UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(MARK ONE)

 

x

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2018.

 

OR

 

¨

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________to ________.

 

Commission File No. 0-16469

 

INTER PARFUMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		13-3275609
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

551 Fifth Avenue, New York, New York	10176
(Address of Principal Executive Offices)	(Zip Code)

 

(212) 983-2640

(Registrants telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

 

Large accelerated Filer ¨	Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

At May 7, 2018, there were 31,282,633 shares of common stock, par value $.001 per share, outstanding.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

INDEX

  

		Page Number
Part I.   Financial Information			1
Item 1.  Financial Statements			1
Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017			2
Consolidated Statements of Income for the Three Months Ended March 31, 2018 and March 31, 2017			3
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and March 31, 2017			4
Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2018 and March 31, 2017			5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and March 31, 2017			6
Notes to Consolidated Financial Statements			7
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.  Quantitative and Qualitative Disclosures About Market Risk			26
Item 4.  Controls and Procedures			27
Part II.  Other Information			27
Item 6.  Exhibits			28
Signatures			28

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Part I.

Financial Information

 

Item 1.

Financial Statements

 

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC. These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2017 included in our annual report filed on Form 10-K.

 

The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share data)

(Unaudited)

 

		March 31, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	168,929			$	208,343
Short-term investments			81,813				69,899
Accounts receivable, net			166,077				120,749
Inventories			141,253				137,058
Receivables, other			2,672				2,405
Other current assets			8,347				7,356
Income taxes receivable			2,114				3,468
Total current assets			571,205				549,278
Equipment and leasehold improvements, net			10,160				10,330
Trademarks, licenses and other intangible assets, net			205,489				200,495
Deferred tax assets			10,113				9,658
Other assets			8,139				8,011
Total assets		$	805,106			$	777,772
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt		$	24,991			$	24,372
Accounts payable – trade			58,740				52,609
Accrued expenses			72,876				81,843
Income taxes payable			6,762				1,722
Dividends payable			6,569				6,561
Total current liabilities			169,938				167,107
Long–term debt, less current portion			31,011				36,207
Deferred tax liability			3,881				3,821
Equity:
Inter Parfums, Inc. shareholders’ equity:
Preferred stock, $.001 par; authorized 1,000,000 shares; none issued			—				—
Common stock, $.001 par; authorized 100,000,000 shares; outstanding 31,282,333 and 31,241,548 shares at March 31, 2018 and December 31, 2017, respectively			31				31
Additional paid-in capital			67,288				66,004
Retained earnings			432,065				422,570
Accumulated other comprehensive loss			(8,426	)			(17,832	)
Treasury stock, at cost, 9,864,805 shares at March 31, 2018 and December 31, 2017			(37,475	)			(37,475	)
Total Inter Parfums, Inc. shareholders’ equity			453,483				433,298
Noncontrolling interest			146,793				137,339
Total equity			600,276				570,637
Total liabilities and equity		$	805,106			$	777,772

 

See notes to consolidated financial statements.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share data)

(Unaudited)

 

		Three months ended March 31,
		2018				2017
Net sales		$	171,767			$	143,058
Cost of sales			66,138				52,988
Gross margin			105,629				90,070
Selling, general and administrative expenses			75,231				63,899
Income from operations			30,398				26,171
Other expenses (income):
Interest expense			462				271
Loss on foreign currency			206				156
Interest income			(1,745	)			(1,272	)
			(1,077	)			(845	)
Income before income taxes			31,475				27,016
Income taxes			9,613				8,849
Net income			21,862				18,167
Less: Net income attributable to the noncontrolling interest			5,953				4,794
Net income attributable to Inter Parfums, Inc.		$	15,909			$	13,373
Net income attributable to Inter Parfums, Inc. common shareholders:
Basic		$	0.51			$	0.43
Diluted		$	0.51			$	0.43
Weighted average number of shares outstanding:
Basic			31,267				31,145
Diluted			31,429				31,254
Dividends declared per share		$	0.21			$	0.17

