# Interparfums Inc: Form 10-Q for the period ended Jun 30, 2011

- Company: [Interparfums Inc](/companies/ipar.md) (CIK 822663)
- Form: 10-Q
- Filed: 2011-08-09
- Accepted by EDGAR: Aug 9, 2011, 16:16 ET
- Period: 2011-06-30
- Accession: 0001144204-11-044928
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/822663/000114420411044928/v230904_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/822663/000114420411044928/

## Management's discussion and analysis

As filed, 47,036 characters.

### Forward Looking Information

Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and "Risk Factors" in Inter Parfums' annual report on Form 10-K for the fiscal year ended December 31, 2010 and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report.

### Overview

We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Our prestige fragrance products are produced and marketed by our European operations through our 74% owned subsidiary in Paris, Interparfums, S.A. (formerly Inter Parfums, S.A.), which is also a publicly traded company as 26% of Interparfums, S.A. shares trade on the Euronext. Prestige cosmetics and prestige skin care products represent less than 1% of consolidated net sales.

We produce and distribute our prestige products primarily under license agreements with brand owners, and prestige product sales represented approximately 90% and 88% of net sales for the six months ended June 30, 2011 and 2010. We have built a portfolio of prestige brands, which include Burberry, Lanvin, Van Cleef & Arpels, Jimmy Choo, Montblanc, Paul Smith, S.T. Dupont, Nickel and Boucheron, whose products are distributed in over 120 countries around the world. Shipments to our distribution subsidiaries are not recognized as sales until that merchandise is sold by our distribution subsidiary to its customers.

Burberry is our most significant license, as sales of Burberry products represented 47% and 57% of net sales for the six months ended June 30, 2011 and 2010, respectively. In addition, we own the Lanvin brand name for our class of business and sales of Lanvin product represented 14% and 13% of net sales for the six months ended June 30, 2011 and 2010, respectively.

Our specialty retail and mass-market fragrance and fragrance related products are marketed through our United States operations and represented 10% and 12% of sales for the six months ended June 30, 2011 and 2010. These fragrance products are sold under trademarks owned by us or pursuant to license or other agreements with the owners of the *Gap, Banana Republic, Brooks Brothers, bebe, Betsey Johnson, Nine West, Lane Bryant* and *Jordache* trademarks.

Historically, seasonality has not been a major factor for our Company as quarterly sales fluctuations were more influenced by the timing of launches than by the third and fourth quarter holiday season. However, in certain markets where we now sell direct to retailers, seasonality is more evident. In 2007 we commenced operations of our European distribution subsidiaries in Italy, Germany, Spain and the United Kingdom, and in January 2011 we commenced operations of our United States distribution subsidiary. In addition, the introduction of our specialty retail product lines for U. S. retailers has also contributed to a concentration of sales in the second half of the year.

We grow our business in two distinct ways. First, we grow by adding new brands to our portfolio, either through new licenses or other arrangements or out-right acquisitions of brands. Second, we grow through the introduction of new products and supporting new and established products through advertising, merchandising and sampling as well as phasing out existing products that no longer meet the needs of our consumers. The economics of developing, producing, launching and supporting products influence our sales and operating performance each year. Our introduction of new products may have some cannibalizing effect on sales of existing products, which we take into account in our business planning.

Our business is not capital intensive, and it is important to note that we do not own manufacturing facilities. We act as a general contractor and source our needed components from our suppliers. These components are received at one of our distribution centers and then, based upon production needs, the components are sent to one of several third party fillers which manufacture the finished good for us which are then delivered to one of our distribution centers.

As with any business, many aspects of our operations are subject to influences outside our control. We believe we have a strong brand portfolio with global reach and potential. As part of our strategy, we plan to continue to make investments behind fast-growing markets and channels to grow market share.

Our reported net sales are impacted by changes in foreign currency exchange rates. A weak U.S. dollar has a positive impact on our net sales. However, earnings are negatively affected by a weak dollar because in excess of 35% of net sales of our European operations are denominated in U.S. dollars, while all costs of our European operations are incurred in euro. Our Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating foreign currency exchange rates.

### Recent Important Events

### The Gap Inc.

In July 2011, we renewed our exclusive agreement with The Gap, Inc. to develop, produce, manufacture and distribute fragrances for Gap and Banana Republic brand names to be sold in Gap and Banana Republic retail stores in the United States and Canada. In July 2011, we also renewed our license agreement with The Gap Inc. for international distribution of fragrances through Gap and Banana Republic stores as well as select specialty and department stores outside the United States, including duty-free and other travel related retailers.

