COTY INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 Consolidated Financial Statements and related notes included elsewhere in this document. 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. The following discussion contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” for a discussion on the uncertainties, risks and assumptions associated with these statements as well as any updates to such discussion as may be included in subsequent reports we file with the SEC. Actual results may differ materially and adversely from those contained in any forward-looking statements. The following discussion 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. OVERVIEW We are one of the world’s largest beauty companies with a portfolio of iconic brands across fragrance, color cosmetics, and skin and body care. We serve consumers around the world, selling prestige and mass market products in approximately 125 countries and territories. Our brands empower people to express themselves freely, creating their own visions of beauty; and we are committed to making a positive impact on the planet. Over the past few years we have been implementing a comprehensive transformation agenda (the “Transformation Plan”), As we execute this multi-year transformation, we have been focusing on our core go-to-market competencies, simplifying our capital structure and deleveraging our balance sheet. 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 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 fiscal 2022, we completed certain transactions to simplify our capital structure resulting in annual dividend savings. We also received shareholder distributions from our equity investment in Wella, which we used to repay debt. We expect that our reported net revenues for fiscal year 2023 will grow in the mid-single digits, excluding the impact of foreign exchange. We remain attentive to economic and geopolitical conditions that may materially impact our business and the implementation of our strategic priorities. We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adapting to changing circumstances. Such conditions – whether resulting from the Russia-Ukraine War, inflation, the COVID-19 pandemic or any other issues – have or may have global implications which may impact the future performance of our business in unpredictable ways. In addition, supply chain constraints may impact the availability of raw materials and services (such as transportation) that we need to manufacture and distribute our products which may negatively impact our ability to meet customer demands timely, thereby impacting future profitability. Russia-Ukraine War In February of 2022, Russia invaded Ukraine and is still engaged in active armed conflict against the country. As a result, governments of the United States, the European Union, and other countries have enacted additional sanctions against Russia and Russian interests. Our operations in Russia, including local Travel Retail, accounted for approximately 3% of consolidated net sales in fiscal 2021. We do not operate any stores, sales counters, e-commerce sites or industrial activities in Russia. We do not have any operations in Ukraine. During April 2022, we announced our Board's decision to wind down the operations of our Russian subsidiary as a result of the war and the related sanctions. We plan to liquidate our remaining inventory in Russia, in accordance with applicable sanctions, over the next six months as part of the wind down. During fiscal 2022, we recognized total pre-tax charges of $83.6 associated with our exit of Russia, which primarily relate to the net realizable value of assets associated with the Russian business. These charges consisted of: $45.5 in Selling, general and administrative expenses, primarily related to the write-down of working capital, long-term assets, as well as contract termination charges, contingent liabilities and legal costs; $31.4 in Asset impairment charges related to the impairment of indefinite-lived intangibles; $6.3 in Restructuring costs related to employee severances; and $0.4 in Cost of sales related to inventory write-downs. We incurred $24.1 of income tax charges associated with our decision to exit Russia, in fiscal 2022. We anticipate incurring up to $10.0 of additional costs through completion of the wind down, and future net cash costs of $40.0 to 45.0 which will be funded by our Russian subsidiary. Additionally, management anticipates derecognizing the 30 cumulative translation adjustment balance pertaining to the Russian subsidiary. The wind down process of the Russian subsidiary is at an early stage and 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. We will continue to monitor events related to the Russia-Ukraine War and any impacts to our global business resulting from increased inflation, supply chain constraints, foreign currency risk and other factors. However, future impacts to our net sales, earnings and cash flows resulting from negative economic or geopolitical events in neighboring and other territories in which we operate, is currently unknown. Inflation Inflationary trends in most markets and global supply chain challenges may negatively affect our sales and operating performance. We experienced the impact of greater inflation on material, logistical and other costs during the current fiscal year. We currently anticipate the impact of inflation in certain markets will be increasing as we move into 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. COVID-19 Impacts Update An increase of COVID-19 related cases in certain parts of China resulted in the re-imposition of widespread lockdowns and restrictions in mid-March 2022. Although on a full year basis, our operating performance in China showed improvement compared to the prior fiscal year, the impact of these lockdowns did negatively impact our results in the fourth quarter. We believe that these lockdowns may continue to have a negative impact on our operations in China, due to reduced customer traffic and supply chain constraints. Future impacts to our sales and operating performance, due to the lockdowns in China or containment measures that may be deployed in other areas or countries are difficult to predict due to the potential high level of uncertainty regarding their nature and duration. Transformation Plan Update We continue to implement our 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 plan is anticipated to be completed by the end of fiscal 2023, with additional plans for savings in fiscal 2024. 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. 31 Selected Financial Data (in millions, except per share data) Year Ended June 30, 2022 2021 2020 (a) Condensed Consolidated Statements of Operations Data: Net revenues $ 5,304.4 $ 4,629.9 $ 4,717.8 Gross profit 3,369.2 2,768.2 2,726.6 Restructuring costs (6.5) 63.6 130.2 Acquisition- and divestiture-related costs 14.7 138.8 157.3 Asset impairment charges 31.4 — 434.0 Operating income (loss) 240.9 (48.6) (1,236.5) Interest expense, net 224.0 235.1 242.7 Other Income, net (409.9) (43.9) (11.6) Income (loss) from continuing operations before income taxes 426.8 (239.8) (1,467.6) Provision (benefit) for income taxes on continuing operations 164.8 (172.0) (377.7) Net income (loss) from continuing operations 262.0 (67.8) (1,089.9) Net income (loss) from discontinued operations 5.7 (137.3) 87.2 Net income (loss) 267.7 (205.1) (1,002.7) Net income (loss) attributable to Coty Inc. $ 259.5 $ (201.3) $ (1,006.7) Amounts attributable to Coty Inc.: Net income (loss) from continuing operations attributable to common stockholders $ 55.5 $ (166.3) $ (1,100.4) Net income (loss) from continuing operations attributable to common stockholders $ 61.2 $ (303.6) $ (1,013.2) Per Share Data: Net income (loss) attributable to Coty Inc. per common share: Basic income (loss) from continuing operations $ 0.07 $ (0.22) $ (1.45) Basic income (loss) for Coty Inc. $ 0.08 $ (0.40) $ (1.33) Diluted income (loss) from continuing operations $ 0.07 $ (0.22) $ (1.45) Diluted income (loss) for Coty Inc. $ 0.08 $ (0.40) $ (1.33) Weighted-average common shares Basic 820.6 764.8 759.1 Diluted 834.1 764.8 759.1 Dividends declared per common share $ — $ — $ 0.38 (in millions) Year Ended June 30, 2022 2021 2020 (a) Consolidated Statements of Cash Flows Data: Net cash provided by (used in) operating activities $ 726.6 $ 318.7 $ (50.9) Net cash provided by (used in) investing activities 269.7 2,441.9 (833.4) Net cash (used in) provided by financing activities (1,034.0) (2,795.1) 877.3 (in millions) As of June 30, 2022 2021 2020 (a) Consolidated Balance Sheets Data: Cash and cash equivalents $ 233.3 $ 253.5 $ 308.3 Total assets 12,116.1 13,691.4 16,728.8 Total debt, net of discount 4,473.9 5,476.9 8,147.3 Total Coty Inc. stockholders’ equity 3,154.5 2,860.7 3,004.6 (a) Included in fiscal 2020 are the financial impacts of the divestiture of Younique LLC on September 16, 2019, and the King Kylie transaction on January 6, 2020. 32 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. 33 • 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, Gain on sale of brand assets and Gains on sale of real estate: We have excluded the impact of Loss/(gain) on divestitures, Gain on sale of brand assets and Gains 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. • 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. • 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. 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 34 items are received or incurred. Additionally, adjustments are made for the tax impact of any intra-entity transfer of assets and liabilities. Also, in connection with our decision to wind down our operations in Russia, we have adjusted recognized tax charges related to certain direct incremental impacts of our decision. 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 and Divestitures 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 in the prior year period, to maintain comparable financial results with the current fiscal year period. Acquisitions, divestitures and early license terminations 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 are shown in the table below. Period of acquisition, divestiture, or termination Acquisition, divestiture, or termination Impact on basis of 2022/2021 presentation Impact on basis of 2021/2020 presentation First quarter fiscal 2020 Divestiture: Younique - the divestiture of the interest in Foundation, LLC, which held the net assets for Younique n/a First quarter fiscal year 2020 net revenue excluded. Third quarter fiscal 2020 Acquisition: King Kylie transaction - the acquisition of 51% interest in King Kylie LLC n/a First and second quarter fiscal year 2021 net revenue excluded. When used herein, the term “Acquisitions” and “Divestitures” refer to the financial contributions of the related acquisitions or divestitures and early license terminations shown above, during the period that is not comparable as a result of such acquisitions or divestitures and early license terminations. Financial results for the Wella Business for fiscal years 2021 and 2020 are presented as discontinued operations. Unless otherwise noted, the following section pertains to the results of continuing operations. NET REVENUES In fiscal 2022, net revenues increased 15%, or $674.5, to $5,304.4 from $4,629.9 in fiscal 2021, reflecting a positive price and mix impact of 10%, an increase in unit volume of 6%, partially offset by a negative foreign currency exchange translation impact of 1%. The increase in net revenues primarily reflects the reopening of stores across regions and increased leisure travel due to reduced COVID restrictions. The reduced travel restrictions have contributed to increased sales through travel retail channels. 