divestiture Activities

In the three months ended December 31, 2021 we incurred $6.9 of costs related to acquisition and divestiture activities. These costs were primarily associated with the Wella Transaction.

In the three months ended December 31, 2020, we incurred $51.7 of costs related to acquisition and divestiture activities. These costs were primarily associated with the Wella Transaction.

In all reported periods, all costs related to acquisition and divestiture activities were reported in Corporate.

#### Gain on Sale of Real Estate

In the three months ended December 31, 2021 we recognized gain of $91.7 related to sale of real estate.

In the three months ended December 31, 2020, we did not recognize any gain related to sale of real estate.

In all reported periods, all gains related to sale of real estate were reported in Corporate.

#### Adjusted Depreciation Expense

In the three months ended December 31, 2021, adjusted depreciation expense of $37.0 and $38.6 was reported in the Prestige and Consumer Beauty segments, respectively. In the three months ended December 31, 2020, adjusted depreciation expense of $38.8 and $42.7 was reported in the Prestige and Consumer Beauty segments, respectively.

INTEREST EXPENSE, NET

In the three months ended December 31, 2021, net interest expense was $60.9 as compared with $59.2 in the three months ended December 31, 2020. This increase is primarily due to higher average interest rate in the current period.

OTHER INCOME, NET

In the three months ended December 31, 2021, other income, net was $126.2 as compared with an expense of $17.6 in the three months ended December 31, 2020. This increase is primarily due to a favorable adjustment of $128.3 related to the realized and unrealized gain in the Wella investment.

INCOME TAXES

The effective income tax rate for the three months ended December 31, 2021 and 2020 was 16.0% and 68.2%, respectively. The positive effective tax rate for the three months ended December 31, 2021 results from reporting income before taxes and a provision for income taxes. The positive effective tax rate for the three months ended December 31, 2020 results from reporting losses before income taxes and a benefit for income taxes. The change in the effective tax rate for the three months ended December 31, 2021, as compared with the three months ended December 31, 2020, is primarily due to the limitation on the deductibility of executive stock compensation and large fair value gains related to the investment in the Wella business in the current period, as well as a benefit of $18.8 in the current period recognized on the revaluation of our deferred tax assets due to a tax rate increase enacted in the Netherlands.

The effective income tax rates vary from the U.S. federal statutory rate of 21% due to the effect of (i) jurisdictions with different statutory rates, (ii) adjustments to our unrecognized tax benefits and accrued interest, (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes. Our effective tax rate could fluctuate significantly and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.

### Reconciliation of Reported (Loss) Income Before Income Taxes to Adjusted Income Before Income Taxes and Effective Tax Rates:

*(in millions)*

|  | Three Months Ended December 31, 2021 (Loss) Income Before Income Taxes | (Benefit) Provision for Income Taxes | Effective Tax Rate | Three Months Ended December 31, 2020 (Loss) Income Before Income Taxes | Provision for Income Taxes | Effective Tax Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported (loss) before income taxes** | **$309.3** | **$49.4** | **16.0%** | **$(59.8)** | **$(40.8)** | **68.2%** |
| Adjustments to reported operating income (a) | (7.7) |  |  | 186.0 |  |  |
| Change in fair value of investment in Wella Business (c) | (128.3) |  |  | — |  |  |
| Other adjustments (d) | (3.0) |  |  | 13.5 |  |  |
| Total Adjustments (b) | (139.0) | (33.1) |  | 199.5 | 54.1 |  |
| **Adjusted income before income taxes** | **$170.3** | **$16.3** | **9.6%** | **$139.7** | **$13.3** | **9.5%** |

(a) See a description of adjustments under “Adjusted Operating Income (Loss) for Continuing Operations.”

(b) The tax effects of each of the items included in adjusted income are calculated in a manner that results in a corresponding income tax expense/provision for adjusted income. In preparing the calculation, each adjustment to reported income is first analyzed to determine if the adjustment has an income tax consequence. The provision for taxes is then calculated based on the jurisdiction in which the adjusted items are incurred, multiplied by the respective statutory rates and offset by the increase or reversal of any valuation allowances commensurate with the non-GAAP measure of profitability.

(c) The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella.

(d) For the three months ended December 31, 2021, this primarily represents a net gain on the exchange of Series B Preferred Stock closed on October 20, 2021. For the three months ended December 31, 2020, this primarily represents the write-off of deferred financing fees related to the Wella sale.

The adjusted effective tax rate was 9.6% for the three months ended December 31, 2021 compared to 9.5% for the three months ended December 31, 2020. The differences were primarily due to the jurisdictional mix of income as well as a benefit of $18.8 in the current period recognized on the revaluation of our deferred tax assets due to a tax rate increase enacted in the Netherlands.

DISCONTINUED OPERATIONS

As the sale of the Wella Business was completed on November 30, 2020, no net revenues or operating expenses from discontinued operations were recorded in the three months ended December 31, 2021. Net income from discontinued operations for the three months ended December 31, 2021 reflects certain purchase price working capital adjustments net of the related income tax impact. On December 22, 2021, we entered into an agreement with the KKR Bidco related to post-closing adjustments to the purchase consideration for the Wella Business. As part of this agreement, we may receive future contingent proceeds. Earning the contingent proceeds is based on the future recovery of certain tax credits of the Wella Business. See Note 3—Discontinued Operations in the notes to our Consolidated Financial Statements for additional information.

NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC.

Net income attributable to Coty Inc. was $261.4 in the three months ended December 31, 2021 as compared to a loss of $252.3 in the three months ended December 31, 2020. The increase in the income is primarily driven by higher operating income in the current year, a favorable adjustment of $128.3 related to the realized and unrealized gain in the Wella investment in the current year, and the loss on sale of the Wella Business, which was recorded in the comparative period.

