# Interparfums Inc: Form 10-Q for the period ended Jun 30, 2015

- Company: [Interparfums Inc](/companies/ipar.md) (CIK 822663)
- Form: 10-Q
- Filed: 2015-08-07
- Accepted by EDGAR: Aug 7, 2015, 16:15 ET
- Period: 2015-06-30
- Accession: 0001144204-15-047330
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/822663/000114420415047330/v416568_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/822663/000114420415047330/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-04-01 to 2015-06-30 | $102.0m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2015-01-01 to 2015-06-30 | $211.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-04-01 to 2015-06-30 | $41.7m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2015-01-01 to 2015-06-30 | $83.3m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2015-04-01 to 2015-06-30 | $60.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2015-01-01 to 2015-06-30 | $127.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-04-01 to 2015-06-30 | $52.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2015-01-01 to 2015-06-30 | $98.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-04-01 to 2015-06-30 | $8.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2015-01-01 to 2015-06-30 | $29.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-04-01 to 2015-06-30 | $613.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2015-01-01 to 2015-06-30 | $771.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-04-01 to 2015-06-30 | $2.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-01-01 to 2015-06-30 | $9.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-04-01 to 2015-06-30 | $4.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2015-01-01 to 2015-06-30 | $14.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-01-01 to 2015-06-30 | $0.46 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-01-01 to 2015-06-30 | $0.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-04-01 to 2015-06-30 | 31,107,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-01-01 to 2015-06-30 | 31,089,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-01-01 to 2015-06-30 | −$9.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2015-01-01 to 2015-06-30 | $1.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2015-01-01 to 2015-06-30 | $7.7m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2015-06-30 | $76.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-06-30 | $456.5m | us-gaap:AssetsCurrent |
| Total assets | at 2015-06-30 | $683.0m | us-gaap:Assets |
| Current liabilities | at 2015-06-30 | $114.4m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2015-06-30 | $89.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-06-30 | $21.9m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-06-30 | $365.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,171 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, 2014 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. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.

We produce and distribute our European based prestige products primarily under license agreements with brand owners, and European based prestige product sales represented approximately 78% and 82% of net sales for the six months ended June 30, 2015 and 2014, respectively. We have built a portfolio of prestige brands, which include *Balmain, Boucheron, Coach, Jimmy Choo, Karl Lagerfeld, Lanvin, Montblanc, Paul Smith, S.T. Dupont, Repetto, Rochas* and *Van Cleef & Arpels*, whose products are distributed in over 100 countries around the world. We own the Lanvin brand name for our class of trade, and license the Montblanc and Jimmy Choo brand names; for the six months ended June 30, 2015, sales of product for these brands represented 15%, 22%, and 18% of net sales, respectively.

Through our United States operations, we also market prestige brand as well as specialty retail fragrance and fragrance related products. United States operations represented 22% and 18% of net sales for the six months ended June 30, 2015 and 2014, respectively. These fragrance products are sold or to be sold under trademarks owned by us or pursuant to license or other agreements with the owners of the *Anna Sui, Abercrombie & Fitch, Agent Provocateur, Anna Sui, Banana Republic, bebe, Dunhill, Gap, Hollister, Oscar de la Renta,* and *Shanghai Tang* brands.

### INTER PARFUMS, INC. AND SUBSIDIARIES

Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality has been more evident in the past few years. We operate distribution subsidiaries in Italy, Germany, Spain, and the United States. In addition, our specialty retail product lines sold to United States retailers are also concentrated 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, 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 product for us and then deliver them to one of our distribution centers.

As with any global 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.

During the six months ended June 30, 2015, the economic uncertainty and financial market volatility taking place in certain European countries, the Middle East and China had a small negative impact on our business, and at this time we do not believe it will significantly affect our business for the foreseeable future. However, if the degree of uncertainty or volatility worsens or is prolonged, then there will likely be a negative effect on ongoing consumer confidence, demand and spending and as a result, our business. Currently, we believe general economic and other uncertainties still exist in select markets in which we do business, and we continue to monitor global economic uncertainties and other risks that may affect our business.