These renewal agreements, which take effect on January 1, 2012 and run through December 31, 2014, contain terms and conditions similar to those of the original agreements.

### Pierre Balmain

In July 2011, we entered into a twelve-year exclusive, worldwide license agreement to create, produce and distribute perfumes and ancillary products under the Balmain brand. Our rights under the agreement commence on January 1, 2012 when we will take over the production and distribution of existing Balmain fragrances and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The Company paid an up front entry fee of €1.5 million (approximately $2.1 million) for this license.

### Anna Sui

In June 2011, we entered into a ten-year exclusive worldwide fragrance license agreement, with two five-year renewal options, to create, produce and distribute perfumes and fragrance-related products under the Anna Sui brand. Our rights under the agreement commence on January 1, 2012 when we will take over production and distribution of the existing Anna Sui fragrance collections and is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. The license agreement replaces a previous license with Procter & Gamble that terminates on December 31, 2011. Inter Parfums is in negotiations to purchase the current inventory and other assets of the existing licensee, which is subject to a definitive agreement.

### S. T. Dupont

In April 2011 we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance lines through December 31, 2016. Our initial eleven-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended in 2006 for an additional three years until June 2011.

### Lane Bryant

In March 2011, we entered into an exclusive agreement with a unit of Charming Shoppes, Inc. for its flagship brand, Lane Bryant. Under the agreement, Inter Parfums designs and manufactures personal care products for the Lane Bryant brand, while Lane Bryant is responsible for marketing, promoting and selling these products. The initial term of the contract, which may be extended by mutual consent, runs through December 31, 2015.

### Discussion of Critical Accounting Policies

We make estimates and assumptions in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations. These accounting policies generally require our management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The judgments used by management in applying critical accounting policies could be affected by a further and prolonged general deterioration in the economic environment, which could negatively influence future financial results and availability of continued financing. Specifically, subsequent evaluations of our accounts receivables, inventories, and deferred tax assets in light of the factors then prevailing, could result in significant changes in our allowance and reserve accounts in future periods, which in turn could generate significant additional charges. Similarly, the valuation of certain intangible assets could be negatively impacted by prolonged and severely depressed market conditions thus leading to the recognition of impairment losses. The following is a brief discussion of the more critical accounting policies that we employ.

### Revenue Recognition

We sell our products to department stores, perfumeries, specialty retailers, mass-market retailers, supermarkets and domestic and international wholesalers and distributors. Sales of such products by our domestic subsidiaries are denominated in U.S. dollars and sales of such products by our foreign subsidiaries are primarily denominated in either euro or U.S. dollars. Accounts receivable reflect the granting of credit to these customers. We generally grant credit based upon our analysis of the customer’s financial position as well as previously established buying patterns. We recognize revenues when merchandise is shipped and the risk of loss passes to the customer. Net sales are comprised of gross revenues less returns, trade discounts and allowances.

### Sales Returns

Generally, we do not permit customers to return their unsold products. However, on a case-by-case and for U.S. based customers of prestige products, we allow customer returns. We regularly review and revise, as deemed necessary, our estimate of reserves for future sales returns based primarily upon historic trends and relevant current data. We record estimated reserves for sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products are recorded as inventories and are valued based upon estimated realizable value. The physical condition and marketability of returned products are the major factors we consider in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from our estimates, if factors such as economic conditions, inventory levels or competitive conditions differ from our expectations.

### Promotional Allowances

We have various performance-based arrangements with certain retailers. These arrangements primarily allow customers to take deductions against amounts owed to us for product purchases. The costs that our Company incurs for performance-based arrangements, shelf replacement costs and slotting fees are netted against revenues on our Company’s consolidated statement of income. Estimated accruals for promotions and advertising programs are recorded in the period in which the related revenue is recognized. We review and revise the estimated accruals for the projected costs for these promotions. Actual costs incurred may differ significantly, either favorably or unfavorably, from estimates if factors such as the level and success of the retailers’ programs or other conditions differ from our expectations.

### Inventories

Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. We record adjustments to the cost of inventories based upon our sales forecast and the physical condition of the inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions or competitive conditions differ from our expectations.

### Equipment and Other Long-Lived Assets

Equipment, which includes tools and molds, is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital spending strategy can result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of equipment should be shortened, we would depreciate the net book value in excess of the salvage value, over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of equipment, or market acceptance of products, could result in shortened useful lives.

