Inter Parfums, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Figures are in U.S. dollars unless noted.
Business context
Inter Parfums develops, markets and distributes prestige fragrances and related products through European and U.S. operations. European operations generated about 81% of 2017 sales. The company relies on licensed brands, third-party manufacturers and distributors; it does not own manufacturing facilities. Montblanc, Jimmy Choo and Lanvin accounted for 21%, 18% and 11% of sales, respectively.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $591.3 million | $521.1 million | +13% |
| Gross margin | $376.3 million; 63.6% | $326.5 million; 62.7% | Margin +0.9 percentage points |
| Operating income | $78.6 million; 13.3% margin | $66.7 million; 12.8% margin | +18% |
| Net income attributable to Inter Parfums, Inc. | $41.6 million; $1.33 diluted EPS | $33.3 million; $1.07 diluted EPS | +25% |
| Cash from operations | $35.9 million | $54.6 million | Down $18.7 million |
- Consolidated net income was $55.3 million, including $13.7 million attributable to noncontrolling interests.
- Cash and cash equivalents were $208.3 million; short-term investments were $69.9 million. Working capital was $382.2 million, with a current ratio of about 3.3 to 1.
- Total debt was $60.6 million, all long-term debt including its current portion; there were no short-term bank borrowings at year-end. Debt primarily financed the 2015 Rochas acquisition. The company reported compliance with its debt covenants.
- Operating cash flow fell principally as working capital used $32.5 million, including a $28.5 million inventory increase. Inventory days on hand rose to 189 from 185; days sales outstanding improved to 67 from 71.
- Capital expenditures were about $3.0 million. Dividends paid, including payments to noncontrolling shareholders, totaled $27.2 million. The annual dividend was increased to $0.84 per share for 2018.
Changes versus prior periods
- European-based product sales rose 18% to $476.5 million; U.S.-based product sales declined 2% to $114.8 million. At comparable exchange rates, total sales rose 12%.
- Growth was led by Coach, whose sales increased 149% to $57.5 million, and Rochas, up 34% to $46.2 million. Jimmy Choo sales increased 20%; Montblanc and Lanvin rose 4% and 5%.
- Sales increased across most regions, including North America (+18%), Eastern Europe (+20%), the Middle East (+21%) and Asia (+8%).
- Advertising and promotion expense increased to $123.7 million from $99.0 million, or 20.9% of sales versus 19.0%. SG&A rose 14% and remained 50% of sales.
- Fourth-quarter sales were $149.5 million versus $134.8 million; net income attributable to the company was $4.4 million versus $3.9 million. Results remain seasonal, with shipments generally weighted to the second half.
Outlook, unusual items and risks
- Management expected continued sales growth in 2018, citing planned launches and brand extensions. It stated a goal of reaching an operating margin of at least 14%; the filing does not provide a specific numerical 2018 sales or EPS forecast.
- In February 2018, the company signed an exclusive 15-year worldwide GUESS fragrance license, effective April 1, 2018. The Jimmy Choo license was extended through 2031, and Paul Smith through 2021.
- 2017 included a $2.1 million impairment related to legacy mass-market product lines planned for discontinuation and a $0.5 million related inventory reserve increase. Management recorded a $3.6 million French dividend-tax refund claim, including interest, and a provisional $1.1 million tax expense from the U.S. Tax Act. Tax Act accounting, including GILTI, remained under evaluation.
- Reported 2017 results also included the French tax recovery; 2016 included a $1.9 million French tax settlement and a $4.7 million gain on the Balmain license buyout. Management’s adjusted net income measure was $41.7 million in 2017 versus $34.7 million in 2016; it is non-GAAP and should be considered alongside GAAP results.
- Key risks include renewal or loss of licenses, brand concentration, consumer demand and product acceptance, competition, reliance on external manufacturers and distributors, foreign exchange exposure, geopolitical and Brexit uncertainty, and potential impairment of intangible assets. The company reported $1.877 billion of future purchase obligations, mainly minimum royalties and advertising commitments over existing license terms; amounts are estimates and distributors share some advertising obligations.
- The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. The company reported no material lawsuits.
Investor verification priorities
- Review the sustainability of sales growth and margins, particularly the performance of newer brands and the slower U.S. segment.
- Track inventory growth and operating cash flow conversion after the unusually large 2017 working-capital use.
- Assess license renewal terms, sales concentration and the scale and flexibility of minimum royalty and advertising commitments.
- Verify realization of the French tax refund and final accounting for the Tax Act, including potential GILTI effects.
- Monitor debt repayments, covenant headroom, and management’s progress toward its 14% operating-margin goal.