Our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our net sales. However, earnings are positively affected by a strong dollar, because almost 50% of net sales of our European operations are denominated in U.S. dollars, while almost 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.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### Recent Important Events

### Coach

In April 2015, the Company, through its majority owned Paris-based subsidiary, Interparfums SA, entered into an 11-year exclusive worldwide license with Coach, Inc. to create, produce and distribute new perfumes and fragrance related products, including new men’s and women’s scents under the Coach brand name. Interparfums SA will distribute these fragrances globally to department stores, specialty stores and duty free shops, as well as in Coach retail stores beginning in 2016. The agreement is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry.

### Rochas

In May 2015, the Company, through its majority owned Paris-based subsidiary, Interparfums SA, acquired the Rochas brand from The Procter & Gamble Company. This transaction includes all brand names and registered trademarks for Rochas *(Femme, Madame, Eau de Rochas*, etc.), mainly for class 3 (cosmetics) and class 25 (fashion). Substantially the entire €106 million purchase price for the assets acquired (approximately $118 million) was allocated to trademarks with indefinite lives, including approximately $5.4 million in acquisition related expenses. An additional $4.4 million was paid for related inventory.

The cost of the acquisition was paid in cash on the closing date and was financed entirely through a 5-year term loan payable in equal quarterly installments plus interest. In order to reduce exposure to rising variable interest rates, the Company entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. The swap is a derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

### Abercrombie & Fitch and Hollister

In December 2014, the Company entered into a 7-year exclusive worldwide license to create, produce and distribute new perfumes and fragrance related products under the Abercrombie & Fitch and Hollister brand names. The Company will distribute these fragrances internationally in specialty retailers, high-end department stores and duty free shops, and in the U.S., in duty free shops and potentially in Abercrombie & Fitch and Hollister retail stores. The agreement is subject to certain minimum sales, advertising expenditures and royalty payments as are customary in our industry. New men’s and women’s scents are planned for both Abercrombie & Fitch and Hollister for 2016.

### 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. Management of the Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Board of Directors.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### 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. 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.

### Accounts Receivable

Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by allowances for sales returns and doubtful accounts. Accounts receivable balances are written-off against the allowance for doubtful accounts when they become uncollectible. Recoveries of accounts receivable previously recorded against the allowance are recorded in the consolidated statement of income when received. We generally grant credit based upon our analysis of the customer’s financial position as well as previously established buying patterns.

### Sales Returns

Generally, we do not permit customers to return their unsold products. However, for U.S. distribution of our prestige products, we allow returns if properly requested, authorized and approved. 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, including information provided by retailers regarding their inventory levels. In addition, as necessary, specific accruals may be established for significant future known or anticipated events. The types of known or anticipated events that we have considered, and will continue to consider, include, but are not limited to, the financial condition of our customers, store closings by retailers, changes in the retail environment and our decision to continue to support new and existing products. 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.

### 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.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### 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 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 indicate that the carrying value of an indefinite-lived intangible asset may not be recoverable. When testing indefinite-lived intangible assets for impairment, the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. The fair values used in our evaluations are estimated based upon discounted future cash flow projections using a weighted average cost of capital of 6.7%. 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. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment charge is recorded.

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 indefinite-lived intangible assets. 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. The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2014 assuming all other assumptions remained constant:

*In millions*

|  | Change | Increase (decrease) to fair value |
| --- | ---: | ---: |
| Weighted average cost of capital | +10% | $(1.0) |
| Weighted average cost of capital | -10% | $1.3 |
| Future sales levels | +10% | $1.0 |
| Future sales levels | -10% | $(1.0) |

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### INTER PARFUMS, INC. AND SUBSIDIARIES

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.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### 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. In addition, 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, 2015 as Compared to the Three and Six Months Ended June 30, 2014

### Net Sales

*($ in millions)*

|  | Three months ended June 30, 2015 | 2014 | % Change | 2015 | Six months ended June 30, 2014 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| European based brand product sales | $77.1 | $94.7 | -18.5% | $163.9 | $197.0 | -16.8% |
| United States based product sales | 24.9 | 23.5 | 5.7% | 47.4 | 42.9 | 10.3% |
| Total net sales | $102.0 | $118.2 | -13.7% | $211.3 | $239.9 | -11.9% |

Net sales for the three months ended June 30, 2015 decreased 13.7% to $102.0 million, as compared to $118.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales decreased 5.3%. Net sales for the six months ended June 30, 2015 decreased 11.9% to $211.3 million, as compared to $239.9 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales decreased 4.0% for the period.