We evaluate goodwill and indefinite-lived intangible assets for impairment at least annually during the fourth quarter, or more frequently when events occur or circumstances change, such as an unexpected decline in sales, that would more likely than not (i) reduce the fair value of the reporting unit below its fair value or (ii) indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable. Impairment of goodwill is evaluated using a two step process. The first step involves a comparison of the estimated fair value of the reporting unit to the carrying value of that unit. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, the second step of the process involves comparison of the implied fair value of goodwill (based on industry purchase and sale transaction data) with its carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized as an amount equal to the excess. For indefinite-lived intangible assets, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, impairment is recorded.

Goodwill relates to our Nickel skin care business, which is primarily a component of our European operations. Testing goodwill for impairment requires us to estimate the fair value of the reporting unit using significant estimates and assumptions. The assumptions we make will impact the outcome and ultimate results of the testing. In making our assumptions and estimates, we use industry accepted valuation models and set criteria that are reviewed and approved by management and, in certain instances, we engage third party valuation specialists to advise us. We have determined that we may be inclined to sell the Nickel business within the next few years. Therefore, as of December 31, 2009, we measured fair value of the business to be equal to the average amount offered by several potential purchasers of the Nickel business. As a result, the carrying amount of the goodwill exceeded its implied fair value resulting in an impairment loss of $1.7 million in 2009. The same evaluation was performed in 2010 and no further impairment was noted. We expect Nickel brand sales to remain steady over the next few years as the result of new product launches in combination with an economic recovery. In estimating future sales, we use our internal budgets developed from recent sales data for existing products and planned timing of new product launches. If sales for the reporting unit decreased 10%, we could incur an additional goodwill impairment charge of €0.5 million.

To determine fair value of indefinite-lived intangible assets, we use an income approach, including the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. The relief-from-royalty calculations require us to make a number of assumptions and estimates concerning future sales levels, market royalty rates, future tax rates and discount rates. We use this method to determine if an impairment charge is required relating to our Nickel brand trademarks. For the year ended December 31, 2009, an impairment charge relating to the Nickel trademark in the amount of $0.54 million was recorded. No impairment charge was required in 2010. We assumed a market royalty rate of 6% and a discount rate of 7.4%.

The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2010 assuming all other assumptions remained constant:

*In thousands*

|  | Change | Increase (decrease) to fair value |
| --- | ---: | ---: |
| Weighted average cost of capital | +10% | $(219) |
| Weighted average cost of capital | -10% | $280 |
| Future sales levels | +10% | $266 |
| Future sales levels | -10% | $(266) |

The fair values used in our evaluations are also estimated based upon discounted future cash flow projections using a weighted average cost of capital of 7.4%. The cash flow projections are based upon a number of assumptions, including, future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. We believe that the assumptions that we have made in projecting future cash flows for the evaluations described above are reasonable and currently no impairment indicators exist for our indefinite-lived assets other than the Nickel trademarks referred to above. However, if future actual results do not meet our expectations, we may be required to record an impairment charge, the amount of which could be material to our results of operations.

Intangible assets subject to amortization are evaluated for impairment testing whenever events or changes in circumstances indicate that the carrying amount of an amortizable intangible asset may not be recoverable. If impairment indicators exist for an amortizable intangible asset, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. If our projection of undiscounted future cash flows is in excess of the carrying value of the intangible asset, no impairment charge is recorded. If our projection of undiscounted future cash flows is less than the carrying value of the intangible asset, an impairment charge would be recorded to reduce the intangible asset to its fair value. The cash flow projections are based upon a number of assumptions, including future sales levels and future cost of goods and operating expense levels, as well as economic conditions, changes to our business model or changes in consumer acceptance of our products which are more subjective in nature. We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable and currently no impairment indicators exist for our intangible assets subject to amortization. In those cases where we determine that the useful life of long-lived assets should be shortened, we would depreciate the net book value in excess of the salvage value (after testing for impairment as described above), over the revised remaining useful life of such asset thereby increasing amortization expense.

In determining the useful life of our Lanvin brand names and trademarks, we applied the provisions of ASC topic 350-30-35-3. The only factor that prevented us from determining that the Lanvin brand names and trademarks were indefinite life intangible assets was Item c. “Any legal, regulatory, or contractual provisions that may limit the useful life”. The existence of a repurchase option in 2025 may limit the useful life of the Lanvin brand names and trademarks to the Company. However, this limitation would only take effect if the repurchase option were to be exercised and the repurchase price was paid. If the repurchase option is not exercised, then the Lanvin brand names and trademarks are expected to continue to contribute directly to the future cash flows of our Company and their useful life would be considered to be indefinite.

