# Coty Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Coty Inc.](/companies/coty.md) (CIK 1024305)
- Form: 10-Q
- Filed: 2022-11-08
- Accepted by EDGAR: Nov 8, 2022, 16:02 ET
- Period: 2022-09-30
- Accession: 0001024305-22-000083
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1024305/000102430522000083/coty-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1024305/000102430522000083/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $1.39bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $501.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $888.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $670.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $171.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $57.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $69.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $128.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 882,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-07-01 to 2022-09-30 | $163.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-07-01 to 2022-09-30 | $75.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2022-07-01 to 2022-09-30 | $3.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2022-09-30 | $215.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $1.83bn | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $11.95bn | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $2.61bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $8.49bn | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $4.31bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-09-30 | $32.7m | us-gaap:DebtCurrent |
| Short-term borrowings | at 2022-09-30 | $0 | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2022-09-30 | $3.05bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 75,249 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, 2022 (“Fiscal 2022 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, strategic planning, targets 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 wind down of the Company’s operations in Russia (including timing and expected impact), 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), expectations and/or plans with respect to joint ventures (including Wella and the timing and size of any related distribution or return of capital), 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 ongoing transformation agenda (including operational and organizational structure changes, operational execution and simplification initiatives, fixed cost reductions, and supply chain changes), the impact, cost, timing and implementation of e-commerce and digital initiatives, expected impact, cost, timing and implementation of sustainability initiatives (including progress, plans and goals), the impact of COVID-19, the expected impact of geopolitical risks including the ongoing war in Ukraine on our business operations, sales outlook and strategy, the expected impact of global supply chain challenges and/or inflationary pressures (including as a result of COVID-19 and/or the war in Ukraine) and expectations regarding future service levels, 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:

- our ability to successfully implement our multi-year transformation agenda and 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 stabilizing our consumer beauty brands through leading innovation and improved execution, accelerating our prestige fragrance brands and ongoing expansion into prestige cosmetics, building a comprehensive skincare portfolio, enhancing our e-commerce and direct-to-consumer (“DTC”) capabilities, expanding our presence in China through prestige products and select consumer beauty brands, and establishing Coty as an industry leader in sustainability) 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, our transformation agenda, our global business strategies, 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 or new products related to Orveda;
- changes in the demand for our products due to declining or depressed global or regional economic conditions, and declines in consumer confidence or spending, whether related to the economy (such as austerity measures, tax increases, high fuel costs, or higher unemployment), wars, natural or other disasters, weather, pandemics, security concerns, terrorist attacks or other factors;
- 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 the war in Ukraine and any escalation or expansion thereof, Brexit (and related business or market disruption), recent elections in Brazil, the current U.S. administration and mid-term elections, 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, and recent and future changes in sanctions regulations including in connection with the war in Ukraine and any escalation or expansion thereof;
- 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 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 joint ventures and strategic partnerships;
- our ability to manage seasonal factors and other variability and to anticipate future business trends and needs;
- 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, 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, and the ability to successfully implement measures to respond to such impacts;
- disruptions in the availability and distribution of raw materials and components needed to manufacture our products;
- disruptions in operations, sales and in other areas, including due to disruptions in our supply chain, restructurings and other business alignment activities, manufacturing or information technology systems, labor disputes, extreme weather and natural disasters, impact from COVID-19 or similar global public health events, the outbreak of war or hostilities (including the war in Ukraine and any escalation or expansion thereof), the 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;
- our ability to adapt our business to address climate change concerns and to respond to increasing governmental and regulatory measures relating to environmental, social and governance matters, including expanding mandatory and voluntary reporting, diligence and disclosure, as well as new taxes (including on energy and plastic), and the impact of such measures on our costs, business operations and strategy;
- 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 similar state laws, the Brazil General Data Protection Law, and the China Data Security Law and Personal Information 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 agenda 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 2023” refer to the fiscal year ending June 30, 2023. 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. As we transform the Company, we continue to make progress on our strategic priorities, including stabilizing and growing 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 Direct-to-Consumer ("DTC") capabilities, expanding our presence in China through Prestige products and select Consumer Beauty brands, and establishing Coty as an industry leader in sustainability.

We remain attentive to economic and geopolitical conditions that may materially impact our business. We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adopting to changing circumstances. Such conditions have or may have global implications which may impact the future performance of our business in unpredictable ways.