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, Hugo Boss The Scent and the relaunch of Kylie cosmetics . The Consumer Beauty segment also experienced net revenue increase due to COVID-19 recovery and market share gains as a result of a repositioning and reinvestment in key color cosmetics brands. Furthermore, the continued growth of e-commerce across the regions and continued market growth in the U.S. and Europe contributed to the net revenue increase. China also contributed to net revenue increase despite a downturn in economic conditions due to increased COVID-19 restrictions impacting performance in the second half of the fiscal year. 35 In fiscal 2021, net revenues decreased 2%, or $87.9, to $4,629.9 from $4,717.8 in fiscal 2020. Excluding the impacts of the Acquisition and Divestitures, total net revenues in fiscal 2021 decreased 2%, or $82.0, to $4,580.3 from $4,662.3 in fiscal 2020, reflecting a decrease in unit volume of 3%, and a negative price and mix impact of 1%, partially offset by a positive foreign currency exchange translation impact of 2%. The decrease in net revenues primarily reflects lower net revenues due to the COVID-19 pandemic, with the highest impact on the mass color cosmetics category, due mainly to category decline related to COVID-19 protocols such as mask-wearing, remote working arrangements, and social distancing which contributed to reduced demand for several product lines, particularly lip and face products. In addition, prestige products in our travel retail channels remained significantly impacted due to continued restrictions on leisure travel. The decrease in demand throughout most of fiscal 2021 was partially offset by the re-opening of stores and reduced COVID restrictions in the last fiscal quarter, which mainly increased prestige products, a repositioning and reinvestment in mass beauty brands, and growth of e-commerce and continued expansion in China. The Company also experienced successful launches of Marc Jacobs Perfect , Gucci Guilty and Gucci Bloom in the 2021 fiscal year. Year Ended June 30, Change % (in millions) 2022 2021 2020 2022/2021 2021/2020 NET REVENUES Prestige $ 3,267.9 $ 2,720.8 $ 2,606.6 20 % 4 % Consumer Beauty 2,036.5 1,909.1 2,111.2 7 % (10 %) Total $ 5,304.4 $ 4,629.9 $ 4,717.8 15 % (2 %) Prestige In fiscal 2022, net revenues in the Prestige segment increased 20%, or $547.1 to $3,267.9 from $2,720.8 in fiscal 2021, reflecting an increase in unit volume of 18%, a positive price and mix impact of 4%, partially offset by a negative foreign currency exchange translation impact of 2%. The increase in net revenues primarily reflects: (i) an increase in net revenues driven by market growth in the U.S. and Europe amid a post COVID-19 recovery, as well as from the travel retail business in many localities, particularly in North America, Europe, and China, had 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 , Hugo Boss The Scent, and the global relaunch of Kylie cosmetics in the current fiscal year, as well as the continued success of Gucci Makeup , Gucci Guilty , Burberry Her , Gucci Bloom , Chloe Atelier des Fleurs , and Marc Jacobs Perfect ; (iii) an increase in net revenues due to positive pricing impact and product mix as a result of global price increases and an overall premiumization strategy focusing on premium plus brands, selling new launches at higher prices, and reducing tail lines resulting in more optimized shelf space utilization; and (iv) an increase in net revenues due to the growth of e-commerce across the regions, distribution expansion in China, and additional shelf space in the U.S. retail stores. These increases were partially offset by: (i) lower net revenues due to strategic initiatives to reduce sales through lower priced channels; (ii) lower net revenues in the last fiscal quarter from China due to increased COVID restrictions limiting travel and consumer spending; (iii) lower net revenues related to Kylie Skin products due to less innovation in the current fiscal year; and (iv) a decrease in the U.S. net revenues for improvements in returns trends for philosophy in the prior year. In fiscal 2021, net revenues in the Prestige segment increased 4%, or $114.2, to $2,720.8 from $2,606.6 in fiscal 2020. Excluding the impact of the Acquisition, net revenues in the Prestige segment increased 2% or $64.6, to $2,671.2 in fiscal 2021 from $2,606.6 in fiscal 2020, reflecting a positive price and mix impact of 3% and a positive foreign currency exchange translation impact of 3%, partially offset by a decrease in unit volume of 4%. The increase in net revenues primarily reflects: (i) increased net revenues due to the recovery from the COVID-19 pandemic, with the highest impact due to reopening of retail malls, and increased store traffic in the second half of the fiscal year; (ii) an increase in net revenues from the launches of Marc Jacobs Perfect, Gucci Guilty EDP and , Hugo Boss Alive as well as improved performance in the last fiscal quarter due to new brand positioning and continued strength of Marc Jacobs Daisy ; 36 (iii) an increase in net revenue from continued success of Gucci Make-up and Kylie Skin; (iv) an incremental increase in net revenues from various brands as a result of reductions in promotional allowances and other trade spend items, as well as less customer returns; and (v) an increase in net revenues as a result of growth in e-commerce sales across brands due to change in consumer shopping preferences, as well as increased holiday program specifically for philosophy . These increases were partially offset by: (i) lower net revenues due to the COVID-19 pandemic, primarily during the first nine months of the fiscal year as a result of reduced customer traffic in retail malls, reduced travel due to continued restrictions in airports and other travel hubs which impacted travel retail channels, and lower launch activity compared to the comparative period; (ii) lower net revenues due to declines in Calvin Klein, Lacoste, Tiffany & Co . and Davidoff mainly as a result of a decrease travel activity; (iii) lower net revenues due to strategic initiatives to reduce sales through lower priced channels; (iv) lower net revenues due to reduced holiday exposure, and promotional activity in the first nine months of the fiscal year compared to the prior period; and (v) lower net revenues due to the ongoing challenges with a key customer and distribution channel in Russia, primarily occurring in the first quarter of fiscal 2021. Consumer Beauty In fiscal 2022, net revenues in the Consumer Beauty segment increased 7%, or $127.4, to $2,036.5 from $1,909.1 in fiscal 2021, reflecting an increase in unit volume of 5%, and a positive price and mix impact of 3%, 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 certain 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 and positive market share uplift in the color cosmetics and fragrance categories, increasing customer demand and store traffic, as well as a healthy growth in e-commerce, which positively impacted brands within the segment; and (iii) an increase in net revenues due to a reduction in sales returns, discounts and allowances, primarily as a result of actions implemented in connection to our Transformation Plan. These actions involved selectively reducing the level of incentives and price reductions on certain products, limiting the frequency and number of shelf resets in the period, and better focusing on planning for new products. These increases were partially offset by lower net revenues from Beyoncé and Stetson as a result of license expiration. Also, the exit from the Russian market negatively impacted brands such as Bourjois , which experienced a decline in net revenue, as well as Max Factor . In addition, nail category declines had a negative impact on our Sally Hansen brand net revenue in the fourth quarter. This resulted from the closure of nail salons in the prior year due to COVID restrictions which increased demand for at-home nail care, positively impacting the nail category and the brand’s net revenue in fiscal 2021. In fiscal 2021, net revenues in the Consumer Beauty segment decreased 10%, or $202.1, to $1,909.1 from $2,111.2 in fiscal 2020. Excluding the impact of the Divestiture, net revenues in the Consumer Beauty segment decreased 7%, or $146.5, to $1,909.1 from $2,055.6 reflecting a negative price and mix impact of 4%, and a decrease in unit volume of 3%. The decrease in net revenues primarily reflects: (i) lower net revenues due to negative brand and category trends for mass color cosmetics, in particular lip and face products, primarily impacting Max Factor, CoverGirl and Rimmel related to lower market consumption mainly driven by consumer behavior changes mainly attributable to the COVID-19 pandemic; (ii) lower net revenues due to overall decreased launch activities, reduced holiday exposure, and promotional activity in the first nine months of the fiscal year compared to prior period; (iii) lower net revenue due to a decline in Max Factor as a result of a strategic decision to exit department stores in China; and (iv) lower net revenues due to strategic initiatives to reduce sales through lower priced channels. 37 These decreases were partially offset by: (i) increased net revenues due to the recovery from the COVID-19 pandemic, due to reopening of retail malls, and increased store traffic in the second half of the fiscal year; (ii) an increase in net revenues from improved performance in the last fiscal quarter due to new brand positioning and increased support for CoverGirl ; and (iii) an increase in net revenues from Sally Hansen products, due to increased demand for at-home manicures and creative Sally Hansen collections. Sally Hansen continued to see incremental net revenues from the launch of Sally Hansen Good.Kind.Pure and Sally Hansen Miracle Gel in prior periods. COST OF SA LES In fiscal 2022, cost of sales increased 4%, or $73.5, to $1,935.2 from $1,861.7 in fiscal 2021. Cost of sales as a percentage of net revenues decreased to 36.5% in fiscal 2022 from 40.2% in fiscal 2021 resulting in a gross margin percentage increase of approximately 370 basis points, primarily reflecting: (i) approximately 130 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 120 basis points related to favorable manufacturing fixed-cost absorption, a favorable impact on variable costs due to increased manufacturing efficiencies, improvements in productivity, as well as procurement and material cost optimization; (iii) approximately 60 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, as well as the impact of greater sales volume in the fiscal year; (iv) approximately 30 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; (v) approximately 20 basis points related to designer license fees due to a favorable impact associated with higher Prestige brand sales in the current year; and (vi) approximately 10 basis points related to freight expense, reflecting both the contribution from our cost savings measures as well as the increased volume of higher priced Prestige products sold. Included in the above is the negative impact of inflation on material, freight, and energy costs of approximately 120 basis points. In fisca l 2021, cost of sales decreased 7%, or $129.5, to $1,861.7 from $1,991.2 in fiscal 2020. Cost of sales as a percentage of net revenues decreased to 40.2% in fiscal 2021 from 42.2% in fiscal 2020 resulting in a gross margin percentage increase of approximately 200 basis points primarily reflecting: (i) approximately 100 basis points primarily related to reductions, as a percentage of revenues, in promotional allowances and other trade spend items, as well as customer returns, which are recorded as adjustments to net sales; (ii) approximately 100 basis points related to decreased excess and obsolescence expense due to the high levels of excess and obsolescence expense in the prior year as a result of COVID-19 pandemic impacting demand, as well as improvements in the current fiscal year in forecasting sales and related inventory levels; and (iii) approximately 40 basis points related to decreased manufacturing overhead cost due to increased manufacturing efficiencies. These positive impacts were partially offset by: (i) approximately 20 basis points related to negative gross margin impacts from changes in product and category mix, primarily due to increased contribution of relatively lower margin body care products, and an increase in the proportionate share of our Brazil market, which has a lower margin contribution; and (ii) approximately 20 basis points related to negative gross margin impact due to an unfavorable mix of prestige brands with higher minimum royalty rates. 38 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In fiscal 2022, selling, general and administrative expenses increased 22%, or $518.1, to $2,881.3 from $2,363.2 in fiscal 2021. Selling, general and administrative expenses as a percentage of net revenues increased to 54.3% in fiscal 2022 from 51.0% in fiscal 2021, or approximately 330 basis points. This increase was primarily due to: (i) 520 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) 310 basis points in stock-based compensation primarily related to the CEO grant made on June 30, 2021; (iii) 90 basis points primarily related to the write-down of working capital, long-term assets, as well as contract termination charges and legal costs, in connection with our decision to exit Russia; and (iv) 30 basis points related to higher bad debt expense. These increases were partially offset by the following decreases: (i) 330 basis points in administrative costs primarily due to a decrease in compensation related to a reduction in employee headcount; (ii) 220 basis points related to gains on sale of real estate; (iii) 50 basis points related to lower logistics costs as a percentage of net revenue; and (iv) 20 basis points related to sale of rights associated with certain brands distributed by a subsidiary in South Africa. In fiscal 2021, selling, general and administrative expenses decreased 24%, or $756.8, to $2,363.2 from $3,120.0 in fiscal 2020. These amounts include the impact of a higher base of overhead costs in continuing operations following the decision to divest the Wella Business. Selling, general and administrative expenses as a percentage of net revenues decreased to 51.0% in fiscal 2021 from 66.1% in fiscal 2020, or approximately 1,510 basis points. This decrease was primarily due to: (i) 690 basis points related to administrative costs primarily due to the decrease in compensation expense from reduction of employee headcount and bonus, reduction in non-essential travel impacted by COVID-19, and decreased professional fees due to completion of the sale of the Wella Business; (ii) 620 basis points related to lower advertising and consumer promotional costs as a percentage of net revenue, as disciplined management of advertising and consumer promotion spending, including lower working media spending of 240 basis points instituted to counter the COVID-19 pandemic, led to savings that outpaced the decline in net revenues; (iii) 110 basis points related to lower bad debt expense; (iv) 40 basis points related to savings in logistics costs due to cost reductions from packaging and storage fees; and (v) 30 basis points in stock compensation related to a modification of the former CEO's equity awards. OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS In fiscal 2022, operating income from continuing operations was $240.9 compared to a loss of $48.6 in fiscal 2021. Operating income as a percentage of net revenues, improved to 4.5% in fiscal 2022 as compared to Operating loss as a percentage of net revenues of (1.0)% in fiscal 2021. 