 

See notes to consolidated financial statements.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Three months ended March 31,
		2018				2017
Comprehensive income:
Net income		$	21,862			$	18,167
Other comprehensive income:
Net derivative instrument (gain) loss, net of tax			(63	)			342
Transfer from other comprehensive income into earnings			(38	)			22
Translation adjustments, net of tax			13,243				5,769
Comprehensive income			35,004				24,300
Comprehensive income attributable to the noncontrolling interests:
Net income			5,953				4,794
Other comprehensive income:
Net derivative instrument (gain) loss, net of tax			(26	)			96
Transfer from other comprehensive income into earnings			(8	)			5
Translation adjustments, net of tax			3,770				1,463
Comprehensive income attributable to the noncontrolling interests			9,689				6,358
Comprehensive income attributable to Inter Parfums, Inc.		$	25,315			$	17,942

 

See notes to consolidated financial statements.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(Unaudited)

 

		Three months ended March 31,
		2018				2017
Common stock, beginning and end of period		$	31			$	31
Additional paid-in capital, beginning of period			66,004				63,103
Shares issued upon exercise of stock options			1,003				542
Share-based compensation			281				234
Additional paid-in capital, end of period			67,288				63,879
Retained earnings, beginning of period			422,570				402,714
Net income			15,909				13,373
Dividends			(6,569	)			(5,299	)
Share-based compensation			155				169
Retained earnings, end of period			432,065				410,957
Accumulated other comprehensive loss, beginning of period			(17,832	)			(57,982	)
Foreign currency translation adjustment, net of tax			9,473				4,306
Transfer from other comprehensive income into earnings			(30	)			17
Net derivative instrument gain (loss), net of tax			(37	)			246
Accumulated other comprehensive loss, end of period			(8,426	)			(53,413	)
Treasury stock, beginning and end of period			(37,475	)			(37,475	)
Noncontrolling interest, beginning of period			137,339				113,267
Net income			5,953				4,794
Foreign currency translation adjustment, net of tax			3,770				1,463
Transfer from other comprehensive income into earnings			(8	)			5
Net derivative instrument (gain) loss, net of tax			(26	)			96
Share-based compensation			127				121
Dividends			(362	)			—
Noncontrolling interest, end of period			146,793				119,746
Total equity		$	600,276			$	503,725

 

See notes to consolidated financial statements.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three months ended March 31,
		2018				2017
Cash flows from operating activities:
Net income		$	21,862			$	18,167
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			2,616				2,619
Provision for doubtful accounts			165				225
Noncash share-based compensation			513				507
Deferred tax benefit			(258	)			(406	)
Change in fair value of derivatives			215				(285	)
Changes in:
Accounts receivable			(42,959	)			(33,983	)
Inventories			(1,178	)			(13,274	)
Other assets			(1,200	)			(743	)
Accounts payable and accrued expenses			(6,984	)			(563	)
Income taxes, net			6,552				4,733
Net cash used in operating activities			(20,656	)			(23,003	)
Cash flows from investing activities:
Purchases of short-term investments			(9,979	)			(24,310	)
Proceeds from sale of short-term investments			—				4,259
Purchases of equipment and leasehold improvements			(580	)			(729	)
Payment for intangible assets acquired			(1,352	)			(129	)
Net cash used in investing activities			(11,911	)			(20,909	)
Cash flows from financing activities:
Repayment of long-term debt			(6,140	)			(5,250	)
Proceeds from exercise of options			1,003				542
Dividends paid			(6,561	)			(5,293	)
Dividends paid to minority interest			(362	)			—
Net cash used in financing activities			(12,060	)			(10,001	)
Effect of exchange rate changes on cash			5,213				1,914
Net decrease in cash and cash equivalents			(39,414	)			(51,999	)
Cash and cash equivalents - beginning of period			208,343				161,828
Cash and cash equivalents - end of period		$	168,929			$	109,829
Supplemental disclosure of cash flow information:
Cash paid for:
Interest		$	420			$	492
Income taxes			5,306				4,576

 

See notes to consolidated financial statements.

