Coty Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2018. Although the request metadata says “2017 Q4,” this is an annual report for fiscal 2018; it also includes quarterly results, including the quarter ended June 30, 2018. Dollar amounts are U.S. dollars.
Business context and reporting period
Coty is a global beauty company operating in Consumer Beauty, Luxury and Professional Beauty, selling products in more than 150 countries. Its strategy centered on integrating the P&G beauty business, completing a portfolio rationalization, strengthening brands and innovation, expanding digital and e-commerce capabilities, and reducing costs and debt. Fiscal 2018 included the Burberry Beauty Business acquisition; fiscal 2017 included the P&G Beauty Business, ghd and Younique acquisitions, so reported growth is not directly comparable without acquisition adjustments.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net revenues | $9.398 billion | $7.650 billion |
| Gross profit / gross margin | $5.790 billion / 61.6% | $4.622 billion / 60.4% |
| Operating income (loss) / margin | $161.2 million / 1.7% | $(437.8) million / (5.7)% |
| Adjusted operating income / margin (non-GAAP) | $999.8 million / 10.6% | $772.8 million / 10.1% |
| Net loss attributable to Coty | $(168.8) million | $(422.2) million |
| Adjusted net income attributable to Coty (non-GAAP) | $516.3 million | $408.5 million |
| Cash from operating activities | $413.7 million | $757.5 million |
| Capital expenditures | $446.4 million | $432.3 million |
| Cash and cash equivalents at year-end | $331.6 million | $535.4 million |
| Total debt, net of discount | $7.610 billion | $7.205 billion |
- Reported revenue rose 23%. Excluding acquisitions and divestitures, revenue increased 4%: price and mix contributed 6%, foreign exchange 4%, while unit volume declined 6%.
- Segment revenue was $3.211 billion in Luxury, $4.268 billion in Consumer Beauty and $1.919 billion in Professional Beauty. On an acquisition- and divestiture-adjusted basis, Luxury grew 10%, Professional Beauty 7%, and Consumer Beauty declined 1%.
- Reported gross margin improved about 120 basis points, helped by product mix, lower acquired-inventory step-up costs and supply-chain savings. Adjusted operating margin improved 50 basis points; the non-GAAP measure excludes substantial items, including restructuring, amortization and acquisition costs.
- Operating cash flow fell $343.8 million, primarily because working capital was a $110.2 million use of cash versus a $796.9 million source in fiscal 2017. Operating cash flow less capital expenditures was approximately negative $32.7 million.
- Fiscal 2018 dividend declarations totaled $0.50 per share, versus $0.65 in fiscal 2017. Cash dividends paid were $375.8 million.
- Current assets were $3.651 billion and current liabilities $4.044 billion. The company said it believed available cash, operating cash generation and borrowing access provided sufficient liquidity, while emphasizing its focus on cash flow and deleveraging.
Material changes versus the prior comparable period
- Fiscal 2018 operating income recovered from the prior-year loss, as acquisition-related costs and restructuring charges declined. Coty still reported a GAAP net loss, with net interest expense rising to $265.0 million from $218.6 million.
- Restructuring and other business realignment costs were $381.1 million, compared with $426.2 million. Acquisition-related costs were $64.2 million, compared with $355.4 million. The reported-to-adjusted operating income reconciliation included $838.6 million of total adjustments in fiscal 2018.
- Consumer Beauty remained uneven: adjusted comparable revenue declined 1%, including lower volume and weakness in CoverGirl and other brands. Luxury benefited from product launches and growth in China and the Middle East; Professional Beauty recorded comparable growth.
- Cash declined by $203.8 million during the year. Debt rose, and Coty refinanced its prior credit facilities in April 2018, issuing dollar and euro notes and entering a new secured credit agreement.
Outlook, commentary, risks and unusual items
- Management targeted flat to modest revenue growth and operating-margin expansion for fiscal 2019, with operating income growth. It expected integration to be largely complete by the end of fiscal 2019 and targeted approximately $750 million of cumulative P&G-related synergies by fiscal 2020; about 50% had been realized through fiscal 2018.
- Management warned that fiscal 2019 performance would not be linear. Supply-chain and logistics disruptions were expected to weigh considerably on revenue and net income, particularly in the first half, with business-disruption impacts expected to be substantially complete by its end.
- Fourth-quarter disruptions at U.S. and U.K. distribution centers caused lost Consumer Beauty sales and additional costs, including retailer penalties. A transportation strike in Brazil also disrupted shipments and raw-material deliveries.
- Coty expected approximately $1.3 billion of operating expenses and $500 million of capital expenditures related to the P&G acquisition through fiscal 2021. It also expected approximately $250 million of pre-tax costs for the separate 2018 restructuring actions.
- Debt totaled $7.623 billion before unamortized discounts and issuance costs. The new credit agreement includes a leverage maintenance covenant that tightens over time, as well as restrictions on certain transactions and payments. Floating-rate debt exposes Coty to interest-rate increases.
- Other material exposures include brand-license renewals and compliance, foreign exchange and trade/tariff changes, integration and execution risks, retailer consolidation and shelf-space losses, digital competition, and the ability to realize projected synergies. Coty cited a Brazilian sales-tax assessment of approximately $65 million, including estimated interest and penalties; it disputed the assessment and had not accrued a loss because management did not consider one probable.
- The Tax Act produced a $41.0 million fiscal 2018 tax expense; Coty said the estimated cash impact was expected to be offset by tax attributes, while some accounting estimates remained provisional. The company recorded a $28.6 million loss on the sale of Playboy and Cerruti assets.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable revenue and unit-volume trends improve, particularly in Consumer Beauty, and whether the CoverGirl turnaround gains traction.
- Whether distribution and manufacturing disruptions subside as forecast, and what their continuing effects are on sales, costs and retailer penalties.
- Progress toward the $750 million synergy target, fiscal 2019 margin objectives and the separate restructuring plan; review the cash costs and exclusions underlying adjusted results.
- Operating cash conversion, working-capital requirements, capital spending, dividends and actual debt reduction against the company’s leverage covenant schedule.
- The final outcome of the Brazilian tax assessment and any changes to provisional Tax Act accounting or other tax exposures.
- Renewal terms for significant brand licenses and developments in goodwill, trademark and other intangible-asset valuations.