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. 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. Our strategic priorities include 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 over the mid-to-long term leveraging existing brands, enhancing our organizational growth capabilities including digital and research and development, expanding our presence in growth channels such as the Travel Retail channel, in China and other growth engine markets (Latin America, including Brazil, the Middle East, North and South East Asia, Africa and India), and establishing Coty as an industry leader in sustainability. We have been making progress on our strategic priorities. In Consumer Beauty, we have implemented the relaunch of our top brands and returned to stable growth and steady margin improvement. Consumer Beauty net revenue grew 6% in fiscal 2024, with growth across mass fragrances, mass color cosmetics, skincare and body care led by Brazil. We are now focusing on accelerating our digital advocacy strategy to amplify our brand and product innovations, leverage consumer analytics and insights, and improve the return on investment of our marketing activities. Our e-commerce channel net revenues grew by over approximately 20% in fiscal 2024, with double-digit percentage growth in Prestige and Consumer Beauty. In Prestige, we continue to accelerate the fragrance business with exceptional new launches and expansion in premium and ultra-premium categories, while steadily expanding the distribution, productivity and assortment of our Prestige cosmetics. Our prestige cosmetics net revenues grew by a double-digit percentage in fiscal year 2024, led by Kylie Cosmetics and Burberry. We are continuing to thoughtfully expand our skincare portfolio (which contributed a mid-single digit percentage of our fiscal 2024 net revenue) with our focus on winning over the most discerning skin care consumers in our areas of excellence – UV protection, photoaging prevention and repair, biotech-enhanced longevity science, and micro-dose formulations. Our skincare business, which contributed a mid-single-digit percentage of sales, generated strong sales growth in fiscal year 2024. We have successfully expanded our e-commerce capabilities, through best-in-class online launches, our digital advocacy strategy and active participation in key online shopping events, and increasing digital media competitiveness. Revenues from our global Travel channel grew in all three regions – Americas, EMEA and Asia Pacific – contributing approximately 20% to the net revenue growth in fiscal year 2024. Our growth engine markets net revenues grew in fiscal 2024, led by Brazil, the rest of LATAM, Southeast Asia, including India, and Africa. Our products are marketed, sold and distributed in approximately 121 countries and territories. As a geographically diverse company we are susceptible to global economic trends, geopolitical conflicts, domestic and foreign governmental policies, and changes in foreign exchange rates. In particular, economic conditions in China have had, and are expected to continue to have, an impact on our strategic initiatives, including our growth agenda in the region for Prestige products and our skincare growth priorities. Within the China market we continue to monitor and take actions to address the impact to our Consumer Beauty brands which have experienced sales declines as retailers and distributors continue to deplete their existing inventory. 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 have or may have global implications which may impact the future performance of our business in unpredictable ways. Changing market trends may impact sales of our products across and within product categories and regions. Within our Consumer Beauty segment, positive market trends within the skin and body care and mass color cosmetics categories in Brazil positively impacted the segment's sales volume during fiscal year 2024. Excluding the contribution from the Brazilian brands, the Consumer Beauty segment experienced a decline in sales volume primarily in the skin and body care category, as a result of a decline in sales from China, and in the color cosmetic category primarily due to negative market trends in the U.S. in mass color cosmetics market. 33 We expect that our net revenue for fiscal year 2025 will grow in the mid-single digit percent to high-single digit percent versus the prior year, excluding the impact of foreign exchange and the early termination of the Lacoste fragrance license. We anticipate that our annual gross margin will remain in the mid-sixties, providing us with opportunities to fund new product initiatives and support our brands through advertising and consumer promotional investments. We continue to target advertising and consumer promotional spending in the high-twenties percentage of net revenues. However, our level of advertising and consumer promotional spending will depend on various factors, including seasonality, the timing of product launches, and budgetary considerations. Global Supply Chain Challenges Our ability to fulfill demand for our products is critical to our success. Through steps taken to improve order fill rates and mitigate the impact of supply chain constraints, we have seen improvements in our order fill rates on a company-wide basis. As a result, in fiscal year 2024 we achieved close to pre-COVID-19 service levels across our divisions. Inflation The impact of inflation on material, logistical and other costs subsided during fiscal year 2024. Inflation may continue to impact certain costs, such as labor. However, we currently anticipate the overall impact of inflation to remain muted. 34 Selected Financial Data (in millions, except per share data) Year Ended June 30, 2024 2023 2022 Net revenues $ 6,118.0 $ 5,554.1 $ 5,304.4 Gross profit 3,939.2 3,547.3 3,369.2 Restructuring costs 36.7 (6.5) (6.5) Acquisition- and divestiture-related costs — — 14.7 Asset impairment charges — — 31.4 Operating income 546.7 543.7 240.9 Interest expense, net 252.0 257.9 224.0 Other expense (income), net 90.2 (419.0) (409.9) Income from continuing operations before income taxes 204.5 704.8 426.8 Provision for income taxes on continuing operations 95.1 181.6 164.8 Net income from continuing operations 109.4 523.2 262.0 Net income from discontinued operations — — 5.7 Net income 109.4 523.2 267.7 Net income attributable to Coty Inc. $ 89.4 $ 508.2 $ 259.5 Amounts attributable to Coty Inc.: Net income from continuing operations attributable to common stockholders $ 76.2 $ 495.0 $ 55.5 Net income from continuing operations attributable to common stockholders $ 76.2 $ 495.0 $ 61.2 Per Share Data: Net income attributable to Coty Inc. per common share: Basic income from continuing operations $ 0.09 $ 0.58 $ 0.07 Basic income from discontinued operations $ 0.00 $ 0.00 $ 0.01 Basic income for Coty Inc. $ 0.09 $ 0.58 $ 0.08 Diluted income from continuing operations $ 0.09 $ 0.57 $ 0.07 Diluted income from discontinued operations $ 0.00 $ 0.00 $ 0.01 Diluted income for Coty Inc. $ 0.09 $ 0.57 $ 0.08 Weighted-average common shares Basic 874.4 849.0 820.6 Diluted 883.4 886.5 834.1 (in millions) Year Ended June 30, 2024 2023 2022 Consolidated Statements of Cash Flows Data: Net cash provided by operating activities $ 614.6 $ 625.7 $ 726.6 Net cash (used in) provided by investing activities (226.2) (118.2) 269.7 Net cash used in financing activities (336.7) (469.3) (1,034.0) (in millions) As of June 30, 2024 2023 2022 Consolidated Balance Sheets Data: Cash and cash equivalents $ 300.8 $ 246.9 $ 233.3 Total assets 12,082.5 12,661.6 12,116.1 Total debt 3,913.7 4,281.6 4,473.9 Total Coty Inc. stockholders’ equity 3,827.1 3,811.1 3,154.5 35 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. 