# Interparfums Inc: Form 10-Q for the period ended Jun 30, 2018

- Company: [Interparfums Inc](/companies/ipar.md) (CIK 822663)
- Form: 10-Q
- Filed: 2018-08-07
- Accepted by EDGAR: Aug 7, 2018, 16:16 ET
- Period: 2018-06-30
- Accession: 0001615774-18-007660
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/822663/000161577418007660/s111588_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/822663/000161577418007660/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $149.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $321.1m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2018-04-01 to 2018-06-30 | $53.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2018-01-01 to 2018-06-30 | $119.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-04-01 to 2018-06-30 | $95.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2018-01-01 to 2018-06-30 | $201.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-04-01 to 2018-06-30 | $76.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2018-01-01 to 2018-06-30 | $152.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | $18.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | $49.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $568.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $1.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $6.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $15.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $10.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $26.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.85 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.86 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 31,490 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 31,459 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | −$6.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $2.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2018-01-01 to 2018-06-30 | $13.1m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2018-06-30 | $145.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $543.1m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $782.5m | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $171.5m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2018-06-30 | $34.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-06-30 | $23.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-06-30 | $438.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,097 characters.

### Forward Looking Information

Statements in this report which are not historical in nature are forward-looking statements. Although we believe that our plans, intentions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. In some cases you can identify forward-looking statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors. These factors include, but are not limited to, the risks and uncertainties discussed under the headings “Forward Looking Statements” and “Risk Factors” in Inter Parfums’ annual report on Form 10-K for the fiscal year ended December 31, 2017 and the reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information contained in this report.

### Overview

We operate in the fragrance business, and manufacture, market and distribute a wide array of fragrances and fragrance related products. We manage our business in two segments, European based operations and United States based operations. Certain prestige fragrance products are produced and marketed by our European operations through our 73% owned subsidiary in Paris, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext.

We produce and distribute our European based fragrance products primarily under license agreements with brand owners, and European based fragrance product sales represented approximately 83% of net sales for both the six months ended June 30, 2018 and 2017. We have built a portfolio of prestige brands, which include *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.

Through our United States operations, we also market fragrance and fragrance related products. United States operations represented 17% of net sales for both the six months ended June 30, 2018 and 2017. These fragrance products are sold or to be sold primarily pursuant to license or other agreements with the owners of the *Abercrombie & Fitch, Agent Provocateur, Anna Sui, bebe, Dunhill, French Connection, Graff, GUESS, Hollister* and *Oscar de la Renta* brands.

Substantially all of our prestige fragrance brands are licensed from unaffiliated third parties, and our business is dependent upon the continuation and renewal of such licenses. With respect to the Company’s largest brands, we own the Lanvin brand name for our class of trade, and license the Montblanc, Jimmy Choo and Coach brand names. As a percentage of net sales, product sales for the Company’s largest brands were as follows:

|  | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Montblanc. | 21.6% | 22.7% |
| Jimmy Choo. | 16.1% | 21.7% |
| Coach. | 14.1% | 6.3% |
| Lanvin. | 11.2% | 12.1% |

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, 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 phasing out underperforming products so we can devote greater resources to those products with greater potential. 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.

In years prior to 2017, the economic and political uncertainty and financial market volatility in Eastern Europe, the Middle East and China had a minor negative impact on our business, but our sales in these regions have been improving and we do not anticipate dramatic changes in business conditions 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 accordingly, our business. We believe general economic and other uncertainties still exist in select markets in which we do business, and we monitor these 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 over 45% 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. Conversely, a weak U.S. dollar has a favorable impact on our net sales while gross margins are negatively affected. 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 pricing models and 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 that territory.

### Recent Important Events

### GUESS:

In February 2018, the Company entered into an exclusive, 15-year worldwide license agreement with GUESS?, Inc. for the creation, development and distribution of fragrances under the GUESS brand. This license became effective on April 1, 2018, and our rights under such license agreement are subject to certain minimum advertising expenditures and royalty payments as are customary in our industry.

### Graff:

In April 2018, the Company entered into an exclusive, 8-year worldwide license agreement with London-based Graff for the creation, development and distribution of fragrances under the Graff brand. Our rights under such license agreement are subject to certain advertising expenditures and royalty payments as are customary in our industry.

### Van Cleef & Arpels:

In May 2018, the Company renewed its license agreement for an additional six years with Van Cleef & Arpels for creation, development, and distribution of fragrance products through December 2024, without any material changes in terms and conditions. Our initial 12-year license agreement with Van Cleef & Arpels was signed in 2006.