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

1.

Significant Accounting Policies:

 

The accounting policies we follow are set forth in the notes to our financial statements included in our Form 10-K, which was filed with the Securities and Exchange Commission for the year ended December 31, 2017. We also discuss such policies in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q.

 

2.

Recent Accounting Pronouncements:

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to improve accounting for hedging activities. The objective of the ASU is to improve the financial reporting of hedging relationships in order to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance. This ASU is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the standard to determine the impact of its adoption on our consolidated financial statements.

 

In August 2016, the FASB issued an ASU to eliminate the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. This ASU is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. We have evaluated the standard and determined that there has been no material impact on our consolidated financial statements.

In February 2016, the FASB issued an ASU which requires lessees to recognize lease assets and lease liabilities arising from operating leases on the balance sheet. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective approach, with early adoption permitted. The Company anticipates the adoption of this new standard to result in a significant increase in lease-related assets and liabilities on our consolidated balance sheets and will require enhanced disclosures about the Company’s leasing arrangements. The impact on the Company's consolidated statements of income is being evaluated. As the impact of this standard is non-cash in nature, we do not anticipate its adoption having an impact on the Company's consolidated statement of cash flows.

 

In May 2014, the FASB issued an ASU which superseded the most current revenue recognition requirements. This new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. The new standard also includes enhanced disclosure requirements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual periods after December 31, 2016. We have adopted the standard as of December 31, 2017 and determined that other than a modification of our revenue recognition policy, there has been no material impact on our consolidated financial statements.

 

There are no other recent accounting pronouncements issued but not yet adopted that would have a material effect on our consolidated financial statements.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

3.

Inventories:

 

Inventories consist of the following:

 

(In thousands)		March 31,  2018				December 31, 2017
Raw materials and component parts		$	48,044			$	46,884
Finished goods			93,209				90,174
		$	141,253			$	137,058

 

4.

Fair Value Measurement:

 

The following tables present our financial assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

 

						Fair Value Measurements at March 31, 2018
						Quoted Prices in				Significant Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets:
Short-term investments		$	81,813			$	—			$	81,813			$	—
Liabilities:
Interest rate swap		$	463			$	—			$	463			$	—
Foreign currency forward exchange contracts accounted for using hedge accounting			140								140
Foreign currency forward exchange contracts not accounted for using hedge accounting			7				—				7				—
		$	610			$	—			$	610			$	—

 

						Fair Value Measurements at December 31, 2017
						Quoted Prices in				Significant Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
Assets:
Short-term investments		$	69,899			$	—			$	69,899			$	—
Foreign currency forward exchange contracts accounted for using hedge accounting			26								26
Foreign currency forward exchange contracts not accounted for using hedge accounting			119				—				119				—
		$	70,044			$	—			$	70,044			$	—
Liabilities:
Interest rate swap		$	529			$	—			$	529			$	—

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

The carrying amount of cash and cash equivalents including money market funds, short-term investments, accounts receivable, other receivables, accounts payable and accrued expenses approximates fair value due to the short terms to maturity of these instruments. The carrying amount of loans payable approximates fair value as the interest rates on the Company’s indebtedness approximate current market rates.

 

Foreign currency forward exchange contracts are valued based on quotations from financial institutions and the value of interest rate swaps are the discounted net present value of the swaps using third party quotes from financial institutions.

 

5.

Derivative Financial Instruments:

 

The Company enters into foreign currency forward exchange contracts to hedge exposure related to receivables denominated in a foreign currency and occasionally to manage risks related to future sales expected to be denominated in a foreign currency. Before entering into a derivative transaction for hedging purposes, it is determined that a high degree of initial effectiveness exists between the change in value of the hedged item and the change in the value of the derivative instrument from movement in exchange rates. High effectiveness means that the change in the cash flows of the derivative instrument will effectively offset the change in the cash flows of the hedged item. The effectiveness of each hedged item is measured throughout the hedged period and is based on the dollar offset methodology and excludes the portion of the fair value of the foreign currency forward exchange contract attributable to the change in spot-forward difference which is reported in current period earnings. Any hedge ineffectiveness is also recognized as a gain or loss on foreign currency in the income statement. For hedge contracts that are no longer deemed highly effective, hedge accounting is discontinued and gains and losses accumulated in other comprehensive income are reclassified to earnings. If it is probable that the forecasted transaction will no longer occur, then any gains or losses accumulated in other comprehensive income are reclassified to current-period earnings. 