Our operations outside of the United States account for a significant portion of our revenues and expenses. As a result, a substantial portion of our total revenue and expenses are denominated in currencies other than the U.S. dollar. Recently, exchange rates between these currencies and the U.S. dollar have fluctuated significantly and may continue to do so in the future. Fluctuations in foreign exchange rates may have a significant impact our operating results. During the first quarter, fluctuations in the U.S. dollar relative to certain other foreign currencies – such as the euro and British pound – reduced our reported revenue and expenses, principally related to cost of sales, controllable fixed costs, and advertising and consumer promotional costs. Refer to Part I, Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for fiscal 2022, for a discussion of these factors and other risks.

We expect that our net revenue for fiscal year 2023 will grow in the mid-to high single digits versus the prior year, excluding the impact of foreign exchange, after adjusting for the impact of the Russia exit.

#### Global Supply Chain Challenges

While our revenues and overall product sales volume increased in the first quarter of fiscal 2023 compared to the prior year period, we continue to experience global supply chain challenges resulting from industry-wide component shortages and transportation delays. These challenges have negatively impacted order fill rates across our product categories, including categories where there has been demand growth, particularly in the North America and certain European countries.

Fragrances brands within our Prestige segment and color cosmetics within our Consumer Beauty segment have been the most impacted by shipment and supplier components constraints.

We continue to take steps to improve order fill rates and mitigate the impact of these constraints by working closely with our suppliers to ensure the availability of components such as glass and metal. However, we expect these challenges to continue into the remainder of the fiscal year 2023.

#### Inflation

Inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. We continued to experience the impact of inflation on material, logistical and other costs during the first quarter. The combination of our strategy to premiumize the portfolio, cost savings programs, and recent pricing actions are enabling us to offset inflationary pressure on costs. We currently anticipate the impact of inflation to continue into the second quarter and second half fiscal 2023. We will continue to implement 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.

#### Russia-Ukraine War

We continue to wind down the operations of our Russian subsidiary. In connection with our wind down, we liquidated a portion of our remaining inventory in Russia, in accordance with applicable sanctions, during the first quarter. We anticipate incurring up to $9.0 of additional costs through completion of the wind down, and future net cash costs of $30.0 to $35.0, which will be funded by our Russian subsidiary. Additionally, management anticipates derecognizing the cumulative translation adjustment balance pertaining to the Russian subsidiary. The amount of future costs, including cash costs, will be subject to various factors, such as additional government regulation and the resolution of legal contingencies.

#### 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.
- Costs related to market exit: We have excluded the impact of direct incremental costs related to our decision to wind down our business operations in Russia. We believe that these direct and incremental costs are inconsistent and infrequent in nature. Consequently, 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.
- Gains on sale of real estate: We have excluded the impact of Gains on sale of real estate as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of the sale. 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 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. Such transactions do not reflect our operating results and we have excluded the impact as 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.
- 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 noncontrolling 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 14—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.

### THREE MONTHS ENDED SEPTEMBER 30, 2022 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2021

NET REVENUES

In the three months ended September 30, 2022, net revenues increased 1%, or $18.3, to $1,390.0 from $1,371.7 in the three months ended September 30, 2021, reflecting a positive price and mix impact of 6% and an increase in unit volume of 2%, partially offset by a negative foreign currency exchange translation impact of 7%. The overall increase in net revenues reflects growth in our Consumer Beauty segment due to positive performance across the body care, skincare, and color cosmetics categories. Net revenues in our Prestige segment remained relatively flat, benefiting from the positive performance in the prestige fragrance category due to the continued success of fragrance brands such as *Gucci, Burberry,* and *Calvin Klein*. The prestige makeup category, negatively impacted by lockdowns in China, experienced a decline in net revenues. The overall increase in net revenues reflects the successful implementation of global price increases across all product categories, our product premiumization strategy, and positive overall market trends. Additionally, there was growth in travel retail sales due to increased leisure travel in the period. E-commerce sales remained relatively flat, led by growth in Europe partially offset by declines across the US, and the Asia Pacific region partially due to lockdowns in China. Despite overall growth, foreign exchange headwinds negatively impacted net revenues, primarily affecting the euro and British pound.

The overall change in net revenues was impacted by our ongoing exit from Russia, resulting in an approximate 2% negative net impact on our net revenues in the current quarter, including an approximate 2% negative net impact on our Prestige business net revenues.

