# Interparfums Inc: Form 10-K for the period ended Dec 31, 2016

- Company: [Interparfums Inc](/companies/ipar.md) (CIK 822663)
- Form: 10-K
- Filed: 2017-03-13
- Accepted by EDGAR: Mar 13, 2017, 16:28 ET
- Period: 2016-12-31
- Accession: 0001144204-17-014248
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/822663/000114420417014248/v460761_10k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/822663/000114420417014248/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 12 months, 2016-01-01 to 2016-12-31 | $326.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 12 months, 2016-01-01 to 2016-12-31 | $258.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 12 months, 2016-01-01 to 2016-12-31 | $66.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 12 months, 2016-01-01 to 2016-12-31 | $2.3m | us-gaap:InterestExpense |
| Income tax | 12 months, 2016-01-01 to 2016-12-31 | $23.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 12 months, 2016-01-01 to 2016-12-31 | $33.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 12 months, 2016-01-01 to 2016-12-31 | $1.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 12 months, 2016-01-01 to 2016-12-31 | $1.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 12 months, 2016-01-01 to 2016-12-31 | 31,175,598 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 12 months, 2016-01-01 to 2016-12-31 | $4.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 12 months, 2016-01-01 to 2016-12-31 | $18.0m | us-gaap:PaymentsOfDividends |
| Share repurchases | 12 months, 2016-01-01 to 2016-12-31 | $77.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-12-31 | $161.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-12-31 | $480.2m | us-gaap:AssetsCurrent |
| Total assets | at 2016-12-31 | $682.4m | us-gaap:Assets |
| Current liabilities | at 2016-12-31 | $142.2m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-12-31 | $53.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-12-31 | $21.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-12-31 | $370.4m | us-gaap:StockholdersEquity |

## Business

As filed, 47,717 characters.

### Introduction

We are Inter Parfums, Inc. We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrance and fragrance related products. Organized under the laws of the State of Delaware in May 1985 as Jean Philippe Fragrances, Inc., we changed our name to Inter Parfums, Inc. in July 1999. We have also retained our brand name, Jean Philippe Fragrances, for some of our mass market products.

Our worldwide headquarters and the office of our three (3) wholly-owned United States subsidiaries, Jean Philippe Fragrances, LLC and Inter Parfums USA, LLC, both New York limited liability companies, and IP Beauty, Inc. (formerly Nickel USA, Inc.), a Delaware corporation, are located at 551 Fifth Avenue, New York, New York 10176, and our telephone number is 212.983.2640. We also own 100% of Inter Parfums USA Hong Kong Limited indirectly through our 100% owned subsidiary, Inter Parfums USA, LLC.

Our consolidated wholly-owned subsidiary, Inter Parfums Holdings, S.A., and its majority-owned subsidiary, Interparfums SA, maintain executive offices at 4 Rond Point des Champs Elysees, 75008 Paris, France. Our telephone number in Paris is 331.5377.0000. Interparfums SA is the sole owner of three (3) distribution subsidiaries: Inter Parfums srl for Italy, Inter España Parfums et Cosmetiques, SL, for Spain and Interparfums Luxury Brands, Inc., a Delaware corporation for distribution of prestige brands in the United States. Interparfums SA is also the majority owner of Parfums Rochas Spain, SL, a Spanish limited liability company, which specializes in the distribution of Rochas fragrances, as well as the majority owner of Inter Parfums Gmbh, a distribution subsidiary for Germany. In addition, Interparfums SA is also the sole owner of Interparfums (Suisse) SARL, a company formed to hold and manage certain brand names, and Interparfums Singapore Pte., Ltd., an Asian sales and marketing office.

Our common stock is listed on The Nasdaq Global Select Market under the trading symbol “IPAR”. The common shares of our subsidiary, Interparfums SA, are traded on the NYSE Euronext Exchange.

We maintain our internet website at www.interparfumsinc.com, which is linked to the Securities and Exchange Commission Edgar database. You can obtain through our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, interactive data files, current reports on Form 8-K, beneficial ownership reports (Forms 3, 4 and 5) and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they have been electronically filed with or furnished to the SEC.

### Company Overview

*The following information is qualified in its entirety by and should be read together with the more detailed information and audited financial statements, including the related notes, contained or incorporated by reference in this report.*

#### General

We operate in the fragrance business and manufacture, market and distribute a wide array of fragrance and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Prestige fragrance products are produced and marketed by both our United States operations, and our European operations, the latter, 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.

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 deliver them to one of our distribution centers.

Our prestige products focus on niche brands, each with a devoted following. By concentrating in markets where the brands are best known, we have had many successful launches. We typically launch new fragrance families for our brands every year or two, and more frequently seasonal and limited edition fragrances are introduced as well.

The creation and marketing of each product family is intimately linked with the brand’s name, its past and present positioning, customer base and, more generally, the prevailing market atmosphere. Accordingly, we generally study the market for each proposed family of fragrance products for almost a full year before we introduce any new product into the market. This study is intended to define the general position of the fragrance family and more particularly its scent, bottle, packaging and appeal to the buyer. In our opinion, the unity of these four elements of the marketing mix makes for a successful product.

As with any business, many aspects of our operations are subject to influences outside our control. We discuss in greater detail risk factors relating to our business in Item 1A of this Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and the reports that we file from time to time with the Securities and Exchange Commission.

#### European Operations

We produce and distribute our fragrance products primarily under license agreements with brand owners, and fragrance product sales through our European operations represented approximately 78% of net sales for 2016. 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.

With respect to the Company’s largest brands, we own the Lanvin brand name for its class of trade, and license the Montblanc and Jimmy Choo brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:

|  | Year Ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| Montblanc | 23% | 21% | 22% |
| Jimmy Choo | 17% | 20% | 16% |
| Lanvin | 12% | 15% | 18% |

#### United States Operations

Prestige brand fragrance products are also marketed through our United States operations, and represented 22% of sales for the year ended December 31, 2016. These fragrance products are sold under trademarks owned by us or pursuant to license or other agreements with the owners of brands, which include *Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, Hollister, French Connection, Oscar de la Renta,* and *Shanghai Tang* brands.

### Recent Developments

#### Buyout of License

In December 2016, we reached an agreement with the Balmain brand calling for Balmain to buyout the Balmain license agreement, effective December 31, 2016, in exchange for a payment aggregating €5.4 million (approximately $5.7 million). As a result of the buyout, we recognized a gain of $4.7 million and we expect to receive the buyout payment by April 30, 2017. We have a three month inventory sell-off period ending March 31, 2017 and Balmain has also agreed to purchase all remaining inventory and tangible assets.

#### Impairment loss

We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Product sales of our Karl Lagerfeld brand have not met with our original expectations. During the fourth quarter of 2016, we decided that we will most likely exercise our rights for an early termination of the Karl Lagerfeld license in 2024, rather than continue the license through its original expiration in 2032. As a result of the shortened expected life of the license, we recorded an impairment loss of $5.7 million as of December 31, 2016.

#### ST Dupont

In September 2016, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2019, without any material changes in terms and conditions. Our initial 11-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended through December 31, 2016.

#### Settlement with French Tax Authorities

The French Tax Authorities examined the 2012 tax return of Interparfums SA, and in August 2015 issued a $6.9 million tax adjustment. It is our position that the French Tax Authorities are incorrect in their assessments and we believe that we have strong arguments to support our tax positions. The main issues challenged by the French Tax Authorities related to the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respectively. Interparfums Singapore Pte. and Interparfums (Suisse) SARL are wholly-owned subsidiaries of Interparfums SA. Due to the subjective nature of the issues involved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax Authorities. The settlement requires Interparfums SA to pay a tax assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as to future acceptable commission and royalty rates, which is not expected to have a significant impact on cash flow. The settlement, which is subject to formal documentation with the French Tax Authorities, was accrued for in March 2016. In July 2016, Interparfums SA paid $1.1 million to the French Tax Authorities upon receipt of formal notification regarding tax years 2013 and 2014.

### Fragrance Products

#### General

We are the owner of the Rochas brand, and Lanvin brand name and trademark for our class of trade. In addition, we have built a portfolio of licensed prestige brands whereby we produce and distribute our prestige fragrance products under license agreements with brand owners. Under license agreements, we obtain the right to use the brand name, create new fragrances and packaging, determine positioning and distribution, and market and sell the licensed products, in exchange for the payment of royalties. Our rights under license agreements are also generally subject to certain minimum sales requirements and advertising expenditures as are customary in our industry.

Our licenses for these brands expire on the following dates:

| Brand Name | Expiration Date |
| --- | --- |
| Abercrombie & Fitch | December 31, 2021 |
| Agent Provocateur | December 31, 2023 |
| Anna Sui | December 31, 2021, plus two five-year optional terms if certain conditions are met |
| bebe Stores | June 30, 2020 |
| Boucheron | December 31, 2025, plus a 5-year optional term if certain sales targets are met |
| Coach | June 30, 2026 |

4

|  |  |
| --- | --- |
| Dunhill | September 30, 2023, subject to earlier termination on September 30, 2019, if certain minimum sales are not met |
| French Connection | December 31, 2027, plus a 10-year optional term if certain sales targets are met |
| Hollister | December 31, 2021 |
| Jimmy Choo | December 31, 2021 |
| Karl Lagerfeld | October 31, 2032 |
| Montblanc | December 31, 2025 |
| Oscar de la Renta | December 31, 2025, plus a 5-year optional term if certain sales targets are met |
| Paul Smith | December 31, 2017 |
| Repetto | December 31, 2024 |
| Shanghai Tang | December 31, 2025, subject to earlier termination on December 31, 2019, if certain minimum sales are not met; subject to 2 year extensions unless 1 year advance notice not to renew is provided |
| S.T. Dupont | December 31, 2019 |
| Van Cleef & Arpels | December 31, 2018, plus a 5-year optional term if certain sales targets are met |

In connection with the acquisition of the Lanvin brand names and trademarks, we granted Lanvin the right to repurchase the brand names and trademarks in 2025 for the greater of €70 million (approximately $74 million) or one times the average of the annual sales for the years ending December 31, 2023 and 2024.

#### Fragrance Portfolio

**Abercrombie & Fitch and Hollister—** In December 2014, we entered into a 7-year exclusive worldwide license to create, produce and distribute new fragrances and fragrance related products under the Abercrombie & Fitch and Hollister brand names. The Company distributes these fragrances internationally in specialty stores, high-end department stores and duty free shops, and in the U.S., in duty free shops and in select Abercrombie & Fitch and Hollister retail stores. In 2016, we launched a new men’s and women’s scent, *Wave*, for Hollister, along with a new men’s scent, *First Instinct* for Abercrombie & Fitch. *Wave 2*, a brand extension for Hollister and a women’s version of *First Instinct*, are in the works for 2017.

Abercrombie & Fitch Co. is a leading global specialty retailer of high-quality, casual apparel for men, women and kids with an active, youthful lifestyle. Abercrombie & Fitch operate stores in the United States, Canada, Europe, Asia, Australia and the Middle East.

**Agent Provocateur—** In July 2013, we entered into a 10.5-year exclusive worldwide license to create, produce and distribute fragrances and fragrance related products under London-based luxury lingerie brand, Agent Provocateur. In 2013, we commenced distribution of selected fragrances within the brand’s legacy fragrance portfolio, and in 2014, we launched our first new Agent Provocateur scents, *Fatale* and *Fatale Pink.* In 2016, we introduced Agent Provocateur *Aphrodisiaque*, our second fragrance family for the brand. Several new scents are scheduled to launch in 2017. Agent Provocateur fragrance sales are concentrated in the United Kingdom and the Middle East.

