Inter Parfums, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. The company develops, markets and distributes prestige fragrances through European and U.S. operations. European operations generated about 83% of first-half sales.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $129.1M | $117.2M | $272.2M | $228.7M |
| Gross margin | $83.9M; 65% | $74.4M; 64% | $174.0M; 64% | $145.7M; 64% |
| Operating income | $14.5M | $11.5M | $40.6M | $29.0M |
| Operating margin | 11.2% | 9.8% | 14.9% | 12.7% |
| Net income attributable to Inter Parfums | $6.7M | $5.8M | $20.1M | $13.2M |
| Diluted EPS | $0.22 | $0.19 | $0.64 | $0.42 |
- Sales rose 10.2% in Q2 and 19.0% in the first half; at comparable exchange rates, increases were 11.3% and 20.8%, respectively. European product sales grew 20.5% and 25.3%; U.S. product sales fell 21.6% and 4.6%.
- Consolidated net income was $9.2M in Q2 and $27.4M for the first half, versus $7.7M and $17.2M a year earlier. The prior-year first-half comparison included a $1.9M French tax settlement expense ($1.4M attributable to Inter Parfums after noncontrolling interest). Excluding that item, adjusted first-half attributable net income was $14.6M in 2016 versus $20.1M in 2017; adjusted diluted EPS was $0.47 versus $0.64.
- First-half selling, general and administrative expense was $133.4M, or 49% of sales, versus $116.8M, or 51%. Advertising and promotion increased to $53.3M from $41.0M, reflecting product launches. Royalties declined to 6.6% of sales from 7.3%.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $10.7M in the first half, compared with negative $5.9M in 2016. Working-capital items used $41.3M; inventory growth was the largest listed use. Investing activities used $16.6M, including net purchases of short-term investments; financing activities used $26.6M, including debt repayments and dividends.
- Cash and cash equivalents were $116.8M at June 30, down from $161.8M at year-end. Short-term investments were $123.8M, bringing cash and short-term investments to $240.6M. Cash declined $45.1M during the half.
- Working capital was approximately $357.8M and the current ratio approximately 3.4:1. Current assets were $509.7M and current liabilities $151.9M.
- Total debt, including current maturities, was approximately $69.1M, down from $74.6M at December 31, 2016. No short-term bank borrowings were outstanding. Available credit facilities included a $20M domestic revolving line and approximately $29M of international credit lines.
- Inventory was $136.9M, versus $97.0M at year-end; accounts receivable was $119.4M, versus $104.8M. Management cited 83 days sales outstanding, compared with 78 days a year earlier, and said inventory supported second-half sales expectations and launches.
Changes, outlook and risks
- Growth was led by European brands and broad geographic gains. First-half Jimmy Choo sales rose 36%, Lanvin 34%, and Rochas 31%; Montblanc sales increased 1% after a difficult comparison with the prior-year launch period. U.S. sales faced tough comparisons to 2016 launches of Abercrombie & Fitch and Hollister products.
- Management said first-half sales were exceptionally strong partly because of launch timing and did not expect the same growth rate in the second half. It cited planned second-half launches including Dunhill Icon Racing and Anna Sui Fantasia, and continued investment in advertising and brand development. No numerical full-year sales or earnings guidance is provided in the supplied filing text.
- The Paul Smith fragrance license was renewed through December 2021 without material changes. Balmain’s license ended in 2016; the buyout was received in May 2017, and Balmain purchased remaining inventory after the sell-off period. The filing gives differing buyout amounts: approximately $5.9M in the financial-statement note and $5.7M in MD&A; the gain had been recognized in 2016.
- The French tax-authority settlement covering 2012–2015 was finalized in Q1 2017; the $1.9M assessment had been accrued in 2016. Management said agreed future commission and royalty rates were not expected to significantly affect cash flow.
- Key exposures include foreign-exchange movements, particularly the euro and British pound; changing consumer demand and economic or political uncertainty in certain markets; dependence on brand licenses and successful launches; and potential impairment of intangible assets if future performance falls short of assumptions. The company uses foreign-exchange forwards and an interest-rate swap and says it does not use derivatives for speculation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company said its financial position and available funding were sufficient for foreseeable operating needs, while noting that future acquisitions or licenses are not assured.
Investor verification priorities
- Reconcile the disclosed Balmain buyout amount ($5.7M versus approximately $5.9M) and confirm related cash-flow classification and timing.
- Reconcile management’s statement that inventory was up approximately 34% from year-end with balance-sheet figures showing an increase from $97.0M to $136.9M.
- Track inventory conversion, receivables and operating cash flow, given negative first-half operating cash flow and higher working-capital use.
- Assess whether second-half launches and brand performance can sustain growth after management’s warning that first-half growth is not expected to continue at the same rate.
- Monitor currency effects, license renewals and intangible-asset assumptions; the filing notes that actual results could differ materially from estimates.