### 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. Our revenue contracts represent single performance obligations to sell our products to customers. 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 contract terms are met, the price is fixed and determinable, collectability is reasonably assured and product is shipped or risk of ownership has been transferred to and accepted by 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 as is customary in the industry. 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 6.22%. 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. 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, 2017 indefinite-lived intangible assets aggregated $129.0 million. The following table presents the impact a change in the following significant assumptions would have had on the calculated fair value in 2017 assuming all other assumptions remained constant:

*$ in millions*

|  | Change | Increase (decrease) to fair value |
| --- | ---: | ---: |
| Weighted average cost of capital | +10% | $(24.4) |
| Weighted average cost of capital | -10% | $30.7 |
| Future sales levels | +10% | $22.3 |
| Future sales levels | -10% | $(22.3) |

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.

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. Accrued interest and penalties are included within the related tax asset or liability in the accompanying financial statements. In addition, the Company follows the provisions of uncertain tax positions as addressed in ASC topic 740.

### Results of Operations

### Three and Six Months Ended June 30, 2018 as Compared to the Three and Six Months Ended June 30, 2017

### Net Sales

*(In millions)*

*(in millions)*

|  | Three months ended June 30, 2018 | 2017 | % Change | 2018 | Six months ended June 30, 2017 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| European based brand product sales | $115.6 | $106.8 | 8.3% | $265.1 | $226.5 | 17.1% |
| United States based product sales | 33.8 | 22.3 | 50.8% | 56.0 | 45.7 | 22.5% |
| Total net sales | $149.4 | $129.1 | 15.7% | $321.1 | $272.2 | 18.0% |

Net sales for the three months ended June 30, 2018 increased 15.7% to $149.4 million, as compared to $129.1 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 12.3%. Net sales for the six months ended June 30, 2018 increased 18.0% to $321.1 million, as compared to $272.2 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 12.8% for the period.

European based product sales increased 8.3% and 17.1% for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods of the prior year. Top line growth in 2018, is primarily attributed to strong sales of established scents and brand extensions by several of our largest brands. Montblanc generated sales of $27.3 million and $69.2 million for the three and six months ended June 30, 2018, respectively. After turning in a 33% increase in the first quarter of 2018, second quarter sales declined 10% but are ahead nearly 12% for the first half, with continuing growth supported by the brand’s *Legend* line’s. Jimmy Choo generated sales of $27.4 million and $51.7 million for the three and six months ended June 30, 2018, respectively. After a 28% decline in the first quarter of 2018, due to a very difficult comparison with the first quarter of 2017, comparable quarter sales increased 8% in the second quarter of 2018 and are down only 12% for the first half. Continued improvement in Jimmy Choo brand sales is anticipated as the year unfolds with the roll-out of *Jimmy Choo Man Blue* and *Jimmy Choo Fever*. Coach fragrances have achieved remarkable growth with brand sales up 99% and 166% for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods of the prior year. Coach brand sales are driven both by the continuing success of the men’s signature fragrance line launched at the end of 2017, and the 2018 debut of the women’s line, *Coach Floral.*

United States based product sales increased 50.8% and 22.5% for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods of the prior year. The inclusion of legacy GUESS fragrances, which began late in the second quarter of 2018, factored into the increase in net sales. Also factoring into the second quarter sales growth was the successful launch of two brand extensions for the Abercrombie & Fitch *First Instinct* fragrance family. Additionally, Anna Sui, Dunhill, and Oscar de la Renta produced significant comparable quarter sales gains. For Anna Sui and Dunhill, we expanded existing collections with flankers, and for Oscar de la Renta, the new *Bella Blanca* scent helped grow brand sales.

*(In millions)*

| Net Sales to Customers by Region | Six months ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| North America | $85.7 | $72.7 |
| Western Europe | 81.0 | 74.3 |
| Asia | 63.4 | 48.2 |
| Middle East | 34.6 | 28.3 |
| Central and South America | 29.9 | 26.5 |
| Eastern Europe | 20.7 | 16.7 |
| Other | 5.8 | 5.5 |
|  | $321.1 | $272.2 |

Virtually all regions registered strong growth for the six months ended June 30, 2018, as compared to the corresponding period of the prior year. Some of the strongest performing regions were the laggards of recent years, namely Eastern Europe, the Middle East and Asia, which increased 24%, 23% and 31%, respectively.

