Coty Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2019; fiscal year ends June 30. Figures are in U.S. dollars unless noted. The filing is for 2019, notwithstanding the request metadata’s “2018 Q3.”
Business context and performance
Coty makes and sells fragrance, cosmetics, hair-care, and skin- and body-care products. It reports Luxury, Consumer Beauty, and Professional Beauty segments. Results reflect a difficult Consumer Beauty business, supply-chain disruptions, foreign-exchange headwinds, and integration of the P&G Beauty Business. Management said the most critical supply-chain issues had been resolved by the quarter, with a small remaining effect expected in fiscal Q4.
Key financial metrics
| Metric | Three months ended Mar. 31, 2019 | Three months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2018 |
|---|---|---|---|---|
| Net revenue | $1,990.6 million | $2,222.7 million | $6,533.1 million | $7,098.6 million |
| Gross profit / margin | $1,249.4 million / 62.8% | $1,410.4 million / 63.5% | $4,026.1 million / 61.6% | $4,387.2 million / 61.8% |
| Operating income (loss) / margin | $85.5 million / 4.3% | $20.7 million / 0.9% | $(739.8) million / (11.3)% | $225.4 million / 3.2% |
| Net income (loss) attributable to Coty / diluted EPS | $(12.1) million / $(0.02) | $(77.0) million / $(0.10) | $(984.8) million / $(1.31) | $12.5 million / $0.02 |
| Adjusted operating income (non-GAAP) | $229.5 million | $228.6 million | $692.6 million | $772.8 million |
| Adjusted net income attributable to Coty (non-GAAP) | $101.6 million | $96.2 million | $364.0 million | $409.7 million |
Third-quarter reported operating income improved mainly as restructuring and other realignment costs fell; adjusted operating income was broadly flat, while adjusted operating margin rose to 11.5% from 10.3%. Nine-month adjusted operating income fell 10%, and adjusted margin declined to 10.6% from 10.9%. Non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Revenue by segment: In Q3, Luxury revenue was $729.2 million (down 3%), Consumer Beauty $840.3 million (down 18%), and Professional Beauty $421.1 million (down 6%). For the nine months, Luxury revenue was $2,539.6 million (up 3%), Consumer Beauty $2,636.9 million (down 18%), and Professional Beauty $1,356.6 million (down 5%). Consumer Beauty’s nine-month operating loss of $901.4 million included major impairment charges.
Cash flow and liquidity: Nine-month operating cash flow was $451.4 million, versus $188.9 million; investing cash outflow was $371.0 million, versus $580.7 million; financing cash outflow was $16.7 million, versus financing inflow of $290.9 million. Capital expenditures were $330.9 million, implying operating cash flow less capital expenditures of approximately $120.5 million (a simple calculation, not a company-defined measure). Cash and cash equivalents were $384.1 million at March 31, 2019, and restricted cash was $36.1 million. Current assets of $3,402.5 million were below current liabilities of $3,578.8 million.
Debt: Total debt was $7,772.3 million, compared with $7,623.2 million at June 30, 2018; long-term debt, net, was $7,490.9 million. The company had $2,435.8 million of remaining revolving-credit capacity and reported compliance with debt covenants. Nine-month net interest expense was $204.4 million. Scheduled debt maturities include $4,084.2 million in fiscal 2023.
Material changes and unusual items
- Revenue fell 10% in Q3 and 8% for the nine months. Excluding acquisition and divestiture effects, management reported nine-month revenue down 7%, with currency translation, lower volume, and negative price/mix contributing.
- Q3 revenue declines were especially pronounced in Consumer Beauty and in North America and Europe. Management cited shelf-space losses, weak category and brand trends, reduced Younique sales, and currency effects. For the nine months, supply-chain disruption also weighed on results.
- The company recorded $977.7 million of nine-month asset impairment charges, including $832.5 million against Consumer Beauty goodwill, $90.8 million against indefinite-lived intangibles, $22.8 million against the philosophy trademark, and other charges. Consumer Beauty’s goodwill had no excess fair value after impairment; further adverse assumptions could trigger additional charges.
- ASC 606 was adopted July 1, 2018. Under the prior revenue standard, Q3 revenue would have been $25.6 million higher and Coty-attributable net income $18.6 million higher; the nine-month differences were $8.9 million and $5.0 million, respectively.
- Nine-month operating cash flow benefited from working-capital movements, including improved collections and payment timing. Coty began factoring receivables under a $150 million facility; $109.1 million of factored receivables remained net of collections at quarter-end. Some receivables carry recourse of up to 10%.
Outlook, commentary, and risks
Management described a broad strategic review under new leadership, prioritizing stabilization of Consumer Beauty, sustainable profitable growth, and gross-margin improvement. The filing provides no clear numerical full-year revenue or earnings guidance. Management expected only a small supply-chain impact in fiscal Q4. It estimated approximately $25 million of additional Global Integration Activities restructuring charges over the next two fiscal years and approximately $9 million of additional charges for the 2018 Restructuring Actions over the next three fiscal years. The company also expected total Global Integration Activities operating expenditures of approximately $1.4 billion; about $1.29 billion of operating and $420 million of capital expenditures had been incurred through March 31, 2019.
Important risks include continued Consumer Beauty market-share and shelf-space losses, supply-chain execution, further impairment of goodwill or trademarks, substantial debt and refinancing needs, foreign-exchange exposure, and the ability to realize integration savings. JAB-related ownership and tender-offer litigation are additional governance and market risks. After quarter-end, an affiliate of JAB completed a tender offer for 150 million shares at $11.65 per share, bringing JAB’s indirect ownership to approximately 60%. Coty disclosed related stockholder lawsuits. A Brazilian tax assessment of approximately $63.8 million, including estimated interest and penalties, remained disputed; no loss was accrued because management did not consider a loss probable.
Most important facts for investors to verify
- Whether Consumer Beauty revenue, market share, and profitability stabilize, and whether the impairment assumptions remain supportable.
- Progress in resolving supply-chain issues and achieving integration savings without further disruption or additional restructuring costs.
- Debt reduction, covenant headroom, refinancing needs, and the impact of the large fiscal 2023 maturity.
- Cash-flow quality, including working-capital timing and the continuing use and recourse terms of receivables factoring.
- Developments in the JAB tender-offer litigation, controlling-stockholder risks, and the Brazilian tax assessment.
- How management’s strategic review translates into measurable targets; the filing does not provide clear numerical operating guidance.