We believe that adjusted net income (loss) attributable to Coty Inc. provides an enhanced understanding of our performance. See “Overview—Non-GAAP Financial Measures.”

*(in millions)*

|  | Three Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | --- |
| **Net income from Coty Inc. net of noncontrolling interests** | **$261.4** | **$(252.3)** | **\>100%** |
| Convertible Series B Preferred Stock dividends | (68.7) | (23.1) | \<(100%) |
| **Reported net income attributable to Coty Inc.** | **$192.7** | **$(275.4)** | **\>100%** |
| % of net revenues | 12.2% | (15.0)% |  |
| Adjustments to reported operating income (a) | (7.7) | 186.0 | \<(100%) |
| Adjustments to Loss on Sale of Business (b) | (4.8) | 219.1 | \<(100%) |
| Change in fair value of investment in Wella Business (c) | (128.3) | — | N/A |
| Adjustment to other expense (d) | (3.0) | 13.5 | \<(100%) |
| Adjustments to noncontrolling interests (e) | (1.7) | (3.3) | 48% |
| Change in tax provision due to adjustments to reported net income attributable to Coty Inc. | 34.1 | 6.2 | \>100% |
| Adjustment for deemed Series B Preferred Stock dividends related to the First and Second Exchanges (f) | 66.4 | — | N/A |
| **Adjusted net income attributable to Coty Inc.** | **$147.7** | **$146.1** | **1%** |
| % of net revenues | 9.4% | 8.0% |  |
| **Per Share Data** |  |  |  |
| Adjusted weighted-average common shares |  |  |  |
| Basic | 829.1 | 764.6 |  |
| Diluted | 892.3 | 937.6 |  |
| Adjusted net income attributable to Coty Inc. per common share |  |  |  |
| Basic | $0.18 | $0.19 |  |
| Diluted | $0.17 | $0.18 |  |

(a) See a description of adjustments under “Adjusted Operating Income (Loss) for Continuing Operations”

(b) This amount reflects certain purchase price working capital adjustments related to the sale of the Wella Business.

(c) The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella.

(d) For the three months ended December 31, 2021, this primarily represents a net gain on the exchange of Series B Preferred Stock closed on October 20, 2021. For the three months ended December 31, 2020, this primarily represents the write-off of deferred financing fees related to the Wella sale.

(e) The amounts represent the after-tax impact of the non-GAAP adjustments included in Net loss attributable to noncontrolling interests based on the relevant noncontrolling interest percentage in the Condensed Consolidated Statements of Operations.

(f) This adjustment represents the deemed dividend from the Second Exchange that closed on November 30, 2021 (as defined in Note 16—Equity and Convertible Preferred Stock).

### SIX MONTHS ENDED DECEMBER 31, 2021 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2020

NET REVENUES

In the six months ended December 31, 2021, net revenues increased 16%, or $410.2, to $2,949.9 from $2,539.7 in the six months ended December 31, 2020, reflecting an increase in unit volume of 5%, and a positive price and mix impact of 11%. The overall increase in net revenues primarily reflects the reopening of stores across regions and increased leisure travel due to reduced COVID restrictions. A number of countries continued to experience rolling lockdowns; however, these lockdowns were confined to certain localities. Increased foot traffic and demand had a favorable impact on both the Prestige and Consumer Beauty segments, with the highest impact on the Prestige segment. In addition, the Prestige segment benefited from various strong and successful launches such as *Gucci Flora, Burberry Hero, Tiffany Rose Gold*, and the relaunch of *Kylie* cosmetics. Consumer Beauty segment also experienced significant net revenue increase due to COVID-19 recovery and market share gain as a result of a repositioning and reinvestment in key color cosmetics brands. Furthermore, the growth of e-commerce and continued expansion in the U.S. and China contributed to the net revenue increase.

### Net Revenues by Segment

*(in millions)*

| NET REVENUES | Six Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | ---: |
| Prestige | $1,878.7 | $1,548.2 | 21% |
| Consumer Beauty | 1,071.2 | 991.5 | 8% |
| **Total** | **$2,949.9** | **$2,539.7** | **16%** |

#### Prestige

In the six months ended December 31, 2021, net revenues from the Prestige segment increased 21%, or $330.5, to $1,878.7 from $1,548.2 in the six months ended December 31, 2020, reflecting an increase in unit volume of 16%, and a positive price and mix impact of 5%. The increase in net revenues primarily reflects:

(i) an increase in net revenues from the travel retail business as many localities, particularly in North America, Europe, and China, have reduced travel restrictions and reopened for leisure travel as they emerge from the COVID-19 pandemic;

(ii) an increase in net revenues from the new launches of *Gucci Flora, Burberry Hero, Tiffany Rose Gold, CK Defy,* and the global relaunch of *Kylie* cosmetics in the current fiscal year, as well as the continued success of *Marc Jacobs Perfect, Gucci Guilty*, and *Gucci Makeup;*

(iii) an increase in net revenues due to positive pricing impact and product mix as a result of global price increase and successful key innovations;

(iv) an increase in net revenues due to growth of e-commerce across the regions, distribution expansion in China, and additional shelf space in the U.S. retail stores;

(v) an incremental increase in net revenues from *Kylie* cosmetics due to a shelf reset for a major customer in the prior year which did not occur in the current year; and

(vi) an increase in net revenues in the Russian market due to the resolution of a dispute with a primary distributor, which negatively impacted net revenues in the prior year.

These increases in net revenue were partially offset by:

(i) lower net revenues due to strategic initiatives to reduce sales through lower priced channels; and

(ii) lower net revenues related to *Kylie* skin products due to less innovation in the current fiscal year.