*(In millions)*

| Gross profit margin | Three months ended June 30, 2018 | 2017 | Six months ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $149.4 | $129.1 | $321.1 | $272.2 |
| Cost of sales | 53.7 | 45.2 | 119.8 | 98.2 |
| Gross margin | $95.7 | $83.9 | $201.3 | $174.0 |
| Gross margin as a percent of net sales | 64% | 65% | 63% | 64% |

Gross profit margin was 64% and 63% of net sales for the three and six months ended June 30, 2018, respectively, as compared to 65% and 64% for the corresponding periods of the prior year. For European operations, gross profit margin was 68% and 65% for the three and six months ended June 30, 2018, respectively, as compared to 68% and 67% for the corresponding periods of the prior year.

We carefully monitor movements in foreign currency exchange rates as over 45% of our European based operations net sales are denominated in U.S. dollars, while most of our costs are incurred in euro. From a margin standpoint, a strong U.S. dollar has a positive effect on our gross profit margin while a weak U.S. dollar has a negative effect. The average dollar/euro exchange rates for the three and six months ended June 30, 2018 was 1.19 and 1.21, respectively, as compared to 1.10 and 1.08 for the corresponding periods of the prior year, accounting for most of the decline in gross margin as a percentage of sales for our European operations.

For U.S. operations, gross profit margin was 50% and 51% for the three and six months ended June 30, 2018, respectively, as compared to 48% and 49% for the corresponding periods of the prior year. Sales growth for our United States operations has primarily come from increased sales of higher margin prestige products under licenses while sales of lower margin fragrance products continue to decline.

Generally, we do not bill customers for shipping and handling costs, and such costs, which aggregated $2.0 million and $3.6 million for the three and six month periods ended June 30, 2018, respectively, as compared to $1.0 million and $2.5 million for the corresponding periods of the prior year, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross profit may not be comparable to other companies, which may include these expenses as a component of cost of goods sold.

*(In millions)*

| Selling, general and administrative expenses | Three months ended June 30, 2018 | 2017 | Six months ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $76.9 | $69.5 | $152.1 | $133.4 |
| Selling, general and administrative expenses as a percent of net sales | 51% | 54% | 47% | 49% |

Selling, general and administrative expenses increased 11% and 14% for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods of the prior year. Selling, general and administrative expenses were 51% and 47% of net sales for the three and six months ended June 30, 2018, respectively, as compared to 54% and 49% for the corresponding periods of the prior year. For European operations sales increased 8% and 17% for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods of the prior year, while selling, general and administrative expenses of our European operations only increased 6% and 12% for the same periods, respectively. In addition, selling, general and administrative expenses of our European operations represented 54% and 48% of net sales for the three and six months ended June 30, 2018, respectively, as compared to 56% and 50% for the corresponding periods of the prior year.

For U.S. operations sales increased 51% and 23% for the three and six months ended June 30, 2018, respectively, as compared to the corresponding periods of the prior year. At the same time, selling, general and administrative expenses of our U.S. operations increased 41% and 23% for the three and six months ended June 30, 2018, as compared to the corresponding periods of the prior year and represented 41% and 45% of net sales for the three and six months ended June 30, 2018, respectively, as compared to 44% and 45% for the corresponding periods of the prior year.

Promotion and advertising included in selling, general and administrative expenses aggregated $32.5 million and $59.3 million for the three and six months ended June 30, 2018, respectively, as compared to $30.4 million and $53.3 million for the corresponding periods of the prior year. Promotion and advertising represented 22% and 18% of net sales for the three and six months ended June 30, 2018, respectively, as compared to 24% and 20% for the corresponding periods of the prior year. We continue to invest heavily in promotional spending to support new product launches and building brand awareness. We have significant promotion and advertising programs underway for 2018, and anticipate that on a full year basis, promotion and advertising expenditure will aggregate approximately 21% of 2018 net sales, which is in line with 2017 annual promotion and advertising expenditures as a percentage of sales.

Royalty expense included in selling, general and administrative expenses aggregated $10.7 million and $22.5 million for the three and six months ended June 30, 2018, respectively, as compared to $7.5 million and $18.0 million for the corresponding periods of the prior year. Royalty expense represented 7.2% and 7.0% of net sales for the three and six months ended June 30, 2017, as compared to 5.8% and 6.6% of net sales for the corresponding period of the prior year. The increase is directly related to new licenses and increased royalty based product sales.

