Inter Parfums, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also reports unaudited fourth-quarter results. The company develops, markets and distributes fragrances, primarily through European prestige operations and U.S. prestige and specialty-retail operations; it relies on third-party manufacturers and does not own manufacturing facilities.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $563.6 million | $654.1 million |
| Gross profit / margin | $328.8 million / 58.3% | $407.2 million / 62.2% |
| Operating income | $78.8 million | $278.4 million reported; included $198.8 million Burberry termination gain |
| Net income attributable to Inter Parfums, Inc. | $39.2 million; diluted EPS $1.27 | $131.1 million; diluted EPS $4.26 |
| Operating cash flow | $49.2 million | $60.6 million |
| Cash and cash equivalents | $125.7 million | $307.3 million |
| Short-term investments | $181.7 million | None reported |
| Working capital | $399.3 million | $366.7 million |
| Bank borrowings | $6.1 million short-term; no long-term debt | $27.8 million short-term; no long-term debt |
Cash and short-term investments totaled approximately $307.3 million at year-end 2013, held by European operations and stated by management to be readily convertible into U.S. dollars. Operating cash flow was reduced in part by cash taxes related to the Burberry termination gain. Investing cash flow was $(181.3) million, principally reflecting purchases of short-term investments; financing cash flow was $(55.6) million, including $36.7 million of dividends paid. Capital expenditures were $5.0 million.
Fourth-quarter 2013 net sales were $105.5 million, versus $176.9 million in fourth-quarter 2012. The company reported a fourth-quarter net loss of $6.4 million and a loss attributable to Inter Parfums, Inc. of $4.2 million, or $(0.13) per share. Fourth-quarter 2012 included a substantial portion of the Burberry termination gain.
Material changes versus the prior period
- Sales fell 14% in 2013, primarily because the Burberry license ended. Burberry sales were $130.3 million in 2013, down from $301.4 million in 2012; the transition period extended through March 31, 2013.
- European-based product sales declined 19% to $464.3 million, while U.S.-based sales rose 21% to $99.3 million. Excluding Burberry, European prestige sales increased 23%.
- Gross margin declined to 58.3% from 62.2%, reflecting the Burberry inventory resolution and the loss of higher-margin Burberry sales. SG&A fell 23% to $250.0 million, partly because Burberry-related advertising, royalties and distribution fees declined.
- For comparison, management reported 2012 operating income excluding the termination gain of approximately $79.6 million and net income attributable to the company excluding the after-tax gain of approximately $38.1 million. On that basis, 2013 operating income was down about 1% and attributable net income increased about 3%.
- Cash and cash equivalents decreased substantially, while the company placed funds into short-term investments. Accounts receivable and inventory balances also declined as the Burberry business wound down.
- Key continuing brands grew: Montblanc sales rose 40%, Jimmy Choo 41%, Lanvin 11%, and Repetto generated $12.0 million in its first seven months of activity.
Outlook, risks and unusual items
- Management expected continued strong performance from Lanvin, Jimmy Choo, Montblanc and Boucheron in 2014, with a major slate of launches planned for Balmain, Karl Lagerfeld, Jimmy Choo, Montblanc and S.T. Dupont. No specific numerical 2014 sales or EPS guidance is provided in the supplied filing text.
- The company entered long-term worldwide fragrance licenses for Shanghai Tang, Agent Provocateur and Oscar de la Renta in 2013, and took over Alfred Dunhill distribution. These agreements involve minimum sales, advertising, royalty or other commitments. The Oscar de la Renta agreement included a $5.0 million entry fee.
- The principal business risk is reliance on third-party brand licenses and retail agreements; loss, nonrenewal or less favorable terms can materially affect results. Burberry had represented 23% of 2013 sales, compared with 46% in 2012.
- Other cited risks include changing consumer preferences, competition, economic weakness, foreign-exchange movements, reliance on external manufacturers and distributors, product-safety and regulatory requirements, intellectual-property claims, and seasonal shipment patterns. Approximately 40% of European operations’ net sales are denominated in U.S. dollars while costs are primarily in euros.
- Contractual obligations totaled approximately $1.15 billion, principally purchase commitments for advertising, promotions and minimum royalties over license terms; these are not equivalent to funded debt.
- The board authorized a regular annual dividend of $0.48 per share and paid a separate $0.48-per-share special dividend in December 2013. Management stated that planned 2014 dividends were not expected to materially affect financial position.
- The filing reports no material lawsuits and no material impairment of indefinite-lived intangible assets in 2013. The Burberry inventory reserve established in 2012 was fully used during 2013. The Nickel brand was sold for $3.5 million, approximately its carrying value.
- After a director’s death in January 2014, the company disclosed that it temporarily no longer met Nasdaq’s majority-independent-director requirement and intended to cure the issue within the applicable period.
Most important facts for investors to verify
- How quickly new and continuing brands can replace Burberry revenue, and whether the 2014 product launches meet sales expectations.
- Comparable earnings excluding the one-time 2012 Burberry termination gain, rather than relying on reported year-over-year EPS alone.
- The availability and practical accessibility of cash and investments held by European operations, including foreign-currency, tax and repatriation considerations.
- The scale and timing of license-related advertising, royalty and purchase commitments, and any minimum-sales conditions or renewal risks.
- Fourth-quarter weakness, seasonality and the extent to which reported 2013 profitability depended on unusually strong first-quarter results.
- Progress in restoring Nasdaq board independence and the ongoing governance arrangements and payments involving executives’ personal holding companies.