36 • 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 and early license termination: We have excluded the impact of gain on sale and termination of brand assets and early license termination as such amounts are inconsistent in amount and frequency and are significantly impacted by the size of the sale of brand assets and early license termination. • 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 well as expenses related to potential or actual sales transactions reducing equity investments, 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 37 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 27—Related Party Transactions 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, or for the impacts of hyperinflation. 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 2024/2023 presentation Impact on basis of 2023/2022 presentation Third quarter fiscal 2023 Market Exit from Russia First and second quarters fiscal 2023 net revenue excluded. Third and fourth quarters fiscal 2022 net revenue excluded. Third quarter fiscal 2024 Termination: Lacoste Third and fourth quarters fiscal 2023 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. Unless otherwise noted, the following section pertains to the results of continuing operations. NET REVENUES In fiscal 2024, net revenues increased 10%, or $563.9, to $6,118.0 from $5,554.1 in fiscal 2023. Excluding net revenue from the first half of the prior period from Russia and the second half of the prior period from Lacoste, net revenues increased 12% or $654.3 to $6,118.0 from $5,463.7, reflecting a positive price and mix impact of 9%, an increase in unit volume of 2%, and a positive foreign currency exchange translation impact of 1%. The overall increase in net revenues reflects growth in our prestige fragrance category due to the continued success of fragrance brands, specifically Burberry, Hugo Boss, Calvin Klein, 38 Gucci, Chloe, Davidoff, Joop, and Marc Jacobs, as well as innovation from the launches including Marc Jacobs Daisy Wild and Cosmic Kylie Jenner, and positive performance in the prestige cosmetics category. The overall increase in net revenues for the Consumer Beauty segment was due to positive performance in the color cosmetics category specifically from Rimmel Manhattan and Risque , mass fragrance category specifically from David Beckham and Bruno Banani , and the skin and body care categories in Brazil, specifically from Monange , Paixao and Bozzano . The overall increase in net revenues reflects the continued success of our pricing and revenue management strategies, including the implementation of price increases across our product portfolio earlier in the fiscal year. Volume growth across our fragrance portfolio, as well as in skin and body care products in Brazil helped drive the increase in revenues, partially offset by volume declines from certain color cosmetic and other body care brands in China due to macroeconomic conditions which resulted in higher trade inventory levels. Geographically, except for China, net revenues in all major markets grew, led by Brazil, the United States, and Germany. Additionally, there was an increase in travel retail channel sales in all regions. Digital and e-commerce channel sales growth also contributed to the increase in 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. 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 exit from Russia impacted the overall change in our reported net revenues. Considering total fiscal 2023 year-to-date net revenues from Russia in both the current and prior fiscal 2022 period, 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. Year Ended June 30, Change % (in millions) 2024 2023 2022 2024/2023 2023/2022 NET REVENUES Prestige $ 3,857.3 $ 3,420.5 $ 3,267.9 13 % 5 % Consumer Beauty 2,260.7 2,133.6 2,036.5 6 % 5 % Total $ 6,118.0 $ 5,554.1 $ 5,304.4 10 % 5 % Prestige In fiscal 2024, net revenues in the Prestige segment increased 13%, or $436.8 to $3,857.3 from $3,420.5 in fiscal 2023. Excluding net revenue from the first half of the prior period from Russia and the second half of the prior period from Lacoste, net revenues increased 15% or $508.5 to $3,857.3 from $3,348.8, reflecting a positive price and mix impact of 8% (primarily due to positive pricing impact as a result of price increases and in line with overall premiumization strategy), an increase in unit volume of 6% (primarily due to successful innovations and positive trends in the prestige fragrance category in many markets), and positive foreign currency exchange translation impact of 1%. The increase in net revenues primarily reflects: • Prestige fragrance sales growth of $476.9, primarily due to the continued success of Burberry Goddess , Classic, Her and Hero, Hugo Boss Boss Bottled and Boss the Scent , Calvin Klein One , Euphoria , and Eternity , Gucci Guilty and Flora , Chloe Nomade and Signature , Marc Jacobs Daisy Wild , Davidoff Cool Water , and Joop Homme , as well as continued brand innovation within the Gucci Flora franchise and Cosmic Kylie Jenner. Prestige fragrance sales grew in major markets such as the United States, Germany, Australia, and Spain as well as through travel retail channel sales across all regions. This growth was partially offset by lower net revenues for the Lacoste brand in the first six months of the current period, which was primarily due to the early license termination resulting in a wind down of 39 sales through the end of the second quarter; and no net revenues for the Bottega Veneta brand in the current period due to the ending of our licensing arrangement where sales of the brand ended in fiscal 2023; and • Prestige cosmetic sales growth of $24.5, primarily due to brand innovation from Kylie Cosmetics . 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% (primarily due to the positive pricing impact as a result of global price increases and in line with overall premiumization strategy) partially offset by a negative foreign currency exchange translation impact of 5%. The increase in net revenues primarily reflects: • Prestige fragrance sales growth of $197.9, due to the continued success of Burberry Hero , Burberry Her , Calvin Klein , Hugo Boss Boss Bottled , Gucci Flora , and Marc Jacobs Daisy , particularly in the U.S. due to positive market trends and innovation, and in the travel retail channel sales across all major regions impacted by increased leisure travel compared to the prior year. These increases were partially offset by: • Prestige makeup sales decline of $18.1, primarily due to Gucci makeup travel retail channel sales in the Asia Pacific region as a result of slow recovery from the lockdowns in China; and • Prestige skincare sales decline of $10.8, primarily due to lower net revenues for philosophy due to less innovation and repositioning of the brand. Consumer Beauty In fiscal 2024, net revenues in the Consumer Beauty segment increased 6%, or $127.1, to $2,260.7 from $2,133.6 in fiscal 2023. Excluding net revenue from the second half of the prior period from Russia, net revenues increased 7% or $145.8 to $2,260.7 from $2,114.9, reflecting a positive price and mix impact of 5% (primarily due to positive pricing impact as a result of price increases), an increase in unit volume of 1% (primarily due to increases from Brazilian brands offsetting decreases in volumes in most other markets), and a positive foreign currency exchange translation impact of 1%. The increase in net revenues primarily reflects: • Color cosmetics sales growth of $51.4, primarily due to the continued success of Rimmel Manhattan which saw continued brand innovation, such as Lasting Finish foundation and Thrill Seeker mascara, and Risque due to strong category momentum in Brazil and positive pricing impact, despite a category slowdown in the US; • Mass fragrance sales growth of $46.3, due to the continued success from the re-launch of David Beckham Instinct in the current period and success of Bruno Banani ; and • Skin and body care sales growth of $44.6, due to the continued success of Brazilian brands Monange , Bozzano , and Paixao benefiting from strong category momentum and positive pricing impact. This growth was partially offset by lower sales volume for adidas primarily as a result of category slowdown in China which resulted in higher trade inventory levels. 