As a result of the above analysis regarding net sales, gross profit margins and selling, general and administrative expenses, income from operations increased 30% to $18.8 million for the three months ended June 30, 2018, as compared to $14.5 million for the corresponding period of the prior year. Income from operations increased 21% to $49.2 million for the six months ended June 30, 2018, as compared to $40.6 million for the corresponding period of the prior year. Operating margins were 12.6% and 15.3% of net sales for the three and six months ended June 30, 2018, respectively, as compared to 11.2% and 14.9% for the corresponding periods of the prior year.

### Other Income and Expense

Interest expense aggregated $0.6 million and $1.0 million for the three and six months ended June 30, 2018, respectively, as compared to $0.7 million and $1.0 million for the corresponding periods of the prior year. Interest expense is primarily related to the financing of the Rochas brand acquisition and includes gains relating to the interest rate swap of $0.2 million and $0.3 million for the six months ended June 30, 2018 and 2017, respectively. We also use the credit lines available to us, as needed, to finance our working capital needs as well as our financing needs for acquisitions.

Foreign currency gain or (loss) aggregated $1.5 million and $1.3 million for the three and six months ended June 30, 2018, respectively, as compared to ($0.8) million and ($1.0) million for the corresponding periods of the prior year. 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. Over 45% of net sales of our European operations are denominated in U.S. dollars.

Interest income aggregated $0.7 million and $2.5 million for the three and six months ended June 30, 2018, respectively, as compared to $0.9 million and $2.2 million for the corresponding periods of the prior year. Cash and cash equivalents and short-term investments are primarily invested in certificates of deposit with varying maturities.

### Income Taxes

On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the future U.S. federal corporate tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.

The Tax Act also established new tax laws that will affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) limitations on the deductibility of certain executive compensation; (v) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vi) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

The Company made reasonable estimates of the effects and recorded provisional estimates for these items as of December 31, 2017. While the Company was able to make a reasonable estimate of the transition tax, it is continuing to gather additional information to more precisely compute the final amount. Likewise, while the Company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. The impact of the Tax Act may differ from the current estimate, possibly materially, due to changes in interpretations and assumptions the Company has made, future guidance that may be issued and actions the Company may take as a result of the law.

As a result of the Tax Act, our effective income tax rate was 30% for both the three and six months ended June 30, 2018, as compared to 33% for both corresponding periods of the prior year. Our effective tax rates differ from statutory rates due to the effect of state and local taxes and tax rates in foreign jurisdictions.

The French government had introduced a 3% tax on dividends or deemed dividends for entities subject to French corporate income tax in 2012. In 2017, the French Constitutional Court released a decision declaring that the 3% tax on dividends or deemed dividends is unconstitutional. As a result of that decision, the Company filed a claim for refund of approximately $3.9 million (€3.2 million) for these taxes paid since 2015 including accrued interest of approximately $0.4 million. The Company recorded the refund claim as of December 31, 2017 and has received the entire refund as of June 30, 2018.

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 per share data)*

|  | Three Months Ended June 30, 2018 | 2017 | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| **Net income European operations** | $12,051 | $8,617 | $33,643 | $25,912 |
| **Net income U.S. operations** | 2,208 | 594 | 2,478 | 1,466 |
| **Net income** | 14,259 | 9,211 | 36,121 | 27,378 |
| Less: Net income attributable to the noncontrolling interest | 3,360 | 2,467 | 9,313 | 7,261 |
| **Net income attributable to Inter Parfums, Inc.** | $10,899 | $6,744 | $26,808 | $20,117 |
| **Earnings per share:** |  |  |  |  |
| **Net income attributable to Inter Parfums, Inc. common shareholders:** |  |  |  |  |
| Basic | $0.35 | $0.22 | $0.86 | $0.65 |
| Diluted | $0.35 | $0.22 | $0.85 | $0.64 |
| **Weighted average number of shares outstanding:** |  |  |  |  |
| Basic | 31,299 | 31,169 | 31,283 | 31,157 |
| Diluted | 31,490 | 31,281 | 31,459 | 31,268 |

Net income was $14.3 million for the three months ended June 30, 2018, as compared to $9.2 million for the corresponding period of the prior year. Net income was $36.1 million for the six months ended June 30, 2018, as compared to $27.4 million for the corresponding period of the prior year. The reasons for significant fluctuations in net income for both European operations and United States operations are directly related to the previous discussions relating to changes in sales, gross margin and selling, general and administrative expenses. As discussed, slightly lower gross profit margins within our European operations due to changes in foreign currency exchange rates were more than offset by lower selling general and administrative expenses as a percentage of sales. This decrease is the result of less promotional spending as a percentage of sales and increased leverage of our fixed expenses. For United States operations, in summary, first half 2018 net sales increased 22.5%, gross margin increased 25.9% and selling, general and administrative expenses increased 23.3%, as compared to the corresponding period of the prior year.

