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 an iconic portfolio of brands across fragrance, color cosmetics, and skin and body care. We continue to make progress on our strategic priorities, including stabilizing and growing our Consumer Beauty brands through leading innovation and improved execution, accelerating our Prestige fragrance business and ongoing expansion into Prestige cosmetics, building a comprehensive skincare portfolio leveraging existing brands, enhancing our e-commerce and Direct-to-Consumer (“DTC”) capabilities, expanding our presence in China and travel retail through Prestige products and select Consumer Beauty brands, and establishing Coty as an industry leader in sustainability. 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. We remain attentive to economic and geopolitical conditions that may materially impact our business. We continue to explore and implement risk mitigation strategies in the face of these unfolding conditions and remain agile in adapting to changing circumstances. Such conditions, including risks and uncertainties associated with the economy in China and the broader global economy, global inflation, and resulting impacts from the conflict between Russia and Ukraine, have or may have global implications that may impact the future performance and growth of our business in unpredictable ways. Our operations outside of the United States account for a significant portion of our revenues and expenses. As a result, a substantial portion of our total revenue and expenses are denominated in currencies other than the U.S. dollar. Exchange rates between certain of these currencies and the U.S. dollar have fluctuated significantly and may continue to do so in the future. Our revenues grew across both divisions in fiscal 2023 and benefited from price increases across our product portfolio despite stable year-over-year sales volumes and market share declines across certain major product categories. Fluctuations in foreign exchange rates may have a significant impact our operating results. During fiscal 2023, fluctuations in the U.S. dollar relative to certain other foreign currencies – such as the euro and British pound – reduced our reported revenue and expenses, such as those expenses principally related to cost of sales, fixed costs, and advertising and consumer promotional costs. Refer to Part I, Item 1A under the heading “Risk Factors” for a discussion of these factors and other risks. We expect that our net revenue for fiscal year 2024 will grow in the mid-to-high single digits versus the prior year, excluding the impact of foreign exchange and the early termination of the Lacoste fragrance license. Global Supply Chain Challenges We experienced global supply chain challenges resulting from industry-wide component shortages and transportation delays. These challenges have negatively impacted order fill rates across our product categories, particularly prestige fragrances where there has been demand growth, especially in North America and certain European countries. In the second half of fiscal 2023 we saw sequential quarterly improvements in our order fill rates on a company-wide basis and continue to take steps to improve order fill rates and mitigate the impact of these constraints, including working closely with our suppliers to ensure the availability of components such as glass and metal, and building our inventory levels to meet demand. We expect to sustain the progress made this fiscal year, into the first quarter of fiscal 2024, or make incremental improvements to our order fill rates on a divisional and company-wide basis. Inflation Inflationary trends in certain markets and global supply chain challenges may negatively affect our sales and operating performance. We experienced the impact of inflation on material, logistical and other costs during 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. Russia-Ukraine War 31 We recognized total pre-tax gains of $17.0 in fiscal year 2023 related to our market exit of Russia primarily related to a bad debt accrual release due to better than expected collections. We also recognized $0.4 of income tax benefits. We anticipate that we will incur an immaterial amount of additional costs through completion of the wind down. Additionally, we anticipate derecognizing the cumulative translation adjustment balance pertaining to the Russian subsidiary. We have substantially completed our commercial activities in Russia. However, we anticipate that the process related to the liquidation of the Russian legal entity will take an extended period of time. 32 Selected Financial Data (in millions, except per share data) Year Ended June 30, 2023 2022 2021 Net revenues $ 5,554.1 $ 5,304.4 $ 4,629.9 Gross profit 3,547.3 3,369.2 2,768.2 Restructuring costs (6.5) (6.5) 63.6 Acquisition- and divestiture-related costs — 14.7 138.8 Asset impairment charges — 31.4 — Operating income (loss) 543.7 240.9 (48.6) Interest expense, net 257.9 224.0 235.1 Other Income, net (419.0) (409.9) (43.9) Income (loss) from continuing operations before income taxes 704.8 426.8 (239.8) Provision (benefit) for income taxes on continuing operations 181.6 164.8 (172.0) Net income (loss) from continuing operations 523.2 262.0 (67.8) Net income (loss) from discontinued operations — 5.7 (137.3) Net income (loss) 523.2 267.7 (205.1) Net income (loss) attributable to Coty Inc. $ 508.2 $ 259.5 $ (201.3) Amounts attributable to Coty Inc.: Net income (loss) from continuing operations attributable to common stockholders $ 495.0 $ 55.5 $ (166.3) Net income (loss) from continuing operations attributable to common stockholders $ 495.0 $ 61.2 $ (303.6) Per Share Data: Net income (loss) attributable to Coty Inc. per common share: Basic income (loss) from continuing operations $ 0.58 $ 0.07 $ (0.22) Basic income (loss) for Coty Inc. $ 0.58 $ 0.08 $ (0.40) Diluted income (loss) from continuing operations $ 0.57 $ 0.07 $ (0.22) Diluted income (loss) for Coty Inc. $ 0.57 $ 0.08 $ (0.40) Weighted-average common shares Basic 849.0 820.6 764.8 Diluted 886.5 834.1 764.8 (in millions) Year Ended June 30, 2023 2022 2021 Consolidated Statements of Cash Flows Data: Net cash provided by operating activities $ 625.7 $ 726.6 $ 318.7 Net cash (used in) provided by investing activities (118.2) 269.7 2,441.9 Net cash (used in) financing activities (469.3) (1,034.0) (2,795.1) (in millions) As of June 30, 2023 2022 2021 Consolidated Balance Sheets Data: Cash and cash equivalents $ 246.9 $ 233.3 $ 253.5 Total assets 12,661.6 12,116.1 13,691.4 Total debt, net of discount 4,265.9 4,473.9 5,476.9 Total Coty Inc. stockholders’ equity 3,811.1 3,154.5 2,860.7 33 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. 34 • 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. • Gain on sale and termination of brand assets: We have excluded the impact of gain on sale and termination of brand assets as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of the sale and termination of brand assets. • Costs related to market exit: We have excluded the impact of direct incremental costs related to our decision to wind down our business operations in Russia. We believe that these direct and incremental costs are inconsistent and infrequent in nature. Consequently, our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance. • Gains on sale of real estate: We have excluded the impact of gains on sale of real estate as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of the sale. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance. • Stock-based compensation: Although stock-based compensation is a key incentive offered to our employees, we have excluded the effect of these expenses from the calculation of adjusted operating income and adjusted EBITDA. This is due to their primarily non-cash nature; in addition, the amount and timing of these expenses may be highly variable and unpredictable, which may negatively affect comparability between periods. • Depreciation and Adjusted depreciation: Our adjusted operating income excludes the impact of accelerated depreciation for certain restructuring projects that affect the expected useful lives of Property, Plant and Equipment, as such charges vary significantly based on the size and timing of the programs. Further, we have excluded adjusted depreciation, which represents depreciation expense net of accelerated depreciation charges, from our adjusted EBITDA. Our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance. • Other (income) expense: We have excluded the impact of pension curtailment (gains) and losses and pension settlements as such events are triggered by our restructuring and other business realignment activities and the amount of such charges vary significantly based on the size and timing of the programs. Further, we have excluded the change in fair value of the investment in Wella, as our management believes these unrealized (gains) and losses do not reflect our underlying ongoing business, and the adjustment of such impact helps investors and others compare and analyze performance from period to period. We have excluded the gain on the exchange of Series B Preferred Stock. Such transactions do not reflect our operating results and we have excluded the impact as our management believes that the adjustment of these items supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance. • Noncontrolling interest: This adjustment represents the after-tax impact of the non-GAAP adjustments included in Net income attributable to noncontrolling interests based on the relevant noncontrolling interest percentage. • Tax: This adjustment represents the impact of the tax effect of the pretax items excluded from Adjusted net income. The tax impact of the non-GAAP adjustments is based on the tax rates related to the jurisdiction in which the adjusted 35 items are received or incurred. Additionally, adjustments are made for the tax impact of any intra-entity transfer of assets and liabilities. • Deemed Preferred Stock Dividends: We have excluded preferred stock deemed dividends related to the First Exchange and the Second Exchange (as disclosed and defined in Note 13—Equity Investments in our Annual Report on Form 10-K for fiscal 2023) from our calculation of adjusted net income attributable to Coty Inc. These deemed dividends are nonmonetary in nature, the transactions were entered into to simplify our capital structure and do not reflect our underlying ongoing business. Management believes that this adjustment helps investors and others compare and analyze our performance from period to period. Constant Currency We operate on a global basis, with the majority of our net revenues generated outside of the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. Therefore, to supplement financial results presented in accordance with GAAP, certain financial information is presented in “constant currency”, excluding the impact of foreign currency exchange translations to provide a framework for assessing how our underlying businesses performed excluding the impact of foreign currency exchange translations. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We calculate constant currency information by translating current and prior-period results for entities reporting in currencies other than U.S. dollars into U.S. dollars using prior year foreign currency exchange rates. The constant currency calculations do not adjust for the impact of revaluing specific transactions denominated in a currency that is different to the functional currency of that entity when exchange rates fluctuate. The constant currency information we present may not be comparable to similarly titled measures reported by other companies. Basis of Presentation of Acquisitions, Divestitures, Terminations and Market Exit from Russia During the period when we complete an acquisition, divestiture, early license termination, or market exit, 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 or markets exited in the prior year period, to maintain comparable financial results with the current fiscal year period. Acquisitions, divestitures, early license terminations, and market exits 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, termination, or market exit Acquisition, divestiture, termination, or market exit Impact on basis of 2023/2022 presentation Impact on basis of 2022/2021 presentation Third quarter fiscal 2023 Market Exit from Russia Third and fourth quarters fiscal 2022 net revenue excluded. n/a When used herein, the term “Acquisitions,” “Divestitures,” “Terminations,” and “Market Exit,” refer to the financial contributions of the related acquisitions or divestitures, early license terminations, and market exits shown above, during the period that is not comparable as a result of such acquisitions or divestitures, early license terminations, and market exits. Financial results for the Wella Business for fiscal year 2021 are presented as discontinued operations. Unless otherwise noted, the following section pertains to the results of continuing operations. NET REVENUES In fiscal 2023, net revenues increased 5%, or $249.7, to $5,554.1 from $5,304.4 in fiscal 2022. Excluding net revenue from the second half of the prior period from Russia, net revenues increased 6% or $276.8 to $5,554.1 from $5,277.3, reflecting a positive price and mix impact of 11% partially offset by a negative foreign currency exchange translation impact of 5%. Net revenues grew across both our segments. The growth in our Consumer Beauty segment was due to positive performance across the body care, skincare, and color cosmetics categories. Growth in our Prestige segment was primarily due to the positive performance in the prestige fragrance category due to the continued success of fragrance brands such as Burberry, Calvin Klein, Hugo Boss, Gucci, and Marc Jacobs . Although, the prestige make up category was negatively impacted by COVID-19 related to the lockdowns in China in the earlier portion of the fiscal period, this category began to show recovery in the last quarter of the fiscal period. The overall increase in net revenues reflects the successful implementation of global price increases across all product categories, our product premiumization strategy, and positive overall market trends. 