Inter Parfums, Inc. — Q1 2015 Form 10-Q
Period and business: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. The company manufactures, markets and distributes fragrances and fragrance-related products through European and U.S. operations. European operations accounted for about 79% of sales; Interparfums SA is 73%-owned.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Net sales | $109.2 million | $121.7 million |
| Gross profit / margin | $67.6 million / 61.9% | $69.2 million / 56.9% |
| Operating income / margin | $21.1 million / 19.3% | $17.4 million / 14.3% |
| Consolidated net income | $13.3 million | $12.2 million |
| Net income attributable to Inter Parfums, Inc. | $10.0 million; diluted EPS $0.32 | $8.9 million; diluted EPS $0.29 |
| Cash flow from operations | $(1.3) million | $(27.3) million |
| Cash and cash equivalents | $87.2 million | $90.1 million at Dec. 31, 2014 |
| Short-term investments | $155.9 million | $190.2 million at Dec. 31, 2014 |
| Loans payable to banks | $0.4 million | $0.3 million at Dec. 31, 2014 |
Sales fell about 10% year over year, but declined 3% at comparable exchange rates. Gross margin improved five percentage points, and operating income rose 21%. The company reported a $2.0 million foreign-currency loss, versus a $0.05 million gain in Q1 2014. Interest expense was $0.2 million; the effective tax rate was 34% in both periods. Dividends declared were $0.13 per share, versus $0.12.
Operating cash use improved from the prior year, but working-capital changes still used $16.6 million. Receivables rose 18% year over year; days sales outstanding was 79, versus 74. Inventory was up about 11% from year-end. Investing activities provided $11.7 million, mainly reflecting purchases and sales of short-term investments; financing used $3.4 million. Cash declined by $2.9 million during the quarter, including a $9.9 million adverse exchange-rate effect.
At March 31, working capital was about $356 million and the current ratio was about 4.5:1. Cash and short-term investments totaled about $243 million, much of it held in euros by European operations. The company reported sufficient resources and access to a $20 million domestic revolving line and about $30 million of international credit lines. Approximately $85 million of certificates of deposit carried early-withdrawal penalties affecting a portion of interest.
Business changes and management commentary
- European sales declined 15% in reported dollars and 6% at comparable exchange rates. The comparison was affected by Karl Lagerfeld launches that generated over $13 million in 2014, versus $2.5 million in Q1 2015. In local currency, Montblanc sales rose 19% and Jimmy Choo rose 52%; Lanvin declined 3%.
- U.S. sales increased 16%, supported by new Oscar de la Renta and Dunhill products. Oscar de la Renta sales rose to $4.5 million from $1.2 million; Dunhill rose to $5.7 million from $3.3 million. Anna Sui sales fell to $2.3 million from $4.6 million amid continued challenges in Asia.
- Management attributed the improvement in gross margin to currency effects in Europe and a U.S. product mix shift toward higher-margin prestige licenses. It expected that U.S. mix trend to continue through 2015.
- Management anticipated strong performance from existing major European prestige brands and planned new launches for Montblanc, Boucheron, Lanvin, Balmain and Van Cleef & Arpels. The filing gives no quantified full-year financial guidance.
Transactions, risks and unusual items
- In March, Interparfums SA agreed to acquire the Rochas brand for $108 million in cash, subject to customary closing conditions and expected to close in the first half of 2015. The company planned to fund the purchase entirely with a medium-term euro loan and used currency contracts to secure the exchange rate for the dollar purchase price.
- In April, after quarter-end, Interparfums SA signed an 11-year worldwide Coach fragrance license, with distribution planned to begin in 2016. The agreement includes customary minimum sales, advertising and royalty obligations. The company also disclosed its December 2014 seven-year Abercrombie & Fitch and Hollister license, with new scents planned for 2016.
- Foreign-currency translation reduced comprehensive income by $47.9 million; total comprehensive loss was $35.2 million, despite positive net income. The euro’s depreciation also reduced reported sales. Management noted that a strong dollar generally benefits earnings because a substantial portion of European sales is in dollars while most European costs are in euros.
- Royalty expense included an additional $0.6 million accrual related to ongoing Burberry royalty settlement negotiations. Management did not anticipate further increases to that liability.
- Management said European political and economic uncertainty had not materially affected the business but could weaken consumer confidence, demand and spending if it worsened or persisted. Other disclosed risks include foreign-exchange volatility, sales seasonality, product-launch execution, customer returns and potential impairment of intangible assets. Management reported no current impairment indicators.
- The company was evaluating the new revenue-recognition standard, effective for annual and interim periods beginning after December 15, 2016; its impact was not yet determined.
Important facts for investors to verify
- Completion, financing cost and post-acquisition performance of the $108 million Rochas purchase.
- Coach and Abercrombie & Fitch/Hollister launch timing, license economics and required minimum commitments.
- Whether sales trends, especially Karl Lagerfeld, Anna Sui and the European business, improve at comparable exchange rates.
- Cash conversion and working-capital movements, including receivables, inventory and the certificate-of-deposit withdrawal terms.
- Foreign-exchange exposure, hedge effectiveness and the outcome of Burberry royalty negotiations.