Founded in 1994 by Joseph Corré, and Serena Rees and acquired by the private equity firm, 3i Group plc in 2007, Agent Provocateur is an iconic, globally-recognized brand, breaking new ground with every collection and rightfully earning its place as a benchmark brand in the world of lingerie. It is a brand that is confident, sensual and irreverent. Agent Provocateur celebrates and empowers women with a unique brand image renowned for being provocative and yet always leaving something to the imagination.

**Anna Sui—**In June 2011, we entered into a 10-year exclusive worldwide fragrance license agreement to produce and distribute fragrances and fragrance related products under the Anna Sui brand. Our rights under the agreement commenced on January 1, 2012 when we took over production and distribution of the existing Anna Sui fragrance collections.

We are working in partnership with American designer, Anna Sui, and her creative team to build upon the brand’s growing customer appeal, and develop new fragrances that capture the brand’s very sweet feminine girly aspect, combined with touch of nostalgia, hipness and rock-and-roll. Anna Sui’s devoted customer base, which spans the world, is concentrated in Asia.

Anna Sui product sales have declined in the past three years primarily owing to the slowdown in the Chinese economy where the brand is especially popular. We are currently distributing several lines of product, including top sellers, *La Vie de Bohème, Romantica and Secret Wish.*

**Balmain—** In December 2016, we reached an agreement with the Balmain brand calling for Balmain to buyout the Balmain license agreement, effective December 31, 2016, in exchange for a payment aggregating €5.4 million (approximately $5.7 million). As a result of the buyout, we recognized a gain of $4.7 million and we expect to receive the buyout payment by April 30, 2017. We have a three month inventory sell-off period ending March 31, 2017 and Balmain has also agreed to purchase all remaining inventory and tangible assets.

**Banana Republic—** Our license for the Banana Republic brand expired by its terms on December 31, 2016, and we have the right to sell-off all remaining inventory until December 31, 2017.

**bebe Stores—** In July 2008, we entered into an exclusive 6-year worldwide agreement with bebe Stores, Inc., that has been renewed through June 30, 2020, under which we design, manufacture and supply fragrances for company-owned bebe stores in the United States and Canada, as well as select specialty and department stores worldwide. We have incorporated bebe’s signature look into fragrances for the brand’s strong, hip, sexy, and sophisticated clientele. Scents currently available for domestic and international markets include: *bebe, bebe Sheer, bebe gold, bebe Glam* and *bebe Glam 24 Karat.*

**Boucheron—** In December 2010, we entered into an exclusive 15-year worldwide license agreement for the creation, development and distribution of fragrances under the Boucheron brand. Boucheron is the French jeweler "par excellence". Founded by Frederic Boucheron in 1858, the House has produced some of the world’s most beautiful and precious creations. Today Boucheron creates jewelry and timepieces and, under license from global brand leaders, fragrances and sunglasses. Currently Boucheron operates through over 40 boutiques worldwide as well as an e-commerce site.

Our first new fragrance under the Boucheron brand, *Jaïpur Bracelet,* debuted in 2012, and *Boucheron Place Vendôme*, which has a beautiful glasswork bottle with a cabochon, the emblematic stone of House Boucheron, was released in 2013. In 2015, we launched a new fragrance duo for the Boucheron brand around its iconic *Quatre* ring, Boucheron *Quatre.* A six scent collection is launching under the Boucheron brand in 2017.

**Coach—** In April 2015, we entered into an exclusive 11-year worldwide license with Coach, Inc. to create, produce and distribute new men’s and women’s fragrances and fragrance related products under the Coach brand name. We distribute these fragrances globally to department stores, specialty stores and duty free shops, as well as in Coach retail stores.

Coach, established in New York City in 1941, is a leading design house of modern luxury accessories and lifestyle collections with a rich heritage of pairing exceptional leathers and materials with innovative design. Coach is sold worldwide through Coach stores, select department stores and specialty stores, and through Coach’s website at www.coach.com. Coach’s common stock is traded on the New York Stock Exchange under the symbol COH and Coach’s Hong Kong Depositary Receipts are traded on The Stock Exchange of Hong Kong Limited under the symbol 6388.

In 2016, we launched our first Coach fragrance, a women’s scent, which has quickly become a top selling new prestige fragrance. A men’s scent is planned for 2017.

**Dunhill—**In December 2012, we entered into an exclusive 10-year worldwide fragrance license to create, produce and distribute fragrances and fragrance related products under the Dunhill brand.

The house of Dunhill was established in 1893 and since that time has been dedicated to providing high quality men’s luxury products, with core collections offered in menswear, leather goods and accessories. The brand has global reach through a premium mix of self-managed retail outlets, high-level department stores and specialty stores. Known for its commitment to elegance and innovation and being a leader of British men’s style, the brand continues to blend innovation and creativity with traditional craftsmanship.

We took over production and distribution of Dunhill legacy fragrances beginning in 2013, and we introduced a legacy scent flanker, *Desire Black*, in 2014. In 2015, we rolled out our new Dunhill scent, *Icon,* the success of which has made the Dunhill brand our largest and fastest growing brand within our United States based operations. For 2016, we launched several product extensions including *Icon Luxury Spray Set* and *Icon Elite.* The brand’s Desire family is adding a new scent, *Desire Extreme* in 2017.

**French Connection—** In September 2015, we entered into a 12-year license agreement to create, produce and distribute fragrances and fragrance related products under the French Connection brand names. We took over distribution of selected fragrances within the brand’s existing fragrance portfolio in 2016.

French Connection operates in the fashion orientated market place offering a fashion-forward range of quality products at affordable prices. Its customers, typically aged 18-35, appreciate that the brand is at the leading edge of high street fashion and offers quality and style in its products. French Connection designs, produces and distributes branded fashion clothing, accessories and household items for men, women, and children in more than 50 countries around the world and has licensed partners operating French Connection stores across Asia, Australia and the Middle East. French Connection operates retail stores and concessions in the United Kingdom, Europe, United States and Canada and also operates an ecommerce business in each of those territories.

**Jimmy Choo—** In October 2009, we entered into an exclusive 12-year worldwide license agreement for the creation, development and distribution of fragrances under the Jimmy Choo brand.

With a heritage in luxury footwear, Jimmy Choo today encompasses a complete luxury lifestyle accessory brand with men’s and women's shoes, handbags, small leather goods, sunglasses and eyewear. Its products are available in the growing network of Jimmy Choo freestanding stores as well as in the most prestigious department, specialty and duty free stores worldwide.

Our first fragrance under the Jimmy Choo brand, a signature scent, rolled out globally in 2011. Jimmy Choo product sales exceeded our expectations and sales topped $40 million in that first year. In 2013, we launched our second Jimmy Choo line, *Flash*, and in 2014, we debuted Jimmy Choo *Man* our first men’s scent which ranked in 2015 as the 9th best-selling men’s fragrance in the United States. In 2015, the launch of Jimmy Choo *Illicit*, our third women's fragrance under that label, was the principal driver for brand growth. For 2016, we debuted a new women’s flanker, Jimmy Choo *Illicit Flower*. In 2017, we have both a women’s and men’s fragrance initiative planned for the brand.

**Karl Lagerfeld—** In October 2012, we entered into a 20-year worldwide license agreement with Karl Lagerfeld B.V., the internationally renowned haute couture fashion house, to create, produce and distribute fragrances under the Karl Lagerfeld brand.

Under the creative direction of Karl Lagerfeld, one of the world’s most influential and iconic designers, the Lagerfeld Portfolio represents a modern approach to distribution, an innovative digital strategy and a global 360 degree vision that reflects the designer’s own style and soul. Our first line, a premium namesake duo scent for both men and women, was launched in 2014. However, in 2015, with sales concentrated in Russia and northern Europe, re-orders were disappointing and sales of this brand declined despite the launch of *Private Klub*, a line extension.

Karl Lagerfeld product sales have failed to meet with our original expectations. In 2016, the Company decided that it will most likely exercise its rights for an early termination of the Karl Lagerfeld license in 2024, rather than continue the license through its original expiration in 2032. As a result of the shortened expected life of the license, the Company recorded an impairment loss of $5.7 million as of December 31, 2016. We will attempt to reinvigorate this brand by changing its strategic positioning and instituting new pricing in 2017.

**Lanvin—** In July 2007, we acquired the worldwide rights to the Lanvin brand names and international trademarks listed in Class 3, our class of trade. A synonym of luxury and elegance, the Lanvin fashion house, founded in 1889 by Jeanne Lanvin, expanded into fragrances in the 1920s.

Lanvin is currently our third largest brand by sales volume. Lanvin fragrances occupy an important position in the selective distribution market in France, Europe and Asia. Current lines in distribution include: *Arpège, Lanvin L’Homme, Éclat d’Arpège, Rumeur 2 Rose, Jeanne Lanvin, Marry Me!, Jeanne Lanvin Couture, Lanvin Me* and *Me L’Eau*. Our *Éclat d’Arpège* line accounts for approximately 50% of this brand’s sales. We have extended our Lanvin fragrance families, and in order to capitalize on the success of our *Éclat d’Arpège* line, in 2015, we launched *Éclat d’Arpège Homme* as well as *Éclat de Fleurs.* For 2016, we released a new women’s line, Lanvin *Modern Princess* in limited distribution to be followed by broader international distribution in 2017. In addition, another interpretation of *Éclat d’Arpège* is also in the works for 2017. Lanvin brand product sales continue to be affected by the economic slowdown in its two flagship markets, Russia and China.

**Montblanc—**In October 2015, we extended our license agreement with Montblanc by five years. The original agreement, signed in 2010, provided us with the exclusive worldwide license rights to create, produce and distribute fragrances and fragrance related products under the Montblanc brand through December 31, 2020. The new 10-year agreement, which went into effect on January 1, 2016, extends the partnership through December 31, 2025 without any material changes in operating conditions from the prior license.

Montblanc has achieved a world-renowned position in the luxury segment and has become a purveyor of exclusive products, which reflect today’s exacting demands for timeless design, tradition and master craftsmanship. Through its leadership positions in writing instruments, watches and leather goods, promising growth outlook in women's jewelry, active presence in more than 70 countries, network of more than 350 boutiques worldwide and high standards of product design and quality, Montblanc has quickly grown to be our largest and fastest growing fragrance brand.

In 2011, we launched our first new Montblanc fragrance, *Legend,* which quickly became our best-selling men’s line. In 2012, we launched our first women’s fragrance under the Montblanc brand, and our second men’s line, *Emblem*, was launched in 2014. Montblanc has quickly become our largest selling brand. The *Emblem* line was expanded in 2015 to include Montblanc *Emblem Intense* and a new women's scent, *Lady Emblem*. In 2016, we further extended our successful Montblanc *Legend* line with a new men’s scent, Montblanc *Legend Spirit.*

**Oscar de la Renta—** In October 2013, we entered into a 12-year exclusive worldwide license to create, produce and distribute fragrances and fragrance related products under the Oscar de la Renta brand. In 2014, we took over distribution of fragrances within the brand’s legacy fragrance portfolio, and our first new women’s fragrance under the Oscar de la Renta brand, *Extraordinary*, was launched in 2015. For 2016, in addition to several flankers that we launched throughout the year in select markets, we debuted a new men’s fragrance family, Oscar de la Renta *Gentlemen. Bella Blanca*, a new Oscar de la Renta scent, will be introduced in 2017.

Oscar de la Renta is one of the world’s leading luxury goods firms. The New York-based company was established in 1965, and encompasses a full line of women’s accessories, bridal, childrenswear, fragrance, beauty and home goods, in addition to its internationally renowned signature women’s ready to wear collection. Oscar de la Renta products are sold globally in fine department and specialty stores, www.oscardelarenta.com and through wholesale channels. The Oscar de la Renta brand has a loyal following in the United States, Canada and Latin America.