#### Consumer Beauty

In the six months ended December 31, 2021, net revenues from the Consumer Beauty segment increased 8%, or $79.7, to $1,071.2 from $991.5 in the six months ended December 31, 2020, reflecting an increase in unit volume of 4%, and a positive price and mix impact of 4%. The increase in net revenues primarily reflects:

(i) an increase in net revenues due to market share gain from the key color cosmetics brands as a result of new brand positioning and enhanced support for these brands;

(ii) an increase in net revenues due to market recovery from COVID-19, increasing customer demand and store traffic, which positively impacted all brands within the segment;

(iii) an increase in net revenues due to reduction in sales returns, discounts and allowances as a result of fewer shelf resets in the period and improvements in forecasting sales and better focus on planning for new products; and

(iv) an incremental increase in net revenues from *Max Factor* in China as a result of additional sell through trend compared to the prior comparative period.

These increases in net revenue were partially offset by lower net revenues as a result of license expiration from *Beyonce* and *Stetson.*

COST OF SALES

In the six months ended December 31, 2021, cost of sales increased 2%, or $17.0, to $1,065.9 from $1,048.9 in the six months ended December 31, 2020. Cost of sales as a percentage of net revenues decreased to 36.1% in the six months ended December 31, 2021 from 41.3% in the six months ended December 31, 2020 resulting in a gross margin increase of approximately 520 basis points primarily reflecting:

(i) approximately 300 basis points related to positive product and category mix associated with increased contribution from higher margin Prestige products, reduced sales of products through lower priced channels, as well as price increases within our product portfolio;

(ii) approximately 110 basis points related to decreased excess and obsolescence expense on inventory due to higher than normal costs in the prior year as a result of the COVID-19 pandemic, as well as improvements in the current fiscal year in forecasting sales and better focus on planning for new products;

(iii) approximately 60 basis points primarily related to reductions in Consumer Beauty, as a percentage of revenues, in promotional allowances and other trade spend items, which are recorded as adjustments to net sales;

(iv) approximately 50 basis points related to decreased manufacturing overhead costs and variable costs due to increased manufacturing efficiencies and improvements in productivity; and

(v) approximately 40 basis points primarily related to a shelf reset for a major customer in the prior year which did not occur in the current year.

These increases were partially offset by approximately 40 basis points related to increases in material costs, after consideration of our cost containment projects.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In the six months ended December 31, 2021, selling, general and administrative expenses increased 22%, or $270.3, to $1,495.2 from $1,224.9 in the six months ended December 31, 2020. Selling, general and administrative expenses as a percentage of net revenues increased to 50.7% in the six months ended December 31, 2021 from 48.2% in the six months ended December 31, 2020, or approximately 250 basis points. This increase was primarily due to:

(i) 710 basis points due to increase in advertising and consumer promotional costs related to support for certain key brands and product launches, as well as increased store promotions coinciding with store reopenings as COVID restrictions ease;

(ii) 390 basis points in stock-based compensation primarily related to the CEO grant made on June 30, 2021; and

(iii) 30 basis points related to bad debt expense due to the collection of previously reserved item as a result of resolution of a dispute with a primary distributor in the Russian market which lowered the bad debt expense in prior year.

These increases were partially offset by the following decreases:

(i) 460 basis points in administrative costs primarily due to a decrease in compensation related to a reduction in employee headcount;

(ii) 320 basis points related to gain on sale of real estate;

(iii) 50 basis points related to favorable transactional impact from our exposure to foreign currency exchange fluctuations; and

(iv) 50 basis points related to lower logistics costs as a percentage of net revenue.

OPERATING INCOME (LOSS)

In the six months ended December 31, 2021, operating income was $261.2 compared to a loss of $49.0 in the six months ended December 31, 2020. Operating margin as a percentage of net revenues, increased to 8.9% in the six months ended December 31, 2021 as compared to an operating income as a percentage of net revenues of (1.9)% in the six months ended December 31, 2020. The improved operating margin is largely driven by lower cost of goods sold as a percentage of net revenues, a reduction in fixed costs, decrease in acquisition and divestiture related expenses, gain recognized on sale of real estate, decrease in restructuring expense, and lower amortization expense, partially offset by an increase in advertising and consumer promotional costs and higher stock-based compensation.

### Operating Income (Loss) by Segment

*(in millions)*

| Operating income (loss) | Six Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | ---: |
| Prestige | $273.7 | $144.8 | 89% |
| Consumer Beauty | 54.7 | 16.7 | \>100% |
| Corporate | (67.2) | (210.5) | 68% |
| **Total** | **$261.2** | **$(49.0)** | **\>100%** |

#### Prestige

In the six months ended December 31, 2021, operating income for Prestige was $273.7 compared to income of $144.8 in the six months ended December 31, 2020. Operating margin increased to 14.6% of net revenues in the six months ended December 31, 2021 as compared to 9.4% in the six months ended December 31, 2020, driven primarily by higher sales volume, lower cost of goods sold as a percentage of net revenues, a reduction in fixed costs, and a decrease in amortization expense, partially offset by an increase in advertising and consumer promotional costs.

#### Consumer Beauty

In the six months ended December 31, 2021, operating income for Consumer Beauty was $54.7 compared to income of $16.7 in the six months ended December 31, 2020. Operating margin increased to 5.1% of net revenues in the six months ended December 31, 2021 as compared to 1.7% in the six months ended December 31, 2020, driven by higher sales volume, a reduction in fixed costs and lower cost of goods sold as a percentage of net revenues, partially offset by an increase in advertising and consumer promotional costs.

#### Corporate

Corporate primarily includes corporate expenses not directly related to our operating activities. These items are included in Corporate since we consider them to be Corporate responsibilities, and these items are not used by our management to measure the underlying performance of the segments.