European based prestige product sales decreased 18.5% and 16.8% for the three and six months ended June 30, 2015, respectively as compared to the corresponding periods of the prior year. At comparable foreign currency exchange rates, European based prestige product sales decreased 8% and 7% for the three and six months ended June 30, 2015, respectively. Jimmy Choo was our leading brand in the second quarter. Strong momentum by the Jimmy Choo *Man* line, particularly in the U.S. market, along with the launch earlier this year of Jimmy Choo *Blossom* for women, led to an increase in local currency sales of 62%. In dollars, Jimmy Choo brand sales increased 30% in the period, reflecting the impact of the 19% depreciation of the euro versus the dollar compared to the prior year second quarter. The weakening of the euro also had the effect of exacerbating lower second quarter sales of other brands, such as Montblanc, which experienced a 23% decline in local currency and a 38% reduction in dollars. Montblanc sales also had a difficult comparison against the highly successful launch of *Emblem* in the second quarter of 2014. Lanvin sales in the second quarter were down 9% and 27% in local currency and dollars, respectively, largely as a result of a challenging market environment in Eastern Europe, which was partially offset by gains for the ever resilient *Eclat d’Arpège.*

### INTER PARFUMS, INC. AND SUBSIDIARIES

Despite the effect of a weaker euro, we maintain confidence in our future as we have strengthened advertising and promotional investments supporting all portfolio brands and accelerated brand development. Our expectations reflect plans to continue to build upon the strength of our brands and our worldwide distribution network. For the remainder of 2015, although we anticipate strong performances from certain of our existing scents within our major European based prestige brands, our optimism is somewhat tempered by the negative market conditions seen in China and Eastern Europe that have continued through the second quarter of 2015, and which we expect to continue throughout 2015. However, we are very excited for the upcoming August launch of Jimmy Choo *Illicit*, which promises to build on the strong results we’ve generated with this brand. Our plans also call for the unveiling of *Lady Emblem* during the second half of 2015, which we expect to boost Montblanc sales as the year progresses and into 2016. Lanvin sales should also benefit from new launch activity in the coming months, with the introduction of a new scent for women, *Eclat de Fleurs.*

United States based product sales increased 5.7% and 10.3% for the three and six months ended June 30, 2015, respectively as compared to the corresponding periods of the prior year and reflects the successful launches of *Extraordinary* by Oscar de la Renta and *Icon* by Dunhill earlier this year. Both of these launches have exceeded our expectations. Oscar de la Renta brand sales increased 94% to $8.4 million for the six months ended June 30, 2015, as compared to $4.3 million for the corresponding period of the prior year. Dunhill brand sales increased 58% in the six month period to $10.2 million, as compared to $6.5 million for the corresponding period of the prior year. Mitigating some of these gains was the decline in Anna Sui brand sales, which resulted from continued negative market conditions in China. Anna Sui product sales declined 24% and 35% for the three and six months ended June 30, 2015 respectively, as compared to the corresponding periods of the prior year.

### Net Sales to Customers by Region

(In millions)

|  | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| North America | $55.3 | $59.2 |
| Western Europe | 49.5 | 63.5 |
| Eastern Europe | 13.9 | 16.8 |
| Central and South America | 21.8 | 26.7 |
| Middle East | 26.2 | 25.2 |
| Asia | 39.5 | 42.9 |
| Other | 5.1 | 5.6 |
|  | $211.3 | $239.9 |

The chart above demonstrates the effect of negative market conditions in China and Eastern Europe. The 2015 decline in Western Europe includes the effect of the 19% devaluation of the euro against the dollar and the difficult comparison for Karl Lagerfeld brand sales in 2015 compared to the initial launch of that brand in the 2014 period.