36 Net revenues also grew across all of our major geographic regions led by growth in the U.S. and Brazil. Additionally, there was an increase in travel retail sales in all major regions due to increased leisure travel in the period. The overall increase in net revenues was partially offset by the negative impact of foreign exchange headwinds on net revenues, primarily affecting the euro and British pound. Our ongoing exit from Russia impacted the overall change in our reported net revenues. Considering total fiscal year-to-date net revenues from Russia in both the current and prior year periods, the net negative impact on our fiscal year-to-date reported net revenue was approximately 1% on a consolidated basis, 1% for our Prestige division, and 1% for our Consumer Beauty division. 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. Year Ended June 30, Change % (in millions) 2023 2022 2021 2023/2022 2022/2021 NET REVENUES Prestige $ 3,420.5 $ 3,267.9 $ 2,720.8 5 % 20 % Consumer Beauty 2,133.6 2,036.5 1,909.1 5 % 7 % Total $ 5,554.1 $ 5,304.4 $ 4,629.9 5 % 15 % Prestige In fiscal 2023, net revenues in the Prestige segment increased 5%, or $152.6 to $3,420.5 from $3,267.9 in fiscal 2022. Excluding net revenue from the second half of the prior period from Russia, net revenues increased 6% or $169.0 to $3,420.5 from $3,251.5, reflecting a positive price and mix impact of 11% partially offset by a negative foreign currency exchange translation impact of 5%. The increase in net revenues primarily reflects: (i) the continued success and growth of prestige fragrances, specifically Burberry Hero, Burberry Her, Calvin Klein, Hugo Boss Boss Bottled, Gucci Flora, and Marc Jacobs Daisy ; (ii) the positive pricing impact as a result of global price increases and in line with the overall premiumization strategy; (iii) growth in travel retail net revenues in all major regions due to increased leisure travel compared to the prior year; and (iv) growth in the U.S due to positive market trends and innovation in the prestige fragrance brands. These increases were partially offset by: (i) lower net revenues in the Prestige makeup category impacted by a decline in Gucci makeup travel retail sales in the Asia Pacific region as a result of slow recovery from the lockdowns in China; and (ii) lower net revenues for philosophy due to less innovation and repositioning of the brand. 37 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. Consumer Beauty In fiscal 2023, net revenues in the Consumer Beauty segment increased 5%, or $97.1, to $2,133.6 from $2,036.5 in fiscal 2022. Excluding net revenue from the second half of the prior period from Russia, net revenues increased 6% or $107.8 to $2,133.6 from $2,025.8, reflecting a positive price and mix impact of 10% partially offset by a negative foreign currency exchange translation impact of 4%. The increase in net revenues primarily reflects: (i) an increase in net revenues from color cosmetics brands, including CoverGirl due to positive pricing impact and higher sell out resulting in lower returns and markdowns in the U.S., and Rimmel Manhattan due to brand innovation and positive price and mix impact in major European markets, such as Germany, Austria and Switzerland, and Australia; (ii) an increase in net revenues from the skin and body care brands in Brazil due to strong category momentum, and positive product mix impact, as well as due to innovation in brands such as Monange and market share gains for Paixao ; and (iii) due to price increases across the Consumer Beauty product portfolio. These increases were partially offset by lower net revenues from the mass fragrance category, primarily due to negative foreign currency exchange translation impacts. 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. 38 These increase s 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. COST OF SA LES In fiscal 2023, cost of sales increased 4%, or $71.6, to $2,006.8 from $1,935.2 in fiscal 2022. Cost of sales as a percentage of net revenues decreased to 36.1% in fiscal 2023 from 36.5% in fiscal 2022 resulting in a gross margin percentage increase of approximately 40 basis points, primarily reflecting: (i) approximately 30 basis points primarily related to manufacturing and material costs due to productivity improvements; (ii) approximately 20 basis points related to designer license fees due to favorable royalty related activity; and (iii) approximately 10 basis points related to excess and obsolescence costs. These increases were partially offset by approximately 20 basis points in increased freight costs. The above includes the negative impact of inflation (principally for material costs) and the positive impact from pricing, estimated at approximately 200 basis points each. In fisca l 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In fiscal 2023, selling, general and administrative expenses decreased 2%, or $63.0, to $2,818.3 from $2,881.3 in fiscal 2022. Selling, general and administrative expenses as a percentage of net revenues decreased to 50.7% in fiscal 2023 from 54.3% in fiscal 2022, or approximately 360 basis points. This decrease was primarily due to: (i) 130 basis points in stock-based compensation cost primarily related to a reduction in expense recognized in connection with a prior year's grant made to the CEO; (ii) 100 basis points due to a decrease in advertising and consumer promotional costs as a percentage of net revenues primarily related to a reduction of working media in the fiscal period; (iii) 100 basis points due to a decrease in administrative costs as a percentage of net revenues primarily due to lower depreciation expense related to fully depreciated IT equipment and lower consulting fees; (iv) 70 basis points due to a decrease in bad debt expense as a percentage of net revenues; and 39 (v) 40 basis points due to a decrease in logistics costs as a percentage of net revenues. These decreases were partially offset by the following increases: (i) 60 basis points due to unfavorable transactional impact from our exposure to foreign currency exchange fluctuations; and (ii) 30 basis points due to gains on sale of real estate recorded in the comparative period, which represented a greater percentage of net revenues compared to the net gains recorded in the current period, which primarily related to the early termination of the Lacoste license. 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. OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS In fiscal 2023, operating income from continuing operations was $543.7 compared to a income of $240.9 in fiscal 2022. Operating income as a percentage of net revenues, improved to 9.8% in fiscal 2023 as compared to Operating income as a percentage of net revenues of 4.5% in fiscal 2022. The improved operating margin is largely driven by lower fixed costs as a percentage of net revenues, lower stock-based compensation as a percentage of net revenues, lower advertising and consumer promotional spending as a percentage of net revenues, and an asset impairment charge related to the impairment of indefinite-lived intangibles recorded in the prior period. 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. 