With respect to the application of ASC topic 350-30-35-8, the Lanvin brand names and trademarks would only have a finite life to our Company if the repurchase option were exercised, and in applying ASC topic 350-30-35-8 we assumed that the repurchase option is exercised. When exercised, Lanvin has an obligation to pay the exercise price and the Company would be required to convey the Lanvin brand names and trademarks back to Lanvin. The exercise price to be received (Residual Value) is well in excess of the carrying value of the Lanvin brand names and trademarks, therefore no amortization is required.

### Derivatives

We account for derivative financial instruments in accordance with ASC topic 815, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This topic also requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet and that they are measured at fair value.

We currently use derivative financial instruments to hedge certain anticipated transactions and interest rates, as well as receivables denominated in foreign currencies. We do not utilize derivatives for trading or speculative purposes. Hedge effectiveness is documented, assessed and monitored by employees who are qualified to make such assessments and monitor the instruments. Variables that are external to us such as social, political and economic risks may have an impact on our hedging program and the results thereof.

### Income Taxes

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. The net deferred tax assets assume sufficient future earnings for their realization, as well as the continued application of currently anticipated tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets, where management believes it is more-likely-than-not that the deferred tax assets will not be realized in the relevant jurisdiction. If the Company determines that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of net earnings at that time.

The Company follows the provisions of uncertain tax positions as addressed in ASC topic 740-10-65-1.

### Results of Operations

### Three and Six Months Ended June 30, 2011 as Compared to the Three and Six Months Ended June 30, 2010

*(In millions)*

| Net sales | Three months ended June 30, 2011 | % Change | 2010 | Six months ended June 30, 2011 | % Change | 2010 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| European based product sales | $106.5 | 16% | $91.9 | $228.1 | 14% | $200.2 |
| United States based product sales | 14.6 | (8)% | 15.9 | 26.3 | (2)% | 26.9 |
| Total net sales | $121.1 | 12% | $107.8 | $254.4 | 12% | $227.1 |

Net sales for the three months ended June 30, 2011 increased 12% to $121.1 million, as compared to $107.8 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 5% for the period. Net sales for the six months ended June 30, 2011 increased 12% to $254.4 million, as compared to $227.1 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 8% for the period. The weakness of the U.S. dollar relative to the euro during the three month period ended June 30, 2011 gave rise to the difference between constant dollar and reported net sales.

European based prestige product sales increased 16% for the three months ended June 30, 2011 and 14% for the six months ended June 30, 2011, as compared to the corresponding periods of the prior year. This sales growth was due to a number of factors, including the commencement of prestige product distribution in the U.S. by our subsidiary, Interparfums Luxury Brands as of January 1, 2011. Other markets that were especially strong during the six month period ending June 30, 2011 include South America, Eastern Europe and Asia, where comparable prestige product sales in local currency were up 19%, 16% and 14%, respectively. Sales for the three month period ended June 30, 2011 were less than expected due to the June opening of our new 340,000 square foot distribution center outside of Paris. The transfer of inventory and certain other unforeseen transitional issues caused a delay in shipments until the third quarter of 2011. We do not expect these issues to impact our sales expectations for the full year ended December 31, 2011.

From a product standpoint, the Jimmy Choo signature fragrance debuted with limited distribution in the first half. With strong demand on order renewals plus broader distribution anticipated in the second half of 2011, we increased our production forecast for the year. First time sales of Montblanc’s historic lines and the launch of *Legend* for men, brand sales which aggregated $8.8 million and $17.7 million for the three and six months ended June 30, 2011, are also running well ahead of budget. In local currency, first half Burberry brand sales declined 13%, in line with expectations, as last year’s period benefited from the worldwide launch of Burberry *Sport*. Similarly in local currency, first half Van Cleef & Arpels sales were 22% below those of last year’s first half which included the launch of *Oriens.*

We are gearing up for a very active 2011, reflecting several factors including the continued strength of our brands and worldwide distribution network. Our growth expectations for 2011 reflect the impact of our taking control over U.S. distribution for our prestige brands and the inclusion of the Montblanc fragrance business for the full year in 2011. In addition, we have a strong line-up of new product launches and brand extensions to drive sales growth. In addition to the Jimmy Choo launch discussed above, early in 2011 we began the integration of existing fragrance lines under the Boucheron brand. In March 2011, we debuted *Legend*, our first new Montblanc fragrance for men, as well as a new men’s and women’s scent for Paul Smith fragrances. Most importantly, to further strengthen the Burberry brand’s potential for sustained growth in the years ahead, a major new women’s line will be launched in Fall 2011. Finally, with respect to Burberry Beauty, the color cosmetics collection, plans call for additional products to be rolled out throughout the year and distribution is expected to be expanded by approximately 60 additional retail outlets for a total of approximately 90. We are currently reviewing Burberry Beauty results, as well as the anticipated financial commitment which may be necessary, in order to determine the appropriate level of distribution for the Burberry Beauty in the years to come.