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% (primarily due to the positive pricing impact as a result of global price increases) partially offset by a negative foreign currency exchange translation impact of 4%. The increase in net revenues primarily reflects: • Color cosmetics sales growth of $59.1, resulting from 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, Switzerland, as well as Australia. • Skin and body care sales growth of $53.3, resulting from growth of brands in Brazil due to strong category momentum and positive product mix impact within our Brazilian brands’ portfolio, as well as due to innovation in brands such as Monange and market share gains for Paixao . 40 COST OF SA LES In fiscal 2024, cost of sales increased 9%, or $172.0, to $2,178.8 from $2,006.8 in fiscal 2023. Cost of sales as a percentage of net revenues decreased to 35.6% in fiscal 2024 from 36.1% in fiscal 2023 resulting in a gross margin percentage increase of approximately 50 basis points, primarily reflecting: (i) approximately 80 basis points related to a decrease in manufacturing and material costs as a percentage of net revenues, driven by increased manufacturing efficiencies, improvements in productivity, as well as procurement and material cost optimization; and (ii) approximately 50 basis points related to decreased freight costs. These increases were partially offset by: (i) approximately 50 basis points related to an increase in excess and obsolescence costs across various subcategories within the Prestige and Consumer Beauty product portfolios; and (ii) approximately 30 basis points related to an increase in designer license fees due to licensed Prestige brands comprising a larger portion of overall net revenues in the current period as well as favorable royalty activity in the prior period, which did not reoccur in the current period. The above reflects a positive impact from pricing net of inflation of approximately 160 basis points. 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In fiscal 2024, selling, general and administrative expenses increased 12%, or $344.1, to $3,162.4 from $2,818.3 in fiscal 2023. Selling, general and administrative expenses as a percentage of net revenues increased to 51.7% in fiscal 2024 from 50.7% in fiscal 2023, or approximately 100 basis points. This increase was primarily due to: (i) 220 basis points due to a decrease in net gains in the current period compared to the prior year related to the early termination of the Lacoste license; (ii) 40 basis points due to an increase in bad debt expense as a percentage of net revenues. These increases were partially offset by the following decreases: (i) 100 basis points due to a decrease in stock-based compensation cost primarily related to a reduction in expense recognized in connection with awards granted to the CEO; (ii) 30 basis points due to a decrease in logistics costs as a percentage of net revenues; and (iii) 30 basis points due to favorable transactional impact from our exposure to foreign currency as a percentage of net revenues. 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; 41 (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 (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. OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS In fiscal 2024, operating income from continuing operations was $546.7 compared to income of $543.7 in fiscal 2023. Operating income as a percentage of net revenues, worsened to 8.9% in fiscal 2024 as compared to Operating income as a percentage of net revenues of 9.8% in fiscal 2023. The worsened operating margin is largely driven by gains from the early termination of the Lacoste license in the prior year (approximately 200 basis points), higher restructuring costs as a percentage of net revenues (approximately 70 basis points), partially offset by lower stock-based compensation expense (approximately 100 basis points) primarily related to a reduction in expense recognize in connection with grants made to the CEO, lower cost of sales as a percentage of net revenues (approximately 50 basis points), lower amortization expense as a percentage of net revenues (approximately 30 basis points), and lower fixed costs as a percentage of net revenues (approximately 30 basis points) primarily related to non-people costs. In addition, the greater proportion of Consumer Beauty net revenues, including a greater proportion of revenues from our Brazilian business were from lower margin Brazil brands, compared to the prior year, negatively impacted our consolidated operating income margin. In fiscal 2023, operating income from continuing operations was $543.7 compared to 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 (approximately 150 basis points) primarily due to lower depreciation expense related to fully depreciated IT equipment, lower stock-based compensation as a percentage of net revenues (approximately 130 basis points) primarily related to a reduction in expense recognized in connection with a prior year’s grant made to the CEO, lower advertising and consumer promotional spending as a percentage of net revenues (approximately 100 basis points) primarily due to a reduction in working media, and a decrease in asset impairment charges as a percentage of net revenues (approximately 60 basis points) related to the impairment of indefinite-lived intangibles recorded in the prior period. In addition, despite a higher proportion of Consumer Beauty sales from lower margin Brazil brands in fiscal 2023 compared to the prior year, a greater proportion of higher margin Prestige product sales in 2023 positively benefited our consolidated gross margin and operating income. Operating Income (Loss) by Segment Year Ended June 30, Change % (in millions) 2024 2023 2022 2024/2023 2023/2022 Operating income (loss) from continuing operations Prestige $ 580.7 $ 483.7 $ 367.2 20 % 32 % Consumer Beauty 89.3 63.3 9.5 41 % >100% Corporate (123.3) (3.3) (135.8) <(100%) 98 % Total $ 546.7 $ 543.7 $ 240.9 1 % >100% Prestige In fiscal 2024, operating income for Prestige was $580.7 compared to income of $483.7 in fiscal 2023. Operating margin improved to 15.1% of net revenues in fiscal 2024 as compared to 14.1% in fiscal 2023, driven primarily by lower amortization expense as a percentage of net revenues (approximately 40 basis points), lower cost of sales as a percentage of net revenues (approximately 40 basis points), lower fixed costs as a percentage of net revenues (approximately 30 basis points) primarily related to non-people costs. 42 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 (approximately 110 basis points) primarily due to lower depreciation expense related to fully depreciated technology equipment, lower cost of goods sold as a percentage of net revenues (approximately 60 basis points) and lower amortization expense as a percentage of net revenues (approximately 60 basis points) mainly due to the certain definite-lived intangible assets reaching the end of their useful lives. Consumer Beauty In fiscal 2024, operating income for Consumer Beauty was $89.3 compared to income of $63.3 in fiscal 2023. Operating margin improved to 4.0% of net revenues in fiscal 2024 as compared to 3.0% in fiscal 2023, primarily driven by lower advertising and consumer promotion expense as a percentage of net revenues (approximately 30 basis points) primarily due to lower spend in offline consumer engagement and lower transactional foreign exchange losses as a percentage of net revenues (approximately 30 basis points). 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 (approximately 90 basis points) primarily due to lower depreciation expense on promotional fixtures as a result of fewer fixtures being installed during the COVID-19 pandemic, a decrease in impairment charges as a percentage of net revenues (approximately 150 basis points) related to the impairment of indefinite-lived intangibles recorded in the prior period, and lower fixed costs as a percentage of net revenues (approximately 130 basis points) primarily due to lower depreciation expense as a percentage of net revenues. 