### Net Revenues by Segment

*(in millions)*

| NET REVENUES | Three Months Ended September 30, 2022 | 2021 | Change % |
| --- | ---: | ---: | ---: |
| Prestige | $863.4 | $870.7 | (1)% |
| Consumer Beauty | 526.6 | 501.0 | 5% |
| **Total** | **$1,390.0** | **$1,371.7** | **1%** |

#### Prestige

In the three months ended September 30, 2022, net revenues from the Prestige segment decreased 1%, or $7.3 to $863.4 compared to $870.7 in the three months ended September 30, 2021, reflecting a negative foreign currency exchange translation impact of 8% and a decrease in unit volume of 3%, partially offset by a positive price and mix impact of 10%. This decrease in net revenues primarily reflects:

(i) lower net revenues related to *Tiffany* due to less innovation in the current fiscal period, the impact of the lockdowns in China and our wind down of Russia;

(ii) lower net revenues for the *Lacoste* brand in the current quarter, which was primarily due to our wind down of Russia; and

(iii) lower net revenues in the prestige makeup category impacted by a decline in *Gucci* travel retail sales in the Asia Pacific region as a result of the lockdowns in China.

These decreases in net revenues were offset by:

(i) the continued success and growth of prestige fragrances, specifically *Gucci Flora, Burberry Hero and Her, and Chloe Atelier des Fleurs;* and

(ii) an increase in net revenues due to positive pricing impact as a result of global price increases and an overall premiumization strategy.

#### Consumer Beauty

In the three months ended September 30, 2022, net revenues from the Consumer Beauty segment increased 5%, or $25.6, to $526.6 from $501.0 in the three months ended September 30, 2021, reflecting a positive price and mix impact of 9% and an increase in unit volume of 3%, partially offset by a negative foreign currency exchange translation impact of 7%. The increase in net revenues primarily reflects:

(i) an increase in net revenues from body care brands led by *Adidas* and *Monange*. Both brands had increases in net revenue due to positive pricing impact and product mix. Additionally, the phasing for upcoming holiday sales and early stages of the re-launch of the *Adidas* brand and the re-launch of the *Monange* brand with increased media spend in Brazil contributed to the increase in net revenues;

(ii) an increase in net revenues for certain key color cosmetics brands, such as *CoverGirl, Max Factor and Bourjois,* due to positive category trends; and

(iii) an increase in net revenues due to price increases across the Consumer Beauty product portfolio.

These increases were partially offset by a decrease in net revenues for *Sally Hansen* products, resulting from the continued decline for demand for at-home nail care compared to the prior year quarter where COVID-19 restrictions had resulted in fewer nail salon visits and positively impacted the nail category and the brand's net revenue in the prior year quarter.

COST OF SALES

In the three months ended September 30, 2022, cost of sales decreased 1%, or $3.5, to $501.3 from $504.8 in the three months ended September 30, 2021. Cost of sales as a percentage of net revenues decreased to 36.1% in the three months ended September 30, 2022 from 36.8% in the three months ended September 30, 2021, resulting in a gross margin increase of approximately 70 basis points, primarily reflecting:

(i) approximately 100 basis points related to positive price impact across our product portfolio;

(ii) approximately 60 basis points due to lower returns and markdown costs for the Consumer Beauty division as a result of higher sell through compared to the prior year period and lower returns volume for products in the Prestige division primarily in the US and Latin American markets;

(iii) approximately 50 basis points related to a favorable impact on variable costs due to increased manufacturing efficiencies, improvements in productivity as well as procurement and material cost optimization; and

(iv) approximately 20 basis points related to designer license fees due to a favorable impact associated with a higher portion of Consumer Beauty sales in the current period.

These increases were partially offset by:

(i) approximately 60 basis points related to product mix impact due to a higher portion of consolidated sales being from the Consumer Beauty division;

(ii) approximately 50 basis points related to freight; and

(iii) approximately 50 basis points in increased excess and obsolescence costs.