With respect to our United States specialty retail and mass-market products, net sales for the three months ended June 30, 2011 were $14.6 million, as compared to $15.9 million for the corresponding period of the prior year. Net sales for the six months ended June 30, 2011 were $26.3 million, as compared to $26.9 million for the corresponding period of the prior year.

After a 16% increase in 2010 and a 6.5% increase in the first quarter of 2011, sales declined slightly during the three months ended June 30, 2011. Most of our new specialty retail product introductions and holiday programs are scheduled to ship in the second half of 2011.

International distribution of specialty retail products continues to perform well. In addition, our *bebe* signature fragrance has done especially well in overseas markets and we expanded *bebe* distribution into additional third party retail outlets.

For the Banana Republic brand, a new women’s scent, *Wildbloom*, was launched early this year and brand extensions for the Discover and Republic of Men and Republic of Women collections are being prepared. Building upon the success of the Gap brand’s *Close* and *Stay* fragrances, a third women’s signature scent, *Near*, launched in 2011. A new men’s scent, *Deep*, has also been added to build the brands men’s fragrance portfolio. We are also adding more lip color and lip care products into the Gap beauty mix, along with their first nail color products. We are in the development stage for several new fragrance concepts and line extensions for our other specialty retail brands. The debut of products for Betsey Johnson and Nine West, are planned for the second half of 2011.

We have been actively pursuing other new business opportunities and in March 2011, we entered into an exclusive agreement with a unit of Charming Shoppes, Inc. for its flagship brand, Lane Bryant. We have worked with Lane Bryant to develop a line of performance-based bath, body and specialty products, which is now being sold under Lane Bryant’s Cacique® brand. The initial line of products was launched at 130 Lane Bryant stores and at www.lanebryant.com in late spring. Chain wide rollout is anticipated in early 2012. Additional products, including a fine fragrance, are contemplated for holiday 2011.

In addition, we are actively pursuing other new business opportunities. However, we cannot assure that any new licenses, acquisitions or specialty retail agreements will be consummated.

*(In millions)*

| Gross margin | Three months ended June 30, 2011 | 2010 | Six months ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $121.1 | $107.8 | $254.4 | $227.1 |
| Cost of sales | 46.1 | 43.1 | 92.8 | 90.7 |
| Gross margin | $75.0 | $64.7 | $161.6 | $136.4 |
| Gross margin as a percent of net sales | 62% | 60% | 64% | 60% |

Gross profit margin was 62% and 64% for the three and six month periods ended June 30, 2011, as compared to 60% for both corresponding periods of the prior year. The gross margin improvement is primarily the result of us taking over, as of January 1, 2011, prestige product distribution in the U.S. by our subsidiary, Interparfums Luxury Brands. We now sell our prestige products in the U.S. directly to retailers rather than through a third party distributor which generates higher gross margins on our product sales. Product mix also contributed to the increase in gross margin.

In addition to the impact of direct distribution referred to above, we carefully watch movements in foreign currency exchange rates as over 35% of our European operations sales are denominated in dollars, while our costs are incurred in euro. Therefore, from a profit standpoint, a weaker U.S. dollar has a negative impact on our gross margin. The average exchange rate for the three months ended June 30, 2011 was 1.44 as compared to 1.27 for the three months ended June 30, 2010 which reflected a weaker U.S. dollar. If not for such effect, gross margins for the three months ended June 30, 2011 would have been more comparable to the gross margins achieved during the first three months of 2011.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $1.6 million and $3.0 million for the three and six month periods ended June 30, 2011, respectively, as compared to $1.3 million and $2.6 million for the corresponding periods of the prior year, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross profit may not be comparable to other companies which may include these expenses as a component of cost of goods sold.