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, gains recognized on sale of real estate, lower amortization expense, decrease in restructuring expense, partially offset by an increase in advertising and consumer promotional costs, higher stock-based compensation and asset impairment charges related to the impairment of indefinite-lived intangibles. In fiscal 2021, operating loss from continuing operations was $48.6 compared to a loss of $1,236.5 in fiscal 2020. Operating loss as a percentage of net revenues, improved to (1.0)% in fiscal 2021 as compared to (26.2)% in fiscal 2020. The improved operating margin is primarily driven by various initiatives to lower costs, including management's plan to reduce certain discretionary and fixed costs, a temporary reduction in advertising and promotional spend, and lower cost of goods sold as a percentage of net revenues. Further, there were no asset impairment charges in fiscal 2021. These improvements are partially offset by an increase in amortization expense. 39 Operating Income (Loss) by Segment Year Ended June 30, Change % (in millions) 2022 2021 2020 2022/2021 2021/2020 Operating income (loss) from continuing operations Prestige $ 367.2 $ 158.1 $ (279.2) >100% >100% Consumer Beauty 9.5 26.9 (531.3) (65 %) >100% Corporate (135.8) (233.6) (426.0) 42 % 45 % Total $ 240.9 $ (48.6) $ (1,236.5) >100% 96 % Prestige In fiscal 2022, operating income for Prestige was $367.2 compared to income of $158.1 in fiscal 2021. Operating margin improved to 11.2% of net revenues in fiscal 2022 as compared to 5.8% in fiscal 2021, driven primarily by higher sales volume, lower cost of goods sold as a percentage of net revenues, lower fixed costs as a percentage of net revenues and a decrease in amortization expense, partially offset by an increase in advertising and consumer promotional costs. In fiscal 2021, operating income for Prestige was $158.1 compared to a loss of $279.2 in fiscal 2020. Operating margin improved to 5.8% of net revenues in fiscal 2021 as compared to (10.7)% in fiscal 2020, primarily reflecting a significant decrease in advertising and promotional spend, higher asset impairment charges in the prior year, a reduction in fixed costs, lower cost of goods sold as a percentage of net revenues, partially offset by higher amortization expense. Consumer Beauty In fiscal 2022, operating income for Consumer Beauty was $9.5 compared to a income of $26.9 in fiscal 2021. Operating margin worsened to 0.5% of net revenues in fiscal 2022 as compared to 1.4% in fiscal 2021, driven by an increase in advertising and consumer promotional costs and asset impairment charges related to the impairment of indefinite-lived intangibles, partially offset by higher sales volume, a reduction in fixed costs, lower cost of goods sold as a percentage of net revenues, and a decrease in amortization expense. In fiscal 2021, operating income for Consumer Beauty was $26.9 compared to a loss of $531.3 in fiscal 2020. Operating margin improved to 1.4% of net revenues in fiscal 2021 as compared to a loss of (25.2)% in fiscal 2020, primarily reflecting higher asset impairment charges in the prior year, a decrease in advertising and consumer promotional costs, a reduction in fixed costs, and lower cost of goods sold. Corporate Corporate primarily includes 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. Operating loss for Corporate was $135.8, $233.6 and $426.0 in fiscal 2022, 2021 and 2020, respectively, as described under “Adjusted Operating Income” below. The operating loss of $135.8 in fiscal 2022 includes stock-based compensation, costs related to the Russia market exit, restructuring and other business realignment costs, acquisition and divestiture related costs, partially offset by a gains on the sale of real estate. The operating loss of $233.6 in fiscal 2021 includes acquisition and divestiture related costs, restructuring and other business realignment costs, and stock-based compensation. The operating loss of $426.0 in fiscal 2020 includes asset impairment charges, restructuring and other business realignment costs, acquisition and divestiture related costs, and stock-based compensation, partially offset by the gain on sale of Younique. 40 Continuing Operations by Segment We believe that adjusted operating (loss) income from continuing operations 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: Year Ended June 30, 2022 (in millions) Reported (GAAP) Adjustments (a) Adjusted (Non-GAAP) Adjusted operating income (loss) from continuing operations Prestige $ 367.2 $ (162.9) $ 530.1 Consumer Beauty 9.5 (75.9) 85.4 Corporate (135.8) (135.8) — Total $ 240.9 $ (374.6) $ 615.5 Year Ended June 30, 2021 (in millions) Reported (GAAP) Adjustments (a) Adjusted (Non-GAAP) Adjusted operating income (loss) from continuing operations Prestige $ 158.1 $ (201.2) $ 359.3 Consumer Beauty 26.9 (50.0) 76.9 Corporate (233.6) (233.6) — Total $ (48.6) $ (484.8) $ 436.2 Year Ended June 30, 2020 (in millions) Reported (GAAP) Adjustments (a) Adjusted (Non-GAAP) Adjusted operating (loss) income from continuing operations Prestige $ (279.2) $ (293.0) $ 13.8 Consumer Beauty (531.3) (374.1) (157.2) Corporate (426.0) (426.0) — Total $ (1,236.5) $ (1,093.1) $ (143.4) (a) See a reconciliation of reported operating (loss) income to adjusted operating income and a description of the adjustments under “Adjusted Operating (Loss) Income from Continuing Operations 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. 41 Adjusted Operating Income (Loss) and Adjusted EBITDA from Continuing Operations for Coty Inc. Adjusted operating income (loss) from continuing operations provides investors with supplementary information relating to our performance. See “Overview—Non-GAAP Financial Measures.” Reconciliation of reported operating loss to adjusted operating (loss) income is presented below: Year Ended June 30, Change % (in millions) 2022 2021 2020 2022/2021 2021/2020 Reported operating income (loss) from continuing operations $ 240.9 $ (48.6) $ (1,236.5) >100% 96 % % of Net revenues 4.5 % (1.0 %) (26.2 %) Amortization expense 207.4 251.2 233.1 (17 %) 8 % Restructuring and other business realignment costs 4.7 67.0 339.1 (93 %) (80 %) Stock-based compensation 195.5 27.8 41.1 >100% (32 %) Costs related to acquisition and divestiture activities 14.7 138.8 157.3 (89 %) (12 %) Asset impairment charges 31.4 — 434.0 N/A (100 %) Gain on divestitures — — (111.5) N/A 100 % Costs related to market exit 45.9 — — N/A N/A Gain on sale of brand assets (9.5) — — N/A N/A Gains on sale of real estate (115.5) — — N/A N/A Total adjustments to reported operating loss 374.6 484.8 1,093.1 (23 %) (56) % Adjusted operating income (loss) from continuing operations $ 615.5 $ 436.2 $ (143.4) 41 % >100% % of Net revenues 11.6 % 9.4 % (3.0 %) Adjusted depreciation 289.8 325.8 334.2 (11 %) (3) % Adjusted EBITDA $ 905.3 $ 762.0 $ 190.8 19 % >100% % of Revenues 17.1 % 16.5 % 4.0 % 3.6 % >100% In fiscal 2022, adjusted operating income was $615.5 compared to a income of $436.2 in fiscal 2021. Adjusted operating margin increased to 11.6% of net revenues in fiscal 2022 as compared to 9.4% in fiscal 2021. In fiscal 2022, adjusted EBITDA was $905.3 compared to $762.0 in fiscal 2021. Adjusted EBITDA margin increased to 17.1% of net revenues in 2022 as compared to 16.5% in fiscal 2021, 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. In fiscal 2021, adjusted operating income was $436.2 compared to an loss of $143.4 in fiscal 2020. These amounts include the impact of a higher base of overhead costs in continuing operations following the decision to divest the Wella Business. Adjusted operating margin increased to 9.4% of net revenues in fiscal 2021 as compared to (3.0%) in fiscal 2020. In fiscal 2021, adjusted EBITDA was $762.0 compared to $190.8 in fiscal 2020. Adjusted EBITDA margin increased to 16.5% of net revenues in 2021 as compared to 4.0% in fiscal 2020, primarily driven by various initiatives to lower costs, including a temporary reduction in advertising and promotional spend, management's plan to reduce certain discretionary and fixed costs, and lower cost of goods sold as a percentage of net revenues. Amortization Expense In fiscal 2022, amortization expense decreased to $207.4 from $251.2 in fiscal 2021. In fiscal 2022, amortization expense of $162.9 and $44.5, was reported in the Prestige and Consumer Beauty respectively. In fiscal 2021, amortization expense of $201.2, $50.0, 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. In fiscal 2021, amortization expense increased to $251.2 from $233.1 in fiscal 2020. In fiscal 2020, amortization expense of $174.9, $58.2, was reported in the Prestige and Consumer Beauty segments, respectively. The increase was primarily driven by finite lived intangibles recorded for the King Kylie acquisition in the third quarter of fiscal 2020. 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. Restructuring costs are initially 42 based on estimates which may differ from actuals due to various factors including more than expected employee attrition and final negotiated severance packages. On May 11, 2020 we announced an expansion of the Turnaround Plan to further reduce fixed costs, the Transformation Plan. We incurred $436.7 of cash costs life-to-date as of June 30, 2022, which have been recorded in Corporate. In fiscal 2022, we incurred restructuring and other business structure realignment costs of $4.7, as follows: • We incurred restructuring costs of $(6.5), related to the Transformation Plan, included in the Consolidated Statements of Operations. Included within restructuring costs is $6.3 related to employee severances in connection with our exit of Russia; and • We incurred business structure realignment costs of $11.2 primarily related to our Transformation Plan and certain other programs. This amount includes $(0.4) reported in selling, general and administrative expenses, which is a result of changes in estimate, and $11.6 reported in cost of sales due to an increase in accelerated depreciation as part of Transformation Plan, in the Consolidated Statement of Operations. In fiscal 2021, we incurred restructuring and other business structure realignment costs of $67.0, as follows: • We incurred restructuring costs of $63.6 primarily related to the Transformation Plan, included in the Consolidated Statements of Operations; and • We incurred business structure realignment costs of $3.4 primarily related to our Transformation Plan and certain other programs. This amount includes $(4.9) reported in selling, general and administrative expenses, which is a result of changes in estimate, and $8.3 reported in cost of sales due to an increase in accelerated depreciation as part of Transformation Plan, in the Consolidated Statement of Operations. In fiscal 2020, we incurred restructuring and other business structure realignment costs of $339.1, as follows: • We incurred restructuring costs of $130.2 primarily related to the Transformation Plan, included in the Consolidated Statements of Operations; and • We incurred business structure realignment costs of $208.9 primarily related to our Transformation Plan and certain other programs. This amount includes $194.4 reported included in selling, general and administrative expenses, primarily related to severance, consulting costs and accelerated depreciation costs; and $14.5 reported in cost of sales in the Consolidated Statement of Operations. In all reported periods, all restructuring and other business realignment costs were reported in Corporate. Stock-based compensation In fiscal 2022, stock-based compensation was $195.5 as compared with $27.8 in fiscal 2021. The increase in stock-based compensation is primarily related to the CEO grant made on June 30, 2021. In fiscal 2021, stock-based compensation was $27.8 as compared with $41.1 in fiscal 2020. Greater share-based compensation expense in the prior period is related to the repurchase of Series A-1 Preferred Stock shares from the Company’s former CEO in fiscal 2020. In all reported periods, all costs related to stock-based compensation were reported in Corporate. Acquisition- and divestiture-related costs In fiscal 2022, we incurred $14.7 of acquisition- and divestiture-related costs which were associated with the Wella Transaction. In fiscal 2021, we incurred $138.8 of acquisition- and divestiture-related costs, of which $135.8 were associated with the Wella Transaction, and $3.0 were consulting and legal costs associated with the Kim Kardashian West Transaction. In fiscal 2020, we incurred $157.3 of acquisition- and divestiture-related costs, of which $137.6 were associated with the Wella Transaction and other contract termination costs and $19.7 were consulting and legal costs associated with the King Kylie transaction and the then pending transaction with Kim Kardashian West. In all reported periods, all acquisition- and divestiture-related costs were reported in Corporate, except where otherwise noted. Asset Impairment Charges In fiscal 2022, we incurred $31.4 of asset impairment charges related to the impairment of indefinite-lived intangibles in connection with our decision to exit Russia, all of which was reported in Consumer Beauty. In fiscal 2021, we did not incur any asset impairment charges. 