In the six months ended December 31, 2021, the operating loss for Corporate was $67.2 compared to a loss of $210.5 in the six months ended December 31, 2020, as described under “Adjusted Operating Income for Coty Inc.” below. The decrease to the operating loss for Corporate was primarily driven by a decrease in acquisition and divestiture related expenses, lower restructuring expense, and gain recognized on the sale of real estate, partially offset by an increase in share-based compensation expense.

### Adjusted Operating Income (Loss) by Segment

We believe that Adjusted Operating income (loss) by segment further enhances an investor’s understanding of our performance. See “Overview—Non-GAAP Financial Measures.” A reconciliation of reported Operating income (loss) to Adjusted Operating income is presented below, by segment:

*(in millions)*

| Operating income (loss) | Six Months Ended December 31, 2021 Reported (GAAP) | Adjustments (a) | Adjusted (Non-GAAP) |
| --- | ---: | ---: | ---: |
| Prestige | 273.7 | $85.4 | $359.1 |
| Consumer Beauty | 54.7 | 23.0 | 77.7 |
| Corporate | (67.2) | 67.2 | — |
| **Total** | **$261.2** | **$175.6** | **$436.8** |

*(in millions)*

| Operating (loss) income | Six Months Ended December 31, 2020 Reported (GAAP) | Adjustments (a) | Adjusted (Non-GAAP) |
| --- | ---: | ---: | ---: |
| Prestige | 144.8 | $101.5 | $246.3 |
| Consumer Beauty | 16.7 | 25.7 | 42.4 |
| Corporate | (210.5) | 210.5 | — |
| **Total** | **$(49.0)** | **$337.7** | **$288.7** |

(a) See a reconciliation of reported operating income to adjusted operating income and a description of the adjustments under “Adjusted Operating Income for Coty Inc.” below. All adjustments are reflected in Corporate, except for amortization and asset impairment charges on goodwill, regional indefinite-lived intangible assets, and finite-lived intangible assets, which are reflected in the Prestige and Consumer Beauty segments.

### Adjusted Operating Income (Loss) and Adjusted EBITDA for Continuing Operations

We believe that adjusted operating income further enhances an investor’s understanding of our performance. See “Overview—Non-GAAP Financial Measures.” A reconciliation of reported operating income (loss) to adjusted operating income is presented below:

*(in millions)*

|  | Six Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | ---: |
| **Reported operating income (loss)** | **261.2** | **(49.0)** | **\>100%** |
| % of net revenues | 8.9% | (1.9)% |  |
| Amortization expense | 108.4 | 127.2 | (15)% |
| Restructuring and other business realignment costs | 13.3 | 92.3 | (86)% |
| Stock-based compensation | 135.7 | 20.2 | \>100% |
| Costs related to acquisition and divestiture activities | 10.9 | 98.0 | (89)% |
| (Gain) on sale of real estate | (92.7) | — | N/A |
| Total adjustments to reported operating income | $175.6 | $337.7 | (48)% |
| **Adjusted operating income** | **$436.8** | **$288.7** | **51%** |
| % of net revenues | 14.8% | 11.4% |  |
| Adjusted depreciation | 153.6 | 162.4 | (5)% |
| **Adjusted EBITDA** | **$590.4** | **$451.1** | **31%** |
| % of net revenues | 20.0% | 17.8% |  |

In the six months ended December 31, 2021, adjusted operating income increased $148.1, to $436.8 from $288.7 in the six months ended December 31, 2020. Adjusted operating margin increased to 14.8% of net revenues in the six months ended December 31, 2021 from 11.4% in the six months ended December 31, 2020. In the six months ended December 31, 2021, adjusted EBITDA increased $139.3 to $590.4 from $451.1 in the six months ended December 31, 2020. Adjusted EBITDA margin increased to 20.0% of net revenues in the six months ended December 31, 2021 from 17.8% in the six months ended December 31, 2020, primarily driven by higher sales volume, lower cost of goods sold as a percentage of net revenues, and a reduction in fixed costs, partially offset by an increase in advertising and consumer promotional costs.

#### Amortization Expense

In the six months ended December 31, 2021, amortization expense decreased to $108.4 from $127.2 in the six months ended December 31, 2020. In the six months ended December 31, 2021, amortization expense of $85.4 and $23.0 was reported in the Prestige and Consumer Beauty segments, respectively. In the six months ended December 31, 2020, amortization expense of $101.5 and $25.7 was reported in the Prestige and Consumer Beauty segments, respectively. The decrease was primarily driven by finite intangible assets that are fully amortized as of fiscal 2021, partially offset by amortization for the KKW collaboration agreement acquired in the third quarter of fiscal 2021.

#### Restructuring and Other Business Realignment Costs

We continue to analyze our cost structure, including opportunities to simplify and optimize operations. In connection with the four-year Turnaround plan announced on July 1, 2019 to drive substantial improvement and optimization in our business, we have and expect to continue to incur restructuring and other business realignment costs. On May 11, 2020 we announced an expansion of the Turnaround Plan to further reduce fixed costs, the Transformation Plan. We incurred $399.6 of cash costs life-to-date as of December 31, 2021, which have been recorded in Corporate.

In the six months ended December 31, 2021, we incurred restructuring and other business structure realignment costs of $13.3, as follows:

- We incurred restructuring costs of $8.3 primarily related to the Transformation Plan, included in the Condensed Consolidated Statements of Operations.
- We incurred business structure realignment costs of $5.0 primarily related to our Transformation plan and certain other programs. This amount includes $(0.3) reported in Selling, general and administrative expenses, and $5.3 reported in Cost of sales in the Condensed Consolidated Statement of Operations.