 

In connection with the Rochas acquisition, $108 million of the purchase price was paid in cash on the closing date and was financed entirely through a 5-year term loan. As the payment at closing was due in dollars and we had planned to finance it with debt in euro, the Company entered into foreign currency forward contracts to secure the exchange rate for the $108 million purchase price at $1.067 per 1 euro. This derivative was designated and qualified as a cash flow hedge.

 

Gains and losses in derivatives designated as hedges are accumulated in other comprehensive income (loss) and gains and losses in derivatives not designated as hedges are included in (gain) loss on foreign currency on the accompanying income statements. Such gains and losses were immaterial for both three month periods ended March 31, 2018 and 2017. For the three months ended March 31, 2018 and 2017, interest expense was reduced by a gain of $0.1 million and $0.2 million, respectively, relating to the interest rate swap.

 

All derivative instruments are reported as either assets or liabilities on the balance sheet measured at fair value. The valuation of interest rate swaps resulted in a liability which is included in long-term debt on the accompanying balance sheets. The valuation of foreign currency forward exchange contracts at March 31, 2018, resulted in a liability and is included in accrued expenses on the accompanying balance sheet.

 

At March 31, 2018, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $9.5 million, GB £8.0 million and JPY ¥240.0 million which all have maturities of less than one year.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

6.

Share-Based Payments:

 

The Company maintains a stock option program for key employees, executives and directors. The plans, all of which have been approved by shareholder vote, provide for the granting of both nonqualified and incentive options. Options granted under the plans typically have a six-year term and vest over a four to five-year period. The fair value of shares vested during both the three months ended March 31, 2018 and 2017 aggregated $0.04 million and $0.05 million, respectively. Compensation cost, net of forfeitures, is recognized on a straight-line basis over the requisite service period for the entire award. Forfeitures are estimated based on historic trends. It is generally our policy to issue new shares upon exercise of stock options.

 

The following table sets forth information with respect to nonvested options for the three month period ended March 31, 2018:

 

		Number of Shares				Weighted Average Grant  Date Fair Value
Nonvested options – beginning of period			431,235			$	8.22
Nonvested options granted			12,000			$	10.72
Nonvested options vested or forfeited			(10,605	)		$	7.61
Nonvested options – end of period			432,630			$	8.31

 

Share-based payment expense decreased income before income taxes by $0.51 million for both the three months ended March 31, 2018 and 2017, respectively, and decreased net income attributable to Inter Parfums, Inc. by $0.32 million for both the three months ended March 31, 2018 and 2017.

 

The following table summarizes stock option information as of March 31, 2018:

 

		Shares				Weighted Average Exercise Price
Outstanding at January 1, 2018			730,980			$	31.92
Options granted			12,000				46.47
Options forfeited			(4,640	)			36.48
Options exercised			(40,785	)			24.59
Outstanding at March 31, 2018			697,555			$	32.57
Options exercisable			264,925			$	27.89
Options available for future grants			922,625

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

As of March 31, 2018, the weighted average remaining contractual life of options outstanding is 3.74 years (2.33 years for options exercisable); the aggregate intrinsic value of options outstanding and options exercisable is $10.2 million and $5.1 million, respectively; and unrecognized compensation cost related to stock options outstanding aggregated $3.3 million.