**Paul Smith—** We signed an exclusive worldwide license agreement with Paul Smith in December 1998 for the creation, development and distribution of Paul Smith fragrances. In 2008, we extended this license for an additional seven years through December 31, 2017, and although we cannot assure you we will be successful, we are currently in discussions to extend this license through December 31, 2019.

Paul Smith is an internationally renowned British designer who creates fashion with a clear identity. Paul Smith has a modern style which combines elegance, inventiveness and a sense of humor and enjoys a loyal following, especially in the UK and Japan. Fragrances include: *Paul Smith, Paul Smith Extrême, Paul Smith Rose* and *Paul Smith Essential.*

**Repetto—** In December 2011, we entered into a 13-year exclusive worldwide license agreement to create, produce and distribute fragrances under the Repetto brand.

Created in 1947 by Rose Repetto at the request of her son, dancer and choreographer Roland Petit, Repetto is today a legendary name in the world of dance. For a number of years it has developed timeless and must-have collections with a fully modernized signature style ranging from dance shoes, ballet slippers, flat shoes, and sandals to more recently handbags and high-end accessories.

With Repetto boutiques in several countries throughout the world, the brand has branched out into Asia, notably China, Hong Kong, Singapore, Thailand, South Korea and Japan with a mix of cross-generational appeal and French chic. Our first Repetto fragrance line was launched in 2013 and a floral scent was added in 2015. Despite this brand’s success with footwear, handbags and high end accessories, fragrance sales have been disappointing due to the lack of brand recognition.

**Rochas—** In May 2015, we acquired the Rochas brand from The Procter & Gamble Company. Founded by Marcel Rochas in 1925, the brand began as a fashion house and expanded into perfumery in the 1950s under Hélène Rochas' direction. This transaction included 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.

This acquisition opened up a new page in the Company's history by integrating for the first time both fragrances and fashion. This is allowing us to apply a global approach to managing a fragrance brand with complete freedom in terms of creativity and aesthetic choices, as well as a very high degree of visibility to establish a position of even greater preeminence for Rochas in the luxury goods universe. Rochas brand sales currently include approximately $2 million of royalties generated by the fashion and accessory business via its portfolio of license agreements. Our first new fragrance for Rochas, *Mademoiselle Rochas,* is to be launched in the first quarter of 2017.

**Shanghai Tang—** In July 2013, we created a wholly-owned Hong Kong subsidiary, Inter Parfums USA Hong Kong Limited, which entered into a 12-year exclusive worldwide license to create, produce and distribute fragrances under China’s leading luxury brand, Shanghai Tang. Our first Shanghai Tang fragrance collection for men and women debuted in 2015.

Founded in 1994, Shanghai Tang is the leading Chinese luxury brand with international recognition and distribution. As the global curator of modern Chinese chic, Shanghai Tang champions the richness and beauty of the Chinese culture through its contemporary lifestyle offer of apparel and accessories for men, women and children, as well as home collections. Shanghai Tang supports an international network of 48 boutiques, including The Shanghai Tang Mansion in Hong Kong, and its largest flagship Boutique, The Cathay Mansion in Shanghai, China and on-line.

**S.T. Dupont—** In June 1997, we signed an exclusive worldwide license agreement with S.T. Dupont for the creation, manufacture and distribution of S.T. Dupont fragrances. In 2011, the agreement was renewed through December 31, 2016, and in September 2016 was renewed again through December 31, 2019, without any material changes in terms and conditions. S.T. Dupont is a French luxury goods house founded in 1872, which is known for its fine writing instruments, lighters and leather goods.

S.T. Dupont fragrances include: *S.T. Dupont, S.T. Dupont Essence Pure, S.T. Dupont Passenger, S.T. Dupont Passenger Cruise, 58 avenue Montaigne, So Dupont* and *S.T. Dupont Collection.*

**Van Cleef & Arpels—** In September 2006, we entered into an exclusive 12-year worldwide license agreement for the creation, development and distribution of fragrance products under the Van Cleef & Arpels brand and related trademarks.

Van Cleef & Arpels fragrances in current distribution include: *First, Van Cleef pour Homme, Tsar, Van Cleef, Féerie, Collection Extraordinaire*, and *Rêve.* For 2016, we launched a new men’s line, *In New York*, and a new women’s line, *So First.* Sales of the *Collection Extraordinaire* line have experienced continued growth since its debut.

### Business Strategy

**Focus on prestige beauty brands**. Prestige beauty brands are expected to contribute significantly to our growth. We focus on developing and launching quality fragrances utilizing internationally renowned brand names. By identifying and concentrating in the most receptive market segments and territories where our brands are known, and executing highly targeted launches that capture the essence of the brand, we have had a history of successful launches. Certain fashion designers and other licensors choose us as a partner, because our Company’s size enables us to work more closely with them in the product development process as well as our successful track record.

**Grow portfolio brands through new product development and marketing**. We grow through the creation of fragrance family extensions within the existing brands in our portfolio. Every year or two, we create a new family of fragrances for each brand in our portfolio. We frequently introduce seasonal and limited edition fragrances as well. With new introductions, we leverage our ability and experience to gauge trends in the market and further leverage the brand name into different product families in order to maximize sales and profit potential. We have had success in introducing new fragrance families (sub-brands, flanker brands or flankers) within our brand franchises. Furthermore, we promote the smooth and consistent performance of our prestige fragrance operations through knowledge of the market, detailed analysis of the image and potential of each brand name, a “good dose” of creativity and a highly professional approach to international distribution channels.

**Continue to add new brands to our portfolio, through new licenses or acquisitions**. Prestige brands are the core of our business and we intend to add new prestige beauty brands to our portfolio. Over the past twenty years, we have built our portfolio of well-known prestige brands through acquisitions and new license agreements. We intend to further build on our success in prestige fragrances and pursue new licenses and acquire new brands to strengthen our position in the prestige beauty market. To that end, during 2014, we signed fragrance licenses for Abercrombie & Fitch and Hollister brands; in 2015, we signed fragrance licenses for Coach and French Connection, extended our Montblanc fragrance license and purchased the Rochas brand, and in 2016, we extended the terms of our S.T. Dupont and bebe licenses. As of December 31, 2016, we had cash, cash equivalents and short-term investments of approximately $256 million, which we believe should assist us in entering new brand licenses or outright acquisitions. However, we cannot assure you that we will be able to enter into any future agreements, or acquire brands or assets on terms favorable to us, or if we do, that any such transaction will be successful. We identify prestige brands that can be developed and marketed into a full and varied product families and, with our technical knowledge and practical experience gained over time, take licensed brand names through all phases of concept, development, manufacturing, marketing and distribution.

**Expand existing portfolio into new categories**. We intend to selectively broaden our product offering beyond the fragrance category and offer other fragrance related products and personal care products under some of our existing brands. We believe such product offerings meet customer needs and further strengthen customer loyalty.

**Continue to build global distribution footprint**. Our business is a global business and we intend to continue to build our global distribution footprint. In order to adapt to changes in the environment and our business, we have formed and are operating distribution subsidiaries in the major markets of the United States, Italy, Spain and Germany for distribution of prestige fragrances. We may look into future joint arrangements or acquire distribution companies within other key markets to distribute certain of our prestige brands. While building a global distribution footprint is part of our long-term strategy, we may need to make certain decisions based on the short-term needs of the business. We believe that in certain markets, vertical integration of our distribution network may be one of the keys to future growth of our Company, and ownership of such distribution should enable us to better serve our customers’ needs in local markets and adapt more quickly as situations may determine.

### Production and Supply

The stages of the development and production process for all fragrances are as follows:

- Simultaneous discussions with perfume designers and creators (includes analysis of esthetic and olfactory trends, target clientele and market communication approach)
- Concept choice
- Produce mock-ups for final acceptance of bottles and packaging
- Receive bids from component suppliers (glass makers, plastic processors, printers, etc.) and packaging companies
- Choose suppliers
- Schedule production and packaging
- Issue component purchase orders
- Follow quality control procedures for incoming components; and
- Follow packaging and inventory control procedures.

Suppliers who assist us with product development include:

- Independent perfumery design companies (Aesthete, Carré Basset, PI Design, Cent Degres)
- Perfumers (IFF, Givaudan, Firmenich, Robertet, Takasago, Mane) which create a fragrance consistent with our expectations and, that of the fragrance designers and creators
- Bottle manufacturers (Pochet du Courval, Verescence, Verreries Brosse, Bormioli Luigi, Stoelzle Masnières ), caps (Qualipac , ALBEA , RPC, Codiplas, LF Beauty, Texen Group)) or boxes (Autajon , MMPP, Nortier , Draeger)
- Production specialists who carry out packaging (CCI, Edipar , Jacomo, SDPP, MF Productions, Biopack) or logistics (Bolloré Logistics for storage, order preparation and shipment)

Suppliers' accounts for our European operations are primarily settled in euro and for our United States operations, suppliers’ accounts are primarily settled in U.S. dollars. For our European operations, prestige fragrances, components and contract filling needs are purchased from many different suppliers located around the world. For United States operations, components for our prestige fragrances are primarily sourced, produced and filled in the United States, and our mass market products are primarily manufactured, produced or filled in the United States or China.

### Marketing and Distribution

Our products are distributed in over 100 countries around the world through a selective distribution network. For our international distribution, we either contract with independent distribution companies specializing in luxury goods or distribute prestige products through our distribution subsidiaries. In each country, we designate anywhere from one to three distributors on an exclusive basis for one or more of our name brands. We also distribute our products through a variety of duty free operators, such as airports and airlines and select vacation destinations.

As our business is a global one, we intend to continue to build our global distribution footprint. For distribution of brands within our European based operations we operate through our distribution subsidiaries in the major markets of the United States, Italy, Spain and Germany. Our third party distributors vary in size depending on the number of competing brands they represent. This extensive and diverse network together with our own distribution subsidiaries provides us with a significant presence in over 100 countries around the world.

Approximately 40% of our European based prestige fragrance net sales are denominated in U.S. dollars. We address 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.

The business of our European operations has become increasingly seasonal due to the timing of shipments by our majority-owned distribution subsidiaries to their customers, which are weighted to the second half of the year.

For our United States operations, we distribute product to approved retailers and distributors in the United States as well as internationally, including duty free and other travel-related retailers. We utilize our in house sales team to reach our third party distributors and customers outside the United States. In addition, the business of our United States operations has become increasingly seasonal as shipments are weighted toward the second half of the year.

#### Geographic Areas

United States export sales were approximately $77.8 million, $66.3 million and $61.0 million in 2016, 2015 and 2014, respectively. Consolidated net sales to customers by region are as follows:

*(in thousands)*

|  | Year ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| North America | $149,600 | $125,700 | $125,900 |
| Europe | 192,800 | 170,600 | 177,900 |
| Central and South America | 43,900 | 41,100 | 57,700 |
| Middle East | 42,200 | 41,900 | 40,300 |
| Asia | 81,600 | 78,200 | 85,600 |
| Other | 11,000 | 11,000 | 11,900 |
|  | $521,100 | $468,500 | $499,300 |

Consolidated net sales to customers in major countries are as follows:

*(in thousands)*

|  | Year Ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| United States | $144,000 | $122,000 | $119,000 |
| United Kingdom | $31,000 | $32,000 | $37,000 |
| France | $43,000 | $34,000 | $50,000 |

### Competition

The market for prestige fragrance products is highly competitive and sensitive to changing preferences and demands. The prestige fragrance industry is highly concentrated around certain major players with resources far greater than ours. We compete with an original strategy, regular and methodical development of quality fragrances for a growing portfolio of internationally renowned brand names.

