Coty Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014; fiscal year ends June 30. Results are unaudited. Coty manufactures and distributes fragrance, color cosmetics, and skin and body care products in more than 130 countries. The holiday season typically makes the second fiscal quarter seasonally stronger.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Year-over-year | Six months ended Dec. 31, 2014 | Year-over-year |
|---|---|---|---|---|
| Net revenue | $1,259.6 million | Down 5% | $2,441.9 million | Down 2% |
| Gross profit / gross margin | $750.7 million / 59.6% | Margin up about 110 bps | $1,450.8 million / 59.4% | Margin up about 20 bps |
| Operating income / margin | $183.7 million / 14.6% | Up 28%; margin up from 10.8% | $303.8 million / 12.4% | Down 2%; margin essentially flat |
| Net income attributable to Coty | $125.4 million | Up 52% | $136.0 million | Down 23% |
| Diluted EPS | $0.35 | Compared with $0.21 | $0.37 | Compared with $0.45 |
| Adjusted operating income (non-GAAP) | $200.9 million; 15.9% margin | Up 10%; margin up from 13.9% | $368.0 million; 15.1% margin | Down $1.4 million; margin up from 14.8% |
| Adjusted net income attributable to Coty (non-GAAP) | $163.2 million; diluted EPS $0.45 | Up 47%; prior diluted EPS $0.28 | $266.2 million; diluted EPS $0.73 | Up 21%; prior diluted EPS $0.56 |
Management cautions that adjusted measures are not GAAP substitutes and may not be comparable with similarly titled measures at other companies.
Segments and drivers
- Quarter: Fragrances revenue fell 5% to $691.7 million; Color Cosmetics rose 2% to $340.5 million; Skin & Body Care fell 13% to $227.4 million. Color Cosmetics growth reflected Sally Hansen, Rimmel and OPI launches. Fragrances faced weaker mature celebrity brands, competitive pricing and lower price/mix. Skin & Body Care was pressured by adidas and Playboy, China distribution changes, reduced retailer shelf space and lower holiday orders.
- Six months: Fragrances revenue fell 4% to $1,332.6 million; Color Cosmetics rose 6% to $684.6 million; Skin & Body Care fell 9% to $424.7 million. Foreign exchange reduced consolidated revenue by about 2% for the period and 5% for the quarter. Excluding currency and China/TJoy effects, management said consolidated revenue was broadly consistent with the prior comparable periods.
- Quarter gross-margin improvement reflected supply-chain savings and an inventory buyback estimate refinement, partly offset by customer discounts. Lower SG&A also supported quarterly operating results; lower prior-year acquisition and real-estate costs affected comparisons.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $355.0 million, down from $447.3 million. Investing used $89.5 million, including $103.1 million of capital expenditures; financing used $210.8 million. Cash declined $34.8 million to $1,203.2 million, including an $89.5 million adverse exchange-rate effect.
- At December 31, 2014, total debt was $3,405.1 million, including $691.6 million classified as short-term/current; long-term debt was $2,713.5 million. Cash was $1,203.2 million. Current assets were $2,720.9 million and current liabilities $2,225.5 million.
- Coty borrowed $600 million under a term loan due September 28, 2015 and used the proceeds to prepay $500 million of senior notes. The prepayment generated an $88.8 million early-extinguishment loss, including the make-whole payment and deferred financing write-off. The existing credit facility had $350 million available at period-end and matures in April 2018.
- Share repurchases included $149.2 million under the announced program and $42.0 million of former CEO shares; Coty also paid a $0.20-per-share dividend. Subsequent to quarter-end through February 4, 2015, it repurchased a further $103.4 million of shares, leaving $47.4 million under the authorization.
Outlook, unusual items and risks
- No specific consolidated revenue or earnings guidance is provided in the filing. Management described a challenging market, particularly mass fragrance in Western Europe and the U.S.; it aims to grow ten power brands, expand in emerging markets and diversify distribution. It expects non-power brands later in their life cycles to decline gradually.
- The Organizational Redesign is expected to cost $145–$180 million pre-tax, all cash, with substantial completion by fiscal 2017. $65.6 million had been incurred by December 31, 2014. The Productivity Program is expected to cost about $70–$75 million, with implementation by fiscal 2016. China Optimization is expected to cost about $10 million and complete in fiscal 2015.
- Coty expects to recognize an approximately $7.3 million gain in fiscal Q3 2015 from the January 2015 sale of certain TJoy assets. A proposed Bourjois acquisition from CHANEL would be paid for with 15 million Class A shares, subject to adjustment; Coty anticipated closing by fiscal year-end 2015. It also expects to pay approximately $12.8 million to acquire a further 14% interest in a Singapore subsidiary.
- Tax audit settlements and other tax items materially reduced the effective tax rate: 17.9% for the quarter and 13.9% for six months, versus 26.6% and 29.0%. Management notes that rates can fluctuate. The six-month tax benefit included approximately $34.4 million of foreign tax audit settlements.
- Risks include foreign-exchange movements, competitive pricing and retail-channel changes, product-launch execution, restructuring delivery, acquisition integration, seasonal working-capital swings, and political and economic conditions in international markets.
- A securities class action alleging IPO disclosure violations remains pending; Coty says it believes the claims are without merit and is defending them. Separately, the Commerce Department’s export enforcement office closed its investigation with a warning and no financial penalty, while an antiboycott compliance investigation remains open through June 30, 2015. Coty says penalties are reasonably possible, has recorded no reserve, and cannot estimate an amount.
- Management concluded disclosure controls were effective at a reasonable assurance level as of December 31, 2014; no material change in internal control over financial reporting was identified during the quarter.
Most important facts for investors to verify
- Whether revenue stabilization persists after excluding currency and China/TJoy impacts, particularly in Fragrances and Skin & Body Care.
- Whether cost savings and improved margins are sustainable without relying on estimate refinements, lower comparative-period costs, or adjustments excluded from non-GAAP results.
- How Coty will address the $600 million September 2015 term-loan maturity and maintain liquidity while funding operations, restructuring, dividends and repurchases.
- The cash cost, timing and realized benefits of the Organizational Redesign and other restructuring programs.
- The final terms, dilution and closing status of the Bourjois transaction, and the outcome and potential exposure from the securities and antiboycott matters.