### INTER PARFUMS, INC. AND SUBSIDIARIES

*(In millions)*

| Selling, general and administrative expenses | Three months ended June 30, 2011 | 2010 | Six months ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $64.1 | $53.2 | $125.2 | $108.9 |
| Selling, general and administrative expenses as a percent of net sales | 53% | 49% | 49% | 48% |

Selling, general and administrative expenses increased 20% and 15% for the three and six-month periods ended June 30, 2011, respectively, as compared to the corresponding periods of the prior year. As a percentage of sales, selling, general and administrative expenses were 53% and 49% of sales for the three and six-month periods ended June 30, 2011, as compared to 49% and 48% for the corresponding periods of the prior year. As discussed above, net sales for the three months ended June 30, 2011 were negatively impacted by transition issues related to our new distribution center. As a result, we did not achieve the leverage of fixed selling, general and administrative expenses for the three months ended June 30, 2011 that we would have expected.

Promotion and advertising included in selling, general and administrative expenses aggregated $22.5 million and $40.9 million for the three and six-month periods ended June 30, 2011, respectively, as compared to $20.4 million and $39.3 million for the corresponding periods of the prior year. Promotion and advertising represented 19% and 16% of net sales for the three and six months ended June 30, 2011, as compared to 19% and 17% of sales for the corresponding period of the prior year. With the commencement in January 2011 of prestige product distribution in the U.S. by our subsidiary, Interparfums Luxury Brands, we are now responsible for 100% of the cost of advertising support for our prestige fragrance brands in the U.S. as opposed to sharing such expenditures with our former U.S. distributor. During the six months ended June 30, 2011, there were no global launches and accordingly, our advertising and promotion expenditures were relatively low. Our plans call for a significant portion of our annual advertising budget to be incurred in the second half of 2011. In addition, service fees relating to the activities of our distribution subsidiaries aggregated $4.4 million and $9.2 million for the three and six-month periods ended June 30, 2011, respectively, as compared to $2.5 million and $5.6 million for the corresponding periods of the prior year.

Royalty expense, included in selling, general and administrative expenses, aggregated $10.8 million and $22.3 million for the three and six-month periods ended June 30, 2011, respectively, as compared to $9.4 million and $20.6 million for the corresponding periods of the prior year. As a percentage of sales, royalty expense represented 8.9% and 8.8% of net sales for the three and six months ended June 30, 2010, as compared to 8.8% and 9.1% of sales for the corresponding period of the prior year.

Income from operations declined 5.6% to $10.8 million for the three-month period ended June 30, 2011, as compared to $11.5 million for the corresponding period of the prior year. Income from operations increased 32% to $36.4 million for the six month period ended June 30, 2011, as compared to $27.5 million for the corresponding period of the prior year. Operating margins were 9.0% and 14.3% of net sales for the three and six month periods ended June 30, 2011, respectively, as compared to 10.7% and 12.1% for the corresponding periods of the prior year.

Interest expense aggregated $0.4 million and $0.8 million for the three and six-month periods ended June 30, 2011, respectively, as compared to $0.5 million and $1.1 million for the corresponding periods of the prior year. We use the credit lines available to us, as needed, to finance our working capital needs. Loans payable – banks and long-term debt including current maturities aggregated $21.4 million as of December 31, 2010, as compared to $34.6 million as of December 31, 2009.

Foreign currency losses aggregated $0.6 million and $0.1 million for the three and six-month periods ended June 30, 2011, respectively, as compared to $0.5 million and $2.9 million for the corresponding periods of the prior year. We enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments. Hedge effectiveness excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings and resulted in most of the losses referred to above.

Our effective income tax rate was 37% and 34% for the three and six-month periods ended June 30, 2011, respectively, as compared to 35% and 34% for the corresponding periods of the prior year. Our effective tax rates differ from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions. Our effective tax rate is usually around 34% to 35%. The higher rate during the three months ended June 30, 2011 is the result of the inability to record tax benefits to offset operating losses incurred in certain distribution subsidiaries as future profitability cannot be assured. No significant changes in tax rates were experienced nor were any expected in jurisdictions where we operate.