In the six months ended December 31, 2020, we incurred restructuring and other business structure realignment costs of $92.3 as follows:

- We incurred restructuring costs of $89.7 primarily related to the Turnaround Plan, included in the Condensed Consolidated Statements of Operations.
- We incurred business structure realignment costs of $2.6 primarily related to our Turnaround plan. This amount includes $2.6 reported in Selling, general and administrative expenses, and nil reported in Cost of sales in the Condensed Consolidated Statement of Operations.

In all reported periods, all restructuring and other business realignment costs were reported in Corporate.

#### Stock-based compensation

In the six months ended December 31, 2021, stock-based compensation was $135.7 as compared with $20.2 in the six months ended December 31, 2020. The increase in stock-based compensation is primarily related to the CEO grant made on June 30, 2021.

In all reported periods, all costs related to stock-based compensation were reported in Corporate.

#### Acquisition and Divestiture Activities

In the six months ended December 31, 2021, we incurred $10.9 of costs related to acquisition and divestiture activities. These costs were primarily associated with the Wella Transaction.

In the six months ended December 31, 2020, we incurred $98.0 of cost relating to acquisition and divestiture activities. These costs were primarily associated with the Wella Transaction.

In all reported periods, all costs related to acquisition and divestiture activities were reported in Corporate.

#### Gain on Sale of Real Estate

In the six months ended December 31, 2021 we recognized gain of $92.7 related to sale of real estate.

In the six months ended December 31, 2020, we did not recognize any gain related to sale of real estate.

In all reported periods, all gains related to sale of real estate were reported in Corporate.

#### Adjusted depreciation expense

In the six months ended December 31, 2021, adjusted depreciation expense of $75.0 and $78.6 was reported in the Prestige and Consumer Beauty segments, respectively. In the six months ended December 31, 2020, adjusted depreciation expense of $72.9 and $89.5 was reported in the Prestige and Consumer Beauty segments, respectively.

INTEREST EXPENSE, NET

In the six months ended December 31, 2021, net interest expense was $120.7 as compared with $121.3 in the six months ended December 31, 2020. This decrease is primarily due to the lower debt balance, partially offset by a higher average interest rate in the current period.

OTHER INCOME, NET

In the six months ended December 31, 2021, other income, net was $512.3 as compared with an expense of $11.8 in the six months ended December 31, 2020. This increase is primarily due to a favorable adjustment of $518.3 related to the realized and unrealized gain in the Wella investment.

INCOME TAXES

The effective income tax rate for the six months ended December 31, 2021 and 2020 was 25.1% and 156.9%, respectively. The change in the effective tax rate for the six months ended December 31, 2021, as compared to the prior period is primarily due to the limitation on the deductibility of executive stock compensation and large fair value gains related to the investment in the Wella business in the current period, as well as a benefit related to a change in the Company's main principal location of $220.5 recorded in the prior period. The benefit recorded in the prior period was the result of a tax rate differential on the deferred taxes recognized on the transfer of assets and liabilities, following the relocation of the Company's main principal location from Geneva to Amsterdam.

The effective income tax rates vary from the U.S. federal statutory rate of 21% due to the effect of: (i) jurisdictions with different statutory rates, (ii) adjustments to our unrecognized tax benefits and accrued interest; (iii) non-deductible expenses, (iv) audit settlements and (v) valuation allowance changes. Our effective tax rate could fluctuate significantly and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.

### Reconciliation of Reported (Loss) Income Before Income Taxes to Adjusted Income Before Income Taxes and Effective Tax Rates:

*(in millions)*

|  | Six Months Ended December 31, 2021 (Loss) Income Before Income Taxes | Provision for Income Taxes | Effective Tax Rate | Six Months Ended December 31, 2020 (Loss) Income Before Income Taxes | Provision for Income Taxes | Effective Tax Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported (loss) income before income taxes** | **$652.8** | **$164.0** | **25.1%** | **$(182.1)** | **$(285.7)** | **156.9%** |
| Other adjustments to reported operating income (a) | 175.6 |  |  | 337.7 |  |  |
| Change in fair value of investment in Wella Business (c) | (518.3) |  |  |  |  |  |
| Other adjustments (d) | (2.8) |  |  | 8.2 |  |  |
| Total Adjustments (b) (e) | (345.5) | (108.0) |  | 345.9 | 305.0 |  |
| **Adjusted income before income taxes** | **$307.3** | **$56.0** | **18.2%** | **$163.8** | **$19.3** | **11.8%** |

(a) See a description of adjustments under “Adjusted Operating Income for Continuing Operations.”

(b) The tax effects of each of the items included in adjusted income are calculated in a manner that results in a corresponding income tax expense/provision for adjusted income. In preparing the calculation, each adjustment to reported income is first analyzed to determine if the adjustment has an income tax consequence. The provision for taxes is then calculated based on the jurisdiction in which the adjusted items are incurred, multiplied by the respective statutory rates and offset by the increase or reversal of any valuation allowances commensurate with the non-GAAP measure of profitability.

(c) The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella.

(d) For the six months ended December 31, 2021, this primarily represents a net gain on the exchange of Series B Preferred Stock closed on October 20, 2021. For the six months ended December 31, 2020, this primarily represents the write-off of deferred financing fees related to the Wella sale and adjustments for pension curtailment gains.

(e) The total tax impact on adjustments in the prior period includes a $220.5 benefit recorded as the result of a tax rate differential on the deferred taxes recognized on the transfer of assets and liabilities, following the relocation of our main principal location from Geneva to Amsterdam on July 1, 2020.

The adjusted effective tax rate was 18.2% for the six months ended December 31, 2021 compared to 11.8% for the six months ended December 31, 2020. The differences were primarily due to the jurisdictional mix of income as well as a benefit of $18.8 in the current period recognized on the revaluation of our deferred tax assets due to a tax rate increase enacted in the Netherlands. In addition, the resolution of foreign uncertain tax positions having a greater proportional effect in the prior year.

