Coty Inc. Form 10-Q Summary
Reporting period: The filing is for the quarter ended March 31, 2018, Coty’s fiscal third quarter of fiscal 2018, and compares results with the three and nine months ended March 31, 2017. The request metadata’s “2017 Q3” does not match the filing period.
Business context and results
Coty manufactures and sells beauty products globally through Luxury, Consumer Beauty and Professional Beauty. Results reflect the P&G Beauty Business integration and other recent acquisitions, brand launches and relaunches, restructuring, and a portfolio rationalization. Management described Luxury as growing strongly, Professional Beauty as sustaining performance, and Consumer Beauty as uneven and challenged by distribution and shelf-space losses.
Key financial metrics
| Metric | Quarter ended March 31, 2018 | Nine months ended March 31, 2018 | Prior comparable period |
|---|---|---|---|
| Net revenue | $2,222.7 million, up 9% | $7,098.6 million, up 31% | $2,032.1 million; $5,409.0 million |
| Gross profit and margin | $1,410.3 million; 63.4% | $4,386.9 million; 61.8% | 59.8%; 60.2% |
| Operating income (loss) | $19.9 million | $223.0 million | $(192.5) million; $(158.8) million |
| Adjusted operating income and margin (non-GAAP) | $227.8 million; 10.2% | $770.4 million; 10.9% | $208.3 million; 10.3%. $682.7 million; 12.6% |
| Net income (loss) attributable to Coty | $(77.0) million | $12.5 million | $(164.2) million; $(117.4) million |
| EPS attributable to Coty | $(0.10) | $0.02 | $(0.22); $(0.19) |
| Adjusted net income attributable to Coty (non-GAAP) | $96.2 million | $409.7 million | $110.3 million; $411.9 million |
| Net cash from operating activities | Not separately presented | $188.9 million | $706.7 million |
| Capital expenditures | Not separately presented | $318.7 million | $324.0 million |
- Quarterly revenue growth excluding acquisition contributions was 6%; management cited price and mix up 7% and favorable currency translation up 6%, offset by unit volume down 7%. YTD revenue growth excluding acquisitions was 5%; favorable currency and price/mix were offset by a 3% volume decline.
- Quarterly gross margin improved approximately 360 basis points, primarily from lower acquisition inventory step-up costs, supply-chain savings and product mix. YTD gross margin improved approximately 160 basis points.
- Adjusted operating income rose 9% for the quarter and 13% YTD, but adjusted operating margin fell 10 basis points for the quarter and 170 basis points YTD, reflecting higher SG&A as a share of revenue.
- Quarterly GAAP operating income improved substantially from the prior-year loss, but GAAP net loss remained. Lower restructuring and acquisition costs contributed to the operating comparison; the quarter also had higher SG&A and interest expense.
Liquidity, debt and balance sheet
- At March 31, 2018, cash and cash equivalents were $460.8 million and restricted cash was $25.7 million, versus cash of $535.4 million and restricted cash of $35.3 million at June 30, 2017.
- Total debt was $7,931.2 million, up from $7,215.6 million at June 30, 2017; long-term debt, net, was $7,628.6 million. Interest expense, net, was $72.6 million for the quarter and $199.3 million YTD, both higher year over year.
- Current assets of $3,910.6 million were slightly below current liabilities of $3,941.8 million. Inventories increased to $1,258.5 million from $1,052.6 million.
- YTD operating cash flow fell to $188.9 million from $706.7 million. Working capital used $318.6 million of cash, compared with providing $634.6 million in the prior period. Operating cash flow less capital expenditures was approximately negative $129.8 million, versus positive $382.7 million.
- Management said available cash, operating cash generation and access to credit supported sufficient near- and long-term liquidity. The company reported compliance with its existing debt covenants at March 31, 2018.
Material changes, outlook and risks
- Segments: Quarterly revenue increased 19% in Luxury, 3% in Consumer Beauty and 10% in Professional Beauty. Excluding acquisitions, Consumer Beauty revenue was nearly flat, with volume down 11%; declines included CoverGirl and hair retail. Luxury benefited from fragrance launches, while Professional Beauty benefited from OPI and Wella launches.
- Integration and restructuring: Management increased the final stage of the P&G integration plan by approximately $100 million of operating expenses, bringing the expected total to approximately $1.3 billion. It reported approximately $1.05 billion of integration operating expenditures and $300 million of capital expenditures through March 31, 2018. The company continued to target $750 million in cumulative synergies by fiscal 2020, with approximately 50% expected by fiscal 2018, 80% by fiscal 2019 and the full amount by fiscal 2020. These are management targets, not guaranteed outcomes.
- Management expected approximately $140 million of additional approved Global Integration Activities restructuring charges over the next two fiscal years, and approximately $7 million in additional charges for the 2018 Restructuring Actions. Costs and cash expenditures remain subject to execution and timing.
- Refinancing after quarter-end: On April 5, 2018, Coty issued $550 million of 6.50% notes due 2026, €550 million of 4.00% notes due 2023 and €250 million of 4.75% notes due 2026, and entered into a new credit agreement. Proceeds and new facility borrowings refinanced the Coty and Galleria facilities. The new revolving facility has a $3.25 billion commitment; actual post-refinancing balances are not stated here.
- Tax: The Tax Act reduced the U.S. federal corporate tax rate to 21%, with a blended fiscal 2018 rate estimated at approximately 28%. Coty’s accounting for certain tax effects remained provisional; management estimated an approximately $15 million fiscal 2018 financial-statement expense and a neutral cash impact, subject to finalization.
- Contingencies and asset sensitivity: Coty disclosed Brazilian tax assessments of approximately $75 million, including estimated interest and penalties, and recorded no loss because management did not consider one probable. The filing also notes goodwill and trademark impairment sensitivity, including limited valuation headroom for the Professional Beauty reporting unit and Sally Hansen trademark.
- Other subsequent event: On April 30, 2018, Coty agreed to divest two brands, with an estimated noncash loss of approximately $30 million. Management cited competition, changing consumer preferences, retail consolidation, execution of brand relaunches, acquisition integration, foreign exchange, leverage and variable interest rates among its risks.
Important facts for investors to verify
- Whether revenue and volume trends improve in Consumer Beauty, particularly for CoverGirl, color cosmetics and hair retail, and how much reported growth depends on acquisitions and foreign exchange.
- Whether the $750 million synergy target is achieved on schedule, and the remaining integration, restructuring and capital costs required to get there.
- Whether operating cash flow recovers from working-capital outflows and capital expenditures, and whether inventory growth converts into sales and cash.
- Post-refinancing debt balances, interest costs, leverage covenant headroom and the company’s progress in reducing debt.
- Final Tax Act accounting, the outcome of the Brazilian tax assessments, and changes in goodwill or trademark impairment assumptions.