Inter Parfums, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results; it is an annual filing, not a standalone Q4 report. Amounts below are U.S. dollars unless stated otherwise.
Business context
The company manufactures, markets and distributes fragrances and related products through European and U.S. operations, using third-party manufacturers rather than owning production facilities. Prestige products accounted for about 90% of 2011 sales. Inter Parfums owns 74% of its publicly traded French subsidiary, Interparfums SA.
Financial performance
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Net sales | $615.2 million | $460.4 million | Up 34% reported; up 28% at comparable exchange rates |
| Gross profit / margin | $386.8 million / 62.9% | $274.0 million / 59.5% | Margin improved 3.4 percentage points |
| Operating income / margin | $66.9 million / 10.9% | $56.4 million / 12.3% | Income up 19%; margin declined |
| Net income | $42.9 million consolidated; $32.3 million attributable to Inter Parfums, Inc. | $35.7 million consolidated; $26.6 million attributable | Parent-attributable income up 21% |
| Diluted EPS attributable to Inter Parfums, Inc. | $1.05 | $0.87 | Up 21% |
| Operating cash flow | $(23.7) million | $37.8 million | Driven by working-capital investment |
| Cash and working capital at year-end | $35.9 million cash; $205.7 million working capital | $37.5 million cash; $183.6 million working capital | Working-capital ratio 2.1:1 |
| Debt at year-end | $16.3 million | $21.4 million | $11.8 million short-term bank borrowings and $4.5 million current long-term debt; no long-term portion remained |
Fourth quarter: Sales were $189.1 million versus $112.4 million in Q4 2010, up about 68%. Gross profit was $116.6 million, net income was $5.9 million, and net income attributable to Inter Parfums, Inc. was $4.1 million, or $0.13 diluted EPS. The filing describes second-half seasonality as increasingly important.
Material changes versus prior year
- European product sales rose 36% to $552.4 million; U.S. product sales rose 13% to $63.0 million. European operations remained the dominant business.
- Burberry sales increased 26% to $307.7 million, representing 50% of consolidated sales, down from 53% in 2010. Jimmy Choo generated $40.8 million and Montblanc $42.5 million in 2011.
- Gross margin benefited by approximately 260 basis points from the subsidiary’s assumption of U.S. distribution of European prestige products. The company cited product mix and currency as other margin factors.
- SG&A rose 47% to $319.0 million, or 52% of sales versus 47%. Advertising and promotion expense rose to $127.8 million from $69.2 million, reflecting the Burberry Body launch, expanded U.S. distribution responsibilities and support for other launches. This contributed to lower operating margin despite higher operating income.
- Receivables increased $88.9 million and inventory increased $60.5 million in cash-flow terms. The company attributed the build to higher late-year sales, growth and new licensing activity; days sales outstanding were 84, versus 83 in 2010.
Outlook, risks and unusual items
- Management expected continued strength in Jimmy Choo and Montblanc, a full year of Burberry Body sales with substantial marketing support, and 2012 launches for Lanvin, Montblanc and Boucheron. Balmain and Repetto were not expected to contribute significantly in 2012; their rights began January 1, 2012.
- The filing refers to 2012 sales and EPS guidance but the supplied filing text does not provide a clear numerical guidance value.
- Burberry is the central exposure. Discussions on a possible new operating structure were ongoing. Burberry could elect by July 31, 2012 to buy out the unexpired license term as of December 31, 2012, or continue the agreement through December 31, 2017. The stated buyback price would be the greater of fair market value of the remaining term or 70% of 2010 net wholesale sales. The company warned that losing the license would materially harm results.
- Other key risks include renewal or loss of licensed brands, consumer demand and product acceptance, reliance on third-party manufacturers and distributors, currency and trade exposure, and competition. The company hedges certain foreign-currency exposures; approximately 40% of European sales were denominated in U.S. dollars while European costs were largely in euros.
- A $0.8 million goodwill impairment was recorded for the Nickel skin-care business; management said it may consider selling the business. The 2011 effective tax rate rose to 36.3% from 33.7%, including a $1.7 million tax expense increase following agreement in principle with French tax authorities; a $1.3 million non-income-tax contingency reserve was reduced.
- The annual dividend was raised to $0.32 per share for 2011 and continued at that rate for 2012. No material lawsuits were reported. Management and the auditor concluded internal controls over financial reporting were effective; the financial-statement audit opinion was unqualified.
Key investor verification points
- Confirm the outcome and economics of Burberry negotiations or any license buyback, given the brand’s 50% share of 2011 sales.
- Assess whether the sharp rise in receivables and inventory converts into cash and whether operating cash flow recovers after the 2011 outflow.
- Track advertising and promotion spending, SG&A as a share of sales, and operating margins as new launches and direct distribution scale.
- Evaluate the durability of growth from Jimmy Choo and Montblanc and the actual contribution of newer and renewed licenses.
- Review the company’s published 2012 guidance and compare it with subsequent results; the supplied filing text does not state the numerical guidance.