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 $123.3, $3.3 and $135.8 in fiscal 2024, 2023 and 2022, respectively, as described under “Adjusted Operating Income” below. The operating loss of $123.3 in fiscal 2024 declined in comparison to the prior year primarily due to the gain recognized due to the early termination of the Lacoste fragrance license in the prior period ($104.4) lower stock based compensation ($47.1 reduction in expense) primarily related to a reduction in expense recognized in connection with grants made to the CEO, partially offset by an increase in restructuring and business realignment costs ($42.9 increase in expense). The operating loss of $3.3 in fiscal 2023 includes stock-based compensation ($135.9), partially offset by gains related to the early termination of the Lacoste fragrance license ($104.4), gains related to the market exit in Russia (approximately $17.0), and gains on sale of real estate ($4.9) The operating loss of $135.8 in fiscal 2022 includes stock-based compensation ($195.5), costs related to the Russia market exit ($45.9), restructuring and other business realignment costs ($4.7), acquisition and divestiture related costs ($14.7), partially offset by a gains on the sale of real estate ($115.5) and gains from sale of brand assets ($9.5). 43 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, 2024 (in millions) Reported (GAAP) Adjustments (a) Adjusted (Non-GAAP) Adjusted operating income (loss) from continuing operations Prestige $ 580.7 $ 153.7 $ 734.4 Consumer Beauty 89.3 39.7 129.0 Corporate (123.3) 123.3 — Total $ 546.7 $ 316.7 $ 863.4 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 (a) See a reconciliation of reported net income to operating income (loss) to adjusted operating income (loss) and adjusted EBITDA for Coty Inc. and reconciliations of segment operating income (loss) to segment adjusted operating income (loss) and segment adjusted EBITDA for the Prestige, Consumer Beauty and Corporate segments with a description of the adjustments under “Net Income, Adjusted Operating Income and Adjusted EBITDA for Coty Inc.” and “Segment Operating Income (Loss), Segment Adjusted Operating Income (Loss) and Segment Adjusted EBITDA”, below. All adjustments are reflected in Corporate, except for amortization and asset impairment charges on goodwill, indefinite-lived intangible assets, and finite-lived intangible assets, which are reflected in the Prestige and Consumer Beauty segments. 44 Net Income, Adjusted Operating Income and Adjusted EBITDA for Coty Inc. Adjusted operating income and adjusted EBITDA provide 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) 2024 2023 2022 2024/2023 2023/2022 Net income $ 109.4 $ 523.2 $ 262.0 (79 %) 100 % Net income margin 1.8 % 9.4 % 4.9 % Provision (benefit) for income taxes $ 95.1 $ 181.6 $ 164.8 (48 %) 10 % Income before income taxes $ 204.5 $ 704.8 $ 426.8 (71 %) 65 % Interest expense, net $ 252.0 $ 257.9 $ 224.0 (2 %) 15 % Other expense (income), net $ 90.2 $ (419.0) $ (409.9) >100% (2 %) Reported operating income $ 546.7 $ 543.7 $ 240.9 1 % >100% % of Net revenues 8.9 % 9.8 % 4.5 % Amortization expense 193.4 191.8 207.4 1 % (8 %) Restructuring and other business realignment costs 36.6 (6.3) 4.7 >100% <(100%) Stock-based compensation 88.8 135.9 195.5 (35 %) (30 %) Costs related to acquisition and divestiture activities — — 14.7 N/A (100 %) Asset impairment charges — — 31.4 N/A (100 %) Early license termination/brand asset sale and market exit costs (0.5) (121.4) 36.4 100 % <(100%) Gains on sale of real estate (1.6) (4.9) (115.5) 67 % 96 % Total adjustments to reported operating income 316.7 195.1 374.6 62 % (48) % Adjusted operating income $ 863.4 $ 738.8 $ 615.5 17 % 20 % % of Net revenues 14.1 % 13.3 % 11.6 % Adjusted depreciation 227.7 234.0 289.8 (3 %) (19) % Adjusted EBITDA $ 1,091.1 $ 972.8 $ 905.3 12 % 7 % % of Revenues 17.8 % 17.5 % 17.1 % 1.7 % 2.3 % In fiscal 2024, adjusted operating income was $863.4 compared to income of $738.8 in fiscal 2023. Adjusted operating margin increased to 14.1% of net revenues in fiscal 2024 as compared to 13.3% in fiscal 2023. In fiscal 2024, adjusted EBITDA was $1,091.1 compared to $972.8 in fiscal 2023. Adjusted EBITDA margin increased to 17.8% of net revenues in 2024 as compared to 17.5% in fiscal 2023. In fiscal 2023, adjusted operating income was $738.8 compared to an 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. 45 Segment Operating Income (Loss), Segment Adjusted Operating Income (Loss) and Segment Adjusted EBITDA Operating Income, Adjusted Operating Income and Adjusted EBITDA - Prestige Segment Year Ended June 30, Change % (in millions) 2024 2023 2022 2024/2023 2023/2022 Reported operating income $ 580.7 $ 483.7 $ 367.2 20 % 32 % Reported operating income margin 15.1 % 14.1 % 11.2 % Amortization expense 153.7 151.4 162.9 2 % (7) % Total adjustments to reported operating income $ 153.7 $ 151.4 $ 162.9 2 % (7) % Adjusted operating income $ 734.4 $ 635.1 $ 530.1 16 % 20 % Adjusted operating income margin 19.0 % 18.6 % 16.2 % Adjusted depreciation 105.2 110.5 138.7 (5) % (20) % Adjusted EBITDA $ 839.6 $ 745.6 $ 668.8 13 % 11 % Adjusted EBITDA margin 21.8 % 21.8 % 20.5 % Operating Income, Adjusted Operating Income and Adjusted EBITDA - Consumer Beauty Segment Year Ended June 30, Change % (in millions) 2024 2023 2022 2024/2023 2023/2022 Reported operating income $ 89.3 $ 63.3 $ 9.5 41 % >100% Reported operating income margin 4.0 % 3.0 % 0.5 % Amortization expense 39.7 40.4 44.5 (2) % (9) % Asset impairment charges — — 31.4 N/A (100) % Total adjustments to reported operating income $ 39.7 $ 40.4 $ 75.9 (2) % (47) % Adjusted operating income $ 129.0 $ 103.7 $ 85.4 24 % 21 % Adjusted operating income margin 5.7 % 4.9 % 4.2 % Adjusted depreciation 122.5 123.5 151.1 (1) % (18) % Adjusted EBITDA $ 251.5 $ 227.2 $ 236.5 11 % (4) % Adjusted EBITDA margin 11.1 % 10.6 % 11.6 % 46 Operating Loss, Adjusted Operating Loss and Adjusted EBITDA - Corporate Segment Year Ended June 30, Change % (in millions) 2024 2023 2022 2024/2023 2023/2022 Reported operating loss $ (123.3) $ (3.3) $ (135.8) <(100%) 98 % Reported operating (loss) margin — % — % — % Restructuring and other business realignment costs $ 36.6 $ (6.3) $ 4.7 >100% <(100%) Stock-based compensation $ 88.8 $ 135.9 $ 195.5 (35) % (30) % Costs related to acquisition and divestiture activities $ — $ — $ 14.7 N/A (100) % Early license termination/brand asset sale and market exit costs $ (0.5) $ (121.4) $ 36.4 100 % <(100%) Gains on sale of real estate $ (1.6) $ (4.9) $ (115.5) 67 % 96 % Total adjustments to reported operating income $ 123.3 $ 3.3 $ 135.8 >100% (98) % Adjusted operating loss $ — $ — $ — N/A N/A Adjusted operating income margin — % — % — % Adjusted depreciation — — — N/A N/A Adjusted EBITDA $ — $ — $ — N/A N/A Adjusted EBITDA margin — % — % — % Amortization Expense In fiscal 2024, amortization expense increased to $193.4 from $191.8 in fiscal 2023. In fiscal 2023, amortization expense decreased to $191.8 from $207.4 in fiscal 2022. The decrease was primarily driven by certain license and collaboration agreements, which fully amortized in early fiscal 2023 and fiscal 2022. Restructuring and Other Business Realignment Costs We incurred $521.3 of cash costs life-to-date related to our previously announced and substantially completed Transformation Plan as of June 30, 2024, which have been recorded in Corporate. In addition, we continue to analyze our cost structure and evaluate opportunities to streamline operations through a range of other cost reduction activities (“Current Restructuring Actions”). In fiscal 2024, we incurred restructuring and other business structure realignment costs of $36.6, as follows: • We incurred restructuring costs of $36.7, primarily related to the Current Restructuring Actions, included in the Consolidated Statements of Operations and • We incurred a credit in business structure realignment costs of $(0.1) which is reported in selling, general and administrative expenses. 