Inter Parfums, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company manufactures, markets and distributes prestige and specialty fragrances through European and U.S. operations. Its Paris-based subsidiary, Interparfums SA, is 73% owned.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $138.9 | $134.2 | $350.2 | $374.1 |
| Gross profit / margin | $85.8 / 62% | $75.3 / 56% | $213.8 / 61% | $212.7 / 57% |
| Operating income / margin | $27.6 / 19.9% | $18.7 / 13.9% | $56.9 / 16.3% | $49.0 / 13.1% |
| Net income | $18.6 | $13.8 | $37.5 | $33.6 |
| Net income attributable to Inter Parfums, Inc. | $14.2 | $11.1 | $28.6 | $26.1 |
| Diluted EPS | $0.46 | $0.36 | $0.92 | $0.84 |
- Q3 sales increased 3.5% as reported and 11.4% at comparable exchange rates. Nine-month sales decreased 6.4% as reported but increased 1.7% at comparable rates.
- Operating income rose 48% in Q3 and 16% year to date. Management attributed stronger margins in part to currency effects in Europe and a higher-margin product mix in U.S. operations.
- Nine-month interest expense was $1.8 million, versus $1.4 million; foreign-currency results were a $1.8 million loss, versus a $1.1 million gain. The 2015 currency loss primarily reflected unhedged intercompany balances.
- At September 30, cash and cash equivalents were $124.5 million and short-term investments were $90.2 million, totaling $214.7 million. Working capital was approximately $353 million; the company reported a working-capital ratio above 4.0 to 1.
- Total debt was approximately $106.5 million, comprising $22.0 million current and $84.6 million long-term. Total assets were $694.9 million and total equity was $489.0 million.
- Nine-month operating cash flow was negative $12.5 million, compared with negative $13.2 million. Investing cash flow was negative $37.2 million, including $119.5 million for intangible assets acquired; financing cash flow was positive $90.6 million, including $111.4 million of long-term debt proceeds. Cash increased by $34.4 million.
Material changes and significant events
- Rochas brand acquisition: completed in May 2015 for approximately €106 million (about $118 million), with substantially all of the purchase price allocated to indefinite-lived trademarks. The company also paid $4.4 million for related inventory. The acquisition was financed with a five-year term loan.
- The company entered into an interest-rate swap on €100 million of debt, fixing the rate at approximately 1.2%. The term loan has financial covenants, and the company reported compliance at September 30.
- Coach worldwide fragrance license signed in April 2015; products are expected to begin distribution in 2016. In October 2015, the Montblanc license was extended through December 31, 2025, effective January 1, 2016.
- Q3 European-based brand sales rose 6.5% reported and 16.8% at comparable exchange rates; nine-month sales fell 8.8% reported but rose 1.3% at comparable rates. U.S.-based sales fell 6.5% in Q3 and rose 3.3% year to date.
- The stronger U.S. dollar reduced reported sales but benefited European gross margins because nearly half of European sales were in dollars while most costs were in euros. Foreign-currency translation reduced nine-month comprehensive income.
Outlook, risks and contingencies
- Management expected strong performance from major European prestige brands for the rest of 2015, while cautioning that weak conditions in China, Eastern Europe and Brazil could continue in the near term. The filing does not provide a specific full-year sales or earnings forecast.
- Management expected the 2015 effective tax rate to be approximately 33%–34%. The company was undergoing a French tax audit; its potential financial impact was not yet assessable.
- Management said available cash, operating cash generation and credit facilities were expected to meet foreseeable operating needs. Credit facilities included a $20 million domestic revolver and approximately $28 million of international bank lines.
- Risks include exchange-rate movements, economic uncertainty and consumer demand in key markets, seasonal sales and working-capital swings, and dependence on brand licenses and customary minimum sales, advertising and royalty obligations. Management reported no current impairment indicators for intangible assets, but noted that a future impairment charge could be material if actual results fall short of assumptions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess how much of the reported sales decline reflects currency translation versus underlying sales, and whether recent brand launches sustain local-currency growth.
- Review Rochas acquisition economics, the term-loan amortization and covenants, and the effect of the interest-rate swap and its fair-value movements.
- Monitor cash conversion and working-capital needs, particularly the seasonal rise in receivables and inventory and the company’s reliance on financing inflows in 2015.
- Track the French tax audit, license obligations and renewals, and any impairment indicators for the enlarged intangible-asset balance.
- Confirm the timing and performance of Coach and other planned 2016 launches, and whether management’s stated tax-rate outlook is achieved.