Inter Parfums, Inc. — Q3 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Inter Parfums manufactures, markets and distributes fragrances through European- and U.S.-based operations; its European business is conducted primarily through its 73%-owned subsidiary, Interparfums SA.
Unless otherwise indicated, amounts below are in U.S. dollars. The company states that interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $134.2 million | $126.8 million | $374.1 million | $458.0 million |
| Gross margin | $75.3 million; 56% | $70.0 million; 55% | $212.7 million; 57% | $268.3 million; 59% |
| Operating income / margin | $18.7 million; 13.9% | $14.6 million; 11.6% | $49.0 million; 13.1% | $89.5 million; 19.5% |
| Net income attributable to Inter Parfums | $11.1 million | $7.9 million | $26.1 million | $43.4 million |
| Diluted earnings per share | $0.36 | $0.25 | $0.84 | $1.40 |
- Q3 sales grew 6.0% and attributable net income rose about 42%. Nine-month sales fell 18.3% and attributable net income fell about 40%.
- Excluding Burberry sales included in the 2013 comparison, ongoing-brand sales increased 6.0% in Q3 and 14.2% for the nine months; at comparable exchange rates, growth was 5.1% and 12.9%, respectively.
- Nine-month operating cash flow was negative $13.2 million, versus positive $21.5 million in 2013. Working-capital changes used $54.8 million; accounts receivable rose, while management reported DSO of 82 days.
- Nine-month investing and financing cash flows were negative $36.6 million and $19.8 million, respectively. Cash and cash equivalents declined $75.5 million to $50.2 million; short-term investments were $196.6 million.
- At September 30, working capital was approximately $392 million, with a 4.7-to-1 current ratio. Cash plus short-term investments totaled about $246.8 million. Bank loans payable were $0.2 million; available credit lines included a $20 million domestic revolver and approximately $25 million of international lines.
Material changes and management commentary
- Burberry’s license had ended, but the transition arrangement generated $130.3 million of sales in the first nine months of 2013. Its absence is the principal reason reported nine-month sales and profit declined year over year. The prior-year period also included an unusually strong first quarter and lower promotional expense.
- European ongoing-brand sales rose 5.7% in Q3 and 17.6% year to date; U.S. sales rose 6.9% and 2.2%. New product launches supported growth. Management cited weaker Eastern Europe, particularly Russia, and slower growth in Asia; Anna Sui sales declined 19% year to date.
- Q3 gross margin and operating margin improved, while nine-month gross margin declined from 59% to 57%, primarily due to the loss of Burberry sales. Q3 operating income benefited from modest sales growth, slightly higher gross margin and lower SG&A as a percentage of sales.
- Management said the company had no current liquidity issues and expected available cash, operating cash generation and credit lines to meet foreseeable needs. It was evaluating potential brand acquisitions, without assurance any transaction would occur.
- Management said recent U.S. dollar strength could benefit Q4 gross margin if it continued. The company has significant foreign-currency exposure; forward contracts outstanding at quarter-end included approximately $12.0 million, £3.3 million and ¥116.0 million, all maturing within a year.
- Planned launches included Shanghai Tang later in 2014, Dunhill Icon shipments in Q4, and an Oscar de la Renta fragrance in 2015. No specific earnings or revenue guidance is provided in the filing.
Risks, contingencies and unusual items
- Foreign-currency translation adjustments were negative $42.6 million for the nine months, contributing to comprehensive loss of $9.0 million; accumulated other comprehensive income moved from $25.9 million at year-end 2013 to a $4.5 million loss at September 30, 2014.
- Contractual obligations tabled in the filing are as of December 31, 2013 and total approximately $1.153 billion, including $1.119 billion of purchase obligations. These include advertising and promotional commitments and minimum or estimated royalties, including amounts subject to variable-price provisions.
- Approximately $98 million of certificates of deposit carried early-withdrawal penalties. Management identified continued economic uncertainty in some markets, currency movements, consumer demand, and the risk that future sales or cash flows may not meet assumptions supporting intangible-asset valuations.
- The company reported no current impairment indicators for intangible assets. It was evaluating a new revenue-recognition standard, effective for periods beginning after December 15, 2016; adoption impact had not yet been determined.
- Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Compare underlying ongoing-brand growth with reported results and confirm the effect of the Burberry license termination on future comparisons.
- Monitor receivables, collections and operating cash flow, given the increase in receivables and working-capital cash use.
- Review the composition, liquidity and withdrawal terms of short-term investments, including the certificates subject to penalties.
- Assess the scale, timing and conditions of purchase obligations and minimum royalty and advertising commitments.
- Track launch execution and demand by brand and region, alongside foreign-exchange effects on sales, margins and equity translation adjustments.