43 In fiscal 2020, we incurred $434.0 of asset impairment charges primarily due to $329.0 related to indefinite-lived other intangible assets and $105.0 related to goodwill. Of the total asset impairment charges incurred $315.9 was reported in Consumer Beauty and $118.1 was reported in Prestige. For further detail as to the factors resulting in the asset impairment charges please see Note 12 —Goodwill and Other Intangible Assets, net to the Consolidated Financial Statements. Gain on divestitures In fiscal 2022, we did not incur a (gain) loss on divestitures. In fiscal 2021, we did not incur a (gain) loss on divestitures. In fiscal 2020, we completed the divestiture of Younique resulting in income of $111.5 included in Gain on divestitures in the Consolidated Statements of Operations. Costs Related to Market Exit In fiscal 2022, we incurred costs related to our decision to wind down our business operations in Russia which are included in Selling, general and administrative expenses and Cost of sales in the Consolidated Statements of Operations. In fiscal 2021 and 2020, we did not recognize costs related to a market exit. Gain on Sale of Brand Assets In fiscal 2022, we recognized a gain of $9.5 related to sale of brand assets in South Africa, which was reported in Corporate. In fiscal 2021 and 2020, we did not recognize any gain or loss on the sale of brand assets. Gains on Sale of Real Estate In fiscal 2022, we recognized gains of $115.5 related to sale of real estate, which was reported in Corporate. In fiscal 2021 and 2020, we did not recognize any gain or loss on the sale of real estate. Adjusted depreciation expense In fiscal 2022, adjusted depreciation expense of $138.7 and $151.1 was reported in the Prestige and Consumer Beauty segments, respectively. In fiscal 2021, adjusted depreciation expense of $144.4 and $181.4 was reported in the Prestige and Consumer Beauty segments, respectively. In fiscal 2020, adjusted depreciation expense of $135.8 and $198.4, was reported in the Prestige and Consumer Beauty segments, respectively. INTEREST EXPENSE, NET Net interest expense was $224.0, $235.1, and $242.7 in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. In fiscal year 2022, the decrease was primarily due to foreign currency exchange gains, offset by the impact of higher interest rates despite lower average debt balances. In fiscal 2021, the decrease is primarily due to the paydown of debt as a result of the completion of Wella Business sale on November 30, 2020. OTHER EXPENSE (INCOME), NET In fiscal 2022, net other income was $409.9 of net other income, primarily related to a favorable adjustment for the unrealized gain in the Wella investment of $403.9. In fiscal 2021, net other income was $43.9, primarily related to a favorable adjustment for the unrealized gain in the Wella investment of $73.5, partially offset by write-off of deferred financing costs and debt discounts of $24.2 as a result of prepayments of the 2018 Coty Term A and B Facilities. In fiscal 2020, net other income was $11.6, primarily related to pension curtailment gains as a result of the Transformation Plan, which significantly reduced the expected years of future service for employees participating in our non-U.S. pension plans, partially offset by changes in the Mandatorily Redeemable Financial Interest (“MRFI”) and other miscellaneous expense. 44 INCOME TAXES The following table presents our (benefit) provision for income taxes, and effective tax rates for the periods presented: 2022 2021 2020 Provision (benefit) for income taxes $ 164.8 $ (172.0) $ (377.7) Effective income tax rate 38.6 % 71.7 % 25.7 % The positive effective income tax rate in fiscal 2022 is primarily due to the limitation on the deductibility of executive stock compensation and tax costs associated with the Russia exit, offset by large fair value gains related to the investment in the Wella business. The positive effective income tax rate in fiscal 2021 is primarily due to a preliminary benefit of $234.4 recorded as a result of a tax rate differential on the deferred taxes recognized on the transfer of assets and liabilities, following the Company’s relocation of the main principal location from Geneva to Amsterdam. The overall value of the assets and liabilities transferred was negotiated with both the Swiss and Dutch Tax Authorities and per terms of the agreements, will be reevaluated after three years. The Company also recorded an expense of $130.0 related to an internal restructuring following the Wella divestiture, primarily intended to create a more efficient structure to hold its equity investment in Wella. The positive effective income tax rate in fiscal 2020 results from reporting losses before taxes and a benefit for income taxes. During fiscal 2020, the Company recorded a benefit of $105.7 for the capital loss generated as a result of the disposition of its investment in Younique. The effective 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 (Loss) Before Income Taxes to Adjusted Income (Loss) Before Income Taxes and Effective Tax Rates from Continuing Operations: Year Ended June 30, 2022 Year Ended June 30, 2021 Year Ended June 30, 2020 (in millions) (Loss)/ income before income taxes (Benefit) provision for income taxes Effective tax rate (Loss)/ income before income taxes (Benefit) provision for income taxes Effective tax rate (Loss)/income before income taxes (Benefit)provision for income taxes Effective tax rate Reported income (loss) before income taxes $ 426.8 $ 164.8 38.6 % $ (239.8) $ (172.0) 71.7 % $ (1,467.6) $ (377.7) 25.7 % Adjustments to reported operating income (loss) (a) 374.6 484.8 1,093.1 Change in fair value of investment in Wella Business (b)(e) (403.9) (73.5) — Other adjustments (f) (2.4) 7.2 (16.4) Total Adjustments (b)(c)(d) (31.7) $ (55.3) 418.5 204.3 1,076.7 320.9 Adjusted income (loss) before income taxes $ 395.1 $ 109.5 27.7 % $ 178.7 $ 32.3 18.1 % $ (390.9) $ (56.8) 14.5 % (a) See a description of adjustments under “Adjusted Operating Income (Loss) for Coty Inc.” (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 benefit/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. In connection with our decision to wind down our operations in Russia, we recognized tax charges related to certain direct incremental impacts of our decision, which are reflected in this amount, in fiscal 2022. (c) The total tax impact on adjustments in the current period includes a tax expense of $24.1 recorded as the result of the Company’s exit from Russia. 45 (d) The total tax impact on adjustments in the prior period includes a $234.4 benefit recorded as the result of the 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. It also includes a $130.0 tax expense recorded as the result of an internal restructuring following the Wella divestiture, primarily intended to create a more efficient structure to hold its equity investment in Wella. (e) The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella. (f) See “Reconciliation of Reported Net Income (Loss) Attributable to Coty Inc. to Adjusted Net Income (Loss) Attributable to Coty Inc.” The adjusted effective tax rate was 27.7% compared to 18.1% in the prior-year period. The differences were primarily due to the resolution of foreign uncertain tax positions having a greater proportional effect in the prior period and a valuation allowance recorded in the current period. Cash paid during the years ended June 30, 2022, 2021 and 2020, for income taxes of $97.2, $15.9 and $123.2 represents 24.6%, 8.9% and (31.5)% of Adjusted (loss) income before income taxes for the fiscal year ended, respectively. NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC. In fiscal 2022, net income attributable to Coty Inc. was $259.5 compared to a loss of $201.3 in fiscal 2021. The net income increase was primarily driven by higher operating income in the current year, a favorable adjustment of $403.9 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 provision for income taxes in the current year compared to income tax benefit in the prior year. In fiscal 2021, net loss attributable to Coty Inc. was $201.3 compared to a loss of $1,006.7 in fiscal 2020. The net loss decrease primarily reflects a lower operating loss in fiscal 2021 compared to the operating loss in fiscal 2020. ADJUSTED NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC. We believe that adjusted net income (loss) attributable to Coty Inc. provides an enhanced understanding of our performance. See “Overview—Non-GAAP Financial Measures.” Year Ended June 30, Change % (in millions) 2022 2021 2020 2022/2021 2021/2020 Net income (loss) from Coty Inc. net of noncontrolling interests $ 259.5 $ (201.3) $ (1,006.7) >100% 80 % Convertible Series B Preferred Stock dividends (a) (198.3) (102.3) (6.5) (94 %) <(100%) Reported net income (loss) attributable to Coty Inc. 61.2 (303.6) (1,013.2) >100% 70 % Adjustments to reported operating income (b) 374.6 486.3 1,204.9 (23 %) (60 %) Adjustments to Loss on Sale of Business (6.1) 246.4 — <(100%) N/A Change in fair value of investment in Wella Business (c) (403.9) (73.5) — <(100%) N/A Adjustments to other expense (income) (d) (2.4) 7.2 (16.4) <(100%) >100% Adjustments to noncontrolling interest (e) (7.0) (11.3) — 38 % N/A Change in tax provision due to adjustments to reported net (loss) income attributable to Coty Inc. 55.7 (170.0) (342.5) >100% 50 % Adjustment for deemed Series B Preferred Stock dividends related to the First and Second Exchanges 160.0 — — Adjusted net income (loss) attributable to Coty Inc. $ 232.1 $ 181.5 $ (167.2) 28 % >100% % of Net revenues 4.4 % 3.2 % (2.5 %) Per Share Data Adjusted weighted-average common shares Basic 820.6 764.8 759.1 Diluted (f) 834.1 764.8 759.1 Adjusted net income attributable to Coty Inc. per common share Basic $ 0.28 $ 0.24 $ (1.33) Diluted (a) $ 0.28 $ 0.24 $ (1.33) 46 (a) Diluted EPS is adjusted by the effect of dilutive securities, including awards under the Company's equity compensation plans and the convertible Series B Preferred Stock. When calculating any potential dilutive effect of stock options, Series A Preferred Stock, restricted stock and RSUs, the Company uses the treasury method and the if-converted method for the Convertible Series B Preferred Stock. The treasury method typically does not adjust the net income attributable to Coty Inc., while the if-converted method requires an adjustment to reverse the impact of the preferred stock dividends, if dilutive,, on net income applicable to common stockholders during the period. (b) See a description of adjustments under “Adjusted Operating Income (Loss) from Continuing Operations for Coty Inc.” (c) In fiscal 2022 and 2021 , the amount represents the unrealized (gain) loss recognized for the change in fair value of the investment in Wella. (d) In fiscal 2022, the amount includes a net gain on the exchange of Series B Preferred Stock partially offset by the amortization of basis differences in certain equity method investments and pension curtailment losses. In fiscal 2021, the Company incurred losses of $13.8 due to the write-off of deferred financing fees related to the Wella sale, primarily offset by pension curtailment gains of $6.9 as a result of the Transformation Plan, which significantly reduced the expected years of future service for employees participating in our non-U.S. pension plans. In fiscal 2020,the Company had gains of $16.3 primarily related to pension curtailment gains as a result of the Transformation Plan, which significantly reduced the expected years of future service for employees participating in our non-U.S. pension plans. (e) The amounts represent the after-tax impact of the non-GAAP adjustments included in Net (loss) income attributable to noncontrolling interests based on the relevant noncontrolling interest percentage in the Consolidated Statements of Operations. (f) As of June 30, 2022 and 2021, 65.4 and 171.1 million shares, respectively, of outstanding stock options and Series A/A-1 Preferred Stock with purchase or conversion rights to purchase shares of Common Stock, RSUs and Convertible Series B Preferred Stock were excluded in the computation of adjusted weighted-average diluted shares because their effect would be anti-dilutive. DISCONTINUED OPERATIONS Due to the sale of the Wella Business on November 30, 2020, no net revenues or operating expenses from discontinued operations were recorded after November 30, 2020. As such, our results from discontinued operations for the fiscal year ended June 30, 2021 reflect only five months of operations. In fiscal 2021, net revenues from discontinued operations decreased 51.2%, to $986.3 from $2,020.1 in fiscal 2020. In fiscal 2021, net revenues from discontinued operations increased by 2.6% or $24.6 to $986.3 from $961.7 in the comparative five month period in the prior year. The increase in net revenues in the comparative five month period was primarily driven by continued growth of ghd products through the e-commerce channel across all geographical regions, and reorders from the reopening and restocking of professional salons in the U.S. and Brazil, increased sales in Wella and Clairol retail channels driven by an ongoing trend of at-home self-care. That increase was partially