### Inventory

We purchase raw materials and component parts from suppliers based on internal estimates of anticipated need for finished goods, which enables us to meet production requirements for finished goods. We generally deliver product to customers within 72 hours of the receipt of their orders. 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.

### Product Liability

Our United States operations maintain product liability coverage in an amount of $5.0 million, and our European operations maintain product liability coverage in an amount of €20.0 million (approximately $21.1 million). Based upon our experience, we believe this coverage is adequate and covers substantially all of the exposure we may have with respect to our products. We have never been the subject of any material product liability claims.

### Government Regulation

A fragrance is defined as a “cosmetic” under the Federal Food, Drug and Cosmetics Act. A fragrance must comply with the labeling requirements of this FDC Act as well as the Fair Packaging and Labeling Act and its regulations. Some of our color cosmetic products may contain menthol and are also classified as a “drug”. Under U.S. law, a product may be classified as both a cosmetic and a drug. Additional regulatory requirements for products which are “drugs” include additional labeling requirements, registration of the manufacturer and the semi-annual update of a drug list. In addition, various jurisdictions prohibit the use of certain ingredients in fragrances and cosmetics.

Our fragrances are subject to the approval of the Bureau of Alcohol, Tobacco and Firearms as a result of the use of specially denatured alcohol. So far we have not experienced any difficulties in obtaining the required approvals.

Our fragrance products that are manufactured or sold in Europe are subject to certain regulatory requirements of the European Union, such as Cosmetic Directive 76/768/CEE and Regulation number 1223/2009 on cosmetic products, but as of the date of this report, we have not experienced any material difficulties in complying with such requirements.

### Trademarks

The market for our products depends to a significant extent upon the value associated with our trademarks and brand names. We have licenses or other rights to use, or own, the material trademark and brand name rights used in connection with the packaging, marketing and distribution of our major products both in the United States and in other countries where such products are principally sold. Therefore, trademark and brand name protection is important to our business. Although most of the brand names we license, use or own are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or brand name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and brand names may be substantial.

Under various license and other agreements we have the right to use certain registered trademarks throughout the world (except as otherwise noted) for fragrance products. These registered trademarks include:

- Abercrombie & Fitch
- Agent Provocateur
- Anna Sui
- bebe
- Boucheron
- Coach
- Dunhill
- French Connection
- Hollister
- Jimmy Choo
- Jordache
- Karl Lagerfeld
- Montblanc
- Oscar de la Renta
- Paul Smith
- Repetto
- Shanghai Tang
- S.T. Dupont
- Van Cleef & Arpels

In addition, we are the registered trademark owner of several trademarks for fragrance and beauty products, including:

- Rochas
- Lanvin
- Intimate
- Aziza

### Employees

As of March 1, 2017, we had 347 full-time employees worldwide. Of these, 257 are full-time employees of our European operations, with 61 employees engaged in sales activities and 196 in administrative, production and marketing activities. Our United States operations have 90 employees, and of these, 16 were engaged in sales activities and 74 in administrative, production and marketing activities. We believe that our relationship with our employees is good.

## Risk factors

As filed, 32,754 characters.

You should carefully consider these risk factors before you decide to purchase or sell shares of our common stock. These factors could cause our future results to differ materially from those expressed or implied in forward-looking statements made by us. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

**We are dependent upon the continuation and renewal of various licenses and other agreements for a significant portion of our sales, and the loss of one or more licenses or agreements could have a material adverse effect on us.**

All of our rights relating to prestige fragrance brands, other than Lanvin and Rochas, are derived from licenses or other agreements from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses and other agreements on terms favorable to us. Each license or agreement is for a specific term and may have additional optional terms. Generally, each license is subject to us making required royalty payments (which are subject to certain minimums), minimum advertising and promotional expenditures and meeting minimum sales requirements. Other agreements are generally subject to meeting minimum sales requirements. Just as the loss of a license or other significant agreement may have a material adverse effect on us, a renewal on less favorable terms may also negatively impact us.

**Our business could be adversely affected by a prolonged downturn or recession in the United States, Europe or other countries in which we conduct business.**

A prolonged economic downturn or recession in the United States, Europe, China or any of the other countries in which we do significant business could materially and adversely affect our business, financial condition and results of operations. In particular, such a downturn or recession could adversely impact (i) the level of spending by our ultimate consumers, (ii) our ability to collect accounts receivable on a timely basis from certain customers, (iii) our ability of certain suppliers to fill our orders for raw materials, packaging or co-packed finished goods on a timely basis, and (iv) the mix of our product sales.

**Consumers may reduce discretionary purchases of our products as a result of a general economic downturn.**

We believe that a high degree of global economic uncertainty could have a negative effect on consumer confidence, demand and spending. In addition, we believe that consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience sustained periods of declines in sales during periods of economic downturn as it may affect consumer purchasing patterns. In addition, a general economic downturn may result in reduced traffic in our customers’ stores which may, in turn, result in reduced net sales to our retail store customers. Any resulting material reduction in our sales could have a material adverse effect on our business, financial condition and operating results.

**Uncertainties and deterioration in global credit markets, as evidenced by previous reductions in sovereign credit ratings in the United States and Europe, could negatively impact suppliers, customers and consumers, which could have an adverse impact on our business as a whole.**

Uncertainties and continued deterioration in the global credit markets as evidenced by previous reductions in sovereign credit ratings in the United States and Europe, could negatively impact our suppliers, customers and consumers which, in turn, could have an adverse impact on our business. While thus far, uncertainties in global credit markets have not significantly affected our access to credit due to our strong credit rating, a further deterioration in global financial markets could make future financing difficult or more expensive. Such lack of credit or lack of credit on favorable terms could have a material adverse effect on our business, financial condition and operating results.

**If our intangible assets, such as trademarks and licenses, become impaired, we may be required to record a significant non-cash charge to earnings which would negatively impact our results of operations.**

Under United States generally accepted accounting principles, we review our intangible assets, including our trademarks and licenses, for impairment annually in the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate the carrying value of our intangible assets may not be fully recoverable. The carrying value of our intangible assets may not be recoverable due to factors such as reduced estimates of future cash flows, including those associated with the specific brands to which intangibles relate, or slower growth rates in our industry. Estimates of future cash flows are based on a long-term financial outlook of our operations and the specific brands to which the intangible assets relate. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates and the recorded value of the intangibles. Any significant impairment to our intangible assets would result in a significant charge to earnings in our financial statements during the period in which the impairment is determined to exist.

**If we are unable to protect our intellectual property rights, specifically trademarks and brand names, our ability to compete could be negatively impacted.**

The market for our products depends to a significant extent upon the value associated with trademarks and brand names that we license, use or own. We have licenses or other rights to use, or own the material trademark and brand name rights in connection with the packaging, marketing and distribution of our major products both in the United States and in other countries where such products are principally sold. Therefore, trademark and brand name protection is important to our business. Although most of the brand names we license, use or own are registered in the United States and in certain foreign countries in which we operate, we may not be successful in asserting trademark or brand name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and brand names may be substantial.

**The illegal distribution and sale by third parties of counterfeit versions of the Company’s products or the unauthorized diversion by third parties of the Company’s products could have an adverse effect on the Company’s revenues and a negative impact on the Company’s reputation and business.**

Third parties may illegally distribute and sell counterfeit versions of the Company’s products. These counterfeit products may be inferior in terms of quality and other characteristics compared to the Company’s authentic products and/or the counterfeit products could pose safety risks that the Company’s authentic products would not otherwise present to consumers. Consumers could confuse counterfeit products with the Company’s authentic products, which could damage or diminish the image, reputation and/or value of the Company’s brands and cause consumers to refrain from purchasing the Company’s products in the future, which could adversely affect the Company’s revenues and have a negative impact on the Company’s reputation.

**Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of other parties.**

Our commercial success depends at least in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and other proprietary rights of others. However, we cannot be certain that the conduct of our business does not and will not infringe, misappropriate or otherwise violate such rights. Many companies have employed intellectual property litigation as a way to gain a competitive advantage, and to the extent we gain greater visibility and market exposure, we may also face a greater risk of being the subject of such litigation. For these and other reasons, third parties may allege that our products, services or activities infringe, misappropriate or otherwise violate their trademark, patent, copyright or other proprietary rights. Defending against allegations and litigation could be expensive, take significant time, divert management’s attention from other business concerns, and delay getting our products to market. In addition, if we are found to be infringing, misappropriating or otherwise violating third party trademark, patent, copyright or other proprietary rights, we may need to obtain a license, which may not be available on commercially reasonable terms or at all, or redesign or rebrand our products, which may not be possible. We may also be required to pay substantial damages or be subject to a court order prohibiting us and our customers from selling certain products or engaging in certain activities. Our inability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of others could therefore have a material adverse effect on our business, financial condition and results of operations.

### The success of our products is dependent on public taste.

Our revenues are substantially dependent on the success of our products, which depends upon, among other matters, pronounced and rapidly changing public tastes, factors which are difficult to predict and over which we have little, if any, control. In addition, we have to develop successful marketing, promotional and sales programs in order to sell our fragrances and fragrance related products. If we are not able to develop successful marketing, promotional and sales programs, then such failure will have a material adverse effect on our business, financial condition and operating results.

### We are subject to extreme competition in the fragrance industry.

The market for fragrance products is highly competitive and sensitive to changing market preferences and demands. Many of our competitors in this market are larger than we are and have greater financial resources than are available to us, potentially allowing them greater operational flexibility. Our success in the prestige fragrance industry is dependent upon our ability to continue to generate original strategies and develop quality products that are in accord with ongoing changes in the market.

If there is insufficient demand for our existing fragrance products, or if we do not develop future strategies and products that withstand competition or we are unsuccessful in competing on price terms, then we could experience a material adverse effect on our business, financial condition and operating results.

**If we are unable to acquire or license additional brands, or obtain the required financing for these agreements and arrangements, then the growth of our business could be impaired.**

Our future expansion through acquisitions or new product license or distribution arrangements, if any, will depend upon the capital resources and working capital available to us. Further, we may be unable to obtain financing or credit that we may require for additional licenses, acquisitions or other transactions. We may be unsuccessful in identifying, negotiating, financing and consummating such acquisitions or arrangements on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business. Just as the loss of a license or other significant agreement may have a material adverse effect on us, our failure to acquire rights to new brands may also negatively impact us.

**We may engage in future acquisitions that we may not be able to successfully integrate or manage. These acquisitions may dilute our stockholders and cause us to incur debt and assume contingent liabilities.**

We continuously review acquisition prospects that would complement our current product offerings, increase our size and geographic scope of operations or otherwise offer growth and operating efficiency opportunities. The financing, if available, for any of these acquisitions could significantly dilute our stockholders and/or result in an increase in our indebtedness. We may acquire or make investments in businesses or products in the future, and such acquisitions may entail numerous integration risks and impose costs on us, including:

- difficulties in assimilating acquired operations or products, including the loss of key employees from acquired businesses
- diversion of management’s attention from our core business
- adverse effects on existing business relationships with suppliers and customers
- risks of entering markets in which we have no or limited prior experience
- dilutive issuances of equity securities
- incurrence of substantial debt
- assumption of contingent liabilities
- incurrence of significant amortization expenses related to intangible assets and the potential impairment of acquired assets and
- incurrence of significant immediate write-offs.

Our failure to successfully complete the integration of any acquired business could have a material adverse effect on our business, financial condition and operating results.

