Coty Inc. Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2014 (Coty fiscal Q3 2014). This differs from the “2013 Q3” period in the request metadata.
Business context and reporting period
Coty manufactures and markets fragrances, color cosmetics, and skin and body care products in more than 130 countries and territories. It reports three segments: Fragrances, Color Cosmetics, and Skin & Body Care. Results are seasonal, with increased holiday demand generally affecting the second fiscal quarter and related working capital and cash needs.
Financial performance
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Nine months ended March 31, 2014 | Nine months ended March 31, 2013 |
|---|---|---|---|---|
| Net revenue | $1,008.7 million | $997.7 million | $3,510.1 million | $3,590.3 million |
| Gross profit / margin | $613.1 million / 60.8% | $615.1 million / 61.7% | $2,093.2 million / 59.6% | $2,168.4 million / 60.4% |
| Operating income (loss) / margin | $(272.0) million / (27.0)% | $30.1 million / 3.0% | $37.1 million / 1.1% | $418.3 million / 11.7% |
| Net income (loss) attributable to Coty / diluted EPS | $(253.3) million / $(0.66) | $20.4 million / $0.05 | $(77.3) million / $(0.20) | $230.3 million / $0.58 |
| Adjusted operating income (non-GAAP) | $81.4 million | $103.7 million | $450.8 million | $527.4 million |
| Adjusted net income attributable to Coty (non-GAAP) | $86.7 million | $68.4 million | $306.3 million | $313.3 million |
| Adjusted diluted EPS (non-GAAP) | $0.22 | $0.17 | $0.78 | $0.79 |
Cash flow and liquidity: For the nine months, operating cash flow was $443.1 million, investing cash use was $224.3 million, and financing cash use was $32.6 million. Cash increased by $226.8 million to $1,147.2 million. Cash and cash equivalents exceeded current liabilities of $1,506.4 million by less than the total amount of current liabilities; current assets were $2,697.0 million. Management stated that available cash, operating cash generation, and access to credit should provide sufficient near- and long-term liquidity.
Debt: Balance-sheet short- and long-term debt totaled $2,745.1 million at March 31, 2014, compared with $2,630.2 million at June 30, 2013. The reported carrying amount of the credit facility was $2,241.0 million; Series A, B, and C senior notes totaled $500.0 million. Net debt, using balance-sheet debt less cash, was approximately $1,597.9 million.
Other metrics: Nine-month capital expenditures were $165.2 million. The company paid $76.9 million in dividends and repurchased $67.6 million of Class A shares during the period. Total marketing and advertising costs were $359.6 million, or 35.6% of quarterly revenue, and $1,168.0 million, or 33.3% of nine-month revenue.
Material changes versus the prior comparable period
- Quarterly revenue rose 1%, but the comparison benefited by about 3% from prior-year cancelled and unshipped orders related to a logistics-provider transition. Excluding that effect and ceased activities, management reported underlying quarterly revenue growth of approximately 2%.
- Nine-month revenue fell 2%, chiefly from lower unit volume. Color Cosmetics revenue declined 9% for the nine months, while Fragrances was approximately flat and Skin & Body Care rose 2%.
- Quarterly GAAP results included a $316.9 million non-cash impairment charge: $256.4 million for goodwill and $60.5 million for other long-lived assets in the China-related Skin & Body Care reporting unit. The charge drove the quarterly and year-to-date GAAP losses and most of the operating-income decline.
- Even excluding the listed adjustments, adjusted operating income fell 22% in the quarter and 15% for the nine months. Adjusted operating margin declined to 8.1% from 10.4% for the quarter and to 12.8% from 14.7% year to date.
- Gross margin decreased 90 basis points for the quarter and 80 basis points year to date, reflecting acquired-inventory revaluation, customer discounting and foreign-currency transaction effects, partly offset by supply-chain savings.
- Quarterly segment revenue increased 4% in Fragrances and 8% in Skin & Body Care, but declined 6% in Color Cosmetics. The Americas were weak, while EMEA and Asia Pacific grew.
- Operating cash flow increased $80.6 million year over year, supported in part by more favorable vendor payment terms and lower bonus payments; the filing also cites lower operating cash contribution and working-capital outflows as offsets.
Outlook, management commentary, risks and unusual items
- No specific revenue, earnings, or EPS guidance is provided. Management targeted $60.0 million of annual savings by fiscal 2016 from its productivity program; expected total program charges were approximately $70.0–$75.0, with $35.6 million incurred through March 31, 2014. Remaining program implementation was expected to finish by fiscal 2016.
- Management was evaluating options for the TJoy mass-channel business in China and cautioned that proposed measures were preliminary and might not succeed. The interim impairment analysis was not complete in all respects, including valuation of inventory and property, plant and equipment; further impairment could result.
- Management described continued competitive pressure and promotional activity, particularly in mass fragrance and color cosmetics in Western Europe and the U.S. It also cited declining U.S. nail-category demand, market-share pressure for Sally Hansen, weaker TJoy results, foreign-exchange exposure, and challenging conditions in Russia.
- The company reported two putative securities class actions relating to its IPO, which it considers without merit and intends to defend. U.S. export-control authorities closed an investigation after finding EAR violations but imposed no penalties; OFAC and antiboycott authorities continued reviews. Coty said penalties were reasonably possible, could be material, and no reserve had been recorded.
- The effective tax rate was unusually affected by the impairment’s limited tax benefit and a $38.1 million reversal of unrecognized tax benefits tied to foreign tax-audit settlements. The nine-month GAAP tax provision was $39.4 million despite a pretax loss of $12.0 million.
- The company acquired StarAsia and Lena White and formed a UAE joint venture during the period. It also planned to pay approximately $16.6 million on July 1, 2014 to acquire an additional 7% interest in a UAE subsidiary.
Most important facts for investors to verify
- Whether the final impairment valuation changes the recorded $316.9 million charge or leads to additional impairment, especially in the China reporting unit.
- Whether TJoy’s cash flows and operating performance improve, and whether management’s contemplated China actions are successful.
- Whether Color Cosmetics demand, particularly U.S. nail products, stabilizes and whether adjusted margins recover amid promotional pressure and higher spending.
- Whether operating cash flow remains sustainable after the benefits from vendor payment terms and bonus-payment timing, and how debt and liquidity evolve.
- How the IPO litigation and remaining export-control and antiboycott reviews resolve, including any penalties, costs, or reputational consequences.
- Progress against the $60.0 million annual savings target, total restructuring costs, and the remaining share-repurchase authorization.