### Net income and earnings per share

*(In thousands except per share data)*

|  | Three Months Ended June 30, 2011 | 2010 | Six Months Ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $6,428 | $6,983 | $23,768 | $15,933 |
| Less: Net income attributable to the noncontrolling interest | 1,435 | 1,627 | 6,016 | 4,027 |
| Net income attributable to Inter Parfums, Inc. | $4,993 | $5,356 | $17,752 | $11,906 |
| **Earnings per share:** |  |  |  |  |
| **Net income attributable to Inter Parfums, Inc. common shareholders:** |  |  |  |  |
| Basic | $0.16 | $0.18 | $0.58 | $0.39 |
| Diluted | $0.16 | $0.18 | $0.58 | $0.39 |
| **Weighted average number of shares outstanding:** |  |  |  |  |
| Basic | 30,506 | 30,361 | 30,490 | 30,277 |
| Diluted | 30,695 | 30,467 | 30,664 | 30,379 |

Net income decreased 8% to $6.4 million for the three month period ended June 30, 2011, as compared to $7.0 million for the corresponding period of the prior year. Net income increased 49% to $23.8 million for the six-month period ended June 30, 2011, as compared to $15.9 million for the corresponding period of the prior year.

Net income attributable to the noncontrolling interest aggregated 22% and 25% of net income for the three and six month periods ended June 30, 2011, respectively, as compared to 23% and 25% for both corresponding periods of the prior year.

Net income attributable to Inter Parfums, Inc. decreased 7% to $5.0 million for the three month period ended June 30, 2011, as compared to $5.4 million for the corresponding period of the prior year. Net income attributable to Inter Parfums, Inc. increased 49% to $17.8 million for the six-month period ended June 30, 2011, as compared to $11.9 million for the corresponding period of the prior year.

Diluted earnings per share were $0.16 and $0.18 for the three month periods ended June 30, 2011 and 2010, respectively, and diluted earnings per share were $0.58 and $0.39 for the six month periods ended June 30, 2011 and 2010, respectively. Weighted average shares outstanding aggregated 30.5 million for both the three and six-month periods ended June 30, 2011, respectively, as compared to 30.4 million and 30.3 million for the corresponding periods of the prior year. On a diluted basis, average shares outstanding were 30.7 million for both the three and six-month periods ended June 30, 2011, as compared to 30.5 million and 30.4 million for the three and six-month periods ended June 30, 2010.

### Liquidity and Capital Resources

Our financial position remains strong. At June 30, 2011, working capital aggregated $209 million and we had a working capital ratio of almost 2.4 to 1. Cash and cash equivalents and short-term investments aggregated $53 million.

Cash provided by (used in) operating activities aggregated ($22.3) million and $19.8 million for the six months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011, working capital items used $53 million in cash from operating activities, as compared to $1.0 million in the 2010 period. The increase in accounts receivable of $14.8 million or 15% from December 31, 2010 is reasonable considering sales were up 12% for the period and accounts receivable balances are typically at their lowest at year end. The $57.8 million increase in inventories for the six months ended June 30, 2011, as shown on the statement of cash flows, reflects the needed inventory build to support sales growth and upcoming product launches in both European operations and U.S. operations. A portion of this inventory build is in preparation for the global launch of Burberry *Body*, a new women’s fragrance coming to market in the third quarter of 2011.

Cash flows provided by (used in) investing activities in 2011 reflect the net redemption of $42.1 million in short-term investments which are certificates of deposit with maturities slightly greater than three months. We also spent approximately $5.5 million for capital items. Our business is not capital intensive as we do not own any manufacturing facilities. However, we typically spend between $2.5 million and $3.5 million per year on tools and molds, depending on our new product development calendar. The balance of capital expenditures is for office fixtures, computer equipment and industrial equipment needed at our distribution centers. Capital expenditures in 2011 are expected to be in the range of $6.5 million to $7.0 million, considering our 2011 launch schedule.

Our short-term financing requirements are expected to be met by available cash on hand at June 30, 2011, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2011 consist of a $15.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $23.0 million in credit lines provided by a consortium of international financial institutions. As of June 30, 2011, short-term borrowings aggregated $7.7 million.

Our long-term credit facilities provide for principal and interest to be repaid in 20 quarterly installments. As of June 30, 2011, total long-term debt including current maturities aggregated $11.1 million. Proceeds from sale of stock of subsidiary reflect the proceeds from shares issued by our French subsidiary Interparfums, S.A. pursuant to options exercised in 2011. To partially offset the dilution resulting from such issuances, we paid $0.75 million to repurchase outstanding shares of Interparfums, S.A.

In January 2011, the board of directors authorized an approximate 23% increase in the annual dividend to $0.32 per share. The next quarterly dividend of $0.08 per share will be paid on October 14, 2011 to shareholders of record on September 30, 2011. Dividends paid, including dividends paid once per year to noncontrolling stockholders of Interparfums, S.A., aggregated $7.6 million for the six months ended June 30, 2011. The annual cash dividend for 2011 are not expected to have any significant impact on our financial position.

