Coty Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended September 30, 2018; comparisons are with the three months ended September 30, 2017 unless noted. Coty manufactures and sells beauty products globally. The filing is unaudited.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net revenue | $2,031.3 million | $2,238.3 million |
| Gross profit / margin | $1,222.2 million / 60.2% | $1,364.1 million / 60.9% |
| Operating income (loss) / margin | $(20.7) million / (1.0)% | $29.5 million / 1.3% |
| Net loss attributable to Coty / diluted EPS | $(12.1) million / $(0.02) | $(19.7) million / $(0.03) |
| Adjusted operating income (non-GAAP) | $140.8 million; 6.9% margin | $195.9 million; 8.8% margin |
| Adjusted net income attributable to Coty (non-GAAP) | $80.5 million; $0.11 diluted EPS | $76.3 million; $0.10 diluted EPS |
Revenue fell 9% reported and 10% excluding acquisitions and divestitures; comparable decline reflected 6% lower volume, 3% unfavorable foreign exchange and 1% unfavorable price/mix. SG&A declined 6% to $1,122.3 million, but increased as a share of revenue to 55.3% from 53.2%. Net loss improved despite the operating loss, with a $77.4 million income tax benefit, including a favorable $30 million Swiss tax ruling. The effective tax benefit rate was 88.5%.
Segment revenue and operating results were: Luxury, $792.9 million and $48.7 million; Consumer Beauty, $828.8 million and $(18.6) million; Professional Beauty, $409.6 million and $5.0 million. Revenue changed by +4%, (21)% and (5)%, respectively. Consumer Beauty’s operating result deteriorated sharply from $61.9 million income a year earlier.
Cash flow, debt and liquidity
- Operating cash outflow was $81.9 million, versus $8.9 million a year earlier. Investing cash outflow was $174.4 million, including $133.6 million of capital expenditures and $40.8 million for acquisitions or asset purchases. Financing provided $351.8 million.
- Cash and cash equivalents were $423.3 million at September 30, 2018, with restricted cash of $29.9 million. Total debt was $8,084.6 million, up from $7,623.2 million at June 30, 2018. Long-term debt, net, was $7,789.7 million.
- Current assets of $3,740.0 million were below current liabilities of $3,791.1 million. Management said cash, expected operating cash generation and access to the revolving facility and other lending sources were sufficient for ongoing needs. The company reported compliance with debt covenants at quarter-end.
- The company paid $93.8 million in dividends, or $0.125 per share. A further quarterly dividend of $0.125 per share was announced November 7, 2018.
Material changes, outlook and risks
- Supply-chain disruptions affected all divisions: warehouse and planning center consolidations in North America and Europe, supplier component shortages affecting Luxury, and Hurricane Florence’s impact on a North Carolina facility. Management expected substantial resolution in Q3 FY2019, but did not expect to recover fully the first-quarter financial impact. It withheld further FY2019 guidance pending assessment.
- Management cited weak mass-beauty categories, market-share and shelf-space losses, retailer inventory changes, increased promotional spending and customer penalties, particularly affecting Consumer Beauty. Its stated response included restoring service levels, improving gross-to-net, reallocating investment toward higher-potential brands and channels, and aligning costs with sales trends.
- Adjusted operating income declined 28%; adjusted margin contracted to 6.9%, primarily reflecting higher cost of sales and SG&A relative to revenue. GAAP results included $92.5 million amortization, $15.5 million restructuring costs and a $12.6 million impairment of a pre-existing license. Adjusted results exclude specified items and are non-GAAP measures.
- Restructuring and other business realignment costs totaled $56.4 million for the quarter. Coty expected approximately $60 million of further charges over two fiscal years for approved Global Integration Activities; the 2018 Restructuring Actions had an estimated $250 million total expected cost, of which $77.5 million had been incurred through quarter-end.
- Brazilian tax assessments, including estimated interest and penalties, totaled approximately $62 million. Coty disputed them, believed it had meritorious defenses and recorded no loss because management did not consider a loss probable.
- ASC 606 revenue accounting was adopted July 1, 2018. For this quarter, the new standard reduced reported revenue by $7.2 million and increased reported net loss by $4.9 million relative to the prior accounting method. Adoption and a separate income-tax accounting change reduced opening accumulated equity.
Most important facts for investors to verify
- Whether supply-chain disruptions substantially resolved as expected and whether revenue, service levels and margins recovered thereafter.
- Whether Consumer Beauty stabilized, including progress in market share, distribution, promotional spending and operating profitability.
- Future operating cash flow and working-capital requirements, given the quarterly cash outflow and current liabilities exceeding current assets.
- Debt reduction, covenant headroom and the company’s capacity to fund dividends, restructuring and capital spending.
- Resolution and potential financial exposure from the Brazilian tax assessments, and any changes to tax benefits or asset impairment assumptions.