 

Cash proceeds, tax benefits and intrinsic value related to stock options exercised during the three months ended March 31, 2018 and March 31, 2017 were as follows:

 

(In thousands)		March 31, 2018				March 31, 2017
Cash proceeds from stock options exercised		$	1,003			$	542
Tax benefits			157				135
Intrinsic value of stock options exercised			897				549

 

The weighted average fair values of the options granted by Inter Parfums, Inc. during the three months ended March 31, 2018 and 2017 were $10.72 and $7.67 per share, respectively, on the date of grant using the Black-Scholes option pricing model to calculate the fair value of options granted. The assumptions used in the Black-Scholes pricing model for the periods ended March 31, 2018 and 2017 are set forth in the following table:

 

		March 31, 2018				March 31, 2017
Weighted average expected stock-price volatility			28	%			29	%
Weighted average expected option life			5 years				5 years
Weighted average risk-free interest rate			2.5	%			2.0	%
Weighted average dividend yield			2.0	%			2.1	%

 

Expected volatility is estimated based on historic volatility of the Company’s common stock. The expected term of the option is estimated based on historic data. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant of the option and the dividend yield reflects the assumption that the dividend payout as authorized by the Board of Directors would increase as the earnings of the Company and its stock price continue to increase.

 

In September 2016, Interparfums SA, our 73% owned subsidiary in Paris, approved a plan to grant an aggregate of 15,100 shares of its stock to employees with no performance condition requirement, and an aggregate of 133,000 shares to officers and managers, subject to certain corporate performance conditions. The shares will be distributed in September 2019 so long as the individual is employed by Interparfums SA at the time, and in the case of officers and managers, only to the extent that the performance conditions have been met. Once distributed, the shares will be unrestricted and the employees will be permitted to trade their shares.

 

The fair value of the grant has been determined based on the quoted stock price of Interparfums SA shares as reported by the NYSE Euronext on the date of grant taking into account the dividend yield as no dividends on this grant will be earned until the shares are distributed. The estimated number of shares to be distributed has been determined taking into account employee turnover. The aggregate cost of the grant of €3.1 million (approximately $3.8 million) will be recognized as compensation cost by Interparfums SA on a straight-line basis over the requisite three year service period. For the three months ended March 31, 2018, $0.3 million of compensation cost has been recognized in connection with this plan.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

To avoid dilution of the Company’s ownership of Interparfums SA, all shares to be distributed pursuant to this plan will be pre-existing shares of Interparfums SA, purchased in the open market by Interparfums SA. As of December 31, 2016, 108,348 shares have been acquired in the open market at an aggregate cost of $2.9 million, and such amount has been classified as an equity transaction on the accompanying balance sheet. No additional shares were purchased during the three months ended March 31, 2018.

 

7.

Net Income Attributable to Inter Parfums, Inc. Common Shareholders:

 

Net income attributable to Inter Parfums, Inc. per common share (“basic EPS”) is computed by dividing net earnings attributable to Inter Parfums, Inc. by the weighted average number of shares outstanding. Net earnings attributable to Inter Parfums, Inc. per share assuming dilution (“diluted EPS”), is computed using the weighted average number of shares outstanding, plus the incremental shares outstanding assuming the exercise of dilutive stock options using the treasury stock method. The reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:

 

(In thousands, except per share data)		March 31,
		2018				2017
Numerator:
Net income attributable to Inter Parfums, Inc.		$	15,909			$	13,373
Denominator:
Weighted average shares			31,267				31,145
Effect of dilutive securities:
Stock options			162				109
Denominator for diluted earnings per share			31,429				31,254
Earnings per share:
Net income attributable to Inter Parfums, Inc. common shareholders:
Basic		$	0.51			$	0.43
Diluted			0.51				0.43

 

Not included in the above computations is the effect of antidilutive potential common shares which consist of outstanding options to purchase 0.18 million and 0.26 million shares of common stock for the three months ended March 31, 2018 and 2017, respectively.

 

8.