**Joint arrangements or strategic alliances in geographic markets in which we have limited or no prior experience may expose us to additional risks.**

We review, and from time to time may establish, arrangements and strategic alliances that we believe would complement our current product offerings, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities. These business relationships may require us to rely on the local expertise of our partners with respect to market development, sales, local regulatory compliance and other matters. Further, there may be challenges with ensuring that such arrangements or strategic alliances implement the appropriate internal controls to ensure compliance with the various laws and regulations applicable to us as a U.S. public company. Accordingly, in addition to commercial and operational risk, these arrangements and strategic alliances may entail risks such as reputational risk and regulatory compliance risk. In addition, there can be no assurance that we will be able to identify suitable alliance or candidates, that we will be able to consummate any such alliances or arrangements on favorable terms, or that we will realize the anticipated benefits of entering into any such alliances or arrangements.

### We are dependent upon Messrs. Jean Madar and Philippe Benacin, the loss of their services could harm our business

Jean Madar, our Chief Executive Officer, and Philippe Benacin, our President and Chief Executive Officer of Interparfums SA, are responsible for day-to-day operations as well as major decisions. Termination of their relationships with us, whether through death, incapacity or otherwise, could have a material adverse effect on our operations, and we cannot assure you that qualified replacements can be found.

**Our reliance on third party manufacturers could have a material adverse effect on us.**

We rely on outside sources to manufacture our fragrances and cosmetics. The failure of such third party manufacturers to deliver either compliant, quality components or finished goods on a timely basis could have a material adverse effect on our business. Although we believe there are alternate manufacturers available to supply our requirements, we cannot assure you that current or alternative sources will be able to supply all of our demands on a timely basis. We do not intend to develop our own manufacturing capacity. As these are third parties over whom we have little or no control, the failure of such third parties to provide components or finished goods on a timely basis could have a material adverse effect on our business, financial condition and operating results.

**Our reliance on third party distributors could have a material adverse effect on us.**

We sell a substantial percentage of our prestige fragrances through independent distributors specializing in luxury goods. Given the growing importance of distribution, we have modified our distribution model by owning a controlling interest in certain of our distributors within key markets. However, we have little or no control over third party distributors and the failure of such third parties to provide services on a timely basis could have a material adverse effect on our business, financial condition and operating results. In addition, if we replace existing third party distributors with new third party distributors or with our own distribution arrangements, then transition issues could have a material adverse effect on our business, financial condition and operating results.

**Terrorist attacks, acts of war or military actions and/or other civil unrest may adversely affect territories in which we operate, and therefore affect our business, financial condition and operating results.**

Terrorist attacks such as those that have occurred in Paris, France where we have our European headquarters, amongst other locations, and attempted terrorist attacks, military responses to terrorist attacks, other military actions, or governmental action in response to or in anticipation of a terrorist attack, or civil unrest as occurring in the Middle East, the Ukraine and Africa, may adversely affect prevailing economic conditions, resulting in work stoppages, reduced consumer spending or reduced demand for our products. These developments subject our worldwide operations to increased risks and, depending on their magnitude, could reduce net sales and therefore could have a material adverse effect on our business, financial condition and operating results.

**The loss of or disruption in our distribution facilities could have a material adverse effect on our business, financial condition and operating results.**

We currently have several distribution facilities in Europe and the United States. The loss of any of those facilities, as well as the inventory stored in those facilities, would require us to find replacement facilities and assets. In addition, acts of God, such as extreme weather conditions, natural disasters and the like or terrorist attacks, could disrupt our distribution operations. If we cannot replace our distribution capacity and inventory in a timely, cost-efficient manner, then such failure could have a material adverse effect on our business, financial condition and operating results.

**Changes in laws, regulations and policies that affect our business could adversely affect our financial results.**

Our business is subject to numerous laws, regulations and policies. Changes in the laws, regulations and policies, including the interpretation or enforcement thereof, that affect, or will affect, our business, including changes in accounting standards, tax laws and regulations, environmental or climate change laws, regulations or accords, trade rules and customs regulations, or increased cosmetics regulation, and the outcome and expense of legal or regulatory proceedings, and any action we may take as a result could adversely affect our financial results.

### Our success depends, in part, on the quality and safety of our products.

Our success depends, in part, on the quality and safety of our products. If our products are found to be defective or unsafe, or if they otherwise fail to meet our consumers’ standards, then our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales and/or become subject to liability claims, any of which could result in a material adverse effect on our business, results of operations and financial condition.

### We are subject to risks related to our foreign operations.

We operate on a global basis, with a substantial portion of our net sales and net income generated outside the United States, and we anticipate for the foreseeable future that a substantial portion of our net sales and net income will be generated outside the United States. We intend to reinvest these earnings in our foreign operations indefinitely, except where we are able to repatriate these earnings to the United States without incurring material incremental tax obligations. A substantial portion of our cash, cash equivalents and short-term investments that result from these earnings remain outside the United States. Foreign operations are subject to many risks and uncertainties, including:

- changes in foreign laws, regulations and policies, including restrictions on trade, import and export license requirements, and tariffs and taxes, as well as changes in United States laws and regulations relating to foreign trade and investment; and
- adverse weather conditions, social, economic and geopolitical conditions, such as terrorist attacks, war or other military action.

These risks could have a material adverse effect on our business, prospects, results of operations and financial condition.

**The United Kingdom’s pending departure from the European Union could adversely impact our business and financial results.**

In June 2016, the United Kingdom held a referendum for the United Kingdom to exit the European Union (“Brexit”), the announcement of which resulted in significant but short-term currency exchange rate fluctuations and volatility in global stock markets. It is expected that the British government will commence negotiations to determine the terms of Brexit. Given the lack of certainty and comparable precedent, the implications of Brexit or how such implications might affect the Company are unclear. Brexit could, among other things, disrupt trade and the free movement of goods, services and people between the United Kingdom and the European Union or other countries as well as create legal and global economic uncertainty. These and other potential implications of Brexit could adversely affect the Company’s business and financial results.

**Changes in foreign tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.**

In addition to being subject to taxation in the United States, we are subject to income and other taxes in other foreign jurisdictions. Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. From time to time, tax proposals are introduced or considered by the United States Congress or the legislative bodies in foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our other tax liabilities. Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses, funding, cross-jurisdictional transfer pricing, and other items in intercompany transactions. A negative determination or ultimate disposition in any tax audit, changes in tax laws or tax rates, or the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows in future periods.

**The international character of our business renders us subject to fluctuation in foreign currency exchange rates and international trade tariffs, barriers and other restrictions.**

A substantial portion of our European operations’ net sales (approximately 40%) are sold in U.S. dollars. In an effort to reduce our exposure to foreign currency exchange fluctuations, we engage in a controlled program of risk management that includes the use of derivative financial instruments for all major currencies with which we operate. Despite such actions, fluctuations in foreign currency exchange rates for the U.S. dollar, particularly with respect to the euro, could have a material adverse effect on our operating results. Possible import, export, tariff and other trade barriers, which could be imposed by the United States, other countries or the European Union might also have a material adverse effect on our operating results.

**Our business is subject to governmental regulation, which could impact our operations.**

Fragrance products must comply with the labeling requirements of the Federal Food, Drug and Cosmetics Act as well as the Fair Packaging and Labeling Act and their regulations. Some of our color cosmetic products may also be classified as a “drug”. Additional regulatory requirements for products which are “drugs” include additional labeling requirements, registration of the manufacturer and the semi-annual update of a drug list. In addition, various jurisdictions prohibit the use of certain ingredients in fragrances and cosmetics.

Our fragrances are subject to the approval of the Bureau of Alcohol, Tobacco and Firearms as a result of the use of specially denatured alcohol. So far we have not experienced any difficulties in obtaining the required approvals.

Our fragrance products that are manufactured or sold in Europe are subject to certain regulatory requirements of the European Union, such as Cosmetic Directive 76/768/CEE and Regulation number 1223/2009 on cosmetic products, but as of the date of this report, we have not experienced any material difficulties in complying with such requirements.

However, we cannot assure you that, should we use proscribed ingredients in our fragrance products that we develop or market, or develop or market fragrance products with different ingredients, or should existing regulations or requirements be revised, we would not in the future experience difficulty in complying with such requirements, which could have a material adverse effect on our results of operations.

**Our information systems and websites may be susceptible to outages, hacking and other risks.**

We have information systems that support our business processes, including product development, production, marketing, order processing, sales, distribution, finance and intra-company communications. We also have Internet websites in the United States and Europe. These systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, hacking and similar events. Despite the implementation of network security measures, our systems may be vulnerable to computer viruses, hacking and similar disruptions from unauthorized tampering. The occurrence of these or other events could disrupt or damage our information systems and adversely affect our business and results of operations.

**Our failure to protect our reputation, or the failure of our partners to protect their reputations, could have a material adverse effect on our brand images.**

Our ability to maintain our reputation is critical to our various brand images. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity or if we, or the third parties with whom we do business, do not comply with regulations or accepted practices. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations, such as animal testing, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Failure to comply with local laws and regulations, including applicable U.S. trade sanctions, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. We are also dependent on the reputations of our brand partners and licensors, which can be affected by matters outside of our control. Damage to our reputation or the reputations of our brand partners or licensors or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.

### Our business is subject to seasonal variability.

Our business has become increasingly seasonal due to the timing of shipments to our customers, which are weighted to the second half of the year. Accordingly, our financial performance, sales, working capital requirements, cash flow and borrowings generally experience variability during the third and fourth quarters.

**The trading prices of our securities periodically may rise or fall based on the accuracy of predictions of our earnings or other financial performance.**

Our business planning process is designed to maximize our long-term strength, growth and profitability, not to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term focus is in the best interests of our Company and our stockholders. At the same time, however, we recognize that it may be helpful to provide investors with guidance as to our forecast of net sales and earnings per share. Accordingly, we provide guidance as to our expected annual net sales, and earnings per share, which is updated as appropriate throughout the year. While we generally provide updates to our guidance when we report our results each fiscal quarter if called for, we assume no responsibility to update any of our forward-looking statements at such times or otherwise. In addition, longer-term guidance that we may from time to time provide is based on goals that we believe, at the time guidance is given, are reasonably attainable. Such targets are more difficult to predict than our current quarter and fiscal year expectations.

In all of our public statements when we make, or update, a forward-looking statement about our sales and/or earnings expectations or expectations regarding other initiatives, we accompany such statements directly, or by reference to a public document, with a list of factors that could cause our actual results to differ materially from those we expect. Such a list is included, among other places, in our earnings press release (by reference to our periodic filings with the Securities and Exchange Commission) and in our periodic filings with the Securities and Exchange Commission (*e.g.,* in our reports on Form 10-K and Forms 10-Q). These and other factors may make it difficult for outside observers, such as research analysts, to predict what our earnings will be in any given fiscal quarter or year.

Outside analysts and investors have the right to make their own predictions of our financial results for any future period. Outside analysts, however, have access to no more material information about our results or plans than any other public investor, and we do not endorse or adopt their predictions as to our future performance. Nor do we assume any responsibility to correct the predictions of outside analysts or others when they differ from our own internal expectations. If and when we announce actual results that differ from those that outside analysts or others have been predicting, the market price of our securities could be affected. Investors who rely on the predictions of outside analysts or others when making investment decisions with respect to our securities do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in the prices of our securities.

**We may become subject to possible liability for improper comparative advertising or “Trade Dress”.**

Brand name manufacturers and sellers of brand name products may make claims of improper comparative advertising or trade dress (packaging) with respect to the likelihood of confusion between some of our mass market products and those of brand name manufacturers and sellers. They may seek damages for loss of business or injunctive relief to seek to have the use of the improper comparative advertising or trade dress halted. However, we believe that our displays and packaging constitute fair competitive advertising and are not likely to cause confusion between our products and others. Further, we have not experienced to any material degree, any of such problems to date.

## Properties

As filed, 3,647 characters.