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

### INTER PARFUMS, INC. AND SUBSIDIARIES

*(In millions)*

| Gross margin | Three months ended June 30, 2015 | 2014 | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $102.0 | $118.2 | $211.3 | $239.9 |
| Cost of sales | 41.7 | 50.1 | 83.3 | 102.6 |
| Gross margin | $60.3 | $68.1 | $128.0 | $137.3 |
| Gross margin as a percent of net sales | 59% | 58% | 61% | 57% |

Gross profit margin was 59% and 61% for the three and six months ended June 30, 2015, respectively, as compared to 58% and 57% for the corresponding periods of the prior year. For European operations, gross profit margin was 62.9% and 63.9% for the three and six months ended June 30, 2015, respectively, as compared to 59.7% and 59.6% for the corresponding periods of the prior year. The margin fluctuation for European operations is directly related to currency fluctuation. We carefully monitor movements in foreign currency exchange rates as almost 50% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rate for both the three and six months ended June 30, 2015 was 1.11, as compared to 1.37 for both periods in 2014.

For U.S. operations, gross profit margin was 49.1% for the six months ended June 30, 2015, as compared to 46.3% for the corresponding period of the prior year. The increase for the six months ended June 30, 2015 is primarily the result of a shift in product mix during the period as sales growth for our U.S. operations has primarily come from our newest, higher margin prestige product licenses, such as Oscar de la Renta and Dunhill, while sales of lower margin specialty retail and mass market products have been in a decline. This trend is expected to continue throughout 2015 although some quarterly fluctuations will occur.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $1.1 million and $2.2 million for the three and six month periods ended June 30, 2015, respectively, as compared to $1.2 million and $2.4 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.

*(In millions)*

| Selling, general and administrative expenses | Three months ended June 30, 2015 | 2014 | Six months ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $52.1 | $55.3 | $98.6 | $107.1 |
| Selling, general and administrative expenses as a percent of net sales | 51% | 47% | 47% | 45% |

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### INTER PARFUMS, INC. AND SUBSIDIARIES

Selling, general and administrative expenses decreased 6% and 8% for the three and six months ended June 30, 2015, respectively, as compared to the corresponding periods of the prior year. Selling, general and administrative expenses were 51% and 47% of net sales for the three and six months ended June 30, 2015, as compared to 47% and 45% for the corresponding periods of the prior year. For European operations, selling, general and administrative expenses decreased 8% and 12% for the three and six months ended June 30, 2015, as compared to the corresponding periods of the prior year and represented 55% and 48% of sales for the three and six months ended June 30, 2015, as compared to 49% and 45% for the corresponding periods of the prior year. With constant currency sales declining 8% and 7% for the three and six months ended June 30, 2015, respectively, we have not yet gained leverage over our fixed expenses. For U.S. operations, while sales increased 6% and 10% for the three and six months ended June 30, 2015, respectively, as compared to the corresponding periods of the prior year, selling, general and administrative expenses increased 6% and 11% for the three and six months ended June 30, 2015. This increase is due as the result of sales growth from our U.S. operations coming primarily from our newest, prestige product licenses, such as Oscar de la Renta and Dunhill, which bear royalty and advertising expenses.

Promotion and advertising included in selling, general and administrative expenses aggregated $17.5 million and $30.1 million for the three and six months ended June 30, 2015, respectively, as compared to $20.3 million and $34.8 million for the corresponding periods of the prior year. Promotion and advertising represented 17% of net sales for both three month periods ended June 30, 2015 and 2014, and represented 14% of net sales for both six month periods ended June 30, 2015 and 2014.

Royalty expense included in selling, general and administrative expenses aggregated $7.6 million and $16.2 million for the three and six months ended June 30, 2015, respectively, as compared to $8.0 million and $15.8 million for the corresponding periods of the prior year. Royalty expense represented 7.5% and 7.7% of net sales for the three and six months ended June 30, 2015, as compared to 6.8% and 6.6% of net sales for the corresponding period of the prior year. Royalty expense for the three and six months ended June 30, 2015 include $0.6 million and $1.2 million, respectively, relating to a June 2015 settlement with Burberry regarding the royalty liability.

Service fees relating to the activities of our distribution subsidiaries aggregated $2.2 million and $4.7 million for the three and six months ended June 30, 2015, respectively, as compared to $2.4 million and $5.7 million for the corresponding periods of the prior year.