Included in the above is the negative impact of inflation on material and freight costs of approximately 180 basis points.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In the three months ended September 30, 2022, selling, general and administrative expenses decreased 14%, or $105.6, to $670.7 from $776.3 in the three months ended September 30, 2021. Selling, general and administrative expenses as a percentage of net revenues decreased to 48.3% in the three months ended September 30, 2022 from 56.6% in the three months ended September 30, 2021, or approximately 830 basis points. This decrease primarily reflects:

(i) 570 basis points due to a decrease in stock-based compensation cost primarily related to a reduction in expense recognized in connection with a prior year's grant made to the CEO;

(ii) 140 basis points due to decrease in advertising and consumer promotional costs as a percentage of net revenue primarily related to a reduction of marketing costs, principally for non-working media, in the first quarter due to the timing of certain campaigns for the Prestige division;

(iii) 40 basis points due to a decrease in bad debt expense as a percentage of net revenues;

(iv) 30 basis points due to lower logistics costs as a percentage of net revenues; and

(v) 20 basis points due to favorable transactional impact from our exposure to foreign currency exchange fluctuations;

(vi) 20 basis points for other operating income (expense) as a percentage of net revenue primarily related to an accrual reversal associated with the resolution of a contingency; and

(vii) 10 basis points due to lower administrative costs as a percentage of net revenues due to a decrease in compensation related to a reduction in employee headcount.

OPERATING INCOME (LOSS)

In the three months ended September 30, 2022, operating income was $171.9 compared to $17.2 in the three months ended September 30, 2021. Operating income as a percentage of net revenues, increased to 12.4% in the three months ended September 30, 2022 as compared to an operating income as a percentage of net revenues of 1.3% in the three months ended September 30, 2021. The improved operating margin is primarily driven by lower stock-based compensation expense, lower advertising and consumer promotional costs as a percentage of revenues, lower restructuring costs, lower amortization expense, lower cost of sales as a percentage of net revenues and lower acquisition and divestiture related costs.

### Operating Income (Loss) by Segment

*(in millions)*

| Operating income (loss) | Three Months Ended September 30, 2022 | 2021 | Change % |
| --- | ---: | ---: | ---: |
| Prestige | $170.3 | $132.1 | 29% |
| Consumer Beauty | 32.0 | 11.4 | \>100% |
| Corporate | (30.4) | (126.3) | 76% |
| **Total** | **$171.9** | **$17.2** | **\>100%** |

#### Prestige

In the three months ended September 30, 2022, operating income for Prestige was $170.3 compared to income of $132.1 in the three months ended September 30, 2021. Operating margin increased to 19.7% of net revenues in the three months ended September 30, 2022 as compared to 15.2% in the three months ended September 30, 2021, driven by lower cost of goods sold as a percentage of net revenues, lower advertising and consumer promotional costs as a percentage of net revenues and lower amortization expense.

#### Consumer Beauty

In the three months ended September 30, 2022, operating income for Consumer Beauty was $32.0 compared to income of $11.4 in the three months ended September 30, 2021. Operating margin increased to 6.1% of net revenues in the three months ended September 30, 2022 as compared to 2.3% in the three months ended September 30, 2021, driven by lower advertising and consumer promotional costs as a percentage of net revenues and lower fixed costs, partially offset by an increase in cost of goods sold as a percentage of net revenues.

#### 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 September 30, 2022, the operating loss for Corporate was $30.4 compared to a loss of $126.3 in the three months ended September 30, 2021, as described under “Adjusted Operating Income (Loss) for Continuing Operations” below. The decrease in the operating loss for Corporate was primarily driven by a decrease in share-based compensation expense, restructuring costs and acquisition and divestiture related costs.

### 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 September 30, 2022 Reported (GAAP) | Adjustments (a) | Adjusted (Non-GAAP) |
| --- | ---: | ---: | ---: |
| Prestige | $170.3 | $37.0 | $207.3 |
| Consumer Beauty | 32.0 | 10.3 | 42.3 |
| Corporate | (30.4) | 30.4 | — |
| **Total** | **$171.9** | **$77.7** | **$249.6** |
|  | **Three Months Ended September 30, 2021** |  |  |
| **(in millions)** | **Reported (GAAP)** | **Adjustments (a)** | **Adjusted (Non-GAAP)** |
| **Operating income (loss)** |  |  |  |
| Prestige | $132.1 | $44.9 | $177.0 |
| Consumer Beauty | 11.4 | 12.1 | 23.5 |
| Corporate | (126.3) | 126.3 | — |
| **Total** | **$17.2** | **$183.3** | **$200.5** |

(a) See a reconciliation of reported operating income to adjusted operating income and a description of the adjustments under “Adjusted Operating Income 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 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.” Reconciliation of reported operating income to adjusted operating income is presented below:

*(in millions)*

|  | Three Months Ended September 30, 2022 | 2021 | Change % |
| --- | ---: | ---: | ---: |
| **Reported operating income** | **$171.9** | **$17.2** | **\>100%** |
| % of net revenues | 12.4% | 1.3% |  |
| Amortization expense | 47.3 | 57.0 | (17)% |
| Restructuring and other business realignment costs | (0.8) | 15.1 | \<(100%) |
| Stock-based compensation | 31.1 | 108.2 | (71)% |
| Costs related to acquisition and divestiture activities | — | 4.0 | (100)% |
| Gain on sale of real estate | (1.0) | (1.0) | —% |
| Costs related to market exit | 1.1 | — | N/A |
| Total adjustments to reported operating income | $77.7 | $183.3 | (58)% |
| **Adjusted operating income** | **$249.6** | **$200.5** | **24%** |
| % of net revenues | 18.0% | 14.6% |  |
| Adjusted depreciation | 58.3 | 78.0 | (25)% |
| **Adjusted EBITDA** | **$307.9** | **$278.5** | 11% |
| % of net revenues | 22.2% | 20.3% |  |

In the three months ended September 30, 2022, adjusted operating income increased $49.1 to $249.6 from $200.5 in the three months ended September 30, 2021. Adjusted operating margin increased to 18.0% of net revenues in the three months ended September 30, 2022 from 14.6% in the three months ended September 30, 2021. In the three months ended September 30, 2022, adjusted EBITDA increased $29.4 to $307.9 from $278.5 in the three months ended September 30, 2021. Adjusted EBITDA margin increased to 22.2% of net revenues in the three months ended September 30, 2022 from 20.3% in the three months ended September 30, 2021, primarily driven by lower advertising and consumer promotional costs as a percentage of revenues and lower cost of sales as a percentage of net revenues.

#### Amortization Expense

In the three months ended September 30, 2022, amortization expense decreased to $47.3 from $57.0 in the three months ended September 30, 2021. In the three months ended September 30, 2022, amortization expense of $37.0 and $10.3 was reported in the Prestige and Consumer Beauty segments, respectively. In the three months ended September 30, 2021, amortization expense of $44.9 and $12.1 was reported in the Prestige and Consumer Beauty segments, respectively. The decrease was primarily driven by certain license agreements and product formulations, which were fully amortized in the prior year.

#### 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 $483.0 of cash costs life-to-date as of September 30, 2022, which have been recorded in Corporate.

In the three months ended September 30, 2022, we incurred a credit in restructuring and other business structure realignment costs of $0.8, as follows:

- We incurred a credit in restructuring costs of $1.2 primarily related to the Transformation Plan changes in estimates, included in the Condensed Consolidated Statements of Operations; and
- We incurred business structure realignment costs of $0.4 primarily related to the Transformation Plan and certain other programs. This amount includes $(0.5) reported in Selling, general and administrative expenses, and $0.9 reported in Cost of sales in the Condensed Consolidated Statement of Operations.

In the three months ended September 30, 2021, we incurred restructuring and other business structure realignment costs of $15.1 as follows:

- We incurred restructuring costs of $12.4 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 $2.7 primarily related to the Transformation Plan and certain other programs. This amount includes nil reported in Selling, general and administrative expenses, and $2.7 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 September 30, 2022, stock-based compensation was $31.1 as compared with $108.2 in the three months ended September 30, 2021. The decrease in stock-based compensation is primarily related to a reduction in expense recognized in connection with a prior year's grant made to the CEO.

In the three months ended September 30, 2022 and 2021, all costs related to stock-based compensation were reported in Corporate.

#### Acquisition and Divestiture Activities

In the three months ended September 30, 2022 we incurred no costs related to acquisition and divestiture activities.

In the three months ended September 30, 2021, we incurred $4.0 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.

#### Adjusted Depreciation Expense

In the three months ended September 30, 2022, adjusted depreciation expense of $27.6 and $30.7 was reported in the Prestige and Consumer Beauty segments, respectively. In the three months ended September 30, 2021, adjusted depreciation expense of $38.0 and $40.0 was reported in the Prestige and Consumer Beauty segments, respectively.

INTEREST EXPENSE, NET

In the three months ended September 30, 2022, net interest expense was $65.9 as compared with $59.8 in the three months ended September 30, 2021. This increase is primarily due to a higher average interest rate despite lower debt balances in the current period.