40 Operating Income (Loss) by Segment Year Ended June 30, Change % (in millions) 2023 2022 2021 2023/2022 2022/2021 Operating income (loss) from continuing operations Prestige $ 483.7 $ 367.2 $ 158.1 32 % >100% Consumer Beauty 63.3 9.5 26.9 >100% (65 %) Corporate (3.3) (135.8) (233.6) 98 % 42 % Total $ 543.7 $ 240.9 $ (48.6) >100% >100% Prestige In fiscal 2023, operating income for Prestige was $483.7 compared to income of $367.2 in fiscal 2022. Operating margin improved to 14.1% of net revenues in fiscal 2023 as compared to 11.2% in fiscal 2022, driven primarily by lower fixed costs as a percentage of net revenues, lower cost of goods sold as a percentage of net revenues and lower amortization expense as a percentage of net revenues. 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. Consumer Beauty In fiscal 2023, operating income for Consumer Beauty was $63.3 compared to income of $9.5 in fiscal 2022. Operating margin improved to 3.0% of net revenues in fiscal 2023 as compared to 0.5% in fiscal 2022, driven by lower advertising and consumer promotional costs as a percentage of net revenues, an impairment charge related to the impairment of indefinite-lived intangibles recorded in the prior period, and lower fixed costs as a percentage of net revenues, partially offset by an increase in cost of sales as a percentage of net revenues. In fiscal 2022, operating income for Consumer Beauty was $9.5 compared to 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. 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 $3.3, $135.8 and $233.6 in fiscal 2023, 2022 and 2021, respectively, as described under “Adjusted Operating Income” below. The operating loss of $3.3 in fiscal 2023 declined in comparison to the prior year primarily due to lower stock based compensation, a gain recognized due to the early termination of the Lacoste fragrance license in the current period, and a reduction in acquisition and divestiture related costs, partially offset by a gain on sale of real estate recognized in the comparative period. 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. 41 Continuing Operations by Segment We believe that adjusted operating income (loss) 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, 2023 (in millions) Reported (GAAP) Adjustments (a) Adjusted (Non-GAAP) Adjusted operating income (loss) from continuing operations Prestige $ 483.7 $ 151.4 $ 635.1 Consumer Beauty 63.3 40.4 103.7 Corporate (3.3) 3.3 — Total $ 543.7 $ 195.1 $ 738.8 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 (a) See a reconciliation of reported operating income (loss) to adjusted operating income and a description of the adjustments under “Adjusted Operating Income (Loss) 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. 42 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 income (loss) is presented below: Year Ended June 30, Change % (in millions) 2023 2022 2021 2023/2022 2022/2021 Reported operating income (loss) from continuing operations $ 543.7 $ 240.9 $ (48.6) >100% >100% % of Net revenues 9.8 % 4.5 % (1.0 %) Amortization expense 191.8 207.4 251.2 (8 %) (17 %) Restructuring and other business realignment costs (6.3) 4.7 67.0 <(100%) (93 %) Stock-based compensation 135.9 195.5 27.8 (30 %) >100% Costs related to acquisition and divestiture activities — 14.7 138.8 (100 %) (89 %) Asset impairment charges — 31.4 — (100 %) N/A (Gains) Costs related to market exit (17.0) 45.9 — <(100%) N/A Gains on sale and termination of brand assets (104.4) (9.5) — <(100%) N/A Gains on sale of real estate (4.9) (115.5) — 96 % N/A Total adjustments to reported operating loss 195.1 374.6 484.8 (48 %) (23) % Adjusted operating income from continuing operations $ 738.8 $ 615.5 $ 436.2 20 % 41 % % of Net revenues 13.3 % 11.6 % 9.4 % Adjusted depreciation 234.0 289.8 325.8 (19 %) (11) % Adjusted EBITDA $ 972.8 $ 905.3 $ 762.0 7 % 19 % % of Revenues 17.5 % 17.1 % 16.5 % 2.3 % 3.6 % In fiscal 2023, adjusted operating income was $738.8 compared to income of $615.5 in fiscal 2022. Adjusted operating margin increased to 13.3% of net revenues in fiscal 2023 as compared to 11.6% in fiscal 2022. In fiscal 2023, adjusted EBITDA was $972.8 compared to $905.3 in fiscal 2022. Adjusted EBITDA margin increased to 17.5% of net revenues in 2023 as compared to 17.1% in fiscal 2022, primarily driven by lower fixed costs as a percentage of net revenues, and lower advertising and consumer promotional costs as a percentage of net revenues. In fiscal 2022, adjusted operating income was $615.5 compared to an 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. Amortization Expense In fiscal 2023, amortization expense decreased to $191.8 from $207.4 in fiscal 2022. In fiscal 2023, amortization expense of $151.4 and $40.4, was reported in the Prestige and Consumer Beauty respectively. In fiscal 2022, amortization expense of $162.9 and $44.5, was reported in the Prestige and Consumer Beauty segments, respectively. The decrease was primarily driven by certain license and collaboration agreements, which fully amortized in early fiscal 2023 and fiscal 2022. In fiscal 2022, amortization expense decreased to $207.4 from $251.2 in fiscal 2021. 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. 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 reached the end of the plan at the end of the fiscal period, however, we will continue looking for opportunities to improve our cost structure. Restructuring costs are initially 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 43 announced an expansion of the Turnaround Plan to further reduce fixed costs, the Transformation Plan. We incurred $517.7 of cash costs life-to-date as of June 30, 2023, which have been recorded in Corporate. In fiscal 2023, we incurred a credit in restructuring and other business structure realignment costs of $(6.3), as follows: • We incurred a credit in restructuring costs of $(6.5), related to the Transformation Plan, included in the Consolidated Statements of Operations and • We incurred business structure realignment costs of $0.2 primarily related to our Transformation Plan. This amount includes $0.9 reported in cost of sales in the Consolidated Statement of Operations, and a credit of $(0.7) reported in selling, general and administrative expenses. In fiscal 2022, we incurred restructuring and other business structure realignment costs of $4.7, as follows: • We incurred a credit in restructuring costs of $(6.5) primarily related to the Transformation Plan, included in the Consolidated Statements of Operations. Included within the credit in 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 $11.6 reported in cost of sales due to an increase in accelerated depreciation as part of Transformation Plan, and a credit of $(0.4) reported in selling, general and administrative expenses 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 $8.3 reported in cost of sales due to an increase in accelerated depreciation as part of Transformation Plan, and a credit of $(4.9) reported included in selling, general and administrative expenses, which is a result of changes in estimate, 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 2023, stock-based compensation was $135.9 as compared with $195.5 in fiscal 2022. The decrease in stock-based compensation is primarily related to a reduction in expense recognized in connection with a prior year's grant made to the CEO. In 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 all reported periods, all costs related to stock-based compensation were reported in Corporate. Acquisition- and divestiture-related costs In fiscal 2023, we incurred no costs related to acquisition- and divestiture-activities. 