As a result of the above analysis regarding margins and selling, general and administrative expenses, income from operations decreased to $8.2 million for the three months ended June 30, 2015, as compared to $12.9 million for the corresponding period of the prior year. Income from operations decreased to $29.3 million for the six month period ended June 30, 2015, as compared to $30.3 million for the corresponding period of the prior year. Operating margins were 8.1% and 13.9% of net sales for the three and six months ended June 30, 2015, respectively, as compared to 10.9% and 12.6% for the corresponding periods of the prior year.

### Other Income and Expense

Interest expense aggregated $0.6 million and $0.8 million for the three and six months ended June 30, 2015 and 2014. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for brand acquisitions.

### INTER PARFUMS, INC. AND SUBSIDIARIES

Foreign currency loss aggregated $0.1 and $2.1 million for the three and six months ended June 30, 2015, respectively, as compared to $0.1 million for both the corresponding periods of the prior year. The volatility in currency exchange rates during the first quarter of 2015 had not been seen in many years. The loss incurred during the six months ended June 30, 2015, primarily represents losses from intercompany accounts between our majority owned subsidiary, Interparfums SA, and its other foreign subsidiaries, which were not hedged by the use of foreign currency forward exchange contracts. We typically enter into foreign currency forward exchange contracts to manage exposure related to receivables from unaffiliated third parties denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Almost 50% of net sales of our European operations are denominated in U.S. dollars.

Interest income aggregated $0.8 million and $2.0 million for the three and six months ended June 30, 2015, respectively, as compared to $0.9 million and $2.1 million for the corresponding periods of the prior year. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

### Income Taxes

Our effective income tax rate was 34% for both the three and six-month periods ended June 30, 2015, respectively, as compared to 41% and 37% for the corresponding periods of the prior year. In the 2014 second quarter, the Company accrued $0.8 million for a tax levied by the French Government equal to 3% on any dividend paid by a French company to its shareholders. Although a similar amount was incurred in the second quarter of 2015, the Company modified its income tax accrual for interim periods to utilize an annual effective rate. Excluding this tax our effective income tax rate was 34% for the six months ended June 30, 2014. Our effective tax rates differ from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### Net income and earnings per share

*(In thousands except per share data)*

|  | Three Months Ended June 30, 2015 | 2014 | Six Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| **Net income European operations** | $4,279 | $6,262 | $16,476 | $18,479 |
| **Net income U.S. operations** | 1,241 | 1,405 | 2,349 | 1,338 |
| **Net income** | 5,520 | 7,667 | 18,825 | 19,817 |
| Less: Net income attributable to the noncontrolling interest | 1,169 | 1,558 | 4,467 | 4,814 |
| **Net income attributable to Inter Parfums, Inc.** | $4,351 | $6,109 | $14,358 | $15,003 |
| **Earnings per share:** |  |  |  |  |
| **Net income attributable to Inter Parfums, Inc. common shareholders:** |  |  |  |  |
| Basic | $0.14 | $0.20 | $0.46 | $0.49 |
| Diluted | $0.14 | $0.20 | $0.46 | $0.48 |
| **Weighted average number of shares outstanding:** |  |  |  |  |
| Basic | 30,988 | 30,938 | 30,984 | 30,919 |
| Diluted | 31,107 | 31,069 | 31,089 | 31,063 |

Net income was $5.5 million for the three months ended June 30, 2015, as compared to $7.7 million for the corresponding period of the prior year. Net income was $18.8 million for the six months ended June 30, 2015, as compared to $19.8 million for the corresponding period of the prior year. The reasons for significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin and selling, general and administrative expenses. As previously discussed, our European operations reported net sales are affected by changes in foreign currency exchange rates, as a strong U.S. dollar has a negative impact on reported net sales. However, earnings are positively affected by a strong U.S. dollar, because almost 50% of net sales of our European operations are denominated in U.S. dollars, while almost all costs of our European operations are incurred in euro. For United States operations during the six months ended June 30, 2015, sales increased 10% while selling, general and administrative expenses increased 11%. Therefore, the increase in net income for the six month period is primarily the result of the increase in gross margin.