OTHER INCOME

In the three months ended September 30, 2022, other income was $(98.2) as compared with $(386.1) in the three months ended September 30, 2021. This decrease in income is primarily due to a less favorable fair value adjustment related to our investment in the Wella Company compared to the prior period, in addition to unfavorable changes in the fair value adjustments for our forward repurchase contracts.

INCOME TAXES

The effective income tax rate for the three months ended September 30, 2022 and 2021 was 34.1% and 33.4%, respectively. The change in the effective tax rate for the three months ended September 30, 2022, as compared with the three months ended September 30, 2021, is primarily due to larger fair value gains related to the investment in the Wella business recorded in the prior period.

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 Income Before Income Taxes to Adjusted Income Before Income Taxes and Effective Tax Rates:

*(in millions)*

|  | Three Months Ended September 30, 2022 Income Before Income Taxes | Provision for Income Taxes | Effective Tax Rate | Three Months Ended September 30, 2021 Income Before Income Taxes | Provision for Income Taxes | Effective Tax Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported income before income taxes** | **$204.2** | **$69.7** | **34.1%** | **$343.5** | **$114.6** | **33.4%** |
| Adjustments to reported operating income (a) | 77.7 |  |  | 183.3 |  |  |
| Change in fair value of investment in Wella Business (c) | (135.0) |  |  | (390.0) |  |  |
| Other adjustments (d) | 0.2 |  |  | 0.2 |  |  |
| Total Adjustments (b) | (57.1) | (26.2) |  | (206.5) | (74.8) |  |
| **Adjusted income before income taxes** | **$147.1** | **$43.5** | **29.6%** | **$137.0** | **$39.8** | **29.1%** |

(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 three months ended September 30, 2022 and 2021, this primarily represents adjustments for equity loss from KKW.

The adjusted effective tax rate was 29.6% for the three months ended September 30, 2022 compared to 29.1% for the three months ended September 30, 2021. The differences were primarily due to the resolution of foreign uncertain tax positions in the prior period.

NET INCOME ATTRIBUTABLE TO COTY INC.

Net income attributable to Coty Inc. was $128.6 in the three months ended September 30, 2022 as compared to an income of $226.0 in the three months ended September 30, 2021. The decrease in the income is primarily driven by the lower unrealized gain in the Wella investment, partially offset by higher operating income and decrease in tax provision in the current period.

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)*

|  | Three Months Ended September 30, 2022 | 2021 | Change % |
| --- | ---: | ---: | ---: |
| **Net income from Coty Inc. net of noncontrolling interests** | **$128.6** | **$226.0** | **(43)%** |
| Convertible Series B Preferred Stock dividends (a) | (3.3) | (123.0) | 97% |
| **Reported net income attributable to Coty Inc.** | **$125.3** | **$103.0** | **22%** |
| % of net revenues | 9.0% | 7.5% |  |
| Adjustments to reported operating income (b) | 77.7 | 183.3 | (58)% |
| Change in fair value of investment in Wella Company (c) | (135.0) | (390.0) | 65% |
| Adjustment to other expense (d) | 0.2 | 0.2 | —% |
| Adjustments to noncontrolling interests (e) | (1.7) | (1.8) | 6% |
| Change in tax provision due to adjustments to reported net income attributable to Coty Inc. | 26.2 | 74.8 | (65)% |
| Adjustment for deemed Series B Preferred Stock dividends related to the First and Second Exchanges (f) | — | 93.6 | (100)% |
| **Adjusted net income attributable to Coty Inc.** | **$92.7** | **$63.1** | **47%** |
| % of net revenues | 6.7% | 4.6% |  |
| **Per Share Data** |  |  |  |
| Adjusted weighted-average common shares |  |  |  |
| Basic | 842.0 | 777.6 |  |
| Diluted (a) | 858.5 | 787.7 |  |
| Adjusted net income attributable to Coty Inc. per common share |  |  |  |
| Basic | $0.11 | $0.08 |  |
| Diluted (a) | $0.11 | $0.08 |  |

(a) Adjusted Diluted EPS is adjusted by the effect of dilutive securities. For the three months ended September 30, 2022, convertible Series B Preferred Stock (23.7 million weighted average dilutive shares were excluded) and the Forward Repurchase Contracts (3.1 million weighted average dilutive shares were excluded) were antidilutive. Accordingly, we excluded these shares from the diluted shares and did not adjust the earnings for the related dividend ($3.3) and change in fair value ($27.7). For the three months ended September 30, 2021 the convertible Series B Preferred Stock was antidilutive. Accordingly, we excluded the convertible Series B Preferred Stock form the diluted shares and did not adjust the earnings for the related dividend.