offset by additional lockdown and restrictions on salon operations due to social distancing protocols. Operating income was $220.8 in fiscal 2021 compared to $218.2 in fiscal 2020. In fiscal 2021, operating income from discontinued operations increased to $220.8 from income of $145.8 in the comparative five month period in the prior year. The increase in operating income was primarily due to no amortization and depreciation charges in the current year (due to the accounting treatment of assets held for sale), as well as lower selling, general, and administrative expenses due to reduction in travel expenses, and lower cost of goods sold as a percentage of net revenues in the current year. The loss on sale of the Wella Business was $246.4 in fiscal 2021. Factored into the loss on sale are the proceeds received from the sale of our majority interest in Wella, the book value of net assets sold and costs to sell. The book value of net assets sold was impacted by the seasonal effects on certain portions of the Wella Business during the months leading up to the sale, resulting in increases in the net assets sold. Additionally, certain legal and tax structuring matters were finalized in the final month of the closing of the transaction, resulting in a reduction to certain deferred tax assets and liabilities that were transferred at the date of sale and an increase in the tax liabilities retained by us. The loss on sale of the Wella Business also reflects certain purchase price working capital adjustments made during fiscal 2021. In connection with the sale of a majority stake in the Wella Business, the Company recorded a tax cost of approximately $34.3 in fiscal 2021. This cost is a combination of cash taxes incurred as well as a deferred tax expense due to the utilization of net operating loss carryforwards, capital loss carryforwards, and foreign tax credits. Net loss was $137.3 in fiscal 2021 compared to net income of $87.2 in fiscal 2020. In fiscal 2021, net loss was $137.3 compared to net income of $123.2 in the comparative five month period in the prior year. The decrease was primarily due to the loss on sale of Wella Business of $246.4. In fiscal 2020, net revenues from discontinued operations decreased 14.4%, to $2,020.1 from $2,360.6 in fiscal 2019. The decrease in net revenues primarily reflects lower sales due to the COVID-19 pandemic, relatively mitigated by the online sales of ghd products and Clairol in the retail hair category. Operating income was $218.2 in fiscal 2020 compared to $216.9 in fiscal 2019, due primarily to the asset impairment charges in the prior year and the lower cost of goods sold as a percentage of net revenues in the current year, offset by the higher selling, general and administrative expenses as a percentage of net revenues in the current year, mainly driven by the lower net revenue base due to the COVID-19 pandemic. 47 Quarterly Results of Operations Data The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the periods ended June 30, 2022. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the consolidated financial statements and related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for any future period. Condensed Consolidated Statements of Operations Data: Fiscal 2022 Fiscal 2021 Three Months Ended Three Months Ended June 30, March 31, December 31, September 30, June 30, March 31, December 31, September 30, (in millions, except per share data) 2022 2022 2021 2021 2021 2021 2020 2020 Net revenues $ 1,168.3 $ 1,186.2 $ 1,578.2 $ 1,371.7 $ 1,062.4 $ 1,027.8 $ 1,415.6 $ 1,124.1 Gross profit 722.1 763.1 1,017.1 866.9 641.3 636.1 831.6 659.2 Restructuring costs (8.0) (6.8) (4.1) 12.4 (26.1) — 59.6 30.1 Acquisition-and divestiture-related costs 0.5 3.3 6.9 4.0 11.1 29.7 51.7 46.3 Asset impairment charges 31.4 — — — — — — — Operating (loss) income (77.4) 57.1 244.0 17.2 1.8 (1.4) 17.0 (66.0) Interest expense, net 40.4 62.9 60.9 59.8 63.5 50.3 59.2 62.1 Loss from continuing operations before income taxes (280.8) 54.8 309.3 343.5 (68.5) 10.8 (59.8) (122.3) Provision (benefit) for income taxes 0.3 0.5 49.4 114.6 132.9 (19.2) (40.8) (244.9) Net (loss) income from continuing operations (281.1) 54.3 259.9 228.9 (201.4) 30.0 (19.0) 122.6 Net (loss) income from discontinued operations 1.2 0.7 3.8 — 10.9 (17.3) (235.6) 104.7 Net (loss) income attributable to noncontrolling interests (2.8) (0.9) (0.9) (0.5) (4.6) (9.4) (2.5) 0.4 Net income attributable to redeemable noncontrolling interests 4.4 2.3 3.2 3.4 0.1 6.5 0.2 5.5 Net (loss) income attributable to Coty Inc. $ (281.5) $ 53.6 $ 261.4 $ 226.0 $ (186.0) $ 15.6 $ (252.3) $ 221.4 Amounts attributable to Coty Inc. common stockholders: Convertible Series B Preferred Stock dividends (3.3) (3.3) (68.7) (123.0) (24.2) (34.1) (23.1) (20.8) Net (loss) income from continuing operations attributable to common stockholders (286.0) 49.6 188.9 103.0 (221.1) (1.2) (39.8) 95.9 Net (loss) income attributable to common stockholders $ (284.8) $ 50.3 $ 192.7 $ 103.0 $ (210.2) $ (18.5) $ (275.4) $ 200.6 Per Share Data: Weighted-average common shares: Basic 838.4 838.4 829.1 777.6 765.4 765.4 764.6 763.9 Diluted (a) 838.4 852.9 842.7 787.7 765.4 765.4 764.6 916.7 Dividends declared per common share $ — $ — $ — $ — $ — $ — $ — $ — Net (loss) income attributable to Coty Inc. per common share: Basic for Continuing Operations $ (0.34) $ 0.06 $ 0.23 $ 0.13 $ (0.29) $ — $ (0.05) $ 0.13 Basic for Coty Inc $ (0.34) $ 0.06 $ 0.23 $ 0.13 $ (0.27) $ (0.02) $ (0.36) $ 0.26 Diluted for Continuing Operations $ (0.34) $ 0.06 $ 0.23 $ 0.13 $ (0.29) $ — $ (0.05) $ 0.13 Diluted for Coty Inc. $ (0.34) $ 0.06 $ 0.23 $ 0.13 $ (0.27) $ (0.02) $ (0.36) $ 0.24 (a) The outstanding stock options and Series A/A-1 Preferred Stock with purchase or conversion rights to purchase shares of Common Stock, RSUs and Convertible Series B Preferred Stock were excluded in the computation of diluted shares when their effect would be antidilutive. 48 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. In fiscal 2022, 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's shares. Cumulatively, such transactions resulted in annual dividend savings of approximately $77.0. Refer to Note 23—Equity and Convertible Preferred Stock. In addition, during fiscal 2022, we received the planned shareholder distributions of $230.6 from our equity investment in Wella, which we used to repay debt. We do not expect further distributions from Wella in the short term. During April 2022, we announced our Board's decision to wind down the operations of our Russian subsidiary as a result of the Russia-Ukraine War and the related sanctions. We plan to liquidate our remaining inventory in Russia, as allowed by the relevant sanctions, over the next six months as part of the wind down. During fiscal 2022, we recognized total pre-tax charges of $83.6 associated with our exit of Russia. These charges are primarily related to the net realizable value of assets associated with the Russian business, including working capital and long-lived assets, as well as contract termination charges, certain contingent liabilities, employee severance charges and other costs to effectuate the wind-down. We incurred $24.1 of income tax charges associated with our decision to exit Russia, in fiscal 2022. We anticipate incurring up to $10.0 of additional costs through completion of the wind down, and future net cash costs of $40.0 to 45.0 which will be funded by our Russian subsidiary. The wind down process of our Russian subsidiary is at an early stage, and 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. During fiscal 2022, we experienced inflationary pressures in most markets resulting in higher commodity and supply chain costs, including material, freight, and energy costs. We expect that the pressures of cost inflation will persist into fiscal 2023. Further, inflationary trends in certain markets and global supply chain challenges may negatively affect our future sales and operating performance. Supply chain constraints may impact the availability of raw materials used to manufacture our products which may negatively impact our ability to meet customer demands, thereby impacting our cash flows and profitability. 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. In 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. During fiscal 2022, we fully redeemed our 2023 euro-denominated notes in the amount of €550.0 million (approximately $606.4 at the redemption date), by utilizing cash on hand and drawing down on our revolving credit facility, thereby accelerating our deleveraging trajectory. Also, during fiscal 2022 we entered into two separate agreements that mature in September and October 2023, which established new U.S. Dollar-denominated credit facilities in Brazil (the “Brazilian Credit Facilities”) in the amounts of $10.5 and $31.9, respectively. 49 These activities improved our medium term liquidity. Our Convertible Series B Preferred stock held by KKR Aggregator was fully converted and exchanged during fiscal 2022, which reduced our future commitment to preferred shareholders and improved our ability to reduce our external debt and simplifying our capital structure. See Note 15—Debt in the notes to our 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 $179.3 and $133.6 as of June 30, 2022 and 2021, respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to $1,041.2 and $793.8 in fiscal 2022 and 2021, respectively. Remaining balances due from factors amounted to $11.2 and $6.3 as of June 30, 2022 and 2021, respectively. Business Combinations During fiscal 2022, we did not enter into any business combinations or asset acquisitions. During fiscal 2021, we completed the acquisition of a 20% ownership interest in KKW Holdings and the related collaboration agreement. Total cash paid in the transaction totaled $200.0. For additional information on our prior period activity from fiscal year 2021, see Note 4—Business Combinations, Asset Acquisitions and Divestitures in the notes to our Consolidated Financial Statements. Dispositions During fiscal 2022, we did not enter into any business dispositions. During fiscal 2021, we completed the sale of a majority stake in the Wella Business and received cash proceeds of $2,451.7, and retained an initial ownership stake of 40% in Wella. As of June 30, 2022, we owned a 25.9% stake in the Wella Company. During the current fiscal year, we entered into an agreement related to post-closing adjustments to the purchase consideration for the Wella Business. Based on this agreement, a $34.0 advance of future contingent proceeds was paid to us and is subject to claw back if recovery targets related to the Wella Business tax credits are not achieved within four years of the Wella sale. During the current fiscal year, certain recovery targets were achieved and we recognized a $0.7 gain related to the advance payment. The remainder of $33.3 is unearned as of the current fiscal year end. For additional information on our prior period business dispositions from fiscal years 2021 and 2020, see Note 4—Business Combinations, Asset Acquisitions and Divestitures in the notes to our Consolidated Financial Statements. Cash Flows Year Ended June 30, (in millions) 2022 2021 2020 Consolidated Statements of Cash Flows Data (a) : Net cash provided by (used in) operating activities $ 726.6 $ 318.7 $ (50.9) Net cash provided by (used in) investing activities 269.7 2,441.9 (833.4) Net cash (used in) provided by financing activities (1,034.0) (2,795.1) 877.3 (a) Balances presented herein represent the cash flows of Coty Inc. Net cash provided by (used in) operating activities Net cash provided by (used in) operating activities was $726.6, $318.7 and $(50.9) for fiscal 2022, 2021 and 2020, respectively. The increase in cash provided by operating activities of $407.9 in fiscal 2022 as compared with fiscal 2021 is primarily driven by a year over year increase in cash related net income and overall increase in cash flows from changes in net working capital accounts. Higher net revenues in both segments, lower costs as percentage of revenues, lower costs for acquisition and divestiture related activities, and lower cash outflows associated with operating leases contributed to the higher year over year cash flows from operating activities which were partially offset by outflows from higher costs during fiscal 2022 for selling, general, and administrative expenses. Higher cash outflows during fiscal 2022 for net income tax payments is driven by the significant prior year tax overpayment collections and were primarily offset by lower year over year cash outflows for restructuring activity payments and payments for interest costs. 