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) primarily 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 47 • 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 included in selling, general and administrative expenses 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 2024, stock-based compensation was $88.8 as compared with $135.9 in fiscal 2023. The decrease in stock-based compensation is primarily related to a reduction in expense recognized in connection with awards granted to the CEO. 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 all reported periods, all costs related to stock-based compensation were reported in Corporate. Acquisition- and divestiture-related costs In fiscal 2024 and 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 all reported periods, all acquisition- and divestiture-related costs were reported in Corporate, except where otherwise noted. Asset Impairment Charges In fiscal 2024 and 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. For further detail as to the factors resulting in the asset impairment charges, see Note 11 —Goodwill and Other Intangible Assets, net to the Consolidated Financial Statements. Early License Termination/Brand Asset Sale and Market Exit Costs In fiscal 2024, we recognized a gain of $(0.5) related to the early termination of a license and our decision to wind down our business in Russia. In fiscal 2023, we recognized gains of $(121.4) related to the early termination of a license and our decision to wind down our business in Russia. In fiscal 2022, we incurred costs of $36.4 related to our decision to wind down our business operations in Russia and the sale of brand assets. Gains on Sale of Real Estate In fiscal 2024, we recognized gains of $1.6 related to sale of real estate, which was reported in Corporate. 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 the sale of real estate, which was reported in Corporate. INTEREST EXPENSE, NET Net interest expense was $252.0, $257.9, and $224.0 in fiscal 2024, fiscal 2023 and fiscal 2022, respectively. In fiscal year 2024, the decrease in interest expense is primarily due to lower debt balances in the current period despite higher interest rates. 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 compared to the previous year. OTHER EXPENSE (INCOME), NET In fiscal 2024, net other expense was $90.2, was principally comprised of net losses on forward repurchase contracts of $124.2, partially offset by a favorable adjustment for the unrealized gain in the Wella investment of $25.0. 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 partially offset by associated fees of $28.2. 48 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. INCOME TAXES The following table presents our (benefit) provision for income taxes, and effective tax rates for the periods presented: 2024 2023 2022 Provision (benefit) for income taxes $ 95.1 $ 181.6 $ 164.8 Effective income tax rate 46.5 % 25.8 % 38.6 % The 20.7% increase in the effective tax rate in fiscal 2024 from fiscal 2023 was primarily driven by the following items: • a 17.6% increase from an increase in valuation allowances recorded primarily on interest expense carryforwards; • a 13.5% increase due to changes to the net deferred taxes recognized on the assignment of strategic service functions from Amsterdam to Geneva, as an indirect result of the required revaluation of the original transfer of the main principal location from Geneva to Amsterdam in fiscal 2021; • an 11.8% increase from the revaluation of our deferred tax liabilities due to a tax rate increase enacted in Switzerland; and • an 11.7% increase in the foreign tax rate differential impact primarily due to lower fair value gains related to the investment in the Wella business taxed at a lower rate as compared to our U.S. Federal statutory rate of 21%. These increases were partially offset by the following decreases: • an 18.5% decrease as a result of the issuance of non-refundable income tax credits received from the Swiss Tax Authorities of $97.1. The Company recorded a benefit for the tax credit of $37.8, net of a valuation allowance; and • a 12.2% decrease from a reduction of foreign tax audits due to the settlement of foreign tax audits. The 12.8% decrease in the effective tax rate in fiscal 2023 from fiscal 2022 was primarily driven by the following items: • a 6.6% decrease in tax costs associated with the Company’s exit from Russia in the prior year; • a 6.6% decrease from a reduction in permanent differences related to non-deductible expenses and non-deductible foreign exchange losses; • a 4.8% decrease as a result of the reduction in the amount of non-deductible executive stock compensation; • a 3.0% decrease from a gain on the disposition of business assets (real estate) in the prior period; and • a 1.9% decrease from a foreign exchange loss recognized on the repatriation of funds in the current year that were previously taxed. These decreases were partially offset by the following increases: • a 7.1% increase in unrecognized tax benefits due to the impact of increasing U.S. taxation of foreign sourced income; and • a 2.4% increase in foreign tax rate differential impact primarily due to lower fair value gains related to the investment in the Wella business taxed at a lower rate as compared to our U.S. Federal statutory rate of 21%. The Company has significant income in jurisdictions such as Germany, Netherlands, France, and Spain which have statutory tax rates higher than the U.S. Federal statutory rate of 21%. The impact of the foreign earnings in higher taxed jurisdictions coupled with U.S. losses at the statutory tax rate of 21% increases the Company’s effective tax rate. This jurisdictional mix is expected to have a continuing impact on the effective tax rate. 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. 49 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, 2024 Year Ended June 30, 2023 Year Ended June 30, 2022 (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 before income taxes $ 204.5 $ 95.1 46.5 % $ 704.8 $ 181.6 25.8 % $ 426.8 $ 164.8 38.6 % Adjustments to reported operating income (loss) (a) 316.7 195.1 374.6 Change in fair value of investment in Wella Business (d) (25.0) (230.0) (403.9) Other adjustments (e) (2.4) 0.2 (2.4) Total Adjustments (b)(c) 289.3 $ 35.6 (34.7) (4.5) (31.7) (55.3) Adjusted income before income taxes $ 493.8 $ 130.7 26.5 % $ 670.1 $ 177.1 26.4 % $ 395.1 $ 109.5 27.7 % (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 2024, fiscal 2023 and fiscal 2022. (c) In fiscal 2024, the total tax impact on adjustments includes a tax expense of $27.6 due to changes to the net deferred taxes recognized on the assignment of strategic service functions from Amsterdam to Geneva, as an indirect result of the required revaluation of the original transfer of the main principal location from Geneva to Amsterdam in fiscal 2021. The total tax impact on adjustments also includes a tax benefit of $1.1, $0.4 and tax expense of $24.1 for fiscal 2024, fiscal 2023 and fiscal 2022, respectively, recorded as the result of the Company’s exit from Russia. (d) The amount represents the realized and unrealized (gain) loss recognized for the change in fair value of the investment in Wella. (e) 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 26.5% compared to 26.4% in the prior-year period. The differences were primarily due to an increase in valuation allowances recorded primarily on interest expense carryforwards and the tax impact of the revaluation of the Company’s deferred tax liabilities due to a tax rate increase enacted in Switzerland offset by a tax benefit recorded as a result of the issuance of non-refundable income tax credits received from the Swiss Tax Authorities and a reduction of unrecognized tax benefits due to the settlement of foreign tax audits. Cash paid during the years ended June 30, 2024, 2023 and 2022, for income taxes was $172.6, $58.6 and $97.2, respectively. NET INCOME (LOSS) ATTRIBUTABLE TO COTY INC. In fiscal 2024, net income attributable to Coty Inc. was $89.4 compared to income of $508.2 in fiscal 2023. The net income increase was primarily driven by losses from forward repurchase contracts of $124.2 compared to gains of $168.7 in the prior year and a lower favorable adjustment of $205.0 related to the unrealized gain in the Wella investment in the current year. 