Inter Parfums, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited consolidated results. Comparisons are with Q1 2015 unless otherwise noted. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless shown in millions.
Business context
Inter Parfums manufactures, markets and distributes fragrances and related products through European and U.S. operations. European operations, primarily in France, generated about 83% of Q1 2016 sales. The company generally uses third parties to manufacture products and says its business is not capital intensive. Its brand portfolio includes Montblanc, Jimmy Choo, Lanvin, Rochas and Coach.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $111.5 million | $109.2 million | +2% reported; +3% at comparable exchange rates |
| Gross profit | $71.3 million | $67.6 million | +5% |
| Gross margin | 63.9% | 61.9% | +2.0 percentage points |
| Operating income | $17.5 million | $21.1 million | -17% |
| Operating margin | 15.7% | 19.3% | -3.6 percentage points |
| Net income, consolidated | $9.4 million | $13.3 million | -29% |
| Net income attributable to Inter Parfums, Inc. | $7.3 million | $10.0 million | -27% |
| Diluted EPS | $0.24 | $0.32 | -25% |
| Operating cash flow | $(12.4) million | $(1.3) million | Greater cash use |
European sales rose 6% to $92.1 million; U.S. sales fell 14% to $19.4 million. Montblanc sales increased 29% to $35.0 million, while Jimmy Choo sales declined 1% to $21.4 million and Lanvin sales fell 25% to $12.2 million. Rochas added $6.4 million in sales. Management attributed U.S. weakness partly to tough comparisons with prior-year product launches.
Gross-margin improvement reflected currency and product mix, including Rochas; the stronger U.S. dollar also benefited European margins because more than 40% of European sales are dollar-denominated while most costs are in euros. Selling, general and administrative expenses rose 15% to $53.8 million, or 48% of sales versus 43%. Advertising and promotion increased to $16.1 million from $12.6 million, principally supporting Montblanc Legend Spirit and Jimmy Choo Illicit launches.
Cash, debt and liquidity
- At March 31, 2016, cash and cash equivalents were $151.5 million and short-term investments were $95.8 million, totaling $247.2 million; most funds were held in euros by European operations.
- Working capital was about $352 million and the current ratio exceeded 3.6 to 1. Total assets were $712.1 million.
- Total long-term debt, including current maturities, was about $97.8 million, principally related to the Rochas acquisition. The company repaid $5.5 million of long-term debt during the quarter. No short-term bank borrowings were outstanding at quarter-end.
- Operating cash use was $12.4 million, reflecting working-capital use of $23.6 million, including higher receivables and inventory. Cash and cash equivalents declined $25.5 million to $151.5 million; investing and financing activities also used cash.
- Management said available cash, operating cash generation and credit lines were expected to provide sufficient resources for foreseeable operating needs. Credit facilities included a $20 million domestic revolving line and approximately $28 million in international bank lines.
Material changes, outlook and risks
- French tax settlement: In April 2016, Interparfums SA reached an agreement in principle with French tax authorities for a $1.9 million assessment covering disputed matters for 2012–2015. The company had previously disclosed a $6.9 million proposed adjustment. The $1.9 million was accrued in Q1 and included in income tax expense; the agreement remained subject to formal documentation. Management said agreed future commission and royalty rates were not expected to significantly affect cash flow.
- Adjusted earnings: The company reported non-GAAP adjusted net income attributable to Inter Parfums, Inc. of $8.7 million, or $0.28 per diluted share, excluding the after-noncontrolling-interest portion of the tax settlement. GAAP attributable net income was $7.3 million, or $0.24 per diluted share.
- Management outlook: The filing gives no numerical full-year earnings or sales guidance. Management expected most European growth in 2016 from Coach and Rochas, cited a Coach women’s fragrance launch planned for September 2016 and further Rochas development, and anticipated better U.S. quarterly comparisons later in the year. The company was also considering potential brand acquisitions, without assurance that any would occur.
- Operating and market risks: Management noted negative conditions in Eastern Europe, the Middle East and China, and said prolonged or worsening uncertainty could weaken consumer confidence, demand and spending. Currency movements affect reported sales and margins. Customer payment delays in some territories contributed to days sales outstanding of 88, versus 79 a year earlier; management said it was monitoring collections and credit limits.
- Other considerations: Sales fluctuate with launch timing and the holiday season. The company reported no current impairment indicators for intangible assets, but future results below expectations could lead to a potentially material impairment charge. A fixed-rate swap covers €100 million of debt at approximately 1.2%. The board increased the annual dividend 15% to $0.60 per share.
Most important facts for investors to verify
- Whether the French tax settlement was formally documented and paid, and whether the agreed future royalty and commission rates affect results or cash flow.
- Whether higher advertising spending and new launches translate into sales growth and recovery in operating margins.
- Whether U.S. sales comparisons improve and European growth from Coach and Rochas offsets weakness in Lanvin and pressured markets.
- Whether receivables, inventory and operating cash flow improve, especially given longer collection times and customer payment delays.
- Debt repayment terms, interest and currency exposures, and the availability and conditions of credit facilities.
- Management’s forward-looking statements are subject to risks; the filing cautions that Q1 results are not necessarily indicative of full-year results.