### United States Operations

| Use Office Space- Corporate headquarters and | Location 551 Fifth Avenue, 15th Floor, New York, NY | Approximate Size 16,800 square feet | Term Expires April 30, 2024 |
| --- | --- | --- | --- |
| United States | 10176 |  |  |
| operations |  |  |  |
| Distribution center | 60 Stults Road | 140,000 square feet | October 31, 2018 |
|  | Dayton, NJ |  |  |
|  | 08810 |  |  |
| Corporate Office for | Leighton Centre | 9,685 square feet | June 14, 2017 |
| Inter Parfums USA | 77 Leighton Road |  |  |
| Hong Kong Limited | Causeway Bay, |  |  |
|  | Hong Kong |  |  |
|  | Suite 1413 |  |  |

### European Operations

| Use | Location | Approximate Size | Term Expires | Other Information |
| --- | --- | --- | --- | --- |
| Office Space-Paris corporate headquarters and European operations | 4 Rond Point Des Champs Elysees Ground and 1st Fl. Paris, France | 571 square meters | March 2022 | Lessee has early termination right every 3 years on 6 months’ notice |
| Office Space-Paris corporate headquarters and European operations | 4 Rond Point Des Champs Elysees 4th Fl. Paris, France | 540 square meters | March 2023 | Lessee has early termination right every 3 years on 6 months’ notice |
| Office Space-Paris corporate headquarters and European operations | 4 Rond Point Des Champs Elysees 5th Fl.- left Paris, France | 155 square meters | March 2022 | Lessee has early termination right on 3 months’ notice |
| Office Space-Paris corporate headquarters and European operations | 4 Rond Point Des Champs Elysees 6th Fl.-Right Paris, France | 157 square meters | March 2022 | Lessee has early termination right every 3 years on 6 months’ notice |
| Office Space-Paris corporate headquarters and European operations | 4 Rond Point Des Champs Elysees 2nd Fl. Paris, France | 544 square meters | September 2017 | Lessee has early termination right every 3 years on 6 months’ notice |
| Office Space-Paris corporate headquarters and European operations | 4 Rond Point Des Champs Elysees 6th Fl. Paris, France | 60 square meters | September 2017 | Lessee has early termination right every 3 years on 6 months’ notice |
| European Distribution Center | Criquebeuf sur Seine (27340), the "Le Bosc Hetrel" business park | 31,000 square meters | May 2020 | NA |
| Rochas Studio & Production Department | 1 Rond Point des Champs Elysees 2nd Fl. Paris, France | 755 square meters | June 2021 | Lessee has early termination right every 3 years on 6 months’ notice |
| Office Space – Singapore regional office, for Asia-Pacific region European operations | 163 Penang Road, #06-03/04 Winsland House 2, Singapore 238463 | 2900 square feet | November 2019 | NA |
| Office Space-US Distribution for European operations | 112 Madison Ave. New York, NY 10016 | 7500 sq feet | October 2024 | Lessee has (i) early termination rights at the 5 year mark with 9 months’ notice; (ii) renewal option for 5 year term with 11-14 months’ notice; (iii) right of first offer on the 11th floor |

28

Interparfums SA has had an agreement with Bolloré Logistics (and its predecessor, Sagatrans, S.A.) for warehousing and distribution services for several years. The current agreement with Bolloré Logistics for warehousing and distribution services expires on December 31, 2017. Service fees payable to Bolloré Logistics are calculated based upon a percentage of sales, which is customary in the industry. Service fees actually paid in 2016, 2015 and 2014 were € 4.3 million, €3.4 million and €3.2 million, respectively.

We believe our office and warehouse facilities are satisfactory for our present needs and those for the foreseeable future.

## Management's discussion and analysis

As filed, 54,800 characters.

### 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 fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 79%, 77% and 82% of net sales for 2016, 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.

With respect to the Company’s largest brands, we own the Lanvin brand name for its class of trade, and license the Montblanc and Jimmy Choo brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:

|  | Year Ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| Montblanc | 23% | 21% | 22% |
| Jimmy Choo | 17% | 20% | 16% |
| Lanvin | 12% | 15% | 18% |

Through our United States operations we also market fragrance and fragrance related products. United States operations represented 22%, 23% and 21% of net sales in 2016, 2015 and 2014, respectively. These fragrance products are sold primarily pursuant to license or other agreements with the owners of the *Abercrombie & Fitch, Agent Provocateur, Anna Sui, Banana Republic, bebe, Dunhill, French Connection, Hollister, Oscar de la Renta,* and *Shanghai Tang* brands.

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 is more evident. We sell directly to retailers in France as well as through our own distribution subsidiaries in Italy, Germany, Spain and the United States.

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 by supporting new and established products through advertising, merchandising and sampling as well as by 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 2016, the economic and political uncertainty and financial market volatility taking place in Eastern Europe, 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 overall 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 approximately 40% 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. We are also carefully monitoring currency trends in the United Kingdom as a result of the volatility created from the United Kingdom’s decision to exit the European Union. We have evaluated our current pricing models and currently we do not expect any significant pricing changes. However, if the devaluation of the British Pound worsens, it may affect future gross profit margins from sales in the territory. We do not expect any material losses on accounts receivables to be collected in British Pounds as we routinely hedge those amounts.

### Recent Important Events

### Buyout of License

In December 2016, the Company reached an agreement with the Balmain brand calling for Balmain to buyout the Balmain license agreement, effective December 31, 2016, in exchange for a payment aggregating €5.4 million (approximately $5.7 million). As a result of the buyout, the Company recognized a gain of $4.7 million and expects to receive the buyout payment by April 30, 2017. The Company has a three month inventory sell-off period ending March 31, 2017 and Balmain has also agreed to purchase all remaining inventory and tangible assets.

### Impairment Loss

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Product sales of our Karl Lagerfeld brand have not met with our original expectations. During the fourth quarter of 2016, the Company decided that it will most likely exercise its rights for an early termination of the Karl Lagerfeld license in 2024, rather than continue the license through its original expiration in 2032. As a result of the shortened expected life of the license, the Company recorded an impairment loss of $5.7 million as of December 31, 2016.

### S.T. Dupont

In September 2016, we renewed our license agreement with S.T. Dupont for the creation, development and distribution of fragrance products through December 31, 2019, without any material changes in terms and conditions. Our initial 11-year license agreement with S.T. Dupont was signed in June 1997, and had previously been extended through December 31, 2016.

### Settlement with French Tax Authorities

As previously reported, the French Tax Authorities examined the 2012 tax return of Interparfums SA, and in August 2015 issued a $6.9 million tax adjustment. It is the Company’s position that the French Tax Authorities are incorrect in their assessments and the Company believes that it has strong arguments to support its tax positions. The main issues challenged by the French Tax Authorities related to the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respectively. Interparfums Singapore Pte. and Interparfums (Suisse) SARL are wholly-owned subsidiaries of Interparfums SA. Due to the subjective nature of the issues involved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax Authorities. The settlement requires Interparfums SA to pay a tax assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as to future acceptable commission and royalty rates, which is not expected to have a significant impact on cash flow. The settlement, which is subject to formal documentation with the French Tax Authorities, was accrued for in March 2016. In July 2016, Interparfums SA paid $1.1 million to the French Tax Authorities upon receipt of formal notification regarding tax years 2013 and 2014.

### 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.

### Revenue Recognition

We sell our products to department stores, perfumeries, specialty stores, 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 and net realizable 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 results 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 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 6.2%. 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.

At December 31, 2016 indefinite-lived intangible assets aggregated $115.8 million. The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2016 assuming all other assumptions remained constant:

*$ in millions*

|  | Change | Increase (decrease) to fair value |
| --- | ---: | ---: |
| Weighted average cost of capital | +10% | $(16.2) |
| Weighted average cost of capital | -10% | $20.0 |
| Future sales levels | +10% | $17.0 |
| Future sales levels | -10% | $(17.0) |

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. In those cases where we determine that the useful life of long-lived assets should be shortened, we would amortize 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. We believe that the assumptions we have made in projecting future cash flows for the evaluations described above are reasonable. Product sales of our Karl Lagerfeld brand have not met with our original expectations. During the fourth quarter of 2016, the Company decided that it will most likely exercise its rights for an early termination of the Karl Lagerfeld license in 2024, rather than continue the license through its original expiration in 2032. As a result of the shortened expected life of the license, the Company recorded an impairment loss of $5.7 million as of December 31, 2016.

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 income at that time. In addition, the Company follows the provisions of uncertain tax positions as addressed in ASC topic 740.

### Quantitative Analysis

During the three-year period ended December 31, 2016, we have not made any material changes in our assumptions underlying these critical accounting policies or to the related significant estimates. The results of our business underlying these assumptions have not differed significantly from our expectations.

While we believe the estimates we have made are proper and the related results of operations for the period are presented fairly in all material respects, other assumptions could reasonably be justified that would change the amount of reported net sales, cost of sales, and selling, general and administrative expenses as they relate to the provisions for anticipated sales returns, allowance for doubtful accounts and inventory obsolescence reserves. For 2016, had these estimates been changed simultaneously by 5% in either direction, our reported gross profit would have increased or decreased by approximately $0.5 million and selling, general and administrative expenses would have changed by approximately $0.02 million. The collective impact of these changes on 2016 operating income, net income attributable to Inter Parfums, Inc., and net income attributable to Inter Parfums, Inc. per diluted common share would be an increase or decrease of approximately $0.5 million, $0.2 million and $0.01, respectively.

### Results of Operations

*(in millions)*

| Net Sales | Years ended December 31, 2016 | % Change | 2015 | % Change | 2014 |
| --- | ---: | ---: | ---: | ---: | ---: |
| European based product sales | $404.0 | 11% | $362.7 | (8)% | $394.0 |
| United States based product sales | 117.1 | 11% | 105.8 | 1% | 105.3 |
| Total net sales | $521.1 | 11% | $468.5 | (6)% | $499.3 |

Net sales increased 11% in 2016 to $521.1 million, as compared to $468.5 million in 2015. At comparable foreign currency exchange rates, net sales increased 12%. Net sales decreased 6% in 2015 to $468.5 million, as compared to $499.3 million in 2014. At comparable foreign currency exchange rates, net sales increased 1.5%. The average U.S. dollar/euro exchange rates were 1.11 in 2016 and 2015 and 1.33 in 2014.

European based prestige product sales increased 11% in 2016 to $404.0 million, as compared to $362.7 million in 2015. At comparable foreign currency exchange rates, European based prestige product sales increased 12.5%. European based prestige product sales decreased 8% in 2015 to $362.7 million, as compared to $394.0 million in 2014. At comparable foreign currency exchange rates, European based prestige product sales increased 1.8% in 2015.

In 2016, Montblanc, our largest brand, continued to lead the way in sales growth reaching $121.7 million in brand sales, a 25% increase from the prior year. The successful launch of Montblanc *Legend Spirit* and the continued popularity of the original *Legend* line were important contributors to Montblanc brand sales. Our newer brands were also contributors to the increase in net sales. Coach brand sales, which commenced in the second half of 2016, were well ahead of expectations generating $23.1 million in incremental sales. Strong demand for the *Eau de Rochas* and *Rochas Man* lines in Spain and France contributed to the successful integration of Rochas, and brand sales aggregated $32.3 million in 2016. We began consolidating brand sales when we acquired Rochas in June 2015. In the absence of a major new product launch, Jimmy Choo fragrance sales declined 2% in 2016 as the bar was set unusually high in 2015 when brand sales were up 18% compared to the preceding year. Lanvin brand sales declined 13% in 2016 as that brand’s product sales continue to be affected by the economic slowdowns in its two flagship markets of Russia and China. We hope to reverse that trend with the recent launch of a new scent by Lanvin, *Modern Princess.*

It was anticipated that 2015 was going to be very challenging from a currency perspective for our European based operations. The significant strength of the U.S. dollar began early on in 2015, and continued throughout the year. As mentioned above, the average U.S. dollar/euro exchange rate for all of 2015 was 1.11, as compared to 1.33 for 2014. The currency impact was most apparent with our three largest brands, led by Jimmy Choo, where brand sales for 2015 increased 41% in local currency, but only 18% in dollars, as compared to 2014. The excellent performance in Jimmy Choo fragrance sales reflects robust gains from the Jimmy Choo *Man* line, and the launch of Jimmy Choo *Illicit,* the brand's third women's fragrance initiative. With only a new line extension launched for the Lanvin brand in 2015, sales were off only 6% in local currency, but 21% in dollars, in 2015 as compared to 2014. Montblanc brand sales increased 6% in local currency but declined 12% in dollars in 2015, as compared to 2014. The brand benefitted from both established scents, such as *Legend* and *Emblem* along with initial sales for the *Lady Emblem* line. The most disappointing performance was that of the Karl Lagerfeld brand, which saw brand sales decline 43% in local currency or 53% in dollars, as its initial 2014 launch did not gain the traction originally anticipated.

