Inter Parfums, Inc. — Q2 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The company manufactures, markets and distributes prestige fragrances through European-based and U.S.-based operations. European operations accounted for about 79% of first-half sales. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $117.2 | $102.0 | $228.7 | $211.3 |
| Gross margin | $74.4 | $60.3 | $145.7 | $127.9 |
| Gross margin % | 64% | 59% | 64% | 61% |
| SG&A | $63.0 | $52.1 | $116.8 | $98.6 |
| Operating income | $11.5 | $8.2 | $29.0 | $29.3 |
| Net income | $7.7 | $5.5 | $17.2 | $18.8 |
| Net income attributable to Inter Parfums | $5.8 | $4.4 | $13.2 | $14.4 |
| Diluted EPS | $0.19 | $0.14 | $0.42 | $0.46 |
- Q2 sales rose 14.8% (14.2% at comparable exchange rates); first-half sales increased 8.2% (8.4% at comparable rates). Q2 operating income increased 39%, while first-half operating income was slightly lower year over year.
- First-half operating margin was 12.7%, versus 13.9% in 2015; Q2 operating margin was 9.8%, versus 8.1%. SG&A rose faster than sales, reflecting increased advertising, promotion, royalties and other brand-support costs.
- Q2 attributable net income increased, but first-half attributable net income declined. The first half included a $1.9 million French tax settlement accrual, of which $1.4 million was added back in the company’s non-GAAP adjusted net income measure. Adjusted first-half attributable net income was $14.6 million, or $0.47 per diluted share, versus GAAP $13.2 million and $0.42.
- First-half promotion and advertising expense was $41.0 million, up from $30.1 million, and represented 18% of sales versus 14%.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $115.9 million and short-term investments were $115.9 million, totaling $231.7 million. Working capital was $338 million and the reported working-capital ratio was nearly 3.5 to 1.
- Operating activities used $5.9 million of cash in the first half, compared with $9.0 million used in the prior-year period. Working-capital items consumed $27.9 million. Inventory increased about 25% from year-end to $124.3 million, primarily to support second-half sales and launches.
- Investing activities used $34.9 million, including net purchases of short-term investments; financing activities used $23.8 million, including $11.1 million of long-term debt repayments and dividends. Cash declined $61.1 million from year-end.
- Total debt was $89.9 million, including $22.7 million current and $67.2 million long-term, down from $98.6 million at December 31, 2015. No short-term bank borrowings were outstanding. Available facilities included a $20 million domestic revolving line and approximately $28 million of international credit lines.
- First-half dividends declared were $0.30 per share. The board increased the annual dividend 15% to $0.60 per share; a $0.15 quarterly dividend was scheduled for October 14, 2016.
Business changes, outlook and risks
- European sales rose 14.8% in Q2 and 10.3% for the first half; U.S. sales rose 14.8% in Q2 and 1.3% for the first half. Montblanc and Jimmy Choo were significant growth drivers: first-half sales increased 31% and 17%, respectively. Lanvin sales fell 22% for the first half, with weakness attributed mainly to Russia and China.
- Management expected European growth in the remainder of 2016 to be supported particularly by Coach and Rochas. The first Coach women’s fragrance was scheduled to launch in September 2016; a new Rochas product line was planned for 2017. Management also said it was evaluating potential brand acquisitions, without assurance any would be completed.
- Management expected an effective tax rate of approximately 35% for full-year 2016, excluding the French settlement. The French tax agreement in principle calls for a $1.9 million assessment covering 2012–2015 and establishes future acceptable commission and royalty rates; formal documentation remained pending. Management said the future rates were not expected to significantly affect cash flow.
- Management reported that economic and political uncertainty in Eastern Europe, the Middle East and China had a small negative effect during the first half. Prolonged or worsening uncertainty could reduce consumer confidence and demand. A strong U.S. dollar can weigh on sales but support earnings and gross margin because many European sales are dollar-denominated while most costs are in euros.
- Management was monitoring U.K. currency volatility after the Brexit vote. Continued pound weakness could affect future gross margins, although no significant pricing changes were then expected. The company uses foreign-currency forwards and an interest-rate swap; it stated that it does not use derivatives for trading or speculation.
- Other items to monitor include the $1.9 million French tax settlement, increased advertising and promotional spending, and the sensitivity of intangible-asset valuations to future sales and cost assumptions. Management reported no current impairment indicators. The company noted that interim results are not necessarily indicative of full-year results.
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 remain consistent with management’s cash-flow expectations.
- Whether Coach and Rochas launches and continued Montblanc and Jimmy Choo growth offset Lanvin weakness and softness in certain regions.
- Whether higher advertising and promotional spending converts into sustained sales and operating-margin improvement, particularly given first-half operating income was slightly lower year over year.
- Whether elevated inventory converts to sales and operating cash flow; first-half operations used cash despite higher revenue.
- Debt repayment, liquidity, currency exposures and the potential impact of further euro or pound movements on sales, margins and reported results.