The noncontrolling interest arises from our 73% owned subsidiary, Interparfums SA, which is also a publicly traded company as 27% of Interparfums SA shares trade on the NYSE Euronext. The noncontrolling interest is also affected by the profitability of Interparfums SA’s 51% owned distribution subsidiaries in Spain. Net income attributable to the noncontrolling interest aggregated 28% of European operations’ net income for both three and six months ended June 30, 2018, respectively, as compared to 29% and 28% for the corresponding periods of the prior year.

### Liquidity and Capital Resources

The Company’s financial position remains strong. At June 30, 2018, working capital aggregated $372 million and we had a working capital ratio of almost 3.2 to 1. Cash and cash equivalents and short-term investments aggregated $223 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 cash and cash equivalents and short-term investments held by our European operations. Approximately 84% of the Company’s total assets are held by European operations and approximately $186 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 used in operating activities aggregated $6.1 million and $10.7 million for the six months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018, working capital items used $47.3 million in cash from operating activities, as compared to $41.3 million in the 2017 period. Although accounts receivable is up 19.8% from year end, the balance is reasonable based on second quarter 2018 sales levels and reflects continued strong collection activity as day’s sales outstanding is 84 days, as compared to 83 days for the corresponding period of the prior year. We continue to monitor collection activities actively and adjust customer credit limits as needed. Inventory levels are up approximately 26% from year end and reflect levels needed to support second half sales expectations and our new product launches.

Cash flows used in investing activities in 2018 reflect the purchases within our European operations, of short-term investments. These investments are primarily certificates of deposit with maturities greater than three months. 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. Payments for licenses, trademarks and other intangible assets primarily represent upfront entry fees incurred in connection with new license agreements.

In 2015, in connection with the acquisition of the Rochas brand, we entered into a 5-year term loan payable in equal quarterly installments of €5.0 million ($5.8 million) plus interest. In order to reduce exposure to rising variable interest rates, the Company entered into a swap transaction effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. The swap is a derivative instrument and is therefore recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

Our short-term financing requirements are expected to be met by available cash on hand at June 30, 2018, cash generated by operations and short-term credit lines provided by domestic and foreign banks. The principal credit facilities for 2018 consist of a $20.0 million unsecured revolving line of credit provided by a domestic commercial bank and approximately $29.0 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both June 30, 2018 and June 30, 2017.

Purchase of subsidiary shares from noncontrolling interest which aggregated $0.8 million for the six months ended June 30, 2018, 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 October 2017, the Board of Directors authorized a 24% increase in the annual dividend to $0.84 per share. The next quarterly cash dividend of $0.21 per share is payable on October 15, 2018 to shareholders of record on September 28, 2018. Dividends paid also include dividends paid once per year to the noncontrolling shareholders of Interparfums SA, which aggregated $8.7 million and $5.9 million for the six months ended June 30, 2018 and 2017, respectively. The annual cash dividends represent a small part of our cash position and 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 six months ended June 30, 2018.

## Market risk

As filed, 2,943 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, whose functional currency is the euro. All foreign currency contracts are denominated in currencies of major industrial countries and are with large financial institutions, which are rated as strong investment grade.

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

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

At June 30, 2018, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $29.0 million, GB £6.6 million and JPY ¥100 million which all have maturities of less than one year. We believe that our risk of loss as the result of nonperformance by any of such financial institutions is remote.

### Interest Rate Risk Management

We mitigate interest rate risk by monitoring interest rates, and then determining whether fixed interest rates should be swapped for floating rate debt, or if floating rate debt should be swapped for fixed rate debt. We entered into an interest rate swap in June 2015 on €100 million of debt, effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. This derivative instrument is recorded at fair value and changes in fair value are reflected in the accompanying consolidated statements of income.

## Controls and procedures

As filed, 1,288 characters.

### Evaluation of Disclosure Controls and Procedures

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

### Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period covered by this report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

### Part II. Other Information

Items 1. Legal Proceedings, 1A. Risk Factors, 2. Unregistered Sales of Equity Securities and Use of Proceeds, 3. Defaults Upon Senior Securities, 4. Mine Safety Disclosures and 5. Other Information, are omitted as they are either not applicable or have been included in Part I.

Filed Aug 7, 2018.
Source: SEC EDGAR, the filing index for accession 0001615774-18-007660. Last ingested by Listed: Nov 4, 2026, 18:31 ET. No prices; not investment advice.