Segment and Geographic Areas:

 

The Company manufactures and distributes one product line, fragrances and fragrance related products. The Company manages its business in two segments, European based operations and United States based operations. The European assets are located, and operations are primarily conducted, in France. European operations primarily represent the sale of prestige brand name fragrances and United States operations primarily represent the sale of prestige brand name and specialty retail fragrance.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

Information on our operations by geographical areas is as follows:

 

(In thousands)		Three months ended March 31,
		2018				2017
Net sales:
United States		$	22,859			$	23,689
Europe			149,514				119,727
Eliminations			(606	)			(358	)
		$	171,767			$	143,058
Net income attributable to Inter Parfums, Inc.:
United States		$	270			$	872
Europe			15,639				12,501
		$	15,909			$	13,373

 

		March 31,				December 31,
		2018				2017
Total Assets:
United States		$	102,873			$	92,909
Europe			721,967				694,385
Eliminations of investment in subsidiary			(19,734	)			(9,522	)
		$	805,106			$	777,772

 

9.

Recent Agreements

 

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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 87% and 84% of net sales for the three months ended March 31, 2018 and 2017, respectively. 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.

 

With respect to our largest brands, we own the Lanvin brand name for its class of trade, and license the Montblanc, Coach and Jimmy Choo brand names; for the three months ended March 31, 2018, sales of product for these brands represented 11%, 24%, 16%, and 14% of net sales, respectively.

 

Through our United States operations we also market fragrance and fragrance related products. United States operations represented 13% and 16% of net sales for the three months ended March 31, 2018 and 2017, respectively. 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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Quarterly sales fluctuations are influenced by the timing of new product launches as well as the third and fourth quarter holiday season. In certain markets where we sell directly to retailers, seasonality 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 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. 

 

For the past several years, 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 the territory.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

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.

 

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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

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 further impairment charges, 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						Increase (decrease)
		Change				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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Results of Operations

 

Three Months Ended March 31, 2018 as Compared to the Three Months Ended March 31, 2017

 

Net Sales		Three months ended March 31,
(in millions)		2018				% Change				2017
European based product sales		$	149.5				25	%		$	119.7
United States based product sales			22.3				(5	%)			23.4
Total net sales		$	171.8				20	%		$	143.1

 

Net sales for the three months ended March 31, 2018 increased 20% to $171.8 million, as compared to $143.1 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 13%. For the 2018 first quarter, the average U.S. dollar/euro exchange rate was 1.23 as compared to 1.06 in the first quarter of 2017.

 

European based product sales increased 25% to $149.5 million for the three months ended March 31, 2018, as compared to $119.7 million for the corresponding period of the prior year. For the three months ended March 31, 2018, Montblanc fragrance sales rose nearly 33% with continuing growth supported by the Legend line's enduring strength and the rollout of Legend Night launched in the 2017 second half. While in last year’s first quarter, Jimmy Choo fragrance sales rose 57% due in great part to the launches of the Jimmy Choo L’Eau and Jimmy Choo Man Ice lines, 2018 first quarter brand sales declined 28%; however, improvement in brand sales is anticipated as the year unfolds with the introduction of Jimmy Choo Man Blue and Jimmy Choo Fever. Coach fragrances have displayed remarkable growth with brand sales up 242% from last year’s first quarter. Increased Coach brand sales were driven both by the continuing success of the men's signature fragrance line launched at the end of 2017, and the recent debut of the women's line, Coach Floral. While there were actual sales gains for most of other brands, including Karl Lagerfeld, Boucheron and Van Cleef & Arpels, the strength of the euro magnified the sales performances of Lanvin and Rochas, whose sales were down slightly in local currency, but in dollars, were up 10% and 14%, respectively.