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 in the current year, a favorable adjustment of $230.0 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. 50 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) 2024 2023 2022 2024/2023 2023/2022 Net income (loss) from Coty Inc. net of noncontrolling interests $ 89.4 $ 508.2 $ 259.5 (82 %) 96 % Convertible Series B Preferred Stock dividends (a) (13.2) (13.2) (198.3) — % 93 % Reported net income (loss) attributable to Coty Inc. 76.2 495.0 61.2 (85 %) >100% Adjustments to reported operating income (b) 316.7 195.1 374.6 62 % (48 %) Adjustments to Loss on Sale of Business — — (6.1) N/A 100 % Change in fair value of investment in Wella Business (c) (25.0) (230.0) (403.9) 89 % 43 % Adjustments to other expense (income) (d) (2.4) 0.2 (2.4) <(100%) >100% Adjustments to noncontrolling interest (e) (6.8) (6.9) (7.0) 1 % 1 % Change in tax provision due to adjustments to reported net income (loss) attributable to Coty Inc. (35.6) 4.5 55.7 <(100%) (92 %) Adjustment for deemed Series B Preferred Stock dividends related to the First and Second Exchanges — — 160.0 N/A (100 %) Adjusted net income attributable to Coty Inc. $ 323.1 $ 457.9 $ 232.1 (29 %) 97 % % of Net revenues 5.3 % 8.2 % 4.4 % Per Share Data Adjusted weighted-average common shares Basic 874.4 849.0 820.6 Diluted (a)(f) 883.4 862.8 834.1 Adjusted net income attributable to Coty Inc. per common share Basic $ 0.37 $ 0.54 $ 0.28 Diluted (a)(f) $ 0.37 $ 0.53 $ 0.28 (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, if applicable. 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 2024, 2023, and 2022, the amount represents the unrealized (gain) loss recognized for the change in fair value of the investment in Wella. (d) In fiscal 2024, the amount includes recovery of previously written-off non-income tax credits and the amortization of basis differences in certain equity method investments. 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. (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, 2024, 2023 and 2022, 23.7 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. 51 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, 2024. 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 2024 Fiscal 2023 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) 2024 2024 2023 2023 2023 2023 2022 2022 Net revenues $ 1,363.4 $ 1,385.6 $ 1,727.6 $ 1,641.4 $ 1,351.6 $ 1,288.9 $ 1,523.6 $ 1,390.0 Gross profit 875.4 897.8 1,124.1 1,041.9 849.5 810.8 998.3 888.7 Restructuring costs 1.7 0.9 5.7 28.4 (1.1) (1.3) (2.9) (1.2) Operating income (loss) 34.7 77.8 236.7 197.5 129.0 43.5 199.3 171.9 Interest expense, net 61.7 60.4 60.1 69.8 72.2 58.8 61.0 65.9 Income (Loss) from continuing operations before income taxes (107.4) 3.4 257.4 51.1 78.8 141.6 280.2 204.2 Provision (benefit) for income taxes (11.8) (5.4) 71.4 40.9 43.3 29.8 38.8 69.7 Net (loss) income from continuing operations (95.6) 8.8 186.0 10.2 35.5 111.8 241.4 134.5 Net (loss) income attributable to noncontrolling interests 1.3 2.4 0.5 1.1 (1.4) 1.0 (1.4) — Net income attributable to redeemable noncontrolling interests — 2.6 4.6 7.5 4.0 2.4 4.5 5.9 Net (loss) income attributable to Coty Inc. $ (96.9) $ 3.8 $ 180.9 $ 1.6 $ 32.9 $ 108.4 $ 238.3 $ 128.6 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) (3.3) (3.3) Net (loss) income from continuing operations attributable to common stockholders (100.2) 0.5 177.6 (1.7) 29.6 105.1 235.0 125.3 Net (loss) income attributable to common stockholders $ (100.2) $ 0.5 $ 177.6 $ (1.7) $ 29.6 $ 105.1 $ 235.0 $ 125.3 Per Share Data: Weighted-average common shares: Basic 867.9 883.1 892.8 854.3 852.0 851.6 850.8 842.0 Diluted (a) 867.9 892.0 922.8 854.3 864.7 865.2 886.8 882.2 Dividends declared per common share $ — $ — $ — $ — $ — $ — $ — $ — Net (loss) income attributable to Coty Inc. per common share: Basic for Coty Inc $ (0.12) $ — $ 0.20 $ — $ 0.03 $ 0.12 $ 0.28 $ 0.15 Diluted for Coty Inc. $ (0.12) $ — $ 0.20 $ — $ 0.03 $ 0.12 $ 0.27 $ 0.15 (a) The outstanding stock options and Series A 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. 52 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 and tax 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 25.84% investment in Wella gives us the opportunity for further permanent debt reductions, when our equity position is fully or partially divested. The timing of any future divestiture of our Wella stake will depend on a combination of factors including market conditions and the decisions of KKR, the majority owner of Wella. We have substantially completed the exit of 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. We anticipate that we will incur future net cash costs of $10.0 to $15.0, 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. The impact of inflation on material, logistical and other costs subsided during fiscal year 2024, which was primarily driven by a significant easing during the second and third quarters. Inflation may continue to impact certain costs, such as labor, however, we currently anticipate the overall impact of inflation to remain muted. Additionally, through steps taken to improve order fill rates and mitigate the impact of supply chain constraints, we have seen improvements in our order fill rates on a company-wide basis. As a result, in fiscal year 2024 we achieved close to pre-COVID-19 service levels across our divisions. Debt Financing 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. We have taken action to reduce variability in our interest payments including completely paying down variable interest rate debt outstanding under our 2018 Coty Term B Facility and issuing fixed rate bonds. While our revolving credit facility, which we draw on from time to time, is subject to variable interest rates, all of our long-term debt outstanding as of June 30, 2024 is fixed rate debt, and all floating-to-fixed interest rate swaps have been terminated. In the first quarter of fiscal 2024, we amended the 2018 Coty Credit Agreement and replaced our existing revolving commitments with two tranches of revolving commitments, having an aggregate principal amount of $1,670.0 available in U.S. dollars and certain other currencies and the other in an aggregate principal amount of €300.0 million available in euros, and issued $750.0 and €500.0 million of senior secured notes due July 2030 and September 2028, respectively. The net proceeds received from the offerings were used to primarily pay down the outstanding balance of the U.S. dollar and euro portions of the 2018 Coty Term B Facility by $715.5 and €22.6 million (approximately $25.1), respectively and a portion of the borrowings outstanding under our revolving credit facility. In August 2023, we repaid the €408.0 million (approximately $446.1) of the debt outstanding under the 2018 Term B Facility, thus repaying the facility in full. In the second quarter of fiscal 2024, one of our wholly-owned subsidiaries utilized cash on hand to fully pay down the U.S. Dollar-denominated credit facility in Brazil in the amount of $31.9. Additionally, we completed cash tender offers on December 7, 2023, and redeemed $150.0 of the Company’s 2026 Dollar Notes and $250.0 of the Company’s 2026 Dollar Senior Secured Notes. In the fourth quarter of fiscal 2024, we issued an aggregate principal amount of €500.0 million of 4.50% senior secured notes due 2027 ("2027 Euro Senior Secured Notes") in a private offering. The net proceeds received of €493.7 million in connection with this offering were utilized to redeem the remaining $323.0 of existing 2026 Dollar Notes. Coty used a combination of proceeds from the issuance and cash on hand to pay fees and expenses associated with this offering. 