Coty Inc. — Form 10-Q summary
Reporting period: The filing is for the three and nine months ended March 31, 2015, Coty’s fiscal third quarter and first nine months of fiscal 2015—not calendar 2014 Q3. The statements are unaudited.
Business context and results
Coty manufactures and markets fragrances, color cosmetics, and skin and body care products in more than 130 countries across prestige and mass markets. The company cited a challenging market, particularly in mass fragrance in Western Europe and the U.S., and seasonal variability in sales and cash flows.
| Metric | Three months ended Mar. 31, 2015 | Three months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2015 | Nine months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Net revenue | $933.8 million | $1,008.7 million | $3,375.7 million | $3,510.1 million |
| Gross profit | $582.0 million | $613.1 million | $2,032.8 million | $2,093.2 million |
| Operating income (loss) | $114.7 million | $(272.0) million | $418.5 million | $37.1 million |
| Net income (loss) attributable to Coty Inc. | $75.5 million | $(253.3) million | $211.5 million | $(77.3) million |
| Diluted EPS | $0.21 | $(0.66) | $0.59 | $(0.20) |
| Adjusted operating income (non-GAAP) | $100.9 million | $81.4 million | $468.9 million | $450.8 million |
| Adjusted net income attributable to Coty (non-GAAP) | $63.6 million | $86.7 million | $329.8 million | $306.3 million |
Revenue, margins, and material changes
- Quarterly revenue fell 7%; management attributed the decline primarily to a 7% adverse foreign-currency translation effect and 4% lower unit volume, partly offset by 4% favorable price and mix. Excluding currency and TJoy/China Optimization effects, revenue was described as consistent with the prior-year quarter.
- Nine-month revenue declined 4%, mainly from a 4% currency headwind and 1% lower unit volume, partly offset by 1% favorable price and mix. Excluding currency and TJoy/China Optimization effects, revenue and unit volume were described as consistent with the prior year.
- Quarterly gross margin was approximately 62.3%, versus 60.8% a year earlier; nine-month gross margin was approximately 60.2%, versus 59.6%. Management said reported improvements included China Optimization estimate revisions; underlying nine-month improvement excluding specified items was approximately 20 basis points.
- Quarterly reported operating margin was 12.3%, versus (27.0%); nine-month reported operating margin was 12.4%, versus 1.1%. Comparisons are heavily affected by the prior-year $316.9 million impairment charge tied to the Skin & Body Care reporting unit. Adjusted operating margin was 10.8% versus 8.1% for the quarter and 13.9% versus 12.8% for nine months.
- Segment revenue for the quarter: Fragrances $431.3 million, down 9%; Color Cosmetics $336.6 million, down 2%; Skin & Body Care $165.9 million, down 12%. For nine months, respective revenue was $1,763.9 million, down 5%; $1,021.2 million, up 3%; and $590.6 million, down 10%.
- Color Cosmetics benefited from Sally Hansen Miracle Gel and Rimmel launches. Fragrances faced weaker existing lines and promotional pricing; Skin & Body Care was pressured by adidas and Playboy, China distribution changes, TJoy discontinuation, and currency, partly offset by philosophy.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $388.2 million, down from $443.1 million. Capital expenditures were $135.0 million; net investing cash outflow was $151.2 million and net financing cash outflow was $162.3 million.
- Cash and cash equivalents were $1,144.1 million at March 31, 2015, versus $1,238.0 million at June 30, 2014. The company attributed the $93.9 million net cash decrease in part to a $168.6 million adverse exchange-rate effect.
- Total debt was $3,586.4 million, up from $3,293.5 million at June 30, 2014; long-term debt was $3,550.9 million. The company reported $172.5 million available under its 2013 credit agreement and said it was in compliance with financial covenants.
- In March 2015, Coty entered a new $800 million term loan due March 2018 and amended its existing credit agreement, including leverage covenant terms. It had repaid $500 million of Senior Notes early in September 2014, recording an $88.8 million extinguishment loss. Nine-month net interest expense was $56.3 million, versus $51.4 million.
- Financing cash use included $263.1 million of share repurchases and $71.0 million of dividends. The company repurchased 13.4 million shares during the nine months; approximately $36.9 million remained authorized under its $400 million repurchase program at March 31.
Outlook, notable items, and risks
- No specific revenue, earnings, or margin guidance is provided in the supplied filing text. Management described its priorities as growing ten power brands through innovation and market execution, expanding in emerging markets and distribution channels, and improving efficiency. It expected gradual declines in non-power brands later in their lifecycles.
- The Organizational Redesign is expected to incur $145 million to $180 million of pretax restructuring and related costs, all cash, with substantial completion by the end of fiscal 2017. The company had incurred $68.5 million of restructuring costs through March 31, 2015. The Productivity Program is expected to cost approximately $70 million to $75 million, with activities planned through fiscal 2016.
- On April 1, 2015, Coty completed the Bourjois cosmetics acquisition for consideration valued at approximately $373.5 million in Coty shares. Proceeds from a share issuance to foreign subsidiaries were used to repay revolving debt; reported total debt fell from approximately $3.6 billion at March 31 to $3.2 billion on April 2. Purchase-price allocation was not yet complete.
- Management identified currency fluctuations, competitive promotional pricing, retail shelf-space changes, consumer and product-launch execution, international political and economic conditions, acquisition integration, and delivery of restructuring benefits among key risks.
- An IPO-related securities class action remained under judicial consideration; Coty said it believed the case was without merit and intended to defend it. Separately, export-control and antiboycott disclosures remained relevant: the Commerce Department’s export-enforcement office closed its investigation with a warning and no penalty, while the antiboycott review was ongoing under a tolling agreement through June 30, 2015. Coty said a penalty was reasonably possible, could be material, and had not been reserved because the amount was unknown.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of March 31, 2015; no material change in internal control over financial reporting was reported during the quarter.
Most important facts for investors to verify
- Separate underlying operating trends from the prior-year $316.9 million impairment and current-period China Optimization estimate benefits when assessing reported profit and margins.
- Track organic/constant-currency revenue, unit volumes, discounting, and performance of Fragrances and Skin & Body Care, particularly in the U.S., Western Europe, and China.
- Review leverage, covenant headroom, borrowing costs, and post-Bourjois debt; confirm the acquisition’s final purchase-price allocation and integration effects.
- Monitor cash conversion and working capital, alongside restructuring cash payments, dividends, and continued share repurchases.
- Follow the antiboycott investigation and securities litigation for any change in potential exposure, and assess whether Coty’s stated restructuring and brand-growth plans deliver measurable results.