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 Transaction. In all reported periods, all acquisition- and divestiture-related costs were reported in Corporate, except where otherwise noted. Asset Impairment Charges In fiscal 2023, we did not incur any 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. 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. 44 (Gains) Costs Related to Market Exit In fiscal 2023, we recognized gains of $(17.0) 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 2022, we incurred costs of $45.9 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, we did not recognize costs related to a market exit. Gains on Sale and Termination of Brand Assets In fiscal 2023, we recognized a gain of $104.4 related to the early termination of the Lacoste fragrance license. 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, we did not recognize any gain or loss on the sale and termination of brand assets. Gains on Sale of Real Estate In fiscal 2023, we recognized gains of $4.9 related to sale of real estate, which was reported in Corporate. In fiscal 2022, we recognized gains of $115.5 related to sale of real estate, which was reported in Corporate. In fiscal 2021, we did not recognize any gain or loss on the sale of real estate. Adjusted depreciation expense In fiscal 2023, adjusted depreciation expense of $110.5 and $123.5 was reported in the Prestige and Consumer Beauty segments, respectively. 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. INTEREST EXPENSE, NET Net interest expense was $257.9, $224.0, and $235.1 in fiscal 2023, fiscal 2022 and fiscal 2021, respectively. In fiscal year 2023, the increase in interest expense is primarily due to the impact of a higher average interest rate despite lower debt balances in the current period. In fiscal year 2022, the decrease in interest expense was primarily due to foreign currency exchange gains, offset by the impact of higher interest rates despite lower average debt balances. OTHER EXPENSE (INCOME), NET In fiscal 2023, net other income was $419.0, primarily related to a favorable adjustment for the unrealized gain in the Wella investment of $230.0 and unrealized gain on forward repurchase contracts of $196.9. In fiscal 2022, net other income was $409.9, 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. INCOME TAXES The following table presents our (benefit) provision for income taxes, and effective tax rates for the periods presented: 2023 2022 2021 Provision (benefit) for income taxes $ 181.6 $ 164.8 $ (172.0) Effective income tax rate 25.8 % 38.6 % 71.7 % The effective income tax rate in fiscal 2023 is primarily due to the limitation on the deductibility of executive stock compensation, offset by fair value gains related to the investment in the Wella business at a lower tax rate. 45 The 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 at a lower rate. The 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 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, 2023 Year Ended June 30, 2022 Year Ended June 30, 2021 (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 $ 704.8 $ 181.6 25.8 % $ 426.8 $ 164.8 38.6 % $ (239.8) $ (172.0) 71.7 % Adjustments to reported operating income (loss) (a) 195.1 374.6 484.8 Change in fair value of investment in Wella Business (e) (230.0) (403.9) (73.5) Other adjustments (f) 0.2 (2.4) 7.2 Total Adjustments (b)(c)(d) (34.7) $ (4.5) (31.7) (55.3) 418.5 204.3 Adjusted income before income taxes $ 670.1 $ 177.1 26.4 % $ 395.1 $ 109.5 27.7 % $ 178.7 $ 32.3 18.1 % (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 2023 and fiscal 2022. (c) The total tax impact on adjustments includes a tax benefit of $0.4 and tax expense of $24.1 for fiscal 2023 and fiscal 2022, respectively, recorded as the result of the Company’s exit from Russia. (d) The total tax impact on adjustments in fiscal 2021 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 26.4% compared to 27.7% in the prior-year period. The differences were primarily due to permanent adjustments and jurisdictional mix of income. Cash paid during the years ended June 30, 2023, 2022 and 2021, for income taxes was $58.6, $97.2 and $15.9, respectively. 46 NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC. In fiscal 2023, net income attributable to Coty Inc. was $508.2 compared to income of $259.5 in fiscal 2022. The net income increase was primarily driven by higher operating income, incremental net gains associated with forward repurchase contracts, contingent consideration gains associated with the sale of Wella, partially offset by a less favorable adjustment related to the unrealized gain in the Wella investment in the current year, higher net interest expense in the current year and an increase in the provision for income taxes in the current year compared to the prior year. 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. 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) 2023 2022 2021 2023/2022 2022/2021 Net income (loss) from Coty Inc. net of noncontrolling interests $ 508.2 $ 259.5 $ (201.3) 96 % >100% Convertible Series B Preferred Stock dividends (a) (13.2) (198.3) (102.3) 93 % (94 %) Reported net income (loss) attributable to Coty Inc. 495.0 61.2 (303.6) >100% >100% Adjustments to reported operating income (b) 195.1 374.6 486.3 (48 %) (23 %) Adjustments to Loss on Sale of Business — (6.1) 246.4 100 % <(100%) Change in fair value of investment in Wella Business (c) (230.0) (403.9) (73.5) 43 % <(100%) Adjustments to other expense (income) (d) 0.2 (2.4) 7.2 >100% <(100%) Adjustments to noncontrolling interest (e) (6.9) (7.0) (11.3) 1 % 38 % Change in tax provision due to adjustments to reported net income (loss) attributable to Coty Inc. 4.5 55.7 (170.0) (92 %) >100% Adjustment for deemed Series B Preferred Stock dividends related to the First and Second Exchanges — 160.0 — (100 %) N/A Adjusted net income attributable to Coty Inc. $ 457.9 $ 232.1 $ 181.5 97 % 28 % % of Net revenues 8.2 % 4.4 % 3.2 % Per Share Data Adjusted weighted-average common shares Basic 849.0 820.6 764.8 Diluted (a)(f) 862.8 834.1 764.8 Adjusted net income attributable to Coty Inc. per common share Basic $ 0.54 $ 0.28 $ 0.24 Diluted (a)(f) $ 0.53 $ 0.28 $ 0.24 (a) Diluted EPS is adjusted by the effect of dilutive securities, including awards under the Company's equity compensation plans, the convertible Series B Preferred Stock and the Forward Repurchase Contracts. When calculating any potential dilutive effect of stock options, Series A Preferred Stock, restricted stock, PRSUs and RSUs, the Company uses the treasury method and the if-converted method for the Convertible Series B Preferred Stock and the Forward Repurchase Contracts. 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 and the impact of fair market value (gains)/losses for contracts with the option to settle in shares or cash, 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 2023, 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 2023, the amount includes the amortization of basis differences in certain equity method investments and pension curtailment gains. 