DISCONTINUED OPERATIONS

As the sale of the Wella Business was completed on November 30, 2020, no net revenues or operating expenses from discontinued operations were recorded in the six months ended December 31, 2021. Net income from discontinued operations for the six months ended December 31, 2021 reflects certain purchase price working capital adjustments net of the related income tax impact. On December 22, 2021, we entered into an agreement with the KKR Bidco related to post-closing adjustments to the purchase consideration for the Wella Business. As part of this agreement, we may receive future contingent proceeds. Earning the contingent proceeds is based on the future recovery of certain tax credits of the Wella Business. See Note 3—Discontinued Operations in the notes to our Consolidated Financial Statements for additional information.

NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC.

Net income attributable to Coty Inc. was $487.4 in the six months ended December 31, 2021, as compared to net loss of $30.9 in the six months ended December 31, 2020. This increase in net income was primarily driven by higher operating income in the current year, a favorable adjustment of $518.3 related to the realized and unrealized gain in the Wella investment in the current year, and the loss on sale of the Wella Business, which was recorded in the comparative period, partially offset by a tax benefit of $220.5 in the first quarter of fiscal 2021 which was the result of a tax rate differential on the deferred taxes recognized on the transfer of assets and liabilities, following the relocation of our main principal location from Geneva to Amsterdam, and the net income recognized from discontinued operations in the prior fiscal year.

We believe that adjusted net income attributable to Coty Inc. provides an enhanced understanding of our performance. See “Overview—Non-GAAP Financial Measures.”

*(in millions)*

|  | Six Months Ended December 31, 2021 | 2020 | Change % |
| --- | ---: | ---: | --- |
| **Net income from Coty Inc. net of noncontrolling interests** | **487.4** | **(30.9)** | **\>100%** |
| Convertible Series B Preferred Stock dividends (a) | (191.7) | (43.9) | \<(100%) |
| **Reported net income (loss) attributable to Coty Inc.** | **295.7** | **(74.8)** | **\>100%** |
| % of net revenues | 10.0% | (2.1)% |  |
| Adjustments to reported operating income (b) | 175.6 | 339.1 | (48)% |
| Adjustments to Loss on Sale of Business (c) | (4.8) | 219.1 | \<(100%) |
| Change in fair value of investment in Wella Business (d) | (518.3) | — | N/A |
| Adjustment to other expense (e) | (2.8) | 8.2 | \<(100%) |
| Adjustments to noncontrolling interests (f) | (3.6) | (4.5) | 20% |
| Change in tax provision due to adjustments to reported net income attributable to Coty Inc. | 109.0 | (249.8) | \>100% |
| Adjustment for deemed Series B Preferred Stock dividends related to the First and Second Exchanges (a) (g) | 160.0 | — | N/A |
| **Adjusted net income attributable to Coty Inc.** | **210.8** | **237.3** | **(11)%** |
| % of net revenues | 7.1% | 6.7% |  |
| **Per Share Data** |  |  |  |
| Adjusted weighted-average common shares |  |  |  |
| Basic | 803.3 | 764.3 |  |
| Diluted (a) | 815.1 | 926.6 |  |
| Adjusted net income attributable to Coty Inc. per common share |  |  |  |
| Basic | $0.26 | $0.31 |  |
| Diluted (a) | $0.26 | $0.30 |  |

60

(a) Adjusted Diluted EPS is adjusted by the effect of dilutive securities, including awards under our equity compensation plans and the convertible Series B Preferred Stock. For the six months ended December 31, 2021, the convertible Series B Preferred Stock was antidilutive. Accordingly, we excluded the convertible Series B Preferred Stock from the diluted shares and did not adjust the earnings for the related dividend.

(b) See a description of adjustments under “Adjusted Operating Income (Loss) for Continuing Operations”

(c) This amount reflects certain purchase price working capital adjustments related to the sale of the Wella Business.

(d) The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella.

(e) For the six months ended December 31, 2021, this primarily represents a net gain on the exchange of Series B Preferred Stock closed on October 20, 2021. For the six months ended December 31, 2020, this primarily represents the write-off of deferred financing fees related to the Wella sale and adjustments for pension curtailment gains.

(f) The amounts represent the after-tax impact of the non-GAAP adjustments included in Net loss attributable to noncontrolling interests based on the relevant noncontrolling interest percentage in the Condensed Consolidated Statements of Operations.

(g) This adjustment represents the deemed dividend from the Second Exchange that closed on November 30, 2021 and the deemed dividend from the First Exchange that closed on October 20, 2021 (as defined in Note 16—Equity and Convertible Preferred Stock).

### FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

### Overview

Our primary sources of funds include cash expected to be generated from operations, borrowings from issuance of debt and lines of credit provided by banks and lenders in the U.S. and abroad.

Our cash flows are subject to seasonal variation throughout the year, including demands on cash made during our first fiscal quarter in anticipation of higher global sales during the second fiscal quarter and strong cash generation in the second fiscal quarter as a result of increased demand by retailers associated with the holiday season.

Our principal uses of cash are to fund planned operating expenditures, capital expenditures, business structure realignment expenditures, interest payments, acquisitions, dividends, share repurchases and any principal payments on debt. Working capital movements are influenced by the sourcing of materials related to the production of products. Cash and working capital management initiatives, including the phasing of vendor payments and factoring of trade receivables from time-to-time, may also impact the timing and amount of our operating cash flows.

During the six months ended December 31, 2021, we simplified our capital structure through a series of transactions with KKR Aggregator, as a result of which KKR Aggregator fully exited its ownership of Coty. Cumulatively, such transactions resulted in annual dividend savings of approximately $77.0. Refer to Note 16—Equity and Convertible Preferred Stock.