53 We expect to continue to take actions to improve the maturity mix of our debt from time to time as market conditions permit. See Note 14—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. Equity Offering On September 28, 2023, we entered into an agreement with a group of underwriters to issue and sell 33.0 million shares of our Class A common stock, par value $0.01 per share (see Note 21—Equity and Convertible Preferred Stock for additional information). We used proceeds of approximately $348.4, net of underwriting fees, from this offering primarily to retire the principal amount of outstanding debt. Other uses included general corporate purposes, such as strategic investments in the business, working capital and capital expenditures. Settlement of the Offering occurred on October 2, 2023. Share Repurchases In connection with our Share Repurchase Program, we entered into forward repurchase contracts in June 2022, December 2022, and November 2023 with three large financial institutions to hedge for $200.0, and a potential $196.0 and $294.0 of share repurchases in 2024, 2025 and 2026, respectively. We physically settled the June 2022 forward repurchase contracts by delivering approximately $200.0 cash in exchange for 27.0 million shares of our Class A Common Stock during the third quarter of fiscal 2024. The forward repurchase contracts permit a net cash settlement alternative in addition to the physical settlement. We may elect net cash settlement of all, or some of the remaining forward repurchase contracts based on factors such as timing, the market value of the underlying shares at the settlement date and other internal cash management considerations. We will continue to incur costs associated with the remaining forward repurchase contracts before settlement. Cash costs incurred in the current fiscal year to date for all forward repurchase contracts amounted to $42.6. 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 $195.3 and $202.9 as of June 30, 2024 and 2023, respectively. The aggregate amount of trade receivable invoices factored on a worldwide basis amounted to $1,534.3 and $1,579.2 in fiscal 2024 and 2023, respectively. Remaining balances due from factors amounted to $10.0 and $14.2 as of June 30, 2024 and 2023, respectively. Other Developments We ended a previously existing distribution arrangement with Wella related to transition services for Wella Brazil in the third quarter of fiscal 2024, resulting in a net positive cash impact of approximately $35.0 during the nine months ended March 31, 2024 related to reimbursements for working capital financed by Coty since the separation of the Wella business. Cash Flows Year Ended June 30, (in millions) 2024 2023 2022 Consolidated Statements of Cash Flows Data (a) : Net cash provided by operating activities $ 614.6 $ 625.7 $ 726.6 Net cash (used in) provided by investing activities (226.2) (118.2) 269.7 Net cash used in financing activities (336.7) (469.3) (1,034.0) (a) Balances presented herein represent the cash flows of Coty Inc. Net cash provided by operating activities Net cash provided by operating activities was $614.6, $625.7 and $726.6 for fiscal 2024, 2023 and 2022, respectively. The decrease in cash provided by operating activities of $11.1 in fiscal 2024 as compared with fiscal 2023 is primarily the result of a negative impact from changes in accounts payable due to the timing of payments and mix of vendor terms, higher cash outflows from the timing of income tax related payments and changes in trade receivables reflecting higher net revenues with an unfavorable customer mix and decreases from lower factoring. These decreases were partially offset by higher year over year impacts from all other net working capital accounts which include a positive impact from inventory levels returning closer to normal compared to the prior year when inventory levels reflected increased safety stock to mitigate supply chain 54 constraints. Net working capital accounts in the current year were also positively impacted by a net inflow of $35.0 as a reimbursement from Wella for working capital financed by Coty since the separation from the Wella business. 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. Net cash (used in) provided by investing activities Net cash (used in) provided by investing activities was $(226.2), $(118.2) and $269.7 for fiscal 2024, 2023 and 2022, respectively. The increase in cash used in investing activities of $108.0 in fiscal 2024 as compared with fiscal 2023 was primarily due to lower current year proceeds related to the early termination of the Lacoste license agreement and proceeds from sale of other long-term assets combined with the impact of an increase in capital expenditures. The year over year increases in cash used in investing activities were partially offset by the current year collection of contingent consideration. The decrease in cash flows provided by 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 during fiscal 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. Net cash used in financing activities Net cash used in financing activities was $(336.7), $(469.3) and $(1,034.0) for fiscal 2024, 2023 and 2022, respectively. The decrease in cash used in financing activities of $132.6 in fiscal 2024 as compared to fiscal 2023 was primarily driven by the current year net proceeds from the issuance of Class A Common Stock in connection with the global offering and lower cash payments related to the Company’s financing related foreign currency contracts in the current year compared to the prior year. The decrease in cash used in financing activities was partially offset by higher outflows in the current year related to the Company’s forward repurchase contracts, higher current year net repayments as a result of current year debt related activity, as well as higher payments year over year for the associated deferred financing fees. The decrease in cash used in financing activities of $564.7 in fiscal 2023 as compared to fiscal 2022 was primarily driven 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. Dividends On April 29, 2020, the Board of Directors suspended the payment of dividends on Common Stock. As previously disclosed, we expect to suspend the payment of dividends until we approach a Net debt to Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) target of 2x. We expect to consider any future resumption of dividends in line with that target while continuing to pursue our deleveraging agenda and implementing our strategic initiatives. 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. We expect 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, 2024, the Board of Directors declared dividends on the Series B Preferred Stock of $13.2, of which $9.9 was paid during fiscal 2024 and $3.3 was paid in July 2024. For additional information on our dividends and dividend policy, respectively, see Note 21—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 21—Equity and Convertible Preferred Stock in the notes to our Consolidated Financial Statements. 