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

(c) For the three months ended September 30, 2021, the amount represents the unrealized (gain) loss recognized for the change in fair value of the investment in Wella.

(d) For the three months ended September 30, 2022 and 2021, this primarily represents the loss from equity investment in KKW.

(e) The amounts represent the after-tax impact of the non-GAAP adjustments included in net income 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 Exchange Agreement on September 30, 2021. The deemed dividend is the result of carrying the Convertible Series B Preferred Stock at fair value.

### 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.

We continue to wind down the operations of our Russian subsidiary. We anticipate incurring up to $9.0 of additional costs through completion of the wind down, and future net cash costs of $30.0 to $35.0, which will be funded by our Russian subsidiary. The amount of future costs, including cash costs, will be subject to various factors, such as additional government regulation and the resolution of legal contingencies.

### Debt

See Note 10—Debt in the notes to our Condensed Consolidated Financial Statements for additional information on our debt arrangements and prior period credit agreements.

### 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 $177.8 and $179.3 as of September 30, 2022 and June 30, 2022, respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to $346.0 and $264.2 during the three months ended September 30, 2022 and 2021, respectively.

### Cash Flows

| Condensed Consolidated Statements of Cash Flows Data: (in millions) | Three Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $163.2 | $285.7 |
| Net cash used in investing activities | (75.0) | (45.0) |
| Net cash used in financing activities | (87.8) | (122.7) |

#### Net cash provided by operating activities

Net cash provided by operating activities was $163.2 and $285.7 for the three months ended September 30, 2022 and 2021, respectively. The decrease in cash provided by operating activities of $122.5 was primarily driven by higher net outflows from changes throughout working capital accounts, which were partially offset by an increase in cash related net income during the first three months of the current fiscal year. Changes in accrued expenses and other current liabilities were the main driver of the increase in outflows from working capital accounts, which was primarily due to timing of payments and accruals for restructuring and sales related activities. Changes in cash related net income reflects higher net revenues and lower costs as a percentage of net revenues year over.

#### Net cash used in investing activities

Net cash used in investing activities was $75.0 and $45.0 for the three months ended September 30, 2022 and 2021, respectively. The increase in cash used in investing activities of $30.0 was due to the timing of payments and level of capital expenditure projects.

#### Net cash used in financing activities

Net cash used in financing activities during the three months ended September 30, 2022 and 2021 was $87.8 and $122.7, respectively. The decrease in cash used in financing activities of $34.9 is primarily driven by is driven by net proceeds from borrowings on revolving credit facilities in the current year compared to net repayments in the prior year as well as higher payments in the prior year for accrued and incurred debt issuance costs and prior year purchase of the remaining mandatorily redeemable noncontrolling interest. Higher cash outflows from realized losses on financing foreign currency contracts was the primary offset to the overall year over year decrease in cash used in financing activities.

### 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 2x. 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. During the three months ended September 30, 2022 and 2021, the Board of Directors declared dividends on the Series B Preferred Stock of $3.3 and $22.7, respectively, of which $0.0 and $3.5, respectively, were paid. Additionally, we paid previously accrued dividends that were outstanding as of June 30, 2022, totaling $3.3.

For additional information on our dividends, see Note 14—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 14—Equity and Convertible Preferred Stock in the notes to our Condensed Consolidated Financial Statements.

### Commitments and Contingencies

See Note 17—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 18—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 $25.0) as of September 30, 2022.

### Off-Balance Sheet Arrangements

We had undrawn letters of credit of $13.6 and $14.3 and bank guarantees of $16.1 and $17.2 as of September 30, 2022 and June 30, 2022, respectively.

### Contractual Obligations

Our principal contractual obligations and commitments as of September 30, 2022 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 2022 Form 10-K. For the three months ended September 30, 2022, 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.

As of September 30, 2022, there have been no 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 2022 Form 10-K.

## Market risk

As filed, 303 characters.

See Note 13—Derivative Instruments for updates to our foreign currency risk management and interest rate risk management. 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 2022 Form 10-K.

## Controls and procedures

As filed, 3,535 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 September 30, 2022. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, 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 first 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 2022.

Filed Nov 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001024305-22-000083. Last ingested by Listed: Nov 5, 2026, 18:58 ET. No prices; not investment advice.