Due to the current status of Brazil's capital markets, we have withdrawn our previously announced filing with the Brazilian Securities and Exchange Commission, Comissão de Valores Mobiliários. Going forward, we will monitor Brazil's capital markets to assess the timing and feasibility of a potential public offering of a minority stake in its Brazilian operations.

#### Our response to the impact of COVID-19

In response to the ongoing risks presented by the COVID-19 pandemic, we continue to utilize a number of measures to bolster our liquidity position and provide additional financial flexibility. Such measures include actively aligning operating expenses to the current state of the business, initiatives to improve cash flow and hiring and travel restrictions. We have also reduced advertising and consumer promotion costs for sales channels heavily impacted by the pandemic. However, as certain markets have reopened, we have increased these expenditures to bolster key brands and product launches. We will continue to actively manage our working capital to support our liquidity needs.

Despite encouraging signs of recovery in the latter half of fiscal 2021 and continuing into the first quarter of fiscal 2022, the impact and duration of COVID-19 on our business continues to be uncertain. Further, inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. The impact on the current quarter was not significant, but we expect a more material headwind from inflation in the second half of the fiscal year. We intend to offset the incremental inflation impacts by increasing prices in selected markets. Currently, we are implementing mitigation strategies and price increases to offset these trends; however, such measures may not fully offset the impact to our operating performance. However, as a result of cash on hand and our plans to manage expenses, we believe we have sufficient liquidity and covenant headroom to meet our foreseeable business operating and recurring cash needs (including for debt service and capital expenditures). To address the potentially longer-lasting impacts of COVID-19, we have implemented a plan to reduce our cost base by the end of fiscal 2023, with additional plans for savings in fiscal 2024. This plan includes an adaptation of our supply network, organizational changes, renegotiation of purchasing and licensing agreements, as well as a reduction of certain discretionary expenses.

### Debt

We are in the process of deleveraging our company and improving the maturity mix of our debt, including through consideration of refinancing or redemption of a portion of our debt. Management expects to use any distributions from the Wella investment to pay down debt.

In the fourth quarter of fiscal 2021, we refinanced $900.0 of our dollar-denominated term loan debt and €700.0 million (approximately $833.3 as of June 30, 2021) of our euro-denominated term loan debt that were scheduled to mature in 2023 with new senior secured notes that mature in 2026. In the second quarter of fiscal 2022, we replaced our two existing classes of revolving commitments, having an aggregate principal amount of $2,750.0, with a single class of revolving commitments, having an aggregate principal amount of $2,000.0 due April 2025, and issued $500.0 of senior secured notes due January 2029. We used the net proceeds of these offerings to repay portions of the term loans outstanding under the existing credit facilities originally due April 2023 and to pay related premiums, fees and expenses thereto. See Note 12—Debt in the notes to our Condensed Consolidated Financial Statements for additional information on our debt arrangements and prior period credit agreements.

These activities improved our medium term liquidity. As noted above, our Convertible Series B Preferred stock was fully converted and exchanged as of December 31, 2021, which reduces our future commitment to preferred shareholders improving our ability to reduce our external debt. As we refinance our debt in order to extend maturing obligations, the applicable interest rates have been, and are likely to continue to be, higher than previous applicable interest rates, due in large part to prevailing macroeconomic conditions and our credit ratings at the time. Despite these higher interest rates, we expect that our interest expense will be favorably impacted by lower overall debt balances as we continue to deleverage.

### Factoring of Receivables

From time to time, we supplement the timing of our cash flows through the factoring of trade receivables. In this regard, we have entered into factoring arrangements with financial institutions.

The net amount utilized under the factoring facilities was $177.0 and $133.6 as of December 31, 2021 and June 30, 2021, respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to $597.9 and $392.6 during the six months ended December 31, 2021 and 2020, respectively.

### Cash Flows

| Condensed Consolidated Statements of Cash Flows Data: (in millions) | Six Months Ended December 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $734.7 | $472.7 |
| Net cash provided by investing activities | 74.5 | 2,714.1 |
| Net cash used in financing activities | (547.5) | (2,932.8) |

#### Net cash provided by operating activities

Net cash provided by operating activities was $734.7 and $472.7 for the six months ended December 31, 2021 and 2020, respectively. The increase in cash flows from operating activities of $262.0 was driven by a year over year increase in higher cash net income and positive impacts from changes in net working capital accounts. Cash net income was positively impacted by reductions in costs as a percentage of net revenues as well as higher net revenues year over year and was partially offset by the prior year positive impact from the collection of tax overpayments. Changes in Accounts payable year over year were the primary driver behind the overall net working capital improvement mainly due to the timing of payments that did not occur to the same extent in the current year and increases in current liabilities due to a higher level of current year advertising and consumer promotional spend. A decrease from changes in Inventories year over year partially offset the increases from Accounts payable and was primarily driven by the cash inflows from changes in inventory due to improvements in our inventory management and related forecasting of sales demand. Decreases from changes in Trade receivables, Prepaid expenses and other current assets, and Accrued expenses and other current liabilities also contributed to partially offsetting higher inflows year over year from net working capital driven by changes in Accounts payable.

#### Net cash provided by investing activities

Net cash provided by investing activities was $74.5 and $2,714.1 for the six months ended December 31, 2021 and 2020, respectively. The decrease in cash flows provided by investing activities of $2,639.6 year over year was primarily driven by lower year over year cash flows due to the prior year impact of the net cash proceeds of $2,386.2 from the sale of the Wella Business and $448.0 proceeds from the return of capital under Coty's equity investment whereby Coty initially retained a 40% stake in Wella. The current year increase in cash inflows of $124.4 from proceeds from the sale of long-term assets and the current year $34.0 receipt of contingent proceeds related to the Wella Business tax credits partially offset the lower cash inflows from investing activities year over year.