We believe that funds provided by or used in operations can be supplemented by our present cash position and available credit facilities, so that they will provide us with sufficient resources to meet all present and reasonably foreseeable future operating needs.

Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the three month period ended June 30, 2011.

### Contractual Obligations

The following table sets forth, as of December 31, 2010, our contractual obligations over the periods indicated in the table, as well as our total contractual obligations ($ in thousands).

| Contractual Obligations | Payments due by period Total | Less than 1 year | Years 2-3 | Years 4-5 | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-Term Debt (2) | $16,800 | $11,600 | $5,200 |  |  |
| Capital Lease Obligations |  |  |  |  |  |
| Operating Leases | $29,700 | $6,900 | $8,200 | $5,500 | $9,100 |
| Purchase obligations(1) | $1,240,600 | $140,400 | $294,800 | $311,100 | $494,300 |
| Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP |  |  |  |  |  |
| Total | $1,287,100 | $158,900 | $308,200 | $316,600 | $503,400 |

(1) Consists of purchase commitments for advertising and promotional items, minimum royalty guarantees, including fixed or minimum obligations, and estimates of such obligations subject to variable price provisions. Future advertising commitments were estimated based on planned future sales for the license terms that were in effect at December 31, 2010, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations.

(2) Includes long-term debt and related interest costs including interest rate swap amounts. Interest due as the result of interest rate swaps is all at a fixed rate and is payable $0.21 million and $0.47 million in 2011 and 2012, respectively.

## Market risk

As filed, 3,078 characters.

### General

We address certain financial exposures through a controlled program of risk management that primarily consists of the use of derivative financial instruments. We primarily enter into foreign currency forward exchange contracts in order to reduce the effects of fluctuating foreign currency exchange rates. We do not engage in the trading of foreign currency forward exchange contracts or interest rate swaps.

### Foreign Exchange Risk Management

We periodically enter into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and to manage risks related to future sales expected to be denominated in a currency other than our functional currency. We enter into these exchange contracts for periods consistent with our identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on the receivables and cash flows of Interparfums, S.A., our French subsidiary, whose functional currency is the Euro. All foreign currency contracts are denominated in currencies of major industrial countries and are with large financial institutions, which are rated as strong investment grade.

All derivative instruments are required to be reflected as either assets or liabilities in the balance sheet measured at fair value. Generally, increases or decreases in fair value of derivative instruments will be recognized as gains or losses in earnings in the period of change. If the derivative is designated and qualifies as a cash flow hedge, then the changes in fair value of the derivative instrument will be recorded in other comprehensive income.

Before entering into a derivative transaction for hedging purposes, we determine that the change in the value of the derivative will effectively offset the change in the fair value of the hedged item from a movement in foreign currency rates. Then, we measure the effectiveness of each hedge throughout the hedged period. Any hedge ineffectiveness is recognized in the income statement.

At June 30, 2011, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $37 million and GB pounds 4.1 million which all have maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.

### Interest Rate Risk Management

We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt. We entered into an interest rate swap in September 2007 on €22 million of debt, effectively exchanging the variable interest rate of 0.6% above the three month EURIBOR to a fixed rate of 4.42%. The remaining balance owed pursuant to this facility is as of June 30, 2011 was €5.5 million. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

## Controls and procedures

As filed, 2,050 characters.

### Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)) as of the end of the period covered by this quarterly report on Form 10-Q (the “Evaluation Date”). Based on their review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date our Company's disclosure controls and procedures were effective.

### Changes in Internal Control Over Financial Reporting

During the 2nd quarter of 2011, our French subsidiary, Interparfums, S.A. implemented SAP, a new accounting software system for its operations (“SAP System”). The implementation was completed and the SAP System went “live” in May, 2011. The SAP System is a fully-integrated set of programs and databases that incorporate order processing, production planning and scheduling, purchasing, accounts receivable, inventory management and accounting. This implementation was subject to various testing and review procedures prior to going “live”. In connection with this SAP System implementation, we are updating our internal control over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures. Other than described above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

### Part II. Other Information

**Items 1. Legal Proceedings, 1A. Risk Factors, 2. Unregistered Sales of Equity Securities and Use of Proceeds, 3. Defaults Upon Senior Securities** and **5. Other Information**, are omitted as they are either not applicable or have been included in **Part I.**

Filed Aug 9, 2011.
Source: SEC EDGAR, the filing index for accession 0001144204-11-044928. Last ingested by Listed: Nov 4, 2026, 18:31 ET. No prices; not investment advice.