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 47 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. (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, 2023 and 2022, 23.7 and 65.4 million dilutive shares of Convertible Series B Preferred Stock were excluded in the computation of adjusted weighted-average diluted shares because their effect would be anti-dilutive. As of June 30, 2021, 171.1 million dilutive shares of 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 was $986.3 and operating income was $220.8 in fiscal 2021. Net loss was $137.3 in fiscal 2021. 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. 48 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, 2023. 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 2023 Fiscal 2022 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) 2023 2023 2022 2022 2022 2022 2021 2021 Net revenues $ 1,351.6 $ 1,288.9 $ 1,523.6 $ 1,390.0 $ 1,168.3 $ 1,186.2 $ 1,578.2 $ 1,371.7 Gross profit 849.5 810.8 998.3 888.7 722.1 763.1 1,017.1 866.9 Restructuring costs (1.1) (1.3) (2.9) (1.2) (8.0) (6.8) (4.1) 12.4 Acquisition-and divestiture-related costs — — — — 0.5 3.3 6.9 4.0 Asset impairment charges — — — — 31.4 — — — Operating income (loss) 129.0 43.5 199.3 171.9 (77.4) 57.1 244.0 17.2 Interest expense, net 72.2 58.8 61.0 65.9 40.4 62.9 60.9 59.8 Income (Loss) from continuing operations before income taxes 78.8 141.6 280.2 204.2 (280.8) 54.8 309.3 343.5 Provision (benefit) for income taxes 43.3 29.8 38.8 69.7 0.3 0.5 49.4 114.6 Net (loss) income from continuing operations 35.5 111.8 241.4 134.5 (281.1) 54.3 259.9 228.9 Net (loss) income from discontinued operations — — — — 1.2 0.7 3.8 — Net (loss) income attributable to noncontrolling interests (1.4) 1.0 (1.4) — (2.8) (0.9) (0.9) (0.5) Net income attributable to redeemable noncontrolling interests 4.0 2.4 4.5 5.9 4.4 2.3 3.2 3.4 Net (loss) income attributable to Coty Inc. $ 32.9 $ 108.4 $ 238.3 $ 128.6 $ (281.5) $ 53.6 $ 261.4 $ 226.0 Amounts attributable to Coty Inc. common stockholders: Convertible Series B Preferred Stock dividends (3.3) (3.3) (3.3) (3.3) (3.3) (3.3) (68.7) (123.0) Net (loss) income from continuing operations attributable to common stockholders 29.6 105.1 235.0 125.3 (286.0) 49.6 188.9 103.0 Net (loss) income attributable to common stockholders $ 29.6 $ 105.1 $ 235.0 $ 125.3 $ (284.8) $ 50.3 $ 192.7 $ 103.0 Per Share Data: Weighted-average common shares: Basic 852.0 851.6 850.8 842.0 838.4 838.4 829.1 777.6 Diluted (a) 864.7 865.2 886.8 882.2 838.4 852.9 842.7 787.7 Dividends declared per common share $ — $ — $ — $ — $ — $ — $ — $ — Net (loss) income attributable to Coty Inc. per common share: Basic for Continuing Operations $ 0.03 $ 0.12 $ 0.28 $ 0.15 $ (0.34) $ 0.06 $ 0.23 $ 0.13 Basic for Coty Inc $ 0.03 $ 0.12 $ 0.28 $ 0.15 $ (0.34) $ 0.06 $ 0.23 $ 0.13 Diluted for Continuing Operations $ 0.03 $ 0.12 $ 0.27 $ 0.15 $ (0.34) $ 0.06 $ 0.23 $ 0.13 Diluted for Coty Inc. $ 0.03 $ 0.12 $ 0.27 $ 0.15 $ (0.34) $ 0.06 $ 0.23 $ 0.13 (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. 49 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, interest payments, dividends, share repurchases, any principal payments on debt, and from time to time, acquisitions, and business structure realignment expenditures. Working capital movements are influenced by the sourcing of materials related to the production of products. Cash and working capital management initiatives, including the phasing of vendor payments and factoring of trade receivables from time-to-time, may also impact the timing and amount of our operating cash flows. We remain focused on deleveraging our balance sheet using cash flows generated from our operations. We continue to take steps to permanently reduce our debt, in order to reduce interest costs and improve our long term profitability and cash flows. In addition, our 25.9% investment in Wella gives us the opportunity for further permanent debt reductions, when our equity position is divested. On July 18, 2023 we announced that we entered into a binding letter of intent to sell a 3.6% stake in Wella to investment firm IGF Wealth Management for $150.0. The closing of the transaction is subject to, among other things, completion of due diligence and the satisfaction of certain closing conditions, including the approval of the transaction by KKR. If the transaction closes, we intend to use the net proceeds to pay down a portion of the outstanding principal balance of our Revolving Credit Facility. Assuming the transaction closes, we would retain 22.3% of the Wella Company. Variable rate debt accounts for approximately 34% of our total debt outstanding as of June 30, 2023. We incurred higher average variable interest rates compared to the same period in the prior year. We have taken action to reduce variability in our interest payments including paying down variable interest rate debt outstanding under our 2018 Coty Term B Facility, issuing fixed rate bonds (as discussed in the Debt section below), and entering into floating to fixed interest rate swaps. Giving effect to transactions in July 2023 (as noted in the Debt section below) on our June 30, 2023 debt balances, the proportion of our fixed rate debt outstanding would have been approximately 84%. During the fiscal year, we terminated our licensing arrangement for Lacoste fragrances and received termination payments from the licensor totaling €87.8 million (approximately $93.9). We expect to receive an additional payment of €15.0 million (approximately $16.3) in fiscal 2024. We used proceeds received to repay debt, as discussed below. We continue to wind down the operations of our Russian subsidiary. We anticipate that we will incur an immaterial amount of additional costs through completion of the wind down, and future net cash costs of $10.0 to $20.0, which will be funded by our Russian subsidiary. The amount of future costs, including cash costs, will be subject to various factors, such as additional government regulation and the resolution of legal contingencies. We have substantially completed our commercial activities in Russia. However, we anticipate that the process related to the liquidation of the Russian legal entity will take an extended period of time. 50 We continue to experience inflationary pressures in most markets resulting in higher commodity and supply chain costs, including material, freight, and energy costs, as well as higher costs for services and labor. Further, inflationary trends in certain markets and global supply chain challenges, including component shortages, 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. To mitigate the impact of these supply chain constraints on our ability to meet demand for our products, we have increased inventory levels throughout the year. We continue to monitor supply chain and other factors impacting our ability to meet demand and we will take the necessary actions to optimize our inventory levels in light of these factors. Debt We are in the process of deleveraging our company and improving the maturity mix of our debt, including through refinancing or repayment of a portion of our debt. Actions that we have taken in fiscal 2023 and subsequently include the following. Fiscal 2023 • Senior Notes – We completed cash tender offers and redeemed $77.0 of our 2026 Dollar Notes and €69.7 million (approximately $72.2) of our 2026 Euro Notes. • 2018 Term B Facility – We