The noncontrolling interest arises from our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. Net income attributable to the noncontrolling interest is directly related to the profitability of our European operations, and aggregated 27% of European operations net income for the three and six months ended June 30, 2015, respectively, as compared to 25% and 26% for the corresponding periods of the prior year.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### Liquidity and Capital Resources

The Company’s financial position remains strong. At June 30, 2015, working capital aggregated $342 million and we had a working capital ratio of almost 4.0 to 1. Cash and cash equivalents and short-term investments aggregated $229 million, practically all of which is held in euro by our European operations and is readily convertible into U.S. dollars. We have not had any liquidity issues to date, and do not expect any liquidity issues relating to such cash and cash equivalents and short-term investments held by our European operations. Almost 90% of the Company’s total assets are held by European operations. In addition to the cash and cash equivalents and short-term investments referred to above, approximately $197 million of trademarks, licenses and other intangible assets are held by European operations.

The Company hopes to benefit from its substantial resources to potentially acquire additional brands either on a proprietary basis or as a licensee. Opportunities for external growth continue to be examined without urgency, with the priority of maintaining the quality and homogeneous nature of our portfolio. However, we cannot assure you that any new license or acquisition agreements will be consummated.

Cash used in operating activities was $9.0 million for the six months ended June 30, 2015, as compared to $11.4 million for the six months ended June 30, 2014. For the 2015 period, working capital items used $34.5 million in cash from operating activities, as compared to $38.9 million in the 2014 period. The only significant fluctuation relates to inventories which increased 26% in terms of cash flow and reflect levels needed to support all of our upcoming new product launches.

Cash flows used in investing activities in 2015 reflect the purchase and sales, in our European operations, of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. Approximately $72 million of such certificates of deposit contain penalties where we would forfeit a portion of the interest earned in the event of early withdrawal. Our business is not capital intensive as we do not own any manufacturing facilities. However, on a full year basis, we spend approximately $4 million on tools and molds, depending on our new product development calendar. Capital expenditures also include amounts for office fixtures, computer equipment and industrial equipment needed at our distribution centers.

In May 2015, the Company, through its majority owned Paris-based subsidiary, Interparfums SA, acquired the Rochas brand from The Procter & Gamble Company. This transaction includes all brand names and registered trademarks for Rochas *(Femme, Madame, Eau de Rochas*, etc.), mainly for class 3 (cosmetics) and class 25 (fashion). Substantially the entire €106 million purchase price for the assets acquired (approximately $118 million) was allocated to trademarks with indefinite lives, including approximately $5.4 million in acquisition related expenses. An additional $4.4 million was paid for related inventory.

The cost of the acquisition was paid in cash on the closing date and was financed entirely through a 5-year term loan payable in equal quarterly installments plus interest. In order to reduce exposure to rising variable interest rates, the Company entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. The swap is a derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

### INTER PARFUMS, INC. AND SUBSIDIARIES

Our short-term financing requirements are expected to be met by available cash on hand at June 30, 2015, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2015 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $28.0 million in credit lines provided by a consortium of international financial institutions.

In January 2015, the Board of Directors authorized an 8% increase in the annual dividend to $0.52 per share. The next quarterly cash dividend of $0.13 per share is payable on October 15, 2015 to shareholders of record on September 30, 2015. The annual cash dividend for 2015 represents a small part of our cash position and is 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 six months ended June 30, 2015.

## Market risk

As filed, 3,015 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 SA, 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.

### INTER PARFUMS, INC. AND SUBSIDIARIES

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, 2015, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $14.0 million, GB pounds £1.9 million and JPY ¥68.0 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 June 2015 on €100 million of debt, effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. 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, 1,494 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

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. In 2015, the Company has implemented *Internal Control – Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

### INTER PARFUMS, INC. AND SUBSIDIARIES

### 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, 4. Mine Safety Disclosures and 5. Other Information, are omitted as they are either not applicable or have been included in Part I.

Filed Aug 7, 2015.
Source: SEC EDGAR, the filing index for accession 0001144204-15-047330. Last ingested by Listed: Nov 4, 2026, 18:31 ET. No prices; not investment advice.