Inter Parfums, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; quarterly figures below compare the fourth quarter with the same quarter of 2011. The company develops, markets and distributes fragrances and related products through European and U.S. operations, relying on licensed brands and third-party manufacturers.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $654.1 million | $615.2 million |
| Gross margin | $407.2 million; 62.2% | $383.5 million; 62.3% |
| Operating income, reported | $278.4 million | $66.9 million |
| Net income attributable to Inter Parfums, Inc. | $131.1 million; diluted EPS $4.26 | $32.3 million; diluted EPS $1.05 |
| Operating cash flow | $60.6 million | $(23.7) million |
| Cash and cash equivalents at year-end | $307.3 million | $35.9 million |
| Short-term bank debt at year-end | $27.8 million | $11.8 million |
| Long-term debt at year-end | None | $4.5 million current portion |
- Sales increased 6% as reported, or 9% at comparable exchange rates. European operations generated about 87% of sales; U.S. operations about 13%.
- Reported 2012 operating income and earnings include a $198.8 million pretax gain from termination of the Burberry license. After tax and allocation to noncontrolling interests, the gain attributable to common shareholders was $93.0 million. Excluding it, attributable net income was $38.1 million and diluted EPS was $1.24.
- Operating income excluding the termination gain was $79.6 million, up 19%; operating margin on that basis was 12.2%, versus 10.9% in 2011. SG&A was $325.8 million, or 50% of sales, compared with $315.7 million, or 51%.
- Year-end working capital was $366.7 million, with a working-capital ratio above 2.4:1. Cash was substantially boosted by the Burberry exit payment. Operating cash flow also benefited from working-capital movements, including collections and lower inventory.
- Fourth-quarter sales were $176.9 million versus $189.1 million in Q4 2011. Q4 net income attributable to the company was $99.6 million, including the termination gain; excluding that gain, it was $6.6 million, or $0.21 diluted EPS.
Material changes and developments
- Burberry represented 46% of 2012 sales, down from 50% in 2011. Burberry exercised its buyout option effective December 31, 2012; the company received approximately $239 million. A transition agreement allows limited activity through March 31, 2013, with a sales cap and no minimum royalties. Inventory sell-off may continue through June 30, 2013.
- Other brands partly offset Burberry’s 2% sales decline: Montblanc rose 40% to $59.3 million, Jimmy Choo rose 26% to $51.5 million, and Boucheron rose 82% to $21.1 million. Lanvin sales declined 3% to $77.6 million.
- The company entered a 20-year Karl Lagerfeld fragrance license and paid approximately $25 million in entry and advance royalty payments; its first launch was planned for 2014. A 10-year Dunhill license begins April 3, 2013.
- Cash flow from investing activities was $206.5 million, largely reflecting net Burberry proceeds. The company recorded a $1.8 million goodwill impairment related to Nickel, following a $0.8 million charge in 2011, and is considering a possible sale of that business.
Outlook, risks and unusual items
- Management’s preliminary 2013 sales target was more than $400 million at then-current exchange rates, excluding potential Burberry transition-period sales. The filing provides no clear 2013 EPS target.
- Management expected to redirect investment toward remaining brands and absorb substantially all Burberry-related fixed costs through growth elsewhere. It cited expected strength in Lanvin, Jimmy Choo, Montblanc and Boucheron and initial Repetto sales, while noting that acquisitions or new licenses were not assured.
- Key risks include dependence on third-party brand licenses and renewals, the loss of Burberry and replacing its sales contribution, changing consumer tastes, competition, retailer and distributor performance, reliance on external manufacturers, foreign-exchange exposure, seasonality, and economic conditions. The company reported that a weak U.S. dollar can weigh on earnings because many European sales are dollar-denominated while costs are in euros.
- License-related minimum advertising, royalty and purchase commitments totaled approximately $974.7 million over the disclosed periods; these are commitments across license terms, not amounts due in a single year. The company reported no material lawsuits. The auditor gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether post-Burberry sales and earnings can replace the lost brand contribution, and how 2013 results compare with the preliminary sales target.
- The final costs, taxes, inventory disposition and cash impact of the Burberry termination and transition arrangements.
- Underlying operating profitability and cash generation, excluding the one-time termination gain and related working-capital effects.
- Performance and investment requirements of newer licenses, including minimum sales, advertising and royalty obligations, and the timing of launches.
- Liquidity and deployment of the large cash balance, including acquisitions, dividends and any increase in borrowing.