55 Contractual Obligations and Commitments Our principal contractual obligations and commitments are presented below as of June 30, 2024. (in millions) Total Payments Due in Fiscal Thereafter 2025 2026 2027 2028 2029 Long-term debt obligations $ 3,909.4 $ — $ 1,590.8 $ 534.3 $ — $ 1,034.3 $ 750.0 Interest on long-term debt obligations (a) 1,689.1 198.8 207.8 234.1 241.2 256.5 550.7 Operating lease obligations 325.0 68.1 56.0 49.2 37.2 33.2 81.3 License agreements: (b) Royalty payments 647.5 132.2 114.5 112.1 79.7 42.9 166.1 Other contractual obligations (c) 897.8 750.4 78.6 44.6 24.2 — — Other long-term obligations: Pension obligations (mandated) (d) 14.0 3.1 2.9 2.8 2.7 2.5 — Total $ 7,482.8 $ 1,152.6 $ 2,050.6 $ 977.1 $ 385.0 $ 1,369.4 $ 1,548.1 (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 $35.6 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 $200.2 as of June 30, 2024, as we are unable to predict when, or if, any payments would be made. See Note 16—Income Taxes in the notes to our Consolidated Financial Statements for additional information on our uncertain tax benefits. The table excludes $93.6 of RNCI which is reflected in Redeemable noncontrolling interest in the Consolidated Balance Sheet as of June 30, 2024 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 20—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 excludes $142.4 of preferred stock, which is reflected in Convertible Series B Preferred Stock in the Consolidated Balance Sheet as of June 30, 2024. 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 21—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. The table excludes amounts related to our remaining forward repurchase contracts. See Note 21—Equity and Convertible Preferred Stock in the notes to our Consolidated Financial Statements for further discussion. Contingencies From time to time, our Brazilian subsidiaries receive tax assessments from local, state, and federal tax authorities in Brazil. In relation to the appeal of our Brazilian tax assessments, we have entered into surety bonds of R$449.0 million (approximately $81.6) as of June 30, 2024. See Note 24—Legal and Other Contingencies for more details on these tax assessments. 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. 56 Foreign Currency Exchange Risk Management We operate in multiple functional currencies and are exposed to the impact of foreign currency fluctuations. For foreign currency exposures, which primarily relate to receivables, inventory purchases and sales, payables and intercompany loans, derivatives are used to better manage the earnings and cash flow volatility arising from foreign currency exchange rate fluctuations. We recorded net foreign currency (losses) gains of $(18.1), $(32.3) and $3.3 in fiscal 2024, 2023 and 2022, 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 $(16.5), $(12.2) and $10.0 in fiscal 2024, 2023 and 2022, 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 when necessary to offset these exposures. As of June 30, 2024, 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 would result in a $89.5 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. All of our long-term debt outstanding as of June 30, 2024 is fixed rate debt, however, we draw on our revolving credit facility which is subject to variable interest rates, from time to time. 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 14—Debt. If interest rates had been 10% higher and all other variables were held constant, Income from continuing operations before income taxes in fiscal 2024 would decrease by $2.3. As of June 30, 2024, 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 $1,085.0 that is valued using the fair value option and approximately $5.6 that is accounted for using the equity method as of June 30, 2024. 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 12—Equity Investments for additional information. In addition to the above equity investments, we entered into forward repurchase contracts in December 2022 and November 2023 with three large financial institutions to hedge for potential $196.0 and $294.0 share buyback programs of share repurchases in 2025 and 2026, respectively. These forward repurchase contracts are accounted for at fair value, with changes in the fair value recorded in Other expense (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 57 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 $47.6 decrease in the fair value of these forward repurchase contracts and reduce our Income (loss) from continuing operations before income taxes. Any realized gains or losses resulting from such fair value changes would occur if we elect to terminate the forward repurchase contracts prior to or on maturity. Refer to Note 21—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 $1.5 as of June 30, 2024. Management believes risk of material loss under these hedging contracts is remote. Inflation Risk The impact of inflation on material, logistical and other costs subsided during fiscal year 2024. Inflation may continue to impact certain costs, such as labor, however. Although we currently anticipate the overall impact of inflation to remain muted, 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 $4.1 and $7.2 and bank guarantees of $18.4 and $16.3 as of June 30, 2024 and 2023, 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 1%, 2% and 2% of gross revenue after customer discounts and allowances in fiscal 2024, 2023 and 2022, respectively. Trade spending activities recorded as a reduction to gross revenue after customer discounts and allowances represent 9%, 10%, and 10% in fiscal 2024, 2023 and 2022, 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 58 We elected the fair value option to account for its investment in Wella to align with our strategy for this investment. The fair value is updated on a quarterly basis. The investments are classified within Level 3 in the fair value hierarchy because we estimate the fair value of the investments using a combination of the income approach, the market approach and private transactions, when applicable. Changes in the fair value of equity investments under the fair value option are recorded in Other expense (income), net within the Consolidated Statements of Operations (see Note 12—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 2024, 2023 or fiscal 2022. Based on the annual impairment test performed on May 1, 2024, we determined that the fair value of each of the reporting units exceeded their respective carrying values at that date by approximately 143.6% and 69.9% relating to the Prestige and 59 Consumer Beauty reporting units, respectively. Consequently, there were no goodwill impairment charges recorded as a result of the annual impairment test performed on May 1, 2024. To determine the fair value of our reporting units, we have used annual revenue growth rates ranging from 3.0%-10.0% and 2.0%-7.8% for the Prestige and Consumer Beauty reporting units, respectively, and a discount rate of 9.5%. 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 $944.6 as of June 30, 2024, and is comprised of trademarks for the following brands: CoverGirl of $327.4, Max Factor of $148.4, Sally Hansen of $158.5, philosophy of $121.8, Bourjois of $36.1 and other trademarks totaling $152.4. 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, 2024 and 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, 2024, we determined that the fair value of our Max Factor and Bourjois trademarks exceeded their carrying values by approximately 4.8% and 5.8%, respectively, using annual revenue growth rates ranging from 2.0%-15.0% and 2.0%-13.5%, respectively, and a discount rate of 10.37%. 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 62 and 75 basis points, respectively, or the discount rate increased by 42 basis points and 50 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. 60 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 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 2024, 2023 and 2022, we recorded asset impairment charges of $1.7, $4.3 and $2.4, respectively, to Property and equipment, net and nil, $1.1 and $1.0, 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. The Company classifies inventories into various categories based upon their stage in the product life cycle, future marketing sales plans and the disposition process. The Company also records an inventory obsolescence reserve, which represents the excess of the cost of the inventory over its net realizable value, based on 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, the Company may establish specific reserves for future known or anticipated events. 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. 61