used proceeds associated with the termination of the Lacoste fragrances license to reduce the euro and U.S. dollar portions of the 2018 Term B Facility, in the amounts of €20.1 million (approximately $21.5) and $29.5, respectively. In addition, on March 7, 2023, we amended the 2018 Coty Credit Agreement to effectuate the transition of the underlying variable interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). Interest payments on our debt agreements were not materially impacted by the transition to SOFR. First Quarter of Fiscal 2024 July Transactions • 2018 Revolving Credit Facility – On July 11, 2023, we extended the maturity of the 2018 Revolving Credit Facility until July 2028. • Senior Notes – On July 26, 2023, we completed a senior secured notes offering and received net proceeds of $740.6. The new senior secured notes are due in 2030 and bear an annual interest rate of 6.625%. • 2018 Term B Facility – At the time we completed the senior secured noted offering, we used net proceeds to fully repay our U.S. dollar variable interest rate loans outstanding and repay a pro-rata portion of our euro variable interest rate loans outstanding under our existing 2018 Term B Facility. August Transactions • On August 3, 2023, we repaid €408.0 million of debt outstanding under our 2018 Term B Facility. See Note 15—Debt in the notes to our Consolidated Financial Statements for additional information on our debt arrangements and prior period credit agreements, as well as definitions of capitalized terms. See Note 28—Subsequent Events in the notes to our Consolidated Financial Statements for disclosures of transactions occurring after June 30, 2023. A significant portion of our long-term debt maturities (excluding capital lease obligations) have been extended from fiscal 2024 and 2025 to fiscal 2029 and thereafter following the July 2023 transactions. Following the transactions over 99% of our aggregate debt maturities have been pushed out to fiscal 2026 and beyond. 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 $202.9 and $179.3 as of June 30, 2023 and 2022, respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to $1,579.2 and $1,041.2 in fiscal 2023 and 2022, respectively. Remaining balances due from factors amounted to $14.2 and $11.2 as of June 30, 2023 and 2022, respectively. 51 Business Combinations During fiscal 2023 and 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 2022, see Note 4—Business Combinations, Asset Acquisitions and Divestitures in the notes to our Consolidated Financial Statements. Dispositions During fiscal 2023 and 2022, we did not enter into any business dispositions. During fiscal 2021, we completed the sale of a majority stake in the Wella Business (as discussed below). The Wella Business Divestiture 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. Additionally, during fiscal 2021, we entered into a post-closing purchase consideration adjustment agreement for the Wella Business sale and received advanced contingent proceeds of $34.0. During fiscal 2022, our ownership stake in the Wella Company was reduced to 25.9%. During fiscal 2023 and 2022, we earned $30.8 and $0.7, respectively of the contingent proceeds advanced to us from the sale of Wella. The remaining $2.5 is unearned as of June 30, 2023. For additional information on our prior period business dispositions from fiscal year 2021, 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) 2023 2022 2021 Consolidated Statements of Cash Flows Data (a) : Net cash provided by operating activities $ 625.7 $ 726.6 $ 318.7 Net cash (used in) provided by investing activities (118.2) 269.7 2,441.9 Net cash (used in) financing activities (469.3) (1,034.0) (2,795.1) (a) Balances presented herein represent the cash flows of Coty Inc. Net cash provided by operating activities Net cash provided by operating activities was $625.7, $726.6 and $318.7 for fiscal 2023, 2022 and 2021, respectively. The decrease in cash provided by operating activities of $100.9 in fiscal 2023 as compared with fiscal 2022 is primarily driven by an overall net decrease in cash from working capital partially offset by an increase in cash related net income. The net decrease in cash from working capital was mainly the result of changes in accrued expenses and other current liabilities and increased inventory levels in fiscal 2023, partially offset by positive impacts from changes in trade receivables. The increase in cash related net income was due to an increase in net revenues and gross margin, and lower selling, general and administrative expenses in the current year compared to the prior year. 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. Net cash (used in) provided by investing activities Net cash (used in) provided by investing activities was $(118.2), $269.7 and $2,441.9 for fiscal 2023, 2022 and 2021, respectively. The decrease in cash flows from investing activities of $387.9 in fiscal 2023 as compared with fiscal 2022 was mainly attributable to the prior year cash received from return of capital from one of our equity investments which did not reoccur 52 during the year ended June 30, 2023. Additionally, the prior year included higher proceeds from the sales of long-lived assets and the positive impact from the receipt of contingent proceeds related to the Wella Business tax credits partially offset with higher capital expenditures in the current year. 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 Net cash (used in) financing activities Net cash (used in) financing activities was $(469.3), $(1,034.0) and $(2,795.1) for fiscal 2023, 2022 and 2021, respectively. The decrease in cash used in financing activities of $564.7 in fiscal 2023 as compared to fiscal 2022 was primarily driven mainly by higher cash outflows in the prior year for net paydowns of the Company's revolving credit facility and other long term debt balances as well, as higher payments of deferred financing fees, and higher dividend payments on Series B Preferred Stock. Additionally, lower cash payments in the current year for the settlement of foreign currency contracts contributed to the overall decrease in use of cash but were partially offset by cash payments related to the Company's forward repurchase contracts. 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 Dividends On April 29, 2020, our Board of Directors suspended the payment of dividends, in keeping with our 2018 Coty Credit Agreement, as amended. As we focus on preserving cash, we expect to suspend the payment of dividends until we reach a Net debt to Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) of 2x. Any determination to pay dividends in the future will be at the discretion of our Board of Directors. Dividends on the Convertible Series B Preferred Stock are payable in cash, or by increasing the amount of accrued dividends on Convertible Series B Preferred Stock, or any combination thereof, at the sole discretion of the Company. After the expiration of applicable restrictions under the 2018 Coty Credit Agreement, as amended, we began to pay dividends on the Convertible Series B Preferred Stock in cash for the period 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, 2023, the Board of Directors declared dividends on the Series B Preferred Stock of $13.2 of which $9.9 was paid and $3.3 was paid in July 2023. 