#### Net cash used in financing activities

Net cash used in financing activities during the six months ended December 31, 2021 and 2020 was $547.5 and $2,932.8, respectively. The decrease in cash used in financing activities of $2,385.3 is primarily driven by lower year over year outflows from long-term debt related activities of $2,781.0, which included higher repayments in the prior year for term loans, and net repayments associated with our available revolving credit facility resulting from the prior year use of proceeds from the sale of the Wella Business to pay down debt. Additionally, we received $500.0 of proceeds from the issuance of senior secured notes during the six months ended December 31, 2021. The main drivers partially offsetting the decrease in cash used in the current year to pay down debt, include the impact of the prior year proceeds of $227.2 from the issuance of Convertible Series B Preferred Stock in connection with the equity investment agreement with KKR Aggregator combined with the impact of current year cash outflows for dividend payments on Series B Preferred Stock of $49.2. Additionally, there were higher cash outflows for settlements of financing related foreign currency contracts of $63.4 and current year payments of $37.2 for deferred financing fees.

### Dividends

On April 29, 2020, our Board of Directors suspended the payment of dividends, in keeping with our 2018 Coty Credit Agreement, as amended. As we focus on preserving cash, we expect to suspend the payment of dividends until we reach a Net debt to Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of 4x. Any determination to pay dividends in the future will be at the discretion of our Board of Directors.

Dividends on the Convertible Series B Preferred Stock are payable in cash, or by increasing the amount of accrued dividends on Convertible Series B Preferred Stock, or any combination thereof, at the sole discretion of the Company. After the expiration of applicable restrictions under the 2018 Coty Credit Agreement, as amended, we began to pay dividends on the Convertible Series B Preferred Stock in cash for the period ended June 30, 2021, and we expect to continue to pay such dividends in cash on a quarterly basis, subject to the declaration thereof by our Board of Directors. Dividends accrued on the Convertible Series B Preferred Stock before April 1, 2021 have been declared and paid in October 2021. The terms of the Convertible Series B Preferred Stock restrict our ability to declare cash dividends on our common stock until all accrued dividends on the Convertible Series B Preferred Stock have been declared and paid in cash. On September 30, 2021, the Board of Directors declared a dividend on the Series B Preferred Stock of $5.9, of which $1.4 was paid.

For additional information on our dividends, see Note 16—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.

### Treasury Stock - Share Repurchase Program

For information on our Share Repurchase Program, see Note 16—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.

### Commitments and Contingencies

See Note 19—Mandatorily Redeemable Financial Interests and Redeemable Noncontrolling Interests in the notes to our Condensed Consolidated Financial Statements for information on our United Arab Emirates subsidiary and subsidiary in the Middle East.

### Legal Contingencies

For information on our litigation matters and Brazilian tax assessments, see Note 20—Commitments and Contingencies in the notes to our Condensed Consolidated Financial Statements. In relation to the appeal of our Brazilian tax assessments, we have entered into surety bonds of R$135.2 million (approximately $24.3) as of December 31, 2021.

### Off-Balance Sheet Arrangements

We had undrawn letters of credit of $14.3 and $15.0 and bank guarantees of $21.3 and $31.2 as of December 31, 2021 and June 30, 2021, respectively.

### Contractual Obligations

See Note 11—Leases and Note 12—Debt for updates to our contractual obligations resulting from the Wella Transaction.

Our principal contractual obligations and commitments as of December 31, 2021 are summarized in Item 7 - “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations and Commitments,” of our Fiscal 2021 Form 10-K, except as noted above. For the six months ended December 31, 2021, there have been no material changes in our contractual obligations outside the ordinary course of business.

### Critical Accounting Policies

We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our Condensed Consolidated Financial Statements:

- Revenue Recognition;
- Equity Investments;
- Goodwill, Other Intangible Assets and Long-Lived Assets;
- Business Combinations;
- Inventory; and
- Income Taxes.

Below are disclosures regarding our equity investments. As of December 31, 2021, there have been no other material changes to the items disclosed as critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II—Item 7 of our Fiscal 2021 Form 10-K.

#### Equity Investments

We elected the fair value option to account for our investment in the Wella Business to align with the our strategy for this investment. The fair value is updated on a quarterly basis. The investments are classified within Level 3 in the fair value hierarchy because we estimate the fair value of the investments using a combination of the income approach, the market approach and private transactions, when applicable. The weighting of the approaches could have a significant impact on the valuation of the investment.

On October 20, 2021, the Company completed the sale of a 9.4% stake in Wella to KKR in exchange for the redemption of 290,465 shares of KKR's Series B Convertible Preferred Stock shares in Coty and a portion of unpaid dividends (the "First Exchange"). On November 30, 2021, Coty completed the sale of an additional 4.7% stake in Wella to KKR in exchange for the redemption of KKR's remaining convertible preferred shares in Coty (the "Second Exchange"). The First Exchange and Second Exchange were also included and weighted for the valuation purposes.

Changes in the fair value of equity investments under the fair value option are recorded in Other (income) expense, net within the Condensed Consolidated Statements of Operations (see Note 9—Equity Investments and Note 16—Equity and Convertible Preferred Stock).

## Market risk

As filed, 335 characters.

See Note 15—Derivative Instruments for updates to our foreign currency risk management and interest rate risk management following the Wella Transaction. There have been no material changes in market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Fiscal 2021 Form 10-K.

## Controls and procedures

As filed, 3,534 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer (the “CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(f) of the Exchange Act during the second fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving our objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

## Risk factors

As filed, 196 characters.

We have disclosed information about the risk factors that could adversely affect our business in Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal 2021.

Filed Feb 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001024305-22-000009. Last ingested by Listed: Nov 5, 2026, 18:58 ET. No prices; not investment advice.