Irrespective of the strong U.S. dollar environment, we maintain confidence in our future as we continue to strengthen advertising and promotional investments supporting all portfolio brands, accelerate brand development and build upon the strength of our worldwide distribution network. For 2017, our first new product for Rochas, a women’s fragrance, will be introduced early in the year, initially in about 12 countries. Also this winter, Lanvin *Modern Princess*, which recently debuted in France, will roll out in wider international distribution. A multi-scent collection for Boucheron is now in selective distribution, and come this spring, we have important new initiatives unveiling for the Jimmy Choo signature scent for women and Jimmy Choo Man, with a brand extension for each. A fragrance duo is in the pipeline for the Karl Lagerfeld brand next summer, and our first men’s scent for Coach will launch in the fall.

United States based product sales increased 11% in 2016 to $117.1 million, as compared to $105.8 million in 2015. International distribution of our first new Abercrombie & Fitch men’s scent, First Instinct, and the Hollister duo, Wave, were major contributors to our top line growth in 2016 as they were rolled out into several international markets throughout the year. Dunhill, which launched its *Icon* fragrance line in early 2015, continues to be a consistent top performing brand. Sales increased 4% in 2016 despite a difficult comparison to 2015, where Dunhill brand sales were up 37% compared to the prior year. The success of the 2015 launch of Dunhill *Icon* has enabled Dunhill to quickly become the largest brand within our United States operations.

Although Oscar de la Renta brand sales had increased 18% in 2015, benefitting from the 2015 launch of *Extraordinary* by Oscar de la Renta, sales of this brand decreased 28% in 2016 due to large part to the absence of any major product launch. For the Spring of 2017, we have a new Oscar de la Renta woman’s scent ready to launch. In addition, sales of Anna Sui fragrances continued to be depressed due to negative market conditions in China throughout the 2014 to 2016 periods. We hope to reverse this trend and anticipate either stable sales or modest growth for Anna Sui fragrances for 2017.

For 2017, we expect our newest brands Abercrombie & Fitch and Hollister, to lead our growth story. Overall, growth within our United States based operations is expected to come from our prestige fragrance licenses, by launching new products and pursuing expanded distribution

Lastly, we hope to benefit our worldwide operations from our strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. However, we cannot assure you that any new license or acquisition agreements will be consummated.

### Net Sales to Customers by Region

*(in millions)*

|  | Years ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| North America | $149.6 | $125.7 | $125.9 |
| Western Europe | 152.6 | 123.6 | 130.9 |
| Eastern Europe | 40.3 | 47.0 | 47.0 |
| Central and South America | 43.9 | 41.1 | 57.7 |
| Middle East | 42.2 | 41.9 | 40.3 |
| Asia | 81.5 | 78.2 | 85.6 |
| Other | 11.0 | 11.0 | 11.9 |
|  | $521.1 | $468.5 | $499.3 |

In 2016, we continued to feel the effect of negative market conditions in Eastern Europe, the Middle East and China, while Western Europe and North America continued to perform well.

For 2015 compared to 2014, the results demonstrate the effect of negative market conditions in China and South America. The 2015 decline in Western Europe includes the effect of the 17% 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.

### Gross Margins

*(in millions)*

|  | Years ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| Net sales | $521.1 | $468.5 | $499.3 |
| Cost of sales | 194.6 | 179.0 | 212.3 |
| Gross margin | $326.5 | $289.5 | $287.0 |
| Gross margin as a percent of net sales | 62.7% | 61.8% | 57.5% |

As a percentage of net sales, gross profit margins were 62.7%, 61.8%, and 57.5% in 2016, 2015 and 2014, respectively. For European operations, gross profit margin was 66%, 65% and 60% in 2016, 2015 and 2014, respectively. The margin fluctuation as a percentage of sales for European operations in 2016, as compared to 2015, is primarily the result of increased product sales, much of which was through our distribution subsidiaries that sell product directly to retailers. In addition to increased sales of Montblanc and Coach product sold through our United States distribution subsidiary, the Rochas brand was also a major contributor as its sales are concentrated in France and Spain, both of which are countries where we distribute directly to retailers.

We carefully monitor movements in foreign currency exchange rates as almost 40% of our European based operations net sales is 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 was 1.11 in 2016 and 2015 and 1.33 in 2014. Although currency fluctuation had only a minor effect on gross margin as a percentage of sales in our European operations for 2016, in 2015 it was the primary cause of the gross margin fluctuation.

For United States operations, gross profit margin was 50% for both 2016 and 2015 and 48% in 2014. Sales growth in recent years for our United States operations has primarily come from higher margin prestige product licenses while sales of other lower margin fragrance products have been in a decline.

Costs relating to purchase with purchase and gift with purchase promotions are reflected in cost of sales and aggregated $30.0 million, $25.4 million and $24.4 million in 2016, 2015 and 2014, respectively, and represented 5.8%, 5.4% and 4.9% of net sales, respectively.

Generally, we do not bill customers for shipping and handling costs and such costs, which aggregated $5.1 million, $4.7 million and $5.2 million in 2016, 2015 and 2014, respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross margins may not be comparable to other companies, which may include these expenses as a component of cost of goods sold.

### Selling, General & Administrative Expenses

*(in millions)*

|  | Years ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| Selling, general & administrative expenses | $258.8 | $228.3 | $233.6 |
| Selling, general & administrative expenses as a percent of net sales | 50% | 49% | 47% |

Selling, general and administrative expenses increased 13% in 2016 as compared to 2015 and decreased 2% in 2015 as compared to 2014. As a percentage of sales, selling, general and administrative expenses were 50%, 49% and 47% in 2016, 2015 and 2014, respectively. For European operations, selling, general and administrative expenses increased 14% in 2016, as compared to 2015 and represented 53% of sales in 2016 as compared to 52% in 2015. As discussed in more detail below, the 2016 increase is primarily from increased promotion and advertising expenditures.

For United States operations, selling, general and administrative expenses increased 9% in 2016 and represented 38% of sales, as compared to 39% in 2015. This increase is in line with sales growth from our newest prestige product licenses, such as Abercrombie & Fitch, Hollister and Dunhill, all of which bear royalty and advertising expenses.

Promotion and advertising included in selling, general and administrative expenses aggregated $99.0 million, $83.8 million and $86.7 million in 2016, 2015 and 2014, respectively. Promotion and advertising as a percentage of sales represented 19.0%, 17.9% and 17.4% of net sales in 2016, 2015 and 2014, respectively. As planned, we invest heavily in promotional spending to support new product launches and continued worldwide building of brand awareness for our brand portfolio.

Royalty expense included in selling, general and administrative expenses aggregated $37.8 million, $33.8 million and $35.6 million in 2016, 2015 and 2014, respectively. Royalty expense as a percentage of sales represented 7.3%, 7.2% and 7.1% of net sales in 2016, 2015 and 2014, respectively. The small increases are the result of increased licensing activities within our U.S. operations.

Service fees, which are fees paid to third parties relating to the activities of our distribution subsidiaries, aggregated $9.9 million, $12.3 million and $11.1 million in 2016, 2015 and 2014,respectively. Service fees decreased in 2016 as a result of our U.S. distribution subsidiary, Interparfums Luxury Brands, Inc.’s 2016 conversion to an in-house sales team model. However, much of this savings was mitigated by an increase in compensation costs of the in-house sales team. Approximately two-thirds of the 2015 increase in service fees was the result of higher fees paid in the U.S. resulting from increased sales. The balance of the increase is from the addition of our newly formed distribution subsidiary in Spain, Parfums Rochas.

### Buyout of License

In December 2016, the Company reached an agreement with the Balmain brand calling for Balmain to buyout the Balmain license agreement, effective December 31, 2016, in exchange for a payment aggregating €5.4 million (approximately $5.7 million). As a result of the buyout, the Company recognized a gain of $4.7 million and expects to receive the buyout payment by April 30, 2017. The Company has a three month inventory sell-off period ending March 31, 2017 and Balmain has also agreed to purchase all remaining inventory and tangible assets.

### Impairment Loss

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Product sales of our Karl Lagerfeld brand have not met with our original expectations. During the fourth quarter of 2016, the Company decided that it will most likely exercise its rights for an early termination of the Karl Lagerfeld license in 2024, rather than continue the license through its original expiration in 2032. As a result of the shortened expected life of the license, the Company recorded an impairment loss of $5.7 million as of December 31, 2016.

### Income from Operations

As a result of the above analysis regarding net sales, gross profit margins, selling, general and administrative expenses, buyout of license and impairment loss, income from operations increased 9% to $66.7 million in 2016 as compared to 2015, after increasing 15% to $61.2 million in 2015 from $53.4 million in 2014. Operating margins aggregated 12.8%, 13.1% and 10.7% for the years ended December 31, 2016, 2015 and 2014, respectively. Excluding the gain on buyout of license and impairment loss, income from operations in 2016 would have aggregated $67.7 million, an increase of 10.6%, compared to 2015 and represented an operating margin of 13.0%. In summary, for the past two years, the increase in gross margin was mitigated by an increase in selling, general and administrative expenses, primarily promotion and advertising expenditures, explaining the effect on operating margin. The Company plans to continue to increase sales without a substantial increase in fixed costs. Our goal is to reach an operating margin of at least 14% in the coming years.

### Other Income and Expenses

Interest expense aggregated $2.3 million, $2.8 million and $1.5 million in 2016, 2015 and 2014, respectively. The significant increase in 2015 is related to the financing of the Rochas brand acquisition and includes an approximate $1.0 million loss in 2015 relating to the interest rate swap. There was a small gain on the swap in 2016. We use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions. Loans payable – banks and long-term debt including current maturities aggregated $74.6 million, $98.6 million and $0.3 million as of December 31, 2016, 2015 and 2014, respectively.

Foreign currency gains or (losses) aggregated ($0.6) million ($0.9) million and $0.9 million in 2016, 2015 and 2014, respectively. Currency exchange rates were extremely volatile during the first quarter of 2015. The 2015 loss includes approximately $2.4 million in losses from intercompany balances of our majority owned subsidiary, Interparfums SA, and its other foreign subsidiaries, which were not hedged. 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 40% of 2016 net sales of our European operations were denominated in U.S. dollars.