50 The increase in operating activities cash flows of $369.6 from outflows in fiscal 2020 to proceeds in fiscal 2021 is primarily driven by improvements in our net income due to management reducing costs to offset the impact of COVID-19 on our business and better fourth quarter results than in the prior year. The increase in net cash from a decreased net loss was offset by higher outflows from changes in working capital during the current year driven by the negative impacts of COVID-19 and higher cash outflows for acquisition and divestiture-related costs. Higher fourth quarter sales in the current year have caused an increase in cash outflows, which was partially offset by current year collection of past due receivables. These outflows were offset by decreased outflows related to payables due to lower spending for advertising and consumer promotion, customer sales, and administrative expenses in fiscal 2021. Additionally, there were inflows from changes in tax receivables primarily related to prior year tax overpayments collected in the current year and lower cash paid for interest resulting from lower average debt balances during fiscal 2021. Net cash provided by (used in) investing activities Net cash provided by (used in) investing activities was $269.7, $2,441.9 and $(833.4) for fiscal 2022, 2021 and 2020, respectively. The decrease in cash flows provided by investing activities of $2,172.2 in fiscal 2022 as compared with fiscal 2021 was principally driven by higher cash proceeds associated with the sale of the discontinued Wella Business in the prior year. Cash proceeds from the sale of the business and related returns on capital associated with Coty’s remaining stake in Wella whereby initial cash proceeds from the sale received were $2,374.1 in fiscal 2021 compared to the $34.0 proceeds from contingent consideration in the current fiscal year. Returns of capital from equity investments for Coty’s remaining stake in Wella were $448.0 in prior year compared to $230.6 in the current year. Higher proceeds from the sale of other long lived assets in fiscal 2022 and outflows from the prior year related to the KKW Holdings asset acquisition and 20% equity investment helped to partially offset the year over year decrease in cash from investing activities. The increase in cash flows from investing activities of $3,275.3 in fiscal 2021 as compared with fiscal 2020 was principally driven by the proceeds received from the sale of the Wella Business that took place on November 30, 2020. As part of the transaction, Coty received initial net cash proceeds of $2,386.2 for the sale of the discontinued operations, net of cash disposed as part of the sale, as well as a return of capital of $448.0 under the equity investment whereby Coty retained a 40% stake in Wella. Prior year investing cash flows also includes the impact of the cash used for the purchase of 51% of the equity interest of King Kylie, LLC for a net cash outflow of $592.2, and was only partially offset by $200.0 of cash used for the fiscal 2021 purchase of 20% KKW Holdings equity investment and related license agreement. Current year investing cash flows were also positively impacted by lower cash used for capital expenditures of $93.5. These current year investing cash flow increases were only slightly offset by the cash payment of $37.6 resulting from the fiscal 2021 termination of the net investment cross currency swap derivative. Net cash (used in) provided by financing activities Net cash (used in) provided by financing activities was $(1,034.0), $(2,795.1) and $877.3 for fiscal 2022, 2021 and 2020, respectively. The decrease in cash used in financing activities of $1,761.1 in fiscal 2022 as compared to fiscal 2021 was primarily driven by lower net cash outflows for repayments associated with the Company's revolving credit facility and other long term debt outstanding under the Company's Credit Agreement. The year over year change in the level of debt repayments is primarily attributable to the impact of the use of prior year proceeds from the sale of the Wella discontinued business being used to prepay more than $2,000.0 of the outstanding debt on the Company's term loan facilities. Net overall cash outflows also occurred in the current year but to a lesser extent and were offset by proceeds from the issuance of the 2029 Senior Secured Notes and the Brazilian Credit Facilities. Increases in cash outflows for the settlement of realized losses on foreign currency contracts in the current year and the prior year inflows from the issuance of Convertible Series B Preferred Stock only partially offset the impact of the year over year changes in debt activities. The decrease in cash inflows of $(3,672.4) in fiscal 2021 as compared to fiscal 2020 was primarily driven by the current year net cash repayments associated with the Company's revolving loan facility compared to net revolver borrowings in the prior year, the use of more than $2,000.0 to prepay a portion of the outstanding balances on the Company's 2018 Coty Term A and B Facilities using the proceeds from the sale of the Wella Business. Proceeds from the issuance of Senior Secured Notes during the fourth quarter of fiscal 2021 were primarily offset against additional prepayments on the Company's 2018 Coty Term A and B Facilities. Lower cash inflows from financing activities is also a result of the higher prior year cash proceeds of $724.5 compared to $227.2 in the current year from the issuance and sale of the Company's Convertible Series B Preferred Stock in connection with the Investment Agreement with KKR. Additionally, dividend payments of $24.2 on the Convertible Series B Preferred Shares also contributed to a decrease in financing cash flows. These financing related decreases year over year were partially offset by lower dividend payments of $195.4 due to the suspension of common stock dividends payments that began in the fourth quarter of fiscal 2020. Further, the current year experienced a positive impact from the prior year payment of $45.0 to purchase the remaining mandatorily redeemable noncontrolling interest in our Southeastern Asian subsidiary. 51 Dividends In May 2019, the Board approved a stock dividend reinvestment program giving shareholders the option to receive their full dividend in cash or to receive their dividend in 50% cash / 50% common stock, which was effective for dividends declared through February 5, 2020, which was paid March 27, 2020. The percentage of our total Common Stock for which the shareholders elected to participate in the Stock Dividend Reinvestment Program for the September 30, 2019, December 27, 2019 and March 27, 2020 dividend was 69%, 65% and 63%, respectively. 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 ending 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. 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 twelve months ended June 30, 2022, the Board of Directors declared dividends on the Series B Preferred Stock of $35.2 of which $30.7 was paid and $1.2 was converted as part of the November 10, 2021 conversion. For additional information on our dividends and dividend policy, respectively, see Note 23—Equity and Convertible Preferred Stock in the notes to our Consolidated Financial Statements and Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy”. Treasury Stock - Share Repurchase Program For additional information on our Share Repurchase Program, see Note 23—Equity and Convertible Preferred Stock in the notes to our Consolidated Financial Statements. Contractual Obligations and Commitments Our principal contractual obligations and commitments are presented below as of June 30, 2022. (in millions) Total Payments Due in Fiscal Thereafter 2023 2024 2025 2026 2027 Long-term debt obligations $ 4,498.4 $ 22.9 $ 65.3 $ 1,467.0 $ 2,443.2 $ — $ 500.0 Interest on long-term debt obligations (a) 1,491.9 197.3 212.9 216.6 220.5 206.1 438.5 Operating lease obligations 413.1 80.6 63.0 52.8 44.2 37.8 134.7 License agreements: (b) Royalty payments 591.8 132.2 86.7 70.3 54.8 49.9 197.9 Advertising and promotional spend obligations 15.1 1.0 1.0 1.6 2.1 2.1 7.3 Other contractual obligations (c) 707.3 647.3 39.4 9.3 8.5 1.5 1.3 Other long-term obligations: Pension obligations (mandated) (d) 12.3 2.5 2.4 2.4 2.5 2.5 — Total $ 7,729.9 $ 1,083.8 $ 470.7 $ 1,820.0 $ 2,775.8 $ 299.9 $ 1,279.7 (a) Interest costs on our debt after consideration of our interest rate swap arrangements are determined based on interest rate forecast and assumptions of the amount of debt outstanding. A 25 basis-point increase in our variable interest rate debt would have increased our interest costs by $40.7 over the term of our long-term debt. (b) Obligations under license agreements relate to royalty payments and required advertising and promotional spending levels for our products bearing the licensed trademark. Royalty payments are typically made based on contractually defined net sales. However, certain licenses require minimum guaranteed royalty payments regardless of sales levels. Minimum guaranteed royalty payments and required minimums for advertising and promotional spending have been included in the table above. Actual royalty payments and advertising and promotional spending are expected to be higher. Furthermore, early termination of any of these license agreements could result in potential cash outflows that have not been reflected above. (c) Other contractual obligations primarily represent advertising/marketing, manufacturing, logistics and capital improvements commitments. Additionally, we have included the mandatorily redeemable financial interest arising out of our subsidiaries as discussed in Note 21 — 52 Mandatorily Redeemable Financial Interest. We also maintain several distribution agreements for which early termination could result in potential future cash outflows that have not been reflected above. (d) Represents future contributions to our pension and other postretirement benefit plans over the next five years mandated by local regulations or statutes. Subsequent funding requirements cannot be reasonably estimated as the return on plan assets in future periods, as well as future assumptions are not known. The table above excludes obligations for uncertain tax benefits, including interest and penalties, of $191.8 as of June 30, 2022, as we are unable to predict when, or if, any payments would be made. See Note 17—Income Taxes in the notes to our Consolidated Financial Statements for additional information on our uncertain tax benefits. The table excludes $69.8 of RNCI which is reflected in Redeemable noncontrolling interest in the Consolidated Balance Sheet as of June 30, 2022 related to our 25.0% RNCI in our subsidiary in the Middle East (“Middle East Subsidiary”). Given the provisions of the associated Put and Call rights, RNCI is redeemable outside of our control and is recorded in temporary equity. See Note 22—Redeemable Noncontrolling Interests in the notes to our Consolidated Financial Statements for further discussion related to the calculation of the redemption value for each of these noncontrolling interests. The table also excludes $142.4 of preferred stock, which is reflected in Convertible Series B Preferred Stock in the Consolidated Balance Sheet as of June 30, 2022. Given the provisions of the associated Put rights, Convertible Series B Preferred Stock is redeemable outside of our control upon certain change of control events and is recorded in temporary equity. See Note 23—Equity and Convertible Preferred Stock in the notes to our Consolidated Financial Statements for further discussion related to the calculation of the Convertible Series B Preferred Stock. Contingencies From time to time, our Brazilian subsidiaries receive tax assessments from local, state, and federal tax authorities in Brazil. See Note 26—Legal and Other Contingencies for more details on these tax assessments. In relation to the appeal of our Brazilian tax assessments, we have entered into surety bonds of R$135.2 million (approximately $26.1) as of June 30, 2022. As of June 30, 2022, we are in the early stages of administrative action and expect the judicial process in Brazil to take a number of years to conclude. Derivative Financial Instruments and Hedging Activities We are exposed to foreign currency exchange fluctuations and interest rate volatility through our global operations. We utilize natural offsets to the fullest extent possible in order to identify net exposures. In the normal course of business, established policies and procedures are employed to manage these net exposures using a variety of financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes. Foreign Currency Exchange Risk Management We operate in multiple functional currencies and are exposed to the impact of foreign currency fluctuations. For foreign currency exposures, which primarily relate to receivables, inventory purchases and sales, payables and intercompany loans, derivatives are used to better manage the earnings and cash flow volatility arising from foreign currency exchange rate fluctuations. In July 2021, the Company entered into foreign exchange forward contracts to hedge up to 80% of our euro denominated external debt as part of management's strategy to minimize the impact of currency movements on those debt instruments. We recorded foreign currency gains (losses) of $3.3, $(7.8) and $(18.0) in fiscal 2022, 2021 and 2020, respectively, resulting from non-financing foreign currency exchange transactions which are included in their associated expense type and are included in the Consolidated Statements of Operations. Net gains (losses) of $10.0, $(6.8) and $(14.8) in fiscal 2022, 2021 and 2020, respectively, resulting from financing foreign exchange currency transactions are included in Interest expense, net in the Consolidated Statements of Operations. Exchange gains or losses are also partially offset through the use of qualified derivatives under hedge accounting, for which we record accumulated gains or losses in Accumulated other comprehensive income until the underlying transaction occurs at which time the gain or loss is reclassified into the respective account in the Consolidated Statements of Operations. We have experienced and will continue to experience fluctuations in our net income as a result of balance