Coty Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended June 30, 2019. The filing also reports the quarter ended June 30, 2019; it is not a 2018 Q4 filing. Unless otherwise noted, amounts are U.S. dollars.
Business context and period
Coty is a global beauty company operating in Luxury, Consumer Beauty and Professional Beauty, selling products in more than 150 countries. The year completed the final steps of integrating the P&G Beauty Business and the supply-chain footprint transformation. Management announced a multi-year Turnaround Plan in July 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $8,648.5 million | $9,398.0 million |
| Gross profit / margin | $5,342.0 million / 61.8% | $5,790.2 million / 61.6% |
| Operating income (loss) | $(3,471.5) million | $153.3 million |
| Adjusted operating income (non-GAAP) | $949.7 million; 11.0% margin | $1,002.3 million; 10.7% margin |
| Net income (loss) attributable to Coty | $(3,784.2) million | $(168.8) million |
| Operating cash flow | $639.6 million | $413.7 million |
| Capital expenditures | $426.6 million | $446.4 million |
| Cash and cash equivalents at year-end | $340.4 million | $331.6 million |
| Total debt, before debt discounts and issuance costs | $7,745.8 million | $7,623.2 million |
Gross margin improved about 20 basis points, while adjusted operating income fell 5% year over year. GAAP operating results included $3,851.9 million of impairment charges, primarily Consumer Beauty goodwill and trademarks. Fourth-quarter FY2019 revenue was $2,115.4 million versus $2,299.4 million a year earlier; the quarter included $2,874.2 million of impairment charges and a net loss attributable to Coty of $2,799.4 million.
Operating cash flow increased by $225.9 million year over year, with collection improvements and receivables factoring contributing to cash generation. Investing cash outflow was $454.0 million and financing cash outflow was $160.3 million. Current assets were $3,272.7 million versus current liabilities of $3,477.1 million. The company said it believed available cash, operating cash generation and borrowing access were sufficient for ongoing needs. The filing states Coty was compliant with debt covenants at June 30, 2019.
Material changes versus prior year
- Revenue declined 8%; excluding acquisition and divestiture effects, it declined 7%, including a 3% adverse foreign-exchange impact and a 4% unit-volume decline.
- Consumer Beauty revenue fell 17% to $3,539.3 million; Luxury revenue rose 3% to $3,294.3 million; Professional Beauty revenue fell 5% to $1,814.9 million.
- Consumer Beauty’s reported operating loss was $3,598.7 million, principally reflecting impairment charges. Adjusted operating income was $219.0 million versus $411.1 million.
- Luxury adjusted operating income increased to $511.2 million from $393.8 million; Professional Beauty adjusted operating income increased to $219.4 million from $194.9 million.
- The $3,851.9 million impairment charge included $3,391.1 million of goodwill impairment and $429.1 million of indefinite-lived intangible impairments, alongside other asset impairments. The Consumer Beauty reporting unit had no excess fair value over carrying value after testing.
Outlook, commentary and risks
- FY2020 outlook: Management expected to moderate the revenue decline and target moderate improvements in cash flow and operating income.
- FY2023 targets: Moderate revenue growth, significant operating income and margin expansion, and improved cash flow. These are targets, not guarantees.
- Turnaround costs: Coty expected approximately $600 million of additional cash costs over FY2020–FY2023, in addition to approximately $160 million of cash costs tied to earlier programs. Plans include organizational simplification, a management headquarters move to Amsterdam, selective brand and market investment, product-range reduction and cost-of-goods improvements.
- Management attributed weakness to Consumer Beauty category softness and market-share and shelf-space losses, especially in CoverGirl, Rimmel and Clairol; foreign exchange; and supply-chain disruptions, which were resolved by Q4 and had minimal Q4 impact.
- Key risks include execution of the turnaround and cost savings, further Consumer Beauty deterioration or impairment, high leverage and refinancing/covenant exposure, retailer concentration and distribution changes, license renewals, foreign exchange, tariffs, supply-chain reliability, and integration or restructuring disruption. The credit agreement amendment reduced revolving commitments by $500 million to $2.75 billion and delayed a leverage-covenant step-down.
- JAB affiliate Cottage Holdco owned approximately 60% of Coty after its May 2019 tender offer; Coty is a controlled company. Shareholder lawsuits concerning the tender offer were pending. A Brazilian tax assessment, including estimated interest and penalties, was approximately $65.2 million; Coty had not recorded a loss because it considered a loss not probable.
- After year-end, Coty agreed to transfer its Younique interest to an existing noncontrolling holder, subject to regulatory clearances, with closing expected by the end of calendar 2019.
Most important facts for investors to verify
- Whether revenue trends and market share stabilize, particularly in Consumer Beauty, and whether reported and adjusted margins improve.
- Whether the turnaround delivers its targets and stays within the estimated $600 million incremental cash cost and timetable.
- Debt maturity, covenant headroom, actual leverage and refinancing capacity; the filing does not provide a clear actual net-leverage value in the summarized disclosures.
- Assumptions underlying the major impairment tests and the potential for further goodwill or trademark impairment.
- Cash-flow quality, including the effects of receivables factoring, and the company’s ability to fund restructuring, dividends and debt reduction.
- Developments in the Brazilian tax matter, tender-offer litigation, Younique divestiture and upcoming brand-license renewals.
Deloitte issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of June 30, 2019.