Interest and dividend income aggregated $3.3 million, $3.0 million and $3.9 million in 2016, 2015 and 2014, respectively. 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 35.5%, 35.6% and 34.2% in 2016, 2015 and 2014, respectively, and differs from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions. The effective tax rate for our European operations was 35.9%, 36% and 33.5% in 2016, 2015 and 2014, respectively. The French Tax Authorities examined the 2012 tax return of Interparfums SA, and in August 2015 issued a $6.9 million tax adjustment. The main issues challenged by the French Tax Authorities related to the commission rate and royalty rate paid to Interparfums Singapore Pte. and Interparfums (Suisse) SARL, respectively. Interparfums Singapore Pte. and Interparfums (Suisse) SARL are wholly-owned subsidiaries of Interparfums SA. Due to the subjective nature of the issues involved, in April 2016, Interparfums SA reached an agreement in principle to settle the entire matter with the French Tax Authorities. The settlement requires Interparfums SA to pay a tax assessment of $1.9 million covering the issues for not only the 2012 tax year, but also covering the issues for the tax years ended 2013 through 2015. The settlement also includes an agreement as to future acceptable commission and royalty rates, which is not expected to have a significant impact on cash flow. The settlement, which is subject to formal documentation with the French Tax Authorities, was accrued as of March 31, 2016. In addition, the 2016 effective tax rate for European operations was favorably impacted by approximately 1.5%, due to lower tax rates in France, Spain, and the United States. The increase in 2015 is primarily the result of higher 2015 profits in high tax rate jurisdictions as compared to 2014.

The effective tax rate for our U.S. operations was 34.0%, 35.1% and 36.5% in 2016, 2015 and 2014, respectively. The early adoption in 2016 of Accounting Standards Update 2016-09 (“ASU 2016-09”) resulted in the recognition of excess tax benefits of $0.4 million in our provision for income taxes rather than in additional paid-in capital. Under previous guidance, excess tax benefits and certain tax deficiencies from share-based compensation arrangements were recorded in additional paid-in capital when the awards vested or were settled. ASU 2016-09 requires that all excess tax benefits and all tax deficiencies be recognized as income tax expense or benefit in the income statement and adoption is on a prospective basis. In 2015, changes in allocation percentages related to state and local taxes of our U.S. operations resulted in a reduced effective tax rate.

Other than as discussed above, we did not experience any significant changes in tax rates, and none were expected in jurisdictions where we operate.

### Net Income and Earnings per Share

*(In thousands except share and per share data)*

|  | Year ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| Net income attributable to European operations | $35,037 | $31,328 | $29,276 |
| Net income attributable to United States operations | 8,211 | 7,641 | 8,069 |
| Net income | 43,248 | 38,969 | 37,345 |
| Less: Net income attributable to the noncontrolling interest | 9,917 | 8,532 | 7,909 |
| Net income attributable to Inter Parfums, Inc. | $33,331 | $30,437 | $29,436 |
| Net income attributable to Inter Parfums, Inc. common shareholders: |  |  |  |
| Basic | $1.07 | $0.98 | $0.95 |
| Diluted | 1.07 | 0.98 | 0.95 |
| Weighted average number of shares outstanding: |  |  |  |
| Basic | 31,072,328 | 30,996,137 | 30,931,308 |
| Diluted | 31,175,598 | 31,100,215 | 31,060,326 |

Net income has continued to increase over the past three years and aggregated $43.2 million, $39.0 million and $37.3 million in 2016, 2015 and 2014, respectively. Net income attributable to European operations was $35.0 million, $31.3 million and $29.3 million in 2016, 2015 and 2014, respectively, while net income attributable to United States operations was $8.2 million, $7.6 million and $8.1 million in 2016, 2015 and 2014, respectively. The significant fluctuations in net income for European operations in are directly related to the previous discussions relating to changes in sales, gross profit margins, selling, general and administrative expenses, buyout of license, impairment loss, and the pending settlement with the French Tax Authorities. In summary, improved gross profit margins in 2016 were offset by increased advertising and promotional expenditures. In addition, for our European operations, net income includes the effects of the $4.7 million gain on buyout of license, $5.7 million impairment loss and the $1.9 million pending income tax settlement with the French Tax Authorities.

For United States operations, in summary, in 2016 sales increased 11% while gross margins as a percentage of sales were unchanged and selling, general and administrative expenses increased 9%, as compared to the corresponding period of the prior year.

The noncontrolling interest arises primarily 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 related to the profitability of our European operations, and aggregated 28.3%, 27.2% and 27.0% of European operations net income in 2016, 2015 and 2014, respectively. Net income attributable to Inter Parfums, Inc. aggregated $33.3 million, $30.4 million and $29.4 million in 2016, 2015 and 2014, respectively. Net margins attributable to Inter Parfums, Inc. aggregated 6.4%, 6.5% and 5.9% in 2016, 2015 and 2014, respectively.

See information regarding Regulation S-K Item 10(e), “Use of Non-GAAP Financial Measures in commission filings,” on page v of this Form 10-K.

### Adjusted Net Income Attributable to Inter Parfums, Inc.

Adjusted Net Income Attributable to Inter Parfums, Inc., is deemed a “non-GAAP financial measure” under the rules of the Securities and Exchange Commission. This non-GAAP measure is calculated using GAAP amounts derived from our consolidated financial statements. Adjusted net income attributable to Inter Parfums, Inc. has limitations and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations or other consolidated income or cash flow data prepared in accordance with GAAP. Because not all companies use identical calculations, this presentation of adjusted income may not be comparable to a similarly titled measure of other companies.

### Adjusted Net Income Attributable to Inter Parfums, Inc. Reconciliation

Adjusted net income attributable to Inter Parfums, Inc. is defined as net income attributable to Inter Parfums, Inc., plus the previously discussed pending nonrecurring tax settlement, net of the portion of the settlement attributable to the noncontrolling interest. We believe that certain investors would consider adjusted net income attributable to Inter Parfums, Inc. a useful means of evaluating our financial performance. The following table provides a reconciliation of net income attributable to Inter Parfums, Inc. to adjusted net income attributable to Inter Parfums, Inc. for the periods indicated.

*(In thousands except share and per share data)*

|  | Year ended December 31, 2016 | 2015 | 2014 |
| --- | ---: | ---: | ---: |
| Net income attributable to Inter Parfums, Inc. | $33,331 | $30,437 | $29,436 |
| Pending nonrecurring tax settlement (net of portion attributable to the noncontrolling interest of $500) | 1,400 | — | — |
| Net income attributable to Inter Parfums, Inc. | $34,731 | $30,437 | $29,436 |
| Adjusted net income attributable to Inter Parfums, Inc. common shareholders: |  |  |  |
| Basic | $1.12 | $0.98 | $0.95 |
| Diluted | 1.11 | 0.98 | 0.95 |
| Weighted average number of shares outstanding: |  |  |  |
| Basic | 31,072,328 | 30,996,137 | 30,931,308 |
| Diluted | 31,175,598 | 31,100,215 | 31,060,326 |

48

### Liquidity and Capital Resources

The Company’s financial position remains strong. At December 31, 2016, working capital aggregated $338 million and we had a working capital ratio of almost 3.4 to 1. Cash and cash equivalents and short-term investments aggregated $256 million most 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. Approximately 88% 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 $174 million of trademarks, licenses and other intangible assets are held by European operations.

The Company hopes to benefit from its strong financial position to potentially acquire one or more brands, either on a proprietary basis or as a licensee. Opportunities for external growth continue to be examined, 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 provided by operating activities aggregated $54.6 million, $50.1 million and $36.6 million in 2016, 2015 and 2014, respectively. In 2016, working capital items used $0.2 million in cash from operating activities, as compared to $0.6 million in 2015 and $10.9 million in 2014. Although accounts receivable is up from that of the prior year, days sales outstanding remained relatively consistent at 71 days in 2016, as compared to 75 days and 66 days in 2015 and 2014, respectively. Inventory days on hand aggregated 185 days in 2016, as compared to 213 days in 2015 and 198 days in 2014, respectively. Fluctuations are primarily a function of new product launch dates. The high level of days on hand in 2015 reflects the inventory buildup needed to support product development for the newest brands, as new scents for Coach, Abercrombie & Fitch and Hollister each made their debut in 2016.

Cash flows used in investing activities reflect the purchase and sales of short-term investments by our European operations. These investments are primarily certificates of deposit with maturities greater than three months. At December 31, 2016, approximately $76 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 $4.0 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 connection with the 2015 acquisition of the Rochas brand, we entered into a 5-year term loan payable in equal quarterly installments of €5.0 million (approximately $5.3 million) plus interest. This term loan requires the maintenance of certain financial covenants, tested semi-annually, including a maximum leverage ratio and a minimum interest coverage ratio. The facility also contains new debt restrictions among other standard provisions. The Company is in compliance with all of the covenants and other restrictions of the debt agreements. 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.

Our short-term financing requirements are expected to be met by available cash on hand at December 31, 2016, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2017 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $26.0 million in credit lines provided by a consortium of international financial institutions. There were no balances due from short-term borrowings as of December 31, 2016 and 2015.

Proceeds from sale of stock of subsidiary reflect the proceeds from shares issued by our French subsidiary, Interparfums SA, pursuant to options exercised. Purchase of subsidiary shares from noncontrolling interest represents the purchase of treasury shares of Interparfums SA, which are expected to be issued to Interparfums SA employees in 2019 pursuant to its Free Share Plan.

In January 2014, our Board of Directors authorized the continuation of the regular $0.48 per share annual dividend for 2014, and in January 2015, our Board of Directors authorized an 8% increase to $0.52 per share. In January 2016, the Board of Directors authorized a 15% increase in the annual dividend to $0.60 per share, and in October 2016, our Board of Directors authorized an additional 13% increase in the annual dividend to $0.68 per share. The next quarterly cash dividend of $0.17 per share is payable on April 14, 2017 to shareholders of record on March 31, 2017. Dividends paid, including dividends paid once per year to noncontrolling stockholders of Interparfums SA, aggregated $22.9 million, $19.6 million and $19.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. The cash dividends to be paid in 2017 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 year ended December 31, 2016.

### Contractual Obligations

The following table summarizes our contractual obligations over the periods indicated, 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 | $74,558 | $21,494 | $42,523 | $10,541 | $-0- |
| Operating Leases | $27,635 | $5,390 | $9,596 | $6,697 | $5,952 |
| Purchase Obligations(1) | $907,206 | $113,633 | $226,386 | $234,357 | $332,830 |
| Total | $1,009,399 | $140,517 | $278,505 | $251,595 | $338,782 |

(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, 2016, without consideration for potential renewal periods and do not reflect the fact that our distributors share our advertising obligations.

## Market risk

As filed, 2,979 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.

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 December 31, 2016, we had foreign currency contracts in the form of forward exchange contracts with notional amounts of approximately U.S. $69.8 million, GB £1.8 million and JPY ¥50.0 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, 5,982 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 annual report on Form 10-K (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.

### Management’s Annual Report on Internal Control over Financial Reporting

The management of Inter Parfums, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) under the Securities Exchange Act of 1934. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in *Internal Control – Integrated Framework (2013)*, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2016.

Our independent auditor, Mazars USA LLP, a registered public accounting firm, has issued its report on its audit of our internal control over financial reporting. This report appears below.

### Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

Board of Directors and Shareholders

Inter Parfums, Inc.

New York, New York

We have audited Inter Parfums, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in *Internal Control – Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Inter Parfums, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of the changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Inter Parfums, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Inter Parfums, Inc. as of December 31, 2016 and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, cash flows and Schedule II for the year ended December 31, 2016 and our report dated March 13, 2017 expressed an unqualified opinion thereon.

Mazars USA LLP

/s/ Mazars USA LLP

New York, New York

March 13, 2017

### 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 fourth quarter of 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. In 2015, the Company implemented *Internal Control – Integrated Framework (2013)* issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Filed Mar 13, 2017.
Source: SEC EDGAR, the filing index for accession 0001144204-17-014248. Last ingested by Listed: Nov 4, 2026, 18:31 ET. No prices; not investment advice.