Inter Parfums, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited quarterly results, including fourth quarter 2018. Amounts below are U.S. dollars unless noted.
Business context and reporting period
Inter Parfums develops, markets and distributes prestige fragrances and related products through European and U.S. operations. It relies on third-party manufacturers and distributors and operates primarily under brand licenses; European operations generated about 80% of 2018 sales. The company owns the Lanvin fragrance trademarks and Rochas brand, and its European subsidiary, Interparfums SA, is 73%-owned.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $675.6 million | $591.3 million | +14% ( +13% at comparable exchange rates ) |
| Gross margin | $427.6 million; 63.3% | $376.3 million; 63.6% | Margin down 0.3 percentage point |
| Operating income | $94.7 million; 14.0% margin | $78.6 million; 13.3% margin | +20% |
| Net income attributable to Inter Parfums, Inc. | $53.8 million; diluted EPS $1.71 | $41.6 million; diluted EPS $1.33 | +29% net income |
| Cash from operating activities | $63.0 million | $35.9 million | +$27.2 million |
Fourth-quarter net sales were $177.2 million versus $149.5 million in 2017. Quarterly gross margin was $117.1 million versus $98.8 million; consolidated net income was $9.2 million versus $5.8 million, and net income attributable to Inter Parfums, Inc. was $8.0 million versus $4.4 million. Diluted EPS was $0.26 versus $0.14.
At year-end, cash and cash equivalents were $193.1 million and short-term investments were $67.9 million, totaling about $261.0 million. Working capital was $382.4 million, with a reported working-capital ratio above 3:1. Long-term debt, including its current portion, was $46.1 million, down from $60.6 million; there were no short-term bank borrowings. Cash declined by $15.2 million during the year. Inventory increased about 21%, and inventory days on hand rose to 223 from 189, primarily reflecting buildup for new licenses and launches.
The annual dividend was increased 31% to $1.10 per share. The filing says 2019 dividends were not expected to materially affect financial position. The company reported compliance with debt covenants and access to a $20 million U.S. revolving line and approximately $28.6 million of international credit lines.
Material changes versus the prior comparable period
- European-based product sales increased 13% to $537.6 million; U.S.-based product sales increased 20% to $138.0 million. U.S. sales benefited in part from GUESS legacy fragrances beginning in the second quarter.
- Coach sales rose 73% to $99.7 million and reached 15% of company sales. Montblanc remained the largest brand at 19% of sales; Jimmy Choo accounted for 17% and Lanvin 10%.
- Operating margin improved to 14.0% from 13.3%, despite slightly lower consolidated gross margin. Selling, general and administrative expense increased 13% to $332.8 million; advertising and promotion expense rose to $139.7 million.
- Operating cash flow increased, while working-capital requirements remained significant. Receivables and inventory were larger year over year; management attributed the inventory increase mainly to new-license support.
- 2018 included receipt of an approximately $3.9 million French dividend-tax refund claim, including accrued interest, which had been recorded in 2017. There was no 2018 impairment charge; 2017 included a $2.1 million impairment and $0.5 million inventory reserve adjustment for discontinued mass-market lines.
Outlook, commentary, risks and unusual items
Management expected continued sales growth in 2019, supported by existing fragrances, marketing investment and planned launches, including Montblanc Explorer, Abercrombie & Fitch Authentic, Lanvin A Girl in Capri, and new products for Dunhill, Graff, Jimmy Choo and Rochas. The filing provides no clear numerical 2019 sales or earnings guidance in the supplied text. Management also said it may pursue additional brands or acquisitions, but gave no assurance any transaction will be completed.
- License and brand dependence: Most prestige brands are licensed from third parties. Renewals, minimum sales, royalty and advertising obligations, or loss of a major license could affect results. Coach, Montblanc and Jimmy Choo together represented 51% of 2018 sales.
- Contractual commitments: The company reported $2.014 billion of future purchase obligations, primarily advertising and promotional commitments and minimum royalty guarantees over license terms. This is not reported as funded debt; estimates include variable obligations and planned future sales assumptions.
- Tax matter: French authorities have asserted that profits of the Swiss subsidiary may be taxable in France. No assessment had been made and no provision was recorded; the company estimated exposure at approximately $1.4 million, excluding interest and penalties, and said it would defend its position.
- Currency and international exposure: A substantial share of European sales is denominated in U.S. dollars while many costs are in euros. The company uses currency forwards and an interest-rate swap; Brexit, exchange-rate movements, tariffs and geopolitical or economic disruption remain risks.
- Other risks: Consumer taste and product acceptance, competition, third-party manufacturing and distribution, counterfeit or grey-market sales, intellectual-property protection, seasonality, and impairment of trademarks or licenses could affect results. The company identified approximately $123.3 million of indefinite-lived intangible assets and noted sensitivity to future sales and discount-rate assumptions.
- Accounting and controls: The company adopted the new lease standard on January 1, 2019 and expected to recognize approximately $40 million of lease assets and liabilities, with no material income-statement or cash-flow impact. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2019 launches and continued Coach growth translate into sales and earnings, and how concentrated sales remain in major brands.
- Actual inventory conversion, receivable collections and operating cash flow as the company works through its higher inventory balance.
- Renewal terms and performance conditions for major licenses, alongside the scale and timing of advertising, royalty and other purchase commitments.
- Any developments in the French tax matter, and changes in currency exposure, hedging results or debt covenant headroom.
- The eventual balance-sheet effect of lease-standard adoption and the continued recoverability of trademark and license values.