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. 53 Contractual Obligations and Commitments Our principal contractual obligations and commitments are presented below as of June 30, 2023. (in millions) Total Payments Due in Fiscal Thereafter 2024 2025 2026 2027 2028 Long-term debt obligations $ 4,274.5 $ 55.1 $ 1,389.3 $ 2,330.1 $ — $ — $ 500.0 Interest on long-term debt obligations (a) 1,508.7 242.2 240.2 237.6 261.2 267.6 259.9 Operating lease obligations 368.2 78.6 60.0 48.8 41.0 32.7 107.1 License agreements: (b) Royalty payments 505.0 132.3 68.7 60.8 43.8 39.0 160.4 Other contractual obligations (c) 931.6 869.3 24.5 22.8 9.9 5.1 — Other long-term obligations: Pension obligations (mandated) (d) 15.6 3.0 3.1 3.1 3.2 3.2 — Total $ 7,603.6 $ 1,380.5 $ 1,785.8 $ 2,703.2 $ 359.1 $ 347.6 $ 1,027.4 (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 $22.0 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. Actual royalty payments 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. 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 $218.6 as of June 30, 2023, 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 $93.5 of RNCI which is reflected in Redeemable noncontrolling interest in the Consolidated Balance Sheet as of June 30, 2023 related to the 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 of this noncontrolling interest. 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, 2023. 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$423.8 million (approximately $87.3) as of June 30, 2023. As of June 30, 2023, 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 54 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. We recorded foreign currency gains (losses) of $(32.3), $3.3 and $(7.8) in fiscal 2023, 2022 and 2021, 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. 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. Net (losses) gains of $(12.2), $10.0 and $(6.8) in fiscal 2023, 2022 and 2021, 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, 2023, 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 $91.6 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 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. We are exposed to changes in interest rates because of certain variable-rate debt discussed in Note 15—Debt. If interest rates had been 10% higher and all other variables were held constant, Income (loss) from continuing operations before income taxes in fiscal 2023 would decrease by $8.4. As of June 30, 2023, we also had fixed-rate senior notes (the “Notes”) outstanding. Since our Notes bear interest at fixed rates and are carried at amortized cost, fluctuations in interest rates do not have any impact on our consolidated financial statements. However, the fair value of the Notes will fluctuate with movements in market interest rates, increasing in periods of declining interest rates and declining in periods of increasing interest rates. 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 $1,060.0 that is valued using the fair value option and approximately $8.9 that is accounted for using the equity method as of June 30, 2023. 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 two potential $200.0 and $196.0 share buyback programs, in 2024 and 2025, respectively. 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 $60.9 decrease in the fair value of these forward repurchase contracts and reduce our Income (loss) from continuing operations before income 55 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 $225.5 as of June 30, 2023. Management believes risk of material loss under these hedging contracts is remote. Inflation Risk We experienced the impact of inflation on our business during the fiscal year. We believe that inflation may continue to have an effect on our business, financial condition or results of operations in fiscal year 2024. Inflation may negatively impact our business by raising cost and reducing profitability and 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 $7.2 and $14.3 and bank guarantees of $16.3 and $17.2 as of June 30, 2023 and 2022, 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 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, 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 2% of gross revenue after customer discounts and allowances in fiscal 2023, 2022 and 2021, respectively. Trade spending activities recorded as a reduction to gross revenue after customer discounts and allowances represent 10%, 10%, and 10% in fiscal 2023, 2022 and 2021, 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 56 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). 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. 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 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 2023, 2022 or fiscal 2021. Based on the annual impairment test performed on May 1, 2023, we determined that the fair value of each of the reporting units exceeded their respective carrying values at that date by approximately 132.1% and 71.6% 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%-11.3% and 2.0%-9.2% for the Prestige and Consumer Beauty reporting units, respectively, and a discount rate of 9.75%. 57 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. 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. 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 $950.8 as of June 30, 2023, and is comprised of trademarks for the following brands: CoverGirl of $327.4, Max Factor of $148.4, Sally Hansen of $159.4, philosophy of $124.0, Bourjois of $36.7 and other trademarks totaling $154.9. As a result of the May 1, 2022 annual impairment test, total impairments on indefinite-lived other intangible assets of $31.4 were recorded. On May 1, 2023, we performed our annual impairment testing of indefinite-lived other intangible assets and determined that no adjustments to carrying values were required. As of May 1, 2023, we determined that the fair value of our Max Factor and Bourjois trademarks exceeded their carrying values by approximately 6.8% and 10.5%, respectively, using annual revenue growth rates ranging from 2.0%-10.5% and 2.0%-8.2%, respectively, and a discount rate of 10.3%. The fair value of the Max Factor and Bourjois trademarks would fall below their carrying values if the average annual revenue growth rate decreased by approximately 55 basis points and 80 basis points, respectively, or the discount rate increased by 60 basis points and 90 basis points, respectively. The fair values of the remaining indefinite-lived trademarks exceeded their carrying values by amounts ranging from 26% to 868%. 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. 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 impairment. When such events or changes in circumstances occur, a recoverability test is performed comparing projected 58 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 2023, 2022 and 2021, we recorded asset impairment charges of $4.3, $2.4 and $5.2, respectively, to Property and equipment, net and $1.1, $1.0 and $0.6, 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. 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. 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. 59