Coty Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2013; Coty’s fiscal year ends June 30. The quarter is its seasonally important holiday selling period. Amounts are U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net revenue | $1,323.2 | $1,379.5 | $2,501.4 | $2,592.6 |
| Gross profit / gross margin | $773.9 / 58.5% | $816.6 / 59.2% | $1,480.1 / 59.2% | $1,553.3 / 59.9% |
| Operating income / margin | $143.5 / 10.8% | $222.3 / 16.1% | $309.1 / 12.4% | $388.2 / 15.0% |
| Net income attributable to Coty | $82.5 | $123.2 | $176.0 | $209.9 |
| Diluted EPS | $0.21 | $0.31 | $0.45 | $0.53 |
- Quarter revenue declined 4%; management attributed the decrease primarily to negative price and mix of 6%, partly offset by 2% higher unit volume. For the six months, revenue fell 4%, reflecting 3% lower volume and negative price and mix of 1%.
- Color Cosmetics was the largest segment weakness: revenue fell 9% in the quarter and 10% for six months; six-month segment operating income declined 46% to $70.5. Management cited promotional pricing, weaker U.S. nail-category demand, and lower Sally Hansen and OPI sales.
- Quarter operating income fell 35%. The decline reflected higher SG&A and cost of sales, restructuring expense, and the absence of a $19.3 million prior-year asset-sale gain. Six-month operating income declined 20%.
- Adjusted operating income, a non-GAAP measure, fell 17% to $183.3 million in the quarter and 13% to $369.4 million for six months. Adjusted net income attributable to Coty was $111.3 million for the quarter and $219.6 million for six months, down 12% and 10%, respectively.
- Effective income tax rates were 26.6% for the quarter and 29.0% for six months, down from 34.6% and 35.4%. Coty attributed the reduction primarily to retroactive extension of certain international tax provisions.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $447.3 million, versus $295.2 million. Capital expenditures were $116.6 million, versus $104.9 million; operating cash flow less capital expenditures was therefore $330.7 million, versus $190.3 million.
- Investing cash outflow was $141.1 million and financing cash outflow was $106.1 million. Cash increased $233.6 million to $1,154.0 million from June 30, 2013.
- At December 31, cash was $1,154.0 million and total reported debt was $2,609.1 million, consisting of $29.0 million current and $2,580.1 million long-term debt. Debt was $2,630.2 million at June 30, 2013. Cash less total debt implies net debt of approximately $1,455.1 million.
- Management said cash on hand, operating cash generation and access to revolving credit and other lending sources were sufficient for near- and long-term needs. Cash flows and working-capital needs are seasonal.
- Cash-flow improvement included favorable movements in accounts payable and accrued liabilities; management also noted a $28.5 million cash outflow related to a one-time prepayment to a licensor. The company paid a $0.20-per-share dividend, totaling $76.9 million in cash during the period.
Material changes, outlook and notable items
- Management described a challenging market, particularly in mass fragrance and color cosmetics, with intense promotional activity in the U.S. and Western Europe. It cited price and mix pressure, consumer demand changes and retail inventory reductions as important drivers.
- The Productivity Program is expected to cost approximately $70–$75 million in total; $31.6 million had been incurred by December 31, 2013. Coty expects implementation by fiscal 2016 and estimated remaining restructuring cash expenditures of $12.0 million in fiscal 2014, $3.7 million in fiscal 2015 and $3.0 million in fiscal 2016.
- Management revised the program’s savings timeline, expecting to be more than halfway to its savings goal by the end of fiscal 2014 and to achieve annual savings of $40–$45 million by the end of fiscal 2015, with potential upside. These are expectations, not guaranteed results.
- New York real-estate consolidation costs were $19.0 million for the six months; additional costs were expected during the remainder of fiscal 2014, with completion expected in fiscal 2014. Six-month acquisition-related costs were $17.5 million, primarily related to South Africa operations and acquired-inventory accounting.
- Coty acquired StarAsia, a regional distributor, for a preliminary purchase price of $23.5 million. The acquired business contributed $11.0 million revenue and a $3.1 million net loss from acquisition through December 31, 2013.
- After quarter-end, Coty entered a UAE joint venture, agreed to acquire U.K. distributor Lena White for approximately $10.8 million subject to adjustments, and authorized up to $200 million of Class A share repurchases on February 12, 2014.
- Regulatory exposure remains: the U.S. Commerce Department’s export enforcement office closed its review with a warning letter and no penalty, finding transactions violated export rules. Treasury’s OFAC and Commerce’s antiboycott office continued reviews; Coty said penalties were possible and reasonably possible to be material, but it had recorded no reserve and could not estimate an amount or timing.
- Foreign-exchange risk is material to operations: Coty estimated that a hypothetical 10% unfavorable currency move on balance-sheet transactional exposures would reduce income before tax by $25.0 million. The filing identifies market, consumer-demand, currency, licensing, supplier, acquisition-integration, cyber and other international risks.
- Management concluded disclosure controls were effective as of December 31, 2013 and reported no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue and margins stabilize, particularly in Color Cosmetics and the U.S. nail category, and whether promotional pressure persists.
- Whether the stated $40–$45 million annual productivity savings are achieved on schedule and at what cost, including restructuring and real-estate charges.
- Cash conversion and working-capital sustainability, given the contribution of payable and accrued-liability movements to operating cash flow.
- Debt, liquidity and capital-allocation plans, including the subsequent $200 million repurchase authorization and dividend commitments.
- Outcomes and potential penalties from the outstanding OFAC and antiboycott reviews, for which no reserve was recorded.
- Performance and integration of the StarAsia acquisition, South Africa expansion and subsequent UAE and Lena White transactions.