 

United States based product sales decreased 5% to $22.3 million for the three months ended March 31, 2018, as compared to $23.4 million for the corresponding period of the prior year. For the three months ended March 31, 2018, Anna Sui and Oscar de la Renta, two of the larger brands in the group, showed good comparable quarterly net sales increases coinciding with new product introductions. We have an active year planned for some of our other brands including a new scent for Dunhill, Century launching this summer. Abercrombie & Fitch will have several brand extensions introduced throughout the year, and we have a completely new Hollister fragrance family launching this summer. We expect far better quarterly sales comparisons for our U.S. operations as we unveil new products and commence sales of GUESS brand fragrances in the second quarter.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

  

Net Sales to Customers by Region		Three months ended March 31,
(in millions)		2018				2017
North America		$	43.5			$	36.6
Western Europe			41.6				37.9
Asia			36.2				26.9
Middle East			20.7				15.7
Central and South America			15.9				13.8
Eastern Europe			11.0				9.3
Other			2.9				2.9
		$	171.8			$	143.1

 

Virtually all regions registered strong growth for the three months ended March 31, 2018, as compared to the corresponding period of the prior year. Some of the stronger performing regions were the laggards of recent years, namely Eastern Europe, the Middle East and Asia.

 

Gross Profit Margin		Three months ended March 31,
(in millions)		2018				2017
Net sales		$	171.7			$	143.1
Cost of sales			66.1				53.0
Gross margin		$	105.6			$	90.1
Gross margin as a % of net sales			61.5	%			63.0	%

 

Gross profit margin was 61.5% of net sales for the three months ended March 31, 2018, as compared to 63.0% for the corresponding period of the prior year. For European operations, gross profit margin was 63.0% and 65.5% in the first quarters of 2018 and 2017, respectively. 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 rate for the three months ended March 31, 2018 was 1.23, as compared to 1.06 for the corresponding period 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 51.4% and 50.1% in the first quarters of 2018 and 2017, respectively. 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 $1.6 million and $1.5 million for the three months ended March 31, 2018 and 2017, respectively, are included in selling, general and administrative expenses in the consolidated statements of income. As such, our Company’s gross profit may not be comparable to other companies which may include these expenses as a component of cost of goods sold.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Selling, General and Administrative Expenses		Three months ended March 31,
(in millions)		2018				2017
Selling, general and administrative expenses		$	75.2			$	63.9
Selling, general and administrative expenses  as a % of net sales			43.8	%			44.7	%

 

Selling, general and administrative expenses increased 18% for the three months ended March 31, 2018, as compared to the corresponding period of the prior year. However, as a percentage of sales, selling, general and administrative expenses were 43.8% and 44.7% for the three months ended March 31, 2018 and 2017, respectively. For European operations, with sales up 25%, selling, general and administrative expenses increased 20% in 2018, as compared to 2017 and represented 43% of sales in 2018, as compared to 45% of sales in 2017. For U.S. operations, with sales down 5%, selling, general and administrative expenses increased 7% in 2018, as compared to 2017 and represented 51% and 45% of sales in 2018 and 2017, respectively. We expect far better quarterly sales comparisons for our U.S. operations as we unveil new products and commence sales of GUESS brand fragrances in the second quarter. We also anticipate significant leverage of our selling, general and administrative expenses as a result.

 

Promotion and advertising included in selling, general and administrative expenses aggregated approximately $26.9 million (15.6% of net sales) for the 2018 period, as compared to $22.9 million (16.0% of net sales) for the 2017 period. 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 $11.8 million for the 2018 period, as compared to $9.5 million in 2017 and represented 6.9% and 6.6% of net sales in 2018 and 2017, respectively.

 

As a result of the above analysis regarding margins and selling, general and administrative expenses, income from operations increased 16% to $30.4 million for the three months ended March 31, 2018, as compared to $26.2 million for the corresponding period of the prior year. Operating margins were 17.7% of net sales in the current period as compared to 18.3% for the corresponding period of the prior year.

