Inter Parfums, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; amounts below are in U.S. dollars. The company develops, markets and distributes fragrances, primarily through licensed prestige brands, and reports European and U.S. operations.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $166.3m | $171.7m | $477.2m | $426.1m |
| Gross margin | $101.1m / 61% | $107.4m / 63% | $295.7m / 62% | $268.0m / 63% |
| Operating income | $22.1m | $21.5m | $66.5m | $57.9m |
| Net income | $13.2m | $13.3m | $40.9m | $37.1m |
| Net income attributable to Inter Parfums | $10.0m | $10.4m | $31.5m | $28.2m |
| Diluted EPS | $0.33 | $0.34 | $1.03 | $0.92 |
- Sales declined 3.2% year over year in Q3 but increased 2.0% at comparable exchange rates. Nine-month sales rose 12.0% as reported and 16.9% at comparable exchange rates. The stronger U.S. dollar reduced reported sales.
- Operating margins, calculated from reported figures, were approximately 13.3% for Q3 2012 and 13.9% for the first nine months, versus approximately 12.5% and 13.6% in 2011. Gross margin fell, which management attributed to a higher mix of costly value sets and discounting of slow-moving products, offsetting currency-related benefits.
- Operating cash flow was $22.4m for the first nine months, versus cash used of $49.1m in 2011. Investing activities used $10.3m and financing activities used $21.7m; cash decreased $10.0m to $25.9m.
- At September 30, cash was $25.9m, working capital was approximately $240.5m, and the current ratio was 2.8:1. Short-term bank borrowings were $1.4m; the company reported no long-term debt. Available facilities included a $15m domestic revolver and approximately $25m of international credit lines.
- Total assets were $496.5m, down from $516.0m at year-end 2011. Total equity was $358.9m. Dividends declared were $0.24 per share for the nine-month period.
Changes and management commentary
- European sales were down 4.0% in Q3 but up 10.0% for nine months; U.S. sales increased 4.0% and 33.4%, respectively. Nine-month growth was supported by Anna Sui and Nine West launches and by strength in several prestige brands. Anna Sui production transition caused temporary inventory delays, which management said had been resolved. Management was reassessing 2013 plans for Nine West after mixed reception to its initial fragrance.
- Burberry represented 45% of nine-month sales, down from 50% a year earlier, and remained the company’s largest license. Burberry exercised its buyout option effective December 31, 2012. An October 11 transition agreement extends certain rights and obligations through March 31, 2013, with a sales cap, non-exclusive manufacturing, reduced advertising requirements and no minimum royalties.
- Burberry’s exit payment is €181m (approximately $230m at then-current exchange rates), expected by December 31, 2012, subject to compliance with the license. The agreement also addresses inventory and asset transfers; the filing estimates about €3m of loss on tangible assets and €2m of other settlements to be offset against the gain on sale. Management expected no loss from selling remaining inventory.
- Management said the Burberry departure will significantly affect future sales and earnings. Its preliminary 2013 sales target was approximately $400m, excluding potential Burberry transition-period sales, with an expected operating margin above 10%. It anticipated limited reorganization, increased investment in remaining brands, and potential brand acquisitions.
- In October 2012, the company signed a 20-year worldwide Karl Lagerfeld fragrance license and paid a €9.6m entry fee and a €9.6m advance royalty (about $25m combined). The advance is creditable against future royalties under stated conditions; launch was scheduled for 2014.
Risks, contingencies and other items
- Foreign exchange is a material exposure: over 40% of European sales were denominated in U.S. dollars while European costs were incurred in euros. The company reported foreign-currency losses of $1.4m in Q3 and $2.6m for nine months, versus gains in the comparable 2011 periods. It used forward contracts, including approximately $67m and £7.1m of contracts maturing within one year.
- Economic uncertainty in European markets could weaken consumer confidence and demand if it worsens or persists. The company also noted that new product launches affect sales, and that seasonality is more evident in some direct-to-retailer and U.S. specialty-retail channels.
- Goodwill relates to the Nickel business. A $0.8m impairment was recorded in 2011; management stated that a 10% decline in the reporting unit’s sales could result in an additional $0.5m impairment. No 2012 triggering events were identified.
- Reported purchase obligations were $1.269bn as of December 31, 2011, primarily advertising, promotion and minimum royalty commitments; the filing notes estimates and assumptions in this schedule. Management said available cash, operating cash flow and credit facilities should meet foreseeable needs.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing states interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Confirm receipt and timing of the €181m Burberry exit payment, compliance conditions, and the final recognized gain or loss after asset and inventory settlements.
- Assess the revenue, earnings and cash-flow impact of losing Burberry, including whether the $400m 2013 sales target and margin-above-10% outlook were achieved.
- Track replacement-brand growth, including Karl Lagerfeld launch economics, required minimum sales, advertising and royalties, and the use of its advance royalty.
- Review gross-margin pressure, foreign-exchange effects and the company’s concentration in major brands; Burberry still accounted for 45% of nine-month 2012 sales.
- Reconcile the large disclosed purchase-obligation schedule with current commitments and monitor liquidity after the Burberry transition and Karl Lagerfeld payments.