sheet transactional exposures. We use a combination of foreign currency forward contracts and cross currency contracts to offset these exposures. As of June 30, 2022, in the event of a 10% unfavorable change in the prevailing market rates of hedged foreign currencies versus the U.S. dollar, the change in fair value of all foreign exchange forward contracts and cross currency contracts would result in a $147.8 decrease in the fair value of these forward contracts, which would be offset by an increase in the underlying foreign currency exposures. Interest Rate Risk Management We are exposed to interest rate risk that relates primarily to our indebtedness, which is affected by changes in the general level of the interest rates primarily in the U.S. and Europe. We periodically enter into interest rate swap agreements to facilitate 53 our interest rate management activities. We have designated these agreements as cash flow hedges and, accordingly, applied hedge accounting. The effective changes in fair value of these agreements are recorded in AOCI/(L), net of tax, and ineffective portions are recorded in current- period earnings. Amounts in AOCI/(L) are subsequently reclassified to earnings as interest expense when the hedged transactions are settled. We expect that both at the inception and on an ongoing basis, the hedging relationship between any designated interest rate hedges and underlying variable rate debt will be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, we will be required to discontinue hedge accounting with respect to that derivative prospectively. The corresponding gain or loss position of the ineffective hedge recorded to AOCI/(L) will be reclassified to current-period earnings. If interest rates had been 10% higher/lower and all other variables were held constant, Income (loss) from continuing operations before income taxes in fiscal 2022 would decrease/increase by $20.1. Equity Investment Risk Our equity investments are investments in equity securities of privately-held companies without readily determinable fair values, including an investment of approximately $830.0 that is valued using the fair value option and approximately $12.6 that is accounted for using the equity method as of June 30, 2022. These investments are subject to a wide variety of market-related risks that could have a material impact on the carrying value of our holdings. We continually evaluate our equity investments in privately-held companies. See Note 13—Equity Investments for additional information. In addition to the above equity investments, we entered into certain forward repurchase contracts to start hedging for a potential $200.0 share buyback program in 2024. These forward repurchase contracts are accounted for at fair value, with changes in the fair value recorded in Other income, net within the Consolidated Statements of Operations. Our primary exposure is the movements of our stock price during the contract period, which may be volatile and is likely to fluctuate due to a number of factors beyond our control. These factors include actual or anticipated fluctuations in the quarterly and annual results of our company or of other peer companies in the industry, market perceptions concerning the macroeconomic, social or political developments, industry conditions, changes in government regulation and the securities market trends. We estimate that an immediate, hypothetical 10% decline in our stock price would result in a $19.6 decrease in the fair value of these forward repurchase contracts and reduce our Income (loss) from continuing operations before income taxes. Any realized gains or losses resulting from such fair value changes would occur if we elect to terminate the forward repurchase contracts prior to or on maturity. Refer to Note 23—Equity and Convertible Preferred Stock. Credit Risk Management We attempt to minimize credit exposure to counterparties by generally entering into derivative contracts with counterparties that have an “A” (or equivalent) credit rating. The counterparties to these contracts are major financial institutions. Exposure to credit risk in the event of nonperformance by any of the counterparties is limited to the fair value of contracts in net asset positions, which totaled $31.4 as of June 30, 2022. Accordingly, management believes risk of material loss under these hedging contracts is remote. Inflation Risk We began to experience the impact of increased inflation on our business during the fiscal year. We believe that inflation may have a more material effect on our business, financial condition or results of operations in fiscal year 2023. Rising inflation may negatively impact our business by raising cost and reducing profitability. If our costs were to become subject to significant inflationary pressures in the future, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, prospects, financial condition, results of operations, cash flows, as well as the trading price of our securities. Off-Balance Sheet Arrangements We had undrawn letters of credit of $14.3 and $15.0 and bank guarantees of $17.2 and $31.2 as of June 30, 2022 and 2021, respectively. Critical Accounting Policies We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions can be subjective and complex and, consequently, actual results may differ from those estimates that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the 54 circumstances. Our most critical accounting policies relate to revenue recognition, the fair value of equity investments, the assessment of goodwill, other intangible and long-lived assets for impairment, business combinations, inventory and income taxes. Our management has discussed the selection of significant accounting policies and the effect of estimates with the Audit and Finance Committee of our Board of Directors. Revenue Recognition Net revenues comprise gross revenues less customer discounts and allowances, actual and expected returns (estimated based on an analysis of historical experience and position in product life cycle) and various trade spending activities. Trade spending activities represent variable consideration promised to the customer and primarily relate to advertising, product promotions and demonstrations, some of which involve cooperative relationships with customers. The costs of trade spend activities are estimated considering all reasonably available information, including contract terms with the customer, the Company’s historical experience and its current expectations of the scope of the activities, and is reflected in the transaction price when sales are recorded. For additional information on our revenue accounting policies, see Note 2—Summary of Significant Accounting Policies. Returns represented 2%, 2% and 3% of gross revenue after customer discounts and allowances in fiscal 2022, 2021 and 2020, respectively. Trade spending activities recorded as a reduction to gross revenue after customer discounts and allowances represent 10%, 10%, and 11% in fiscal 2022, 2021 and 2020, respectively. Our sales return accrual reflects seasonal fluctuations, including those related to the holiday season in the first half of our fiscal year. This accrual is a subjective critical estimate that has a direct impact on reported net revenues, and is calculated based on history of actual returns, estimated future returns and information provided by retailers regarding their inventory levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The types of known or anticipated events that we have considered, and will continue to consider, include the financial condition of our customers, store closings by retailers, changes in the retail environment, and our decision to continue to support new and existing brands. If the historical data we use to calculate these estimates does not approximate future returns, additional allowances may be required. Equity Investments We elected the fair value option to account for its investment in Wella to align with 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. Changes in the fair value of equity investments under the fair value option are recorded in Other income, net within the Consolidated Statements of Operations (see Note 13—Equity Investments). On October 20, 2021, we 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, we 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 included and weighted for valuation purposes, when appropriate. In May 2022, the Wella Company divested its Russian operations. The impact of the divestiture was included for valuation purposes. Some of the inherent estimates and assumptions used in determining fair value of the Wella Company are outside the control of management, including interest rates, cost of capital, tax rates, credit ratings and industry growth. Further, continued uncertainty exists due to the macroeconomic impacts of inflationary and supply chain pressures and the indirect impact of the Russia Ukraine war. While we believe we have made reasonable estimates and assumptions to calculate the fair value of the Wella Company, it is possible changes could occur. As for the Wella Company, if in future years, the actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to recognize additional adjustments. Goodwill, Other Intangible Assets and Long-Lived Assets Goodwill Goodwill is calculated as the excess of the cost of purchased businesses over the fair value of their underlying net assets. Other intangible assets consist of indefinite-lived trademarks. Goodwill and other indefinite-lived intangible assets are not amortized. We assess goodwill at least annually as of May 1 for impairment, or more frequently, if certain events or circumstances warrant. We test goodwill for impairment at the reporting unit level, which is the same level as our reportable segments. We identify our reporting units by assessing whether the components of our reporting segments constitute businesses for which 55 discrete financial information is available and management of each reporting unit regularly reviews the operating results of those components. When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine if it is necessary to perform a quantitative goodwill impairment test. In performing our qualitative assessment, we consider the extent to which unfavorable events or circumstances identified, such as changes in economic conditions, industry and market conditions or company specific events, could affect the comparison of the reporting unit’s fair value with its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform a quantitative impairment test. Quantitative impairment testing for goodwill is based upon the fair value of a reporting unit as compared to its carrying value. We make certain judgments and assumptions in allocating assets and liabilities to determine carrying values for our reporting units. The impairment loss recognized would be the difference between a reporting unit’s carrying value and fair value in an amount not to exceed the carrying value of the reporting unit’s goodwill. Testing goodwill for impairment requires us to estimate fair values of reporting units using significant estimates and assumptions. The assumptions made will impact the outcome and ultimate results of the testing. We use industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, we engage independent third-party valuation specialists. To determine fair value of the reporting unit, we used a combination of the income and market approaches, when applicable. We believe the blended use of both models, when applicable, compensates for the inherent risk associated with either model if used on a stand-alone basis, and this combination is indicative of the factors a market participant would consider when performing a similar valuation. Under the income approach, we determine fair value using a discounted cash flow method, projecting future cash flows of each reporting unit, as well as a terminal value, and discounting such cash flows at a rate of return that reflects the relative risk of the cash flows. Under the market approach, when applicable, we utilize information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, which creates valuation multiples that are applied to the operating performance of the reporting units being tested, to value the reporting unit. The key estimates and factors used in these approaches include revenue growth rates and profit margins based on our internal forecasts, our specific weighted-average cost of capital used to discount future cash flows, and comparable market multiples for the industry segment, when applicable, as well as our historical operating trends. Certain future events and circumstances, including deterioration of market conditions, higher cost of capital, a decline in actual and expected consumer consumption and demands, could result in changes to these assumptions and judgments. A revision of these assumptions could cause the fair values of the reporting units to fall below their respective carrying values, resulting in a non-cash impairment charge. Such charge could have a material effect on the Consolidated Statements of Operations and Balance Sheets. There were no impairments of goodwill at our reporting units in fiscal 2022 or fiscal 2021. During fiscal year 2020 we recorded total goodwill impairment of $105.0. Based on the annual impairment tested performed at May 1, 2022, we determined that the fair value of each of the reporting units exceeded their respective carrying values at that date by approximately 78.6% and 61.5% relating to the Prestige and Consumer Beauty reporting units, respectively. To determine the fair value of our reporting units, we have used annual revenue growth rates ranging from 3.0%-12.6% and 2.0%-8.5% for the Prestige and Consumer Beauty reporting units, respectively, and a discount rate of 9.25%. Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, credit ratings and industry growth. Further, continued uncertainty exists due to the macroeconomic impacts of inflationary and supply chain pressures, and the indirect impact of the Russia Ukraine war. While the Company believes it has made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible changes could occur. As for all the Company’s reporting units, if in future years, the reporting unit’s actual results are not consistent with the Company’s estimates and assumptions used to calculate fair value, the Company may be required to recognize material impairments to goodwill. The Company will continue to monitor its reporting units for any triggering events or other signs of impairment. The Company may be required to perform additional impairment testing based on changes in the economic environment, disruptions to the Company’s business, significant declines in operating results of the Company’s reporting units, further sustained deterioration of the Company’s market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when improvements in macroeconomic conditions will occur, if consumer confidence and consumer spending decline significantly in the future or if commercial and industrial economic activity or the market capitalization deteriorates significantly from current levels, it is reasonably likely the Company will be required to record impairment charges in the future. 56 Other Intangible Assets We assess indefinite-lived other intangible assets (trademarks) at least annually as of May 1 for impairment, or more frequently if certain events occur or circumstances change that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying value. Trademarks are tested for impairment on a brand level basis. The trademarks’ fair values are based upon the income approach, primarily utilizing the relief from royalty methodology. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the trademark. An impairment loss is recognized when the estimated fair value of the intangible asset is less than the carrying value. Fair value calculation requires significant judgments in determining both the assets’ estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value. Variations in economic conditions or a change in general consumer demand, operating results estimates or the application of alternative assumptions could produce significantly different results. The carrying value of our indefinite-lived other intangible assets was $936.6 as of June 30, 2022, and is comprised of trademarks for the following brands: CoverGirl of $327.4, Max Factor of $148.4, Sally Hansen of $157.3, Philosophy of $119.2, Bourjois of $35.3 and other trademarks totaling $149.0. As a result of the May 1, 2020 annual impairment test, total impairments on indefinite-lived other intangible assets of $329.0 were recorded. On May 1, 2021, we performed our annual impairment testing of indefinite-lived other intangible assets and determined that no adjustments to carrying values were required. In the fourth quarter of fiscal 2022, as a result of the May 1, 2022 annual impairment test, the Company recorded asset impairment charges of $21.3 and $10.1 related to the Max Factor and Bourjois trademarks, respectively, that are part of the Consumer Beauty reporting unit. The principle drivers of the impairments were related to the loss of revenue and impact on profitability as a result of the Company’s decision to exit the Russian market. Additionally, the current macroeconomic environment resulted in a 150 basis point increase in the discount rate compared to the May 1, 2021 test. Based on results of the test, the fair value of the Max Factor trademark fell below its carrying value using projections that assumed an annual revenue growth rate ranging from 2.0% to 15.1% and a discount rate of 10.0%. The fair value of the Bourjois trademark fell below its carrying value using projections that assumed an annual revenue growth rate ranging from 2.0% to 7.4% and a discount rate of 10.0%. As the impaired indefinite-lived intangible assets have a 0% excess, further material negative trends in the actual and expected business performance or an increase in the discount rate may result in further impairments. For instance, with regards to our Max Factor trademark, our largest impaired indefinite-lived intangible asset, if the annual revenue declined by 5% it may cause an additional impairment of $7.3. If the discount rate increased by 50 basis points, it may cause an additional impairment of $8.6. With regards to our Bourjois trademark, our second largest impaired indefinite-lived intangible asset, if the annual revenue declined by 5% it may cause an additional impairment of $1.9. If the discount rate increased by 50 basis points, it may cause an additional impairment of $2.2. The fair values of the remaining indefinite-lived trademarks exceeded their carrying values by amounts ranging from 39% to 50%. Some of the inherent estimates and assumptions used in determining fair value of the indefinite-lived intangible assets are outside the control of management, including interest rates, cost of capital, tax rates, credit ratings and industry growth. Further, continued uncertainty exists due to the macroeconomic impacts of inflationary and supply chain pressures and the indirect impact of the Russia Ukraine war. While the Company believes it has made reasonable estimates and assumptions to calculate the fair values of the indefinite-lived intangible assets, it is possible changes could occur. As for the indefinite-lived intangible assets, the most significant assumptions used are the revenue growth rate and the discount rate, a decrease in the revenue growth rate or an increase in the discount rate could result in a future impairment. The Company will continue to monitor its indefinite-lived tradenames for any triggering events or other signs of impairment. The Company may be required to perform additional impairment testing based on changes in the economic environment, disruptions to the Company’s business, significant declines in operating results of the Company’s reporting units and/or tradenames, further sustained deterioration of the Company’s market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when improvements in macroeconomic conditions will occur, if consumer confidence and consumer spending decline significantly in the future or if commercial and industrial economic activity or the market capitalization deteriorates significantly from current levels, it is reasonably likely the Company will be required to record impairment charges in the future. Long-Lived Assets Long-lived assets, including tangible and intangible assets with finite lives, are amortized over their respective lives to their estimated residual values and are also reviewed for impairment whenever certain triggering events may indicate 57 impairment. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying value. If the projected undiscounted cash flows are less than the carrying value, an impairment would be recorded for the excess of the carrying value over the fair value, which is determined by discounting future cash flows. During fiscal years 2022, 2021 and 2020, we recorded asset impairment charges of $2.4, $5.2 and $16.8, respectively, to Property and equipment, net and $1.0, $0.6 and $7.8, respectively to Operating lease right-of-use assets, primarily relating to the abandonment of equipment or leases no longer in use. These impairment charges are primarily recorded in Selling, general and administrative expenses in the Consolidated Statements of Operations. Business Combinations We allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact our future operating results, as we recognize depreciation and amortization expense on long-lived assets. We use a variety of information sources to determine the value of acquired assets and liabilities including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories; and legal counsel or other experts to assess the obligations and liabilities associated with legal, environmental or other claims. Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. The fair value estimates are based on historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain. Determining the useful life of an intangible asset also requires judgment. Certain brand intangibles are expected to have indefinite lives based on their history and our plans to manage the acquired brands. Other intangible assets are expected to have determinable useful lives. Our assessment of intangible assets that have an indefinite life and those that have a determinable life is based on a number of factors including the competitive environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment. The costs of determinable-lived intangible assets are amortized to expense over the estimated useful life. We generally use the following methodologies for valuing our significant acquired intangibles assets: • Trademarks (indefinite or finite) - We use a relief from royalty method to value trademarks. The key assumptions for the model are forecasted net revenue, the royalty rate, the effective tax rate and the discount rate. • Customer relationships and license agreements - We use an excess earnings method to value customer relationships. The key assumptions for the model are forecasted net revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”), the estimated allocation of earnings between different classes of assets, the attrition rate, the effective tax rate and the discount rate. Inventory Inventories include items which are considered salable or usable in future periods, and are stated at the lower of cost or net realizable value, with cost being based on standard cost which approximates actual cost on a first-in, first-out basis. Costs include direct materials, direct labor and overhead (e.g., indirect labor, rent and utilities, depreciation, purchasing, receiving, inspection and quality control) and in-bound freight costs. We classify inventories into various categories based upon their stage in the product life cycle, future marketing sales plans and the disposition process. We also record an inventory obsolescence reserve, which represents the excess of the cost of the inventory over its estimated net realizable value, based on various product sales projections. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends, and requirements to support forecasted sales. In addition, and as necessary, we may establish specific reserves for future known or anticipated events. These estimates could vary significantly, either favorably or unfavorably, from the amounts that we may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels, competitive conditions or other factors differ from our estimates and expectations. Income Taxes We are subject to income taxes in the U.S. and various foreign jurisdictions. We account for income taxes under the asset and liability method. Therefore, income tax expense is based on reported income before income taxes, and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. Deferred taxes are recorded at currently enacted statutory tax rates and are adjusted as enacted tax rates change. 58 A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized based on currently available evidence. We consider how to recognize, measure, present and disclose in financial statements uncertain tax positions taken or expected to be taken on a tax return. We are subject to tax audits in various jurisdictions. We regularly assess the likely outcomes of such audits in order to determine the appropriateness of liabilities for unrecognized tax benefits. We classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. For unrecognized tax benefits, we first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. As the determination of liabilities related to unrecognized tax benefits, including associated interest and penalties, requires significant estimates to be made by us, there can be no assurance that we will accurately predict the outcomes of these audits, and thus the eventual outcomes could have a material impact on our operating results or financial condition and cash flows. Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of examinations by tax authorities, developments in case law and closing of statute of limitations. Such adjustments are reflected in the provision for income taxes as appropriate. In addition, we are present in approximately 40 tax jurisdictions and we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. As a result of the 2017 Tax Act changing the U.S. to a modified territorial tax system, the Company no longer asserts that any of its undistributed foreign earnings are permanently reinvested. We do not expect to incur significant withholding or state taxes on future distributions. To the extent there remains a basis difference between the financial reporting and tax basis of an investment in a foreign subsidiary after the repatriation of the previously taxed income, the Company is permanently reinvested. A determination of the unrecognized deferred taxes related to these components is not practicable.