 

Other Income and Expense

 

Interest expense aggregated $0.5 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. Interest expense is primarily related to the financing of the Rochas brand acquisition, and includes gains relating to the interest rate swap of $0.1 million in 2018 and $0.2 million in 2017. 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. Long-term debt including current maturities aggregated $56.0 million and $70.2 million as of March 31, 2018 and 2017, respectively.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Foreign currency losses aggregated $0.2 million for both the three months ended March 31, 2018 and 2017, respectively. 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 $1.7 million and $1.3 million for the three months ended March 31, 2018 and 2017, respectively. 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. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

 

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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

As a result of the Tax Act, our effective income tax rate declined to 30.5% for the three months ended March 31, 2018, as compared to 32.8% for the corresponding period 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 has 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. The Company has received $1.8 million of such claim as of March 31, 2018 and an additional $0.9 million in April 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 March 31,
		2018				2017
Net income attributable to European operations		$	21,592			$	17,295
Net income attributable to United States operations			270				872
Net income			21,862				18,167
Less: Net income attributable to the noncontrolling interest			5,953				4,794
Net income attributable to Inter Parfums, Inc.		$	15,909			$	13,373
Net income attributable to Inter Parfums, Inc. common shareholders:
Basic		$	0.51			$	0.43
Diluted		$	0.51			$	0.43
Weighted average number of shares outstanding:
Basic			31,267				31,145
Diluted			31,429				31,254

 

Net income increased 20% to $21.9 million for the three months ended March 31, 2018, as compared to $18.2 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, lower gross profit margins within our European operations were more than offset by increased leverage in selling general and administrative expenses resulting from the 25% increase in sales. For United States operations, in summary, 2018 sales declined by 5%, gross margin declined 2% and selling, general and administrative expenses increased 7%, 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. 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 the three months ended March 31, 2018 and 2017. Net income attributable to Inter Parfums, Inc. increased 19% to $15.9 million, as compared to $13.4 million for the corresponding period of the prior year.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Liquidity and Capital Resources

 

The Company’s financial position remains strong. At March 31, 2018, working capital aggregated $401 million and we had a working capital ratio of almost 3.4 to 1. Cash and cash equivalents and short-term investments aggregated $251 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 90% of the Company’s total assets are held by European operations, and approximately $197 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 $20.7 million and $23.0 million for the three months ended March 31, 2018 and 2017, respectively. For the three months ended March 31, 2018, working capital items used $45.8 million in cash from operating activities, as compared to $43.8 million in the 2017 period. Although accounts receivable is up 38% from year end, the balance is reasonable based on first quarter 2018 sales levels, and reflects continued strong collection activity as day’s sales outstanding is 87 days and 88 days for the three month periods ended March 31, 2018 and 2017, respectively. Inventory levels are relatively unchanged from year end and reflect inventory needed to support 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 $81 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. 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 ($6.2 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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Our short-term financing requirements are expected to be met by available cash on hand at March 31, 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 $31.0 million in credit lines provided by a consortium of international financial institutions. There were no short-term borrowings outstanding as of both March 31, 2018 and 2017.

 

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 July 13, 2018 to shareholders of record on June 29, 2018.

 

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

 

Inflation rates in the U.S. and foreign countries in which we operate did not have a significant impact on operating results for the three month period ended March 31, 2018.

 

Item 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

General

 

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

 

Foreign Exchange Risk Management

 

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

 

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

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

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

 

At March 31, 2018, we had foreign currency contracts in the form of forward exchange contracts in the amount of approximately U.S. $9.5 million, GB £8.0 million and JPY ¥240.0 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.

 

Item 4.

CONTROLS AND PROCEDURES

 

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.

 

 

INTER PARFUMS, INC. AND SUBSIDIARIES

 

Item 6. Exhibits.

 

The following documents are filed herewith:

 

Exhibit No.		Description		Page Number
31.1		Certifications required by Rule 13a-14(a) of Chief Executive Officer		29
31.2		Certifications required by Rule 13a-14(a) of Chief Financial Officer and Principal Accounting Officer		30
32.1		Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Executive Officer		31
32.2		Certification required by Section 906 of the Sarbanes-Oxley Act of Chief Financial Officer and Principal Accounting Officer		32
101		Interactive data files

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 8th day of May 2018.

 

	INTER PARFUMS, INC.
	By:	/s/ Russell Greenberg
		Executive Vice President and
		Chief Financial Officer